-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nt39GY3v1rb1KWWQ8WZKMWMFWCdrvLXmye64DvMggdI9y9vhgoQJfsqzbL5AzFZE qIPg1CChk+4EW8WO2+sDwA== 0000891618-96-001569.txt : 19960808 0000891618-96-001569.hdr.sgml : 19960808 ACCESSION NUMBER: 0000891618-96-001569 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAFCO INC CENTRAL INDEX KEY: 0000352956 STANDARD INDUSTRIAL CLASSIFICATION: HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES [3433] IRS NUMBER: 942159547 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10120 FILM NUMBER: 96604942 BUSINESS ADDRESS: STREET 1: 2690 MIDDLEFIELD RD CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153632690 MAIL ADDRESS: STREET 1: 2690 MIDDLEFIELD ROAD CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 FROM 10-Q 1 =============================================================================== SECURITIES AND EXCHANGE COMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-10120 FAFCO, Inc. (Exact name of Registrant as specified in its charter) California 94-2159547 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2690 Middlefield Road, Redwood City, California 94063 (Address, including zip code, of Registrant's principal executive offices) (415) 363-2690 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At August 14, 1996, 3,298,311 shares of the Registrant's Common Stock, $.125 par value were issued and outstanding. =============================================================================== Page 1 of 10 2 Part 1 - FINANCIAL INFORMATION Item 1 - Financial Statements FAFCO, Inc. CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 DECEMBER 31, 1995 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $69,500 $126,200 Accounts receivable, less allowance for doubtful accounts of $489,900 in 1996 and $463,900 in 1995 1,940,000 1,149,600 Current portion of long-term notes receivable (net) 247,600 64,000 Inventories 1,031,600 717,200 Prepaid expenses and other current assets 152,300 145,500 Other accounts receivable 2,100 Deferred tax asset, net of allowance 125,200 125,200 - ------------------------------------------------------------------------------------------------------------- Total current assets 3,568,300 2,327,700 - ------------------------------------------------------------------------------------------------------------- Plant and equipment, at cost 2,450,000 2,345,100 Less accumulated depreciation and amortization (2,093,800) (2,085,900) - ------------------------------------------------------------------------------------------------------------- 356,200 259,200 - ------------------------------------------------------------------------------------------------------------- Notes receivable and other assets (net) 104,900 327,700 Deferred tax asset, net of allowance 485,800 485,800 - ------------------------------------------------------------------------------------------------------------- Total assets $4,515,200 $3,400,400 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable to bank $411,300 $751,300 Accounts payable and other accrued expenses 1,531,600 949,100 Accrued compensation and benefits 256,000 188,900 Accrued warranty expanse 240,300 216,000 Income taxes payable 18,800 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 2,458,000 2,105,300 - ------------------------------------------------------------------------------------------------------------- Convertible subordinated notes $550,000 and $425,000 was owed to related parties in 1996 and 1995 respectively 925,000 600,000 Other non-current liabilities 18,600 80,400 - ------------------------------------------------------------------------------------------------------------- Total liabilities 3,401,600 2,785,700 - ------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred Stock-authorized 1,000,000 shares of $1.00 par value, none of which has been issued Common Stock-authorized 10,000,000 shares of $0.125 par value; 3,298,311 issued and outstanding in 1996 and 3,112,687 was outstanding in 1995. 412,200 389,000 Capital in excess of par value 5,105,100 5,035,600 Notes receivable secured by Common Stock (75,100) (75,100) Deficit (4,328,600) (4,734,800) - ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,113,600 614,700 - ------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities - ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,515,200 $3,400,400 - -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. Page 2 of 10 3 Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1996 1995 1996 1995 ---------------------------- ---------------------------- Net sales $ 2,775,500 $ 2,712,500 $ 5,059,900 $ 4,801,800 Other income (net) 20,300 26,000 36,400 26,800 ----------- ----------- ----------- ----------- Total revenues 2,795,800 2,738,500 5,096,300 4,828,600 ----------- ----------- ----------- ----------- Cost of goods sold 1,583,900 1,843,400 2,907,400 3,227,600 Marketing & selling expense 459,000 602,400 928,100 1,168,500 General & administrative expense 370,700 403,900 682,700 764,900 Research & development expense 5,400 150,500 58,000 278,200 Net interest expense 40,700 17,800 81,100 33,600 ----------- ----------- ----------- ----------- Total costs and expenses 2,459,700 3,018,000 4,657,300 5,472,800 ----------- ----------- ----------- ----------- Income (loss) before income taxes 336,100 (279,500) 439,000 (644,200) Provision for income taxes 30,500 32,800 ----------- ----------- ----------- ----------- Net income (loss) $ 305,600 ($ 279,500) $ 406,200 ($ 644,200) =========== =========== =========== =========== Primary net income (loss) per share $ 0.09 $ (0.08) $ 0.13 $ (0.19) ----------- ----------- ----------- ----------- Fully diluted net income per share $ 0.09 $ (0.08) $ 0.13 $ (0.19)
The accompanying notes are an integral part of this statement. Page 3 of 10 4 Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------------- 1996 1995 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 406,200 $ (644,200) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 59,500 84,600 Allowance for doubtful accounts 26,000 22,600 Gain on sale of fixed assets (6,000) Change in assets and liabilities: Change in accounts receivable (1,041,000) 407,900 Increase in inventories (314,500) (245,100) Increase in prepaid expenses (6,900) (19,600) Decrease in other assets 261,900 5,200 Increase in payables and accrued expenses 702,100 87,600 Decrease in other non-current liabilities (61,700) (3,200) ----------- ----------- Net cash provided by (used in) operating activities 25,600 (304,200) ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed assets (156,500) (54,000) Proceeds from sale of property & equipment 6,000 ----------- ----------- Net cash used in investing activities (150,500) (54,000) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from borrowing 325,000 115,000 Proceeds from sale of common stock 92,800 Repayment of borrowings (349,600) (52,700) ----------- ----------- Net cash provided by financing activities 68,200 62,300 ----------- ----------- Net increase (decrease) in cash and cash equivalents (56,700) (295,900) Cash and cash equivalents, beginning of period 126,200 338,000 =========== =========== Cash and cash equivalents, end of period $ 69,500 $ 42,100 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 73,200 $ 33,900 Cash paid during the period for income taxes $ 7,500 $ 49,000
The accompanying notes are an integral part of this statement. Page 4 of 10 5 Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. This information is unaudited; however, in the opinion of the Registrant's management, all adjustments necessary for a fair statement of results for the periods presented have been included. The results for the period ended June 30, 1996 are not necessarily indicative of results to be expected for the entire year. These financial statements, notes and analyses should be read in conjunction with the Registrant's audited annual financial statements for the year ended December 31, 1995, included in its 1995 Annual Report to Shareholders. 2. Net income (loss) per share is calculated using the weighted average number of common and common equivalent shares outstanding during the periods presented. (See Note 6) 3. Inventories are valued at the lower of cost or market, determined on a last in, first out (LIFO) basis, and consist of the following.
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- Raw materials $534,900 $395,200 Work in process 233,900 118,500 Finished goods 262,800 203,500 ========== ======== $1,031,600 $717,200 ========== ========
4. In February 1996, the Registrant entered into a line of credit agreement with Silicon Valley Bank, which line of credit allows the Registrant to borrow the lesser of $1,000,000 or an amount determined by a formula applied to accounts receivable. Unused borrowing capacity was $588,700 at June 30, 1996. Amounts borrowed bear interest at prime rate plus 2 -1/2% per annum and are secured by the Registrant's assets along with The Gregory Company's assets. This line of credit expires on June 5, 1997. Page 5 of 10 6 Part I - FINANCIAL INFORMATION (continued) Deferred tax assets are comprised of the following at:
JANUARY 1, 1996 JANUARY 1, 1995 --------------- --------------- Allowance for doubtful accounts $ 197,000 $ 199,400 Accrued expenses 142,300 140,000 Loss carryforwards 1,360,500 625,000 Tax credits 178,600 193,600 Other 116,400 53,900 ---------- --------- 1,994,800 1,211,900 Deferred tax asset valuation allowance (1,383,800) (600,900) ========== ========= Total deferred taxes, net $ 611,000 $ 611,000 ========== =========
6. Net Income (Loss) Per Share Primary earnings per share were calculated as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net income (loss) $ 305,600 $ (279,500) $ 406,200 $ (644,200) ---------- --------- ---------- --------- Average common shares outstanding 3,298,311 3,100,887 3,209,579 3,100,887 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A 280,835 N/A 259,226 Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A 118,261 N/A 118,261 Adjusted weighted average shares outstanding 3,298,311 3,500,003 3,209,579 3,478,394 ---------- ---------- ---------- ---------- Net loss per share $ 0.09 $ (0.08) $ 0.13 $ (0.19) ========== ========== ========== ==========
Primary earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of shares issued and outstanding and shares issuable upon exercise of dilutive stock options and warrants during each year. Page 6 of 10 7 Part I - FINANCIAL INFORMATION (continued) Fully diluted earnings per share were calculated as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net income (loss) $ 305,600 $ (279,500) $ 406,200 $ (644,200) ---------- ---------- ---------- ---------- Average common shares outstanding 3,298,311 3,100,887 3,209,579 3,100,887 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A 280,835 N/A 259,226 Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A 118,261 N/A 118,281 Add: conversion of convertible debt into shares N/A N/A N/A N/A ---------- ---------- ---------- ---------- Adjusted weighted average shares outstanding 3,298,311 3,500,003 3,209,579 3,478,394 ---------- ---------- ---------- ---------- Net loss per common share assuming full dilution $ 0.09 $ (0.08) $ 0.13 $ (0.19) ========== ========== ========== ==========
Fully diluted earnings (loss) per share are calculated by dividing net income (loss), adjusted for the dilutive after-tax effect of the interest expense associated with the convertible debt, by the sum of the weighted average number of shares issued and outstanding and shares issuable upon exercise of dilutive stock options and warrants, and upon conversion of convertible debt during each year. Page 7 of 10 8 Part - FINANCIAL INFORMATION (continued) Item 2 FAFCO, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Results of Operations Net sales for the quarter ended June 30, 1996 increased by 2.3% from $2,712,500 from 1995 to $2,775,500 in 1996. Net sale for the six months ended June 30, 1996 increased by 5.4% from $4,801,800 in 1995 to $5,059,900 in 1996. These increases were primarily due to increased IceStor(TM) and pool panel product sales partially offset by decreased unit sales of the Company's automated swimming pool controls. Cost of goods sold decreased from $1,843,400 (68.0% of net sales) in the quarter ended June 30, 1995 to $1,583,900 (57.1% of net sales) in the corresponding quarter in 1996, and decreased from $3,227,600 (67.2% of net sales) for the six month period ended June 30, 1995 to $2,907,400 (57.5% of net sales) for the corresponding period in 1996. These decreases in cost of goods sold were due primarily to the spreading of reduced overhead costs over slightly higher net sales. Marketing and selling expenses decreased from $602,400 (22.2% of net sales) in the quarter ended June 30 1995 to $459,000 (16.5% of net sales) in the same quarter of 1996 and a decrease from $1,168,500 (24.3% of net sales) in the six month period ended June 30, 1995 to $928,100 ( 18.3% of net sales) for the corresponding period in 1996. These increases were due mainly to the decrease of in-house sales support personnel. General and administrative expenses decreased from $403,900 (14.9% of net sales) in the quarter ended June 30, 1995 to $370,700 (13.4% of net sales) in the same quarter in 1996 and from $764,900 (15.9% of net sales) in the six month period ended June 30, 1995 to $682,700 (13.5% of net sales) for the corresponding period in 1996. These decrease were due mainly to a reduction of cost associated with decreases in personnel throughout the company. Research and development expensed decreased from $150,500 (5.6% of net sales) for the quarter ended June 30 1995 to $5,400 (0.2% of net sales) for the quarter ended June 30, 1996 and it decreased from $278,200 (5.8% of net sales) in the six month period ended June 30, 1995 to $58,000 (1.1% of net sales) for the corresponding period in 1996. These decreases were primarily a result of decrease in personnel in the research and development area. Net interest expense increased from $17,800 (0.7% of net sales) in the quarter ended June 30, 1995 to $40,700 (1.5% of net sales) for the quarter ended June 30, 1996 and increased from $33,600 (0.7% of net sales) in the six month period ended June 30, 1995 to $81,100 (1.6% of net sales) for the corresponding period in 1996. These increases were mainly due to higher average daily borrowing in 1996 along with higher interest rates in 1996. Other income (net) included $14,100 in refunds of prior year's insurance premiums in the second quarter and $30,000 during the first six months of 1996 compared with $24,400 in the second quarter and the first six months of 1995. Liquidity and Capital Resources At June 30, 1996, the Registrant's inventories had increased to $1,031,600 from $717,200 at December 31,1995. This increase was due mainly to acquisition of inventories required to support the increased sales levels experienced during the first half of 1996. Page 8 of 10 9 Part I - FINANCIAL INFORMATION (continued) At June 30, 1996, the Registrant's accounts payable and other accrued expenses had increased to $1,531,600 from $949,100 at December 31, 1995. This increase is primarily due to decreased cash flow during the first half of 1996 as a result of the Registrant's "Early Buy" program from Above Ground Pool systems and increased sales levels experienced during the quarter. At June 30, 1996, the Registrant's accounts receivable had increased to $1,940,000 from $1,149,600 at December 31, 1995 due mainly to the effect of the Company's "Early Buy" program for Above Ground Pool panel sales which was introduced in 1996 along with increased sales levels experienced during the first half of 1996. At June 30, 1996, the Registrant's accrued compensation and benefits had increased to $256,000 from $188,900 at December 31, 1995, due mainly to the fact that the December 1995 level was abnormally low due to heavy use of vacation while the Company was closed in the latter half of December. At June 30, 1996, the Registrant's current ratio was 1.45 to 1 compared with 1.11 to 1 at December 31, 1995. The Registrant had working capital of $1,110,300 at June 30, 1996 compared with $222,400 at December 31, 1995. Total assets exceeded total liabilities by $1,113,600 at June 30, 1996 compared with $614,700 at December 31, 1995. The Registrant believes that its cash flow from operations along with its available line of credit will be sufficient to support operations during the next twelve months. Significant Accounting Policies - Income Taxes Effective as of the beginning of 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), on a prospective basis. The new standard requires an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. See Note 5 of Notes to Interim Consolidated Financial Statements. For periods prior to 1993, the Company followed the deferred method prescribed by Accounting Principles Board Opinion No. 11. Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K a. The following exhibits are filed as part, to the extent indicated herein, in the Form 10-Q.
EXHIBIT NO. DESCRIPTION 4.6 Form of Subordinated Note and Warrant Purchase Agreement dated as of March 27, 1996 between Registrant and certain investors. 10.19(g) Amended and Restated Loan and Security Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated June 5, 1996.
b. Reports on Form 8-K A report on Form 8-K was filed on March 28, 1996 reporting the extension of the Registrant's bank line of credit. Page 9 of 10 10 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FAFCO, Inc. (Registrant) DATE: August 14, 1996 BY:/s/Alex N. Watt ------------------- --------------- Alex N. Watt, Vice President - Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer Page 10 of 10 11
Subsequently ITEMS Numbered Pages ================================================================================================================= EXHIBIT NO. DESCRIPTION 4.6 Form of Subordinated Note and Warrant Purchase Agreement dated as of March 27, Page 12 1996 between Registrant and certain investors. 10.19(g) Amended and Restated Loan and Security Agreement between Registrant as Borrower Page 45 and Silicon Valley Bank as Lender dated June 5, 1996.
Page 11 of 10 EX-4.6 2 FORM OF SUBORDINATED NOTE & WARRENT PURCHASE AGMT. 1 FAFCO, INC. SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT DATED AS OF MARCH 27 , 1996 This Agreement is made as of March 27 , 1996, between FAFCO, Inc., a California corporation (the "Company"), and the persons and entities (the "PURCHASERS") listed on the Schedule of Purchasers attached hereto as Exhibit A (the "SCHEDULE OF PURCHASERS"). SECTION 1 SALE OF CONVERTIBLE NOTES AND STOCK WARRANTS 1.1 The Notes. Each Purchaser severally agrees, on the terms of and subject to the conditions specified in this Agreement, to lend to the Company the sum set forth in Column 2 of Exhibit A opposite such Purchaser's name at the Closing (as defined below). Each Purchaser's loan shall be evidenced by a promissory note (individually a "NOTE" and collectively the "NOTES"), dated as of the date of Closing, in the form of Exhibit B. 1.2 The Warrants. In exchange for the payment of the warrant issuance price set forth in Column 4 of Exhibit A opposite each Purchaser's name, the Company agrees to issue to each Purchaser at the Closing a stock purchase warrant in the form of Exhibit C (individually a "WARRANT" and collectively the "WARRANTS") exercisable initially for the number of shares of Common Stock ("COMMON") set forth in Column 3 of Exhibit A opposite such Purchaser's name. The securities issued or issuable upon exercise of the Warrants are referred to as the "WARRANT COMMON." SECTION 2 CLOSING DATE; DELIVERY. 2.1 Closing Date. The first closing of the purchase and sale of the Notes and Warrants hereunder shall be held at the law offices of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California at 3 p.m., on March 27 1996. Any subsequent closings shall be held at such other time and place upon which the Company and the Purchasers participating in such subsequent closing shall agree. The term "CLOSING" and "CLOSING DATE," as used herein, shall refer to the relevant closing and the date thereof with respect to the Purchaser being referenced, as shown on the Schedule of Purchasers attached hereto as Exhibit A. 2.2 Delivery. At the Closing, the Company will deliver to each Purchaser a Note in the principal amount set forth opposite such's name in Column 2 of Exhibit A, and a Warrant initially exercisable for the number of shares of Common Stock set forth opposite such Purchaser's name in 1 2 Column of Exhibit A. At the Closing, each Purchaser shall either deliver the amount of such Purchaser's Loan as set forth opposite such Purchaser's name in Column of Exhibit A by check or wire transfer, or shall present for cancellation a 10% convertible subordinated Note, issued to the Purchaser by the Company and having a principal amount equal to the amount of the Loans. SECTION 3 REPRESENTATIONS AND WARRANTIES OF HE COMPANY Subject to and except as set forth in the Schedule of Exceptions attached as Exhibit D hereto (the "SCHEDULE OF EXCEPTIONS"), the Company hereby represents and warrants to the PURCHASERS as follows: 3.1 Organization and Standing; Articles and By-Laws. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction where such qualification is required, except jurisdictions where the failure to be so qualified would not materially adversely affect the business or financial condition of the Company. 3.2 Corporate Power. The Company will have at the Closing Date all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Notes and Warrants hereunder, to issue the Warrant Common upon exercise of the Warrants and to carry out and perform its obligations under the terms of this Agreement. 3.3 Financial Statements and Other Information. The Company has delivered to each Purchaser the following: (a) Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission (the "COMMISSION" of the "SEC") pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), together with the index to exhibits thereto; (b) Definitive Proxy Statement dated April 10, 1995 for the Annual Meeting of Shareholders held on April 27, 1995, as filed with the Commission pursuant to Section 14 of the Exchange Act and Regulation 14A promulgated thereunder; (c) 1995 Annual Report to Shareholders, as filed with the Commission pursuant to Section 14 of the Exchange Act and Rule 14a-3(c) promulgated thereunder; (d) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995, as filed with the Commission pursuant to Section 13 of the Exchange Act, together with the indices to exhibits thereto; and 2 3 (e) Term Sheet including a brief description of the Notes and Warrants and the use of proceeds from the sale thereof. 3.4 Authorization. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Notes and the Warrants (and the Common Stock issuable upon exercise of the Warrants) and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Notes, and the Warrants, when issued in compliance with the provisions of this Agreement, will be validly issued and will be free of any liens and encumbrances, and the Warrant Common has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Notes and the Warrants (and the Warrant Common) may be subject to restrictions on transfer under state and/or federal securities laws and as set forth herein. 3.5 Compliance with Other Instruments. The Company is not in violation of any term of its Articles of Incorporation or Bylaws, as amended, or in violation of any material agreement, instrument, judgment or decree or, to the best of its knowledge, any order, statute, rule or regulation applicable to the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein will not result in any such violation or be in conflict with or constitute a default under any such provision or agreement, and will not accelerate the performance provided by the terms of any material agreement or instrument to which the Company is a party, or constitute a default thereunder, or an event which, with the lapse of time or action by a third party, could result in a default thereof, or result in the creation of any lien, charge or encumbrance upon any assets or properties of the Company, which breach, default, lien, charge or encumbrance, singularly or in the aggregate, would materially and adversely affect the business or property of the Company. 3.6 Litigation. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any basis therefor or threat thereof), which, either in any case or in the aggregate, might result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted or as proposed to be conducted, or in any material liability on the part of the Company, and none which questions the validity of this Agreement or any action taken or to be taken in connection herewith. SECTION 4 INVESTMENT REPRESENTATION 3 4 4.1 Investment Representation. (a) The Purchaser understands and confirms that this Agreement is made with the Purchasers in reliance upon each Purchaser's representation to the Company that the Notes and Warrants to be received are to be acquired for investment and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting participation in or otherwise distributing the same, but subject nevertheless to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Agreement, each Purchaser further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to the Notes, the Warrants, or the Warrant Common. (b) Each Purchaser understands that the Notes, the Warrants and the Warrant Common are not registered under the Securities Act of 1933, as amended (the "Act") on the basis that the sale provided for in this Agreement and the issuance of securities is exempt pursuant to Section 4(2) of the Act and Regulation D promulgated thereunder, and that the Company's reliance on such exemption is predicated on the Purchasers' representations set forth herein. (c) Each Purchaser agrees that it will not make a disposition of the Notes or Warrants purchased hereunder (or the Warrant Common) except in compliance with Section 6 hereof. (d) Each Purchaser represents that it is able to fend for itself in the transactions contemplated by this Agreement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, has the ability to bear the economic risks of its investment, and has had all questions which it has asked answered by the Company. (e) Each Purchaser represents and warrants that, at a reasonable time prior to the Closing Date, it has been given the opportunity to ask questions and receive answers concerning the terms and conditions of this offering, to obtain any additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information furnished pursuant to Section 3.3 hereof, and to discuss the Company and its plans, operations and financial condition with its officers and that it has heretofore received all such information as it deems necessary and appropriate to enable it to evaluate the financial risk inherent in making an investment in the securities of the corporation. It further represents and warrants that it has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. (f) Each Purchaser understands that the Notes, Warrants and Warrant Common have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of its investment intent as expressed herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if its representation was predicated solely upon a present intention to hold these securities for the minimum 4 5 capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (g) Each Purchaser further understands that the Notes, Warrants and Warrant Common must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available (such as Rule 144 under the Act). Moreover, the Purchaser understands that, except as set forth in Section 6 hereof, the Company is under no obligation to register the Notes, Warrants or Warrant Common. In addition, the Purchaser understands that the certificates evidencing the Notes, Warrants, and Warrant Common may be imprinted with a legend which prohibits the transfer of such securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (h) Each Purchaser is familiar with the provisions of Rule 144, promulgated under the Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, including among other things: (1) The availability of certain public information about the Company; (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker transaction" or in transactions directly with a market maker, as said term is defined under the Exchange Act and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. There can be no assurances that the requirements of Rule 144 will be met, or that the Notes, Warrants or Warrant Common will ever be saleable. (i) Each Purchaser further understands that at the time the Purchaser wishes to sell the Notes, Warrants or Warrant Common there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the Purchaser would be precluded from selling such securities under Rule 144 even if the two-year minimum holding period had been satisfied. (j) Each Purchaser further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, compliance with some other registration exemption or the notification to the Company of the proposed disposition by it and the furnishing to the Company of (i) detailed information regarding the disposition, and (ii) and opinion of its counsel to the effect that such disposition will not require registration (the Purchaser understands such counsel's opinion must be acceptable to counsel for the Company) will be required and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. 5 6 4.2* Accredited Investor. Each Purchaser represents and warrants that one or more of the following criteria are applicable to such Purchaser: (a) The Purchaser is a director or executive officer of the Company; (b) The Purchaser is a natural person who has an individual net worth or joint net worth with the Purchaser's spouse exceeding $1,000,000 at the time of purchase; (c) The Purchaser is a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that Purchaser's spouse in excess of $300,000 in each of those years and who reasonably expects to reach the same level of income in the current year; (d) The Purchaser is either (i) a bank as defined in Section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual capacity or fiduciary capacity, (ii) a broker or dealer registered pursuant to Section 15 of the Exchange Act, (iii) an insurance company as defined in Section 2(13) of the Act, (iv) an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of such Act, (v) a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, (vi) a plan established and maintained by a state or its political subdivisions, or any agency or instrumentatility of a state or its political subdivisions, for the benefit of its employees, which plan has total assets of $5,000,000, or (vii) an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which plan fiduciary is either a bank, savings and loan association, insurance company or registered investment adviser, or which employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (e) The Purchaser is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (f) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets of $5,000,000; (g) The Purchaser is a not-for-profit organization or other entity exempt from income tax under Section501(c)(3) of the Internal Revenue Code, not formed with the specific purpose of acquiring the securities offered hereunder, with total assets in excess of $5,000,000; or - -------- *A PURCHASER UNABLE TO MEET AT LEAST ONE OF THE CRITERIA SET FORTH IN SECTION 4.2 ABOVE MUST ACKNOWLEDGE SUCH INABILITY BY PLACING ITS INITIALS HERE: _________________ 6 7 (h) The Purchaser is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered hereunder, whose purchase is directed by a person who has such experience in business and financial matters as to enable such person to evaluate the merits and risks of acquiring the securities offered hereunder, (i) The Purchaser is an entity in which all of the equity owners meet the qualifications set forth in (a), (b), (c), (d), (e), (f), (g) or (h) above. As used in this Section 4.2, the term "net worth" means the excess of total assets over total liabilities. In computing net worth for purposes of paragraph (b) above, the principal residence of the Purchaser must be valued at cost (including cost of improvements), or at a recently appraised value established by an institutional lender making a secured loan, in either case net of encumbrances. SECTION 5 CONDITIONS TO CLOSING The Purchasers' and the Company's obligations to purchase and to sell and issue, respectively, the Notes and Warrants at the Closing are subject to the fulfillment on or prior to the Closing Date of the following conditions: 5.1 Representations and Warranties of Company Correct. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date. 5.2 Representations of Purchasers Correct. The representations made by the Purchasers in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date. 5.3 Covenants and Laws. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all respects and the purchase and sale of the Notes and Warrants pursuant to the terms of this Agreement shall not violate any law or regulation to which any of the Purchasers or the Company is subject. SECTION 6 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT 6.1 Certain Definitions. As used in this Section, the following terms shall have the following respective meanings: 7 8 "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act. "Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Restricted Securities" shall mean the Notes, the Warrants and the Warrant Common required to bear the legend set forth in Section 6.3 hereof. "Registrable Securities" means (i) the Warrant Common, and (ii) any Common Stock issued in respect of such shares upon any stock split, stock dividend, recapitalization or similar event, which shares, in each of the foregoing instances, have not been sold to the public pursuant to Rule 144 under the Act or otherwise. The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Section 6.5 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale and any expenses incurred by a Holder for its own benefit including all fees and disbursements of counsel to the Holders participating in the offering (including the allocable portion of the fees and disbursements of counsel to the Company, if such counsel is also serving as counsel to the selling shareholders), except those expenses included in the definition of Registration Expenses. "Holder" shall mean any Purchaser or any permitted transferee or assignee of such Purchaser pursuant to Section 6.10. 6.2 Restrictions on Transferability. The Notes, the Warrants and the Warrant Common shall not be transferable except upon the conditions specified in this Section, which conditions are intended to insure compliance with the provisions of the Act. Each Purchaser will cause any proposed transferee of the Notes, the Warrants or the Warrant Common held by a Purchaser to agree to take and hold such Notes, Warrants or Warrant Common subject to the provisions and upon the conditions specified in this Section. 6.3 Restrictive Legend. Each certificate representing (i) the Notes, (ii) the Warrants, (iii) shares of Warrant Common, and (iv) any other securities issued in respect of the Notes, the Warrants or the Warrant Common upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 6.4 below) be stamped 8 9 or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. 6.4 Notice of Proposed Transfers. Each holder of a certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 6.4. Prior to any proposed transfer of any Restricted Securities (other than under circumstances described in Section 6.5 hereof), the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and, if requested by the Company, shall be accompanied (except in transactions in compliance with Rule 144) by an unqualified written opinion of legal counsel, which opinion shall be addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Act. The holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of such legal opinion (if reasonably acceptable as above provided) and the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 6.3 above, except that such certificate shall not bear such restrictive legend if transferred in compliance with Rule 144 or if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Act. 6.5 Piggy-Back Registration Rights. (a) Notice of Registration. Whenever the Company proposes to register any of its Common Stock under the Act for a public offering for cash, whether as a primary or secondary offering (or pursuant to the registration rights granted to other holders of securities of the Company), other than a registration relating to employee benefit plans or in connection with a Rule 145 transaction or equivalent, the Company will: (i) give to each Holder at the address indicated on the books of the transfer agent written notice of the intent to so register its securities; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests delivered to the Company or its legal counsel by any Holder or Holders within 15 days after the date of mailing of such written notice by the Company, except as set forth in subparagraphs (b) and (c) below. 9 10 (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subparagraph (a)(i) of this Section. In such event the right of any Holder to registration pursuant to this Section shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company or by holders exercising demand registration rights, as the case may be. Notwithstanding any other provisions of this Section, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders requesting inclusion in such proportion, as nearly as practicable, as the respective amounts of Registrable Securities entitled to inclusion in such registration held by such Holders at the time of filing the registration statement bear to the aggregate amount of such securities held by all such Holders. To the extent that other persons holding the Company's securities may possess registration rights with respect to such securities (whether heretofore or hereafter granted), the total number of shares to be sold by selling shareholders under a registration statement, if less than the total amount requested to be sold by such persons, shall be allocated on a pro rata basis according to the total number of shares held by such persons which are entitled to registration rights with respect to such offering, subject to the prior rights set forth in subsection (c) hereof. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom at any time prior to filing of the registration statement by written notice to the Company and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall not be included in such registration. [(c) Prior Rights. Certain holders (the "Prior Holders") of the Company's Common Stock have registration rights granted pursuant to a Stock Purchase Agreement dated as of April 14, 1977 (the "Prior Agreement"). In the event that a registration is effected pursuant to the Prior Holders' demand rights set forth in Section 6.5 of the Prior Agreement, securities held by the Holders and others desiring to sell securities in the registration may only be included to the extent that the amount of securities being registered for the account of the Prior Holders will not be diminished. In the event of a registration which is not initiated by a demand of the Prior Holders but with respect to which such Prior Holders have piggyback rights under Section 6.6 of the Prior Agreement, the securities to be sold by the Prior Holders may not be reduced to less than 33-1/3% of the total amount of securities being registered.] 6.6 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Section shall be borne by the Company; and all Selling Expenses shall be borne by the Holders of the securities so registered for whose account such expenses were incurred. 6.7 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section, the Company will advise each participating Holder 10 11 as to the filing of the registration statement with the Commission and the effective date thereof. The Company shall also advise each participating Holder, concurrently with the notice of effectiveness, of the jurisdictions in which the securities being registered have been qualified for sale to the public. At its expense, the Company will: (a) Keep such registration, qualification or compliance effective for a period of 90 days after effectiveness with the Commission or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. 6.8 Indemnification. (a) The Company will indemnify each participating Holder, each of its officers and directors and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Section 6, and each underwriter, if any, and each person who controls any underwriter against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its partners, officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or action arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each legal counsel and independent accountant of the Company, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Act, and each other such Holder, each of its partners, officers and directors and each person controlling such Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such partners, 11 12 directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder from the sale of Registrable Securities as contemplated herein. (c) Each party entitled to indemnification under this Section (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for such Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) Notwithstanding the foregoing, if the Registrable Securities are to be distributed by means of an underwritten public offering, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with such underwriting are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall be controlling. 6.9 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 6. 6.10 Transfer of Piggy-Back Registration Rights. The rights to cause the Company to register a Purchaser's Registrable Securities, granted hereunder by the Company, may be assigned to a transferee or assignee of 25,000 or more shares of Warrant Common (as adjusted to reflect stock splits, stock dividends and similar events) provided that the Company is given advance written notice by such Purchaser of said transfer and of the intent to transfer such Purchaser's registration rights together with such securities, stating the name and address of said transferee or assignee and identifying the Registrable Securities with respect to which such registration rights are being assigned, and provided, further, that no transferee or assignee of any of such Restricted Securities shall be entitled to the registration rights provided in this Section if such transferee or assignee would be 12 13 permitted to sell all of the Restricted Securities so transferred or assigned to him within one three-month period pursuant to Rule 144 promulgated under the Act. 6.11 "Market Stand-off" Agreement. Any Holder of Registrable Securities being registered under this Section 6 agrees, if requested by the Company or an underwriter of such registered public offering, not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder during a period of up to 180 days following the effective date of the registration statement of the Company filed under the Act, provided that all officers and directors of the Company enter into similar agreements. Such agreement shall be in writing in the form satisfactory to the Company and such underwriter, and may be included in the underwriting agreement. The Company may impose stop-transfer instructions with respect to the securities subject to the foregoing restriction until the end of the required stand-off period. 6.12 Termination of Registration Rights. The rights granted under this Section shall terminate as to any Purchaser or permissible transferee or assignee of such rights if such person would be permitted to sell all of the Restricted Securities held by such person within one three-month period pursuant to Rule 144 promulgated under the Act. SECTION 7 MISCELLANEOUS 7.1 Agreement Is Entire Contract. This Agreement, the Exhibits hereto and the other documents delivered pursuant hereto constitute the entire contract between the parties hereto and no party shall be liable or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 7.2 Amendment by Agreement. Any provision of this Agreement may be amended or waived by a written instrument signed by the Company and by a majority in interest of the holders of the Warrants (on an as-if-exercised basis) and the Warrant Common. 7.3 Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, sent by facsimile or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery at the respective addresses or facsimile phone number of the parties as set forth below. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. If to a Purchaser: At the address set forth in the Schedule of Purchasers 13 14 If to Company: FAFCO, Inc. 2690 Middlefield Road Redwood City, CA 94063 Attention: Alex N. Watt, Chief Financial Officer With a copy to: Ann Yvonne Walker, Esq. Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice of such new address in conformance with this paragraph. 7.4 Agent's Fees. (a) The Company hereby agrees to indemnify and to hold each Purchaser harmless of and from any liability for commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which the Company, or any of its employees or representatives, is responsible. (b) Each Purchaser (i) represents and warrants that no finders or brokers have been retained in connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to indemnify and to hold the Company and the Purchasers (other than himself) harmless of and from any liability for any commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which such Purchaser, or any of his employees or representatives, are responsible. 7.5 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be severed from this Agreement as if such provision were not included and the balance of this Agreement shall be enforceable in accordance with its terms. 7.6 Expenses. The Company and each Purchaser shall bear its own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION, OR EXEMPTION THEREFROM, IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION, OR EXEMPTION THEREFROM, BEING OBTAINED. 7.8 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. 14 15 7.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. FAFCO, INC. PURCHASERS: By:_______________________________ ______________________________ Title:____________________________ 15 16 EXHIBIT "A" SUBORDINATED NOTE AND PURCHASE AGREEMENT
Name Amount Lent Number of Warrant Shares - ---- ----------- ------------------------
17 EXHIBIT "B" THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION AND QUALIFICATION IS NOT REQUIRED. 11% SUBORDINATED PROMISSORY NOTE $* March 27, 1996 - - Redwood City, California FOR VALUE RECEIVED, FAFCO, Inc., a California corporation (the "Company") promises to pay to _______________, ("Lender"), or its registered assigns, the principal sum of ____________ Dollars ($____), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to eleven percent (11.0%) per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on March 27, 2000 (the "Payment Date"). Accrued interest shall be payable on January 1, April 1, July 1 and October 1 of each year, commencing July 1, 1996, the last payment of any accrued and unpaid interest to be made together with payment of the principal on the Payment Date. This Note may be prepaid only in accordance with Section 4 below. This Note is issued pursuant to a Subordinated Note and Warrant Purchase Agreement dated as of April 13, 1996 (the "Purchase Agreement") between the Company and the purchasers listed on the Schedule of Purchasers to such Purchase Agreement, and is subject to the terms and provisions of the Purchase Agreement, a copy of which may be obtained from the Company at its principal executive offices. The following is a statement of the rights of Lender and the conditions to which this Note is subject, and to which Lender, by the acceptance of this Note, agrees: 1. DEFINITIONS. As used in this Note, the following capitalized terms have the following meanings: (a) "Articles" shall mean the Articles of Incorporation of Company, as amended and/or restated from time to time. (b) "Company" includes the corporation initially executing this Note and any Person that shall succeed to or assume the obligations of Company under this Note. 1 18 (c) "Event of Default" has the meaning given in Section 2 hereof. (d) "Lender" shall mean the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered holder of this Note. (e) "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. 2. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Note. (a) Failure to Pay. Company shall fail to pay any principal, interest or other payment due hereunder within ten (10) days of Company's receipt of Lender's written demand; or (b) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i)apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it or (vii) take any action for the purpose of effecting any of the foregoing; or (c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within ninety (90) days of commencement. 3. RIGHTS OF LENDER UPON DEFAULT. Upon the occurrence or existence of an Event of Default described in Paragraph 2(a) and at any time thereafter during the continuance of such Event of Default, Lender may, by written notice to Company, declare all outstanding amounts payable by Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Paragraphs 2(b) and 2(c), immediately and without notice, all outstanding amounts payable by Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Lender may exercise any other right, power or remedy permitted to it by law, either by suit in equity or by action at law, or both. 4. REDEMPTION. 4.1 Right of Redemption. The Company or its successor, as the case may be, may, at its own option, redeem and prepay in whole the principal amount, plus accrued interest to the date of payment, of this Note. 2 19 4.2 Redemption Premium. In the event that the Company redeems this Note prior to the Payment Date, the Company shall issue to the Lender a warrant (the "Premium Warrant") to purchase one share of the Company's Common Stock for each $10.00 in principal amount of this Note that is so redeemed. Such Premium Warrant shall be in the form of Exhibit A hereto and shall have an exercise price equal to [$0.125] per share. 4.3 Notice of Redemption. Notice of redemption shall be given by first class mail, postage prepaid, mailed not less than thirty (30) calendar days prior to the date fixed for such redemption (the "Redemption Date") to each Lender at the Lender's address last appearing on the register kept at the Office of the Company for registration and transfers of the Notes. Such notice shall specify the redemption price of the Note (the "Redemption Price"), which shall be the principal amount of this Note plus the accrued interest on such principal amount to the Redemption Date. 4.4 Note Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Note to be so redeemed shall, on the Redemption Date, become due and payable in full, and on and after the Redemption Date (unless the Company shall default in the payment of the Redemption Price), such Note shall no longer be considered outstanding. Upon surrender of any Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price on the Redemption Date. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the Note shall remain outstanding and the outstanding principal amount shall, until paid, continue to bear interest from the Redemption Date at the rate borne by the Note. No interest shall accrue on any Note following the Redemption Date. 4.5 Selection of Notes to be Redeemed. All of the Notes issued pursuant to the Purchase Agreement shall rank equally without preference or priority of any kind over one another, and all payments on account of principal and interest shall be applied ratably and proportionately on all outstanding Notes on the basis of the principal amount of outstanding indebtedness represented thereby. 4.6 Prepayment. Except as set forth in this Section 4, this Note may not be prepaid in whole or in part at any time. 5. REPRESENTATIONS AND WARRANTIES OF LENDER. In addition to the representations and warranties contained in Section 4 of the Purchase Agreement, by its acceptance hereof, the Lender represents and warrants to Company that: (a) Securities Law Compliance. Lender has been advised that this Note has not been registered under the Securities Act of 1933, as amended (the Act) and, therefore, cannot be resold unless it is registered under the Act and qualified under applicable state securities laws or unless an exemption from such registration and qualification requirements is available. Lender is aware that Company is under no obligation to effect any such registration and qualification with respect to this Note or to file for or comply with any exemption from registration and qualification. Lender has not been formed solely for the purpose of making this investment and is acquiring this Note for its own account for investment, not as a nominee or agent, and not with a view to, or for resale in connection with, the distribution thereof. Lender has such knowledge and experience in financial and business matters that such Lender is capable of evaluating the merits and risks of such investment, is able to incur a complete loss of such investment and is able to bear the economic risk of such investment for an indefinite period of time. Lender is an accredited investor as such term is defined in Rule 501 of Regulation D under the Act. (b) Access to Information. Lender acknowledges that Company has given Lender access to all documents and other information required for Lender to make an informed decision with respect to the purchase of this Note. 3 20 6. SUBORDINATION. (a) "Senior Indebtedness" means the principal of and premium, if any, and interest on indebtedness of the Company for money borrowed from commercial banks, equipment lessors or other financial institutions under a secured or unsecured line of credit, term loan or equipment lease. (b) The Company agrees and the holder of this Note, by acceptance hereof, agrees, expressly for the benefit of the present and future holders of Senior Indebtedness, that, except as otherwise provided herein, upon (i) an event of default under any Senior Indebtedness, or (ii) any dissolution, winding up or liquidation of the Company, whether or not in bankruptcy, insolvency or receivership proceedings, the Company shall not pay, and the holder of such Note shall not be entitled to receive, any amount in respect of the principal and interest of such Note unless and until the Senior Indebtedness shall have been paid or otherwise discharged. Upon (1) an event of default under any Senior Indebtedness, or (2) any dissolution, winding up or liquidation of the Company, any payment or distribution of assets of the Company, which the holder of this Note would be entitled to receive but for the provisions hereof, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the holders of Senior Indebtedness ratably according to the aggregate amounts remaining unpaid on Senior Indebtedness after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness. Subject to the payment in full of the Senior Indebtedness and until this Note is paid in full, the holder of this Note shall be subrogated to the rights of the holders of the Senior Indebtedness (to the extent of payments or distributions previously made to the holders of Senior Indebtedness pursuant to this paragraph 6(b)) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. (c) This Section 6 is not intended to impair, as between the Company, its creditors (other than the holders of Senior Indebtedness) and the holder of this Note, the unconditional and absolute obligation of the Company to pay the principal of and interest on the Note or affect the relative rights of the holder of this Note and the other creditors of the Company, other than the holders of Senior Indebtedness. Nothing in this Note shall prevent the holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under the Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect to cash, property or securities of the Company received upon the exercise of any such remedy. 7. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer described in Sections 9 and 10 below, the rights and obligations of Company and Lender shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 8. AMENDMENTS WITH CONSENT OF HOLDERS. With the written consent of the Holders of not less than a majority in principal amount of outstanding Notes issued pursuant to the Purchase Agreement, the Company may amend this or any other Note by executing and delivering to the Lenders an amendment thereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Notes or of modifying in any manner the rights of the Lenders; provided, however, that no such amendment shall, without the consent of the Lender of this Note affected thereby, change the maturity of the principal of, or any installment of interest on, the Note, or reduce the principal amount thereof or the interest thereon or payable upon the redemption thereof or impair the right to institute suit for the enforcement of any such payment on or after the maturity thereof (or, in the case of redemption, on or after the Redemption Date). 9. TRANSFER OF THIS NOTE. Transfers of this Note may only be made in compliance with the provisions of the Purchase Agreement, which are incorporated herein by reference. With respect to any offer, sale or other disposition of this Note, Lender will give written notice to Company prior thereto, describing briefly the manner thereof, together with a written opinion of Lender's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). 4 21 Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, Company, as promptly as practicable, shall notify Lender that Lender may sell or otherwise dispose of this Note, all in accordance with the terms of the notice delivered to Company. If a determination has been made pursuant to this Section 9 that the opinion of counsel for Lender is not reasonably satisfactory to Company, Company shall so notify Lender promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for Company such legend is not required in order to ensure compliance with the Act. Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and Company shall not be affected by notice to the contrary. 10. ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, other than by operation of law (such as in a merger), in whole or in part, by Company without the prior written consent of Lender. 11. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, sent by facsimile or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery at the respective addresses or facsimile phone number of the parties as set forth below. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. If to Lender: At the address set forth in the Schedule of Purchasers to the Purchase Agreement. If to Company: FAFCO, Inc. 2690 Middlefield Road Redwood City, CA 94063 Attention: Alex N. Watt, Chief Financial Officer With a copy to: Ann Yvonne Walker, Esq. Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice of such new address in conformance with this paragraph. 12. PAYMENT. Payment shall be made in lawful tender of the United States. 13. DEFAULT RATE; USURY. In the event that any payment of principal or interest provided for herein is not paid by Company when due (including the entire unpaid balance of this Note in the event such amount is made immediately due and payable pursuant to the terms hereof), then Company shall pay interest on the such amounts not paid when due at a rate per annum two percent (2%) higher than the rate otherwise applicable hereunder. In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. 5 22 14. EXPENSES; WAIVERS. If action is instituted to collect this Note, Company promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred in connection with such action. Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. No delay on the part of Lender in exercising any right hereunder shall operate as a waiver of such right or any other right. 15. GOVERNING LAW. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state. 6 23 IN WITNESS WHEREOF, Company has caused this Note to be issued as of the date first written above. FAFCO, INC. a California corporation By:__________________________________ Name:________________________________ Title:_______________________________ ACKNOWLEDGED AND AGREED TO: "LENDER" _____________________________________ By:__________________________________ Title:_______________________________ 7 24 EXHIBIT "C" THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF FAFCO, INC. THIS CERTIFIES that, for value received Freeman A. Ford ("Ford"), is entitled, upon the terms and subject to the conditions hereinafter set forth, to purchase from FAFCO, Inc., a California corporation (the "Company"), that number of fully paid and nonassessable shares of the Company's Common Stock at the purchase price per share as set forth in Section 1 below ("Exercise Price"). The number of shares and Exercise Price are subject to adjustment as provided in Section 10 hereof. 1. Number of Shares; Exercise Price; Term. (a) Subject to adjustments as provided herein, this Warrant is exercisable for __________ shares (the :"Shares") of the Company's Common Stock at a purchase price of $0.125 per share, in accordance with the vesting schedule set forth in Section 1(b) hereof. (b) Subject to the terms and conditions set forth herein, this Warrant shall be immediately exercisable as to twenty percent (20%) of the Shares. This Warrant shall become exercisable as to an additional twenty percent (20%) of the Shares on each of the first, second, third and fourth anniversaries of the issuance hereof. This Warrant shall cease to be exercisable on March 27, 2000. 2. Title to Warrant. This Warrant and all rights hereunder are transferable, in whole or in part, but only with the prior written consent of the Company. Transfers shall occur at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 3. Exercise of Warrant. The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time, or from time to time, during the term hereof as described in Section l above, by the surrender of this Warrant and the Notice of Exercise and Investment Representation Statement annexed hereto duly completed and executed on behalf of the holder hereof, at the office of the Company in Redwood City, California (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and subject to Section 4 hereof, 1 25 upon payment of the purchase price, the holder of this Warrant shall be entitled to receive a certificate for the number of shares so purchased and, if this Warrant is exercised in part, an amended Warrant for the unexercised portion of this Warrant. The Company agrees that, upon exercise of this Warrant in accordance with the terms hereof, the shares so purchased shall be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. Payment of the aggregate Purchase Price may be by any of the following methods, at the election of the holder of this Warrant: (a) Cash; (b) Check; (c) By surrender of a fraction of this Warrant ("Net Issuance") equal to B/A, where A is the Fair Market Value (as hereinafter defined) of one (1) share of Common Stock of the Company, and B is the Exercise Price; or (d) Any combination of the foregoing. For purposes of Section 3(c), Fair Market Value shall mean (i) if the Company's Common Stock is traded on a national exchange or the Nasdaq Stock Market, the average of the closing prices of the Company's Common Stock over the five business day period immediately preceding the date of exercise; or (ii) if the Company's Common Stock is traded in the non-NASDAQ over-the-counter market, the averages of the closing bid and asked prices for the Company's Common Stock over the five business day period immediately preceding the date of exercise. Certificates for shares purchased hereunder shall be issued by the Company promptly and in no event later than twenty-one (21) days after the date of exercise, and, on partial exercise of this Warrant, an amended Warrant for the unexercised portion of this Warrant shall be delivered to the holder hereof as promptly as practicable after the date on which this Warrant shall have been exercised. All other terms and conditions of such amended Warrant shall be identical to those contained herein. The Company covenants that all shares which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant and payment of the aggregate Exercise Price, be fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which such holder would otherwise be entitled, such holder shall be entitled, at its option, to receive either (i) a 2 26 cash payment equal to the excess of fair market value for such fractional share above the Exercise Price for such fractional share (as mutually determined by the Company and the holder) or (ii) a whole share if the holder tenders the Exercise Price for one whole share. 5. Charges, Taxes and Expenses. Issuance of certificates for shares upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant (with the prior written consent of the Company); provided, however, that in the event certificates for shares are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof and the Notice of Exercise duly completed and executed and stating in whose name and certificates are to be issued; and provided further, that such assignment shall be subject to applicable laws and regulations. Upon any transfer involved in the issuance or delivery of any certificates for shares of the Company's securities, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. No Rights as Shareholders. This Warrant does not entitle the holder hereof to any voting rights, dividend rights or other rights as a shareholder of the Company prior to the exercise hereof. 7. Exchange and Registry of Warrant. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer or exercise, in accordance with its terms, at the office of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 9. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday or a Sunday or a legal holiday. 10. Adjustments and Termination of Rights. The purchase price per share and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) Merger. If at any time there shall be a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, then, as a part of such merger or consolidation, lawful provision shall be made so that the holder of this 3 27 Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the aggregate Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such merger or consolidation, to which a holder of the stock deliverable upon exercise of this Warrant would have been entitled in such merger or consolidation if this Warrant had been exercised immediately before such merger or consolidation. In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the holder after the merger or consolidation. (b) Reclassification, etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. (c) Split, Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, the Exercise Price shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. (d) Adjustment of Number of Shares. Upon each adjustment in the Exercise Price pursuant to 10(c) above, the number of shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of shares purchasable immediately prior to such adjustment in the Exercise Price by a fraction (i) the numerator of which shall be the Exercise Price immediately prior to such adjustment, and (ii) the denominator of which shall be the Exercise Price immediately after such adjustment. 11. Notice of Adjustments; Notices. Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 10 hereof, the Company shall issue a certificate signed by its Chief Executive Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of shares purchasable here under after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first class mail, postage prepaid) to the holder of this Warrant. 4 28 12. Miscellaneous. (a) Governing Law. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant shall constitute a contract under the laws of California and for all purposes shall be construed in accordance with and governed by the laws of said state, without giving effect to the conflict of laws principles. (b) Restrictions. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (c) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the holder relating hereto, the prevailing party shall be entitled to reasonable attorneys' fees and expenses incurred in enforcing this Warrant. (d) Amendments. This Warrant may be amended and the observance of any term of this Warrant may be waived only with the written consent of the Company and the then holders of Warrants exercisable for a majority of the shares of the Company's Common Stock then issuable upon exercise of all outstanding unexercised Warrants sold pursuant to the Purchase Agreement. (e) Notice. Any notice required or permitted hereunder shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by certified mail, postage prepaid and addressed to the party to be notified at the address indicated below for such party, or at such other address as such other party may designate by ten-day advance written notice 5 29 IN WITNESS WHEREOF, FAFCO, Inc. has caused this Warrant to be executed by its officer thereunto duly authorized. Dated:_________________________, 1996. FAFCO, INC. By:__________________________________ Alex N. Watt, Chief Financial Officer WARRANT HOLDER: ___________________________________________ Print Name ___________________________________________ Street Address ___________________________________________ City State Zip Code NOTICE OF EXERCISE To: FAFCO, Inc. 1. The undersigned hereby elects to purchase 50,000 shares of Common Stock ("Stock") of FAFCO, Inc. (the "Company") pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price and any transfer taxes payable pursuant to the terms of the Warrant, together with an Investment Representation Statement in form and substance satisfactory to legal counsel to the Company. 2. The shares of Stock to be received by the undersigned upon exercise of the Warrant are being acquired for its own account, not as a nominee or agent, and not with a view to resale or distribution of any part thereof, and the undersigned has no present intention of selling, granting any participation in, or otherwise distributing the same. The undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to the Stock. The undersigned believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Stock. 6 30 3. The undersigned understands that the shares of Stock are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in transactions not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, the undersigned represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4. The undersigned understands the instruments evidencing the Stock may bear one or all of the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT." (b) Any legend required by applicable state law. 5. Please issue a certificate or certificates representing said shares of Stock in the name of the undersigned: _____________________________ [Name] 6. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned: _____________________________ [Name] _________________________________ _____________________________ [Date] [Signature] 7 31 ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to ___________________________________________________________________ (Please Print) whose address is___________________________________________________ (Please Print) ___________________________________________________________________ Dated:___________________ , 19____ Holder's Signature:____________________________ Holder's Address:____________________________ ____________________________ Signature Guaranteed____________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 8 32 INVESTMENT REPRESENTATION STATEMENT PURCHASER Freeman A. Ford COMPANY : FAFCO, Inc. SECURITIES : Common Stock DATE : March 27, 1996 In connection with the purchase of the above-listed Securities, the undersigned, the Purchaser represents to the Company the following: (a) The undersigned is sufficiently aware of the Company's business affairs and financial condition to reach an informed and knowledgeable decision to acquire the Securities. The undersigned is purchasing these Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) The undersigned understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of its investment intent as expressed herein. In this connection, the undersigned understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if its representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The undersigned further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available (such as Rule 144 under the Securities Act). Moreover, the undersigned understands that the Company is under no obligation to register the Securities. In addition, the undersigned understands that the certificate evidencing the Securities may be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) The undersigned is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (1) The availability of certain public information about the Company; (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker, as said term is defined under 9 33 the Securities Exchange Act of 1934 (the "Exchange Act") and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. There can be no assurances that the requirements of Rule 144 will be met, or that the Securities will ever be saleable. (e) The undersigned further understands that at the time the undersigned wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the undersigned would be precluded from selling the Securities under Rule 144 even if the two-year minimum holding period had been satisfied. (f) The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied registration under the Securities Act, compliance with Regulation A, compliance with some other registration exemption or the notification to the Company of the proposed disposition by it and the furnishing to the Company of (i) detailed information regarding the disposition, and (ii) and opinion of its counsel to the effect that such disposition will not require registration (the undersigned understands such counsel's opinion shall concur with the opinion by counsel for the Company and the undersigned shall have been informed of such compliance) will be required and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (g) The undersigned understands that, in connection with any public offering of the Company's equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any shares of the Company's capital stock without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the Company or the underwriters; provided, that the officers and directors of the Company who own, or hold options to purchase, Common Stock of the Company also agree to such restrictions. Signature of Purchaser: By:_______________________________________ Title:____________________________________ 10 EX-10.19 3 AMENDED & RESTATED LOAN & SECURITY AGMT. 1 =============================================================================== FAFCO, INC. AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT =============================================================================== 2 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS AND CONSTRUCTION................................................................................... 1 1.1 Definitions.......................................................................................... 1 1.2 Accounting Terms..................................................................................... 10 2. LOAN AND TERMS OF PAYMENT...................................................................................... 10 2.1 Advances............................................................................................. 10 2.2 Overadvances......................................................................................... 10 2.3 Interest Rates, Payments, and Calculations........................................................... 10 2.4 Crediting Payments................................................................................... 11 2.5 Fees................................................................................................. 11 2.6 Additional Costs..................................................................................... 12 2.7 Term................................................................................................. 12 3. CONDITIONS OF ADVANCES......................................................................................... 12 3.1 Conditions Precedent to Initial Advance.............................................................. 12 3.2 Conditions Precedent to all Advances................................................................. 13 4. CREATION OF SECURITY INTERESTS................................................................................. 13 4.1 Grant of Security Interest........................................................................... 13 4.2 Delivery of Additional Documentation Required........................................................ 13 4.3 Right to Inspect..................................................................................... 14 5. REPRESENTATIONS AND WARRANTIES................................................................................. 14 5.1 Due Organization and Qualification................................................................... 14 5.2 Due Authorization, No Conflict....................................................................... 14 5.3 No Prior Encumbrances................................................................................ 14 5.4 Bona Fide Eligible Accounts.......................................................................... 14 5.5 Merchantable Inventory............................................................................... 14 5.6 Name, Location of Chief Executive Office............................................................. 14 5.7 Litigation........................................................................................... 15 5.8 No Material Adverse Change in Financial Statements................................................... 15 5.9 Solvency............................................................................................. 15 5.10 Regulatory Compliance................................................................................ 15 5.11 Environmental Condition.............................................................................. 15 5.12 Taxes................................................................................................ 16 5.13 Subsidiaries......................................................................................... 16 5.14 Government Consents.................................................................................. 16 5.15 Full Disclosure...................................................................................... 16 6. AFFIRMATIVE COVENANTS ......................................................................................... 16 6.1 Good Standing........................................................................................ 16 6.2 Government Compliance................................................................................ 16 6.3 Financial Statements, Reports, Certificates.......................................................... 16 6.4 Inventory, Returns................................................................................... 17 6.5 Taxes................................................................................................ 17 6.6 Insurance............................................................................................ 18 6.7 Principal Depository................................................................................. 18 6.8 Quick Ratio.......................................................................................... 18 6.9 Debt Net Worth Ratio................................................................................. 18 6.10 Tangible Net Worth................................................................................... 18 6.11 Profitability........................................................................................ 18 6.12 Registration of Intellectual Property Rights......................................................... 18
i 3 6.13 Further Assurances................................................................................... 19 7. NEGATIVE COVENANTS............................................................................................. 19 7.1 Dispositions......................................................................................... 19 7.2 Change in Business................................................................................... 19 7.3 Mergers or Acquisitions.............................................................................. 19 7.4 Indebtedness......................................................................................... 20 7.5 Encumbrances......................................................................................... 20 7.6 Distributions........................................................................................ 20 7.7 Investments.......................................................................................... 20 7.8 Transactions with Affiliates......................................................................... 20 7.9 Subordinated Debt.................................................................................... 20 7.10 Inventory............................................................................................ 20 7.11 Compliance........................................................................................... 20 8. EVENTS OF DEFAULT.............................................................................................. 21 8.1 Payment Default...................................................................................... 21 8.2 Covenant Default..................................................................................... 21 8.3 Material Adverse Change.............................................................................. 21 8.4 Attachment........................................................................................... 21 8.5 Insolvency........................................................................................... 22 8.6 Other Agreements..................................................................................... 22 8.7 Judgments............................................................................................ 22 8.8 Misrepresentations................................................................................... 22 9. BANK'S RIGHTS AND REMEDIES..................................................................................... 22 9.1 Rights and Remedies.................................................................................. 22 9.2 Power of Attorney.................................................................................... 23 9.3 Accounts Collection.................................................................................. 24 9.4 Bank Expenses........................................................................................ 24 9.5 Bank's Liability for Collateral...................................................................... 24 9.6 Remedies Cumulative.................................................................................. 24 9.7 Demand; Protest...................................................................................... 24 10. NOTICES ....................................................................................................... 25 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..................................................................... 25 12. GENERAL PROVISIONS............................................................................................. 26 12.1 Successors and Assigns............................................................................... 26 12.2 Indemnification...................................................................................... 27 12.3 Time of Essence...................................................................................... 27 12.4 Severability of Provisions........................................................................... 27 12.5 Amendments in Writing, Integration................................................................... 27 12.6 Counterparts......................................................................................... 27 12.7 Survival............................................................................................. 27 12.8 Confidentiality...................................................................................... 28
ii 4 This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of June 5,1996, by and between SILICON VALLEY BANK ("Bank") and FAFCO, INC. ("Borrower"). RECITALS A. Borrower and Bank are parties to that certain Business Loan Agreement dated June 10, 1992 and that certain Commercial Security Agreement dated June 3, 1994, each as may have been amended pursuant to Change in Terms Agreements dated February 15, 1993 and April 29, 1993 (the "Change in Terms Agreements") and Loan Modification Agreements dated December 9,1993, March 8, 1994, July 27, 1994, June 5, 1995, August 7, 1995 and February 8, 1996 (the "Loan Modification Agreements") and as may have been further amended. B. Borrower has executed a Promissory Note dated June 10, 1992 in favor of Bank, as may have been amended by the Change in Terms Agreements and the Loan Modification Agreements and as may have been further amended. C. Borrower wishes to continue to borrow money from Bank, and Bank desires to continue to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means an advance under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" has the meaning set forth in Section 2.1 hereof. 1 5 "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Committed Line" means One Million Dollars ($1,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon thirty (30) days prior written notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible -Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; 2 6 (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States, except to the extent Borrower has filed notices under the Assignment of Claims Act in a form acceptable to Bank; (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that are: (1) covered by credit insurance in form and amount, and by an insurer satisfactory to Bank less the amount of any deductible(s) which may be or become owing thereon; or (2) supported by one or more letters of credit in favor of Bank as beneficiary, in an amount and of a tenor, and issued by a financial institution, acceptable to Bank; or (3) that Bank approves on a case-by-case basis. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any 3 7 other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations. "Maturity Date" means the day immediately before the first anniversary of the Closing Date. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; 4 8 (c) Indebtedness to trade creditors and with respect to surety bonds and similar obligations incurred in the Ordinary cause of business. (d) Subordinated Debt; (e) Indebtedness of Borrower to any Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of Borrower (provided that the primary obligations are not prohibited hereby), and Indebtedness of any Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of any other Subsidiary (provided that the primary obligations are not prohibited hereby); (f) Indebtedness secured by Permitted Liens; (g) Capital leases or indebtedness incurred solely to purchase equipment which is secured in accordance with clause (c) of "Permitted Liens" below and is not in excess of the lesser of the purchase price of such equipment or the fair market value of such equipment on the date of acquisition; and (h) Extensions, refinancings, modifications, amendments and restatements of any of items of Permitted Indebtedness (a) through (g) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, and (iv) any Investments permitted by Borrower's investment policy, as amended from time to time, provided that such investment policy (any such amendment thereto) has been approved by Bank; (c) Investments consisting of the endorsement of negotiable instrument for deposit or collection or similar transaction in the ordinary course of business; (d) Investments accepted in connection with Transfers permitted by Section 7.1; (e) Investments (whether consisting of the purchase or securities, loans, capital contribution, or otherwise) of Subsidiaries in or to other Subsidiaries or in Borrower; (f) Investments consisting of (i) compensation of employees, officers and directors of Borrower or its Subsidiaries so long as the Board of Directors of Borrower determines that such compensation is in the best interests of Borrower, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower's Board of Directors; 5 9 (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (h) Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; (i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments by Borrower in any Subsidiary; (j) Investments constituting acquisitions permitted under Section 7.3; and (k) Deposit accounts of Borrower in which Bank has a Lien prior to any other lien. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Liens on Equipment leased by Borrower or any Subsidiary pursuant to an operating or capital lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such Equipment (including Liens pursuant to leases permitted pursuant to Section 7.1 and Liens arising from UCC financing statements regarding leases permitted by this Agreement); (e) Leases or subleases and license and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license; (f) Liens on assets (including the proceeds thereof and accessions thereto) that existed at the time such assets were acquired by Borrower or any Subsidiary (including Liens on assets of any corporation that existed at the time it became or becomes a Subsidiary); provided such Liens are not granted in contemplation of or in connection with the acquisition of such asset by Borrower or a Subsidiary; (g) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.8; (h) Easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not constituting a Material Adverse Effect; 6 10 (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods; (j) Liens that are not prior to the Lien of Bank which constitute rights of set-off of a customary nature or banker's Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with arrangement entered in to with banks in the ordinary course of business; (k) Earn-out and royalty obligations existing on the date hereof or entered into in connection with an acquisition permitted by Section 7.3; (l) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described in clauses (a), (c), (d), (e), (f) and (k) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (m) Liens on insurance proceeds in favor of insurance companies granted solely as security for financed premiums. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue cash advances, as specified in Section 2.1 hereof. "Schedule" means the schedule of exceptions, if any, attached hereto. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the consolidated total assets of Borrower and its Subsidiaries minus, without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and 7 11 research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, and (ii) Total Liabilities. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness (other than Contingent Obligations) but specifically excluding Subordinated Debt. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT 2.1 Advances. Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not to exceed the lesser of (i) the Committed Line or (ii) the Borrowing Base. For purposes of this Agreement, "Borrowing Base" shall mean an amount equal to seventy-five percent (75%) of Eligible Accounts. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. California time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account. The Revolving Facility shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 and all other amounts outstanding under this Agreement shall be immediately due and payable. 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank is greater than the lesser of the Committed Line or the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to two and one-half (2.5) percentage points above the Prime Rate. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on the fourth calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Line, in which case those amounts shall thereafter accrue interest at the rate then 8 12 applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any payment (other than a wire transfer of immediately available funds) received by Bank after 3:00 p.m. California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to Seven Thousand Five Hundred Dollars ($7,500), which fee shall be due on the Closing Date and shall be fully earned and nonrefundable; (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and explanation of Borrower performed from time to time by Bank or its agents; (c) Bank Expenses. Upon the date hereof, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the date hereof, all Bank Expenses upon delivery of an invoice therefor. 2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, 9 13 and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such Cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error; provided, however, that Borrower shall not be liable for any such amount attributable to any period prior to the date one hundred eighty (180) days prior to the date of such certificate. 2.7 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Advances under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they remain inchoate at the time outstanding payment obligations are paid in full) are outstanding. 3. CONDITIONS OF ADVANCES 3.1 Conditions Precedent to Initial Advance. The obligation of Bank to make the initial Advance is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) a good standing certificate for Borrower from the Secretary of State of California, dated as of a recent date; (d) collateral assignment and patent mortgage; (e) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and (f) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Advances. The obligation of Bank to make each Advance, including the initial Advance, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Advance as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Advance (except to the extent they relate specifically to any earlier date, in which case such representations and warranties shall continue to have been true and accurate as of such date). The making of each Advance shall be deemed to be a 10 14 representation and warranty by Borrower on the date of such Advance as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof, in each case, to the extent that a security interest in such Collateral can be perfected by the filing of a financing statement or, in the case of Collateral consisting of instruments, documents, chattel paper or certificated securities, to the extent that Bank takes possession of such Collateral. Bank agrees to execute and deliver to Borrower from time to time such Lien releases as Borrower may request and as are necessary to give to other lenders which finance equipment for Borrower a first priority security interest in the equipment financed so long as the Liens and the Indebtedness incurred with respect to such equipment financing are permitted under this Agreement. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Subject to Section 12.8, Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified, except for states as to which any failure to so qualify would not have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default would reasonably be expected to have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Accounts are bona fide existing obligations. The property giving rise to such Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. 11 15 Borrower has not received notice of an actual or imminent insolvency Proceeding of any account debtor, the Accounts of which are included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending (or, to Borrower's knowledge, threatened) by or against Borrower or any Subsidiary before any court or administrative agency in which a likely decision would reasonably be expected to have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.8 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.9 Solvency. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.10 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that would reasonably be expected to have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.11 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.12 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 12 16 5.13 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.14 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted except where the failure to obtain any such consent, approval or authorization, to make any such declaration or filing, or to be given any such notice would not reasonably be expected to have a Material Adverse Effect. 5.15 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results). 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, without the written consent of the Bank, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make an Advance hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain or cause to be maintained its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which would reasonably be expected to have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which would reasonably be expected to have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared balance sheet and income statement covering Borrower's operations during such period, certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that would reasonably be expected to result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. 13 17 Within twenty (20) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. So long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy to the replacement or repair of destroyed or damaged property; provided, that after the occurrence and during the continuance of an Event of Default, all proceeds payable under any such policy shall, at the option of Bank, be payable to Bank for application to the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank for so long as Bank offers terms that are competitive with other commercial banks. 14 18 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio Quick Assets to Current Liabilities of at least 0.50 to 1.00. 6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus subordinated Debt of not more than 2.75 to 1.00. 6.10 Tangible Net Worth. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth plus Subordinated Debt of not less than One Million Three Hundred Seventy Five Thousand Dollars ($1,375,000.00). 6.11 Profitability. As of the last day of each of Borrower's second, third and fourth fiscal quarters, Borrower shall have a minimum net profit, measured on a fiscal year to date basis, of not less than One Dollar ($1.00). 6.12 Registration of Intellectual Property Rights. Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Collateral Assignment, Patent Mortgage and Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonable request to perfect Bank's security interest in such additional intellectual property rights. 6.13 Further Assurances. At any time and from time to time Borrower shall execute ;and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, without the prior written consent of Bank, which shall not be unreasonably withheld so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment or Equipment financed by other vendors; (iv) Transfers which constitute liquidation of Investments permitted under Section 7.7; and (v) other Transfers not otherwise permitted by this Section 7.1 not exceeding One Hundred Thousand Dollars ($100,00) in the aggregate in any fiscal year. 7.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and its Subsidiaries and any business substantially similar or related thereto (or incidental thereto), or, prior to the existence of a public market for Borrower's securities, suffer a material change in Borrower's ownership, other than the sale by Borrower of equity securities of Borrower. Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 15 19 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person; provided that this Section 7.3 shall not apply to (i) the purchase of inventory, equipment or intellectual property rights in any transaction valued at less than One Hundred Thousand Dollars ($100,000) in the ordinary course of business or (ii) transactions among Subsidiaries or among Borrower and its Subsidiaries in which Borrower is the surviving entity. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock; provided, that (i) Borrower may declare and make any dividend payment or other distribution payable in its equity securities, (ii) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange therefor and (iii) for so long as an Event of Default has not occurred, Borrower may repurchase stock from former employees of Borrower in accordance with the terms of repurchase or similar agreements between Borrower and such employees. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person and except for transactions with a Subsidiary that are upon fair and reasonable terms and transactions constituting Permitted Investments. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt. 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 16 20 8. EVENTS OF DEFAULT Subject to Section 12.9, any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay the principal of, or any interest on, any Advances when due and payable; or fails to pay any portion of any other Obligations not constituting such principal or interest, including without limitation Bank Expenses, within thirty (30) days of receipt by Borrower of an invoice for such other Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any Responsible Officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within twenty (20) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Advances will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) or that would reasonably be expected to have a Material Adverse Effect; 17 21 8.7 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Five Hundred Thousand Dollars ($500,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment); or 8.8 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable; 18 22 (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and Bank's obligation to provide Advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Bank's Liability for Collateral. So long as Bank complies with its obligations under Section 9207 of the Code, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. Subject to the foregoing, all risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 19 23 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: FAFCO, Inc. 2690 Middlefield Road Redwood City, CA 94063 Attn: Mr. Alex Watt FAX: (415) 363-2890 If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, California 95054 Attn: Mr. James Marshall FAX: (408) 727-8728 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS 12.1 Successors and Assigns. (a) This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participations in 20 24 all or any part of, or any interest in Bank's obligations, rights and benefits hereunder, subject to the provisions of this Section 12.1. (b) Bank may sell, negotiate or grant participations to other financial institutions in all or part of the obligations of the Borrower outstanding under the Loan Documents, without notice to or the approval of Borrower; provided that any such sale, negotiation or participation shall be in compliance with the applicable federal and state securities laws and the other requirements of this Section 12.1. Notwithstanding the sale, negotiation or grant of participations, Bank shall remain solely responsible for the performance of its obligations under this Agreement, and Borrower shall continue to deal solely and directly with Bank in connection with this Agreement and the other Loan Documents. (c) The grant of a participation interest shall be on such terms as Bank determines are appropriate, provided only that (1) the holder of such a participation interest shall not have any of the rights of Bank under this Agreement except, if the participation agreement so provides, rights to demand the payment of costs of the type described in Section 2.6. provided that the aggregate amount that the Borrower shall be required to pay under Section 2.6 with respect to any ratable share of the Committed Line or any Advance (including amounts paid to participants) shall not exceed the amount that Borrower would have had to pay if no participation agreements had been entered into, and (2) the consent of the holder of such a participation interest shall not be required for amendments or waivers of provisions of the Loan Agreement other than those which (i) increase the amount of the Committed Line, (ii) extend the term of this Agreement, (iii) decrease the rate of interest or the amount of any fee or any other amount payable to Bank under this Agreement, (iv) reduce the principal amount payable under this Agreement, or (v) extend the date fixed for the payment of principal or interest or any other amount payable under this Agreement. (d) Bank may assign, from time to time, all or any portion of the Committed Line to an Affiliate of Bank or to The Federal Reserve Bank or, subject to the prior written approval of Borrower (which approval will not be unreasonably withheld), to any other financial institution; provided, that (i) the amount of the Committed Line being assigned pursuant to each such assignment shall in no event be less than $400,000 and shall be an integral multiple of $200,000 and (ii) the parties to each such assignment shall execute and deliver to Borrower an assignment agreement in a form reasonably acceptable to each. Upon such execution and delivery, from and after the effective date specified in such assignment agreement (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment agreement, have the rights and obligations of a Bank hereunder and (y) Bank shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such assignment agreement, relinquish its rights and be released from its obligations under this Agreement (other than pursuant to this Section 12.1(d)), and, in the case of an assignment agreement covering all or the remaining portion of Bank's rights and obligations under this Agreement, Bank shall cease to be a party hereto. In the event of an assignment hereunder, the parties agree to amend this Agreement to the extent necessary to reflect the mechanical changes which are necessary to document such assignment. Each party shall bear its own expenses (including without limitation attorneys' fees and costs) with respect to such an amendment. 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential from or to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 21 25 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. Notwithstanding the foregoing, all Financing Statements executed by the Borrower for the benefit of Bank and filed with the California Secretary of State shall remain in full force and effect. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they remain inchoate at the time the outstanding payment Obligations are paid in full) remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run, provided that so long as the obligations set forth in the first sentence of this Section 12.7 have been satisfied, and Bank has no commitment to make any Advances or to make any other loans to Borrower, Bank shall release all security interests granted hereunder and redeliver all Collateral held by it in accordance with applicable law. 12.8 Confidentiality. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may deem appropriate in the exercise of its remedies under this Agreement. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. Notwithstanding any provision of this Agreement to the contrary, neither Borrower nor any of its Subsidiaries will be required to disclose, permit the inspection, examination, copying or making extracts of, or discussions of: any document, information or other matter (i) prior to the occurrence of an Event of Default that constitutes non-financial trade secrets or non-financial proprietary information (provided that the terms of agreements that generate Accounts shall not be deemed to be "non-financial trade secrets or non-financial proprietary information"), or (ii) in respect to which disclosure to Bank (or designated representative) is then prohibited by (a) law, or (b) an agreement binding upon Borrower or any Subsidiary that was not entered into by Borrower or such Subsidiary for the primary purpose of concealing information from Bank. 22 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. FAFCO, INC. By: /s/ Alex N. Watt -------------------------------- Title: Vice President- Finance ----------------------------- SILICON VALLEY BANK By: /s/Julie Schneider -------------------------------- Title: AVB ----------------------------- TO BE ATTACHED TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED JUNE 5, 1996 BETWEEN FAFCO, INC. AND SILICON VALLEY BANK. 23 27 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) Any and all claims, rights and interests in any of the above and all substitutions for, -additions and accessions to and proceeds thereof. 24 28 EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ---------------------- FAX#: (408) 496-2426 TIME: ---------------------- FROM: FAFCO, Inc. -------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ------------------------------------------------------------------ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ---------------------------------------------------------- PHONE NUMBER: ------------------------------------------------------------------ FROM ACCOUNT # TO ACCOUNT # -------------------------- ------------------------ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT - -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $ ------------------------------------ PRINCIPAL PAYMENT (ONLY) $ ------------------------------------ INTEREST PAYMENT (ONLY) $ ------------------------------------ PRINCIPAL AND INTEREST (PAYMENT) $ ------------------------------------ OTHER INSTRUCTIONS: ------------------------------------------------------------ - ------------------------------------------------------------------------------- All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: - ------------------ The following person is authorized to request the loan payment transfer/loan on the advance designated account and is known to me. - -------------------------------------- ------------------------------- Authorized Requester Phone # - -------------------------------------- ------------------------------- Received by (Bank) Phone # --------------------------------------------------------- Authorized Signature (Bank) 25 29 [CAPTION] EXHIBIT C BORROWING BASE CERTIFICATE - ------------------------------------------------------------------------------- Borrower: FAFCO, INC. Lender: Silicon Valley Bank Commitment Amount: $1,000,000 - ------------------------------------------------------------------------------- ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $____________ 2. Additions (please explain on reverse) $____________ 3. TOTAL ACCOUNTS RECEIVABLE $____________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due (Distributors over 60) $_________ 5. Balance of 50% over 90 day accounts $_________ 6. Concentration Limits $_________ 7. Foreign Accounts $_________ 8. Governmental Accounts $_________ 9. Contra Accounts $_________ 10. Promotion or Demo Accounts $_________ 11. Intercompany/Employee Accounts $_________ 12. Other (please explain on reverse) $_________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________ 14. Eligible Accounts (#3 minus #13) $____________ 15. LOAN VALUE OF ACCOUNT'S (75% of #14) $____________ BALANCES 16. Maximum Loan Amount $1,000,000 17. Total Funds Available (Lesser of #16 or #15) $_________ 18. Present balance owing on Line of Credit $____________ 19. RESERVE POSITION (#17 minus #18) $____________
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: FAFCO, INC. By:______________________________________ Authorized Signer 26 30 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: FAFCO, INC. The undersigned authorized officer of FAFCO, Inc., a California corporation, hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ___________with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 90 days Yes No A/R & A/P Agings Monthly within 20 days Yes No A/R Audit Initial and Semi-Annual Yes No FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 0.50:1.00 _____:1:00 Yes No Minimum Tangible Net Worth $1,050,000 $____ Yes No plus 100% net equity from subordinated debt Maximum Debt/Tangible Net Worth 2.75:1.00 _____:1:00 Yes No Maintain on a Quarterly Basis: Profitability* $1.00 $____ Yes No
* Measured on a year to date basis. Tested for second, third and fourth quarters only. COMMENTS REGARDING EXCEPTIONS: See Attached. Sincerely. _____________________________________________ SIGNATURE _____________________________________________ TITLE _____________________________________________ DATE 27 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 JUN-30-1996 69,500 0 2,795,600 528,900 1,031,600 3,568,300 2,450,000 (2,093,800) 4,515,200 2,458,000 943,600 0 0 412,200 701,400 4,515,200 5,059,900 5,096,300 2,907,400 2,907,400 58,000 25,900 81,100 439,000 32,800 406,200 0 0 0 406,200 .13 .13
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