-----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, MBQLlBGrkMHdF4YYez6W7uc5pHarykajl251b+1bu7YiJXAR4RgV+GKS9XSZUfOf l117SDDyxj5mfRHoxYJFuA== 0000050842-96-000007.txt : 19960618 0000050842-96-000007.hdr.sgml : 19960618 ACCESSION NUMBER: 0000050842-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960617 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERPOINT CORP /NEW/ CENTRAL INDEX KEY: 0000050842 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 910850556 STATE OF INCORPORATION: WA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11069 FILM NUMBER: 96581740 BUSINESS ADDRESS: STREET 1: 10301 WILLOWS RD STREET 2: PO BOX 97005 CITY: REDMOND STATE: WA ZIP: 98073-9705 BUSINESS PHONE: 2068823100 MAIL ADDRESS: STREET 1: 10301 WILLOWS ROAD STREET 2: PO BOX 97005 CITY: REDMOND STATE: WA ZIP: 98073-9705 FORMER COMPANY: FORMER CONFORMED NAME: INTEGRATED CIRCUITS INC DATE OF NAME CHANGE: 19890321 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-Q ________________ [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1996 [ ] 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 0-11069 INTERPOINT CORPORATION Incorporated under the laws I.R.S. Identification of the State of Washington No. 91-0850556 10301 Willows Road P.O. Box 97005 Redmond, Washington 98073-9705 (206) 882-3100 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. [X] Yes [ ] No The total shares of common stock without par value outstanding at the end of the quarter reported is 7,799,054. PART I - FINANCIAL INFORMATION Item 1. Financial statements CONSOLIDATED BALANCE SHEETS April 30, 1996 and October 31, 1995 ASSETS April 30, 1996 October 31, 1995 -------------- ---------------- (Unaudited) Current assets: Cash $ 1,762,277 $ 777,844 Trade accounts receivable, less allowance for doubtful accounts of $211,000 in 1996 and $133,000 in 1995 19,536,969 16,963,322 Inventories 22,542,544 18,008,496 Prepaid expenses and other 514,190 418,447 Deferred income taxes 759,116 764,253 ----------- ----------- Total current assets 45,115,096 36,932,362 Property, plant and equipment, at cost, net of accumulated depreciation and amortization of $14,265,000 in 1996 and $13,275,000 in 1995 8,703,085 8,716,192 Note receivable 1,087,500 -- Investment in common stock -- 1,629,640 Other assets 796,315 641,932 ----------- ----------- $55,701,996 $47,920,126 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans payable $ 187,408 $ 8,583,680 Accounts payable 8,739,377 6,799,365 Income taxes payable 1,266,948 1,335,080 Accrued wages and commissions 2,977,980 2,919,042 Other current liabilities 731,179 662,107 Long-term debt, current portion 1,007,824 1,342,464 ----------- ----------- Total current liabilities 14,910,716 21,641,738 Long-term debt 16,054,804 3,551,357 Accrued retirement benefits 569,259 572,260 Deferred income taxes 807,251 804,232 Commitments Stockholders' equity: Preferred stock, 500,000 shares authorized, none issued -- -- Common stock, 10,000,000 shares authorized, 7,799,054 shares issued and outstanding, (7,655,508 in 1995) 990,948 shares reserved 4,825,331 4,707,331 Retained earnings 18,209,153 16,212,902 Cumulative translation adjustments 325,482 430,306 ----------- ----------- Total stockholders' equity 23,359,966 21,350,539 ----------- ----------- $55,701,996 $47,920,126 =========== =========== See accompanying notes. CONSOLIDATED STATEMENTS OF INCOME Three months and six months ended April 30, 1996 and 1995 (Unaudited) Three months ended Six months ended April 30, April 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $25,946,475 $16,041,106 $45,076,607 $29,583,105 Cost of sales 1,872,200 10,946,894 32,811,939 20,266,685 ----------- ----------- ----------- ----------- Gross profit 7,074,275 5,094,212 12,264,668 9,316,420 Selling and administrative 4,074,618 3,615,457 7,808,190 7,002,289 Research and development 563,949 392,318 1,065,514 860,492 ----------- ----------- ----------- ----------- Operating profit 2,435,708 1,086,437 3,390,964 1,453,639 Other expenses (net) (283,470) (216,101) (574,702) (462,463) Equity in net income (loss) of an affiliate 102,976 (1,068) 155,789 39,865 Income from other equity transactions 270,647 -- 270,647 -- ----------- ---------- ----------- ----------- Income before provision for income taxes 2,525,861 869,268 3,242,698 1,031,041 Provision for income taxes 1,011,400 251,528 1,246,447 304,157 ----------- ---------- ----------- ----------- Net income $ 1,514,461 $ 617,740 $ 1,996,251 $ 726,884 =========== =========== =========== =========== Average number of common and common equivalent shares outstanding 8,125,120 7,956,936 8,050,230 7,958,998 =========== =========== =========== =========== Net income per share $ .19 $ .08 $ .25 $ .09 =========== =========== =========== =========== See accompanying notes. CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended April 30, 1996 and 1995 (Unaudited) 1996 1995 ----------- ----------- Operating activities: Net income $ 1,996,251 $ 726,884 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,070,607 969,277 Equity in net income of an affiliate (155,789) (39,865) Income from other equity transactions (270,647) -- Net book value of assets retired -- 2,156 Change in assets and liabilities: Receivables (2,591,697) 395,896 Inventories (4,595,853) (1,866,722) Prepaid expenses and other (104,263) 29,761 Other assets (346,202) (47,911) Accounts payable 1,971,703 (464,169) Income taxes payable (66,174) 264,682 Accrued liabilities 157,442 (144,751) Accrued retirement benefits -- 37,558 ----------- ----------- Net cash used in operating activities (2,934,622) (137,204) ----------- ----------- Investing activities: Purchases of property, plant and equipment (1,031,449) (690,027) Proceeds from sale of investment in common stock 1,087,500 -- ----------- ----------- Net cash provided by (used in) investing activities 56,051 (690,027) ----------- ----------- Financing activities: Net proceeds from (repayments of) short-term loans payable (8,396,272) 493,386 Net proceeds from long-term revolving loan payable 12,900,000 -- Proceeds from long-term borrowings -- 312,045 Repayment of long-term debt (731,193) (579,357) Proceeds from issuance of common stock for stock options 118,000 75,848 ----------- ----------- Net cash provided by financing activities 3,890,535 301,922 ----------- ----------- Effect of exchange rate changes on cash (27,531) 413 ----------- ----------- Net increase (decrease) in cash 984,433 (524,896) Cash at beginning of period 777,844 541,805 ----------- ----------- Cash at end of period $ 1,762,277 $ 16,909 =========== =========== See accompanying notes. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS April 30, 1996 (Unaudited) Note 1. Basis of presentation - The accompanying condensed financial statements are unaudited and should be read in conjunction with the Interpoint financial statements included in the Company's fiscal 1995 Annual Report on Form 10-K. Operating results for the six-month period ended April 30, 1996, are not necessarily indicative of the results that may be expected for the full year. In the opinion of management, all adjustments necessary for a fair presentation of interim operating results are reflected herein. Note 2. Per share calculations - Per-share calculations are determined on the weighted average number of common and common equivalent shares outstanding during each period. On May 30, 1996, the Company announced a two-for-one stock split effective for shareholders of record as of June 13, 1996. Retroactive effect was given to the distribution. Note 3. Inventories - Inventory is comprised as follows: April 30, 1996 October 31, 1995 -------------- ---------------- Finished goods $ 5,915,111 $ 4,736,490 Work-in-process 6,942,848 6,483,072 Raw materials 10,798,550 7,693,764 ----------- ----------- 23,656,509 18,913,326 Allowance for inventory obsolescence 1,113,965 904,830 ----------- ----------- $22,542,544 $18,008,496 =========== =========== Note 4. Income from other equity transactions - In March 1996, the Company sold its minority interest in Apex Microtechnology Corporation (Apex) of Tucson, Arizona for $2,175,000. Sale terms include a cash payment and note receivable each equaling $1,087,500. The sale resulted in a pre-tax gain of approximately $390,000 reflecting the sales price less the balance sheet valuation of approximately $1,785,000. The valuation is the sum of the purchase price of $904,200 and earnings of approximately $881,000 accumulated under the equity method of accounting, including approximately $103,000 earned this quarter but prior to the sale. Income taxes payable of approximately $353,000 associated with the sale of Apex have been recorded resulting in an after-tax gain of approximately $37,000. The $353,000 tax due, which will be paid on an installment basis, is computed as the difference of the sales value and original purchase price.The note receivable bears interest at prime plus one percent, payable interest only through 1998 then payable $30,208 per month plus interest through 2001. Other sale terms include a potential additional payment in the event of a sale or public offering of Apex shares over the next five years. Offsetting the gain is a pre-tax loss of approximately $119,000 associated with the write down of an unrelated investment. Note 5. Loan payable - In March 1996, Interpoint signed a five year secured revolving credit agreement with its principal bank to refinance its domestic borrowings and provide a source of available cash. The new financing arrangement comprises a $20 million reducing line of credit. Borrowings against the line of credit bear interest at the bank's prime rate or adjusted LIBOR rate. The revolving credit agreement requires the Company to comply with certain financial covenants; as of April 30, 1996, the Company was in compliance with all such covenants. Note 6. Industry segment information - Net sales by industry segment are presented in the table below. Three months ended Six months ended April 30, April 30, 1996 1995 1996 1995 ----------- ----------- ----------- ------------ Microelectronics $12,167,275 $ 9,364,881 $20,691,027 $17,084,087 Data Storage 13,779,200 6,676,225 24,385,580 12,499,018 ----------- ----------- ----------- ----------- $25,946,475 $16,041,106 $45,076,607 $29,583,105 =========== =========== =========== =========== Note 7. Reclassification - Certain items in the previous year financial statements have been reclassified to conform with the current year presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Total revenues for the quarter ended April 30, 1996, were $26 million, an increase of 62 percent versus the same quarter a year ago. There was growth in both business segments, however the data storage segment experienced the most significant increase. The increase of over 100 percent is primarily associated with the sales of Digital Linear Tape (DLT) library products which were introduced late in fiscal year 1995. The Company expects continued strong sales of these products. Sales from the Microelectronics business increased by 30 percent due to growth both in proprietary and custom products. Gross margin declined from 32 percent in the second quarter of 1995 to 27 percent during the current quarter. This percentage is consistent with margins experienced in the first quarter of this year. The decline comes primarily from the change in product mix as lower margin ADIC products have increased as a percentage of the Company's sales. The DLT products are lower margin primarily due to the expensive tape drive component. In addition there were some non-recurring charges in the Microelectronics business. The Company anticipates a slight margin increase for the final two quarters of fiscal 1996. Selling and administrative costs have decreased significantly as a percentage of sales from 23 percent in 1995 to 16 percent in 1996. The volume increase in sales provides strong operating leverage without commensurate growth in these costs. Other expenses consist primarily of interest costs which have increased in connection with the increased usage on the short and long term revolving lines of credit. The increase is net of the effect of slightly lower interest rates on these lines. Income from other equity transactions reflects a gain on the sale of Apex Microtechnology Corporation (Apex), net of the write down of an unrelated investment. Equity in net income of an affiliate relates to earnings accounted for on the equity method prior to the sale. Income taxes are higher than the statutory rate for the second quarter of 1996 due to tax expense recorded in connection with the sale of Apex. Because earnings on the equity method are not recognized for taxation purposes, the tax gain, to be recognized on the installment basis, is significantly larger than the gain shown in the financial statements. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $2.9 million for the six months ended April 30, 1996, primarily due to increases in inventories and accounts receivable. The inventory growth is to support sales volumes in both businesses, with the bulk of the increase being attributable to ADIC. Trade receivables increased due to the increased sales volume coupled with the elimination of early pay discounts for certain data storage distributors. In March 1996, the Company signed a five-year secured credit agreement with its principal bank to repay existing short-term debt and provide operating cash. The new financing arrangement comprises a $20 million reducing line of credit which bears interest at the bank's prime rate or adjusted LIBOR rate. At April 30, 1996, this rate was 7.35%. The agreement requires the Company to comply with certain financial covenants. As of April 30, 1996, the Company was in compliance with all such covenants. The Company believes that the new financing together with a $700,000 facility to finance capital equipment and cash generated by operations will be sufficient to meet its cash requirements for the upcoming year. FORWARD LOOKING INFORMATION The information set forth above includes "forward-looking" information as outlined in the recently enacted Private Securities Litigation Reform Act of 1995. The Cautionary Statements filed by the Company as Exhibit 99 to the Quarterly Report on Form 10Q for the period ended January 31, 1996 are incorporated herein by reference and investors are specifically referred to such Cautionary Statements for a discussion of factors which could affect the Company's operations and forward-looking statements contained herein. PART II - OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other information. None. Item 6. Exhibits and Reports on Form 8-K. Exhibit 10.1 Credit Agreement between Interpoint Corporation and Seafirst Bank dated March 29, 1996 Exhibit 10.2 Revolving Note, Interpoint Corporation dated March 29, 1996 Exhibit 10.3 Security Agreement between Interpoint Corporation and Seafirst Bank dated March 29, 1996 Exhibit 10.4 Security Agreement between Advanced Digital Information Corporation and Seafirst Bank dated March 29, 1996 SIGNATURES 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. INTERPOINT CORPORATION Dated: June 14, 1996 /s/Peter H. van Oppen ------------- ---------------------------- Peter H. van Oppen, Chairman and Chief Executive Officer Dated: June 14, 1996 /s/Leslie S. Rock ------------- ---------------------------- Leslie S. Rock Vice President, Treasurer Chief Accounting Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the second quarter 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS OCT-31-1996 APR-30-1996 1,762 0 19,537 211 22,543 45,115 22,968 14,265 55,702 14,911 16,055 0 0 4,825 18,209 55,702 45,077 45,077 32,812 32,812 0 0 575 3,243 1,246 1,996 0 0 0 1,996 .25 .25
EX-10.1 3 Exhibit 10.1 CREDIT AGREEMENT Between INTERPOINT CORPORATION and SEAFIRST BANK Dated March 29, 1996 TABLE OF CONTENTS ----------------- ARTICLE 1 ARTICLE 3 Definitions 1 Collateral Security 6 1.1 ADIC 1 3.1 Collateral 6 1.2 Adjusted LIBOR Rate 1 3.2 Maintenance of Security 6 1.3 Advances 1 3.3 Negative Pledge 6 1.4 Assessment Rate 1 3.4 Setoff 6 1.5 Available Amount 2 1.6 Business Day 2 ARTICLE 4 1.7 Cash Flow 2 Interest Rate Options 7 1.8 Commencement Date 2 4.1 Interest Rates and Payment 1.9 Credit Limit 2 Dates 7 1.10 Debt 2 4.2 Procedure 7 1.11 Debt Service Coverage 4.3 Option Restrictions 7 Ratio 2 4.4 Repayments 7 1.12 Debt Service 2 4.5 Reversion to Prime 7 1.13 ERISA 2 4.6 Inability to Participate 1.14 Funded Debt 2 in Market 7 1.15 Funded Debt Ratio 3 4.7 Costs 7 1.16 GAAP 3 4.8 Basis of Quotes 8 1.17 Interest Payment Dates 3 1.18 Interest Period 3 ARTICLE 5 1.19 LIBOR Rate 3 Conditions of Lending 8 1.20 LIBOR Rate Loans 3 5.1 Authorization 8 1.21 Loan Documents 3 5.2 Documentation 8 1.22 London Banking Day 3 5.3 Proof of Insurance 8 1.23 Margin 4 5.4 Representations and 1.24 Modified Quick Ratio 4 Warranties 8 1.25 Obligations 4 5.5 Compliance 9 1.26 Person 4 1.27 Plan 4 ARTICLE 6 1.28 Prime Rate 4 Representations and 1.29 Prime Rate Loans 4 Warranties 9 1.30 Reserve Adjustment 4 6.1 Existence 1.31 Subsidiary 4 6.2 Enforceability 9 1.32 Swap Obligations 4 6.3 No Legal Bar 9 1.33 Tangible Net Worth 5 6.4 Financial Information 9 1.34 Termination Date 5 6.5 Liens and Encumbrances 10 1.35 Unsecured Trade Credit 5 6.6 Litigation 10 6.7 Payment of Taxes 10 ARTICLE 2 6.8 Employee Benefit Plan 10 Revolving Loan 5 6.9 Misrepresentations 10 2.1 Revolving Loan Facility 5 6.10 No Default 10 2.2 Revolving Note 5 6.11 No Burdensome Restrictions 10 2.3 Procedure for Advances 5 2.4 Facility Fee 6 ARTICLE 7 Affirmative Convenants 11 7.1 Use of Proceeds 11 7.2 Tangible Net Worth 11 7.3 Debt Service Coverage Ratio 11 7.4 Modified Quick Ratio 11 7.5 Funded Debt Ratio 11 7.6 Financial Information 11 7.7 Maintenance of Existence 12 7.8 Books and Records 12 7.9 Access to Premises and Records 12 7.10 Notice of Events 13 7.11 Payment of Debts and Taxes 13 7.12 Insurance 13 7.13 Subsidiary Guaranties 14 ARTICLE 8 Negative Covenants 14 8.1 Debt 14 8.2 Liens and Encumbrances 14 8.3 Guaranties 15 8.4 Disposition of Assets 15 8.5 Mergers 15 8.6 Wage and Hour Laws 15 8.7 ERISA 15 8.8 Dissolution 15 8.9 Business Activities 15 8.10 Acquisitions 15 8.11 Capital Expenditures 16 ARTICLE 9 Events and Consequences of Default 16 9.1 Events of Default 16 9.2 Remedies Upon Default 17 ARTICLE 10 Miscellaneous 18 10.1 Manner of Payments 18 10.2 Notices 19 10.3 Documentation and Administration Expenses 19 10.4 Collection Expenses 19 10.5 Waiver 20 10.6 Assignment 20 10.7 Merger 20 10.8 Amendments 20 10.9 Mandatory Arbitration 20 10.10 Construction 21 CREDIT AGREEMENT THIS CREDIT AGREEMENT ("Agreement") is made between Interpoint Corporation, a Washington corporation ("Borrower"), and Bank of America NW, N.A., doing business as Seafirst Bank, a national banking association (including its successors and/or assigns, "Bank"). The parties agree as follows: ARTICLE 1 Definitions All terms defined below shall have the meaning indicated. All references in this Agreement to: (a) "dollars" or "$" shall mean U.S. dollars; (b) "Article," "Section," or "Subsection" shall mean articles, sections, and subsections of this Agreement, unless otherwise indicated; (c) terms defined in the Washington version of the Uniform Commercial Code, R.C.W. 62A.9-101, et seq. ("UCC"), and not otherwise defined in this Agreement, shall have the meaning given in the UCC; and (d) an accounting term not otherwise defined in this Agreement shall have the meaning assigned to it under GAAP. .1 ADIC shall mean Advanced Digital Information Corporation, a Washington corporation. .2 Adjusted LIBOR Rate shall mean for any day that per annum rate equal to the sum of (a) the Margin, (b) the Assessment Rate, and (c) the quotient of (i) the LIBOR Rate as determined for such day, divided by (ii) the Reserve Adjustment. The Adjusted LIBOR Rate shall change with any change in the LIBOR Rate on the first day of each Interest Period and on the effective date of any change in the Assessment Rate or Reserve Adjustment. .3 Advances shall mean the disbursement of loan proceeds under the Revolving Loan. An Advance shall not constitute a "payment order" under R.C.W. 62A.4A-103. .4 Assessment Rate shall mean as of any day the minimum annual percentage rate established by the Federal Deposit Insurance Corporation (or any successor) for the assessment due from members of the Bank Insurance Fund (or any successor) in effect for the assessment period during which said day occurs based on deposits maintained at such members' offices located outside of the United States. In the event of a retroactive reduction in the Assessment Rate after a commencement of any Interest Period, Bank shall not retroactively adjust as to such Interest Period any interest rate calculated using the Assessment Rate. .5 Available Amount shall mean at any time the amount of the Credit Limit, minus the unpaid balance of the Revolving Note. .6 Business Day shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in Seattle, Washington, are authorized or required by law to close. .7 Cash Flow shall mean Borrower's net income after taxes (after eliminating any unusual or infrequent gains and losses up to a maximum of $250,000) subject to the following adjustments: (a) Items added to net income shall be charges against income consisting of depreciation of real and personal property, amortization, write-off of goodwill and other intangibles, and interest expense. (b) Items deducted from net income shall be cash paid by Borrower for unfunded capital expenditures and dividends and distributions paid to Borrower's shareholders. .8 Commencement Date shall mean the first day of any Interest Period as requested by Borrower. .9 Credit Limit shall mean $20,000,000 through March 31, 1998; $18,000,000 from April 1, 1998 through March 31, 1999; $16,000,000 from April 1, 1999 through March 31, 2000; and $14,000,000 from April 1, 2000 through the Termination Date. .10 Debt shall mean all consolidated obligations, on a GAAP basis, included in the liability section of a balance sheet of Borrower. .11 Debt Service Coverage Ratio shall mean the ratio of Cash Flow to Debt Service. .12 Debt Service shall mean for any period the amount of cash interest expense together with the current portion of Funded Debt, as of the last day of the relevant period, excluding any repayments made or required to be made pursuant to reductions in the Credit Limit. .13 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended. .14 Funded Debt shall mean, as of the date of determination, the aggregate principal amount of all Debt except (a) Unsecured Trade Credit, (b) accrued liabilities, (c) current and deferred income taxes payable, and (d) other non-interest bearing liabilities. .15 Funded Debt Ratio shall mean the ratio of (a) Funded Debt, to (b) Borrower's consolidated net income, adjusted for any unusual or infrequent gains and losses up to a maximum of $250,000, plus depreciation plus amortization plus other non-cash charges plus income tax expense plus interest expense, on a trailing four-quarter basis. .16 GAAP shall mean generally accepted accounting principles as in effect from time to time in the United States and as consistently applied by Borrower. .17 Interest Payment Dates shall mean the first Business Day of each month, and upon maturity, including upon maturity by acceleration. .18 Interest Period shall mean the period commencing on the date of any Advance at or conversion to an Adjusted LIBOR Rate and ending on any date thereafter as selected by Borrower, subject to the restrictions of Section 4.3. If any Interest Period would end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day, unless the next succeeding Business Day falls in the next month, in which case the Interest Period shall be shortened to the preceding Business Day. .19 LIBOR Rate shall mean for any Interest Period the per annum rate, calculated on the basis of actual number of days elapsed over a year of 360 days, for U.S. Dollar deposits for a period equal to the Interest Period appearing on the display designated as "Page 3750" on the Telerate Service (or such other page on that service or such other service designated by the British Banker's Association for the display of that Association's Interest Settlement Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on the day which is two London Banking Days prior to the first day of the Interest Period. If there is no period equal to the Interest Period on the display, the LIBOR Rate shall be determined by straight-line interpolation to the nearest month (or week or day if expressed in weeks or days) corresponding to the Interest Period between the two nearest neighboring periods on the display. .20 LIBOR Rate Loans shall mean those portions of principal of the Revolving Note accruing interest at the Adjusted LIBOR Rate. .21 Loan Documents shall mean collectively this Agreement, the Revolving Note, the Term Note, all documents representing Swap Obligations, and all other mortgages, deeds of trust, security agreements, documents, instruments, and other agreements now or later executed in connection with this Agreement. .22 London Banking Day shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in London, England, are authorized or required by law to close. .23 Margin shall mean 1.65% at all times when the Funded Debt Ratio, as determined for the most recent quarter end, is less than 1.50 to 1; and 1.90% at all times when the Funded Debt Ratio, as determined for the most recent quarter end, is greater than or equal to 1.50 to 1. .24 Modified Quick Ratio shall mean the ratio of (a) Borrower's cash and trade accounts receivable, net of allowance for doubtful accounts, to (b) the outstanding principal balance of the Revolving Note. .25 Obligations shall mean the Revolving Note, all Swap Obligations, the term note made by Borrower to Bank scheduled to mature on August 1, 1997 (the "Term Note"), and all fees, costs, expenses, and indemnifications due to Bank under this Agreement. .26 Person shall mean any individual, partnership, corporation, business trust, unincorporated organization, joint venture, or any governmental entity, department, agency, or political subdivision. .27 Plan shall mean any employee benefit plan or other plan maintained for Borrower's employees and covered by Title IV of ERISA, excluding any plan created or operated by or for any labor union. .28 Prime Rate shall mean the floating commercial loan reference rate of Bank, publicly announced from time to time as its "prime rate" (calculated on the basis of actual number of days elapsed over a year of 360 days), with any change in the Prime Rate to be effective on the date the "prime rate" changes. .29 Prime Rate Loans shall mean those portions of principal of the Revolving Note accruing interest at the Prime Rate. .30 Reserve Adjustment shall mean as of any day the remainder of one minus that percentage (expressed as a decimal) which is the highest of any such percentages established by the Board of Governors of the Federal Reserve System (or any successor) for required reserves (including any emergency, marginal, or supplemental reserve requirement) regardless of the aggregate amount of deposits with said member bank and without benefit of any possible credit, proration, exemptions, or offsets for time deposits established at offices of member banks located outside of the United States or for eurocurrency liabilities, if any. .31 Subsidiary shall mean a corporation 50.1% or more of the outstanding voting stock of which is owned, directly or indirectly, by Borrower or by one or more other Subsidiaries, or by Borrower together with one or more other Subsidiaries. .32 Swap Obligations shall mean all indebtedness and obligations of Borrower to Bank under any ISDA (or successor) Master Agreement, or equivalent interest rate swap agreement, including all schedules thereto, confirmations of transactions thereunder, and documents, definitions, and agreements incorporated therein by reference or relating thereto (and including, without limitation, any interest due thereon, fees, costs, and expenses connected therewith, and termination payments and indemnifications relating thereto). .33 Tangible Net Worth shall mean Borrower's total shareholders equity, including any intangible assets reported on Borrower's balance sheet as of October 31, 1995, but excluding any intangible assets or goodwill associated with subsequent operations or acquisitions. .34 Termination Date shall mean April 1, 2001, or such earlier date upon which Bank's commitment to lend is terminated pursuant to Subsection 9.2(a). .35 Unsecured Trade Credit shall mean unsecured, short-term Debt arising from current operations by purchasing on credit goods, services, supplies, or merchandise and not constituting borrowings. ARTICLE 2 Revolving Loan .1 Revolving Loan Facility. Subject to the terms and conditions of this Agreement, Bank shall make Advances to Borrower from time to time, until the Termination Date ("Revolving Loan"), with the aggregate principal amount at any one time outstanding not to exceed the Credit Limit. Borrower may use the Revolving Loan by borrowing, prepaying, and reborrowing the Available Amount, in whole or in part. .2 Revolving Note. The obligation of Borrower to repay the Revolving Loan shall be evidenced by a promissory note (including all renewals, modifications, and extensions thereof, the "Revolving Note") made by Borrower to the order of Bank, and shall bear interest as provided in Article 4. The Revolving Note shall be secured as provided in Article 3 and shall be in substantially the same form as Exhibit A attached. If at any time the outstanding principal balance of the Revolving Note shall exceed the Credit Limit, Borrower shall immediately repay principal of the Revolving Note in an amount sufficient to reduce the principal balance of the Revolving Note to the Credit Limit then in effect. .3 Procedure for Advances. Borrower may borrow under the Revolving Loan on any Business Day. Borrower shall give Bank irrevocable notice (written or oral) specifying the amount to be borrowed and the requested borrowing date. Bank must receive such notice on or before 3:30 p.m., Seattle time, on the day borrowing is requested, or by such earlier time as may be required under Article 4. All Advances shall be discretionary to the extent notification by Borrower is given subsequent to that time. .4 Facility Fee. Borrower shall pay to Bank upon execution of this Agreement a facility fee of $70,000. In addition, on the last Business Day of each April, July, October, and January, beginning April 30, 1999, and accruing from April 1, 1999, Borrower shall pay to Bank in arrears a commitment fee equal to .125% per annum of the daily difference between the Credit Limit and the outstanding principal balance of the Revolving Note. ARTICLE 3 Collateral Security .1 Collateral. As security for the prompt payment and performance of all Obligations, Borrower and ADIC have granted or will grant to Bank a first lien security interest in the following collateral (the "Collateral"): all of their respective accounts, inventory, equipment, fixtures, general intangibles, documents, instruments, chattel paper, financial assets, investment property, and deposit accounts, wherever located, all whether now owned or hereafter acquired, and all proceeds and products thereof; provided that Bank's security interest shall not be required to be a first lien as to fixed assets subject to purchase money security interests permitted under this Agreement. .2 Maintenance of Security. Borrower shall execute and deliver to Bank, whenever requested, such security instruments as Bank deems necessary, in its sole opinion, for the preservation of its security interest or to ensure the priority of each security interest. Borrower hereby irrevocably appoints Bank as its attorney-in-fact, solely for the purpose of executing on Borrower's behalf any financing statement or other security document deemed necessary by Bank to carry out the purposes of this Article, which appointment shall continue so long as this Agreement remains in effect or any Obligations remain outstanding. .3 Negative Pledge. So long as any amount is payable by Borrower under this Agreement, Borrower shall not allow any Collateral to be transferred or encumbered, except sales in the ordinary course of business, purchase money finance of fixed assets, or encumbrances to secure the Obligations. .4 Setoff. Bank may exercise the right of setoff, assert its banker's lien, or counterclaim against any interest of Borrower in each deposit account which Borrower may now or later have with Bank, or any property which is now or shall later be in Bank's possession. ARTICLE 4 Interest Rate Options .1 Interest Rates and Payment Date. The Revolving Note shall bear interest from the date of Advance on the unpaid principal balance outstanding from time to time at the Prime Rate or Adjusted LIBOR Rate as selected by Borrower and all accrued interest shall be payable in arrears on each Interest Payment Date. .2 Procedure. Borrower may, on any London Banking Day two London Banking Days before a Commencement Date, request Bank to give an Adjusted LIBOR Rate quote for a specified loan amount and Interest Period. Bank will then quote to Borrower the available Adjusted LIBOR Rate. Borrower shall have two hours from the time of the quote to elect an Adjusted LIBOR Rate by giving Bank irrevocable notice of such election. .3 Option Restrictions. Each Interest Period shall be one month, two months, three months, or one year. In no event shall the Interest Period extend beyond the Termination Date. The minimum amount of a LIBOR Rate Loan shall be $500,000. .4 Prepayments. If Borrower prepays all or any portion of a LIBOR Rate Loan prior to the end of an Interest Period, there shall be due at the time of any such prepayment the Prepayment Fee, determined in accordance with Form 51-6325, which shall be attached as Exhibit 1 to the Revolving Note. Borrower may prepay Prime Rate Loans on any Business Day without premium or penalty. .5 Reversion to Prime. The Revolving Note shall bear interest at the Prime Rate unless an Adjusted LIBOR Rate is specifically selected. At the termination of any Interest Period, each LIBOR Rate Loan shall revert to a Prime Rate Loan unless Borrower directs otherwise pursuant to Section 4.2. .6 Inability to Participate in Market. If Bank in good faith cannot participate in the Eurodollar market for legal or practical reasons, the Adjusted LIBOR Rate shall cease to be an interest rate option. Bank shall notify Borrower if and when it again becomes legal or practical to participate in the Eurodollar market, at which time the Adjusted LIBOR Rate shall resume being an interest rate option. .7 Costs. Borrower shall, as to LIBOR Rate Loans, reimburse Bank for all costs, taxes, and expenses, and defend and hold Bank harmless for any liabilities, which Bank may incur as a consequence of any changes in the cost of participating in, or in the laws or regulations affecting, the Eurodollar market, including any additional reserve requirements, except to the extent such costs are already calculated into the Adjusted LIBOR Rate. This covenant shall survive this Agreement and the payment of the Revolving Note. .8 Basis of Quotes. Borrower acknowledges that Bank may or may not in any particular case actually match-fund a LIBOR Rate Loan. FDIC assessments, and Federal Reserve Board reserve requirements, if any are assessed, will be based on Bank's best estimates of its marginal cost for each of these items. Whether such estimates in fact represent the actual cost to Bank for any particular dollar or Eurodollar deposit or any LIBOR Rate Loan will depend upon how Bank actually chooses to fund the LIBOR Rate Loan. By electing an Adjusted LIBOR Rate, Borrower waives any right to object to Bank's means of calculating the Adjusted LIBOR Rate quote accepted by Borrower. ARTICLE 5 Conditions of Lending Bank's obligation to make the initial Advance is subject to the conditions precedent listed in Sections 5.1 through 5.3, and to make subsequent Advances is subject to the conditions precedent listed in Sections 5.4 and 5.5, unless waived by Bank in writing: .1 Authorization. Borrower shall have delivered to Bank a certified copy of minutes of a meeting of Borrower's board of directors authorizing the transactions contemplated by this Agreement and the execution, delivery, and performance of all Loan Documents, together with appropriate certificates of incumbency. .2 Documentation. Borrower shall have executed and delivered to Bank all documents to reflect the existence of the Obligations and Borrower and ADIC shall have executed and delivered to Bank all documents necessary to perfect, as a first lien (except as otherwise permitted under this Agreement), the security interests granted to Bank. .3 Proof of Insurance. Proof of insurance as required by Section 7.12 shall have been provided to Bank. .4 Representations and Warranties. The representations and warranties made by Borrower in the Loan Documents and in any certificate, document, or financial statement furnished at any time shall continue to be true and correct, except to the extent that such representations and warranties expressly relate to an earlier date. .5 Compliance. No Default or other event which, upon notice or lapse of time or both would constitute a Default, shall have occurred and be continuing, or shall exist after giving effect to the advance of credit to be made. ARTICLE 6 Representations and Warranties To induce Bank to enter into this Agreement, Borrower represents, warrants, and covenants to Bank as follows: .1 Existence. Borrower is in good standing as a corporation under the laws of the state of Washington, has the power, authority, and legal right to own and operate its property or lease the property it operates and to conduct its current business; and is qualified to do business and is in good standing in all other jurisdictions where the ownership, lease, or operation of its property or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on Borrower. .2 Enforceability. The Loan Documents, when executed and delivered by Borrower, shall be enforceable against Borrower in accordance with their respective terms. .3 No Legal Bar. The execution, delivery, and performance by Borrower of the Loan Documents, and the use of the loan proceeds, shall not violate any existing law or regulation applicable to Borrower; any ruling applicable to Borrower of any court, arbitrator, or governmental agency or body of any kind; Borrower's organizational documents; any security issued by Borrower; or any mortgage, indenture, lease, contract, undertaking, or other agreement to which Borrower is a party or by which Borrower or any of its property may be bound. .4 Financial Information. By submitting each of the financial statements required by Subsection 7.6(a) and 7.6(b), Borrower is deemed to represent and warrant that: (a) such statement is complete and correct and fairly presents the financial condition of Borrower as of the date of such statement; (b) such statement discloses all liabilities of Borrower that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent; and (c) such statement has been prepared in accordance with GAAP. As of this date, there has been no adverse change in Borrower's financial condition since preparation of the last such financial statements delivered to Bank which would materially impair Borrower's ability to repay the Obligations. .5 Liens and Encumbrances. As of this date, Borrower has good and marketable title to its property free and clear of all security interests, liens, encumbrances, or rights of others, except for taxes which are not yet delinquent and for conditions, restrictions, easements, and rights of way of record which do not materially affect the use of any of Borrower's property. .6 Litigation. Except as disclosed in writing to Bank, there is no threatened (to Borrower's knowledge) or pending litigation, investigation, arbitration, or administrative action which may materially adversely affect Borrower's business, property, operations, or financial condition. .7 Payment of Taxes. Borrower has filed or caused to be filed all tax returns when required to be filed; and has paid all taxes, assessments, fees, licenses, excise taxes, franchise taxes, governmental liens, penalties, and other charges levied or assessed against Borrower or any of its property imposed on it by any governmental authority, agency, or instrumentality that are due and payable (other than those returns or payments of which the amount, enforceability, or validity are contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP are provided on Borrower's books). .8 Employee Benefit Plan. Borrower is in compliance in all respects with the provisions of ERISA and the regulations and published interpretations thereunder. Borrower has not engaged in any acts or omissions which would make Borrower liable to the Plan, to any of its participants, or to the Internal Revenue Service, under ERISA. .9 Misrepresentations. No information, exhibits, data, or reports furnished by Borrower or delivered to Bank in connection with Borrower's application for credit misstates any material fact, or omits any fact necessary to make such information, exhibits, data, or reports not misleading. .10 No Default. Borrower is not in default in any Loan Document, or in any contract, agreement, or instrument to which it is a party. .11 No Burdensome Restrictions. No contract or other instrument to which Borrower is a party, or order, award, or decree of any court, arbitrator, or governmental agency, materially impairs Borrower's ability to repay the Obligations. ARTICLE 7 Affirmative Covenants So long as this Agreement shall remain in effect, or any liability exists under the Loan Documents, Borrower shall: .1 Use of Proceeds. Use the proceeds of the Revolving Loan for working capital or other general corporate purposes. .2 Tangible Net Worth. Maintain a Tangible Net Worth, measured quarterly, of not less than $20,000,000, increasing to $23,000,000 by quarter ending October 31, 1996; to $27,000,000 by quarter ending October 31, 1997; and to $32,000,000 by quarter ending October 31, 1998, and for all quarters thereafter. If Borrower sells its existing investment in Apex Microtechnology Corporation ("Apex"), and separately elects to implement a stock repurchase program, the minimum Tangible Net Worth required to be maintained as of October 31, 1996 and each quarter end thereafter until but not including October 31, 1998 shall be reduced by the lesser of (a) $2,000,000, or (b) the total cost of stock repurchased by Borrower through its stock repurchase program, or (c) the cash proceeds received by Borrower from the sale of its investment in Apex. .3 Debt Service Coverage Ratio. Maintain a Debt Service Coverage Ratio, measured quarterly, on a trailing four-quarter basis, of at least 2.00 to 1, increasing to 2.25 to 1 by quarter ending October 31, 1997; and increasing to 2.50 to 1 by quarter ending October 31, 1998, and for all quarters thereafter. .4 Modified Quick Ratio. Maintain a Modified Quick Ratio, measured quarterly, of at least 1.0 to 1 through quarter ending July 31, 1997, at east 1.1 to 1 as of quarter ending October 31, 1997; at least 1.2 to 1 as of quarter ending October 31, 1998; and at least 1.3 to 1 as of quarter ending October 31, 1999, and as of each quarter end thereafter. .5 Funded Debt Ratio. Maintain a Funded Debt Ratio, measured quarterly, on a trailing four-quarter basis, of not more than 2.50 to 1, decreasing to 2.25 to 1 by quarter ending October 31, 1997; and to 2.00 to 1 by quarter ending October 31, 1998, and for all quarters thereafter. .6 Financial Information. Maintain a standard system of accounting in accordance with GAAP and furnish to Bank the following: (a) SEC Reporting. As soon as made available to the Securities and Exchange Commission or Borrower's shareholders, copies of all 10-Q and 10-K filings; (b) Annual Financial Statements. As soon as available and, in any event, within 90 days after the end of each fiscal year, a copy of the consolidated balance sheet, consolidated statement of income and retained earnings, consolidated statement of shareholders' equity, and consolidated statement of cash flow of Borrower for such year, setting forth in each case, in comparative form, corresponding figures from the preceding annual statements, each audited by independent certified public accountants of recognized standing selected by Borrower and satisfactory to Bank certifying that such statement is complete and correct, fairly presents without qualification the financial condition of Borrower for such period, is prepared in accordance with GAAP, and has been audited in conformity with generally accepted auditing standards; (c) Aging Report. Quarterly or more frequently as requested by Bank, a report providing the agings of accounts receivable and accounts payable, in form and substance satisfactory to Bank; (d) Projections. Annually, within 90 days of each fiscal year end, consolidated financial projections of Borrower for the fiscal year then beginning, in form satisfactory to Bank; (e) Other Certificates. Together with the delivery of the financial statements required by Subsections 7.6(a) and 7.6(b), a certificate of the chief accounting officer of Borrower, in the form of Exhibit B attached; and (f) Additional Financial Information. As soon as available and, in any event, within ten days after request, such other data, information, or documentation as Bank may reasonably request. .7 Maintenance of Existence. Preserve and maintain its existence, powers, and privileges in the jurisdiction of its formation, and qualify and remain qualified in each jurisdiction in which its presence is necessary or desirable in view of its business, operations, or ownership of its property. Borrower shall also maintain and preserve all of its property which is necessary or useful in the proper course of its business, in good working order and condition, ordinary wear and tear excepted. .8 Books and Records. Keep accurate and complete books, accounts, and records in which complete entries shall be made in accordance with GAAP, reflecting all financial transactions of Borrower. .9 Access to Premises and Records. At all reasonable times and as often as Bank may reasonably request, permit any authorized representative designated by Bank to have access to the premises, property, and financial records of Borrower, including all records relating to the finances, operations, and procedures of Borrower, and to make copies of or abstracts from such records. .10 Notice of Events. Furnish Bank prompt written notice of: (a) Proceedings. Any proceeding instituted by or against Borrower in any court or before any commission or regulatory body, or any proceeding threatened against it in writing by any governmental agency which if adversely determined would have a material adverse effect on Borrower's business, property, or financial condition, or where the amount involved is $250,000 or more and not covered by insurance; (b) Material Development. Any material development in any such proceeding referred to in Subsection 7.10(a); (c) Defaults. Any accident, event, or condition which is or, with notice or lapse of time or both, would constitute a Default, or a default under any other agreement to which Borrower is a party; and (d) Adverse Effect. Any other action, event, or condition of any nature which could result in a material adverse effect on the business, property, or financial condition of Borrower. .11 Payment of Debts and Taxes. Pay each Debt greater than $100,000 and perform all material obligations promptly and in accordance with their terms, and pay and discharge promptly all taxes, assessments, and governmental charges or levies imposed upon Borrower, its property, or revenues prior to the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies, or otherwise which, if unpaid, might become a lien or charge upon Borrower's property. Borrower shall not, however, be required to pay or discharge any such tax, assessment, charge, levy, or claim so long as its enforceability, amount, or validity is contested in good faith by appropriate proceedings. .12 Insurance. Maintain commercially adequate levels of coverage with financially sound and reputable insurers, including, without limitation: (a) Property Insurance. Insurance on all property of a character usually insured by organizations engaged in the same or similar type of business as Borrower against all risks, casualties, and losses through extended coverage or otherwise and of the kind customarily insured against by such organizations, with such policy or policies covering tangible collateral to name Bank as loss payee, as its interests may appear; (b) Liability Insurance. Public liability insurance against tort claims which may be asserted against Borrower; and (c) Additional Insurance. Such other insurance as may be required by law. .13 Subsidiary Guaranties. Provide to Bank, upon demand, a full and continuing guaranty of the Obligations by each Subsidiary of Borrower. ARTICLE 8 Negative Covenants So long as this Agreement shall remain in effect, or any liability shall exist under the Loan Documents, Borrower shall not, without prior written consent of Bank, which consent shall not be unreasonably withheld: .1 Debt. Create, incur, assume, permit to exist, or otherwise become committed for any Debt except any: (a) Unsecured Trade Credit. Unsecured Trade Credit; (b) Existing Obligations. Debt owing to Bank, or in existence as of this date and disclosed to Bank, and all renewals, modifications, and extensions thereof; (c) Purchase Money Finance. Debt incurred to finance the acquisition of fixed assets, subject to other restrictions of this Agreement; (d) Lease Agreements. Debt incurred in connection with capital leases calling for payments in the aggregate not exceeding $250,000 in any one fiscal year; and (e) Ordinary Course. Debt incurred in the ordinary course of business and appearing on the liability section of the balance sheet of Borrower, prepared in accordance with GAAP, including, without limitation, accrued liabilities and taxes payable. .2 Liens and Encumbrances. Create, incur, or assume, or agree to create, incur, or assume any lien, whether consensual or nonconsensual, on any of its property, or to enter into any lease with respect to any of its property except: (a) Existing Liens. Liens in effect as of this date; (b) Purchase Money Liens. Liens securing purchase money finance of fixed assets, as permitted under Subsection 8.1(c); (c) Liens of Bank. Liens in favor of Bank; (d) Tax Liens. Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings; and (e) Incidental Liens. Other liens incidental to the conduct of its business or the ownership of its property which are not incurred in connection with the borrowing of money or the obtaining of credit, and which do not in the aggregate materially impair the value or use of property. .3 Guaranties. Assume, guaranty, endorse, become a surety for, indemnify, or otherwise in any fashion become responsible for, directly or indirectly, any obligation of any Person, except: (a) Negotiable Instruments. Endorsements on negotiable instruments for deposit or collection in the ordinary course of business; and (b) Performance Bonds. Performance bonds as required in the ordinary course of Borrower's business. .4 Disposition of Assets. Sell, transfer, lease, or otherwise assign or dispose of a substantial portion of its property to any Person, outside the ordinary course of business. .5 Mergers. Become a party to any merger, consolidation, or like corporate change, or make any substantial transfer or contribution to, or material investment in, stock, shares, or licenses of any Person, if any such merger, investment, or the like is in an amount of $500,000 or more. .6 Wage and Hour Laws. Engage in any material violation of the federal Fair Labor Standards Act or any comparable state wage and hour law. .7 ERISA. Engage in any act or omission which would make Borrower materially liable under ERISA to the Plan, to any of its participants, or to the Internal Revenue Service. .8 Dissolution. Adopt any agreement or resolution for dissolving, terminating, or substantially altering Borrower's present business activities. .9 Business Activities. Engage or enter into any activity which is unusual to Borrower's existing business. .10 Acquisitions. Make any acquisition, or permit any Subsidiary to make any acquisition, in an amount of $500,000 or more, without the prior written consent of Bank, which shall not be unreasonably withheld so long as Bank has received complete information concerning the details of such acquisition. .11 Capital Expenditures. Make in any one fiscal year capital expenditures which when cumulated exceed $2,500,000, or in any two consecutive fiscal years capital expenditures which when cumulated exceed $4,000,000. ARTICLE 9 Events and Consequences of Default .1 Events of Default. Any of the following events shall, at the option of Bank and at any time without regard to any previous knowledge on the part of Bank, constitute a default by Borrower under the terms of this Agreement, the Revolving Note, and all other Loan Documents ("Default"): (a) Nonpayment. Any payment or reimbursement due or demanded under this Agreement or any Loan Document is not made within five days of the date when due; (b) Breach of Warranty. Any representation or warranty made in connection with this Agreement or any other Loan Document, or any certificate, notice, or report furnished pursuant hereto, is determined by Bank to be false in any material respect when made, and is relied upon by Bank to its detriment; (c) Failure to Perform. Any other term, covenant, or agreement contained in any Loan Document is not performed or satisfied, and, if remediable, such failure continues unremedied for 30 days after written notice thereof has been given to Borrower by Bank; (d) Defaults on Other Obligations. There exists a default in the performance of any other agreement or obligation for the payment of borrowed money, for the deferred purchase price of property or services, or for the payment of rent under any lease, whether by acceleration or otherwise, which obligation exceeds $100,000, and which would permit such obligation to be declared due and payable prior to its stated maturity; and such default continues for 30 days after Borrower receives written notice thereof from the creditor so affected; (e) Loss, Destruction, or Condemnation of Property. A portion of Borrower's property is affected by any uninsured loss, damage, destruction, theft, sale, or encumbrance other than created herein or is condemned, seized, or appropriated, the effect of which materially impairs Borrower's financial condition or its ability to pay its debts as they come due; (f) Attachment Proceedings and Insolvency. Borrower or any of Borrower's property is affected by any: (i) Judgment lien, execution, attachment, garnishment, general assignment for the benefit of creditors, sequestration, or forfeiture, to the extent Borrower's financial condition or its ability to pay its debts as they come due is thereby materially impaired; or (ii) Proceeding under the laws of any jurisdiction relating to receivership, insolvency, or bankruptcy, whether brought voluntarily or involuntarily by or against Borrower, including, without limitation, any reorganization of assets, deferment or arrangement of debts, or any similar proceeding, and, if such proceeding is involuntarily brought against Borrower, it is not dismissed within 60 days; (g) Judgments. Final judgment on claims not covered by insurance which, together with other outstanding final judgments against Borrower, exceeds $250,000, and which materially impairs Borrower's financial condition or its ability to pay its debts as they come due, is rendered against Borrower and is not discharged, vacated, or reversed, or its execution stayed pending appeal, within 60 days after entry, or is not discharged within 60 days after the expiration of such stay; or (h) Government Approvals. Any governmental approval, registration, or filing with any governmental authority, now or later required in connection with the performance by Borrower of its obligations under the Loan Documents, is revoked, withdrawn, or withheld, or fails to remain in full force and effect, except Borrower shall have 60 days after notice of any such event to take whatever action is necessary to obtain all necessary approvals, registrations, and filings. .2 Remedies Upon Default. If any Default occurs and is continuing, Bank may at its option, by notice to Borrower: (a) Terminate Commitments. Terminate Bank's commitment to make Advances; (b) Suspend Commitments. Refuse to make further Advances until any Default has been cured; (c) Accelerate. Declare the Revolving Note and/or the Term Note, together with all accrued interest, to be immediately due and payable without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower; (d) Setoff. Exercise its right of setoff against deposit accounts of Borrower with Bank; (e) Collateral. Proceed to realize on any or all Collateral by any available means; and/or (f) All Remedies. Pursue any other available legal and equitable remedies. All of Bank's rights and remedies in all Loan Documents shall be cumulative and can be exercised separately or concurrently. ARTICLE 10 Miscellaneous .1 Manner of Payments. (a) Payments on Nonbusiness Days. Whenever any event is to occur or any payment is to be made under any Loan Document on any day other than a Business Day, such event may occur or such payment may be made on the next succeeding Business Day and such extension of time shall be included in computation of interest in connection with any such payment. (b) Payments. All payments and prepayments to be made by Borrower shall be made to Bank when due, at Bank's office as may be designated by Bank, without offsets or counterclaims for any amounts claimed by Borrower to be due from Bank, in U.S. dollars and in immediately available funds. (c) Application of Payments. All payments made by Borrower shall be applied first against fees, expenses, and indemnities due; second, against interest due; and third, against principal, with Bank having the right, after a Default which is continuing, to apply any payments or collections received against any one or more of the Obligations in any manner which Bank may choose. (d) Recording of Payments. Bank is authorized to record on a schedule or computer-generated statement the date and amount of each Advance, all conversions between interest rate options, and all payments of principal and interest. All such schedules or statements, absent manifest error, shall constitute prima facie evidence of the accuracy of the information so recorded. .2 Notices. Bank may make Advances and conversions between interest rates based on telephonic, telex, and oral requests made by any Person whom Bank in good faith believes to be authorized to act on behalf of Borrower. All other notices, demands, and other communications to be given pursuant to any of the Loan Documents shall be in writing and shall be deemed received the earlier of when actually received, or two days after being mailed, postage prepaid and addressed as follows, or as later designated in writing: Bank: SEAFIRST BANK Western Commercial Banking, Team 2 10500 N.E. 8th Street, 5th Floor Bellevue, WA 98004 Attention: Thomas E. Kasanders Borrower: INTERPOINT CORPORATION 10301 Willows Road Redmond, WA 98052 Attention: Leslie Rock .3 Documentation and Administration Expenses. Borrower shall pay, reimburse, and indemnify Bank for all of Bank's reasonable costs and expenses, including, without limitation, all accounting, appraisal, and report preparation fees or expenses, all reasonable attorneys' fees (including the allocated cost of in-house counsel), legal expenses, and recording or filing fees, incurred in connection with the negotiation, preparation, execution, and administration of this Agreement and all other Loan Documents, and all amendments, supplements, or modifications thereto, and the perfection of all security interests, liens, or encumbrances that may be granted to Bank; provided, that Borrower shall not be required to reimburse Bank for more than $2,000 of Bank's legal fees and other documentation fees for initial documentation of the facility represented by this Agreement. Borrower acknowledges that any legal counsel retained or employed by Bank acts solely on the Bank's behalf and not on Borrower's behalf, despite Borrower's obligation to reimburse Bank for the cost of such legal counsel, and that Borrower has had sufficient opportunity to seek the advice of its own legal counsel with regard to this Agreement. .4 Collection Expenses. The nonprevailing party shall, upon demand by the prevailing party, reimburse the prevailing party for all of its costs, expenses, and reasonable attorneys' fees (including the allocated cost of in-house counsel) incurred in connection with any controversy or claim between said parties relating to this Agreement or any of the other Loan Documents, or to an alleged tort arising out of the transactions evidenced by this Agreement, including those incurred in any action, bankruptcy proceeding, arbitration or other alternative dispute resolution proceeding, or appeal, or in the course of exercising any judicial or nonjudicial remedies. .5 Waiver. No failure to exercise and no delay in exercising, on the part of Bank, any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power, or privilege. Further, no waiver or indulgence by Bank of any Default shall constitute a waiver of Bank's right to declare a subsequent similar failure or event to be a Default. .6 Assignment. This Agreement is made expressly for the sole benefit of Borrower and for the protection of Bank and its successors and assigns. The rights of Borrower hereunder shall not be assignable by operation of law or otherwise, without the prior written consent of Bank. .7 Merger. The rights and obligations set forth in this Agreement shall not merge into or be extinguished by any of the Loan Documents, but shall continue and remain valid and enforceable. This Agreement and the other Loan Documents constitute Bank's entire agreement with Borrower with regard to the Revolving Loan, and supersede all prior writings and oral negotiations. No oral or written representation, covenant, commitment, waiver, or promise of either Bank or Borrower shall have any effect, whether made before or after the date of this Agreement, unless contained in this Agreement or another Loan Document, or in an amendment complying with Section 10.8. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. .8 Amendments. Any amendment or waiver of, or consent to any departure by Borrower from any provision of, this Agreement shall be in writing signed by each party to be bound thereby, and shall be effective only in the specific instance and for the specific purpose for which given. .9 Mandatory Arbitration. (a) At the request of either Bank or Borrower, any controversy or claim between Bank and Borrower, arising from or relating to this Agreement or any of the other Loan Documents, or arising from an alleged tort, shall be settled by arbitration in Seattle, Washington. The United States Arbitration Act shall apply even though this Agreement is otherwise governed by Washington law. The proceedings shall be administered by the American Arbitration Association under its commercial rules of arbitration. Any controversy over whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction over the parties. The institution and maintenance of an action for judicial relief or pursuit of an ancillary or provisional remedy shall not constitute a waiver of the right of either party, including the plaintiff, to submit the controversy or claim to arbitration if such action for judicial relief is contested. For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this subsection is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this subsection is subject to any applicable statute of limitations. The arbitrator(s) will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. The parties consent to the joinder of any guarantor, hypothecator, or other party having an interest relating to the claim or controversy being arbitrated in any proceedings under this Section. (b) No provision of this subsection shall limit the right of Borrower or Bank to exercise self-help remedies such as set-off, foreclosure, retention or sale of any collateral, or obtaining any ancillary, provisional, or interim remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration proceeding. The exercise of any such remedy does not waive the right of either party to request arbitration. .10 Construction. Each term of this Agreement and each Loan Document shall be binding to the extent permitted by law and shall be governed by the laws of the State of Washington, excluding its conflict of laws rules. If one or more of the provisions of this Agreement should be invalid, illegal, or unenforceable in any respect, the remaining provisions of this Agreement shall remain effective and enforceable. If there is a conflict among the provisions of any Loan Documents, the provisions of this Agreement shall be controlling. The captions and organization of this Agreement are for convenience only, and shall not be construed to affect any provision of this Agreement. DATED March 29, 1996. Borrower: INTERPOINT CORPORATION By /s/Leslie S. Rock ------------------------- Title Vice President, Treasurer ------------------------- Bank: SEAFIRST BANK By /s/T.E. Kasanders _________________________ Title Vice President ------------------------- EX-10.2 4 EXHIBIT 10.2 DUE: April 1, 2001 REVOLVING NOTE INTERPOINT CORPORATION $20,000,000.00 Dated: March 29, 1996 Seattle, Washington INTERPOINT CORPORATION ("Maker") unconditionally promises to pay to the order of Bank of America NW, N.A., doing business as SEAFIRST BANK ("Bank") at its Western Commercial Banking, Team 2 office, on or before April 1, 2001, in immediately available funds, the principal sum of Twenty Million and No/100 Dollars ($20,000,000.00), or such lesser sum as may be outstanding under this Note, together with interest on the daily unpaid principal balance from the date of each Advance until paid in full in accordance with the terms, conditions, and definitions of the Credit Agreement dated March 29, 1996 ("Agreement") between Maker, as Borrower, and Bank. If at any time the outstanding principal balance of this Note shall exceed the Credit Limit, Maker shall immediately repay principal of the this Note in an amount sufficient to reduce the principal balance of this Note to the Credit Limit then in effect. This Note is the Revolving Note referred to in the Agreement, and the Agreement is incorporated herein. Also incorporated herein is Exhibit 1 attached hereto, regarding prepayment fees. If a Default shall occur, interest shall accrue, at the option of the holder of this Note, from the date of Default at a floating rate per annum three percent (3%) above the Prime Rate, as the Prime Rate may vary from time to time, and the entire unpaid principal amount of this Note, together with all accrued interest, shall become immediately due and payable at the option of the holder hereof. Advances under this Note may be made by Bank at the oral or written request of Leslie S. Rock, Peter H. van Oppen, Chris Willis, Marilyn Goldberg, any one acting alone, who are authorized to request Advances and direct the disposition of any such Advances until written notice of the revocation of such authority is received by Bank at its office indicated above. Any such Advance shall be conclusively presumed to have been made to or for the benefit of Maker when made in accordance with such requests and directions, or when said Advances are deposited to the credit of an account of Maker with Bank, regardless of the fact that persons other than those authorized under this paragraph may have authority to draw against such account. Except as otherwise expressly set forth in the Agreement, Maker hereby waives presentment, demand, protest, and notice of dishonor hereof. Each party signing or endorsing this Note signs as maker and principal, and not as guarantor, surety, or accommodation party; and is estopped from asserting any defense based on any capacity other than maker or principal. This Note shall be governed by and construed in accordance with the laws of the State of Washington. INTERPOINT CORPORATION By /s/Leslie s. Rock ------------------------- Title Vice President, Treasurer ------------------------- EX-10.3 5 EXHIBIT 10.3 SECURITY AGREEMENT This security agreement ("Agreement") is made and entered into by Interpoint Corporation, a Washington corporation ("Borrower"), for the benefit of Bank of America NW, N.A., doing business as Seafirst Bank, a national banking association ("Secured Party"). RECITALS: A. Concurrently with the execution hereof, Secured Party and Borrower entered into a Credit Agreement dated March 29, 1996 (together with all supplements, exhibits, and amendments thereto, referred to as the "Credit Agreement"), pursuant to which Secured Party agreed to make available to Borrower certain credit facilities (the "Credit Facilities"). B. Borrower wishes to grant to Secured Party a security interest in all certain of its assets as security for all the Secured Obligations. NOW, THEREFORE, in order for Secured Party to extend the Credit Facilities, Borrower agrees as follows: 1 DEFINITIONS Unless otherwise defined herein, terms defined in the Credit Agreement shall have the same meanings when used herein. For the purposes of this Agreement, the following terms shall have the following meanings: "Accounts" means any right to payment for goods sold or leased or for services rendered that is not evidenced by an Instrument or Chattel Paper, whether or not it has been earned by performance. "Account Debtor" means the party who is obligated on or under any Account, Chattel Paper, or General Intangible. "Assignee Deposit Account" shall have the meaning set forth in Section 5.7 hereof. "Applicable Law" shall mean the laws of the State of Washington, without regard to its choice of law rules. "Chattel Paper" means all interest of Borrower in writings that evidence both a monetary obligation and a security interest in or a lease of specific goods, including any group of writings consisting of both a security agreement or a lease and an Instrument or series of Instruments. "Collateral" means all personal property, tangible and intangible, wherever located, now owned or hereafter acquired by Borrower, or in which Borrower has or later obtains an interest, and all products, profits, rents, and proceeds of such property, including but not limited to Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, General Intangibles, Goods, Instruments, Inventory, Trademarks, and Vehicles. "Deposit Account" means a demand, time, savings, passbook, or like account maintained with a bank, savings and loan association, credit union, or like organization, other than an account evidenced by a certificate of deposit. "Document" means all of Borrower's right, title, and interest in or to any document of title as defined in RCW 62A.1- 201 and any receipt of the kind described in RCW 62A.7-201(2). "Equipment" means all of Borrower's right, title, and interest in and to Goods that are used or bought for use primarily in business and that are not included within the definition of Inventory, including but not limited to all machinery, equipment, furnishings, fixtures, vehicles, tools, supplies, and other equipment of any kind and nature and all additions, substitutions, and replacements of any of the foregoing, together with all attachments, components, parts, accessories, improvements, upgrades, and accessories installed thereon or affixed thereto. "Event of Default" means an occurrence of a Default as defined in the Credit Agreement. "Financial Assets" means all of Borrower's right, title, and interest in and to any financial asset as defined in RCW 62A.8- 102. "Fixtures" shall have the meaning given to such term in RCW 62A.9-101 et seq. "General Intangibles" means all personal property (including things in action) other than Goods, Accounts, Chattel Paper, Documents, Instruments, and money, including but not limited to all Trademarks, insurance proceeds, patents, copyrights, trade names, trade secrets, goodwill, registration, license rights, licenses, permits, corporate and other business records, rights to refunds or indemnification, tax refunds, choses in action, judgments taken on any rights or claims included in the Collateral, and all other intangible personal property of Borrower of every kind and nature. "Goods" means all things that are movable or that are fixtures, not including money, Documents, Instruments, Accounts, Chattel Paper, or General Intangibles. "Governmental Approvals" means any approval by or registration or filing with any Governmental Body, now or later required in connection with the performance by Borrower of its obligations under the Loan Documents. "Governmental Body" means any local, state, or federal government, or any agency, subdivision, or court thereof. "Instrument" means any negotiable instrument or security or other writing that evidences a right to the payment of money and is not itself a security agreement or lease and is of a type that is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. "Inventory" means all Goods held by Borrower for sale or lease, furnished or to be furnished by Borrower under any contract of service, or held by Borrower as raw materials, work in progress, or materials used or consumed in Borrower's business. "Investment Property" means all of Borrower's right, title, and interest in and to any investment property as defined in RCW 62A.9-115. "Secured Obligations" means the "Obligations" as defined in the Credit Agreement, and any obligations which are specified in this Agreement as being included as Secured Obligations. "Trademark" means (a) any trademark, trade name, corporate name, company name, business name, fictitious business name, trade style, service mark, logo or other source or business identifier, and the goodwill associated therewith, now existing or hereafter adopted or acquired, any registration or recording thereof, and any application in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States or of any state thereof, or any other country or any political subdivision thereof, or otherwise, including but not limited to any thereof referred to in Schedule A-1 hereto, and (b) all renewals thereof. "Vehicle" means any car, truck, trailer, forklift, loader, construction or earth-moving equipment, or other vehicle covered by a certificate of title of any state, including but not limited to any tires or other appurtenances to any of the foregoing. 2 GRANT OF SECURITY INTEREST As security for the prompt payment and satisfaction of the Secured Obligations, Borrower hereby grants to Secured Party a continuing security interest in and assigns to Secured Party all of Borrower's right, title, and interest in the Collateral and all products, profits, rents, and proceeds thereof. 3 COVENANTS OF BORROWER Borrower shall fully perform each of the covenants set forth below. .1 Obligations to Pay. (a) Borrower shall pay to Secured Party, in timely fashion and in full, all amounts payable by Borrower to Secured Party, pursuant to the Credit Agreement and the other Loan Documents; and (b) Borrower shall pay and reimburse Secured Party for all expenditures including reasonable attorney fees and legal expenses (including the allocated cost of the services of in-house counsel) in connection with the exercise by Secured Party of any of its rights or remedies under the Credit Agreement or the other Loan Documents. .2 Performance. Borrower shall fully perform in a timely fashion every covenant, agreement, and obligation set forth in the Credit Agreement and the other Loan Documents. .3 Further Documentation. At its own expense, Borrower shall execute and deliver any financing statement, any renewal, substitution, or correction thereof, or any other document; shall procure any document; and shall take such further action as Secured Party may reasonably require in obtaining the full benefits of this Agreement. .4 Filing Fees. Borrower shall pay all costs of filing any financing, continuation, or termination statement with respect to the security interests granted herein. .5 Pledges. Borrower shall deliver and pledge to Secured Party, endorsed or accompanied by instruments of assignment or transfer satisfactory to Secured Party, any Instruments, Documents, General Intangibles, or Chattel Paper that Secured Party may specify from time to time. .6 Maintenance of Records. Borrower shall keep and maintain at its own cost and expense satisfactory and complete records of the Collateral including but not limited to a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. Borrower shall mark its records pertaining to the Collateral to evidence this Agreement and the security interests granted herein. Borrower shall deliver and turn over to Secured Party copies of all records pertaining to the Collateral at any time after the occurrence and during the continuation of an Event of Default, if so demanded by Secured Party. .7 Disposition of Collateral. Except as allowed in the Credit Agreement, Borrower shall not sell or transfer any of the Collateral or release, compromise, or settle any obligation or receivable due to Borrower. .8 Indemnification. Borrower agrees to pay, and to indemnify Secured Party and hold Secured Party harmless from, all liabilities, costs, and expenses including but not limited to legal fees and expenses with respect to or resulting from (a) any delay in paying any excise, sales, or other taxes that may be payable or determined to be payable with respect to any of the Collateral, (b) any delay by Borrower in complying with any requirement of law applicable to any of the Collateral, or (c) any of the transactions contemplated by this Agreement. In any suit, proceeding, or action brought by Secured Party under any Account to enforce payment of any sum owing thereunder or to enforce any provisions of any Account, Borrower will indemnify Secured Party and hold Secured Party harmless from all expense, loss, or damage suffered by reason of any defense, setoff, counterclaim, recoupment, reduction, or liability whatsoever of the Account Debtor thereunder arising out of a breach by Borrower of any obligation thereunder or arising out of any other agreement, indebtedness, or liability at any time owing to or in favor of such Account Debtor or its successors from Borrower. .9 Further Identification of Collateral. Borrower will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. .10 Notices. Borrower will advise Secured Party promptly in reasonable detail at its address set forth in the Credit Agreement of any Lien (other than Liens created hereby or permitted under the Credit Agreement) on or claim asserted against any of the Collateral and (b) of the occurrence of any other event that could reasonably be expected to have a material adverse effect on the Collateral or on the Liens created hereunder. .11 Changes in Locations, Name, Etc. Borrower will not (a) change the location of its chief executive office/chief place of business from that specified in Section 4.10 or remove its records from the location specified in Section 4.7, (b) permit any of the Inventory or Equipment (excluding Vehicles) to be kept at locations other than those listed on Schedule A-2 hereto, or (c) change its name, identity, or structure to such an extent that any financing statement filed by Secured Party in connection with this Agreement would become seriously misleading, unless it shall have given Secured Party at least ten days' prior written notice thereof. .12 Trademarks. (a) Unless the failure to do so would have a material adverse effect on Borrower, Borrower (either itself or through licensees) will (i) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures, and price lists in order to maintain such Trademark in full force free from any claim of abandonment for nonuse, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark that is confusingly similar to or a colorable imitation of such Trademark unless Secured Party shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (b) Borrower will notify Secured Party immediately if it knows, or has reason to know, of (i) any application or registration relating to any Trademark material to its business that may become abandoned or dedicated, or (ii) any adverse determination or development (including but not limited to the institution of, or any adverse determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding Borrower's ownership of any material Trademark or its right to register, keep, or maintain the same. (c) Whenever Borrower, either by itself or through any agent, employee, licensee, or designee, shall file an application for the registration of any material Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, Borrower shall report such filing to Secured Party within five Business Days after the last day of the calendar month in which such filing occurs. Borrower shall execute and deliver to Secured Party all agreements, instruments, powers of attorney, documents, and papers that Secured Party may reasonably request to evidence Secured Party's security interest in any Trademark and in the goodwill and general intangibles of Borrower relating to or represented by the Trademark. Borrower hereby constitutes Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, with all acts of such attorney being hereby ratified and confirmed; and such power, being coupled with an interest, is irrevocable until all Secured Obligations are paid in full. (d) Borrower will take all reasonable and necessary steps, including but not limited to all reasonable and necessary steps in any proceeding before the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application, to obtain the relevant registration, and to maintain each registration of material Trademarks, including but not limited to filing applications for renewal, affidavits of use, and affidavits of incontestability. (e) If any Trademark that is included in the Collateral is infringed, misappropriated, or diluted by a third party, Borrower shall promptly notify Secured Party after it learns thereof and, unless the failure to do so would have a material adverse effect on Borrower, shall take such action as Borrower reasonably deems appropriate under the circumstances to protect such Trademark. .13 Insurance. Borrower agrees to insure the Collateral against all hazards in form and amount reasonably satisfactory to Secured Party. If Borrower fails to obtain such insurance, Secured Party shall have the right, but not the obligation, to obtain either insurance covering both Borrower's and Secured Party's interest in the Collateral, or insurance covering only Secured Party's interest in the Collateral. Borrower agrees to pay any premium charged for such insurance. This amount may be added to the outstanding balance of the Credit Facilities, and interest thereon shall be charged at the rate specified in any applicable Loan Document, or Secured Party may demand immediate payment. Any unpaid insurance premium advanced by Secured Party shall be secured under the terms of this Agreement. Secured Party will have no liability whatsoever for any loss which may occur by reason of the omission or lack of coverage of any such insurance. Borrower hereby assigns to Secured Party the right to receive proceeds of such insurance to the full amount of the Secured Obligations and hereby directs any insurer to pay all proceeds directly to Secured Party, and authorizes Secured Party to endorse any draft. In Secured Party's sole discretion, during the continuance of an Event of Default, Secured Party may apply any insurance proceeds either toward the repair or replacement of the property or reduction of the balance of the Secured Obligations; otherwise, such proceeds will be applied either toward the repair or replacement of the property or reduction of the balance of the Secured Obligations, as determined by Borrower in its sole discretion. .14 Copy of Financing Statement. Borrower agrees that a carbon, photographic, or other reproduction of a financing statement or this Agreement is sufficient as a financing statement. 4 REPRESENTATIONS AND WARRANTIES Borrower hereby makes the following representations and warranties: .1 Title to Collateral. Borrower has good and marketable title to all the Collateral, free and clear of all Liens excepting only the security interests created pursuant to this Agreement or permitted pursuant to the Credit Agreement. .2 No Impairment of Collateral. None of the Collateral shall be impaired or jeopardized because of the security interest herein granted. .3 Other Agreements. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof will not result in the breach of any of the terms, conditions, or provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation under any (a) agreement or other instrument to which Borrower is a party or by which Borrower is bound or (b) Applicable Law. .4 No Approvals. No Governmental Approvals of any nature are required in connection with the security interests herein granted, except the filing of UCC financing statements. .5 Authority. Borrower has full power and authority to assign to Secured Party and to grant to Secured Party a security interest in the Collateral. .6 Location of Records. The address of the office where the records of Borrower are kept concerning the Collateral is set forth on Schedule A-3. .7 Location of Collateral. The locations of all Inventory and Equipment of Borrower are described on Schedule A-2. .8 Name. Borrower conducts its business only under the names listed on Schedule A-6. .9 Accounts. The amount represented by Borrower to Secured Party from time to time as owing by each Account Debtor or by all Account Debtors in respect of the Accounts will at such time be the correct amount actually owing by such Account Debtor or Debtors thereunder. No material amount payable to Borrower under or in connection with any Account is evidenced by any Instrument or Chattel Paper that has not been delivered to Secured Party. .10 Chief Executive Office. Borrower's chief executive office and chief place of business is located at the address set forth on Schedule A-4. .11 Trademarks. Schedule A-1 hereto includes all Trademarks owned by Borrower in its own name as of the date hereof. To the best of Borrower's knowledge, each such Trademark is valid, subsisting, unexpired, and enforceable and has not been abandoned. Except as set forth in Schedule A-5, none of such Trademarks is the subject of any licensing or franchise agreement. No holding, decision, or judgment that would limit, cancel, or question the validity of any such Trademark has been rendered by any Governmental Body. No action or proceeding is pending that (a) seeks to limit, cancel, or question the validity of any such Trademark or (b) would, if adversely determined, have a material adverse effect on the value of any Trademark. 5 SECURED PARTY'S RIGHTS WITH RESPECT TO THE COLLATERAL .1 No Duty on Secured Party's Part. Secured Party shall not be required (except at its option upon the occurrence and during the continuation of any Event of Default) to realize upon any Accounts, Instruments, Chattel Paper, or General Intangibles; collect the principal, interest, or payment due thereon, exercise any rights or options of Borrower pertaining thereto; make presentment, demand, or protest; give notice of protest, nonacceptance, or nonpayment; or do any other thing for the protection, enforcement, or collection of such Collateral. The powers conferred on Secured Party hereunder are solely to protect Secured Party's interests in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that Secured Party actually receives as a result of the exercise of such powers; and neither Secured Party nor any of its officers, directors, employees, or agents shall be responsible to Borrower for any act or failure to act hereunder. .2 Negotiations with Account Debtors. Upon the occurrence and during the continuation of any Event of Default, Secured Party may, in its sole discretion, extend or consent to the extension of the time of payment or maturity of any Instruments, Accounts, Chattel Paper, or General Intangibles. .3 Right to Assign. Except as otherwise provided in the Credit Agreement, Secured Party may assign or transfer the whole or any part of the Secured Obligations and may transfer therewith as collateral security the whole or any part of the Collateral; and all obligations, rights, powers, and privileges herein provided shall inure to the benefit of the assignee and shall bind the successors and assigns of the parties hereto. .4 Duties Regarding Collateral. Beyond the safe custody thereof, Secured Party shall not have any duty as to any Collateral in its possession or control, or as to any preservation of any rights of or against other parties. .5 Collection From Account Debtors. Upon the occurrence and during the continuation of any Event of Default, Borrower shall, upon demand by Secured Party (and without any grace or cure period), notify all Account Debtors to make payment to Secured Party of any amounts due or to become due. Borrower authorizes Secured Party, during the continuation of an Event of Default, to contact the Account Debtors for the purpose of having all or any of them pay their obligations directly to Secured Party. .6 Inspection. Secured Party and its designees, from time to time at reasonable times and intervals, may inspect the Equipment and Inventory and inspect, audit, and make copies of and extracts from all records and all other papers in the possession of Borrower. .7 Assignee Deposit Account. Upon the occurrence and during the continuation of an Event of Default and demand by Secured Party, Borrower will transmit and deliver to Secured Party, in the form received, immediately after receipt, all cash, checks, drafts, Chattel Paper, Instruments, or other writings for the payment of money (properly endorsed, where required, so that the items may be collected by Secured Party) that may be received by Borrower at any time. All items or amounts that are delivered by Borrower to Secured Party, or collected by Secured Party from the Account Debtors, shall be deposited to the credit of a Deposit Account ("Assignee Deposit Account") of Borrower with Secured Party, as security for the payment of the Secured Obligations. Borrower shall have no right to withdraw any funds deposited in the Assignee Deposit Account. Secured Party shall, upon the request of Borrower made not more than twice in any week, apply all or any of the balance, representing collected funds, in the Assignee Deposit Account, to payment of the Secured Obligations, whether or not then due, in such order of application, not inconsistent with the terms of the Credit Agreement and this Agreement, as Secured Party may determine; and Secured Party may, from time to time in its discretion, release all or any of such balance to Borrower. 6 SECURED PARTY'S RIGHTS AND REMEDIES .1 General. Upon the occurrence of any Event of Default, Secured Party may exercise its rights and remedies in the Credit Agreement and in any other Loan Documents and any other rights and remedies at law and/or in equity, simultaneously or consecutively, all of which rights and remedies shall be cumulative. The choice of one or more rights or remedies shall not be construed as a waiver or election barring other rights and remedies. Borrower hereby acknowledges and agrees that Secured Party is not required to exercise all rights and remedies available to it equally with respect to all the Collateral and that Secured Party may select less than all the Collateral with respect to which the rights and remedies as determined by Secured Party may be exercised. .2 Notice of Sale, Duty to Assemble Collateral. In addition to or in conjunction with the rights and remedies referred to in Section 6.1 hereof: (a) Written notice mailed to Borrower at the address designated herein ten days or more prior to the date of public or private sale of any of the Collateral shall constitute reasonable notice. (b) If Secured Party requests, Borrower will assemble the Collateral and make it available to Secured Party at places that Secured Party shall reasonably select, whether on Borrower's premises or elsewhere. 7 GENERAL PROVISIONS .1 Entire Agreement. This Agreement, together with the Credit Agreement and the other Loan Documents, sets forth all the promises, covenants, agreements, conditions, and understandings between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements, or conditions, express or implied, oral or written, with respect thereto, except as contained or referred to herein. This Agreement may not be amended, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of such amendment, waiver, discharge, or termination is sought. .2 Invalidity. If any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereunder, but this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. .3 Nonwaiver and Nonexclusive Rights and Remedies. (a) No right or remedy herein conferred upon or reserved to Secured Party is intended to be to the exclusion of any other right or remedy, but each and every such right or remedy shall be cumulative and shall be in addition to every other right or remedy given hereunder and now or hereafter existing at law or in equity. (b) No delay or omission by Secured Party in exercising any right or remedy accruing upon an Event of Default shall impair any such right or remedy, or shall be construed to be a waiver of any such Event of Default, or an acquiescence therein, nor shall it affect any subsequent Event of Default of the same or of a different nature. .4 Termination of Security Interest. When all the Secured Obligations have been paid in full and Secured Party has no ongoing credit commitment to Borrower in effect, the security interest provided herein shall terminate and Secured Party shall return to Borrower all Collateral then held by Secured Party, if any, and upon written request of Borrower shall execute, in form for filing, termination statements of the security interests herein granted. Thereafter, no party hereto shall have any further rights or obligations hereunder. .5 Successors and Assigns. All rights of Secured Party hereunder shall inure to the benefit of its successors and assigns, and all obligations of Borrower shall be binding upon its successors and assigns. .6 Secured Party's Appointment as Attorney-in-Fact. (a) Borrower hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Borrower and in the name of Borrower or in its own name, from time to time in Secured Party's discretion, for the purpose of carrying out the terms of this Agreement during the existence of any Event of Default, to take any and all appropriate action, and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement; and without limiting the generality of the foregoing, Borrower hereby gives Secured Party the power and right, on behalf of Borrower, without consent by or notice to Borrower, to do the following: (i) to transfer to Secured Party or to any other person all or any of said Collateral, to endorse any Instruments pledged to Secured Party, and to fill in blanks in any transfers of Collateral, powers of attorney, or other documents delivered to Secured Party; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement, and to pay all or any part of the premiums therefor and the costs thereof; (iii) upon the occurrence and during the continuation of any Event of Default (A) to take possession of, endorse, and collect any checks, drafts, notes, acceptances, or other instruments for the payment of moneys due under any Account, Instrument, or General Intangible or with respect to any other Collateral and (B) to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Secured Party for the purpose of collecting all such moneys due under any Account, Instrument, or General Intangible or with respect to any other Collateral whenever payable; and (iv) upon the occurrence and during the continuation of any Event of Default (A) to direct any party liable for any payment under any of the Collateral to make payment of all moneys due or to become due thereunder directly to Secured Party or as Secured Party shall direct; (B) to ask for, demand, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices, and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions, or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action, or proceeding brought against Borrower with respect to any Collateral; (F) to settle, compromise, or adjust any suit, action, or proceeding described in clause (E) above and, in connection therewith, to give such discharge or releases as Secured Party may deem appropriate; (G) to assign any Trademark (along with the goodwill of the business to which any such Trademark pertains) throughout the world for such term or terms, on such conditions, and in such manner as Secured Party shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge, and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes; and to do, at Secured Party's option and Borrower's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's liens thereon and to effect the intent of this Agreement, all as fully and effectively as Borrower might do. (b) Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (c) Borrower also authorizes Secured Party, at any time and from time to time, to execute, in connection with the sale provided for in Article 6 hereof, any endorsements, assignments, or other instruments of conveyance or transfer with respect to the Collateral. (d) The powers conferred on Secured Party hereunder are solely to protect Secured Party's interests in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees, or agents shall be responsible to Borrower for any act or failure to act hereunder. .7 Performance by Secured Party of Borrower's Obligations. If Borrower fails to perform or comply with any of its agreements contained herein and Secured Party, as provided for by the terms of this Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expense of Secured Party incurred in connection with such performance or compliance, together with interest thereon at the rate provided for in the Credit Agreement upon the occurrence of an Event of Default, shall be payable by Borrower to Secured Party on demand and shall constitute Secured Obligations. .8 Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with and shall be governed by the Applicable Law. .9 Notices. All notices, requests, consents, demands, approvals, and other communications hereunder shall be deemed to have been duly given, made, or served if in writing and when delivered in accordance with the notice provisions of the Credit Agreement. .10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original Agreement, but all of which together shall constitute one and the same instrument. Dated as of March 29, 1996. Borrower: INTERPOINT CORPORATION By /s/Leslie S. Rock ------------------------- Title Vice President, Treasurer ------------------------- Secured Party: SEAFIRST BANK By T.E. Kasanders ------------------------- Title Vice President ------------------------- SCHEDULE A TO SECURITY AGREEMENT DATED AS OF MARCH 29, 1996 Schedule A-1 (Specific Trademarks): NONE Schedule A-2 (Locations of Inventory or Equipment): 10301 Willows Road Redmond, WA 98052 14833 - 87th Street N.E. Redmond, WA 98052 Schedule A-3 (Location of Records): 10301 Willows Road, Redmond, WA 98052 Schedule A-4 (Location of Chief Executive Offices): 10301 Willows Road, Redmond, WA 98052 Schedule A-5 (Trademark Licenses or Assignments): NONE Schedule A-6 (Tradenames used): Interpoint Corporation Interpoint Taiwan Corporation Interpoint (UK) Ltd. Interpoint France SARL Interpoint GmbH Interpoint Trade Corporation EX-10.4 6 EXHIBIT 10.4 SECURITY AGREEMENT This security agreement ("Agreement") is made and entered into by Advanced Digital Information Corporation, a Washington corporation ("Grantor"), for the benefit of Bank of America NW, N.A., doing business as Seafirst Bank, a national banking association ("Secured Party"). RECITALS: A. Concurrently with the execution hereof, Secured Party and Interpoint Corporation, a Washington corporation ("Borrower") entered into a Credit Agreement dated March 29, 1996 (together with all supplements, exhibits, and amendments thereto, referred to as the "Credit Agreement"), pursuant to which Secured Party agreed to make available to Borrower certain credit facilities (the "Credit Facilities"). B. Grantor wishes to grant to Secured Party a security interest in all certain of its assets as security for all the Secured Obligations. NOW, THEREFORE, in order for Secured Party to extend the Credit Facilities, Grantor agrees as follows: 1 DEFINITIONS Unless otherwise defined herein, terms defined in the Credit Agreement shall have the same meanings when used herein. For the purposes of this Agreement, the following terms shall have the following meanings: "Accounts" means any right to payment for goods sold or leased or for services rendered that is not evidenced by an Instrument or Chattel Paper, whether or not it has been earned by performance. "Account Debtor" means the party who is obligated on or under any Account, Chattel Paper, or General Intangible. "Assignee Deposit Account" shall have the meaning set forth in Section 5.7 hereof. "Applicable Law" shall mean the laws of the State of Washington, without regard to its choice of law rules. "Chattel Paper" means all interest of Grantor in writings that evidence both a monetary obligation and a security interest in or a lease of specific goods, including any group of writings consisting of both a security agreement or a lease and an Instrument or series of Instruments. "Collateral" means all personal property, tangible and intangible, wherever located, now owned or hereafter acquired by Grantor, or in which Grantor has or later obtains an interest, and all products, profits, rents, and proceeds of such property, including but not limited to Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, General Intangibles, Goods, Instruments, Inventory, Trademarks, and Vehicles. "Deposit Account" means a demand, time, savings, passbook, or like account maintained with a bank, savings and loan association, credit union, or like organization, other than an account evidenced by a certificate of deposit. "Document" means all of Grantor's right, title, and interest in or to any document of title as defined in RCW 62A.1-201 and any receipt of the kind described in RCW 62A.7-201(2). "Equipment" means all of Grantor's right, title, and interest in and to Goods that are used or bought for use primarily in business and that are not included within the definition of Inventory, including but not limited to all machinery, equipment, furnishings, fixtures, vehicles, tools, supplies, and other equipment of any kind and nature and all additions, substitutions, and replacements of any of the foregoing, together with all attachments, components, parts, accessories, improvements, upgrades, and accessories installed thereon or affixed thereto. "Event of Default" means an occurrence of a Default as defined in the Credit Agreement. "Financial Assets" means all of Grantor's right, title, and interest in and to any financial asset as defined in RCW 62A.8- 102. "Fixtures" shall have the meaning given to such term in RCW 62A.9-101 et seq. "General Intangibles" means all personal property (including things in action) other than Goods, Accounts, Chattel Paper, Documents, Instruments, and money, including but not limited to all Trademarks, insurance proceeds, patents, copyrights, trade names, trade secrets, goodwill, registration, license rights, licenses, permits, corporate and other business records, rights to refunds or indemnification, tax refunds, choses in action, judgments taken on any rights or claims included in the Collateral, and all other intangible personal property of Grantor of every kind and nature. "Goods" means all things that are movable or that are fixtures, not including money, Documents, Instruments, Accounts, Chattel Paper, or General Intangibles. "Governmental Approvals" means any approval by or registration or filing with any Governmental Body, now or later required in connection with the performance by Grantor of its obligations under the Loan Documents. "Governmental Body" means any local, state, or federal government, or any agency, subdivision, or court thereof. "Instrument" means any negotiable instrument or security or other writing that evidences a right to the payment of money and is not itself a security agreement or lease and is of a type that is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. "Inventory" means all Goods held by Grantor for sale or lease, furnished or to be furnished by Grantor under any contract of service, or held by Grantor as raw materials, work in progress, or materials used or consumed in Grantor's business. "Investment Property" means all of Grantor's right, title, and interest in and to any investment property as defined in RCW 62A.9-115. "Secured Obligations" means the "Obligations" as defined in the Credit Agreement, and any obligations which are specified in this Agreement as being included as Secured Obligations. "Trademark" means (a) any trademark, trade name, corporate name, company name, business name, fictitious business name, trade style, service mark, logo or other source or business identifier, and the goodwill associated therewith, now existing or hereafter adopted or acquired, any registration or recording thereof, and any application in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States or of any state thereof, or any other country or any political subdivision thereof, or otherwise, including but not limited to any thereof referred to in Schedule A-1 hereto, and (b) all renewals thereof. "Vehicle" means any car, truck, trailer, forklift, loader, construction or earth-moving equipment, or other vehicle covered by a certificate of title of any state, including but not limited to any tires or other appurtenances to any of the foregoing. 2 GRANT OF SECURITY INTEREST As security for the prompt payment and satisfaction of the Secured Obligations, Grantor hereby grants to Secured Party a continuing security interest in and assigns to Secured Party all of Grantor's right, title, and interest in the Collateral and all products, profits, rents, and proceeds thereof. 3 COVENANTS OF GRANTOR Grantor shall fully perform each of the covenants set forth below. .1 Obligations to Pay. Grantor shall pay and reimburse Secured Party for all expenditures including reasonable attorney fees and legal expenses (including the allocated cost of the services of in-house counsel) in connection with the exercise by Secured Party of any of its rights or remedies under this Agreement. .2 Further Documentation. At its own expense, Grantor shall execute and deliver any financing statement, any renewal, substitution, or correction thereof, or any other document; shall procure any document; and shall take such further action as Secured Party may reasonably require in obtaining the full benefits of this Agreement. .3 Filing Fees. Grantor shall pay all costs of filing any financing, continuation, or termination statement with respect to the security interests granted herein. .4 Pledges. Grantor shall deliver and pledge to Secured Party, endorsed or accompanied by instruments of assignment or transfer satisfactory to Secured Party, any Instruments, Documents, General Intangibles, or Chattel Paper that Secured Party may specify from time to time. .5 Maintenance of Records. Grantor shall keep and maintain at its own cost and expense satisfactory and complete records of the Collateral including but not limited to a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. Grantor shall mark its records pertaining to the Collateral to evidence this Agreement and the security interests granted herein. Grantor shall deliver and turn over to Secured Party copies of all records pertaining to the Collateral at any time after the occurrence and during the continuation of an Event of Default, if so demanded by Secured Party. .6 Disposition of Collateral. Except as allowed in the Credit Agreement, Grantor shall not sell or transfer any of the Collateral or release, compromise, or settle any obligation or receivable due to Grantor. .7 Indemnification. Grantor agrees to pay, and to indemnify Secured Party and hold Secured Party harmless from, all liabilities, costs, and expenses including but not limited to legal fees and expenses with respect to or resulting from (a) any delay in paying any excise, sales, or other taxes that may be payable or determined to be payable with respect to any of the Collateral, (b) any delay by Grantor in complying with any requirement of law applicable to any of the Collateral, or (c) any of the transactions contemplated by this Agreement. In any suit, proceeding, or action brought by Secured Party under any Account to enforce payment of any sum owing thereunder or to enforce any provisions of any Account, Grantor will indemnify Secured Party and hold Secured Party harmless from all expense, loss, or damage suffered by reason of any defense, setoff, counterclaim, recoupment, reduction, or liability whatsoever of the Account Debtor thereunder arising out of a breach by Grantor of any obligation thereunder or arising out of any other agreement, indebtedness, or liability at any time owing to or in favor of such Account Debtor or its successors from Grantor. .8 Further Identification of Collateral. Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. .9 Notices. Grantor will advise Secured Party promptly in reasonable detail at its address set forth in the Credit Agreement of any Lien (other than Liens created hereby or permitted under the Credit Agreement) on or claim asserted against any of the Collateral and (b) of the occurrence of any other event that could reasonably be expected to have a material adverse effect on the Collateral or on the Liens created hereunder. .10 Changes in Locations, Name, Etc. Grantor will not (a) change the location of its chief executive office/chief place of business from that specified in Section 4.10 or remove its records from the location specified in Section 4.7, (b) permit any of the Inventory or Equipment (excluding Vehicles) to be kept at locations other than those listed on Schedule A-2 hereto, or (c) change its name, identity, or structure to such an extent that any financing statement filed by Secured Party in connection with this Agreement would become seriously misleading, unless it shall have given Secured Party at least ten days' prior written notice thereof. .11 Trademarks. (a) Unless the failure to do so would have a material adverse effect on Borrower, Grantor (either itself or through licensees) will (i) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures, and price lists in order to maintain such Trademark in full force free from any claim of abandonment for nonuse, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark that is confusingly similar to or a colorable imitation of such Trademark unless Secured Party shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (b) Grantor will notify Secured Party immediately if it knows, or has reason to know, of (i) any application or registration relating to any Trademark material to its business that may become abandoned or dedicated, or (ii) any adverse determination or development (including but not limited to the institution of, or any adverse determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding Grantor's ownership of any material Trademark or its right to register, keep, or maintain the same. (c) Whenever Grantor, either by itself or through any agent, employee, licensee, or designee, shall file an application for the registration of any material Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, Grantor shall report such filing to Secured Party within five Business Days after the last day of the calendar month in which such filing occurs. Grantor shall execute and deliver to Secured Party all agreements, instruments, powers of attorney, documents, and papers that Secured Party may reasonably request to evidence Secured Party's security interest in any Trademark and in the goodwill and general intangibles of Grantor relating to or represented by the Trademark. Grantor hereby constitutes Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, with all acts of such attorney being hereby ratified and confirmed; and such power, being coupled with an interest, is irrevocable until all Secured Obligations are paid in full. (d) Grantor will take all reasonable and necessary steps, including but not limited to all reasonable and necessary steps in any proceeding before the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application, to obtain the relevant registration, and to maintain each registration of material Trademarks, including but not limited to filing applications for renewal, affidavits of use, and affidavits of incontestability. (e) If any Trademark that is included in the Collateral is infringed, misappropriated, or diluted by a third party, Grantor shall promptly notify Secured Party after it learns thereof and, unless the failure to do so would have a material adverse effect on Borrower, shall take such action as Grantor reasonably deems appropriate under the circumstances to protect such Trademark. .12 Insurance. Grantor agrees to insure the Collateral against all hazards in form and amount reasonably satisfactory to Secured Party. If Grantor fails to obtain such insurance, Secured Party shall have the right, but not the obligation, to obtain either insurance covering both Grantor's and Secured Party's interest in the Collateral, or insurance covering only Secured Party's interest in the Collateral. Grantor agrees to pay any premium charged for such insurance. This amount may be added to the outstanding balance of the Credit Facilities, and interest thereon shall be charged at the rate specified in any applicable Loan Document, or Secured Party may demand immediate payment. Any unpaid insurance premium advanced by Secured Party shall be secured under the terms of this Agreement. Secured Party will have no liability whatsoever for any loss which may occur by reason of the omission or lack of coverage of any such insurance. Grantor hereby assigns to Secured Party the right to receive proceeds of such insurance to the full amount of the Secured Obligations and hereby directs any insurer to pay all proceeds directly to Secured Party, and authorizes Secured Party to endorse any draft. In Secured Party's sole discretion, during the continuance of an Event of Default, Secured Party may apply any insurance proceeds either toward the repair or replacement of the property or reduction of the balance of the Secured Obligations; otherwise, such proceeds will be applied either toward the repair or replacement of the property or reduction of the balance of the Secured Obligations, as determined by Grantor in its sole discretion. .13 Copy of Financing Statement. Grantor agrees that a carbon, photographic, or other reproduction of a financing statement or this Agreement is sufficient as a financing statement. 4 REPRESENTATIONS AND WARRANTIES Grantor hereby makes the following representations and warranties: .1 Title to Collateral. Grantor has good and marketable title to all the Collateral, free and clear of all Liens excepting only the security interests created pursuant to this Agreement or permitted pursuant to the Credit Agreement. .2 No Impairment of Collateral. None of the Collateral shall be impaired or jeopardized because of the security interest herein granted. .3 Other Agreements. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof will not result in the breach of any of the terms, conditions, or provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation under any (a) agreement or other instrument to which Grantor is a party or by which Grantor is bound or (b) Applicable Law. .4 No Approvals. No Governmental Approvals of any nature are required in connection with the security interests herein granted, except the filing of UCC financing statements. .5 Authority. Grantor has full power and authority to assign to Secured Party and to grant to Secured Party a security interest in the Collateral. .6 Location of Records. The address of the office where the records of Grantor are kept concerning the Collateral is set forth on Schedule A-3. .7 Location of Collateral. The locations of all Inventory and Equipment of Grantor are described on Schedule A-2. .8 Name. Grantor conducts its business only under the names listed on Schedule A-6. .9 Accounts. The amount represented by Grantor to Secured Party from time to time as owing by each Account Debtor or by all Account Debtors in respect of the Accounts will at such time be the correct amount actually owing by such Account Debtor or Debtors thereunder. No material amount payable to Grantor under or in connection with any Account is evidenced by any Instrument or Chattel Paper that has not been delivered to Secured Party. .10 Chief Executive Office. Grantor's chief executive office and chief place of business is located at the address set forth on Schedule A-4. .11 Trademarks. Schedule A-1 hereto includes all Trademarks owned by Grantor in its own name as of the date hereof. To the best of Grantor's knowledge, each such Trademark is valid, subsisting, unexpired, and enforceable and has not been abandoned. Except as set forth in Schedule A-5, none of such Trademarks is the subject of any licensing or franchise agreement. No holding, decision, or judgment that would limit, cancel, or question the validity of any such Trademark has been rendered by any Governmental Body. No action or proceeding is pending that (a) seeks to limit, cancel, or question the validity of any such Trademark or (b) would, if adversely determined, have a material adverse effect on the value of any Trademark. 5 SECURED PARTY'S RIGHTS WITH RESPECT TO THE COLLATERAL .1 No Duty on Secured Party's Part. Secured Party shall not be required (except at its option upon the occurrence and during the continuation of any Event of Default) to realize upon any Accounts, Instruments, Chattel Paper, or General Intangibles; collect the principal, interest, or payment due thereon, exercise any rights or options of Grantor pertaining thereto; make presentment, demand, or protest; give notice of protest, nonacceptance, or nonpayment; or do any other thing for the protection, enforcement, or collection of such Collateral. The powers conferred on Secured Party hereunder are solely to protect Secured Party's interests in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that Secured Party actually receives as a result of the exercise of such powers; and neither Secured Party nor any of its officers, directors, employees, or agents shall be responsible to Grantor for any act or failure to act hereunder. .2 Negotiations with Account Debtors. Upon the occurrence and during the continuation of any Event of Default, Secured Party may, in its sole discretion, extend or consent to the extension of the time of payment or maturity of any Instruments, Accounts, Chattel Paper, or General Intangibles. .3 Right to Assign. Except as otherwise provided in the Credit Agreement, Secured Party may assign or transfer the whole or any part of the Secured Obligations and may transfer therewith as collateral security the whole or any part of the Collateral; and all obligations, rights, powers, and privileges herein provided shall inure to the benefit of the assignee and shall bind the successors and assigns of the parties hereto. .4 Duties Regarding Collateral. Beyond the safe custody thereof, Secured Party shall not have any duty as to any Collateral in its possession or control, or as to any preservation of any rights of or against other parties. .5 Collection From Account Debtors. Upon the occurrence and during the continuation of any Event of Default, Grantor shall, upon demand by Secured Party (and without any grace or cure period), notify all Account Debtors to make payment to Secured Party of any amounts due or to become due. Grantor authorizes Secured Party, during the continuation of an Event of Default, to contact the Account Debtors for the purpose of having all or any of them pay their obligations directly to Secured Party. .6 Inspection. Secured Party and its designees, from time to time at reasonable times and intervals, may inspect the Equipment and Inventory and inspect, audit, and make copies of and extracts from all records and all other papers in the possession of Grantor. .7 Assignee Deposit Account. Upon the occurrence and during the continuation of an Event of Default and demand by Secured Party, Grantor will transmit and deliver to Secured Party, in the form received, immediately after receipt, all cash, checks, drafts, Chattel Paper, Instruments, or other writings for the payment of money (properly endorsed, where required, so that the items may be collected by Secured Party) that may be received by Grantor at any time. All items or amounts that are delivered by Grantor to Secured Party, or collected by Secured Party from the Account Debtors, shall be deposited to the credit of a Deposit Account ("Assignee Deposit Account") of Grantor with Secured Party, as security for the payment of the Secured Obligations. Grantor shall have no right to withdraw any funds deposited in the Assignee Deposit Account. Secured Party shall, within one business day, apply all or any of the balance, representing collected funds, in the Assignee Deposit Account, to payment of the Secured Obligations, whether or not then due, in such order of application, not inconsistent with the terms of the Credit Agreement and this Agreement, as Secured Party may determine; or release all or any of such balance to Grantor. 6 SECURED PARTY'S RIGHTS AND REMEDIES .1 General. Upon the occurrence of any Event of Default, Secured Party may exercise its rights and remedies in the Credit Agreement and in any other Loan Documents and any other rights and remedies at law and/or in equity, simultaneously or consecutively, all of which rights and remedies shall be cumulative. The choice of one or more rights or remedies shall not be construed as a waiver or election barring other rights and remedies. Grantor hereby acknowledges and agrees that Secured Party is not required to exercise all rights and remedies available to it equally with respect to all the Collateral and that Secured Party may select less than all the Collateral with respect to which the rights and remedies as determined by Secured Party may be exercised. .2 Notice of Sale, Duty to Assemble Collateral. In addition to or in conjunction with the rights and remedies referred to in Section 6.1 hereof: (a) Written notice mailed to Grantor at the address designated herein ten days or more prior to the date of public or private sale of any of the Collateral shall constitute reasonable notice. (b) If Secured Party requests, Grantor will assemble the Collateral and make it available to Secured Party at places that Secured Party shall reasonably select, whether on Grantor's premises or elsewhere. 7 GENERAL PROVISIONS .1 Entire Agreement. This Agreement, together with the Credit Agreement and the other Loan Documents, sets forth all the promises, covenants, agreements, conditions, and understandings between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements, or conditions, express or implied, oral or written, with respect thereto, except as contained or referred to herein. This Agreement may not be amended, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of such amendment, waiver, discharge, or termination is sought. .2 Invalidity. If any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereunder, but this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. .3 Nonwaiver and Nonexclusive Rights and Remedies. (a) No right or remedy herein conferred upon or reserved to Secured Party is intended to be to the exclusion of any other right or remedy, but each and every such right or remedy shall be cumulative and shall be in addition to every other right or remedy given hereunder and now or hereafter existing at law or in equity. (b) No delay or omission by Secured Party in exercising any right or remedy accruing upon an Event of Default shall impair any such right or remedy, or shall be construed to be a waiver of any such Event of Default, or an acquiescence therein, nor shall it affect any subsequent Event of Default of the same or of a different nature. .4 Termination of Security Interest. When all the Secured Obligations have been paid in full and Secured Party has no ongoing credit commitment to Borrower in effect, the security interest provided herein shall terminate and Secured Party shall return to Grantor all Collateral then held by Secured Party, if any, and upon written request of Grantor shall execute, in form for filing, termination statements of the security interests herein granted. Thereafter, no party hereto shall have any further rights or obligations hereunder. .5 Successors and Assigns. All rights of Secured Party hereunder shall inure to the benefit of its successors and assigns, and all obligations of Grantor shall be binding upon its successors and assigns. .6 Secured Party's Appointment as Attorney-in-Fact. (a) Grantor hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Grantor and in the name of Grantor or in its own name, from time to time in Secured Party's discretion, for the purpose of carrying out the terms of this Agreement during the existence of any Event of Default, to take any and all appropriate action, and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement; and without limiting the generality of the foregoing, Grantor hereby gives Secured Party the power and right, on behalf of Grantor, without consent by or notice to Grantor, to do the following: (i) to transfer to Secured Party or to any other person all or any of said Collateral, to endorse any Instruments pledged to Secured Party, and to fill in blanks in any transfers of Collateral, powers of attorney, or other documents delivered to Secured Party; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement, and to pay all or any part of the premiums therefor and the costs thereof; (iii) upon the occurrence and during the continuation of any Event of Default (A) to take possession of, endorse, and collect any checks, drafts, notes, acceptances, or other instruments for the payment of moneys due under any Account, Instrument, or General Intangible or with respect to any other Collateral and (B) to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Secured Party for the purpose of collecting all such moneys due under any Account, Instrument, or General Intangible or with respect to any other Collateral whenever payable; and (iv) upon the occurrence and during the continuation of any Event of Default (A) to direct any party liable for any payment under any of the Collateral to make payment of all moneys due or to become due thereunder directly to Secured Party or as Secured Party shall direct; (B) to ask for, demand, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices, and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions, or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action, or proceeding brought against Grantor with respect to any Collateral; (F) to settle, compromise, or adjust any suit, action, or proceeding described in clause (E) above and, in connection therewith, to give such discharge or releases as Secured Party may deem appropriate; (G) to assign any Trademark (along with the goodwill of the business to which any such Trademark pertains) throughout the world for such term or terms, on such conditions, and in such manner as Secured Party shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge, and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes; and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's liens thereon and to effect the intent of this Agreement, all as fully and effectively as Grantor might do. (b) Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (c) Grantor also authorizes Secured Party, at any time and from time to time, to execute, in connection with the sale provided for in Article 6 hereof, any endorsements, assignments, or other instruments of conveyance or transfer with respect to the Collateral. (d) The powers conferred on Secured Party hereunder are solely to protect Secured Party's interests in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees, or agents shall be responsible to Grantor for any act or failure to act hereunder. .7 Performance by Secured Party of Grantor's Obligations. If Grantor fails to perform or comply with any of its agreements contained herein and Secured Party, as provided for by the terms of this Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expense of Secured Party incurred in connection with such performance or compliance, together with interest thereon at the rate provided for in the Credit Agreement upon the occurrence of an Event of Default, shall be payable by Grantor to Secured Party on demand and shall constitute Secured Obligations. .8 Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with and shall be governed by the Applicable Law. .9 Notices. All notices, requests, consents, demands, approvals, and other communications hereunder shall be deemed to have been duly given, made, or served if in writing and when delivered in accordance with the notice provisions of the Credit Agreement. .10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original Agreement, but all of which together shall constitute one and the same instrument. Dated as of March 29, 1996. Grantor: ADVANCED DIGITAL INFORMATION CORPORATION By /s/Peter H. van Oppen ------------------------- Title Chief Executive Officer ------------------------- Secured Party: SEAFIRST BANK By T.E. Kasanders ------------------------ Title Vice President ------------------------ SCHEDULE A TO SECURITY AGREEMENT DATED AS OF MARCH 29, 1996 Schedule A-1 (Specific Trademarks): Advanced Digital Information Corporation has trademarked the product name "Scalar." Schedule A-2 (Locations of Inventory or Equipment): 10201 Willows Road Redmond, WA 98052 Schedule A-3 (Location of Records): 10201 Willows Road, Redmond, WA 98052 Schedule A-4 (Location of Chief Executive Offices): 10301 Willows Road, Redmond, WA 98052 Schedule A-5 (Trademark Licenses or Assignments): NONE Schedule A-6 (Tradenames used): Advanced Digital Information Corporation ADIC Europe -----END PRIVACY-ENHANCED MESSAGE-----