-----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, I1pdfvFSGExHkcJ0RnSYYCOOzOnLf1gpv1bE/iNMKRo3kLMnIqWY94jSYWeelYoy jzxMmEoMkBfy0+SkfvfRNw== 0000950005-97-000663.txt : 19970801 0000950005-97-000663.hdr.sgml : 19970801 ACCESSION NUMBER: 0000950005-97-000663 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELEXSYS INTERNATIONAL INC CENTRAL INDEX KEY: 0000727010 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 953534864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11691 FILM NUMBER: 97649288 BUSINESS ADDRESS: STREET 1: 4405 FORTRAN COURT CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 7148330870 MAIL ADDRESS: STREET 1: 4405 FORTRAN COURT CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: DICEON ELECTRONICS INC DATE OF NAME CHANGE: 19920703 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission file number 0-11691 ELEXSYS INTERNATIONAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 95-3534864 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4405 Fortran Court, San Jose, California 95134 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 935-6300 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At July 24, 1997 there were 9,509,476 outstanding shares of common stock. This report consists of 15 pages ELEXSYS INTERNATIONAL, INC. FORM 10-Q INDEX Page ---- Part I. Financial Information: Item 1. Consolidated Balance Sheets as of June 28, 1997 and September 30, 1996 ............................................................... 3 Consolidated Statements of Operations for the Three and Nine Months Ended June 28, 1997 and June 29, 1996............................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended June 28, 1997 and June 29, 1996............................... 5 Notes to the Consolidated Financial Statements...................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 10 Part II. Other Information: Item 5. Other Information .................................................. 13 Item 6a. Exhibits............................................................ 14 2 ELEXSYS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 28, September 30, 1997 1996 ----------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,063 $ 1,075 Accounts receivable, net 24,813 20,463 Inventories 16,737 10,690 Prepaid expenses and other current assets 1,744 1,447 ------- ------- Total current assets 44,357 33,675 ------- ------- Property, plant and equipment, net 32,526 24,818 Other assets 4,043 3,612 ======= ======= Total assets $80,926 $62,105 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $14,444 $12,629 Accrued payroll and related costs 4,272 2,611 Other current liabilities 1,006 1,321 Short-term borrowings 4,633 5,310 Current portion of long-term debt 883 1,234 ------- ------- Total current liabilities 25,238 23,105 ------- ------- Long-term debt 12,154 2,448 Convertible subordinated debentures 12,000 12,000 Stockholders' equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued and outstanding at June 28, 1997 and September 30, 1996 Common stock, $1.00 par value, 20,000,000 shares authorized, 9,488,826 shares outstanding at June 28, 1997 and 9,300,810 shares outstanding at September 30, 1996 9,489 9,301 Additional paid-in capital 7,925 7,294 Cumulative foreign currency translation adjustment 135 (22) Retained earnings 13,985 7,979 ------- ------- Total stockholders' equity 31,534 24,552 ======= ======= Total liabilities and stockholders' equity $80,926 $62,105 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 3 ELEXSYS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 -------- -------- -------- -------- Net sales $ 44,826 $ 30,841 $118,802 $ 90,140 Cost of sales 36,505 25,312 98,362 73,527 -------- -------- -------- -------- Gross profit 8,321 5,529 20,440 16,613 Operating expenses: Selling, general and administrative 4,903 3,091 12,274 9,165 Research and development 91 71 201 211 -------- -------- -------- -------- Total operating expenses 4,994 3,162 12,475 9,376 -------- -------- -------- -------- Income from operations 3,327 2,367 7,965 7,237 Interest expense, net 596 354 1,590 982 -------- -------- -------- -------- Income before income taxes 2,731 2,013 6,375 6,255 Provision for income taxes 132 49 369 52 -------- -------- -------- -------- Net Income $ 2,599 $ 1,964 $ 6,006 $ 6,203 ======== ======== ======== ======== Earnings per share: Primary $ 0.26 $ 0.20 $ 0.61 $ 0.65 Fully Diluted $ 0.26 $ 0.20 $ 0.61 $ 0.65 -------- -------- -------- -------- Weighted average common shares and common equivalent shares outstanding: Primary 10,002 9,619 9,844 9,548 Fully Diluted 10,002 9,619 9,844 9,548 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4 ELEXSYS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended June 28, June 29, 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,006 $ 6,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,309 3,924 Increase in accounts receivable (3,152) (2,501) Increase in inventories (5,802) (3,237) Increase in prepaid expenses and other current assets (285) (488) Increase in accounts payable 1,518 2,629 Increase in accrued payroll and related taxes 1,638 514 Decrease in other current liabilities (320) (611) Other 42 (318) ------- ------- Net cash provided by operating activities 4,954 6,115 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Neutronic Stampings, Inc., net of cash acquired (1,234) - Purchase of Anetec Technologies - (1,400) Purchase of property, plant and equipment (10,039) (6,685) Proceeds from sale of property, plant and equipment 102 - Decrease other long-term assets 109 - ------- ------- Net cash used by investing activities (11,062) (8,085) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 819 545 Net change in short-term borrowings (677) 809 Borrowings under long term debt 8,032 118 Principal payments on debt (2,083) (175) ------- ------- Net cash provided by financing activities 6,091 1,297 ------- ------- Effects of exchange rate changes on cash and cash equivalents 5 - ------- ------- Net decrease in cash and cash equivalents (12) (673) Cash and cash equivalents, beginning of period 1,075 903 ------- ------- Cash and cash equivalents, end of period $ 1,063 $ 230 ======= ======= NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital leases $ 1,007 $ - ------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: Interest payments $ 1,283 $ 513 ======= ======= Income tax payments $ 427 $ 330 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 5 ELEXSYS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Elexsys International, Inc. and its subsidiaries (the "Company") contain all adjustments, consisting of only normal recurring accruals, which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 28, 1997 and September 30, 1996 and the results of its operations and cash flows for the three and nine months ended June 28, 1997 and June 29, 1996. Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures in the consolidated financial statements are adequate to make the information presented not misleading. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. Note 2 - Inventories Inventories consist of the following (in thousands): June 28, September 30, 1997 1996 ----------- ------------- (Unaudited) Raw materials $ 8,532 $ 5,434 Work in progress 8,205 5,256 ------- ------- Totals $16,737 $10,690 ======= ======= Note 3 - Goodwill Goodwill relates to acquired subsidiaries and is being amortized on a straight-line basis over estimated useful life of ten years. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Note 4 - Earnings Per Share Primary and fully diluted earnings per common share for the three and nine months ended June 28, 1997 and June 29, 1996 have been computed based on weighted average common shares outstanding and common stock equivalents (stock options) as of the above dates and do not include the assumed conversion of the 5 1/2 percent Convertible Subordinated Debentures due 2012 into common stock as such effect would have been antidilutive. 6 ELEXSYS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5 - Borrowing Arrangements In December 1996, the Business Finance Authority of the State of New Hampshire (the "Issuer') issued a tax-exempt qualified small issue private placement bond, the proceeds of which were loaned to the company on January 27, 1997 to reimburse the Company for the $2.3 million it paid to purchase its Nashua, New Hampshire manufacturing facility in November 1996, with approximately another $400,000 available to reimburse the Company for improvements it intends to make to the premises. In connection with the loan, the Company entered into a Loan Agreement among the Issuer, GE Capital Public Finance, Inc., as lender to the Issuer, and the Company, as borrower, dated as of December 1, 1996 (the "Loan Agreement"). Under the terms of the Loan Agreement, the loan has a ten year term with interest payable monthly in arrears at a rate of 6.33%. Principal payments are also due monthly based on a twenty years amortization schedule. The loan is secured by a standby letter of credit issued by Sanwa Bank of California under the Company's line of credit facility of 100% of the principal amount plus 120 days interest. On January 17, 1997, the Company terminated its existing working capital line of credit and entered into a series of new loan agreements with Sanwa Bank California. The Accounts Receivable Credit Agreement consists of a $13 million working capital line of credit. The Term Loan Credit Agreement consists of $7 million term loan to be used for acquisition financing. The borrowings under the working capital line of credit and the term loan bear interest at prime rate plus 1/2 percent and 1 percent, respectively. At the Company's request, interest on the line of credit or the term loan can be converted to a fixed rate at 250 basis points and 300 basis point, respectively, over the cost of funds. The line of credit and the term loan are collateralized by substantially all of the Company's assets. The Accounts Receivable Credit Agreement and the Line of Credit will remain in effect until January 31, 1998. The amount outstanding on the Term Loan Credit Agreement can fluctuate and interest only will be payable until January 31, 1998, at which point the amount outstanding will become due and payable in 36 equal monthly installments of principal and interest ending on January 31, 2001. These credit facilities contain covenants including the maintenance of certain levels of working capital, tangible net worth and certain financial ratios. In addition, the company is restricted from incurring additional indebtedness, dividends, and certain other payments. On May 14, 1997 the Company amended and restated its Term Loan Credit agreement and its Accounts Receivable Credit Agreement with its principal lender Sanwa Bank modifying certain loan covenants giving recognition of the Company's need for additional capital spending. In addition, on May 14, 1997 the Company entered in an a Line of Credit Agreement, with essentially the same terms and termination date as its Accounts Receivable Credit Agreement, allowing the company to borrow up to $5.0 million in a foreign currency within the borrowing limits of the Accounts Receivable Credit Agreement. 7 ELEXSYS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6 - Income Taxes In the first nine months of fiscal 1997, the Company provided $369,000 for income taxes. This tax provision primarily relates to federal alternative minimum tax and state taxes. As of September 30, 1996, the Company had net operating loss carryforwards for federal, state, and foreign income tax purposes of approximately $24,416,000, $19,402,000, and $672,000, respectively. These carryforwards, for which future benefits are not assured, expire in various amounts through 2008. Note 7 - Purchase of the assets of Neutronic Stampings, Inc. On April 14, 1997, the Company acquired, pursuant to a Stock Purchase Agreement, Neutronic Stampings, Inc. including the remaining 50% interest not already owned by the Company in two partnerships, Neutronic Plating Services and H&V Services, plus other production equipment leased by the above entities for approximately $4.6 million. These entities are engaged in stamping spools of metal to create parts and/or plating spools of metal parts used in various industries such as backplane assemblies. The purchase price included cash of $2.0 million and promissory notes payable over one year for $2.3 million. The acquisition was accounted for using the purchase method of accounting with the purchase price allocated to assets and goodwill upon completion of an appraisal of the assets acquired. The total purchase price of approximately $4.6 million was allocated as described in the following table (in millions): Cash $ .8 Accounts receivable 1.1 Inventories .2 Prepaid expenses and other current assets .2 Property, plant and equipment 1.5 Goodwill 1.5 Accounts payable (.1) ----- Total assets acquired 5.2 Less pre-existing investment in partnerships (.6) ----- Net assets acquired $ 4.6 ===== Note 8 - Recently Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will restate at that time earnings per share (EPS) data for the prior periods to conform with SFAS 128. Earlier application is not permitted. 8 ELEXSYS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8 - Recently Issued Accounting Standard (continued) SFAS 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income, available to common stockholders, by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If SFAS had been in effect during the current and prior year periods, basic EPS would have been $.27 and $.21 for the quarters ended June 28, 1997 and June 29, 1996 respectively, and $.64 and $.68 for the nine month periods ending June 28, 1997 and June 29, 1996, respectively. Diluted EPS under SFAS 128 would not have been significantly different than fully diluted EPS currently reported for the periods. Note 9 - Subsequent Event On July 22, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sanmina Corporation providing that each outstanding share of common stock of the Company would be converted into 0.33 shares of Sanmina common stock in a transaction valued at approximately $220 million. The merger is subject to certain conditions, including the approval of Elexsys's shareholders. The Merger Agreement contains a provision that should the Company terminate the Merger Agreement because of receipt of a "Superior Proposal" (as defined in the Merger Agreement), the Company would pay to Sanmina Corporation an aggregate amount of $7.5 million cash in three equal payments on days 5, 180 and 270 after the termination date. The transaction is intended to be a tax-free reorganization and intended to be accounted for as a pooling of interests (see Part II, Item 5, Other Information). 9 ELEXSYS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained elsewhere within this Report on Form 10-Q. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The actual future results of the Company could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and those discussed in the Company's Form 10-K for the year ended September 30, 1996. Results of Operations Net Sales Net sales for the three months ended June 28, 1997 were $44.8 million, an increase of 45%, compared to the $30.8 million reported in the three months ended June 29, 1996. This increase resulted primarily from an increase in demand in the Company's assembly business. Net sales for the nine months ended June 28, 1997 were $118.8 million, an increase of 32%, compared to the $90.1 reported in the nine months ended June 29, 1996. This increase resulted primarily from an increase in demand in the Company's assembly business. Gross Margin Gross margin, as a percentage of net sales for the three months ended June 28, 1997 was 18.6% versus 17.9 % for the three months ended June 29, 1996. The increase in gross margin was primarily due to lower costs in relation to higher net sales. Gross margin, as a percentage of net sales for the nine months ended June 28, 1997 was 17.2% versus 18.4 % for the nine months ended June 29, 1996. The decrease in gross margin was due to higher costs and lower efficiencies resulting from materials related issues that lead to higher production costs to replace and rebuild products as reported in the quarter ended March 29, 1997. Selling, General and Administrative SG&A was 10.9% and 10.0% of net sales for the three month periods ended June 28, 1997 and June 29, 1996, respectively. The increase in SG&A in relation to net sales was due primarily to expenses associated with employee terminations, increased goodwill amortization, and costs associated with acquisitions that were investigated but not completed. Offsetting these increased expenses were lower selling and marketing costs in relation to net sales. SG&A was 10.3% and 10.2% of net sales for the nine month periods ended June 28, 1997 and June 29, 1996 respectively. The increase in SG&A in relation to sales was due primarily to the same factors mentioned above, offset by lower selling and marketing costs in relation to net sales. Interest Expense, Net Net Interest expense for the three month period ended June 28, 1997 was $0.6 million versus $0.4 million for the three months ended June 29, 1996. Net interest expense for the nine month period ended June 28, 1997 was $1.6 million versus $1.0 million for the nine months ended June 29, 1996. The increases are mainly attributable to increased long term debt to finance working capital needs and for the purchase of Neutronic Stampings, Inc. on April 14, 1997 and the Company's New Hampshire facility and adjacent space in November 1996. 10 ELEXSYS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Factors That May Affect Future Results The Company's future operating results may be adversely affected by a number of factors, including general economic conditions, foreign competition, industry consolidation, the Company's ability to develop, manufacture, and sell its products profitably, and the cyclical nature of the business of some of the Company's customers. The Company participates in a highly competitive industry. The printed circuit board industry has been characterized by stringent customer demands for timely deliveries, service and quality of products and by aggressive pricing practices. The Company's operating results could be materially adversely affected should the Company be unable to meet customer demands. Liquidity and Capital Resources The Company had cash flows from operating activities of $5.0 million during the first nine months of fiscal 1997 compared to $6.1 million during the same period of the previous year. This decrease was primarily attributable to additional working capital required to support the growth in operations. The increase in inventories of $5.8 million in the first nine months of fiscal 1997 was primarily due to the build-up of the Company's assembly inventory to support additional customers on a turn key basis. Accounts receivable grew $3.2 million due to higher sales levels. Working capital during the first nine months of fiscal 1997 was positively impacted by an aggregate increase of $2.9 million for accounts payable, accrued expenses, and other current liabilities. Cash provided by operating activities of $5.0 million during the first nine months of fiscal 1997 was offset by cash used by investing activities of $11.1 million during the same period. Cash from investing activities was used for the purchase of $10.0 million of property, plant and equipment (including the $2.3 million purchase of the Company's Nashua, New Hampshire facility) and for a $1.2 million payment (net of cash acquired) related to the purchase of Neutronic Stampings, Inc. Property, plant and equipment were purchased for the enhancement of manufacturing capabilities and for normal replacement of equipment. Investing activities were also funded by financing activities of $6.1 million, with bank borrowings, capital leases and tax exempt bonds as the primary sources of borrowings. As of June 28, 1997, the Company's ratio of current assets to current liabilities was 1.8 to 1.0. The additional cash requirement to meet the obligations of the April 14, 1997 Neutronic Stampings, Inc. acquisition, was provided for by a draw down under the Company's Term Loan Credit Agreement which is designated for Company acquisitions. On May 14, 1997 the Company amended and restated its Term Loan Credit agreement and its Accounts Receivable Credit Agreement with its principal lender modifying certain loan covenants to reflect the Company's need for additional capital spending. The total borrowing limits, interest terms and termination dates under these agreements remained unchanged (See Note 5, Borrowing Arrangements). 11 ELEXSYS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) As of June 28, 1997, the Company had borrowed $4.8 million under the Company's $13 million Accounts Receivable Credit Agreement, with an additional $3.4 million pledged under letters of credit. The remaining borrowing capacity under this line is approximately $4.8 million. As of June 28, 1997 the Company was in compliance with all of the covenants as defined within the agreement. As of June 28, 1997, the Company had borrowed $5.4 million under the Company's $7 million Term Loan Agreement with an additional $1.6 million available for payment of outstanding notes of $1.8 million, related to previous acquisitions. As of June 28, 1997 there were no borrowings under the Line of Credit Agreement (See Note 5, Borrowing Arrangements). 12 Part II. OTHER INFORMATION Item 5. Other Information This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein involve risks and uncertainties, including those relating to the possible inability to complete the merger transaction involving the Company and Sanmina Corporation, a Delaware corporation ("Sanmina"), as scheduled, if at all, and those associated with the ability of the combined company to achieve the anticipated benefits of the merger. Actual results and developments may differ materially from those described or incorporated by reference in this Report. For more information about the Company and risks arising when investing in the Company, investors are directed to the Company's most recent report on Form 10-K as filed with the Securities and Exchange Commission (the "SEC"). On July 22, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), among the Company, Sanmina and SANM Acquisition Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of Sanmina ("Merger Sub"). The description contained in this Item 5 of the transactions contemplated by the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is referenced in this Report as Exhibit 10.54. The Merger Agreement contemplates that, subject to the satisfaction of certain conditions set forth therein, including the approval and adoption of the Merger Agreement by the requisite vote of the Company's stockholders and the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Merger Sub would be merged into the Company. As a result of the merger of Merger Sub into the Company (the "Merger"), the Company would become a wholly-owned subsidiary of Sanmina. Under the terms of the Merger Agreement, each outstanding share of the Company's common stock would be converted into thirty-three hundredths (0.33) of a share of Sanmina common stock. The Merger is intended to be a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and is intended to be accounted for as a pooling of interests. In connection with the execution of the Merger Agreement, each of the directors of the Company, who collectively beneficially own approximately 45% of the outstanding shares of common stock of the Company, entered into a Stockholder Agreement pursuant to which such director agreed to vote his shares in favor of the Merger. The description contained in this Item 5 of the transactions contemplated by the Stockholder Agreement is qualified in its entirety by reference to the full text of the Stockholder Agreement, the form of which is attached to this Report as Exhibit 10.55. A registration statement relating to the Sanmina common stock to be issued in connection with the Merger has not yet been filed with the SEC, nor has a proxy statement relating to a vote of the Company's stockholders on the Merger been filed with the SEC. The Sanmina common stock may not be offered, nor may offers to acquire such stock be accepted, prior to the time such a registration statement becomes effective. This report shall not constitute an offer to sell or the solicitation of an offer to buy any Sanmina common stock or any other security, and shall not constitute the solicitation of any vote with respect to the Merger. 13 Item 6 a. Exhibits 10.50 Amendment To Anetec Lease dated June 26, 1997 10.51 Amended and Restated Accounts Receivable Credit Agreement dated May 14, 1997 10.52 Line of Credit Agreement dated May 14, 1997 10.53 Amended and Restated Term Loan Credit Agreement dated May 14, 1997 10.54 Agreement and Plan of Merger, dated as of July 22, 1997, among Sanmina Corporation, a Delaware corporation, SANM Acquisition Subsidiary, Inc., a Delaware corporation, and Elexsys International, Inc., a Delaware corporation (incorporated by reference to Exhibit 7.4 of Amendment 10 to the Schedule 13D filed by Milan Mandaric with the Commission on or about July 30, 1997. 10.55 Stockholder Agreement, as of July 22, 1997, between Sanmina Corporation, a Delaware corporation, and each director of Elexsys International, Inc., a Delaware corporation. 11.1 Computations of Earnings Per Share and Common Equivalent Share for the Three and Nine Month Periods Ending June 28, 1997 and June 29, 1996 27 Financial Data Schedule b. Current reports on Form 8-K None 14 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. ELEXSYS INTERNATIONAL, INC. --------------------------- (Registrant) Date: July 31, 1997 By: W.F. Hegarty ------------- ------------ W.F. Hegarty President and Chief Operating Officer By: Robert DeLaurentis ------------------ Robert DeLaurentis Chief Financial Officer 15 EX-10.50 2 AMENDMENT TO LEASE EXHIBIT 10.50 AMENDMENT TO LEASE THIS THIRD AMENDMENT TO LEASE is dated for reference purposes only as June 26, 1997, and is part of that Lease dated March 26, 1992, together with the Summary of Basic Lease Terms, the First Addendum To Lease, the Acceptance Agreement, the First Amendment to Lease, dated July 21, 1992, the Right of First Refusal Agreement, dated November 12, 1992, the Memorandum Agreement, dated November 12, 1992, the Second Amendment to Lease, dated November 12, 1992, the Assignment of Lease, dated June 7, 1996, and the Guaranty, dated June 7, 1996 thereto (collectively, the "Lease") by and between SSMRT Pacific Business Center (1), Inc., a Delaware corporation, ("Landlord") Successor-In-Interest to Catellus Development Corporation, ("Landlord"), and ELXI Acquistion, Inc., a California corporation as Successor-in-Interest to Anetec Technology, Inc., a California corporation is made with reference to the following facts: A. The Premises currently leased by Tenant pursuant to the Lease consists of 17,220 rentable square feet commonly known as 6082 Stewart Avenue, City of Fremont, California. B. The Lease Term for said Premises currently expires on September 30, 1997. C. Tenant and Landlord have agreed to extend the Term of the Lease. NOW, THEREFORE, Landlord and Tenant hereby agree that the Summary of Basic Lease Terms is amended as follows: 1. Lease Term: Article 2 is hereby amended to provide that the Lease Term shall be extended through and including January 31, 1998. 2. Base Monthly Rent: Commencing October 1, 1997, Article 3.1, is hereby amended to provide for the Base Monthly Rent as follows: October 1, 1997 through and including January 31, 1998: $10,676.40 per month 3. Security Deposit: Article 3.3 is hereby amended to provide for an increase in the Security Deposit of $ 1,894.20 which Tenant has provided Landlord upon signature hereon, for a total of $ 10,676.40. 4. Retained Real Estate Brokers: Article 18.7 is amended to provide that Tenant warrants that it has not had any dealings with any real estate brokers or salesmen or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease Amendment. 5. Delivery and Acceptance of Premises: Delivery and acceptance of the Premises shall be "as is". 6. Except as expressly set forth in this Amendment, all terms and conditions of the Lease remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Third Amendment to be effective as of the date first set forth above. LANDLORD: TENANT: SSMRT Pacific Business Center (1), Inc. ELXI Acquisition, Inc. a Delaware corporation a California corporation By: AMB Insitutional Realty Advisors Its: Asset Manager By: ______________________________ By: ____________________________ John L. Rossi, Vice President [Name] Title: ____________________________ Dated: __________________________ Dated: ____________________________ EX-10.51 3 AMENDED & RESTATED ACCOUNTS RECEIVABLE EXHIBIT 10.51 AMENDED AND RESTATED ACCOUNTS RECEIVABLE CREDIT AGREEMENT This Accounts Receivable Credit Agreement (the "Agreement") is made and entered into this ___________________ day of May, 1997, by and between SANWA BANK CALIFORNIA (the "Bank") and ELEXSYS INTERNATIONAL, INC. (the "Borrower") , on the terms and conditions that follow: Whereas Bank and Borrower entered into an Accounts Receivable Credit Agreement dated as of January 17, 1997, (the "Prior Agreement"); and Whereas, Bank and Borrower wish to amend and restate the Prior Agreement/ Now, therefore, the parties hereto agree as follows: SECTION I DEFINITIONS 1.01 Certain Defined Terms: Unless elsewhere defined in this Agreement, the following terms shall have the following meanings (such meanings to be generally applicable to the singular and plural forms of the terms defined): (a) "Account Debtor": shall mean the person or entity obligated to the Borrower upon an account. (b) "Advance": shall mean an advance to the Borrower under the Line of Credit. (c) "Average Unused Portion of the Line of Credit": shall mean for any quarter: (a) the Line of Credit less, (b) the average daily balance of Advances under the Line of Credit that were outstanding during that quarter less, (c) Letters of Credit. (d) "Borrowing Base": shall mean, the lesser of: (i) 80% of the aggregate amount of Eligible Accounts of the Borrower; or (ii) $13,000,000, this is the total loan commitment. (e) "Business Day": shall mean a day, other than a Saturday or Sunday, on which commercial banks are open for business in California. (f) "Collateral": shall mean the property described in Section 5.01. (g) "Debt": shall mean all liabilities of the Borrower less Subordinated Debt. (h) "Effective Tangible Net Worth": shall mean the Borrower's stated net worth plus Subordinated Debt less all intangible assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items).. (i) "Eligible Account": shall mean, at any time, the gross amount, less returns, discounts, credits or offsets of any nature, of the trade accounts owing to the Borrower by Account Debtors but excluding the following: (1) Accounts with respect to which the Account Debtor is an officer, employee or agent of the Borrower. (2) Accounts with respect to which goods are placed on consignment, guarantied sale or other terms by reason of which the payment by the Account Debtor may be conditional. (3) Accounts with respect to which the Account Debtor is not a resident of the United States except to the extent such accounts are supported by adequate Eximbank insurance or other insurance acceptable to the Bank or by irrevocable letters of credit issued by banks satisfactory to the Bank, and except in the case of United States Dollar denominated invoices to Northern Telecom, or any of its Canadian subsidiaries (collectively "Northern Telecom"). (4) Accounts with respect to which the Account Debtor is the United States or any department or agency thereof. (5) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with, the Borrower or its shareholders, officers or directors. (6) Net amount of accounts with respect to which the Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to the Borrower. (7) That portion of the accounts of any single Account Debtor that exceeds 15% of all of the Borrower's accounts, except for Northern Telecom which may not exceed 20% of all of the Borrower's accounts. (8) Accounts which have not been paid in full within 60 days from the date payment was due or 90 days from the original date of invoice, whichever is less. (9) All accounts of any single Account Debtor if 25% or more of the dollar amount of all such accounts are represented by accounts which have not been paid in full within 60 days from the date payment was due or 90 days from the original date of invoice, whichever is less. (10) Accounts which are subject to dispute, counterclaim or setoff. (11) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (12) Accounts with respect to which the Bank, in its reasonable sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (13) Accounts of any Account Debtor who has filed or had filed against it a petition in bankruptcy, or an application for relief under any provision of any state or federal bankruptcy, insolvency or debtor-in-relief acts; or who has had appointed a trustee, custodian or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (14) Accounts which represent credits or refunds due to the Borrower's customers. (j) "ERISA": shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. (k) "Event of Default": shall have the meaning set forth in Section 9. (l) "Expiration Date": shall mean January 31, 1998 or the date of termination of the Bank's commitment to lend under this Agreement pursuant to Section 8, whichever shall occur first. (m) "Indebtedness": shall mean, with respect to the Borrower, (i) all indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss and (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles, reported as capital leases in respect of which the Borrower is liable, contingently or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss. (n) "Line of Credit": shall mean the credit facility described in Section 2. (o) "Obligations": shall mean all amounts owing by the Borrower to the Bank pursuant to this Agreement including, but not limited to, the unpaid principal amount of Advances. (p) "Permitted Indebtedness": shall mean (i) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the date hereof and disclosed in writing to the Bank; (iii) Subordinated Debt; (iv) Indebtedness to trade creditors, including, without limitation, affiliates of Borrower, incurred in the ordinary course of business; (v) Other Indebtedness of Borrower not exceeding $1,000,000.00 in the aggregate outstanding at any time; (vi) Contingent obligations of Borrowing consisting of guarantees (and other credit support) of the obligations of vendors and suppliers of Borrower in respect of transactions entered into in the ordinary course of business; (vii) Indebtedness with respect to capital lease obligations and purchase money indebtedness incurred in connection with the acquisition of assets secured by Permitted Liens; (viii) Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness. (q) "Permitted Investment": shall mean (i) investments existing on the date hereof and disclosed in writing to the Bank; (ii) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof; (iii)commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (iv) investments consisting of deposits maturing no more than one (1) year from the date of investment therein issued by Bank; (v) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (vi) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (vii) investments, including debt obligations, received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (viii) investments consisting of compensation of employees, officers and directors of Borrower so long as the Board of Directors of Borrower determines that such compensation is in the best interest of Borrower, and travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business; (ix) other investments aggregating not in excess of $250,000.00 at any time. (r) "Permitted Liens": shall mean: (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith; (iii) liens of materialmen, mechanics, warehousemen, or carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure Indebtedness outstanding on the date hereof or permitted to be incurred under Section 8.09 hereof; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets; liens securing capital lease obligations on assets subject to such capital leases; (vii) liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or attachment has not caused or resulted in an Event of Default, (viii) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar liens affecting real property not interfering in any material respect with the ordinary conduct of the business of Borrower, (ix) liens in favor of customs and revenue authorities arising as a mater of law to secure payment of customs duties in connection with the importation of goods, (x) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institutions; (xi) liens not otherwise permitted which liens do not in the aggregate exceed $250,000.00 at any time. (s) "Reference Rate": shall mean an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate. (t) "Subordinated Debt": shall mean such liabilities of the Borrower which have been subordinated to those owed to the Bank in a manner acceptable to the Bank including, but not limited to, that certain Indenture dated as of February 15, 1987 between Borrower and Manufacturers Hanover Trust Company, as trustee, with respect to the 5 1/2% Convertible Subordinated Debentures due March 1, 2012. 1.02 Accounting Terms: All references to financial statements, assets, liabilities, and similar accounting items not specifically defined herein shall mean such financial statements or such items prepared or determined in accordance with generally accepted accounting principles consistently applied and, except where otherwise specified, all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 1.03 Other Terms: Other terms not otherwise defined shall have the meanings attributed to such terms in the California Uniform Commercial Code. SECTION 2 THE LINE OF CREDIT 2.01 The Line of Credit: On terms and conditions as set forth herein, the Bank agrees to make Advances to the Borrower from time to time from the date hereof to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, the Borrower may borrow, partially or wholly prepay, and reborrow under this Section 2.01. 2.02 Making Line Advances: Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of the Borrower (i) when credited to any deposit account of the Borrower maintained with the Bank or (ii) when paid in accordance with the Borrower's written instructions. Subject to the requirements of Section 6, Advances shall be made by the Bank upon telephonic or written request in form acceptable to the Bank received from the Borrower, which request shall be received not later than 2:00 p.m. (California time) on the date specified for such Advance, which date shall be a Business Day. Requests for Advances received after such time may, at the Bank's option, be deemed to be a request for an Advance to be made on the next succeeding Business Day. 2.03 Mandatory Repayments: (a) If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, the Borrower hereby promises and agrees, immediately upon written or telephonic notice from the Bank, to pay to the Bank an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. (b) On the Expiration Date, the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal amount of all Advances then outstanding, together with all accrued and unpaid interest thereon. 2.04 Interest on Advances: Interest shall accrue from the date of each Advance under the Line of Credit at one of the following rates, as quoted by the Bank and as elected by the Borrower pursuant to paragraph 2.05 or paragraph 2.06 below: (a) Variable Rate Advances: A variable rate per annum equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate (the "Reference Rate") plus 0.50% (the "Variable Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. An Advance based upon the Variable Rate is hereinafter referred to as a "Variable Rate Advance". (b) Fixed Rate Advances: A fixed rate quoted by the Bank for 30, 60, or 90 days or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "Interest Period"] for Advances in the minimum amount of $100,000 and in $50,000 increments thereafter. Such interest rate shall be a percentage approximately equivalent to 2.50% per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Interest Period (the "Fixed Rate"). Advances based upon the Fixed Rate are hereinafter referred to as "Fixed Rate Advances". Interest on any Advance shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. Interest on Variable Rate Advances shall be paid in monthly installments commencing on the first day of the month following the date of the first such Advance and continuing on the first day of each month thereafter. Interest on any Fixed Rate Advance shall be paid on the last day of the Interest Period pertaining to such Fixed Rate Advance. 2.05 Notice of Election to Adjust Interest Rate: The Borrower may elect: (a) That interest on a Variable Rate Advance shall be adjusted to accrue at the Fixed Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests that interest be adjusted to accrue at the Fixed Rate. (b) That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Variable Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice (as prescribed herein) of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the newly quoted Fixed Rate the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate upon the expiration of the Interest Period pertaining to such Advance. 2.06 Prepayment: The Borrower may prepay any Advance in whole or in part, at any time and without penalty, provided, however, that: (i) any partial prepayment shall first be applied, at the Bank's option, to accrued and unpaid interest and next to the outstanding principal balance; and (ii) during any period of time in which interest is accruing on any Advance on the basis of the Fixed Rate, no prepayment shall be made except on a day which is the last day of the Interest Period pertaining thereto. If the whole or any part of any Fixed Rate Advance is prepaid by reason of acceleration or on a day which is not the last day of the interest period pertaining thereto, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) sustained by the Bank as a consequence of such prepayment. 2.07 Indemnification for Fixed Rate Costs: During any period of time in which interest on any Advance is accruing on the basis of the Fixed Rate the Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to funds used by the Bank in quoting and determining the Fixed Rate. Borrower shall not be obligated to pay to or reimburse Bank for any reimbursable amounts which arose or were incurred during or are otherwise attributable to any period of time more than 180 days prior to the date on which Bank delivered its written statement for indemnification or reimbursement of such reimbursable amounts. 2.08 Conversion from Fixed Rate to Variable Rate: In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Interest Period or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event the Fixed Rate Advance, shall be deemed to be a Variable Rate Advance and interest shall thereupon immediately accrue at the Variable Rate. 2.09 Commitment Fee: The Borrower agrees to pay to Bank a commitment fee of .25% per annum on the Average Unused Portion of the Line of Credit payable quarterly in arrears and computed on a year of 360 days for actual days elapsed. 2.10 Line Account: (a) The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Line of Credit (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 60 days after the Borrower's receipt of any such statement which it deems to be incorrect, or unless there is a manifest error. (b) The Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under the Line of Credit is not made when due, to charge, from time to time, against any or all of the Borrower's deposit accounts with the Bank any amount so due. 2.11 Late Payment: If any payment of principal (other than a principal payment due pursuant to Section 2.03(b)) or interest, or any portion thereof, under this Agreement is not paid within ten (10) calendar days after it is due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. SECTION 3 LETTERS OF CREDIT SUBLIMIT In addition to making Advances under the Line of Credit, the Bank hereby agrees to make the following credit accommodations available to the Borrower: 3.01 Letter of Credit Subfacility: The Bank agrees to issue commercial and standby letters of credit (each a "Letter of Credit") on behalf of the Borrower for general corporate purposes. At no time, however, shall the total face amount of all Letters of Credit outstanding, less any partial draws paid by the Bank, exceed the sum of $7,000,000 and, together with the total principal amount of all Advances outstanding, exceed the Borrowing Base. (a) Upon the Bank's request, the Borrower shall promptly pay to the Bank standby letter of credit issuance fees of 1% per annum and commercial letter of credit issuance fees of .25% and such other fees, commissions, costs and any out-of-pocket expenses charged or incurred by the Bank with respect to any Letter of Credit. (b) The commitment by the Bank to issue Letters of Credit shall, unless earlier terminated in accordance with the terms of the Agreement, automatically terminate on the Expiration Date and no commercial letter of credit shall expire on a date which is more than 90 days after the Expiration Date and no standby letter of credit shall expire on a date after the Expiration Date. (c) Each Letter of Credit shall be in form and substance satisfactory to the Bank and in favor of beneficiaries satisfactory to the Bank, provided that the Bank may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where the Bank, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation or order from issuing such Letter of Credit. (d) Prior to the issuance of each Letter of Credit, but in no event later than 10:00 a.m. (California time) on the day such Letter of Credit is to be issued (which shall be a Business Day), the Borrower shall deliver to the Bank a duly executed form of the Bank's standard form of application for issuance of a Letter of Credit with proper insertions. (e) The Borrower shall, upon presentment of a Letter of Credit or upon the Bank's request, promptly pay to and reimburse the Bank for all draws under the Letters of Credit, costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to any Letter of Credit. SECTION 4 FOREIGN EXCHANGE FACILITY SUBLIMIT 4.01 Foreign Exchange Subfacility. Borrower may from time to time request Bank to purchase or sell foreign currency in a specified amount, at a fixed price, and for delivery at a future date no greater than 365 days from the date of purchase (each a "Foreign Exchange Contract"). At no time, however, shall 20% of the aggregate settlement price of all Foreign Exchange Contracts outstanding exceed $2,000,000 as determined by Bank at the time of entering into each Foreign Exchange Contract and, together with outstanding Advances and issued and unexpired Letters of Credit, exceed the Borrowing Base. (a) Requests for Foreign Exchange Contracts. Each request for a Foreign Exchange Contract shall be made by telephone or rapifax, confirmed in writing (each a "Request"). Each Request shall be delivered or communicated to the Bank no later than 3:00 p.m. (California time) on the day (which shall be a Business Day) on which the Foreign Exchange Contract is requested. By making any such Request, Borrower agrees that all matters relating to each such Foreign Exchange Contract shall be governed by this Agreement and Borrower restates all warranties and representations made by Borrower herein as if made on the date the Foreign Exchange Contract is entered into. (b) Expiration Date. The commitment by the Bank to enter into Foreign Exchange Contracts shall, unless earlier terminated in accordance with this Agreement, automatically terminate on the Expiration Date and no Foreign Exchange Contract shall expire on a date which is after the Expiration Date. (c) Availability. Bank may refuse to enter into a Foreign Exchange Contract with the Borrower where the Bank, in its sole discretion, determines that such foreign currency is unavailable, or where Bank would be prohibited by any applicable law, regulation or order from purchasing such foreign currency. (d) Purpose. The Foreign Exchange Contract shall be used to hedge foreign exchange exposure and/or risk. (e) Payment. Payment is due on the settlement date of any Foreign Exchange Contract (the "Payment Date"). Bank is hereby authorized by Borrower to charge the full settlement price of any Foreign Exchange Contract against the depository account or accounts maintained by the Borrower with Bank on the Payment Date. (f) Assessments. Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any assessment, reserve, deposit, capital maintenance or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to any Foreign Exchange Contract. SECTION 5 COLLATERAL 5.01 The Collateral: To secure payment and performance of all the Borrower's Obligations under this Agreement and all other liabilities, loans, guarantees, covenants and duties owed by the Borrower to the Bank, whether or not evidenced by this or by any other agreement, absolute or contingent, due or to become due, now existing or hereafter and howsoever created, the Borrower hereby grants the Bank a security interest in and to all of the following property: (a) All goods now owned or hereafter acquired by the Borrower or in which the Borrower now has or may hereafter acquire any interest, including, but not limited to, all machinery, equipment, furniture, furnishings, fixtures, tools, supplies and motor vehicles of every kind and description, and all additions, accessions, improvements, replacements and substitutions thereto and thereof. (b) Bank agrees to release its security interest in any equipment, fixtures, leasehold improvements, or other property if within ninety (90) days after Borrower acquires title to such property, Borrower finances such property pursuant to either (i) a sale and leaseback transaction or (ii) a debt financing transaction in an amount not to exceed the purchase price of, and secured by a security interest in such property. (c) All inventory now owned or hereafter acquired by the Borrower, including, but not limited to, all raw materials, work in process, finished goods, merchandise, parts and supplies of every kind and description, including inventory temporarily out of the Borrower's custody or possession, together with all returns on accounts. (d) All accounts, contract rights and general intangibles now owned or hereafter created or acquired by the Borrower, including, but not limited to, all receivables, goodwill, trademarks, trade styles, trade names, patents, patent applications, software, customer lists and business records. (e) All documents, instruments and chattel paper now owned or hereafter acquired by the Borrower. (f) All monies, deposit accounts, certificates of deposit and securities of the Borrower now or hereafter in the Bank's or its agents' possession. The Bank's security interest in the Collateral shall be a continuing lien and shall include the proceeds and products of the Collateral including, but not limited to, the proceeds of any insurance thereon. SECTION 6 CONDITIONS OF LENDING 6.01 Conditions Precedent to the Initial Advance: The obligation of the Bank to make the initial Advance and the first extension of credit to or on account of the Borrower hereunder is subject to the conditions precedent that the Bank shall have received before the date of such initial Advance and such first extension of credit all of the following, in form and substance satisfactory to the Bank: (a) Evidence that the execution, delivery and performance by the Borrower of this Agreement and any document, instrument or agreement required hereunder have been duly authorized. (b) Such other evidence as the Bank may request to establish the consummation of the transaction contemplated hereunder and compliance with the conditions of this Agreement. 6.02 Conditions Precedent to All Advances: The obligation of the Bank to make each Advance and each other extension of credit to or on account of the Borrower (including the initial Advance and the first extension of credit) shall be subject to the further conditions precedent that, on the date of each Advance or each extension of credit and after the making of such Advance or extension of credit: (a) The Bank shall have received the documents set forth in Section 8.06(e). (b) The Bank shall have received such supplemental approvals, opinions or documents as the Bank may reasonably request. (c) Except as disclosed in writing to Bank, the representations contained in Section 7 and in any other document, instrument or certificate delivered to the Bank hereunder are correct. (d) No event has occurred and is continuing which constitutes, or, with the lapse of time or giving of notice or both, would constitute an Event of Default. (e) The security interest in the Collateral has been duly authorized, created and perfected with first priority, assuming Bank has timely filed and taken all actions necessary or desirable to perfect and protect such security, and is in full force and effect. The Borrower's acceptance of the proceeds of any Advance or the Borrower's execution of any document or instrument evidencing or creating any Obligation hereunder shall be deemed to constitute the Borrower's representation and warranty that all of the above statements are true and correct. SECTION 7 REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank as of the date of this Agreement. 7.01 Status: The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware and is properly licensed and is qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business and where failure to so qualify would have a material adverse effect. 7.02 Authority: The execution, delivery and performance by the Borrower of this Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having application to the Borrower; (ii) result in a breach of or constitute a default under any material indenture or loan or credit agreement or other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (iii) require any consent or approval of its stockholders or violate any provision of its certificate of incorporation. 7.03 Legal Effect: This Agreement constitutes, and any instrument, document or agreement required hereunder when delivered hereunder will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 7.04 Fictitious Trade Styles: There are no fictitious trade styles used by the Borrower in connection with its business operations. The Borrower shall notify the Bank within 30 days of effecting any change in the matters described hereinor prior to using any other fictitious trade style at any future date, indicating the trade style and state(s) of its use. 7.05 Financial Statements: All financial statements, information and other data which may have been or which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the financial condition or, as applicable, the other information disclosed therein. Since the most recent submission of such financial information or data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 7.06 Litigation: Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties in excess of $500,000 before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition or operations or on the Collateral. 7.07 Title to Assets: The Borrower has good and marketable title to all of its assets (including, but not limited to, the Collateral) and the same are not subject to any security interest, encumbrance, lien or claim of any third person except for Permitted Liens. 7.08 ERISA: If the Borrower has a pension, profit sharing or retirement plan subject to ERISA, such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 7.09 Taxes: The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than such taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. 7.10 Accounts: Each Eligible Account represents a bona fide sale conforming to the requirements of Section 1.01(i). 7.11 Environmental Compliance: The Borrower has implemented and complied in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or environmental conditions. There are no suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or its property claiming violations of any federal, state or local law, ordinance, statute or regulation relating to hazardous or toxic wastes, substances or related materials. SECTION 8 COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower will, unless the Bank shall otherwise consent in writing: 8.01 Preservation of Existence; Compliance with Applicable Laws: Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization; notwithstanding the foregoing Borrower may liquidate or dissolve, or enter into any consolidation, merger, partnership, joint venture or other combination, acquire any other business organization, or acquire all or substantially all of the assets of any other person (collectively, an "Acquisition"), so long as Borrower is in compliance with the covenants contained in Section 8.14 immediately after such Acquisition; and conduct its business and operations in accordance with all applicable laws, rules and regulations. 8.02 Maintenance of Insurance: Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. All such insurance shall be in form and amount and with companies satisfactory to the Bank. With respect to insurance covering properties in which the Bank maintains a security interest or lien, such insurance shall name the Bank as loss payee pursuant to a loss payable endorsement satisfactory to the Bank and shall not be altered or canceled except upon 10 days' prior written notice to the Bank. Upon the Bank's request, the Borrower shall furnish the Bank with the original policy or binder of all such insurance. 8.03 Maintenance of Collateral and Other Properties: Except for Permitted Liens, keep and maintain the Collateral free and clear of all levies, liens, encumbrances and security interests (including, but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest; comply with all laws, statutes and regulations pertaining to the Collateral and its use and operation; execute, file and record such statements, notices and agreements, take such actions and obtain such certificates and other documents as necessary to perfect, evidence and continue the Bank's security interest in the Collateral and the priority thereof; maintain accurate and complete records of the Collateral which show all sales, claims and allowances; and properly care for, house, store and maintain the Collateral in good condition, free of misuse, abuse and deterioration, other than normal wear and tear. The Borrower shall also maintain and preserve all its properties in good working order and condition in accordance with the general practice of other businesses of similar character and size, ordinary wear and tear excepted. 8.04 Payment of Obligations and Taxes: Make timely payment of all assessments and taxes and all of its liabilities and obligations including, but not limited to, trade payables, unless the same are being contested in good faith by appropriate proceedings with the appropriate court or regulatory agency. For purposes hereof, the Borrower's issuance of a check, draft or similar instrument without delivery to the intended payee shall not constitute payment. 8.05 Inspection Rights: At any reasonable time and from time to time, permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower shall maintain any records (including, but not limited to, computer generated records or computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records which it may request, at the Borrower's expense, limited to $20,000 or at Bank's expense, the amount of which shall be payable within five (5) days of written notice. In addition, the Bank may, at any reasonable time and from time to time, conduct inspections and audits of the Collateral and the Borrower's accounts payable, the cost and expenses of which shall be paid by the Borrower to the Bank upon five (5) days prior written notice. 8.06 Reporting and Certification Requirements: Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: (a) Not later than 90 days after the end of each of the Borrower's fiscal years, a copy of (i) the annual audited financial report of the Borrower for such year prepared by a firm of certified public accountants reasonably acceptable to Bank, and (ii) the Borrower's Form 10-K filed with the Securities Exchange Commission and (iii) the Borrower's consolidating balance sheet and income statement for such year; and, not later than 60 days after the end of each of the Borrower's fiscal years, a copy of the Borrower's projected balance sheet and income statement for the fiscal year then in effect. (b) Not later than 45 days after the end of each of the Borrower's fiscal quarters, a copy of the Borrower's Form 10-Q filed with the Securities Exchange Commission and the Borrower's consolidating balance sheet and income statement for such quarter for the first three quarters only. (c) Concurrently with the delivery of the financial reports required hereunder, a compliance certificate in substantially the form attached hereto as Exhibit "A", showing the calculations which would demonstrate compliance with all of the financial covenants contained herein. (d) Not later than 30 days after the end of each month, an aging of accounts receivable indicating separately the amount of Eligible Accounts and the amount of total accounts receivable which are current, 1 to 30 days past the date of invoice, 31 to 60 days past the date of invoice, and the amount over 60 days past the date of invoice and an aging of accounts payable indicating the amount of such payables which are current, 1 to 30 days past the date of invoice, 31 to 60 days past the date of invoice, and the amount over 60 days past the date of invoice. (e) Daily or at such other time as required by the Bank: (i) a transaction report and schedule of accounts receivable which indicates all sales made and all collections received for each such day; (ii) all remittances and collections of accounts in kind and without commingling to be applied to the payment of the Borrower's Obligations on the next Business Day following receipt thereof; provided, however, that if such amounts are received in a form other than cash or bank wire, the Bank may withhold application of such amounts for such time to the extent permitted by law as the Bank, in its sole discretion, deems reasonable to allow for collection and provided further that any remittances and collections received by the Bank later than 2:30 p.m. (California time) on any day shall be deemed received on the next succeeding Business Day; and (iii) clear and legible copies of all invoices or sales receipts evidencing the sale of goods or services by the Borrower. (f) Promptly upon the Bank's request, such other information pertaining to the Borrower, the Collateral or any guarantor hereunder as the Bank may reasonably request. 8.07 Payment of Dividends: Not declare or pay any dividends on any class of stock now or hereafter outstanding except (i) dividends payable solely in the Borrower's capital stock, or (ii) dividends approved by Bank. 8.08 Redemption or Repurchase of Stock: Not redeem or repurchase in excess of 5% per year any class of the Borrower's stock now or hereafter outstanding without prior written Bank approval. 8.09 Additional Indebtedness: Not, after the date hereof, create, incur or assume, directly or indirectly, any additional Indebtedness other than (i) indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade creditors incurred in the ordinary course of the Borrower's business or (iii) Permitted Indebtedness. 8.10 Loans: Not make any loans or advances or extend credit to any third person, including, but not limited to, directors, officers, shareholders, partners, employees, affiliated entities and subsidiaries of the Borrower, except for (i) credit extended in the ordinary course of the Borrower's business as presently conducted and (ii) Permitted Investments. 8.11 Liens and Encumbrances: Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust, or other lien (including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, or execute or allow to be filed any financing statement or continuation thereof affecting any of such properties, except for Permitted Liens or as otherwise provided in this Agreement. 8.12 Transfer Assets: Except for an amount not exceeding in the aggregate $100,000 in any fiscal year, not, after the date hereof, sell, contract for sale, convey, transfer, assign, lease or sublet, any of its assets (including, but not limited to, the Collateral) except in the ordinary course of business as presently conducted by the Borrower and, then, only for fair and reasonable consideration and (i) sales of inventory in the ordinary course of business, (ii) transfer of assets in the ordinary course of business that have become worn out or obsolete or that are promptly being replaced, (iii) transfers of non-exclusive licenses and similar arrangements for the use of property of Borrower made in the ordinary course of business, and (iv) transfers which constitute liquidation of permitted investments. 8.13 Change in Nature of Business: Not make any material change in its financial structure or the nature of its business as existing or conducted as of the date hereof. 8.14 Financial Condition: Maintain at all times: (a) A minimum Effective Tangible Net Worth of at least $31,000,000 plus 50% of net profit after taxes at the end of each fiscal quarter. (b) A ratio of Senior Debt to Effective Tangible Net Worth of not more than 1.5 to 1. (c) A minimum working capital (defined as current assets minus current liabilities) of not less than $5,000,000. (d) A ratio of the sum of cash, cash equivalents and accounts receivable to current liabilities of not less than .65 to 1.0 (e) A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter for the immediately preceding two (2) fiscal quarters. (f) Maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization expense to the sum of (i) interest expense and (ii) the current portion of long term Debt of not less than 2.00:1.00 at the end of each fiscal quarter for the immediately preceding 4 fiscal quarters.. 8.15 Compensation of Employees: Compensate its employees for services rendered at an hourly rate at least equal to the minimum hourly rate prescribed by any applicable federal or state law or regulation. 8.16 Capital Expense: Not make any fixed capital expenditure, including, but not limited to, incurring liability for leases which would be, in accordance with generally accepted accounting principles, reported as capital leases, or purchase any real or personal property in an aggregate amount exceeding $15,000,000 in any one fiscal year, exclusive of acquisition financing, provided, however, that Borrower may make capital expenditures in connection with acquisitions in an amount up to $3,000,000 in any one fiscal year without the Bank's approval (subject to the terms and conditions of the Term Loan Credit Agreement dated as of May __, 1997 between the Bank and the Borrower. 8.17 Notice: Give the Bank prompt written notice of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and in which the claim or liability exceeds $500,000 or which affects the Collateral; and (iii) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower. 8.18 Environmental Compliance. The Borrower shall: (a) Implement and comply in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or to environmental conditions. (b) Not own, use, generate, manufacture, store, handle, treat, release or dispose of any hazardous or toxic wastes, substances or materials, except in material compliance with all applicable federal, state and local laws, ordinances, statutes and regulations. (c) Give prompt written notice of any discovery of or suit, proceeding, claim, dispute, or filing respecting hazardous or toxic wastes, substances or related materials. (d) At all times indemnify and hold harmless Bank from and against any and all liability arising out of Borrower's use, generation, manufacture, storage, handling, treatment, or disposal by Borrower of hazardous or toxic wastes, substances or materials at the site. SECTION 9 EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default (an "Event of Default") under this Agreement: 9.01 Non-Payment: The Borrower shall fail to pay any Obligations within 10 days of when due. 9.02 Performance Under This and Other Agreements: The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Borrower (whether such indebtedness is owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other instrument, document or agreement, which failure shall constitute and be an Event of Default if not paid within 10 days of when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default. 9.03 Representations and Warranties; Financial Statements: Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 9.04 Insolvency: The Borrower or any guarantor shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties and assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee, for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or substantial part of its properties, assets or businesses and shall not be discharged within 60 days after the date of such appointment. 9.05 Execution: Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 60 days after the issuance or attachment of such writ or lien. 9.06 Suspension: The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 9.07 Change in Ownership: There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 25% of the issued and outstanding capital stock of the Borrower, if a corporation, or there shall occur a change in any general partner or a change affecting the control of the Borrower, if a partnership. SECTION 10 REMEDIES ON DEFAULT Upon the occurrence and during the continuance of any Event of Default, the Bank may, at its sole and absolute election, without demand and with prompt subsequent notice to Borrower: 10.01 Acceleration: Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 10.02 Cease Extending Credit: Cease making Advances or otherwise extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 10.03 Termination: Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank, the Bank's obligations to the Borrower, or the Bank's or Borrower's rights and remedies under this Agreement or under any other document, instrument or agreement. 10.04 Notification of Account Debtors: (a) Notify any Account Debtor, any buyers or transferee of the Collateral or any other persons of the Bank's interest in the Collateral and the proceeds thereof. (b) Sign the Borrower's name (which authority the Borrower hereby irrevocably and unconditionally grants to the Bank) on any invoice or bill of lading relating to accounts or other drafts against the Account Debtors. (c) Require the Borrower to indicate on the face of all invoices (or such other documentation as may be specified by the Bank relating to the sale, delivery or shipment of goods giving rise to the account) that the account has been assigned to the Bank and that all payments are to be made directly to the Bank at such address as the Bank may designate. 10.05 Protection of Security Interest: Make such payments and do such acts as the Bank, in its sole judgment, considers necessary and reasonable to protect its security interest or lien in the Collateral. The Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgment, deems to be prior or superior to its security interest. Further, the Borrower hereby agrees to pay to the Bank, upon demand therefor, all reasonable expenses and expenditures (including reasonable attorneys' fees) incurred in connection with the foregoing. Notwithstanding the foregoing, Bank shall be responsible for its own gross negligence or willful misconduct. 10.06 Foreclosure: Enforce any security interest or lien given or provided for under this Agreement or under any security agreement, mortgage, deed of trust or other document, in such manner and such order, as to all or any part of the properties subject to such security interest or lien, as the Bank, in its sole judgment, deems to be necessary or appropriate and the Borrower hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest or lien, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Borrower's records pertaining thereto, or the Bank may require the Borrower to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of the sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgment to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of the Borrower to the Bank and shall be paid by the Borrower to the Bank within five (5) business days of written notice. 10.07 Foreign Exchange Contracts: The Bank may, at its sole and absolute discretion and in addition to any other remedies available to it hereunder or otherwise, require the Borrower to pay to the Bank within five (5) business days of written notice, for application against the future settlement price under any outstanding Foreign Exchange Contracts, the outstanding face amount of any such Foreign Exchange Contracts which have not matured or settled and Borrower hereby grants to Bank a security interest in and to such funds. Any portion of the amount so paid to the Bank which is not subsequently applied to satisfy repayment on any such matured Foreign Exchange Contracts or any other obligations of the Borrower to the Bank shall be repaid to the Borrower without interest. 10.08 Letters of Credit: The Bank may, at its sole and absolute discretion and in addition to any other remedies available to it hereunder or otherwise, require the Borrower to pay within five (5) business days of written notice to the Bank, for application against drawings under any outstanding Letters of Credit, the outstanding principal amount of any such Letters of Credit which have not expired. Any portion of the amount so paid to the Bank which is not applied to satisfy draws under any such Letters of Credit or any other obligations of the Borrower to the Bank shall be repaid to the Borrower without interest. 10.09 Non-Exclusivity of Remedies: Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. 10.10 Application of Proceeds: All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation of the Bank's lien in the Collateral, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, liquidating, selling or disposing of the Collateral; next, to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligations; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Borrower. SECTION 11 MISCELLANEOUS 11.01 Amounts Payable on Demand: If the Borrower shall fail to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower having so failed to pay such amount, create an Advance under the Line of Credit in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under the Line of Credit. 11.02 Default Interest Rate: The Borrower shall pay the Bank interest on any indebtedness or amount payable under this Agreement, from the date that such indebtedness or amount became due or was demanded to be due until paid in full, at a rate which is 3% in excess of the rate otherwise provided under this Agreement. 11.03 Disposal of Invoices: All documents, schedules, invoices or other papers received by the Bank from the Borrower may be destroyed or disposed of 6 months after receipt by the Bank, unless the Borrower requests in writing the return thereof, which shall be done at the Borrower's expense. 11.04 Rights of the Bank on Default: Upon written notice from the Bank, the Borrower agrees that the Bank may at any time and at its option, whether or not the Borrower is in default: (a) Require the Borrower to direct all Account Debtors to forward all remittances, payments and proceeds of the Collateral directly to the Bank at such address as the Bank may designate. In connection therewith, the Borrower hereby irrevocably constitutes and appoints the Bank as its attorney-in-fact to endorse the Borrower's name on any notes, acceptances, checks, drafts, money orders or other evidence of payment that may come into the Bank's possession. (b) Require the Borrower to deliver to the Bank, at such times designated by the Bank, records and schedules which show the status and condition of the Collateral, where it is located and such contracts or other matters which affect the Collateral. (c) Send verification requests to any Account Debtor. (d) Make inquiries of the Borrower's trade vendors. 11.05 Indemnification: The Borrower agrees to hold the Bank harmless from and indemnify and defend the Bank from any liability, claim, loss or expense (including, but not limited to, reasonable attorneys' fees) arising from any transaction between the Borrower and any Account Debtor including, but not limited to, any loss, claim or liability arising from: (a) Any violation of any federal or state consumer protection law (including, but not limited to, the federal Truth-In-Lending Act) and regulations promulgated thereunder. (b) Improper collection practices or procedures of the Borrower. (c) Any unlawful acts taken by the Borrower in connection with the collection of any account(s). (d) Any suit by any person against the Bank resulting or arising from such person's dealings with the Borrower. 11.06 Dispute Resolution. It is understood and agreed that upon the request of any party to this agreement any dispute, claim, or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (1) this Agreement, or any related agreements, documents, or instruments, (2) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (3) any incidents, omissions, acts, practices, or occurrences causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (4) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by Judicial Arbitration & Mediation Services, Inc. ("J-A-M-S") as follows: (a) Step I - Mediation: At the request of any party to the dispute, claim or controversy of the matter shall be referred to the nearest office of J-A-M-S for mediation, that is, an informal, non-binding conference or conferences between the parties in which a retired judge or justice for the J-A-M-S panel will seek to guide the parties to a resolution of the case. (b) Step II - Unsecured Contracts - Arbitration: Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase then all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in San Jose County and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys fees and costs. This subparagraph (b) shall apply only if, at the time of the submission of the matter to J-A-M-S, the dispute(s) or issue(s) do(es) not arise out of a transaction(s) which is/are secured by real property collateral or, if so secured, all parties consent to such submission. As soon as practicable after selection of the arbitrator, the arbitrator or his/her designated representative shall determine a reasonable estimate of anticipated fees and costs of the Arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter each party shall, within 10 days of receipt of said statement, deposit said sum with the Arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. (c) Step II - Contracts Secured By Real Estate - Trial by Court Reference [ss.638 (1)] Code of Civil Procedure): If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration as provided by subparagraph (b) and has not been resolved by Step I mediation, them any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of J-A-M-S appointed pursuant to the provisions of California Code of Civil Procedure ss.638(1) or any amendment, addition or successor section thereto to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If this parties are unable to agree upon a member of the J-A-M-S panel to act as referee then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the cause(s) of action which is(are) the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. (d) Provisional Remedies, Self Help and Foreclosure: No provision of, or the exercise of any right(s) under subparagraph (b), nor any other provision of this Dispute Resolution Provision, shall limit the right of any party to exercise self help remedies such as set off, to foreclose against any real or personal property collateral, or obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from any court having jurisdiction before, during or after the pendency of any arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional remedies pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration. 11.07 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.08 Reliance: Each warranty, representation, covenant, obligation and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants and agreements which the Borrower now or hereafter shall give, or cause to be given, to the Bank. 11.09 Attorneys' Fees: Borrower shall pay to the Bank all costs and expenses, including but not limited to reasonable attorneys fees, incurred by Bank in connection with the administration, enforcement, or any refinancing or restructuring in the nature of a "work-out", of this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder. 11.10 Notices: All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party hereto, shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed as set forth below or to such other address as may be specified from time to time in writing by either party to the other. To the Borrower To the Bank: ELEXSYS INTERNATIONAL, INC. SANWA BANK CALIFORNIA 4405 Fortran Court San Jose CBC San Jose, CA 95134 220 Almaden Blvd. San Jose, CA 95113 Attn: Robert DeLaurentis Attn: Jillian E. Mathur Title: C.F.O. Vice President with a copy to: With a copy to: COOLEY GODWARD LLP SANWA BANK CALIFORNIA Five Palo Alto Square Asset Based Financing Department 3000 El Camino Real Palo Alto, CA 94306-2155 444 Market Street, 22nd Floor San Francisco, CA 94111 Attn: Bill Veatch 11.11 Waiver: Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any other document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder, or under any other document, instrument or agreement mentioned herein, constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. 11.12 Conflicting Provisions: To the extent the provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 11.13 Binding Effect; Assignment: This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may sell, assign or grant participation in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower and any guarantor. 11.14 Jurisdiction: This Agreement, any notes issued hereunder, the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 11.15 Headings: The headings herein set forth are solely for the purpose of identification and have no legal significance. 11.16 Entire Agreement: This Agreement and all documents, instruments and agreements mentioned herein constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties pertaining to the transactions contemplated hereunder not incorporated or referenced in this Agreement or in such documents, instruments and agreements are superseded hereby. 11.17 Confidentiality Agreement. In handling any confidential information Bank, and all employees and agents of Bank, including but not limited to accountants, shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower; (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order; (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first hereinabove written. Borrower Bank: SANWA BANK CALIFORNIA ELEXSYS INTERNATIONAL, INC. BY:_________________________________ BY:_______________________________ Name: Robert DeLaurentis Name: Jillian E. Mathur Title: C.F.O. Title: Vice President EX-10.52 4 LINE OF CREDIT AGREEMENT EXHIBIT 10.52 LINE OF CREDIT AGREEMENT This Line of Credit Agreement (the "Agreement") is made and entered into this ___________________ day of May _______, 1997, by and between SANWA BANK CALIFORNIA (the "Bank") and ELEXSYS INTERNATIONAL, INC. (the "Borrower"), on the terms and conditions that follow: SECTION I DEFINITIONS 1.01 Certain Defined Terms: Unless elsewhere defined in this Agreement, the following terms shall have the following meanings (such meanings to be generally applicable to the singular and plural forms of the terms defined): "Advance": shall mean an advance to the Borrower under the Line of Credit described in Section 2. "Alternate Currency": shall mean any lawful currency other than Dollars which is freely transferable and convertible into Dollars. "Business Day": shall mean a day other than a Saturday or Sunday on which commercial banks are open for business in California, USA, and, with respect to Eurocurrency Advances, on which dealings are carried on in the London interbank market and banks are open for business in London and in the country of issue of the currency of such Advance. "Cash Flow": shall mean the sum of net income after tax and exclusive of extraordinary gains, plus depreciation and amortization expense minus dividends and distributions. "Collateral": shall mean the property described in Section 3.01. "Cost of Funds Advance", "Cost of Funds Interest Period" and "Fixed Rate": shall have the meanings provided in Section 2.4 hereof. "Debt": shall mean all liabilities of the Borrower less Subordinated Debt. "Effective Tangible Net Worth": shall mean the Borrower's stated net worth plus Subordinated Debt less all intangible assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items). "Dollars" and the sign "$": shall mean lawful money of the United States. "ERISA": shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Eurocurrency Advance", "Eurocurrency Interest Period " and "Eurocurrency Rate": shall have the meanings provided in Section 2.4 hereof. "Event of Default": shall have the meaning set forth in Section 7. "Expiration Date": shall mean January 31, 1998 or the date of termination of the Bank's commitment to lend under this Agreement pursuant to Section 8, whichever shall occur first. "Indebtedness": shall mean, with respect to the Borrower, (i) all indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss and (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles, reported as capital leases in respect of which the Borrower is liable, contingently or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss. "Line Account": shall have the meaning provided in Section 2.12 hereof. "Line of Credit": shall mean the credit facility described in Section 2. -1- "Obligations": shall mean all amounts owing by the Borrower to the Bank pursuant to this Agreement including, but not limited to, the unpaid principal amount of Advances. "Permitted Indebtedness": shall mean (i) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the date hereof and disclosed in writing to the Bank; (iii) Subordinated Debt; (iv) Indebtedness to trade creditors, including, without limitation, affiliates of Borrower, incurred in the ordinary course of business; (v) Other Indebtedness of Borrower not exceeding $1,000,000.00 in the aggregate outstanding at any time; (vi) Contingent obligations of Borrowing consisting of guarantees (and other credit support) of the obligations of vendors and suppliers of Borrower in respect of transactions entered into in the ordinary course of business; (vii) Indebtedness with respect to capital lease obligations and purchase money indebtedness incurred in connection with the acquisition of assets secured by Permitted Liens; (viii) Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness. "Permitted Investment": shall mean (i) investments existing on the date hereof and disclosed in writing to the Bank; (ii) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof; (iii)commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (iv) investments consisting of deposits maturing no more than one (1) year from the date of investment therein issued by Bank; (v) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (vi) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (vii) investments, including debt obligations, received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (viii) investments consisting of compensation of employees, officers and directors of Borrower so long as the Board of Directors of Borrower determines that such compensation is in the best interest of Borrower, and travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business; (ix) other investments aggregating not in excess of $250,000.00 at any time. "Permitted Liens": shall mean: (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith; (iii) liens of materialmen, mechanics, warehousemen, or carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure Indebtedness outstanding on the date hereof or permitted to be incurred under Section 6.09 hereof; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets; liens securing capital lease obligations on assets subject to such capital leases; (vii) liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or attachment has not caused or resulted in an Event of Default, (viii) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar liens affecting real property not interfering in any material respect with the ordinary conduct of the business of Borrower, (ix) liens in favor of customs and revenue authorities arising as a mater of law to secure payment of customs duties in connection with the importation of goods, (x) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institutions; (xi) liens not otherwise permitted which liens do not in the aggregate exceed $250,000.00 at any time. "Redenominate", "Redenomination" and "Redenominated": each refers to redenomination of each Advance from Dollars into an Alternate Currency or from an Alternate Currency into Dollars or another Alternate Currency pursuant to Section 2.06. "Reference Rate": shall have the meanings provided in Section 2.4 hereof. "Variable Rate Advance" and "Variable Rate": shall have the meanings provided in Section 2.4 hereof. 1.2 Accounting Terms: All references to financial statements, assets, liabilities, and similar accounting items not specifically defined herein shall mean such financial statements or such items prepared or determined in accordance with generally accepted accounting principles consistently applied and, except where otherwise specified, all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 1.3 Other Terms: Other terms not otherwise defined shall have the meanings attributed to such terms in the California Uniform Commercial Code. -2- 1.4 Currency Equivalents Generally: For all purposes of this Agreement other than Section 2, the equivalent in any Alternate Currency of an amount in Dollars shall be determined at the rate of exchange quoted by the Bank in Los Angeles, at 9:00 A.M. on the date of determination, for the spot purchase in the relevant foreign exchange market of such amount of Dollars with such Alternate Currency. SECTION 2 THE LINE OF CREDIT 2.1 The Line of Credit: On terms and conditions as set forth herein, the Bank agrees to make Advances in Dollars or in Alternate Currency to the Borrower from time to time from the date hereof to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed $5,000,000 or the Dollar equivalent in Alternate Currency of $5,000,000 ("Line of Credit"). Within the foregoing limits, the Borrower may borrow, partially or wholly prepay, and reborrow under this Section 2.01. 2.2 Making Line Advances: Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of the Borrower (i) when credited to any deposit account of the Borrower maintained with the Bank or (ii) when paid in accordance with the Borrower's written instructions. Subject to the requirements of Section 5, Advances shall be made by the Bank upon telephonic or facsimile request received from the Borrower, and confirmed in writing within two Business Days, which request shall be received not later than 12:00 p.m. (Pacific Standard Time) on the date specified for a Variable Rate Advance and 7:00 a.m. (Pacific Standard Time) two business days prior to the date specified for a Eurocurrency Advance or a Cost of Funds Advance, each of which dates shall be a Business Day. The rates for a Eurocurrency Advance or a Cost of Funds Advance shall be set on the same Business Day as the request is received if received by 7:00 a.m. and on the next Business Day if received after 7:00 a.m.. Requests for Advances received after such time may, at the Bank's option, be deemed to be a request for an Advance to be made on the next succeeding Business Day for a Variable Rate Advance and the third succeeding Business Day for a Eurocurrency Advance or a Cost of Funds Advance. 2.3 Repayment: On the Expiration Date, the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal amount of all Advances then outstanding, together with all accrued and unpaid interest thereon, provided, however, that any Advance denominated in Dollars must be repaid in Dollars and any Advance denominated in an Alternate Currency must be repaid in the same Alternate Currency. 2.4 Interest on Advances: Interest shall accrue from the date of each Advance under the Line of Credit at one of the following rates, as quoted by the Bank and as elected by the Borrower pursuant to paragraph 2.05 or paragraph 2.06 below: (a) Variable Rate Advances: For Advances denominated in Dollars, a variable rate per annum equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate (the "Reference Rate") plus .50% (the "Variable Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. An Advance which bears interest at the Variable Rate is hereinafter referred to as a "Variable Rate Advance". (b) Eurocurrency Advances: For Advances denominated in Dollars or in Alternate Currency, a fixed rate quoted by the Bank for one, three, six, nine or twelve months or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "Eurocurrency Interest Period"] for Advances in the minimum amount of $500,000 and in $100,000 increments thereafter. Such interest rate shall be a percentage, rounded upward to the nearest one-hundredth of one percent, equivalent to 2.50% in excess of the Bank's Eurocurrency Rate for Dollars or such Alternate Currency which is that rate determined by the Bank's Treasury Desk as being the approximate rate at which the Bank could purchase Dollars or Alternate Currency deposits in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Eurocurrency Interest Period (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the purchase by the Bank of such Alternate Currency deposits [the "Eurocurrency Rate"]. An Advance which bears interest at the Eurocurrency Rate is hereinafter referred to as the "Eurocurrency Advance". (c) Cost of Funds Advances. For Advances denominated in Dollars, the Bank hereby agrees to make Advances to the Borrower, at Borrower's election, at a fixed rate quoted by Bank in its sole discretion for each Advance (the "Cost of Funds Rate") and for such period of time that the Bank may quote and offer, provided that any such period of time shall be for at least ____ days and provided further that any such period of time does not extend beyond the Expiration Date (the "Cost of Funds Interest Period") for Advances in the minimum amount $500,000 and in $100,000 increments thereafter. Advances based upon the Cost of Funds Rate are hereinafter referred to as "Cost of Funds Advances". Eurocurrency Advances and Cost of Funds Advances are sometimes hereinafter referred to as a "Fixed Rate Advance". -3- Interest on Variable Rate Advances and Cost of Funds Advances shall be paid in Dollars in monthly installments commencing on the first day of the month following the date of the first such Advance and continuing on the first day of each month thereafter. Interest on any Eurocurrency Advance shall be paid on the last day of the Eurocurrency Interest Period pertaining to such Eurocurrency Advance and shall be paid in Dollars or in the relevant Alternate Currency as the case may be. The Borrower further promises and agrees to pay the Bank interest on any Eurocurrency Advance with an Eurocurrency Interest Period in excess of 90 days on a quarterly basis (i.e., on the last day of each 90-day period occurring in such Eurocurrency Interest Period) and on the last day of the relevant Eurocurrency Interest Period. If interest is not paid as and when it is due, it shall be added to the principal, become and be treated as a part thereof, and shall thereafter bear like interest. 2.5 Notice of Election to Adjust Interest Rate: The Borrower may elect that interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Eurocurrency Rate or Cost of Funds Rate; provided, however, that such notice shall be received by the Bank no later than 7:00 a.m. two business days prior to the last day of the Eurocurrency Interest Period for a Eurocurrency Advance and 1:00 p.m. one business day prior to the last day of a Cost of Funds Interest Period for a Cost of Funds Advance. Such notice may be by telephone if confirmed in writing by telecopy with the original of such writing deposited in the US mail or with an air courier on the same day. The Bank shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above that the Bank believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of the Borrower and upon any borrowing, Redenomination or continuation by the Bank in accordance with this Agreement pursuant to any telephonic notice, the Borrower shall have effected the borrowing, redenomination or continuation of Advances hereunder. The Borrower may elect that interest on a Fixed Rate Advance shall accrue at the Variable Rate; provided, however, that such notice shall be received by the Bank no later than one business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance, and provided further, however, that such Fixed Rate Advance shall be in Dollars or Redenominated in Dollars pursuant to the terms of Section 2.06. If the Bank shall not have received notice (as prescribed herein) of Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the newly quoted Eurocurrency Rate or Cost of Funds Rate or Variable Rate as the case may be, the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate then in effect and any Alternate Currency shall be Redenominated in Dollars. 2.6 Redenomination of Advances: The Borrower may, upon notice given to the Bank at least four Business Days prior to the date of the proposed Redenomination, request that a Eurocurrency Advance be Redenominated from Dollars into an Alternate Currency or from an Alternate Currency into Dollars or another Alternate Currency; provided, however, that any Redenomination shall be made on, and only on, the last day of an Interest Period for such Advances. Each such notice of request of a Redenomination ( "Notice of Redenomination") shall be by telecopier, telex or cable, confirmed immediately in writing, or may be by telephone if confirmed in writing by telecopy with the original of such writing deposited in the US mail or with an air courier on the same day, and the Bank shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above that the Bank believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of the Borrower and upon any borrowing, Redenomination or continuation by the Bank in accordance with this Agreement pursuant to any telephonic notice, the Borrower shall have effected the borrowing, redenomination or continuation of Advances hereunder, specifying (i) the Eurocurrency Advance(s) to be Redenominated, (ii) the date of the proposed Redenomination, (iii) the Alternate currency into which such Advances are to be Redenominated, and (iv) the duration of the Interest Period for such Advances upon being so Redenominated. In the case of a Notice of Redenomination which requests a Redenomination of Advances into an Alternate Currency, such Redenomination is subject to confirmation by Bank not later than the third Business Day before the requested date of such Redenomination that such Bank agrees to such Redenomination. which confirmation shall be notified to the Borrower. If no confirmation is provided the Redenomination will not occur. Each Advance so requested to be Redenominated will be Redenominated, on the date specified therefor in such Notice of Redenomination, into an equivalent amount thereof in the currency requested in such Notice of Redenomination, such equivalent amount to be determined on such date in accordance with Section 2.13, and, upon being so Redenominated, will have an initial Interest Period as requested in such Notice of Redenomination. 2.7 Prepayment: (a) The Borrower may prepay any Advance in whole or in part, at any time and without penalty, provided, however, that: (i) any partial prepayment shall first be applied, at the Bank's option, to accrued and unpaid interest and next to the outstanding principal balance; and (ii) during any period of time in which interest is accruing on any Advance on the basis of the Eurocurrency Rate or -4- the Cost of Funds Rate, no prepayment shall be made except on a day which is the last day of the Interest Period pertaining thereto provided, however, if the whole or any part of any Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss actually incurred by the Bank, excluding loss of profit on any margin, but including any loss resulting from the re-employment of funds, sustained by the Bank as a consequence of such prepayment, and provided further, that any prepayment hereunder shall not be deemed to be an event of default. (b) If, on the last day of any Interest Period, the equivalent in Dollars of the aggregate principal amount of all Eurocurrency Advances then outstanding when combined with the aggregate principal amount of all Variable Rate Advances and Cost of Funds Advances then outstanding exceeds the Line of Credit, the Borrower shall on such last day prepay an aggregate principal amount of such Advances to the Bank in an amount at least equal to such excess, with accrued interest to the date of such prepayment on the principal amount prepaid. 2.8 Indemnification for Eurocurrency Rate and Cost of Funds Rate Costs: During any period of time in which interest on any Advance is accruing on the basis of the Eurocurrency Rate or the Cost of Funds Rate, the Borrower shall, upon the Bank's written request, which request shall explain in reasonable detail the reason for such costs or payments, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to the Alternate Currency or Dollars or cost of funds used by the Bank in quoting and determining the Eurocurrency Rate or the Cost of Funds Rate under this Agreement. Bank shall use its best efforts to provide Borrower, in advance, with an estimate of any such costs which may potentially be incurred hereunder. 2.9 Eurocurrency Rate or Cost of Funds Rate Infeasible: In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Eurocurrency Rate or the Cost of Funds Rate (i) is infeasible at the time of any borrowing, continuation or Redenomination because the Bank is unable to determine the Eurocurrency Rate or Cost of Funds Rate due to the unavailability of Dollars or Alternate Currency deposits, contracts or time deposits in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to relevant Interest Period or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event such Fixed Rate Advance shall be immediately prepaid but then may be converted or Redenominated into a Variable Rate Advance at the election of Borrower. 2.10 Failure to Borrow: In the case of any Fixed Rate Advance, the Borrower shall indemnify Bank against any loss, cost or expense incurred by Bank as a result of any failure to borrow on the date specified for such Fixed Rate Advance (other than as a result of Bank's failure to make funds available for such Advance), including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund such Fixed Rate Advance to be made by Bank when such Fixed Rate Advance is not made on such date. 2.11 Computations and Payments: Interest on any Advance shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest; provided, however, if such extension would cause payment of interest on or principal of Eurocurrency Advances to be made in the next following calendar month, such payment shall be made on the immediately preceding Business Day. 2.12 Taxes: (a) Any and all payments by the Borrower shall be made hereunder free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, taxes imposed on the Bank's income, and franchise taxes imposed on it, by the jurisdiction under the laws of which Bank is organized or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) the Bank receives an amount equal to the sum it would have received had -5- no such deductions been made, (ii) Borrower shall make such deductions and (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. Bank shall use its best efforts to advise Borrower of any taxes or levies to the best of Bank's knowledge thereof. (b) In addition, Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment or registration of, or otherwise with respect to, this Agreement (hereinafter referred to as "Other Taxes"). (c) Borrower will indemnify Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, other than liabilities arising from Bank's gross negligence or willful misconduct, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date Bank makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Bank at its address referred to hereinbelow, the original or a certified copy of a receipt evidencing payment thereof. If no taxes are payable in respect of any payment hereunder, Borrower will furnish to the Bank at such address, a certificate from each appropriate taxing authority, or an opinion of counsel acceptable to the Bank, in either case stating that such payment is exempt from or not subject to Taxes. (e) To the extent that any Taxes were not lawfully payable, any recovery ultimately received by the Bank in respect of any such Taxes shall be refunded to the Borrower to the extent of the applicable indemnification payment. (f) Bank agrees that, upon receiving written notice from Borrower, Bank shall take all such actions as are reasonably necessary to enable the Borrower to pay all Taxes in a timely manner and to claim such exemptions as the Bank may be entitled to claim in respect of all or any portion of any Taxes which are otherwise required to be paid or deducted or withheld pursuant to this Section 2.12 in respect of any payments under this Agreement. (g) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.12 shall survive the payment in full of principal and interest hereunder. 2.13 Currency Equivalents: For purposes of the provisions of this Section 2, (i) the equivalent in Dollars of any Alternate Currency shall be determined by using the quoted spot rate at which Bank's principal office in Los Angeles offers to exchange Dollars for such Alternate Currency at 9:00 A.M. (Los Angeles time) two Business Days prior to the date on which such equivalent is to be determined, (ii) the equivalent in any Alternate Currency of any other Alternate Currency shall be determined by using the quoted spot rate at which Bank's principal office in Los Angeles offers to exchange such Alternate Currency for the equivalent in Dollars of such other Alternate Currency at 9:00 A.M. (Los Angeles time) two Business Days prior to the date on which such equivalent is to be determined, and (iii) the equivalent in any Alternate Currency of Dollars shall be determined by using the quoted spot rate at which Bank's principal office in Los Angeles offers to exchange such Alternate Currency for Dollars at 9:00 A.M. (Los Angeles time) two Business Days prior to the date on which such equivalent is to be determined. Except as specified in Section 1.04 , the equivalent in Dollars of each Eurocurrency Rate Advance made in an Alternative Currency shall be recalculated hereunder on each date that it shall be necessary to determine the unused portion of Bank's Line of Credit or any or all Advance or Advances outstanding on such date. 2.14 Line Account: (a) The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Line of Credit (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account upon the Borrower's request therefor from time to time, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 30 days after the Borrower's receipt of any such statement which it deems to be incorrect. (b) The Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under the Line of Credit is not made when due, to charge, from time to time, against any or all of the Borrower's deposit accounts with the Bank any amount so due. (c) If any payment required to be made by the Borrower hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payayble at the -6- then applicable rate during such extension. All payments required to be made hereunder shall be made to the office of the Bank designated for the receipt of notices herein or such other office as Bank shall from time to time designate. 2.15 Late Payment: In addition to any other rights the Bank may have hereunder, if any payment of principal (other than a principal payment due pursuant to Section 2.03) or interest, or any portion thereof, under this Agreement is not paid when due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. 2.16 Maximum Outstanding Advances. Notwithstanding anything herein to the contrary, outstanding Advances under the Line of Credit when combined with outstanding Advances under that certain Accounts Receivable Credit Agreement dated of even date herewith and by and between Bank and Borrower may not exceed $13,000,000. SECTION 3 COLLATERAL 3.01 The Collateral: To secure payment and performance of all the Borrower's Obligations under this Agreement and all other liabilities, loans, guarantees, covenants and duties owed by the Borrower to the Bank, whether or not evidenced by this or by any other agreement, absolute or contingent, due or to become due, now existing or hereafter and howsoever created, the Borrower hereby grants the Bank a security interest in and to all of the following property: (a) All goods now owned or hereafter acquired by the Borrower or in which the Borrower now has or may hereafter acquire any interest, including, but not limited to, all machinery, equipment, furniture, furnishings, fixtures, tools, supplies and motor vehicles of every kind and description, and all additions, accessions, improvements, replacements and substitutions thereto and thereof. (b) Bank agrees to release its security interest in any equipment, fixtures, leasehold improvements, or other property if within ninety (90) days after Borrower acquires title to such property, Borrower finances such property pursuant to either (i) a sale and leaseback transaction or (ii) a debt financing transaction in an amount not to exceed the purchase price of, and secured by a security interest in such property. (c) All inventory now owned or hereafter acquired by the Borrower, including, but not limited to, all raw materials, work in process, finished goods, merchandise, parts and supplies of every kind and description, including inventory temporarily out of the Borrower's custody or possession, together with all returns on accounts. (d) All accounts, contract rights and general intangibles now owned or hereafter created or acquired by the Borrower, including, but not limited to, all receivables, goodwill, trademarks, trade styles, trade names, patents, patent applications, software, customer lists and business records. (e) All documents, instruments and chattel paper now owned or hereafter acquired by the Borrower. (f) All monies, deposit accounts, certificates of deposit and securities of the Borrower now or hereafter in the Bank's or its agents' possession. The Bank's security interest in the Collateral shall be a continuing lien and shall include the proceeds and products of the Collateral including, but not limited to, the proceeds of any insurance thereon. SECTION 4 CONDITIONS OF LENDING 4.1 Conditions Precedent to the Initial Advance: The obligation of the Bank to make the initial Advance and the first extension of credit to or on account of the Borrower hereunder is subject to the conditions precedent that the Bank shall have received before the date of such initial Advance and such first extension of credit all of the following, in form and substance satisfactory to the Bank: -7- (a) Evidence that the execution, delivery and performance by the Borrower of this Agreement and any document, instrument or agreement required hereunder have been duly authorized. (b) Such other evidence as the Bank may request to establish the consummation of the transaction contemplated hereunder and compliance with the conditions of this Agreement. 4.2 Conditions Precedent to All Advances: The obligation of the Bank to make each Advance and each other extension of credit to or on account of the Borrower (including the initial Advance and the first extension of credit) shall be subject to the further conditions precedent that, on the date of each Advance or each extension of credit and after the making of such Advance or extension of credit: (a) The Bank shall have received such supplemental approvals, opinions or documents as the Bank may reasonably request. (b) The representations contained in Section 5 and in any other document, instrument or certificate delivered to the Bank hereunder are true, correct and complete. (c) No event has occurred and is continuing which constitutes, or with the lapse of time or giving of notice or both, would constitute an Event of Default. (d) The security interest in the Collateral has been duly authorized, created and perfected with first priority, assuming Bank has timely filed and taken all actions necessary or desirable to perfect and protect such security, and is in full force and effect. The Borrower's acceptance of the proceeds of any Advance or the Borrower's execution of any document or instrument evidencing or creating any Obligation hereunder shall be deemed to constitute the Borrower's representation and warranty that all of the above statements are true and correct. SECTION 5 REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: 5.01 Status: The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware and is properly licensed and is qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business and where failure to so qualify would have a material adverse effect. 5.02 Authority: The execution, delivery and performance by the Borrower of this Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having application to the Borrower; (ii) result in a breach of or constitute a default under any material indenture or loan or credit agreement or other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (iii) require any consent or approval of its stockholders or violate any provision of its certificate of incorporation. 5.03 Legal Effect: This Agreement constitutes, and any instrument, document or agreement required hereunder when delivered hereunder will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5.04 Fictitious Trade Styles: There are no fictitious trade styles used by the Borrower in connection with its business operations. The Borrower shall notify the Bank within 30 days of effecting any change in the matters described hereinor prior to using any other fictitious trade style at any future date, indicating the trade style and state(s) of its use. 5.05 Financial Statements: All financial statements, information and other data which may have been or which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the financial condition or, as applicable, the other information disclosed therein. Since the most recent submission of such financial information or data to the Bank, the Borrower represents and -8- warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 5.06 Litigation: Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties in excess of $500,000 before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition or operations or on the Collateral. 5.07 Title to Assets: The Borrower has good and marketable title to all of its assets (including, but not limited to, the Collateral) and the same are not subject to any security interest, encumbrance, lien or claim of any third person except for Permitted Liens. 5.08 ERISA: If the Borrower has a pension, profit sharing or retirement plan subject to ERISA, such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 5.09 Taxes: The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than such taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. 5.10 Environmental Compliance: The Borrower has implemented and complied in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or environmental conditions. There are no suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or its property claiming violations of any federal, state or local law, ordinance, statute or regulation relating to hazardous or toxic wastes, substances or related materials. SECTION 6 COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower will, unless the Bank shall otherwise consent in writing: 6.01 Preservation of Existence; Compliance with Applicable Laws: Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization; notwithstanding the foregoing Borrower may liquidate or dissolve, or enter into any consolidation, merger, partnership, joint venture or other combination, acquire any other business organization, or acquire all or substantially all of the assets of any other person (collectively, an "Acquisition"), so long as Borrower is in compliance with the covenants contained in Section 6.14 immediately after such Acquisition; and conduct its business and operations in accordance with all applicable laws, rules and regulations. 6.02 Maintenance of Insurance: Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. All such insurance shall be in form and amount and with companies satisfactory to the Bank. With respect to insurance covering properties in which the Bank maintains a security interest or lien, such insurance shall name the Bank as loss payee pursuant to a loss payable endorsement satisfactory to the Bank and shall not be altered or canceled except upon 10 days' prior written notice to the Bank. Upon the Bank's request, the Borrower shall furnish the Bank with the original policy or binder of all such insurance. 6.03 Maintenance of Collateral and Other Properties: Except for Permitted Liens, keep and maintain the Collateral free and clear of all levies, liens, encumbrances and security interests (including, but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest; comply with all laws, statutes and regulations pertaining to the Collateral and its use and operation; execute, file and record such statements, notices and agreements, take such actions and obtain such certificates and other documents as necessary to perfect, evidence and continue the Bank's security interest in the Collateral and the priority thereof; maintain accurate and complete records of the Collateral which show all sales, claims and allowances; and properly care for, house, store and maintain the Collateral in good condition, free of misuse, abuse and deterioration, other than normal wear and tear. The Borrower shall also maintain and preserve all its properties in good working order and condition in accordance with the general practice of other businesses of similar character and size, ordinary wear and tear excepted. 6.04 Payment of Obligations and Taxes: Make timely payment of all assessments and taxes and all of its liabilities and obligations including, but not limited to, trade payables, unless the same are being contested in good faith by appropriate proceedings with -9- the appropriate court or regulatory agency. For purposes hereof, the Borrower's issuance of a check, draft or similar instrument without delivery to the intended payee shall not constitute payment. 6.05 Inspection Rights: At any reasonable time and from time to time, permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower shall maintain any records (including, but not limited to, computer generated records or computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records which it may request, at the Borrower's expense, limited to $20,000 or at Bank's expense, the amount of which shall be payable within five (5) days of written notice. In addition, the Bank may, at any reasonable time and from time to time, conduct inspections and audits of the Collateral and the Borrower's accounts payable, the cost and expenses of which shall be paid by the Borrower to the Bank upon five (5) days prior written notice. 6.06 Reporting and Certification Requirements: Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: (a) Not later than 90 days after the end of each of the Borrower's fiscal years, a copy of (i) the annual audited financial report of the Borrower for such year prepared by a firm of certified public accountants reasonably acceptable to Bank, and (ii) the Borrower's Form 10-K filed with the Securities Exchange Commission and (iii) the Borrower's consolidating balance sheet and income statement for such year; and, not later than 60 days after the end of each of the Borrower's fiscal years, a copy of the Borrower's projected balance sheet and income statement for the fiscal year then in effect. (b) Not later than 45 days after the end of each of the Borrower's first three fiscal quarters, a copy of the Borrower's Form 10-Q filed with the Securities Exchange Commission and the Borrower's consolidating balance sheet and income statement (c) Concurrently with the delivery of the financial reports required hereunder, a compliance certificate in substantially the form attached hereto as Exhibit "A", showing the calculations which would demonstrate compliance with all of the financial covenants contained herein. (d) Promptly upon the Bank's request, such other information pertaining to the Borrower, the Collateral or any guarantor hereunder as the Bank may reasonably request. 6.07 Payment of Dividends: Not declare or pay any dividends on any class of stock now or hereafter outstanding except (i) dividends payable solely in the Borrower's capital stock, or (ii) dividends approved by Bank. 6.08 Redemption or Repurchase of Stock: Not redeem or repurchase in excess of 5% per year any class of the Borrower's stock now or hereafter outstanding without prior written Bank approval. 6.09 Additional Indebtedness: Not, after the date hereof, create, incur or assume, directly or indirectly, any additional Indebtedness other than (i) indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade creditors incurred in the ordinary course of the Borrower's business or (iii) Permitted Indebtedness. 6.10 Loans: Not make any loans or advances or extend credit to any third person, including, but not limited to, directors, officers, shareholders, partners, employees, affiliated entities and subsidiaries of the Borrower, except for (i) credit extended in the ordinary course of the Borrower's business as presently conducted and (ii) Permitted Investments. 6.11 Liens and Encumbrances: Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust, or other lien (including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, or execute or allow to be filed any financing statement or continuation thereof affecting any of such properties, except for Permitted Liens or as otherwise provided in this Agreement. 6.12 Transfer Assets: Except for an amount not exceeding in the aggregate $100,000 in any fiscal year, not, after the date hereof, sell, contract for sale, convey, transfer, assign, lease or sublet, any of its assets (including, but not limited to, the Collateral) except in the ordinary course of business as presently conducted by the Borrower and, then, only for fair and reasonable consideration and (i) sales of inventory in the ordinary course of business, (ii) transfer of assets in the ordinary course of business that have become worn out or obsolete or that are promptly being replaced, (iii) transfers of non-exclusive licenses and similar arrangements for the use of property of Borrower made in the ordinary course of business, and (iv) transfers which constitute liquidation of permitted investments. -10- 6.13 Change in Nature of Business: Not make any material change in its financial structure or the nature of its business as existing or conducted as of the date hereof. 6.14 Financial Condition: Maintain at all times: (a) A minimum Effective Tangible Net Worth of at least $31,000,000 plus 50% of net profit after taxes at the end of each fiscal quarter. (b) A ratio of Debt to Effective Tangible Net Worth of not more than 1.5 to 1. (c) A minimum working capital (defined as current assets minus current liabilities) of not less than $5,000,000. (d) A ratio of the sum of cash, cash equivalents and accounts receivable to current liabilities of not less than .65 to 1.0 (e) A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter for the immediately preceding two (2) fiscal quarters. (f): Maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization expense to the sum of (i) interest expense and (ii) the current portion of long term Debt of not less than 2.00:1.00 at the end of each fiscal quarter for the immediately preceding 4 fiscal quarters.. 6.15 Compensation of Employees: Compensate its employees for services rendered at an hourly rate at least equal to the minimum hourly rate prescribed by any applicable federal or state law or regulation. 6.16 Capital Expense: Not make any fixed capital expenditure, including, but not limited to, incurring liability for leases which would be, in accordance with generally accepted accounting principles, reported as capital leases, or purchase any real or personal property in an aggregate amount exceeding $15,000,000 in any one fiscal year, exclusive of acquisition financing, provided, however, that Borrower may make capital expenditures in connection with acquisitions in an amount up to $3,000,000 in any one fiscal year without the Bank's approval. 6.17 Notice: Give the Bank prompt written notice of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and in which the claim or liability exceeds $500,000 or which affects the Collateral; and (iii) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower. 6.18 Environmental Compliance. The Borrower shall: (a) Implement and comply in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or to environmental conditions. (b) Not own, use, generate, manufacture, store, handle, treat, release or dispose of any hazardous or toxic wastes, substances or materials, except in material compliance with all applicable federal, state and local laws, ordinances, statutes and regulations. (c) Give prompt written notice of any discovery of or suit, proceeding, claim, dispute, or filing respecting hazardous or toxic wastes, substances or related materials. (d) At all times indemnify and hold harmless Bank from and against any and all liability arising out of Borrower's use, generation, manufacture, storage, handling, treatment, or disposal by Borrower of hazardous or toxic wastes, substances or materials at the site. -11- SECTION 7 EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default (an "Event of Default") under this Agreement: 7.01 Non-Payment: The Borrower shall fail to pay any Obligations within 10 days of when due. 7.02 Performance Under This and Other Agreements: The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Borrower (whether such indebtedness is owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other instrument, document or agreement, which failure shall constitute and be an Event of Default if not paid within 10 days of when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default. 7.03 Representations and Warranties; Financial Statements: Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 7.04 Insolvency: The Borrower or any guarantor shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties and assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee, for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or substantial part of its properties, assets or businesses and shall not be discharged within 60 days after the date of such appointment. 7.05 Execution: Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 60 days after the issuance or attachment of such writ or lien. 7.06 Suspension: The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 7.07 Change in Ownership: There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 25% of the issued and outstanding capital stock of the Borrower, if a corporation, or there shall occur a change in any general partner or a change affecting the control of the Borrower, if a partnership. SECTION 8 REMEDIES ON DEFAULT Upon the occurrence of any Event of Default, the Bank may, at its sole and absolute election, without demand and only upon such notice as may be required by law: 8.1 Acceleration: Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 8.2 Cease Extending Credit: Cease making Advances or otherwise extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 8.3 Termination: Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank or the Bank's rights and remedies under this Agreement or under any other document, instrument or agreement. 8.04 Protection of Security Interest: Make such payments and do such acts as the Bank, in its sole judgment, considers necessary and reasonable to protect its security interest or lien in the Collateral. The Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgment, deems to be prior or superior -12- to its security interest. Further, the Borrower hereby agrees to pay to the Bank, upon demand therefor, all reasonable expenses and expenditures (including reasonable attorneys' fees) incurred in connection with the foregoing. Notwithstanding the foregoing, Bank shall be responsible for its own gross negligence or willful misconduct. 8.05 Foreclosure: Enforce any security interest or lien given or provided for under this Agreement or under any security agreement, mortgage, deed of trust or other document, in such manner and such order, as to all or any part of the properties subject to such security interest or lien, as the Bank, in its sole judgment, deems to be necessary or appropriate and the Borrower hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest or lien, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Borrower's records pertaining thereto, or the Bank may require the Borrower to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of the sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgment to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of the Borrower to the Bank and shall be paid by the Borrower to the Bank within five (5) business days of written notice. 8.6 Non-Exclusivity of Remedies: Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. 8.07 Application of Proceeds: All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation of the Bank's lien in the Collateral, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, liquidating, selling or disposing of the Collateral; next, to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligations; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Borrower. SECTION 9 MISCELLANEOUS 9.01 Amounts Payable on Demand: If the Borrower shall fail to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower having so failed to pay such amount, create an Advance under the Line of Credit in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under the Line of Credit. 9.02 Default Interest Rate: The Borrower shall pay the Bank interest on any indebtedness or amount payable under this Agreement, from the date that such indebtedness or amount became due or was demanded to be due until paid in full, at a rate which is 3% in excess of the rate otherwise provided under this Agreement. 9.03 Disposal of Invoices: All documents, schedules, invoices or other papers received by the Bank from the Borrower may be destroyed or disposed of 6 months after receipt by the Bank, unless the Borrower requests in writing the return thereof, which shall be done at the Borrower's expense. 9.04 Dispute Resolution. It is understood and agreed that upon the request of any party to this agreement any dispute, claim, or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (1) this Agreement, or any related agreements, documents, or instruments, (2) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (3) any incidents, omissions, acts, practices, or occurrences causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (4) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by Judicial Arbitration & Mediation Services, Inc. ("J-A-M-S") as follows: -13- (a) Step I - Mediation: At the request of any party to the dispute, claim or controversy of the matter shall be referred to the nearest office of J-A-M-S for mediation, that is, an informal, non-binding conference or conferences between the parties in which a retired judge or justice for the J-A-M-S panel will seek to guide the parties to a resolution of the case. (b) Step II - Unsecured Contracts - Arbitration: Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase then all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in San Jose County and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys fees and costs. This subparagraph (b) shall apply only if, at the time of the submission of the matter to J-A-M-S, the dispute(s) or issue(s) do(es) not arise out of a transaction(s) which is/are secured by real property collateral or, if so secured, all parties consent to such submission. As soon as practicable after selection of the arbitrator, the arbitrator or his/her designated representative shall determine a reasonable estimate of anticipated fees and costs of the Arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter each party shall, within 10 days of receipt of said statement, deposit said sum with the Arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. (c) Step II - Contracts Secured By Real Estate - Trial by Court Reference [ss.638 (1)] Code of Civil Procedure): If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration as provided by subparagraph (b) and has not been resolved by Step I mediation, them any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of J-A-M-S appointed pursuant to the provisions of California Code of Civil Procedure ss.638(1) or any amendment, addition or successor section thereto to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If this parties are unable to agree upon a member of the J-A-M-S panel to act as referee then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the cause(s) of action which is(are) the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. (d) Provisional Remedies, Self Help and Foreclosure: No provision of, or the exercise of any right(s) under subparagraph (b), nor any other provision of this Dispute Resolution Provision, shall limit the right of any party to exercise self help remedies such as set off, to foreclose against any real or personal property collateral, or obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from any court having jurisdiction before, during or after the pendency of any arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional remedies pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration. 9.05 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. -14- 9.06 Reliance: Each warranty, representation, covenant, obligation and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants and agreements which the Borrower now or hereafter shall give, or cause to be given, to the Bank. 9.07 Attorneys' Fees: Borrower shall pay to the Bank all costs and expenses, including but not limited to reasonable attorneys fees, incurred by Bank in connection with the administration, enforcement, or any refinancing or restructuring in the nature of a "work-out", of this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder. 9.08 Notices: All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party hereto, shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed as set forth below or to such other address as may be specified from time to time in writing by either party to the other. To the Borrower To the Bank: ELEXSYS INTERNATIONAL, INC. SANWA BANK CALIFORNIA 4405 Fortran Court San Jose CBC San Jose, CA 95134 220 Almaden Blvd. San Jose, CA 95113 Attn: Robert DeLaurentis Attn: Jillian E. Mathur Title: C.F.O. Vice President with a copy to: With a copy to: COOLEY GODWARD LLP SANWA BANK CALIFORNIA Five Palo Alto Square Asset Based Financing Department 3000 El Camino Real Palo Alto, CA 94306-2155 444 Market Street, 22nd Floor San Francisco, CA 94111 Attn: Bill Veatch 9.09 Waiver: Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any other document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder, or under any other document, instrument or agreement mentioned herein, constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. 9.10 Conflicting Provisions: To the extent the provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 9.11 Binding Effect; Assignment: This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may sell, assign or grant participation in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower and any guarantor. 9.12 Jurisdiction: This Agreement, any notes issued hereunder, the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 9.13 Headings: The headings herein set forth are solely for the purpose of identification and have no legal significance. -15- 9.14 Entire Agreement: This Agreement and all documents, instruments and agreements mentioned herein constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties pertaining to the transactions contemplated hereunder not incorporated or referenced in this Agreement or in such documents, instruments and agreements are superseded hereby. 9.1 Confidentiality Agreement. In handling any confidential information Bank, and all employees and agents of Bank, including but not limited to accountants, shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower; (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order; (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first hereinabove written. Borrower Bank: SANWA BANK CALIFORNIA ELEXSYS INTERNATIONAL, INC. BY:________________________________ BY:________________________________ Name: Robert DeLaurentis Name: Jillian E. Mathur Title: C.F.O. Title: Vice President -16- EX-10.53 5 EXHIBIT 10.53 EXHIBIT 10.53 AMENDED AND RESTATED TERM LOAN CREDIT AGREEMENT This Term Loan Credit Agreement (the "Agreement") is made and entered into this ___________________ day of May, 1997, by and between SANWA BANK CALIFORNIA (the "Bank") and ELEXSYS INTERNATIONAL, INC. (the "Borrower") , on the terms and conditions that follow: Whereas Bank and Borrower entered into a Term Loan Credit Agreement dated as of January 27, 1997, (the "Prior Agreement"); and Whereas, Bank and Borrower wish to amend and restate the Prior Agreement. Now, therefore, the parties hereto agree as follows: SECTION I DEFINITIONS 1.01 Certain Defined Terms: Unless elsewhere defined in this Agreement, the following terms shall have the following meanings (such meanings to be generally applicable to the singular and plural forms of the terms defined): (a) "Business Day": shall mean a day, other than a Saturday or Sunday, on which commercial banks are open for business in California. (b) "Collateral": shall mean the property described in Section 3.01. (c) "Debt": shall mean all liabilities of the Borrower less Subordinated Debt. (d) "Effective Tangible Net Worth": shall mean the Borrower's stated net worth plus Subordinated Debt less all intangible assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items). (e) "ERISA": shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. (f) "Event of Default": shall have the meaning set forth in Section 7. (g) "Indebtedness": shall mean, with respect to the Borrower, (i) all indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss and (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles, reported as capital leases in respect of which the Borrower is liable, contingently or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss. (h) "Obligations": shall mean all amounts owing by the Borrower to the Bank pursuant to this Agreement including, but not limited to, the unpaid principal amount of the Term Loan, as hereinafter defined. (i) "Permitted Indebtedness": shall mean (i) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the date hereof and disclosed in writing to the Bank; (iii) Subordinated Debt; (iv) Indebtedness to trade creditors, including, without limitation, affiliates of Borrower, incurred in the ordinary course of business; (v) Other Indebtedness of Borrower not exceeding $1,000,000.00 in the aggregate outstanding at any time; (vi) Contingent obligations of Borrowing consisting of guarantees (and other credit support) of the obligations of Accounts Receivable Credit Agreement - Page 1 vendors and suppliers of Borrower in respect of transactions entered into in the ordinary course of business; (vii) Indebtedness with respect to capital lease obligations and purchase money indebtedness incurred in connection with the acquisition of assets secured by Permitted Liens; (viii) Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness. (j) "Permitted Investment": shall mean (i) investments existing on the date hereof and disclosed in writing to the Bank; (ii) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof; (iii)commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (iv) investments consisting of deposits maturing no more than one (1) year from the date of investment therein issued by Bank; (v) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (vi) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (vii) investments, including debt obligations, received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (viii) investments consisting of compensation of employees, officers and directors of Borrower so long as the Board of Directors of Borrower determines that such compensation is in the best interest of Borrower, and travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business; (ix) other investments aggregating not in excess of $250,000.00 at any time. (k) "Permitted Liens": shall mean: (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith; (iii) liens of materialmen, mechanics, warehousemen, or carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure Indebtedness outstanding on the date hereof or permitted to be incurred under Section 6.09 hereof; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets; liens securing capital lease obligations on assets subject to such capital leases; (vii) liens arising from judgments, decrees or attachments to the extent and only so long as such judgment, decree or attachment has not caused or resulted in an Event of Default, (viii) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar liens affecting real property not interfering in any material respect with the ordinary conduct of the business of Borrower, (ix) liens in favor of customs and revenue authorities arising as a mater of law to secure payment of customs duties in connection with the importation of goods, (x) liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institutions; (xi) liens not otherwise permitted which liens do not in the aggregate exceed $250,000.00 at any time. (l) "Reference Rate": shall mean an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate. (m) "Subordinated Debt": shall mean such liabilities of the Borrower which have been subordinated to those owed to the Bank in a manner acceptable to the Bank including, but not limited to, that certain Indenture dated as of February 15, 1987 between Borrower and Manufacturers Hanover Trust Company, as trustee, with respect to the 5 1/2% Convertible Subordinated Debentures due March 1, 2012. (n) "Term Loan": shall mean the credit facility described in Section 2. 1.02 Accounting Terms: All references to financial statements, assets, liabilities, and similar accounting items not specifically defined herein shall mean such financial statements or such items prepared or determined in accordance with generally accepted accounting principles consistently applied and, except where otherwise specified, all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 1.03 Other Terms: Other terms not otherwise defined shall have the meanings attributed to such terms in the California Uniform Commercial Code. Accounts Receivable Credit Agreement - Page 2 SECTION 2 THE TERM LOAN 2.01 Term Loan. The Bank agrees to lend to the Borrower, upon the Borrower's request therefor made prior to December 31, 1998, the lesser of 80% of the appraised liquidation value of the Borrower's fixed assets or 7,000,000.00 (the "Term Loan"). A. Purpose. Proceeds under the Term Loan shall be used for business acquisitions. B. Interest. Interest shall accrue on the outstanding principal balance of the Term Loan (the "Term Balance") at one of the following rates, as quoted by the Bank and as elected by the Borrower: 1. Variable Rate Balance: A variable rate per annum equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by Bank at, below or above such reference rate ("Reference Rate") plus 1.00% per annum. (the "Variable Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. A Term Balance based upon the Variable Rate is hereinafter referred to as a "Variable Rate Balance". 2. Cost of Funds Balance: At the Borrower's election, at a fixed rate for such period of time that the Bank may quote and offer, provided that any such period of time shall be for at least 30 days and shall not extend beyond the maturity date (the "Cost of Funds Interest Period") for the Term Balance. Such interest rate shall be a percentage approximately equivalent to three percent (3.00 %) per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount equal to the amount of the Term Balance and for a period of time approximately equal to the relevant Interest Period (the "Cost of Funds Rate" or the "Fixed Rate"). Term Balances based upon the Cost of Funds or Fixed Rate are hereinafter referred to as "Cost of Funds Balances" or "Fixed Rate Balances". Interest shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. The Borrower hereby promises and agrees to pay the Bank interest monthly, commencing on May 31, 1997 and continuing on the last day of each month thereafter to and including January 31, 2001. If interest is not paid as and when it is due it shall be added to and become and be treated as part of principal, and the amount of such unpaid interest shall bear interest, until paid in full, at the then applicable interest rate. (a) Notice of Election to Adjust Interest Rate. Upon telephonic notice which shall be received by the Bank at or before 11:00 a.m. (California time) on a business day, the Borrower may elect: (1) That interest on a Variable Rate Balance shall be adjusted to accrue at the Fixed Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests that interest be adjusted to accrue at the Fixed Rate. (2) That interest on a Fixed Rate Balance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Variable Rate; provided, however that such notice shall be received by the Bank no later than two business days prior to the last day of the Interest Period pertaining to such Fixed Rate Balance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Balance shall continue to accrue at the Fixed Rate, the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate upon the expiration of the Interest Period pertaining to such Term Balance. (b) Prohibition Against Prepayment of Fixed Rate Balances. Notwithstanding anything to the contrary in the Agreement, no prepayment shall be made on any Fixed Rate Balance except on a day which is the last day of the Interest Period pertaining thereto. If the whole or any part of any Fixed Rate Balance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) sustained by the Bank as a consequence of such prepayment. Borrower shall not be obligated to pay to or reimburse Bank for any reimbursable Accounts Receivable Credit Agreement - Page 3 amounts which arose or were incurred during or are otherwise attributable to any period of time more than 180 days prior to the date on which Bank delivered its written statement for indemnification or reimbursement of such reimbursable amounts. (c) Conversion from Fixed Rate to Variable Rate. In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Term Balance and for a period of time approximately equal to the relevant Interest Period; or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event any Fixed Rate Term Balance shall be deemed to be a Variable Rate Term Balance and interest shall thereupon immediately accrue at the Variable Rate. Interest on any Term Balance shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. C. Principal. The Borrower hereby promises and agrees to pay principal in 36 equal installments commencing on January 31, 1998, and continuing on the last day of each month thereafter up to and including December 31, 2000. On January 31, 2001, the Borrower hereby promises and agrees to pay to the Bank the entire unpaid principal balance, together with accrued and unpaid interest. Each payment received by the Bank shall, at the Bank's option, be applied to pay interest then due and unpaid and the remainder thereof (if any) shall be applied to pay principal. D. Term Loan Account. (a) The Bank shall maintain on its books a record of account in which the Bank shall make entries for each drawing under the Term Loan and such other debits and credits as shall be appropriate in connection with the Term Loan (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 60 days after the Borrower's receipt of any such statement which it deems to be incorrect, or unless there is a manifest error. (b) The Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under the Term Loan is not made when due, to charge, from time to time, against any or all of the Borrower's deposit accounts with the Bank any amount so due. E. Late Payment: If any payment of principal (other than a principal payment due on January 31, 2001) or interest, or any portion thereof, under this Agreement is not paid within ten (10) calendar days after it is due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. 1.03 Disbursement of Proceeds from Loan. Any loan made hereunder shall be conclusively presumed to have been made to and for the Borrower's benefit when the proceeds of such loan are disbursed in accordance with the Borrower's instructions or deposited into a checking account of the Borrower maintained at the Bank. SECTION 3 COLLATERAL 3.01 The Collateral: To secure payment and performance of all the Borrower's Obligations under this Agreement and all other liabilities, loans, guarantees, covenants and duties owed by the Borrower to the Bank, whether or not evidenced by this or by any other agreement, absolute or contingent, due or to become due, now existing or hereafter and howsoever created, the Borrower hereby grants the Bank a security interest in and to all of the following property: (a) All goods now owned or hereafter acquired by the Borrower or in which the Borrower now has or may hereafter acquire any interest, including, but not limited to, all machinery, equipment, furniture, furnishings, fixtures, tools, supplies and motor vehicles of every kind and description, and all additions, accessions, improvements, replacements and substitutions thereto and thereof. Accounts Receivable Credit Agreement - Page 4 (b) Bank agrees to release its security interest in any equipment, fixtures, leasehold improvements, or other property if within ninety (90) days after Borrower acquires title to such property, Borrower finances such property pursuant to either (i) a sale and leaseback transaction or (ii) a debt financing transaction in an amount not to exceed the purchase price of, and secured by a security interest in such property. (c) All inventory now owned or hereafter acquired by the Borrower, including, but not limited to, all raw materials, work in process, finished goods, merchandise, parts and supplies of every kind and description, including inventory temporarily out of the Borrower's custody or possession, together with all returns on accounts. (d) All accounts, contract rights and general intangibles now owned or hereafter created or acquired by the Borrower, including, but not limited to, all receivables, goodwill, trademarks, trade styles, trade names, patents, patent applications, software, customer lists and business records. (e) All documents, instruments and chattel paper now owned or hereafter acquired by the Borrower. (f) All monies, deposit accounts, certificates of deposit and securities of the Borrower now or hereafter in the Bank's or its agents' possession. The Bank's security interest in the Collateral shall be a continuing lien and shall include the proceeds and products of the Collateral including, but not limited to, the proceeds of any insurance thereon. SECTION 4 CONDITIONS OF LENDING 4.01 Conditions Precedent : The obligation of the Bank to make the first extension of credit to or on account of the Borrower hereunder is subject to the conditions precedent that the Bank shall have received before the date of such initial extension of credit all of the following, in form and substance satisfactory to the Bank: (a) Evidence that the execution, delivery and performance by the Borrower of this Agreement and any document, instrument or agreement required hereunder have been duly authorized. (b) Except as disclosed in writing to Bank, the representations contained herein and in any other document, instrument or certificate delivered to the Bank hereunder are correct. (c) No event has occurred and is continuing which constitutes, or, with the lapse of time or giving of notice or both, would constitute an Event of Default. (d) Such other evidence as the Bank may request to establish the consummation of the transaction contemplated hereunder and compliance with the conditions of this Agreement. SECTION 5 REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank as of the date of this Agreement. 5.01 Status: The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware and is properly licensed and is qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business and where failure to so qualify would have a material adverse effect. 5.02 Authority: The execution, delivery and performance by the Borrower of this Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having application to the Borrower; (ii) result in a breach of or constitute a default under any material indenture or loan or credit agreement or other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (iii) require any consent or approval of its stockholders or violate any provision of its certificate of incorporation. Accounts Receivable Credit Agreement - Page 5 5.03 Legal Effect: This Agreement constitutes, and any instrument, document or agreement required hereunder when delivered hereunder will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5.04 Fictitious Trade Styles: There are no fictitious trade styles used by the Borrower in connection with its business operations. The Borrower shall notify the Bank within 30 days of effecting any change in the matters described hereinor prior to using any other fictitious trade style at any future date, indicating the trade style and state(s) of its use. 5.05 Financial Statements: All financial statements, information and other data which may have been or which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the financial condition or, as applicable, the other information disclosed therein. Since the most recent submission of such financial information or data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 5.06 Litigation: Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties in excess of $500,000 before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition or operations or on the Collateral. 5.07 Title to Assets: The Borrower has good and marketable title to all of its assets (including, but not limited to, the Collateral) and the same are not subject to any security interest, encumbrance, lien or claim of any third person except for Permitted Liens. 5.08 ERISA: If the Borrower has a pension, profit sharing or retirement plan subject to ERISA, such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 5.09 Taxes: The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than such taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. 5.10 Environmental Compliance: The Borrower has implemented and complied in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or environmental conditions. There are no suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or its property claiming violations of any federal, state or local law, ordinance, statute or regulation relating to hazardous or toxic wastes, substances or related materials. SECTION 6 COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower will, unless the Bank shall otherwise consent in writing: 6.01 Preservation of Existence; Compliance with Applicable Laws: Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization; notwithstanding the foregoing Borrower may liquidate or dissolve, or enter into any consolidation, merger, partnership, joint venture or other combination, acquire any other business organization, or acquire all or substantially all of the assets of any other person (collectively, an "Acquisition"), so long as Borrower is in compliance with the covenants contained in Section 6.14 immediately after such Acquisition; and conduct its business and operations in accordance with all applicable laws, rules and regulations. 6.02 Maintenance of Insurance: Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. All such insurance shall be in form and amount and with companies satisfactory to the Bank. With respect to insurance covering properties in which the Bank maintains a security interest or lien, such insurance shall name the Bank as loss payee pursuant to a loss payable endorsement satisfactory to the Bank and shall not be altered Accounts Receivable Credit Agreement - Page 6 or canceled except upon 10 days' prior written notice to the Bank. Upon the Bank's request, the Borrower shall furnish the Bank with the original policy or binder of all such insurance. 6.03 Maintenance of Collateral and Other Properties: Except for Permitted Liens, keep and maintain the Collateral free and clear of all levies, liens, encumbrances and security interests (including, but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest; comply with all laws, statutes and regulations pertaining to the Collateral and its use and operation; execute, file and record such statements, notices and agreements, take such actions and obtain such certificates and other documents as necessary to perfect, evidence and continue the Bank's security interest in the Collateral and the priority thereof; maintain accurate and complete records of the Collateral which show all sales, claims and allowances; and properly care for, house, store and maintain the Collateral in good condition, free of misuse, abuse and deterioration, other than normal wear and tear. The Borrower shall also maintain and preserve all its properties in good working order and condition in accordance with the general practice of other businesses of similar character and size, ordinary wear and tear excepted. 6.04 Payment of Obligations and Taxes: Make timely payment of all assessments and taxes and all of its liabilities and obligations including, but not limited to, trade payables, unless the same are being contested in good faith by appropriate proceedings with the appropriate court or regulatory agency. For purposes hereof, the Borrower's issuance of a check, draft or similar instrument without delivery to the intended payee shall not constitute payment. 6.05 Inspection Rights: At any reasonable time and from time to time, permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower shall maintain any records (including, but not limited to, computer generated records or computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records which it may request, at the Borrower's expense, limited to $20,000 or at Bank's expense, the amount of which shall be payable within five (5) days of written notice. In addition, the Bank may, at any reasonable time and from time to time, conduct inspections and audits of the Collateral and the Borrower's accounts payable, the cost and expenses of which shall be paid by the Borrower to the Bank upon five (5) days prior written notice. 6.06 Reporting and Certification Requirements: Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: (a) Not later than 90 days after the end of each of the Borrower's fiscal years, a copy of (i) the annual audited financial report of the Borrower for such year prepared by a firm of certified public accountants reasonably acceptable to Bank, and (ii) the Borrower's Form 10-K filed with the Securities Exchange Commission and (iii) the Borrower's consolidating balance sheet and income statement for such year; and, not later than 60 days after the end of each of the Borrower's fiscal years, a copy of the Borrower's projected balance sheet and income statement for the fiscal year then in effect. (b) Not later than 45 days after the end of each of the Borrower's first three fiscal quarters, a copy of the Borrower's Form 10-Q filed with the Securities Exchange Commission and the Borrower's consolidating balance sheet and income statement (c) Concurrently with the delivery of the financial reports required hereunder, a compliance certificate in substantially the form attached hereto as Exhibit "A", showing the calculations which would demonstrate compliance with all of the financial covenants contained herein. (d) Promptly upon the Bank's request, such other information pertaining to the Borrower, the Collateral or any guarantor hereunder as the Bank may reasonably request. 6.07 Payment of Dividends: Not declare or pay any dividends on any class of stock now or hereafter outstanding except (i) dividends payable solely in the Borrower's capital stock, or (ii) dividends approved by Bank. 6.08 Redemption or Repurchase of Stock: Not redeem or repurchase in excess of 5% per year any class of the Borrower's stock now or hereafter outstanding without prior written Bank approval. 6.09 Additional Indebtedness: Not, after the date hereof, create, incur or assume, directly or indirectly, any additional Indebtedness other than (i) indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade creditors incurred in the ordinary course of the Borrower's business or (iii) Permitted Indebtedness. Accounts Receivable Credit Agreement - Page 7 6.10 Loans: Not make any loans or advances or extend credit to any third person, including, but not limited to, directors, officers, shareholders, partners, employees, affiliated entities and subsidiaries of the Borrower, except for (i) credit extended in the ordinary course of the Borrower's business as presently conducted and (ii) Permitted Investments. 6.11 Liens and Encumbrances: Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust, or other lien (including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, or execute or allow to be filed any financing statement or continuation thereof affecting any of such properties, except for Permitted Liens or as otherwise provided in this Agreement. 6.12 Transfer Assets: Except for an amount not exceeding in the aggregate $100,000 in any fiscal year, not, after the date hereof, sell, contract for sale, convey, transfer, assign, lease or sublet, any of its assets (including, but not limited to, the Collateral) except in the ordinary course of business as presently conducted by the Borrower and, then, only for fair and reasonable consideration and (i) sales of inventory in the ordinary course of business, (ii) transfer of assets in the ordinary course of business that have become worn out or obsolete or that are promptly being replaced, (iii) transfers of non-exclusive licenses and similar arrangements for the use of property of Borrower made in the ordinary course of business, and (iv) transfers which constitute liquidation of permitted investments. 6.13 Change in Nature of Business: Not make any material change in its financial structure or the nature of its business as existing or conducted as of the date hereof. 6.14 Financial Condition: Maintain at all times: (a) A minimum Effective Tangible Net Worth of at least $31,000,000 plus 50% of net profit after taxes at the end of each fiscal quarter. (b) A ratio of Debt to Effective Tangible Net Worth of not more than 1.5 to 1. (c) A minimum working capital (defined as current assets minus current liabilities) of not less than $5,000,000. (d) A ratio of the sum of cash, cash equivalents and accounts receivable to current liabilities of not less than .65 to 1.0. (e) A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter for the immediately preceding two (2) fiscal quarters. (f): Maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization expense to the sum of (i) interest expense and (ii) the current portion of long term Debt of not less than 2.00:1.00 at the end of each fiscal quarter for the immediately preceding 4 fiscal quarters.. 6.15 Compensation of Employees: Compensate its employees for services rendered at an hourly rate at least equal to the minimum hourly rate prescribed by any applicable federal or state law or regulation. 6.16 Capital Expense: Not make any fixed capital expenditure, including, but not limited to, incurring liability for leases which would be, in accordance with generally accepted accounting principles, reported as capital leases, or purchase any real or personal property in an aggregate amount exceeding $15,000,000 in any one fiscal year, exclusive of acquisition financing, provided, however, that Borrower may make capital expenditures in connection with acquisitions in an amount up to $3,000,000 in any one fiscal year without the Bank's approval. 6.17 Notice: Give the Bank prompt written notice of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and in which the claim or liability exceeds $500,000 or which affects the Collateral; and (iii) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower. 6.18 Environmental Compliance. The Borrower shall: Accounts Receivable Credit Agreement - Page 8 (a) Implement and comply in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or to environmental conditions. (b) Not own, use, generate, manufacture, store, handle, treat, release or dispose of any hazardous or toxic wastes, substances or materials, except in material compliance with all applicable federal, state and local laws, ordinances, statutes and regulations. (c) Give prompt written notice of any discovery of or suit, proceeding, claim, dispute, or filing respecting hazardous or toxic wastes, substances or related materials. (d) At all times indemnify and hold harmless Bank from and against any and all liability arising out of Borrower's use, generation, manufacture, storage, handling, treatment, or disposal by Borrower of hazardous or toxic wastes, substances or materials at the site. SECTION 7 EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default (an "Event of Default") under this Agreement: 7.01 Non-Payment: The Borrower shall fail to pay any Obligations within 10 days of when due. 7.02 Performance Under This and Other Agreements: The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Borrower (whether such indebtedness is owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other instrument, document or agreement, which failure shall constitute and be an Event of Default if not paid within 10 days of when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default. 7.03 Representations and Warranties; Financial Statements: Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 7.04 Insolvency: The Borrower or any guarantor shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties and assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee, for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or substantial part of its properties, assets or businesses and shall not be discharged within 60 days after the date of such appointment. 7.05 Execution: Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 60 days after the issuance or attachment of such writ or lien. 7.06 Suspension: The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 7.07 Change in Ownership: There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 25% of the issued and outstanding capital stock of the Borrower, if a corporation, or there shall occur a change in any general partner or a change affecting the control of the Borrower, if a partnership. SECTION 8 REMEDIES ON DEFAULT Accounts Receivable Credit Agreement - Page 9 Upon the occurrence and during the continuance of any Event of Default, the Bank may, at its sole and absolute election, without demand and with prompt subsequent notice to Borrower: 8.01 Acceleration: Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 8.02 Cease Extending Credit: Cease extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 8.03 Termination: Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank, the Bank's obligations to the Borrower, or the Bank's or Borrower's rights and remedies under this Agreement or under any other document, instrument or agreement. 8.04 Protection of Security Interest: Make such payments and do such acts as the Bank, in its sole judgment, considers necessary and reasonable to protect its security interest or lien in the Collateral. The Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgment, deems to be prior or superior to its security interest. Further, the Borrower hereby agrees to pay to the Bank, upon demand therefor, all reasonable expenses and expenditures (including reasonable attorneys' fees) incurred in connection with the foregoing. Notwithstanding the foregoing, Bank shall be responsible for its own gross negligence or willful misconduct. 8.05 Foreclosure: Enforce any security interest or lien given or provided for under this Agreement or under any security agreement, mortgage, deed of trust or other document, in such manner and such order, as to all or any part of the properties subject to such security interest or lien, as the Bank, in its sole judgment, deems to be necessary or appropriate and the Borrower hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest or lien, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Borrower's records pertaining thereto, or the Bank may require the Borrower to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of the sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgment to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of the Borrower to the Bank and shall be paid by the Borrower to the Bank within five (5) business days of written notice. 8.06 Non-Exclusivity of Remedies: Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. 8.07 Application of Proceeds: All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation of the Bank's lien in the Collateral, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, liquidating, selling or disposing of the Collateral; next, to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligations; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Borrower. SECTION 9 MISCELLANEOUS 9.01 Default Interest Rate: The Borrower shall pay the Bank interest on any indebtedness or amount payable under this Agreement, from the date that such indebtedness or amount became due or was demanded to be due until paid in full, at a rate which is 3% in excess of the rate otherwise provided under this Agreement. Accounts Receivable Credit Agreement - Page 10 9.02 Disposal of Invoices: All documents, schedules, invoices or other papers received by the Bank from the Borrower may be destroyed or disposed of 6 months after receipt by the Bank, unless the Borrower requests in writing the return thereof, which shall be done at the Borrower's expense. 9.03 Dispute Resolution. It is understood and agreed that upon the request of any party to this agreement any dispute, claim, or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (1) this Agreement, or any related agreements, documents, or instruments, (2) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (3) any incidents, omissions, acts, practices, or occurrences causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (4) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by Judicial Arbitration & Mediation Services, Inc. ("J-A-M-S") as follows: (a) Step I - Mediation: At the request of any party to the dispute, claim or controversy of the matter shall be referred to the nearest office of J-A-M-S for mediation, that is, an informal, non-binding conference or conferences between the parties in which a retired judge or justice for the J-A-M-S panel will seek to guide the parties to a resolution of the case. (b) Step II - Unsecured Contracts - Arbitration: Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase then all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in San Jose County and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys fees and costs. This subparagraph (b) shall apply only if, at the time of the submission of the matter to J-A-M-S, the dispute(s) or issue(s) do(es) not arise out of a transaction(s) which is/are secured by real property collateral or, if so secured, all parties consent to such submission. As soon as practicable after selection of the arbitrator, the arbitrator or his/her designated representative shall determine a reasonable estimate of anticipated fees and costs of the Arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter each party shall, within 10 days of receipt of said statement, deposit said sum with the Arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. (c) Step II - Contracts Secured By Real Estate - Trial by Court Reference [ss.638 (1)] Code of Civil Procedure): If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration as provided by subparagraph (b) and has not been resolved by Step I mediation, them any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of J-A-M-S appointed pursuant to the provisions of California Code of Civil Procedure ss.638(1) or any amendment, addition or successor section thereto to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If this parties are unable to agree upon a member of the J-A-M-S panel to act as referee then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the cause(s) of action which is(are) the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. (d) Provisional Remedies, Self Help and Foreclosure: No provision of, or the exercise of any right(s) under subparagraph (b), nor any other provision of this Dispute Resolution Provision, shall limit the right of any party to exercise self help remedies such as set off, to foreclose against any real or personal property collateral, or obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from any court having jurisdiction before, during or after the pendency of any arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an Accounts Receivable Credit Agreement - Page 11 action for provisional remedies pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration. 9.04 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 9.05 Reliance: Each warranty, representation, covenant, obligation and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants and agreements which the Borrower now or hereafter shall give, or cause to be given, to the Bank. 9.06 Attorneys' Fees: Borrower shall pay to the Bank all costs and expenses, including but not limited to reasonable attorneys fees, incurred by Bank in connection with the administration, enforcement, or any refinancing or restructuring in the nature of a "work-out", of this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder. 9.07 Notices: All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party hereto, shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed as set forth below or to such other address as may be specified from time to time in writing by either party to the other. To the Borrower To the Bank: ELEXSYS INTERNATIONAL, INC. SANWA BANK CALIFORNIA 4405 Fortran Court San Jose CBC San Jose, CA 95134 220 Almaden Blvd. San Jose, CA 95113 Attn: Robert DeLaurentis Attn: Jillian E. Mathur Title: C.F.O. Vice President with a copy to: With a copy to: COOLEY GODWARD LLP SANWA BANK CALIFORNIA Five Palo Alto Square Asset Based Financing Department 3000 El Camino Real Palo Alto, CA 94306-2155 444 Market Street, 22nd Floor San Francisco, CA 94111 Attn: Bill Veatch 9.08 Waiver: Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any other document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder, or under any other document, instrument or agreement mentioned herein, constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. Accounts Receivable Credit Agreement - Page 12 9.09 Conflicting Provisions: To the extent the provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 9.10 Binding Effect; Assignment: This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. The Bank may sell, assign or grant participation in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower and any guarantor. 9.11 Jurisdiction: This Agreement, any notes issued hereunder, the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 9.12 Headings: The headings herein set forth are solely for the purpose of identification and have no legal significance. 9.13 Entire Agreement: This Agreement and all documents, instruments and agreements mentioned herein constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties pertaining to the transactions contemplated hereunder not incorporated or referenced in this Agreement or in such documents, instruments and agreements are superseded hereby. 9.14 Confidentiality Agreement. In handling any confidential information Bank, and all employees and agents of Bank, including but not limited to accountants, shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower; (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order; (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. Accounts Receivable Credit Agreement - Page 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first hereinabove written. Borrower Bank: SANWA BANK CALIFORNIA ELEXSYS INTERNATIONAL, INC. BY:________________________________ BY:________________________________ Name: Robert DeLaurentis Name: Jillian E. Mathur Title: C.F.O. Title: Vice President EX-10.55 6 EXHIBIT 10.55 EXHIBIT 10.55 STOCKHOLDER AGREEMENT STOCKHOLDER AGREEMENT (the "Agreement") dated as of July 22, 1997, among Sanmina Corporation, a Delaware corporation ("Parent"), and the individual identified on Schedule A attached hereto (the "Stockholder"). WHEREAS Sanmina Corporation, SANM Acquisition Subsidiary, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and Elexsys International, Inc., a Delaware corporation (the "Company"), propose to enter into an Agreement and Plan of Merger dated as of the date hereof (as the same may be amended or supplemented, the "Merger Agreement"; capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement) providing for the merger of Sub with and into the Company (the "Merger"), upon the terms and subject to the conditions set forth in the Merger Agreement; and WHEREAS the Stockholder owns of record the number of shares of common stock, par value $1.00 per share, of the Company (the "Common Stock"), set forth opposite his name on Schedule A attached hereto; and WHEREAS, as a condition to its willingness to enter into the Merger Agreement, Parent has requested that the Stockholder enter into this Agreement; NOW, THEREFORE, to induce Parent to enter into, and in consideration of its entering into, the Merger Agreement, and in consideration of the promises and the representations, warranties and agreements contained herein, the parties agree as follows: 1. Definition. For purposes of this Agreement, "Subject Shares" shall mean all issued and outstanding shares of Common Stock of the Company owned of record or beneficially by the Stockholder as of the record date for persons entitled (a) to receive notice of, and to vote at, a meeting of the stockholders of the Company called for the purpose of voting on the matter referred to in Section 4(a), or (b) to take action by written consent of the stockholders of the Company with respect to the matter referred to in Section 4(a). Notwithstanding anything to the contrary contained in this Agreement, the "Subject Shares" shall not include, and the Stockholder shall not be deemed to be the beneficial owner of, any shares of Common Stock of the Company that the Stockholder may acquire upon the exercise of any stock option (unless such option has been exercised and such shares have been issued to the Stockholder and are held by the Stockholder as of such record date). 2. Representations and Warranties of the Stockholder. The Stockholder hereby represents and warrants to Parent as of the date hereof as follows: (a) Authority. The Stockholder has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Stockholder and constitutes a valid and binding obligation of the Stockholder enforceable against the Stockholder in accordance with its terms. Except for informational filings with the SEC, the execution and delivery of this Agreement by the Stockholder do not, and the consummation by the Stockholder of the transactions contemplated hereby and compliance by the Stockholder with the terms hereof will not, (i) conflict with, or result in any violation of, or default (with or without notice or lapse of time or both) under any trust agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, judgment, order, notice, decree, statute, law, ordinance, rule or regulation applicable to the Stockholder or to the Stockholder's property or assets, (ii) require any filing by the Stockholder on or before the Closing Date with, or require the Stockholder to obtain on or before the Closing Date, any permit, authorization, consent or approval of, any Federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic or foreign, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Stockholder or the Subject Shares. (b) The Shares. The Stockholder is the record and beneficial owner of, and has good and valid title to, the shares of Common Stock set forth opposite his name on Schedule A attached hereto, free and clear of any Liens whatsoever. The Stockholder does not own, of record or beneficially, any shares of capital stock of the Company other than the shares of Common Stock set forth opposite his name on Schedule A attached hereto. The Stockholder has the sole right to vote such shares, and none of such shares is subject to any voting trust or other agreement, arrangement or restriction with respect to the voting of such shares, except as contemplated by this Agreement. 3. Representations and Warranties of Parent. Parent hereby represents and warrants to the Stockholder that Parent has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by Parent and constitutes a valid and binding obligation of Parent enforceable against Parent in accordance with its terms. Except for informational filings with the SEC, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the terms hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time or both) under any provision of, the certificate of incorporation or bylaws of Parent, or any trust agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise, license, judgment, order, notice, decree, statute, law, ordinance, rule or regulation applicable to Parent or to Parent's property or assets. 4. Covenants of the Stockholder. Until the termination of this Agreement in accordance with Section 11, the Stockholder agrees as follows: (a) Subject to Section 5, at any meeting of stockholders of the Company called to vote upon the Merger and the Merger Agreement or at any adjournment thereof or in any other circumstances upon which a vote, consent or other approval (including by written consent) with respect to the Merger and the Merger Agreement is sought from the Company's stockholders in their capacities as such, the Stockholder shall, including by executing a written consent if requested by Parent, vote (or cause to be voted) the Subject Shares in favor of the Merger, and the adoption and approval by the Company of the Merger Agreement. (b) The Stockholder shall not (i) sell, transfer, pledge, assign or otherwise dispose of (including by gift) (collectively, "Transfer"), consent to any Transfer of, or enter into any contract, option or other arrangement (including any profit sharing arrangement) with respect to the Transfer of, any or all of the Subject Shares (or any interest therein) to any person other than pursuant to the terms of the Merger or (ii) enter into any voting arrangement, whether by proxy, voting agreement or otherwise, in connection with, directly or indirectly, any Takeover Proposal, and agrees not to commit or agree to take any of the foregoing actions; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Stockholder may, without the consent of Parent or any other person, transfer any or all of the Subject Shares (or any interest therein) to one or more members of the Stockholder's family, any trust for the benefit of the Stockholder or one or more members of the Stockholder's family or any entity controlled by the Stockholder so long as the transferee of such Subject Shares (or such interest therein) agrees to be bound by the applicable provisions of this Agreement. (c) The Stockholder shall not, nor shall he instruct any agent or any investment banker, attorney or other adviser or representative of the Stockholder to, directly or indirectly, (i) solicit, initiate or knowingly encourage the submission to the Company of, any Takeover Proposal or (ii) participate in any discussions or negotiations with any person (other than Parent and its affiliates, agents and representatives) regarding, or furnish to any such person any non-public information with respect to, or take any other action intended to facilitate the making of any inquiry or proposal that constitutes, or may reasonably be expected to lead to, any Takeover Proposal. (d) If, at the time the Merger Agreement is submitted for approval to the stockholders of the Company, the Stockholder is an "affiliate" of the Company for purposes of Rule 145 under the Securities Act or for purposes of qualifying the Merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations, the Stockholder shall deliver to Parent on or prior to the Closing Date a written agreement substantially in the form attached as Exhibit A to the Merger Agreement. 5. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Until the termination of this Agreement in accordance with Section 11, the Stockholder hereby irrevocably grants to, and appoints, Parent and Jure Sola and Randy W. Furr, in their respective capacities as officers of Parent, and any individual who shall hereafter succeed to any such office of Parent, and each of them individually, the Stockholder's proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of the Stockholder, to vote the Subject Shares, or grant a consent or approval in respect of the Subject Shares, in favor of approval of the Merger and the adoption and approval of the Merger Agreement. (b) The Stockholder represents that any proxies heretofore given in respect of the Subject Shares are not irrevocable, and that all such proxies are hereby revoked. (c) The Stockholder hereby affirms that the irrevocable proxy set forth in this Section 5 is given in connection with the execution of the Merger Agreement, and that such irrevocable proxy is given to secure the performance of the duties of the Stockholder under this Agreement. The Stockholder hereby further affirms that the irrevocable proxy is coupled with an interest and may under no circumstances be revoked. The Stockholder hereby ratifies and confirms all that such proxies and attorneys in fact may lawfully do or cause to be done by virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of Section 212(e) of the Delaware General Corporation Law. 6. Further Assurances. The Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as Parent may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. 7. Certain Events. The Stockholder agrees that this Agreement and the obligations hereunder shall attach to the Subject Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Subject Shares shall pass, whether by operation of law or otherwise, including such Stockholder's heirs, guardians, administrators or successors. In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the capital structure of the Company affecting the Company's Common Stock, or the acquisition of additional shares of Common Stock or other voting securities of the Company by the Stockholder, the number of Subject Shares shall be adjusted appropriately and this Agreement and the obligations hereunder shall attach to any additional shares of Common Stock or other voting securities of the Company issued to or acquired by the Stockholder. 8. Registration Rights. If the Stockholder determines in good faith after consultation with the Stockholder's counsel that any shares of common stock of Parent received by the Stockholder in connection with the Merger ("Merger Shares") may be deemed to be "restricted securities" under Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or are otherwise subject to any restriction on resale (other than restrictions imposed by Rule 145 promulgated under the Securities Act or restrictions imposed by Accounting Series Release 135), then, as soon as practicable after the Effective Time (and in any event within 30 days after the Effective Time), Parent, at its sole expense, shall (a) file a registration statement permitting the resale of the Merger Shares, (b) take all actions reasonably necessary to cause such registration statement to be declared effective, (c) maintain the effectiveness and availability of such registration statement until the first anniversary of the Effective Time, (d) use commercially reasonable efforts to register or qualify the Merger Shares under the Blue Sky laws of such jurisdictions as the Stockholder shall reasonably request, and maintain the effectiveness of such registrations and qualifications for as long as such registration statement remains effective, and (e) take such other actions as are reasonably necessary to enable the Stockholder to sell the Merger Shares without restriction. To the extent permitted by law, Parent shall indemnify and hold harmless the Stockholder against and from any costs, expenses (including reasonable attorneys' fees), settlement payments, claims, demands, judgments, fines, penalties, losses, damages and liabilities that arise out of or are related to any inaccuracy in, or omission with respect to, such registration statement. 9. Indemnification. Parent shall indemnify and hold harmless the Stockholder and the Stockholder's affiliates, agents, advisers and representatives (the "Indemnified Parties") against and from any costs, expenses (including reasonable attorneys' fees), settlement payments, claims, demands, judgments, fines, penalties, losses, damages and liabilities incurred in connection with any claim, suit, action or proceeding (whether asserted, commenced or arising before or after the Effective Time) that arises directly or indirectly from or relates directly or indirectly to (a) the execution, delivery or performance of this Agreement, or (b) any of the transactions contemplated by this Agreement. In the event any such claim, suit, action or proceeding is asserted or commenced against any Indemnified Party, (i) Parent shall advance and pay the reasonable fees and expenses of any counsel retained by such Indemnified Party in connection with such claim, suit, action or proceeding promptly after receipt of a request therefor from such Indemnified Party, and (ii) Parent shall cooperate with such Indemnified Party and such Indemnified Party's counsel in the defense of such claim, suit, action or proceeding. Parent agrees to pay all expenses, including attorneys' fees, that may be incurred by any of the Indemnified Parties in enforcing the indemnity and other obligations provided for in this Section 9. 10. Assignment. Except as otherwise provided in Section 4(b), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Stockholder, on the one hand, without the prior written consent of Parent nor by Parent, on the other hand, without the prior written consent of the Stockholder, except that Parent may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder (other than Parent's obligations under Sections 8 and 9) to any direct or indirect wholly owned subsidiary of Parent (provided that in the case of any assignment by Parent to any such subsidiary of Parent, Parent shall remain jointly and severally liable for the due and timely performance of any obligations so assigned) . Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective representatives, executors, administrators, estate, heirs, successors and assigns. 11. Termination. This Agreement (including the proxy referred to in Section 5) and all rights of Parent and all obligations of the Stockholder hereunder, shall terminate upon the first to occur of (i) the Effective Time or (ii) the date on which the Merger Agreement is terminated in accordance with its terms; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the rights of the Stockholder and the obligations of Parent pursuant to Sections 8 and 9, and the provisions contained in Sections 12, 13 and 15, shall survive any termination of this Agreement.. 12. General Provisions. (a) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto. (b) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to Parent in accordance with Section 8.2 of the Merger Agreement and to the Stockholder at his address set forth on Schedule A attached hereto (or at such other address for a party as shall be specified by like notice). (c) Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Wherever the words "include," "includes@ or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (d) Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be deemed to be one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart. (e) Entire Agreement; No Third-Party Beneficiaries. The Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto (and the other persons referred to in Section 9) any rights or remedies hereunder. (f) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. (g) No Limitations. Nothing in this Agreement shall, and nothing in this Agreement shall be deemed to, prevent the Stockholder from acting in accordance with his fiduciary duties as a director of the Company or otherwise limit the ability of the Stockholder to take any action in his capacity as a director or officer of the Company. (h) Voidability. If prior to the execution hereof, the Board of Directors of the Company shall not have duly and validly authorized and approved by all necessary corporate action, the Merger Agreement and the transactions contemplated thereby, so that by the execution and delivery hereof Parent or Sub would become, or could reasonably be expected to become an "interested stockholder" within the meaning of Section 203 of the DGCL, then this Agreement shall be void and unenforceable until such time as such authorization and approval shall have been duly and validly obtained. 13. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Delaware or in a Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit such party to the personal jurisdiction of any court of the United States located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the transactions contemplated hereby, (ii) agrees that such party will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that such party will not bring any action relating to this Agreement or the transactions contemplated hereby in any court other than a court of the United States located in the State of Delaware or a Delaware state court and (iv) waives any right to trial by jury with respect to any claim or proceeding related to or arising out of this Agreement or any of the transactions contemplated hereby. 14. Public Announcement. Except to the extent required by law or regulation, the Stockholder shall not issue any press release or other public statement with respect to the transactions contemplated by this Agreement and the Merger Agreement without the prior written consent of Parent. 15. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. IN WITNESS WHEREOF, Parent has caused this Agreement to be signed by its officer thereunto duly authorized and the Stockholder has signed this Agreement, all as of the date first written above. Parent, By:________________________________________ Name: Title: ___________________________________________ SCHEDULE A Number of Shares of Common Stock Name and Address of Stockholder Owned of Record - ---------------------------------------- ----------------------------------- EX-11.1 7 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 ELEXSYS INTERNATIONAL, INC. COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (In thousands of dollars, except per share amounts) Three Months Ended Nine Months Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 ------- ------- ------- ------- Net income $ 2,599 $ 1,964 $ 6,006 $ 6,203 ======= ======= ======= ======= Earnings per common share and common share equivalents: Primary $ 0.26 $ 0.20 $ 0.61 $ 0.65 Fully diluted $ 0.26 $ 0.20 $ 0.61 $ 0.65 ======= ======= ======= ======= Weighted average common and dilutive common equivalent shares outstanding: Primary Weighted average common shares outstanding 9,474 9,189 9,403 9,112 Common shares relating to stock options 528 430 441 436 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding: 10,002 9,619 9,844 9,548 ======= ======= ======= ======= Fully diluted Weighted average common shares outstanding: 9,474 9,189 9,403 9,112 Common shares relating to stock options 528 430 441 436 ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 10,002 9,619 9,844 9,548 ======= ======= ======= ======= Refer to Note 4 captioned "Earnings Per Share" of Notes to Consolidated Financial Statements in the Company's Form 10-Q for the quarterly period ended June 28, 1997 for additional discussion of earnings per share. EX-27 8 FDS FOR 10Q
5 0000727010 ELEXSYS INTERNATIONAL INC. 1000 9-MOS SEP-30-1997 JUN-28-1997 1063 0 25122 309 16737 44357 94696 62170 80926 25238 24154 0 0 9489 22045 80926 118802 118802 98362 98362 201 105 1596 6375 369 6006 0 0 0 6006 0.61 0.61
-----END PRIVACY-ENHANCED MESSAGE-----