-----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, UwRiGWDBDrx+F1Hs9UdoKk5jNv6vdcZKs7GOW3T3xeJodlRFQiR375F3183PAiHB QbHPqcOpZ2j79pRcjvbTQA== /in/edgar/work/0000950148-00-001414/0000950148-00-001414.txt : 20000713 0000950148-00-001414.hdr.sgml : 20000713 ACCESSION NUMBER: 0000950148-00-001414 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENSE PAC MICROSYSTEMS INC CENTRAL INDEX KEY: 0000784770 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 330033759 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-14843 FILM NUMBER: 671717 BUSINESS ADDRESS: STREET 1: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 BUSINESS PHONE: 7148980007 MAIL ADDRESS: STREET 1: 7321 LINCOLN WAY STREET 2: 7321 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 10QSB 1 e10qsb.txt FORM 10QSB 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000 - 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 0-14843 DENSE-PAC MICROSYSTEMS, INC. (Exact Name of Small Business Issuer as Specified in Its Charter)
CALIFORNIA 33-0033759 (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.)
7321 LINCOLN WAY GARDEN GROVE, CALIFORNIA 92841 (Address of Principal Executive Offices) (714) 898-0007 Issuer's Telephone Number, Including Area Code Not Applicable (Former Name, Former Address and Former Fiscal Year if Changed Since Last Year) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of common stock, no par value, outstanding as of June 30, 2000 was 19,717,722. Transitional Small Business Disclosure Format (check one): Yes_______ No___X____ ================================================================================ TOTAL PAGES: 10 Exhibit pages: 15 2 PART I- FINANCIAL INFORMATION ITEM 1. Financial Statements Dense-Pac Microsystems, Inc. Consolidated Balance Sheet
May 31, February 29, 2000 2000 ------------ ------------ (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,805,186 $ 2,949,562 Accounts receivable, net 3,436,816 3,346,318 Inventories 1,638,731 1,778,959 Other current assets 275,382 200,120 ------------ ------------ Total current assets 9,156,115 8,274,959 Property, net 5,570,671 5,819,824 Other assets 29,171 29,171 ------------ ------------ $ 14,755,957 $ 14,123,954 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt 623,336 671,336 Accounts payable 925,246 1,152,151 Accrued compensation 469,016 782,996 Other accrued liabilities 262,453 353,393 Deferred revenue 525,000 450,000 ------------ ------------ Total current liabilities 2,805,051 3,409,876 ------------ ------------ Other long-term debt 1,136,305 1,263,544 ------------ ------------ Stockholders' equity Common stock 20,131,854 20,039,109 Unearned compensation expense (76,895) (116,131) Accumulated deficit (9,240,358) (10,472,444) ------------ ------------ Total stockholders' equity 10,814,601 9,450,534 ------------ ------------ $ 14,755,957 $ 14,123,954 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 Dense-Pac Microsystems, Inc. and Consolidated Subsidiary Summary of Operations (Unaudited)
For the quarter ended --------------------------------------- May 31, May 31, 2000 1999 -------------- --------------- NET SALES $ 10,980,203 $ 6,041,037 COST OF SALES 7,874,169 4,599,713 -------------- --------------- GROSS PROFIT 3,106,034 1,441,324 COSTS AND EXPENSES: Selling, general and administrative 1,417,312 1,027,226 Research and development 422,149 178,653 -------------- --------------- Total costs and expenses 1,839,461 1,205,879 PROFIT FROM OPERATIONS 1,266,573 235,445 -------------- --------------- OTHER EXPENSE (INCOME) Interest expense 36,855 38,590 Interest income (42,368) (6,638) -------------- --------------- Total other expense (income) (5,513) 31,952 INCOME BEFORE INCOME TAX PROVISION 1,272,086 203,493 INCOME TAX PROVISION 40,000 - -------------- --------------- NET INCOME (LOSS) $ 1,232,086 $ 203,493 ============== =============== NET INCOME PER SHARE: Basic $0.06 $0.01 ============== =============== Diluted $0.06 $0.01 ============== =============== WEIGHTED AVERAGE SHARES OUTSTANDING: OUTSTANDING - BASIC 19,359,000 18,300,000 ============== =============== OUTSTANDING - DILUTED 20,661,000 19,700,000 ============== ===============
See accompanying notes to condensed consolidated financial statements. 4 DENSE-PAC MICROSYSTEMS, INC. Statements of Cash Flow (Unaudited)
For the three months ended ----------------------------- May 31, May 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,232,086 $ 203,493 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 362,669 262,072 Amortization of unearned compensation 39,236 -- Changes in operating assets and liabilities: Accounts receivable (90,498) (298,547) Inventories 140,228 849,281 Other current assets (75,262) (8,226) Accounts payable (226,905) (414,751) Accrued compensation (313,980) 21,177 Other accrued liabilities (90,940) 124,362 Deferred revenue 75,000 -- ----------- ----------- Net cash provided by (used in) operations: 1,051,634 738,861 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (113,516) (364,199) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on other long-term debt (175,239) (95,330) Proceeds from issuance of common stock 92,745 18,159 ----------- ----------- Net cash used in financing activities (82,494) (77,171) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 855,624 297,491 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,949,562 1,273,887 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF QUARTER $ 3,805,186 $ 1,571,378 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 46,242 $ 20,648 =========== =========== Income taxes paid $ 48,000 $ 0 =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property under capital leases $ 0 $ 358,915 =========== =========== Conversion of notes payable to related parties to common stock $ 0 $ 1,200,000 =========== ===========
See accompanying notes to condensed financial statements. 5 DENSE-PAC MICROSYSTEMS, INC. CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - Dense-Pac Microsystems, Inc. (Dense-Pac or the Parent Company), a California corporation, and its wholly-owned subsidiary, TypeHaus, Inc. (TypeHaus) (together, the Company) designs and manufacturers proprietary chip-stacking components and subsystems. The Company's revenues are generated primarily from manufacturers of electronic components, as well as from subcontracts where the primary contractor is the United States government. The Company grants credit to customers included in the military, aerospace, and a variety of commercial industries. TypeHaus provides printer media devices, printer memory, and electronic laser products to a variety of OEM customers. It also supplies custom memory subsystems and support software for OEM manufacturers of laser printers. NOTE 2 - As contemplated by the Securities and Exchange Commission ("SEC") under Item 310 (b) of Regulation S-B, the accompanying financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles. This report on Form 10-QSB for the period ended May 31, 2000 should be read in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year ended February 29, 2000 filed with the SEC. In the opinion of the Company management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position as of May 31, 2000 and May 31, 1999, and the results of its operations and its cash flows for the quarters ended May 31, 2000 and 1999. Results for the interim periods are not necessarily indicative of those to be expected for the full year. NOTE 3 - Recent Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company does not invest in derivative investments nor does it engage in hedging activity and, therefore, does not believe that the adoption of SFAS No. 133 will have an impact on the Company's financial statements. NOTE 4 - In fiscal 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The Company engages in business activity primarily in two operating segments: the design and manufacturing of proprietary and patented three-dimensional, high-density semiconductor products and the design and manufacturing of memory and memory related products for the laser printer industry (through its wholly-owned subsidiary, TypeHaus, Inc.). Required operating segment data were as follows: -5- 6
Quarter ended May 31, 2000 Dense-Pac TypeHaus Eliminations Total - -------------------------- ----------- --------- ------------ ----------- Net sales $10,722,652 $257,551 $10,980,203 Net income (Loss) $ 1,268,859 $(36,773) $ 1,232,086 Total assets $14,272,698 $493,259 $(10,000) $14,755,957
Quarter ended May 31, 1999 Dense-Pac TypeHaus Eliminations Total - -------------------------- ----------- --------- ------------ ----------- Net sales $5,628,177 $419,860 $ (7,000) $6,041,037 Net income $ 141,948 $ 61,545 $ -- $ 203,493 Total assets $9,755,003 $750,402 $(10,000) $10,495,405
NOTE 5 - The following table summarizes stock option activity under Dense-Pac's 1985 and 1996 Stock Option Plans for the three months ended May 31, 2000:
Number of Price per Number of Shares Share Options Exercisable --------- -------------- ------------------- Balance, February 29, 2000 2,071,500 $ .94 - $7.56 653,150 --------- -------------- ------- Granted 272,000 $ 5.50 - $8.63 Exercised (78,450) $ 1.00 - $1.81 Canceled (99,500) $ 1.56 - $8.63 --------- -------------- ------- Balance, May 31, 2000 2,165,550 $ .94 - $8.63 700,500 ========= ============== =======
NOTE 6 - The weighted average shares outstanding during the three month period ended May 31, 2000 was 19,382,000 and the fully diluted shares outstanding for the three month period was 20,661,000. Options and warrants to purchase shares of common stock during these periods were included in the above calculations. ITEM 2 - Management's Discussion and Analysis or Plan of Operation -6- 7 RESULTS OF OPERATIONS Net sales for the quarter ended May 31, 2000 increased $ 4,939,166 or 82% compared to the quarter ended May 31, 1999. The increase in net sales for the quarter ended May 31, 2000, when compared to the same quarter in the prior year was due primarily to an increase in the high-density commercial portion of the company's business. The overall unit increase in commercial stacks shipped during the quarter increased by approximately 45% from the previous quarter in the prior year. Additionally, a larger percentage of the Company's sales included memory components, which in prior quarters had typically been consigned and not included in sales and cost of sales. For the commercial high density product, the revenue of products containing the semiconductor components increased by 248% from the first quarter in the prior fiscal year. In certain cases, the Company will purchase material for the commercial order and will determine the final purchase price prior to the order, in order to avoid any price volatility in the components. The company continued to focus the sales effort associated with the Company's high density commercial products. See "Forward Looking Statements." For the first quarter, approximately $257,000 of revenue was generated from the Company's wholly-owned subsidiary as compared to $420,000 in the previous year's first quarter. Gross profit as a percentage of sales was 28% for the three month period ended May 31, 2000, as compared to 24% for the three month period ended May 31, 1999. The increase in the gross margin for the first quarter ended May 31, 2000 can be attributed to the type of products that the company was selling during the comparable quarters. Specifically, the Company increased its production during the first quarter ending May 31, 2000, without a significant increase in fixed assets. This was offset slightly by the fact that the Company shipped more commercial orders for which the company procured the semiconductor. As the cost of the memory components are included in revenue to the customers the resulting gross margin decreases. In the prior quarter the majority of commercial orders had consigned memory associated with the sales. During the first quarter of fiscal year 2001, the Company continued its offering of commercial products and focused on those products that relate to the Company's proprietary packaging technology. In this manner, the Company believes that the Company has been able to define a niche for the products that use a unique proprietary stacking technology and has been marketing these products to a defined market. The Company believes that margins should improve due to increased production. See "Forward-Looking Statements." Selling, general and administrative expenses increased in the first quarter of fiscal 2001 by $390,000 or 38% from the first quarter of the prior fiscal year. The increase in general and administrative expenses can be attributed to an increase in recruitment expenses and employee costs associated with the increase in business volume. There were also increases in legal expense of $100,000 associated with a patent infringement lawsuit and other legal expenses. For the quarter ended May 31, 2000, research and development costs increased $243,000 or 136% from the same quarter in the previous fiscal year. The increase is primarily due to continued efforts to allocate resources to the development and production of unique new technologies into the commercial marketplace. The Company is continuing to invest in research and development for new products in the aerospace and commercial marketplace. See "Forward Looking Statements". -7- 8 For the three months ended May 31, 2000, other expenses decreased $37,000 from the same period last year. This decrease is due to additional interest income associated with the increase in the cash reserves. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity for the first quarter of fiscal 2000 was the cash generated from the operations. The Company continued to improve its operating performance and generate cash for operation purposes. Assuming that the Company is successful in its efforts to continue its first quarter financial performance, the Company believes that the cash from operations will be sufficient to meet the Company's operating cash needs for the next twelve months. Additionally, the Company has received a credit facility for three million dollars from a financial institute if the need should arise for additional working capital to support operations. See "Forward Looking Statements." Net cash provided by operations was approximately $1,052,000 during the first quarter of fiscal year 2000 which was generated from the profitable results of operations. These increases included depreciation and amortization of $362,000 and a decrease in inventories of $140,000, offset by decreases in accounts payable and accrued compensation of approximately $541,000. The Company purchased approximately $114,000 in new equipment during the first quarter of fiscal year 2000. The Company is expecting that it may incur additional lease debt with the purchase of additional equipment during the next quarter. The Company expects that it will not purchase more than one million dollars in additional equipment for the remainder of the year. See "Forward-Looking Statements". On April 8, 1999, the Company amended the terms of its $1.8 million loan payable to a major shareholder, and a $100,000 loan payable to a director. Under the terms of the amendment, $1,200,000 of the outstanding principal was converted into 662,069 shares of common stock at $1.8125 per share, the approximate fair market value of the Company's common stock at the date of the amendment. The remaining outstanding principal will accrue interest at 8.75% per annum, with interest only payments due quarterly and the principal due on December 31, 2000. At the election of the lenders, the remaining outstanding principal may be converted into common stock at the price of $1.8125, based on the terms defined in the agreement. On November 1, 1999, the remaining outstanding principal was converted into 386,208 shares of common stock at a price of $1.8125 per share, based on the terms defined in the amended loan agreement. FORWARD-LOOKING STATEMENTS Included in the Notes to Consolidated Financial Statements, this Item 2. Management's Discussion and Analysis or Plan of Operation and elsewhere in this Report are certain statements that do not present historical information. These forward-looking statements reflect the Company's current expectations. Although the Company believes that its expectations are based on reasonable assumptions, there can no assurance that the Company's financial goals or expectations will be realized. Numerous factors may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Some of these factors include demand for and acceptance of new and existing products, technological advances and product obsolescence, availability of semiconductor devices at reasonable prices, competitive factors, costs and risks concerning litigation, the ability to protect -8- 9 proprietary intellectual property, and the availability of capital to finance growth. These and other factors which could cause actual results to differ materially from those in the forward looking statements are discussed in greater detail in the Company's Annual Report on Form 10-KSB for the year ended February 29, 1999 under the heading "Cautionary Statements". Investors are cautioned against ascribing undue weight to any forward looking statements herein. PART II - OTHER INFORMATION Item 1 - Legal Proceedings On September 23, 1998, Dense-Pac Microsystems, Inc. was served with a complaint from Simple Technology, Inc., filed in U.S. District Court for the Central District of California, Santa Ana Division for an undetermined amount, alleging that Dense-Pac's stacking technology infringes on a Simple Technology patent. Dense-Pac intends to vigorously defend itself against such charges. On October 23, 1998, Dense-Pac filed a cross-compliant in the U.S. District Court for the Central District of California, Santa Ana for patent infringement against Simple Technology. The suit alleges that the Simple Technology infringement has benefited Simple Technology and unlawfully interfered with Dense-Pac's sales efforts. In April 1999, Dense-Pac filed two motions for summary judgement, one relating to non-infringement of the Simple patent and the second relating to previous public art, which may invalidate the claims in the Simple Technology patent. The ultimate outcome or any resulting potential loss cannot be determined at this time. On May 31, 2000, the trial, originally scheduled for June 6, 2000, was rescheduled to February 13, 2001. On April 11, 2000, Dense-Pac Microsystems filed suit, in Superior Court for the State of California, Orange County, against Simple Technology, Inc. and its chief operating officer. The compliant alleges trade secret misappropriation, unfair competition and intentional and negligent interference with prospective business advantages. Dense-Pac believes that on or before September 1997, Simple Technology and its officer obtained Dense-Pac's proprietary technology concerning Dense-Pac's products without authorization or consent from Dense-Pac. The complaint alleges that Simple Technology then used the above proprietary technology to manufacture a product substantially identical to Dense-Pac's proprietary rail M-Densus product and interfered with Dense-Pac's business. Dense-Pac is seeking general damages, monetary losses, attorneys' fees and punitive and exemplary damages. Dense-Pac intends to aggressively pursue this action. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed below are hereby filed with the Securities and Exchange Commission as part of the Quarterly Report. Exhibit 27 - Financial Data Schedule Exhibit 99 - Credit Facility with Imperial Bank dated May 4, 2000 (b) Reports on Form 8-K - No reports on Form 8-K were filed during the first quarter of fiscal 2001 covered by this Form 10-QSB. -9- 10 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. DENSE-PAC MICROSYSTEMS, INC. (Small Business Issuer) July 12, 2000 /s/ Ted Bruce - ----------------------------------- ------------------------------------ Date Ted Bruce, Chief Executive Officer July 12, 2000 /s/ William M. Stowell - ----------------------------------- ------------------------------------ Date William M. Stowell, Chief Financial Officer EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE QUARTER ENDED MAY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR THE QUARTER ENDED MAY 31, 2000. 3-MOS FEB-28-2001 MAR-01-2000 MAY-31-2000 3,805,186 0 3,521,816 85,000 1,638,731 9,156,115 9,427,228 3,856,557 14,755,957 2,805,051 0 0 0 20,131,854 (76,895) 10,814,601 10,980,203 10,980,203 7,874,169 9,713,630 (5,513) 85,000 36,855 1,272,086 40,000 1,232,086 0 0 0 1,232,086 .06 .06
EX-99 3 ex99.txt EXHIBIT 99 1 CREDIT AGREEMENT EXHIBIT 99 This Credit Agreement ("Agreement") is made and entered into on May 4, 2000, by and between Dense-Pac Microsystems, Inc. ("Borrower"), a California Corporation and Imperial Bank, a California banking corporation, ("Bank"). Subject to the terms and conditions of this Agreement, any security agreement(s) executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor of Bank, or any other agreements executed in conjunction therewith (collectively, the "Loan Documents"), Bank shall make the loan(s) and or advance(s) (individually a "Loan" and collectively "Loans") referred to below to Borrower. In consideration of mutual covenants and conditions hereof, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.01 DOMESTIC ASSET BASED LINE OF CREDIT COMMITMENT (a) LINE OF CREDIT - ACCOUNTS RECEIVABLE BORROWING BASE CONSTRAINED. Subject to all the terms and conditions of this Agreement, provided that no event of default then has occurred and is continuing, Bank shall upon Borrower's request, make advances ("ABL Loans") to Borrower, from time to time and in such amounts as Borrower shall request up to an aggregate principal amount outstanding not to exceed: (1) Seventy Five percent (75%) of Eligible Accounts, as such Eligible Accounts may be adjusted from time to time as provided for under Section 4.15 hereof (the "Borrowing Base") or (2) and in no event more than $3,000,000 (the "ABL Line of Credit"). If at any time or for any reason, the outstanding principal amount of the ABL Loan Account (as defined below) is greater than the lessor of: (x) the Borrowing Base or (y) the ABL Line of Credit, Borrower shall immediately pay to Bank, in cash, the amount of such excess. Any commitment of Bank, pursuant to the terms of this Agreement, to make ABL Loans shall expire on the ABL Maturity Date (as hereinafter defined), subject to Bank's right to renew said commitment in its sole and absolute discretion at Borrower's request. Any such renewal of said commitment shall not be binding upon Bank unless it is in writing and signed by an officer of Bank. Provided that no Event of Default (as hereinafter defined) has occurred and is continuing, all or any portion of the ABL Loans advanced by Bank which are repaid by Borrower shall be available for reborrowing in accordance with the terms hereof. Borrower promises to pay to Bank the entire outstanding unpaid principal balance (and all accrued unpaid interest thereon) of the ABL Loan Account on the earlier of demand by Bank or May 1, 2001 ("ABL Maturity Date"). (b) LIMITATION ON ADVANCE OF ANY ABL LOANS. Notwithstanding any of the provisions contained in Section 1.01 hereof, prior to any advance of an ABL Loan, a representative of Bank shall have conducted an audit of Borrower's books and records relating to the Accounts and Inventory and any other 1 2 Collateral for the ABL Loans and made extracts therefrom, and arranged for verification of the Accounts, directly with the account debtors or otherwise, and of the Inventory all with results satisfactory to Bank, the cost of such audit shall be at Borrower's sole expense. Based on Bank's review of such audit, and prior to the advance of an ABL Loan in accordance with the terms hereof, Bank may adjust the Borrowing Base percentage, in its sole and reasonable discretion, as provided for under Section 4.15 hereof. (c) LOAN LEDGER ACCOUNT; USE OF PROCEEDS. The amount of each ABL Loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank for the ABL Line of Credit (herein called the "ABL Loan Account") and Bank shall credit the ABL Loan Account with all loan repayments in respect thereof made by Borrower. ABL Loans may only be used for working capital purposes. (d) ABL LOANS INTEREST. Borrower further promises to pay to Bank from the date of the advance of the initial ABL Loan through the Foreign ABL Maturity Date, on or before the first (1) day of each month, interest on the unpaid balance of the ABL Loan Account at a rate of interest equal to rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in the Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the ABL Loans are outstanding divided by 360, which shall for interest computation purposes be considered one (1) year. (e) APPLICATION OF RECEIPTS. All sums received by Bank, whether from Borrower or from Borrower's account debtors shall be applied to the outstanding ABL Loan balance immediately upon receipt thereof by the Bank. The Borrower will be charged, on a monthly basis, for the uncollected balance fees. (f) CERTAIN DEFINITIONS. As used herein the following terms shall have the following meanings: "Accounts" means any right to payment for goods sold or leased, or rented, or to be sold or to be leased, or to be rented, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. "Collateral" means any and all property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. "Eligible Accounts" Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. "Eligible Accounts" shall also NOT include any of the following: (1) All Accounts under which payment is not received within 90 days from any invoice date; (2) All Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account; (3) Any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. 2 3 (4) Credit balances greater than 90 days from invoice date. (5) Accounts due from a debtor if 25% or more of the aggregate amount of accounts of such debtor have at that time remained unpaid for more than 90 days from invoice date. (6) For accounts representing more than 20% of Borrower's total accounts receivable, the balance in excess of 20% is not eligible. However, the Bank may deem, in its sole discretion, the entire amount, or any portion thereof, eligible. With respect to Northrop Grumman and Toshiba American Electronics, the balance in excess of 30% of the total accounts receivable will be ineligible, unless the Bank deems the entire amount eligible in its sole discretion. (7) Accounts with respect to international transactions unless insured by an insurance company acceptable to the Bank or covered by letters of credit issued or confirmed by a bank acceptable to the Bank. Bank, in its sole discretion, may deem as eligible amounts due from major, publicly owned foreign companies. (8) Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. (9) Accounts where the account debtor is a seller to Borrower, whereby a potential offset (contra) exists. (10) Consignment or guaranteed sales. (11) Contract receivables; bill and hold accounts. (12) Collection accounts. (13) C.O.D. accounts. (14) Salesmen's accounts for promotional purposes. (15) All United States Government receivables, unless formally assigned to the Bank. (16) Accounts representing billings for service or maintenance contracts or for inventory or equipment on rent to the account debtor. (17) Deferred revenues. (18) Pre-billings. (g) REQUESTS FOR ABL LOANS. Requests for ABL Loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of Loan being requested. 3 4 (h) LATE CHARGE. If any installment payment, interest payment, principal payment or principal balance due under the ABL Line of Credit is delinquent ten (10) or more days, Borrower agrees to pay Bank a late charge in the amount of five percent (5%) of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept any past due payment or less than the total unpaid principal balance after maturity. All payments, at Bank's sole discretion, shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. (i) DEFAULT RATE. If an Event of Default occurs hereunder, then during the continuance thereof at the Bank's option, the interest rate shall be five percent (5%) per year in excess of the rate otherwise applicable. (j) INTEREST CALCULATIONS. The term "Prime Rate" shall mean the rate that the Bank has announced as its prime lending rate, which shall vary concurrently with any change in the Prime Rate. Interest based on the Prime Rate shall vary concurrently with any change in the Prime Rate. All interest shall be computed at the rate specified in any note on the basis of the actual number of days during which the principal balance of the corresponding Loans are outstanding divided by 360, which shall for interest computation purposes be considered one (1) year. 1.02 LOAN FEE. In addition to any other amounts due, or to become due, concurrent with the execution hereof, in connection with the ABLG Revolving Line of Credit, Borrower shall pay to Bank a loan fee of Seven Thousand Five Hundred Dollars ($7,500). 1.03 DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any other amounts due, or to become due, concurrently with the execution hereof, Borrower agrees to pay to Bank a documentation fee in the amount of $250, and all other costs and expenses incurred by the Bank in the preparation of this Agreement, the other Loan Documents and the perfection of any security interest granted to Bank by Borrower. 1.04 COLLATERAL. Borrower shall grant or cause to be granted to Bank a first priority lien on any and all personal property assets of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest or pursuant to the terms of any security agreement, an intellectual property security agreement or otherwise as security for all of Borrower's obligations to Bank, all as may be subject to Section 5.03 hereof. 1.05 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest, fees, costs, and/or expenses due under this Agreement by charging Borrower's demand deposit account number 08-226-415 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. 2. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 4 5 2.01 EXISTENCE AND RIGHTS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of California, which shall survive at least five years beyond the maturity of any Loans hereunder; Borrower is authorized and in good standing to do business in the state of its incorporation; Borrower has the appropriate powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each state in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary; and Borrower has the power and adequate authority to make and carry out this Agreement. Borrower has no investment in any other business entity unless specified in writing to Bank. 2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement and the Loan Documents are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower articles of incorporation or similar document as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms; subject only to bankruptcy, insolvency or similar laws affecting creditors rights generally. 2.03 NO CONFLICT. The execution, delivery and performance of this Agreement and the Loan Documents are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 2.04 LITIGATION. Except as disclosed in writing to Bank by Borrower, there is no litigation or other proceeding pending or threatened against or affecting Borrower which if determined adversely to Borrower or its interest would have a material adverse effect on the financial condition of Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. 2.05 FINANCIAL CONDITION. The consolidated balance sheet of Borrower as of November 30, 1999, and the related profit and loss statement for the nine month period ended as of that date, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said balance sheet truly presents the financial condition of Borrower as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section 5.03 hereof. 5 6 2.07 TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 2.09 REGULATION U. None of the proceeds of any Loan shall be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). 2.10 ERISA. All defined benefit pension plans as defined in the Employees Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet, as of the date hereof, the minimum funding standards of Section 302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in ERISA has occurred with respect to any such plan. 3. CONDITIONS PRECEDENT TO LOAN Prior to Bank being obligated to make any Loan pursuant to this Agreement, Bank must receive all of the following, each of which must be in form and substance satisfactory to Bank: 3.01 PROMISSORY NOTE(s). Original, executed promissory note(s) as applicable. 3.02 SECURITY AGREEMENT. Original, executed security agreement(s) covering the personal property collateral securing the Loan(s). 3.03 FINANCING STATEMENT. Financing statement(s) executed by Borrower and any grantor of a security interest. 3.04 INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage required pursuant to that Agreement to Provide Insurance executed by Borrower, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with Lenders Loss Payable endorsement in favor of Bank. 3.05 ORGANIZATIONAL DOCUMENTS. Copies of the articles of incorporation or similar document as the case may be, of the any Borrower. 3.06 AUTHORIZATIONS. Certified copies of all action taken by the Borrower to authorize the execution, delivery and performance of the Loan Documents. 3.07 GOOD STANDING. Good standing certificates from the appropriate secretary of state of the state in which any Borrower is organized and in each state in which it is required to be qualified to do business. 3.08 CREDIT AGREEMENT. This Agreement executed by Borrower. 6 7 3.09 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonably deem necessary. 4. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, or so long as Bank has any obligation to extend credit to Borrower it will, unless Bank shall otherwise consent in writing: 4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes specified in Section 1 of this Agreement. 4.03 INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment, and as required by that Agreement to Provide Insurance executed by Borrower, with the Bank to be shown as Lenders Loss Payee on such policies. 4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it to be adequate with respect thereto. 4.05 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times and upon reasonable notice during normal business hours; and furnish Bank: (a) MONTHLY FINANCIAL STATEMENT. As soon as available, and in any event within thirty (30) days after the close of each month, a consolidated balance sheet, profit and loss statement and reconciliation of Borrower's capital balance accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail and reasonably acceptable to Bank, in accordance with generally accepted accounting 7 8 principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower. (b) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within Ninety (90) days after and as of the close of each fiscal year of Borrower, a consolidated report of audit of Company, all in reasonable detail, audited by an independent certified public accountant selected by Borrower and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; (c) OFFICER'S CERTIFICATE. Within thirty (30) days after the end of each quarter and fiscal year of Borrower, a certificate of the chief financial officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof in the form of exhibit 4.05 (c) attached hereto. (d) AUDIT REPORTS. Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim work on the accounts of Borrower made by such accountants; (e) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AGINGS; INVENTORY ACTIVITY. Within ten (10) days from each month-end, deliver to Bank a detailed accounts receivable aging reconciled to the general ledger of Borrower, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent and an inventory certification outlining consigned inventory composition and activity for the month. All the foregoing will be in a form and with such detail as Bank may request from time to time. (f) BORROWING BASE CERTIFICATE. Deliver to Bank, on a weekly basis, a Borrowing Base Certificate including sales and cash receipts. (g) TRANSACTION REPORTS. Deliver to Bank weekly transaction reports, together with payments in kind, including Collateral activity and appropriate loan activity, certified by an authorized signer of Borrower. The weekly reports delivered to Bank include the following Bank forms: AC-1 Accounts Receivable And Inventory Transaction Report, AC-1 Schedule of Accounts Receivable Assigned, and AC-3 Schedule of Collections. Applicable only if credit facility is utilized. (h) LIST OF CUSTOMERS. On a quarterly basis or more frequently if requested by Bank, provide Bank with an alphabetized list of customers including addresses. (i) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS Promptly after the same are available, copies of all such proxy statements, financial statements and reports as Borrower or any subsidiary shall send to its members or stockholders as appropriate, if any, and copies of all reports which Borrower or any subsidiary may file with the Securities and Exchange Commission. (j) OTHER INFORMATION. Such other information relating to the affairs of Borrower as the Bank reasonably may request from time to time. 8 9 4.06 QUICK RATIO. Maintain on a quarterly basis a consolidated quick ratio of cash and accounts receivable to current liabilities of at least 1.30 to 1.00. 4.07 TANGIBLE NET WORTH. Maintain on a quarterly basis a consolidated Tangible Net Worth (defined as stockholder's equity less any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, and any amounts due from stockholders, officers and affiliates) of not less than Eight Million Two Hundred and Fifty Thousand Dollars ($8,250,000). Tangible Net Worth shall increase annually by 70% of net income on a cumulative basis. 4.08 DEBT TO TANGIBLE NET WORTH. Maintain on a quarterly basis a consolidated ratio of total liabilities to Tangible Net Worth of not greater than 1.0 to 1.0. 4.09 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of Borrower to, at all times, meet the minimum funding standards of Section 302 of ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined in ERISA, will occur with respect to any such plan. 4.10 LAWS. At all times comply with, or cause to be complied with, all laws, statues, rules, regulations, orders and directions of any governmental authority having jurisdiction over Borrower or Borrower's business. 4.11 GAAP. Compliance with all financial covenants shall be calculated based on generally accepted accounting principles applied on a consistent basis as maintained by Borrower. 4.12 Intentionally left blank. 4.13 OPERATING ACCOUNTS. Maintain all primary accounts and banking relationship with the Bank. Maintain, or cause to be maintained, on deposit with Bank, non-interest bearing demand deposit balances sufficient to compensate Bank for all services provided by Bank. Balances shall be calculated after reduction for the reserve requirement of the Federal Reserve Board and uncollected funds. Any deficiencies shall be charged directly to the Borrower on a monthly basis. 4.14 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event of Default hereunder or any event which upon notice and lapse of time would be an Event of Default; (ii) all litigation affecting Borrower where the amount is $250,000 or more; any substantial dispute which may exist between Borrower and any governmental regulatory body or law enforcement authority; any change in Borrower's name or principal place of business; or any other matter which has resulted or might result in a material adverse change in Borrower's financial condition or operations. 4.15 AUDITS. Permit representatives of Bank to conduct audits of Borrower's books and records relating to the Accounts, and other Collateral and make extracts therefrom, with results satisfactory to Bank, provided that Bank shall use its best efforts to not interfere with the conduct of Borrower's business, and to the extent possible to arrange for verification of the Accounts directly with the account debtors obligated thereon or otherwise, all under reasonable procedures acceptable to Bank and at Borrower's sole expense; provided further that, prior to an Event of Default, Borrower shall not be responsible for the expense of more than One Thousand Five Hundred ($1,500) per audit, in any fiscal year. Notwithstanding any of the provisions contained in Section 1.01 (a) hereof, Borrower hereby acknowledges and agrees that upon 9 10 completion of any such audit Bank shall have the right to adjust the Borrowing Base percentage, in its sole and reasonable discretion, based on its review of the results of such collateral audit. 4.16 COVENANTS RELATING TO COLLATERAL. In addition to any covenants in any Loan Document relating to any Collateral the Borrower agrees: (a) To execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. (b) Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to Section 4.16 (e), Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. (c) That until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to Section 4.16 (e), Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall, within Fifteen (15) days of the end of each month notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. (d) To promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto (e) That Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby 10 11 make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. (f) To do all acts necessary to maintain, preserve, and protect the Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof. (g) In the event any unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding Loans to which the Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank for credit to Borrower's Loan Account the amount of such excess. 5. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, or so long as Bank has any obligation to extend credit to Borrower, it will not, without Bank's written consent: 5.01 TYPE OF BUSINESS; MANAGEMENT; CHANGE IN CONTROL. Make any substantial change in the character of its business; make any change in its executive management. 5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than Loans from the Bank except obligations now existing as shown in the financial statement dated November 30, 1999, excluding those obligations being refinanced by Bank, or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due or to become due. 5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned or hereafter acquired by it, other than liens for taxes not delinquent and liens in Bank's favor and other than liens agreed to in writing by Bank and other than those Permitted Liens listed in Schedule 5.03 attached hereto. 5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. 5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, 11 12 including without limitation the selling of any property or other asset accompanied by the leasing back of the same. 6. EVENTS OF DEFAULT The occurrence of any of the following events of default ("Events of Default") shall, at Bank's option, terminate Bank's commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrower's indebtedness to Bank immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived: 6.01 FAILURE TO PAY. Failure to pay any installment of principal or of interest on any indebtedness of Borrower to Bank within five (5) days of its due date. 6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or condition of this Agreement or any Loan Document binding upon Borrower. 6.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any respect. 6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. 6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $500,000, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of its assets and shall remain unvacated, unbonded or unstayed for a period of ten (10) days or in any event later than five (5) days prior to the date of any proposed sale thereunder. 6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower and, if instituted against it, shall not be dismissed within thirty (30) days thereafter. 6.07 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its business. 6.08 ADVERSE CHANGE. Any change which, in the opinion of Bank, is materially adverse to the financial condition of Borrower or any Guarantor; or should Bank, for any reason, believe that the prospect of Borrower's payment or performance hereunder or under any other agreement or instrument with Bank be impaired. 6.09 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's obligations to Bank, shall commit or do or fail to commit or do any act or thing which would constitute an event of default under any of the terms of any other agreement, document or instrument executed or to be executed by it concerning the obligation to pay money. 12 13 6.10 ADVANCES. Notwithstanding anything to the contrary contained herein, Bank shall have no duty to make advances while any event of default exists notwithstanding any cure period provided for herein. 7. MISCELLANEOUS PROVISIONS 7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or any note (s) issued in connection with a Loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement, and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, written or oral, with respect thereto. 7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to the Loan, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising the Loan after the occurrence of an Event of Default, whether or not suit is filed. If suit is brought to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and court costs in addition to any other remedy or recovery awarded by the court. 7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.05 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 7.06 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the state of California, to the jurisdiction of whose courts the parties hereby agree to submit. 7.07 OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of the Loan may have under applicable law, Bank or other holder of any note issued hereunder shall, upon the occurrence of any Event of Default or any event which with the passage of time or notice would constitute such an Event of Default, have the right to appropriate and apply to the payment of the Loan any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 13 14 7.08 SEVERABILITY. Should any one or more provisions of the Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 7.10 ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 7.11 REFERENCE PROVISION. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Credit Agreement, any security agreement executed by Borrower in favor of Bank or any note executed by Borrower in favor of Bank or any other agreement or instrument issued in favor of Bank by Borrower (collectively in this Section, the "Agreement") which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the state of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding 14 15 upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the state of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 7.12 This Agreement may be modified only by a writing signed by all parties hereto. This Agreement is executed on behalf of the parties by duly authorized officers as of the date first above written. IMPERIAL BANK DENSE-PAC MICROSYSTEMS, INC. ("BANK") ("BORROWER") By: /s/ Tom Thompson By /s/ William M. Stowell -------------------------------- ---------------------------------- Tom Thompson William M. Stowell Its: Vice President Its: Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----