-----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, TjO7zBhPg4e37IJ45pMmDVjNlaC/u8TzO7oZ3u/pnAzWWjUb6fFmdCPJAArfpHBV P+xKASOM8uM8xzLbSiKgrQ== 0000730255-02-000014.txt : 20020531 0000730255-02-000014.hdr.sgml : 20020531 20020531164512 ACCESSION NUMBER: 0000730255-02-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA AMPLIFIER INC CENTRAL INDEX KEY: 0000730255 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 953647070 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12182 FILM NUMBER: 02668101 BUSINESS ADDRESS: STREET 1: 460 CALLE SAN PABLO CITY: CAMARILLO STATE: CA ZIP: 93012 BUSINESS PHONE: 8059879000 MAIL ADDRESS: STREET 1: 460 CALLE SAN PABLO CITY: CAMARILLO STATE: CA ZIP: 93012 10-K 1 calamp2002_10-k.txt FISCAL 2002 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2002 COMMISSION FILE NUMBER: 0-12182 ___________ CALIFORNIA AMPLIFIER, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 95-3647070 ______________________________ __________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 460 CALLE SAN PABLO, CAMARILLO, CALIFORNIA 93012 _________________________________________ __________________ (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-9000 ________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ___________________ __________________ None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: $.01 PAR VALUE COMMON STOCK ___________________________ (Title of Class) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock of the Company held by non-affiliates of the Company as of May 22, 2002 was approximately $98,481,000. There were 14,597,437 shares of the Company's Common Stock outstanding as of May 22, 2002. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on July 18, 2002 are incorporated by reference into Part III, Items 11, 12 and 13 of this Form 10-K. This Proxy Statement will be filed within 120 days after the end of the fiscal year covered by this report. PART I ITEM 1. BUSINESS THE COMPANY California Amplifier, Inc. (the "Company") is engaged in the design, manufacture and marketing of a broad line of integrated microwave fixed point reception and transmission products used primarily in satellite television and terrestrial broadband applications. The Company's Satellite Products business unit designs and markets reception components for the worldwide Direct Broadcast Satellite ("DBS") television market as well as a full line of consumer and commercial products for video and data reception. The Wireless Access business unit designs and markets integrated reception and two-way transmission fixed wireless solutions for video, voice, data, telephony and networking applications. California Amplifier is an ISO 9001 certified company. In July 2001, the Company sold its 51% interest in Micro Pulse, Inc. ("Micro Pulse"). Micro Pulse designs, manufactures and markets antennas and amplifiers used principally in GPS applications. Accordingly, the results of operations of Micro Pulse, which represented a separate business segment of the Company, have been presented as a discontinued operation for all periods presented in the accompanying consolidated statements of operations. The Company was incorporated in California in 1981 and was reincorporated in Delaware in 1987. SATELLITE PRODUCTS Satellite dishes are used for the reception of video, audio and data transmitted from orbiting satellites. The Company's products, which are components of the dish assembly, are used in both commercial satellite dish applications and home satellite dishes. The Company's Satellite product sales to date have been primarily generated from sales of integrated downconverters, amplifiers and feedhorns used in home satellite dish and cable headend dish applications. The satellite dish is a parabolic reflector antenna. Microwave signals transmitted primarily in Ku-band or C-band for video and data transmission are transmitted from orbiting satellites toward the earth's surface. The dish reflects the microwaves back to a focal point where a feedhorn collects the microwaves transferring the signals into an amplifier/downconverter. The microwave amplifier amplifies the microwave signal millions of times for further processing. The downconverter changes the frequency into an intermediate frequency so that the receiver and television can process the signal and create a picture. Since the early 1980s the Company has been a leading supplier of C-band downconverters and amplifiers to the "large backyard dish" markets worldwide, primarily the United States in the 1980s and 1990s, and Brazil and the Middle East in the mid 1990s. In April 1999, the Company purchased substantially all of the satellite television products business from Gardiner Communications Corp. This acquisition allowed the Company immediate entry into the U.S. Ku- band DBS mainstream consumer market, and provided the Company with the opportunity to service certain satellite markets in Europe, and Asia, both of which position the Company to be a more significant supplier to key markets around the world. In fiscal year 2002, substantially all of the Company's satellite product sales were Ku-DBS products, while sales of C-band satellite products were negligible. The Company believes Ku-band DBS products will continue to dominate its satellite product sales as the Company focuses on the DBS market opportunities in the United States, Europe, Latin America and Asia. WIRELESS ACCESS PRODUCTS The Company's legacy Wireless Access products relate primarily to microwave downconverter/amplifier reception products and broadband scrambling products for wireless cable video reception. The downconverter/amplifier products are similar in function to the Company's satellite products, except that the microwave programming is transmitted from a terrestrial tower instead of a satellite. Two years ago, the Company's product focus shifted to transceiver products, and more recently to the development of integrated modem-transceiver products located at customer premises, for use in "last- mile" wireless access to homes and businesses. The market and product background is outlined below. Wireless Cable Video Wireless Cable television operates similarly to coaxial cable television transmission. The key difference is that Wireless Cable uses a microwave frequency band (Multichannel Multipoint Distribution System, or MMDS) to transmit programming from a headend site to homes within a local service area. The signal can generally be received by subscribers within a 25 to 40 mile omni-directional radius of the transmission tower; however, the subscriber must have a direct line-of-sight or "view" between the transmission tower and the receive antenna at the home. Typically, 55% to 80% of the homes within a service area are able to receive these wireless signals, with the remainder shadowed from the transmitter. The percentage of line-of-sight homes is affected by the tower elevation, local topology and the height of the subscriber's antenna. In 1995, the Wireless Cable industry in the United States generated a great deal of interest in Tele-TV, a consortium comprised of Bell Atlantic, NYNEX and Pacific Telesis, which announced its intention to deliver digitally compressed video to customers using Wireless Cable technology. In late 1996, the Tele-TV consortium announced that certain members had changed their strategic emphasis and were not going forward with their Wireless Cable plans. That same year, BellSouth announced its plan to use digital Wireless Cable technology to deliver video services in the southeastern region of the United States, and launched video programming services in Atlanta, New Orleans, Orlando, Daytona Beach, and Jacksonville. In 2000, BellSouth re- evaluated its video programming delivery service, and converted a portion of its subscriber base to wired cable service. The remainder of its wireless cable television subscriber base was sold to a DBS satellite operator to deliver video services, allowing BellSouth to utilize its MMDS spectrum for other applications. Smaller service providers such as Nucentrix have also followed this model by selling their subscriber base to DBS satellite operators, in order to free up their spectrum for alternate uses. Currently, the domestic Wireless Cable video market is small and shrinking. Internationally, the Wireless Cable industry has also been declining. Increasing worldwide demand for multichannel television programming has been offset by constraints on capital available to the Wireless Cable service providers and increased competition from alternate distribution means, such as satellite and cable. It is expected that an increasing number of operators/MMDS spectrum owners may re-assess their video strategy and focus on broadband Internet and telephony services, as described below. Broadband Wireless Products Terrestrial Wireless Cable operators own significant wireless spectrum in the 2.5 to 2.7 gigahertz range. Additionally, a number of countries have recently licensed spectrum in the 3.4 to 3.6 GHz range for wireless communications. As worldwide markets move toward wireless communications, these spectrum holders have considered using a portion or all of this spectrum for broadband data applications, such as high speed Internet access. By deploying two-way wireless technology, operators can offer a high- speed data service alternative to bridge the critical "last mile" between networks and customers. There are key distinctions between broadband wireless access and the two most prevalent traditional high-speed pipelines, cable and digital subscriber line (DSL), typically provided by local cable or telephone companies. Wireless allows rapid deployment of broadband services with relatively low build-out costs and it extends high-speed access to rural and suburban markets that are not served or are underserved by cable or DSL. Essentially, operators will establish two-way transmissions to and from base stations and homes, and businesses, operating in many instances like cellular and PCS systems. The Company currently provides outdoor transceivers, which the system operator installs on the subscriber's home or business rooftop. These transceivers interface to an indoor modem which is connected to PCs or local area networks, and send and receive data to/from the base stations to provide access to the Internet. The network management system manages and controls the traffic transmitted over the broadband wireless system, allowing many users to share the available bandwidth. Beginning in March 1999, MCI WorldCom and Sprint began making debt and equity investments in many of the U.S. MMDS multi-system operators, essentially acquiring over 60% of the MMDS spectrum in major cities throughout the United States. In conjunction with these acquisitions, the companies announced their intention to initiate a broad-based roll-out of fixed wireless broadband services to consumers in approximately 100 U.S. cities by the end of 2001 using technology that required line-of-sight between the base station tower and subscriber antenna. As of September 2001, Sprint was operating in 13 cities, and as of May 2002 MCI WorldCom was operating in 14 cities. In late 2001, Sprint announced that it had suspended its previous roll-out strategies using line-of-sight technology, and was awaiting the availability of next generation broadband non-line-of-sight technologies before finalizing its deployment strategies. MCI WorldCom has continued its service roll-out to small and medium sized businesses in already launched markets, but plans to launch additional markets only when suitable next generation technology is available. Following MCI WorldCom's lead, a number of international spectrum holders launched two way services to small and medium sized businesses using line-of-sight technologies. These spectrum holders continue to roll out service to businesses. In December 2001, the Company announced a licensing agreement that provides access to non-line-of-sight broadband modem technology and allows the Company to develop integrated customer premise equipment that interoperates with base stations from Navini Networks ("Navini"). Sprint and Navini have announced technology trials that Company management believes are initially yielding promising results. In addition to Sprint, a number of other wireless spectrum holders are running field trials of Navini technology in anticipation of launching broadband wireless data networks. However, there can be no assurances that the Company's development efforts or these trials will be successful. For additional information regarding the Company's sales by segment and geographical area, see Note 13 of Notes to Consolidated Financial Statements. MANUFACTURING The Company currently manufactures and assembles its products in Camarillo, California and under a subcontract arrangement in China. In fiscal years 2000 and 2001, the Company also manufactured and assembled satellite DBS products in Garland, Texas. At the end of fiscal 2001, the Company's domestic manufacturing operations were consolidated in Camarillo, California. Manufacturing operations consist of assembly of printed circuit boards and components utilizing surface mount technology automated assembly equipment. All printed circuit assemblies are then hand assembled into various aluminum and plastic housings, in-line tested, and subjected to additional tests on a sampled basis to ensure functional reliability. Electronic devices, components and made-to-order assemblies used in the Company's products are generally obtained from a number of suppliers, although certain components are obtained from sole source suppliers. Some devices or components are standard items while others are manufactured to the Company's specifications by its suppliers. The Company attempts to operate without substantial levels of raw materials by depending on certain key suppliers to provide material on a "just-in-time" basis. The Company believes that most raw materials are available from alternative suppliers. However, any significant interruption in the delivery of such items could have an adverse effect on the Company's operations. ISO 9001 INTERNATIONAL CERTIFICATION In August 1995, the Company became registered to ISO 9001, the international standard for conformance to quality excellence in meeting market needs in all areas including product design, manufacturing, quality assurance and marketing. The registration assessment was performed by Underwriter's Laboratory, Inc., according to the ISO 9001:1994 International Standard. Continuous assessments to maintain certification are performed semi-annually, and the Company has maintained its certification through each audit evaluation, most recently in March 2002. RESEARCH AND DEVELOPMENT Each of the markets the Company competes in are characterized by technological change, evolving industry standards, and new product requirements to meet market growth. During the last three years, the Company has focused its research and development resources primarily on: Satellite DBS products, two-way MMDS transceivers, two-way MMDS integrated transceiver/modems. In addition, development resources were allocated to broaden existing product lines, reduce product costs and improve performance by product redesign efforts. Research and development expenses in fiscal years 2002, 2001 and 2000 were $7,583,000, $6,120,000 and $4,685,000, respectively. Given the rapid pace of technological change involving its products, management anticipates that the Company's research and development expenses will continue to increase in the future in order to maintain the Company's a competitive position in the markets that it serves. SALES AND MARKETING The Company sells its Satellite products primarily to DBS operators and to manufacturers for incorporation into complete satellite dish systems. A small portion of Satellite product sales are made to satellite equipment distributors. The Company sells its Wireless Access products directly to system operators as well as through distributors and system integrators. The Company's sales and marketing functions for both business units are centralized at its corporate headquarters in Camarillo, California. In addition, the Company has sales offices and personnel in Paris, France and Sao Paulo, Brazil. The Company may add additional sales offices and employees as market conditions warrant, in market areas that require additional sales and customer support not adequately served by a major distributor or reseller. See also Note 13 of Notes to Consolidated Financial Statements for segment and geographical sales information. COMPETITION The markets in which the Company competes are highly competitive. In addition, if the markets for the Company's products continue to grow, the Company anticipates increased competition from new companies entering such markets, some of whom may have financial and technical resources substantially greater than those of the Company. Furthermore, because some of the Company's products may not be proprietary, they may be duplicated by low- cost producers, resulting in price and margin pressures. The Company believes that competition in its markets is based primarily on price, performance, reputation, product reliability and technical support. In the terrestrial Wireless Access market, the Company has supplier relationships with major operators in various regions of the world, and believes that its pricing, accompanied by product performance, reliability, low field failure rate, and its ongoing technical support, are currently competitive advantages to the Company. In the Satellite television market, its reputation for performance and quality allows the Company a competitive advantage if pricing of its products is comparable to its competitors. Its acquisition of rights to U.S. DBS products in 1999 allowed the Company immediate entry into the U.S. DBS market where it believes it now maintains a leadership position. The Company's continued success in these markets, however, will depend upon its ability to continue to design and manufacture quality products at competitive prices. BACKLOG The Company's products are sold to customers that do not usually enter into long-term purchase agreements, and as a result, the Company's backlog at any date is not significant to the annualized sales trends. In addition, because of customer order modifications, cancellations, or orders requiring wire transfers or letters of credit from international customers, the Company's backlog as of any particular date, may not be indicative of sales for any future period. INTELLECTUAL PROPERTY The Company's timely application of its technology and its design, development and marketing capabilities have been of substantially greater importance to its business than patents or licenses. The Company currently has 19 patents ranging from design features for downconverter and antenna products, to its MultiCipher broadband scrambling system. Those that relate to its downconverter products do not give the Company any significant advantage since other manufacturers using different design approaches can offer similar microwave products in the marketplace. In addition to its awarded patents, the Company currently has 10 patent applications pending. California Amplifier(R) and MultiCipher(R) are federally registered trademarks of the Company. EMPLOYEES At February 28, 2002, the Company had 276 employees. None of the Company's employees are represented by a labor union. In addition, the Company contracts with an independent temporary agency to provide certain of its production personnel at its manufacturing facilities in Camarillo, California; the Company employs none of the personnel provided through the agency. At February 28, 2002, the number of contracted production personnel was approximately 160. ITEM 2. PROPERTIES The Company's corporate headquarters and its primary manufacturing operations are located in two adjacent facilities in Camarillo, California (approximately 60 miles north of Los Angeles) totaling approximately 90,000 square feet. The leases on both facilities expire in February 2004. Neither of these leases contain renewal options. The Company is currently evaluating its facility alternatives and has not yet reached a decision on whether to seek an extension of one or both of the existing leases, or to pursue a new lease on different facilities. The Company also has sales offices France and Brazil, and product design centers in Dallas, Texas and Chanhassen, Minnesota. Subsequent to fiscal 2002, as part of the acquisition of the assets and business of Kaul-Tronics, Inc. and two affiliated companies, the Company acquired three facilities in Wisconsin. See Note 15 to the accompanying consolidated financial statements. ITEM 3. LEGAL PROCEEDINGS Yourish class action and RLI Insurance Company litigation: On March 29, 2000 the Company and the individual defendants (present and former officers and directors of the Company) reached a settlement in the matter entitled Yourish v. California Amplifier, Inc., et al., Case No. CIV 173569 shortly after trial commenced in the Superior Court for the State of California, County of Ventura. The terms of the settlement called for the issuance by the Company of 187,500 shares of stock along with a cash payment of $3.5 million, funded in part by insurance proceeds, for a total settlement valued at approximately $11.0 million. Of the total settlement, $9.5 million was accrued in the consolidated financial statements for the year ended February 28, 2000, and the remaining $1.5 million was expected to be funded by the Company's director and officer liability insurance carriers. The common stock portion of the settlement was originally accrued at $7.5 million, or $40 per share, which share price was based on the trading range of the Company's common stock at the time the settlement agreement was reached. By Order dated September 14, 2000, the court approved the terms of the settlement and dismissed the action with prejudice. Upon approval of the settlement agreement by the court, in September 2000 the Company issued 65,625 of the 187,500 shares of common stock and paid $2.5 million of the $3.5 million cash portion of the settlement. T.I.G. Insurance Company ("T.I.G."), one of the Company's liability insurance carriers, paid the remaining $1 million. The fair value of the Company's common stock on September 14, 2000, the date the settlement agreement was approved by the court, was $33.063 per share. Accordingly, at that time the Company reduced its litigation accrual by $1.3 million to revalue the common stock portion of the settlement at $33.063 per share instead of $40 per share. Also in September 2000, the Company accrued $500,000 for additional legal expenses associated with this litigation which had not been previously accrued, and accrued $800,000 for a refund contingently payable to T.I.G., which had contributed $1 million to the settlement under a reservation of rights. In connection with the settlement of the Yourish action, the Company and certain of its former and current officers and directors filed a lawsuit (California Amplifier, Inc., et al. v. RLI Insurance Company, et al., Ventura County Superior Court Case No. CIV196258), against one of its insurance carriers to recover $2.0 million of coverage the insurance carrier has stated was not covered under its policy of insurance. The insurance carrier filed a Motion for Judgment on the Pleadings seeking judgment on the basis, inter alia, that the claims in the Yourish action for alleged violations of Sections 25400 and 25500 of the California Corporation Code were not insurable as a matter of law pursuant to Insurance Code Section 533. The Plaintiffs opposed the motion and a hearing was held on September 22, 2000. On October 18, 2000, the Court entered an Order granting the motion for judgment on the pleadings. Judgment was entered on November 9, 2000, and Notice of Entry of Judgment given on November 15, 2000. California Amplifier filed a Notice of Appeal on November 21, 2000. The matter was fully briefed and argued before the Court of Appeals on September 12, 2001. On December 4, 2001, the Court of Appeals upheld the decision of the lower court in favor of the insurance carrier. The Company filed a petition for review with the California Supreme Court in January 2002, but the petition for review was denied by the State Supreme Court. In March 2002, T.I.G. notified the Company that it intends to seek a refund of its $1 million settlement contribution made under a reservation of rights, based on the adverse outcome of the Company's action against RLI Insurance Company. As discussed above, the Company had previously accrued a reserve of $800,000 for the refund contingently payable to T.I.G. Consequently, at February 28, 2002 the Company accrued an additional $200,000 for the contingent refund payable to T.I.G. The Company's consolidated balance sheet at February 28, 2002 includes an accrued liability of $5.0 million related to the Yourish settlement, which amount represents the remaining 121,875 shares still to be issued, valued at $33.063 per share, and the $1 million reserved for the contingent refund payable to T.I.G. Pursuant to the terms of the court-approved settlement, the Company must wait for instructions from plaintiffs' counsel before issuing the remaining shares of common stock under the settlement. 2001 securities litigation and shareholder derivative lawsuit: Following the announcement by the Company on March 29, 2001 of the resignation of its controller and the possible overstatement of net income for the fiscal year ended February 28, 2000 and the subsequent restatement of the Company's financial statements for fiscal year 2000 and the interim periods of fiscal years 2000 and 2001, the Company and certain officers were named as defendants in twenty putative actions in Federal Court. Caption information for each of the lawsuits is set forth in Item 3 of the Company's Form 10-K for the fiscal year ended February 28, 2001. On June 18, 2001, the twenty actions were consolidated into a single action pursuant to stipulation of the parties, and lead plaintiffs' counsel was appointed. In July 2001, all of the current directors of the Company were named as defendants in the above-entitled shareholder derivative lawsuit filed in Los Angeles Superior Court. The Company was named as a nominal defendant. The complaint alleged claims against the directors for breach of fiduciary duty, abuse of control and gross mismanagement, arising out of the Company's restatement of earnings for fiscal year 2000 and portions of fiscal year 2001. In October 2001, the insurance company that provides the Company's primary director and officer liability coverage applicable to the above matters filed a lawsuit seeking to rescind the policy on the grounds that there was a misstatement in the policy application that incorporated by reference the Company's financial statements prior to their restatement. In December 2001, the parties reached an agreement to settle both the class action litigation and the shareholder derivative lawsuit for the aggregate sum of $1.5 million, subject to final court approval. Of this amount, the Company's primary directors and officers liability insurance carrier agreed to contribute $575,000 toward the settlement, which amount was paid in December 2001, and agreed to withdraw its policy rescission lawsuit. The Company has accrued its $925,000 share of the settlement in the accompanying consolidated financial statements for the year ended February 28, 2002. Of this amount, $425,000 was paid by the Company in December 2001, and the remaining $500,000 is to be paid once the court approves the settlement. At the Company's option, this final settlement installment of $500,000 may be paid in the form of cash or Common Stock. The Stipulation of Settlement seeking preliminary Court approval of the settlement by the Court was filed in May 2002. Once preliminary approval is obtained, plaintiff's counsel will send notice to the class and obtain a hearing date for final approval of the settlement agreement. The Company expects this process to be completed over the next several months. Investigation by the Securities and Exchange Commission: In May 2001, the Company announced that it had received notice from the Securities and Exchange Commission (SEC) that the SEC was conducting an informal inquiry into the circumstances that caused the Company to announce that it would be restating earnings for fiscal year 2000 and certain interim quarters of fiscal year 2001. Subsequently, the Company learned that the SEC adopted an order directing a private investigation and designating officers to take testimony. The Company has been and expects to continue cooperating with the SEC in connection with its investigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended February 28, 2002, no matters were submitted to a vote of the Company's security holders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "CAMP". The following table sets forth for each fiscal period indicating the high and low sale prices for the Company's Common Stock, as reported by Nasdaq: LOW HIGH Fiscal Year Ended February 28, 2002: 1st Quarter $ 5.03 $ 7.25 2nd Quarter 3.50 8.50 3rd Quarter 3.55 5.72 4th Quarter 4.30 7.49 Fiscal Year Ended February 28, 2001: 1st Quarter $14.50 $49.75 2nd Quarter 19.25 63.00 3rd Quarter 15.50 45.88 4th Quarter 5.44 19.44 At May 22, 2002 the number of stockholders of record of the Company's Common Stock was 254. The number of stockholders of record does not include the number of persons having beneficial ownership held in "street name" which are estimated to approximate 11,000. The Company has never paid a cash dividend and has no current plans to pay cash dividends on its Common Stock. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data for the years ended February 28, 1998 through 2002 set forth below are derived from the audited consolidated financial statements and notes thereto. The consolidated balance sheets as of February 28, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended February 28, 2002, appear elsewhere in this Report. The Selected Consolidated Financial Data are qualified in their entirety by reference to, and should be read in conjunction with, the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended February 28, --------------------------------------------- OPERATING DATA 2002 2001 2000 1999 1998 -------- -------- ------- ------- ------- Sales $100,715 $117,129 $79,429 $33,248 $41,229 Cost of goods sold 77,834 93,776 64,296 24,034 33,087 -------- -------- ------- ------- ------- Gross profit 22,881 23,353 15,133 9,214 8,142 -------- -------- ------- ------- ------- Operating expenses: Research and development 7,583 6,120 4,685 3,949 3,946 Selling 2,299 3,255 4,254 3,858 4,601 General and administrative 7,740 5,869 4,850 3,429 4,033 -------- -------- ------- ------- ------- Total operating expenses 17,622 15,244 13,789 11,236 12,580 -------- -------- ------- ------- ------- Operating income (loss) 5,259 8,109 1,344 (2,022) (4,438) -------- -------- ------- ------- ------- Non-operating income (expense): Settlement of litigation (1,125) - (9,500) - - Other income (expense), net 47 (359) (60) 106 - -------- -------- ------- ------- ------- Total non-operating expense (1,078) (359) (9,560) 106 - -------- -------- ------- ------- ------- Income (loss) from continuing operations before income taxes 4,181 7,750 (8,216) (1,916) (4,438) Income tax (provision) benefit (1,307) (2,810) 2,950 603 1,663 -------- -------- ------- ------- ------- Income (loss) from continuing operations 2,874 4,940 (5,266) (1,313) (2,775) Income (loss) from discontinued operations, net of tax (25) 269 202 (123) 110 Gain on sale of discontinued operations, net of tax 1,615 - - - - -------- -------- ------- ------- ------- Net income (loss) $ 4,464 $ 5,209 $(5,064) $(1,436) $(2,665) ======== ======== ======= ======= ======= CALIFORNIA AMPLIFIER, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) (Continued) Year ended February 28, ------------------------------------------- OPERATING DATA (Continued) 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Basic earnings (loss) per share: Income (loss) from continuing operations $ 0.21 $ 0.37 $ (0.44) $ (0.11) $ (0.24) Income (loss) from discontinued operations - 0.02 0.02 (0.01) 0.01 Gain on sale of discontinued operations 0.12 - - - - ------- ------- ------- ------- ------- Basic earnings (loss) per share $ 0.33 $ 0.39 $ (0.42) $ (0.12) $ (0.23) ======= ======= ======= ======= ======= Diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.21 $ 0.35 $ (0.44) $ (0.11) $ (0.24) Income from discontinued operations - 0.02 0.02 (0.01) 0.01 Gain on sale of discontinued operations 0.11 - - - - ------- ------- ------- ------- ------- Diluted earnings (loss) per share $ 0.32 $ 0.37 $ (0.42) $ (0.12) $ (0.23) ======= ======= ======= ======= ======= February 28, ------------------------------------------- BALANCE SHEET DATA 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Current assets $45,739 $35,523 $37,201 $20,331 $19,887 Current liabilities $15,480 $15,032 $32,729 $ 4,853 $ 5,001 Working capital $30,259 $20,491 $ 4,472 $15,478 $14,886 Current ratio 3.0 2.4 1.1 4.2 4.0 Total assets $56,688 $49,812 $51,497 $25,549 $27,831 Long-term debt $ 3,628 $ 4,500 $ 145 $ 516 $ 1,112 Stockholders' equity $37,580 $29,624 $18,281 $20,065 $21,397 Equity per share $ 2.76 $ 2.18 $ 1.44 $ 1.70 $ 1.82 Shares outstanding (000s) 13,630 13,601 12,658 11,785 11,771 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Basis of Presentation The Company uses a 52-53 week fiscal year ending on the Saturday closest to February 28, which for fiscal years 2002, 2001 and 2000 fell on March 2, 2002, March 3, 2001 and February 26, 2000, respectively. In these consolidated financial statements, the fiscal year end for all years, including leap years, is shown as February 28 for clarity of presentation. Fiscal year 2001 consisted of 53 weeks, compared to 52 weeks for the fiscal years 2002 and 2000. As more fully described in Note 2 to the accompanying consolidated financial statements, in July 2001 the Company sold its 51% interest in Micro Pulse. Micro Pulse designs, manufactures and markets antennas and amplifiers used principally in GPS applications. Accordingly, the results of operations of Micro Pulse, which represented a separate business segment of the Company, have been presented as a discontinued operation for all periods presented. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to: allowance for doubtful accounts, inventory valuation, product warranties and the deferred tax asset valuation allowance. Actual results could differ materially from these estimates. Allowance for Doubtful Accounts The Company establishes an allowance for estimated bad debts based upon a review and evaluation of specific customer accounts identified as known and expected collection problems, based on historical experience, due to insolvency, disputes or other collection issues. As further described in Note 1 to the accompanying consolidated financial statements, the Company's customer base is quite concentrated, with only four customers accounting for approximately 82% of the Company's fiscal 2002 sales. Changes in either a key customer's financial position, or the economy as a whole, could cause actual write-offs to be materially different from the recorded allowance amount. Inventories The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. To the extent that estimated selling prices do not exceed the associated carrying values, inventory carrying amounts are written down. In addition, the Company generally considers that inventory on hand or committed with suppliers, which is not expected to be sold within the next 12 months, as excess and thus appropriate write-downs of the inventory carrying amounts are established through a charge to cost of sales. Estimated usage in the next 12 months is based on firm demand represented by orders in backlog at the end of the quarter and management's estimate of sales beyond existing backlog, giving consideration to customers' forecasted demand, ordering patterns and product life cycles. Significant reductions is product pricing, or changes in technology and/or demand may necessitate additional write-downs of inventory carrying value in the future. Product Warranties The Company provides for the estimated cost of product warranties at the time revenue is recognized. While it engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from management's estimates, revisions to the estimated warranty liability would be required. Deferred Income Tax Asset Valuation Allowance The deferred income tax asset reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A deferred income tax asset is recognized if realization of such asset is more likely than not, based upon the weight of available evidence which includes historical operating performance and the Company's forecast of future operating performance. The Company evaluates the realizability of its deferred income tax asset on a quarterly basis, and a valuation allowance is provided, as necessary. During this evaluation, the Company reviews its forecasts of income in conjunction with the positive and negative evidence surrounding the realizability of its deferred income tax asset to determine if a valuation allowance is needed. If in the future a portion or all of the valuation allowance is no longer deemed to be necessary, reductions of the valuation allowance will either increase additional paid-in capital or decrease the income tax provision, depending on the nature of the underlying deferred tax asset. Alternatively, if in the future the Company were unable to support the recovery of its net deferred income tax asset, it would be required to provide an additional valuation allowance for all or a portion of the net deferred income tax asset, which would increase the income tax provision. At February 28, 2002, the Company's net deferred income tax asset was $3,580,000, which amount includes a valuation allowance of $8,724,000. Approximately $5.6 million of the valuation allowance at February 28, 2002 is related to a tax asset generated upon the exercise of non-qualified stock options and, in general, these are the tax benefits which are being recognized first. Any future reduction of this portion of the valuation allowance will result in the tax benefit being recorded as an increase in additional paid-in capital. If and when this portion of the valuation allowance is completely eliminated, further reductions of the remaining valuation allowance will be recognized as an income tax benefit. Results of Operations The following table sets forth, for the periods indicated, the percentage of sales represented by items included in the Company's Consolidated Statements of Operations: Year Ended February 28, ---------------------------- 2002 2001 2000 ------ ------ ------ Sales 100.0% 100.0% 100.0% Cost of goods sold 77.3 80.1 80.9 ----- ----- ----- Gross profit 22.7 19.9 19.1 Operating expenses: Research and development 7.5 5.2 5.9 Selling 2.3 2.8 5.4 General and administrative 7.7 5.0 6.1 ----- ----- ----- Operating income 5.2 6.9 1.7 Settlement of litigation (1.1) - (12.0) Other expense, net - (0.3) (0.1) ----- ----- ----- Income (loss) from continuing operations before income taxes 4.1 6.6 (10.4) Income tax (provision) benefit (1.3) (2.4) 3.7 ----- ----- ----- Income (loss) from continuing operations 2.8 4.2 (6.7) Income from discontinued operations - 0.2 0.3 Gain on sale of discontinued operations 1.6 - - ----- ----- ----- Net income (loss) 4.4% 4.4% (6.4)% ===== ===== ===== Fiscal Years 2002 and 2001 Sales Total sales for fiscal 2002 were $100,715,000, a decline of 14% from fiscal 2001 sales of $117,129,000. Sales of Satellite products decreased $6,208,000, or 7%, from $85,107,000 to $78,899,000. Sales of Wireless Access products decreased $10,206,000, or 32%, from $32,022,000 to $21,816,000. Sales of the Satellite segment in fiscal 2002 declined from the prior year in part because system operators maintained higher ordering patterns in the first half of fiscal 2001 in an effort to avoid product shortages in the event electronic components supply disruptions affected manufacturers' production. This led to order cutbacks by the system operators beginning in the third quarter of fiscal 2001 in order to work down their high inventory levels. These order cutbacks persisted through the first half of fiscal 2002, during which Satellite product sales amounted to $33.0 million. Although sales increased to $45.9 million in the second half of fiscal 2002, sales for the year as a whole still fell short of the fiscal 2001 level. The downturn in Wireless Access product sales is attributable to a combination of the general slowdown in capital spending in the telecommunications industry and the anticipation of second generation non- line of sight products. These factors resulted in a steady decline in sequential quarter sales of the Wireless business segment during the past year. Fiscal 2002 fourth quarter Wireless Access sales were only $2.7 million. The Company expects its Wireless Access sales to remain low in fiscal 2003. The Company does not anticipate that Wireless Access sales will rebound until the development of second generation non-line of sight two-way transceiver products is completed, and until wireless access service providers resume the expansion of their subscriber bases. Management believes that the future success of the Company's Wireless Access business segment is dependent to a large degree on the market acceptance and market penetration of wireless broadband access technology developed by Navini. The Company has licensed this technology from Navini, and is developing customer premise equipment products which are compatible with Navini's technology. Gross Profit and Gross Margins Gross profit for fiscal 2002 declined slightly to $22,881,000 from $23,353,000 in fiscal 2001. Consolidated gross margin improved from 19.9% last year to 22.7% in fiscal 2002. The increase in consolidated gross margin is attributable to higher gross margins for Satellite products. Gross margins for Satellite products improved to 19.9% in fiscal 2002 from 15.2% in fiscal 2001. Satellite gross margins improved primarily because the Company completed the consolidation of its Texas plant into its California manufacturing operations at the end of fiscal 2001, resulting in reduced manufacturing costs beginning in fiscal 2002. Also, Satellite gross margin in fiscal 2001 had been adversely impacted by electronic component shortages that caused production inefficiencies. Gross margins for Wireless Access products declined to 32.8% in fiscal 2002 from 32.6% last fiscal year. Wireless Access gross margins have declined principally due to the decline in sales as discussed above. See also Note 13 to the accompanying consolidated financial statements for additional operating data by business segment. Operating Expenses Research and development expense ("R&D")increased by $1,463,000 from $6,120,000 in fiscal 2001 to $7,583,000 in fiscal 2002. Investment in R&D has been increased in an effort to improve the Company's market position in both of its business segments. Increased R&D spending is primarily in the form of additional engineering and design personnel, higher salaries to remain competitive with industry compensation trends, and higher material costs relating to new product design primarily related to the next generation of products for the Company's Wireless Access business segment. Selling expense decreased by 29% from $3,255,000 last year to $2,299,000 in fiscal 2002. These declines are attributable primarily to decreases in discretionary marketing spending. General and administrative expense increased by $1,871,000 to $7,740,000 in fiscal 2002 from $5,869,000 in fiscal 2001. This increase was due primarily to expenses of $950,000, primarily accounting and legal, incurred in the first quarter of fiscal 2002 in connection with the restatement of the Company's fiscal 2000 and fiscal 2001 financial statements, and to a bad debt write-off of $817,000 during fiscal 2002 for uncollectible receivable balances due from a Wireless Access customer. Litigation Settlement The non-operating expense captioned "Settlement of Litigation" in the amount of $1,125,000 for fiscal 2002 represents an accrued settlement of $925,000 for litigation brought against the Company as a result of the fiscal 2000 and 2001 financial misstatements caused by the Company's former controller, and an accrual of $200,000 for a contingent refund payable to an insurance company involving a legal settlement reached in March 2000, all as further described in Note 12 to the accompanying consolidated financial statements. Income from Continuing Operations Before Income Taxes Income from continuing operations before income taxes decreased from $7,750,000 in fiscal 2001 to $4,181,000 in fiscal 2002 due primarily to the increase in operating expenses of $2,378,000 and to the non-operating expense of $1,125,000 for litigation settlement. Income Tax Provision and Deferred Income Tax Asset The effective tax rates for fiscal 2002 and 2001 were 31.2% and 36.3%, respectively. The decline in the tax rate is attributable primarily to the estimated tax benefit associated with the new Extraterritorial Income Exclusion ("EIE") beginning in fiscal 2002. Under the EIE rules, taxable income associated with qualifying sales made to foreign customers is excludable from taxable income. During fiscal 2002, the Company recognized income tax benefits of $3,525,000 associated with tax deductions on non-qualified employee stock options which were exercised prior to fiscal 2002. These tax benefits were recognized by reducing the deferred income tax asset valuation allowance in the aggregate amount of $3,525,000, with a corresponding increase in additional paid-in capital. Reduction of the deferred income tax asset valuation allowance during fiscal 2002 resulted in a net deferred income tax asset of $3,580,000 at the end of fiscal 2002. The deferred income tax asset valuation allowance was established in years prior to fiscal 2002 because management believed at the time that it did not have the basis to conclude that it was more likely than not that the deferred income tax asset would be fully realized in the future. In view of the Company's profitable operations in fiscal 2001 and fiscal 2002, during which time the Company generated aggregate income from continuing operations before income taxes of $11.9 million, management believes that it is more likely than not that the Company will generate sufficient taxable income in the future to utilize the net deferred income tax asset of $3,580,000. Discontinued Operations As described further in Note 2 to the accompanying consolidated financial statements, the Company sold its 51% ownership interest in Micro Pulse during the second quarter of fiscal 2002. A gain of $1,615,000 net of tax was recognized on this transaction. Net Income Net income, for reasons described above, decreased to $4,464,000 in fiscal 2002 from $5,209,000 in fiscal 2001. Fiscal Years 2001 and 2000 Sales increased $37,700,000, or 47.5%, from $79,429,000 in fiscal year 2000 to $117,129,000 in fiscal year 2001. The fiscal year 2001 sales increase resulted primarily from increases in each of both of the Company's business segments. Sales of Satellite products increased $24,696,000, or 40.9%, from $60,411,000 to $85,107,000. The increase in Satellite product sales resulted primarily from increased sales of DBS products to domestic customers. The Company experienced significant year-to-year sales growth ($28.7 million increase) in the first half of fiscal year 2001 as compared to the first half of fiscal year 2000, offset by a negative comparison ($4.0 million decrease) for the second half year-to-year comparisons. The reductions of shipments of satellite DBS products in the second half of fiscal year 2000 reflects a slowing of subscriber additions, reduction in inventory levels by operators, in addition to the elimination of single output downconverters from their product offering. A delay by the Company of a new product introduction contributed $3.4 million of the fourth quarter sales decrease. This product began shipments of small volume in the Company's first quarter of fiscal year 2002. Sales of Wireless Access products increased $13,004,000, or 68.4%, from $19,018,000 to $32,022,000. The increase in Wireless Access product sales results from increased sales of two-way wireless transceivers, partially offset by reductions in the Company's legacy wireless cable video products. Gross profits increased $8,220,000, or 54.3%, from $15,133,000 in fiscal year 2000 to $23,353,000 in fiscal year 2001. The increase in gross profits occurred primarily because of the increase in sales, and slightly higher product gross margins. Gross margins increased from 19.1% in fiscal year 2000 to 19.9% in fiscal year 2001. The increase in gross margins relates to increased sales of Wireless Access products at higher gross margins of 32.6% while Satellite product gross margins remained relatively consistent with the prior year at 15.2%. See also Note 13 to notes to the consolidated financial statements included elsewhere herein. Research and development expenses increased by $1,435,000, from $4,685,000 in fiscal year 2000 to $6,120,000 in fiscal year 2001. The increase results primarily to additional design personnel in the Wireless Access business unit to focus on the development of wireless two-way MMDS transceivers, and salary increases to ensure engineers' compensation is competitive with current market conditions. Selling expenses decreased by $999,000 from $4,254,000 in fiscal year 2000 to $3,255,000 in fiscal year 2001. The decrease relates primarily to reductions in discretionary marketing expense, offset by additions in personnel and salary increases. General and administrative expenses increased by $1,019,000 from $4,850,000 in fiscal year 2000 to $5,869,000 in fiscal year 2001. The increase results primarily from increases in legal and other professional fees. Operating income increased by $6,765,000 from $1,344,000 in fiscal year 2000 to $8,109,000 in fiscal year 2001. The principal reasons for the improvement are as described above: a $37.7 million increase in sales, a $8.2 million increase in gross profits, offset by a $1.5 million increase in operating expenses. The $9.5 million settlement of litigation in fiscal year 2000 relates to the settlement of the class action lawsuit filed in June 1997. See Note 12 to the consolidated financial statements included elsewhere herein. The (provision for) benefit from income taxes for fiscal years 2001 and 2000 was approximately 36% of income (loss) before taxes. For the reasons outlined above, income from continuing operations for fiscal year 2001 increased $10.2 million from a loss of $5.3 million in fiscal year 2000 to income of $4.9 million in fiscal year 2001. Liquidity and Capital Resources The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $23,156,000 at February 28, 2002, and its $8 million working capital line of credit with a bank. During fiscal year 2002, cash and cash equivalents increased by $13,147,000. This increase consisted of cash provided by operating activities of $12,313,000, net proceeds from the sale of discontinued operations of $2,956,000, and other activity with a net cash inflow impact of $11,000, partially offset by capital expenditures of $1,534,000 and debt repayments of $599,000. Components of operating working capital decreased by $2,130,000 during fiscal 2002, comprised of a $2,269,000 decrease in accounts receivable, a $283,000 decrease in inventories, and an increase of $458,000 in accounts payable and accrued liabilities, partially offset by a $880,000 increase in prepaid expenses and other assets. The Company believes that inflation and foreign currency exchange rates have not had a material effect on its operations. The Company believes that fiscal year 2003 will not be impacted significantly by foreign exchange since a significant portion of the Company's sales are to U.S. markets, or to international markets where its sales are denominated in U.S. dollars. At February 28, 2002, the Company had contractual cash obligations, consisting of future maturities of debt and operating lease commitments, ranging from $542,000 to $1.7 million annually in fiscal 2003 through fiscal 2007, for a total of $6.1 million. As further described in Note 15 to the accompanying consolidated financial statements, on May 2, 2002, the Company entered into a new $12 million term loan with its bank to partially finance the acquisition of the assets and business of Kaul-Tronics, Inc. and two affiliated companies (the "KTI Acquisition"), which was consummated on April 5, 2002. Future maturities of this $12 million term loan are $200,000 per month, or $2.4 million annually, beginning April 1, 2003. The new term loan bears interest at LIBOR plus 2.0% or the bank's prime rate. On April 3, 2002, the Company's working capital line of credit was increased from $8 million to $13 million, and on April 5, 2002, the Company borrowed $12 million on the working capital line of credit to partially fund the KTI Acquisition. In addition to the $12 million proceeds of the line of credit borrowing, the Company used approximately $4.3 million of its existing cash and cash equivalents and issued approximately 929,000 shares of its common stock to pay for the KTI Acquisition. On May 2, 2002, the $12 million outstanding balance on the working capital line of credit was repaid in full from the proceeds of the new $12 million bank term loan referred to in the preceding paragraph. Also on May 2, 2002, the maturity date of the working capital line was extended from August 2, 2002 to August 2, 2005. At February 28, 2002 and at the present time, there are no outstanding borrowings under the working capital line of credit, and $1 million of the line is reserved for a standby letter of credit. The Company believes that cash flow from operations, together with amounts available under its working capital line of credit, are sufficient to support operations, fund capital equipment requirements and discharge contractual cash obligations over the next twelve months. New Authoritative Pronouncements See Note 1 of the accompanying consolidated financial statements for a description of new authoritative accounting pronouncements which had not yet been adopted by the Company as of the end of fiscal 2002. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk. As of February 28, 2002, the Company's term debt and credit facility with its bank are subject to variable interest rates. The Company monitors its debt and interest bearing cash equivalents levels to mitigate the risk of interest rate fluctuations. A fluctuation of one percent in interest rates would have an annual impact of less than $50,000 net of tax on the Company's Statement of Operations. FORWARD LOOKING STATEMENTS Forward looking statements in this Form 10-K which include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "may" "could", "plans", "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance and are subject to certain risks and uncertainties, including, without limitation, product demand, market growth, new competition, competitive pricing and continued pricing declines in the DBS market, supplier constraints, manufacturing yields, meeting demand with multiple facilities, timing and market acceptance of new product introductions, new technologies, the outcome of pending litigation, and other risks and uncertainties that are detailed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission, copies of which may be obtained from the Company upon request. Such risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RISK FACTORS The Company's business operations and implementation of its long-term business strategy are subject to significant risks inherent in its business, including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below could have a material adverse effect on the Company's financial condition, results of operations and cash flows. OUR BUSINESS IS SUBJECT TO MANY FACTORS THAT COULD CAUSE OUR QUARTERLY OR ANNUAL OPERATING RESULTS TO FLUCTUATE AND OUR STOCK PRICE TO BE VOLATILE Our quarterly and annual operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the trading price of our common stock could significantly decline. Some of the factors that could affect our quarterly or annual operating results include: - - the timing and amount of, or cancellation or rescheduling of, orders for our products; - - our ability to develop, introduce, ship and support new products and product enhancements and manage product transitions; announcements, new product introductions and reductions in price of products offered by our competitors; - - our ability to achieve cost reductions; - - our ability to obtain sufficient supplies of sole or limited source components for our products; - - our ability to achieve and maintain production volumes and quality levels for our products; - - the volume of products sold and the mix of distribution channels through which they are sold; - - the loss of any one of our major customers or a significant reduction in orders from those customers; - - increased competition, particularly from larger, better capitalized competitors; - - fluctuations in demand for our products and services; and - - telecommunications and wireless market conditions specifically and economic conditions generally. Due in part to factors such as the timing of product release dates, purchase orders and product availability, significant volume shipments of products could occur at the end of our fiscal quarter. Failure to ship products by the end of a quarter may adversely affect our operating results. In the future, our customers may delay delivery schedules or cancel their orders without notice. Due to these and other factors, quarterly revenue, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. BECAUSE SOME OF OUR KEY COMPONENTS ARE FROM SOLE SOURCE SUPPLIERS OR REQUIRE LONG LEAD TIMES, OUR BUSINESS IS SUBJECT TO UNEXPECTED INTERRUPTIONS, WHICH COULD CAUSE OUR OPERATING RESULTS TO SUFFER. Some of our key components are complex to manufacture and have long lead times. Also, some of our components are purchased from sole source vendors for which alternative sources are not readily available. In the event of a reduction or interruption of supply, or a degradation in quality, as many as six months could be required before we would begin receiving adequate supplies from alternative suppliers, if any. As a result, product shipments could be delayed and our revenues and results of operations would suffer. If we receive a smaller allocation of component parts than is necessary to manufacture products in quantities sufficient to meet customer demand, customers could choose to purchase competing products and we could lose market share. OUR LACK OF PRODUCT DIVERSIFICATION MEANS THAT ANY DECLINE IN PRICE OR DEMAND FOR OUR PRODUCTS WOULD ADVERSELY AFFECT OUR BUSINESS. Our Satellite and Wireless Access products have accounted for substantially all of our historical revenue and are expected to do so for the foreseeable future. Consequently, a decline in the price of, or demand for, our Satellite or Wireless Access products, or their failure to achieve or maintain broad market acceptance, would adversely affect our business. IF WE DO NOT MEET PRODUCT INTRODUCTION DEADLINES, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our inability to develop new products or product features on a timely basis, or the failure of new products or product features to achieve market acceptance, could adversely affect our business. In the past, we have experienced design and manufacturing difficulties that have delayed our development, introduction or marketing of new products and enhancements which has caused us to incur unexpected expenses. In addition, some of our customers have conditioned their future purchases of our products on the addition of product features. In the past we have experienced delays in introducing new features. Furthermore, in order to compete in some markets, we will have to develop different versions of our existing products that operate at different frequencies and comply with diverse, new or varying governmental regulations in each market. DEMAND FOR CALIFORNIA AMPLIFIER'S PRODUCTS FLUCTUATES RAPIDLY AND UNPREDICTABLY, WHICH MAKES IT DIFFICULT TO MANAGE ITS BUSINESS EFFICIENTLY AND CAN REDUCE ITS GROSS MARGINS AND PROFITABILITY. Our cost structure is based in part on our expectations for future demand. Many costs, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. The rapid and unpredictable shifts in demand for our products make it difficult to plan manufacturing capacity and business operations efficiently. If demand is significantly below expectations, we may be unable to rapidly reduce these fixed costs, which can diminish gross margins and cause losses. A sudden downturn may also leave us with excess inventory, which may be rendered obsolete as products evolve during the downturn and demand shifts to newer products. Our ability to reduce costs and expenses is further constrained because we must continue to invest in research and development to maintain our competitive position and to maintain service and support for our existing global customer base. Conversely, in sudden upturns, we sometimes incur significant costs to rapidly expedite delivery of components, procure scarce components and outsource additional manufacturing processes. These costs could reduce our gross margins and overall profitability. Any of these results could adversely affect our business. BECAUSE WE SELL SOME OF OUR PRODUCTS IN COUNTRIES OTHER THAN THE UNITED STATES, SUBJECTING US TO DIFFERENT REGULATORY SCHEMES, AND WE HAVE A SIGNIFICANT FOREIGN SUPPLY BASE, WE MAY NOT BE ABLE TO DEVELOP PRODUCTS THAT WORK WITH THE DIFFERENT STANDARDS RESULTING IN OUR INABILITY TO SELL OUR PRODUCTS, AND, FURTHER, WE MAY BE SUBJECT TO POLITICAL, ECONOMIC, AND OTHER CONDITIONS AFFECTING SUCH COUNTRIES THAT COULD RESULT IN REDUCED SALES OF OUR PRODUCTS AND WHICH COULD ADVERSELY AFFECT OUR BUSINESS. If our sales are to grow in the longer term, we must continue to sell our products in many different countries. Many countries require communications equipment used in their country to comply with unique regulations, including safety regulations, radio frequency allocation schemes and standards. If we cannot develop products that work with different standards, we will be unable to sell our products. If compliance proves to be more expensive or time consuming than we anticipate, our business would be adversely affected. Some countries have not completed their radio frequency allocation process and therefore we do not know the standards with which we would be forced to comply. Furthermore, standards and regulatory requirements are subject to change. If we fail to anticipate or comply with these new standards, our business and results of operations will be adversely affected. Sales to customers outside the U.S. accounted for 16.5% and 19.9% of our total sales for the fiscal years ended February 28, 2002 and 2001, respectively. Accordingly, we are subject to the political, economic and other conditions affecting countries or jurisdictions other than the U.S., including Africa, the Middle East, Europe and Asia. Additionally, a substantial portion of our components and subassemblies are procured from foreign suppliers located primarily in Hong Kong, mainland China, Taiwan, and other Pacific Rim countries. Any interruption or curtailment of trade between the countries in which we operate and their present trading partners, change in exchange rates, a significant shift in U.S. trade policy toward these countries or a significant downturn in the political, economic or financial condition of these countries could cause demand for and sales of our products to decrease, cause disruption of our supply channels or otherwise disrupt our operations, cause our costs of doing business to increase, or subject us to increased regulation including future import and export restrictions, any of which could adversely affect our business. WE RELY ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR SALES AND BUSINESS. We generate a significant portion of our sales from a relatively small number of customers. Sales to our four largest customers accounted for approximately 82% and 56% of total sales in the fiscal years ended February 28, 2002 and 2001, respectively. Furthermore, if the pending merger between Echostar Communications Corporation and DirectTv is consummated, our customer base could become even more concentrated because we sell, directly or indirectly, to both of these DBS system operators. The loss of, or a decrease in orders by, one or more of our major customers could adversely affect our sales, business and reputation. In addition, Sprint, the largest MMDS license holder in the U.S., accounted for 62% and 37% of the sales of our Wireless Access business unit in fiscal years ended February 28, 2002 and 2001, respectively. In October 2001, Sprint announced that it has suspended any new deployments of broadband wireless equipment, as well as ceasing the acquisition of any new customers, until a second-generation system could be evaluated. Our Wireless Access business unit has only a small number of other customers. We expect little or no revenue from Sprint in our fiscal year ending February 28, 2003. WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS AND OUR CUSTOMERS MAY CEASE PURCHASING OUR PRODUCTS AT ANY TIME. We generally do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly, our customers can cease purchasing our products at any time without penalty, our customers are free to purchase products from our competitors, we are exposed to competitive price pressure on each order, and our customers are not required to make minimum purchases. OUR WIRELESS ACCESS BUSINESS IS SUBJECT TO RAPID TECHNOLOGY CHANGES, EVOLVING STANDARDS AND GOVERNMENT REGULATION. The market for wireless Internet access served by our Wireless Access business is subject to rapid technological change, frequent new service introductions and evolving industry standards. We believe that our future success will depend largely on our ability to anticipate or adapt to these changes and to offer, on a timely basis, products that meet evolving standards. We cannot predict the extent to which competitors using existing or future methods of delivery of Internet access services will compete with our services. We cannot assure you that: - existing, proposed or undeveloped technologies will not render our broadband wireless systems less profitable or less viable, - we will have the resources to acquire new technologies or to introduce new services that could compete with future technologies, or - we will be successful in responding to technological changes in a timely and cost effective manner. Additionally, regulatory changes by the U.S. Federal Communications Commission or by regulatory agencies outside the United States, including changes in the allocation of available frequency spectrum, could significantly affect our operations by restricting our development efforts, rendering current products obsolete, or increasing the opportunity for additional competition. There can be no assurance that new regulations will not be promulgated that could materially and adversely affect our business and operating results. BECAUSE THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE HAVE, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL CONTINUE TO BE ACCEPTED IN THE MARKETPLACE OR CAPTURE INCREASED MARKET SHARE. The market for integrated microwave fixed point reception and transmission products is intensely competitive and characterized by rapid technological change, evolving standards, short product life cycles, and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our products would be sufficient to establish and sustain our products in the market. Any increase in price or other competition could result in erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations. We cannot provide assurance that we will have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. We face competition from a variety of companies, which generally vary in size and in the scope and breadth of products and services offered. We also face competition from customers' or prospective customers' own internal development efforts. Many of the companies that compete, or may compete in the future, against us have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources. These competitors may also have pre-existing relationships with our customers or potential customers. As a result, they may be able to introduce new technologies, respond more quickly to changing customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Our competitors may successfully integrate the functionality of our reception and transmission products into their products and thereby render our products obsolete. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so. We believe our principal competitors include or will include REMEC, Sharp, Channelmaster, Andrew corp., Signal Technology, IP Wireless and NextNet. In addition, there have been a number of announcements by other companies, including smaller emerging companies, that they intend to enter the market segments adjacent to or addressed by our products. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND OUR COMPETITORS MAY BE ABLE TO OFFER SIMILAR PRODUCTS AND SERVICES THAT WOULD HARM OUR COMPETITIVE POSITION. Our success depends, in large part, upon our intellectual property. We rely primarily on patents, trademark and trade secret laws, confidentiality procedures and contractual provisions to establish and protect our intellectual property. These mechanisms provide us with only limited protection. We currently hold 19 patents and have 10 patent applications pending. As part of our confidentiality procedures, we enter into non- disclosure agreements with all of our executive officers, managers and supervisory employees. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. Furthermore, effective protection of intellectual property rights is unavailable or limited in some foreign countries. Our protection of our intellectual property rights may not provide us with any legal remedy should our competitors independently develop similar technology, duplicate our products and services, or design around any intellectual property rights we hold. IF WE ARE UNABLE TO INTEGRATE SUCCESSFULLY INTO OUR COMPANY THE EMPLOYEES, TECHNOLOGIES AND OTHER ASSETS WE RECENTLY ACQUIRED FROM KAUL-TRONICS, INC., WE MAY NOT ACHIEVE THE ANTICIPATED BENEFITS OF THE ACQUISITION. We are in the initial stages of integrating the new employees, technologies and other assets related to the DBS antenna dish business that we acquired from Kaul-Tronics, Inc. and two affiliated companies in April 2002. Because the new employees and facilities will remain in Wisconsin, and our headquarters are in Camarillo, California, we face the additional challenge of integrating employees in geographically disparate locations. The integration effort will take time and could distract management from other aspects of our business. We cannot assure you that we will be successful in integrating the acquired business and if we are unable to do so, we may incur increased expenses and may not achieve the benefits of the acquisition. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT HAVE ADVERSE CONSEQUENCES FOR OUR BUSINESS. Recently, we completed the acquisition of the assets and business of Kaul-Tronics, Inc., as described above. As part of our business strategy, from time to time, we expect to review opportunities to acquire and may acquire other businesses or products that will complement our existing product offerings, augment our market coverage or enhance our technological capabilities. Although we have no current agreements or negotiations underway with respect to any material acquisitions, we may make acquisitions of businesses, products or technologies in the future. However, we cannot be sure that we will be able to locate suitable acquisition opportunities. The acquisitions that we have completed, agreed to complete and which we may complete in the future could result in the following, any of which could seriously harm our results of operations or the price of our stock: (i) issuances of equity securities that would dilute the percentage ownership of our current stockholders; (ii) large one-time write-offs; (iii) the incurrence of debt and contingent liabilities; (iv) difficulties in the assimilation and integration of the acquired companies; (v) diversion of management's attention from other business concerns; (vi) contractual disputes; (vii) risks of entering geographic and business markets in which we have no or only limited prior experience; and (viii) potential loss of key employees of acquired organizations. OUR PRIMARY OPERATIONS ARE LOCATED NEAR KNOWN EARTHQUAKE FAULTS. The occurrence of an earthquake or other natural disaster in the vicinity of our primary operations located in Camarillo, California could cause significant damage to our facility that may require us to cease or suspend operations. Although we currently have insurance for earthquake risks, we can provide no assurance that such insurance coverage would be adequate in the event of a catastrophic loss, or that earthquake insurance will continue to be available, or that if available that earthquake coverage will continue to be carried by us in the future. WE DEPEND ON OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL. IF WE LOSE ANY OF MEMBERS OF OUR SENIOR MANAGEMENT TEAM, OUR ABILITY TO CARRY OUT OUR LONG-TERM BUSINESS STRATEGY COULD BE ADVERSELY AFFECTED. We believe our future success largely depends on the expertise of our senior management team. The loss of one or more members of senior management could disrupt our operations or the execution of our business strategy. We do not maintain key person life insurance on any officer or manager. WE FACE RISKS ASSOCIATED WITH SHAREHOLDER LITIGATION. We and certain members of our board of directors have been sued by alleged shareholders in two class action lawsuits during the past several years. The most recent litigation was initiated in April 2001 as a result of financial misstatements affecting our fiscal 2000 and fiscal 2001 financial statements caused by the our former controller, which we became aware of and disclosed in March 2001. An out-of-court settlement of this class action litigation was reached in December 2001, but this settlement agreement has not yet been filed with the court for approval. We can provide no assurance that the court will approve it on the terms and conditions which we agreed to with the plaintiffs. If the court does not approve the settlement agreement as currently structured, it could adversely affect our financial position, results of operations, cash flows and liquidity. WE FACE RISKS ASSOCIATED WITH A PENDING SEC INVESTIGATION. As a result of the financial misstatements caused by our former controller, as discussed above, the Securities and Exchange Commission opened an investigation into the matter. The Company has been and expects to continue cooperating with the SEC in connection with its investigation. We can provide no assurance that we will be able to avoid the imposition of penalties or other sanctions by the SEC as a result of this investigation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information required to be filed hereunder are indexed on page 33 of this report and are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows: NAME AGE POSITION - -------------------------- --- ----------------------- Ira Coron (1) 73 Chairman of the Board of Directors Fred M. Sturm 44 Chief Executive Officer, President and Director Philip Cox 62 Vice President, Wireless Access Products Robert Hannah 41 Vice President, Satellite Products Patrick Hutchins 39 Vice President, Operations Kris Kelkar 38 Senior Vice President, Wireless Access Products Richard K. Vitelle 48 Vice President, Finance, Chief Financial Officer and Corporate Secretary Richard B. Gold (1) 47 Director Arthur H. Hausman (1)(2) 78 Director Frank Perna, Jr. (2) 64 Director Thomas L. Ringer (2) 70 Director (1) Member of Compensation Committee. (2) Member of Audit Committee. IRA CORON has been Chairman of the Board for California Amplifier, Inc. since March of 1994, and in addition was the Chief Executive Officer until 1997 and remained an officer of the Company until February 1999. From 1989 to 1994 he was an independent management consultant to several companies and venture capital firms. He retired from TRW, Inc., after serving in numerous senior management positions from June 1967 to July 1989 among which was Vice President and General Manager of TRW's Electronic Components Group. He also served as a member of the Executive Committee of the Wireless Communications Association. FRED M. STURM was appointed Chief Executive Officer, President and Director in August 1997. Prior to joining the Company from 1990 to 1997, Mr. Sturm was President of Chloride Power Systems (USA), and Managing Director of Chloride Safety, Security, and Power Conversion (UK), both of which are part of Chloride Group, PLC (LSE: CHLD). From 1979 to 1990, he held a variety of general management positions with M/A-Com and TRW Electronics, which served RF and microwave markets. PHILIP COX joined the Company in July 1996. In January 1998, in conjunction with the reorganization previously mentioned, Mr. Cox was appointed Vice President, Wireless Products and most recently Vice President Sales, Wireless Access Products. Prior to July 1996, he held various sales and marketing positions with Signal Technology and M/A-Com. ROBERT HANNAH joined the Company as Vice President of Engineering in April 1995. In January 1998, in conjunction with the reorganization previously mentioned, Mr. Hannah was appointed Vice President, Satellite Products. Prior to April 1995, Mr. Hannah held various positions with Hughes, most recently the position of Technical Manager at Hughes Network Systems. PATRICK HUTCHINS joined the Company as Vice President, Operations in August 2001. From March 1997 until joining the Company, Mr. Hutchins served in general management capacities with several units of Chloride Group PLC and Genlyte Thomas LLC, most recently serving as the President and General Manager of Chloride Systems, a division of Genlyte Thomas. KRIS KELKAR was appointed Senior Vice President of Sales and Marketing in April 1995 and Vice President, Marketing in April 1997. In January 1998, in conjunction with the reorganization previously mentioned, Mr. Kelkar was appointed Vice President, Voice and Data Products, and, most recently, Vice President, Wireless Access Products. Prior to April 1995, he held various positions with General Instrument Corporation, the most recent Vice President of International Marketing for General Instrument's Communications Division. RICHARD K. VITELLE joined the Company as Vice President, Finance, Chief Financial Officer and Corporate Secretary in July 2001. Prior to joining the Company, he served as Vice President of Finance and CFO of SMTEK International, Inc., a publicly held electronics manufacturing services provider, where he was employed for a total of 11 years. Earlier in his career Mr. Vitelle served as a senior manager with Price Waterhouse. RICHARD B. GOLD became a director of California Amplifier, Inc. in December 2000. Mr. Gold has been the Chairman, President and Chief Executive Officer of Genoa Corporation, a privately-held optical communications equipment company, since January 1999. From November 1991 through December 1998, Mr. Gold held various senior-level executive positions with Pacific Monolithics, Inc., a supplier of wireless communications equipment, including Vice President -- Engineering, Chief Operating Officer and, from January 1997 through December 1998, President and Chief Executive Officer. In October 1998, Pacific Monolithics filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Mr. Gold is a director of Nucentrix Broadband Networks, Inc., a publicly held company. ARTHUR H. HAUSMAN has been a director of the Company since 1987. Mr. Hausman is Chairman Emeritus of the Board of Ampex Corporation. He served as Chairman of the Board of Directors and Chief Executive Officer of Ampex, having been with Ampex for 27 years until his retirement in 1988. He currently serves as a director of Vista Research Corporation, a privately held company, and Drexler Technology Corporation, a publicly held company. He was appointed by President Reagan to the President's Export Council, to the Council's Executive Committee and to the Chairmanship of the Export Administration Subordinate Committee of the Council for the period 1985 to 1989. FRANK PERNA, JR. has been a director since May 2000. From 1990 to 1993, Mr. Perna was Chief Executive Officer of MagneTek. From 1994 to 1998 Mr. Perna was Chairman and Chief Executive Officer of EOS Corporation, and from 1998 to the present as Chairman and Chief Executive Officer of MSC Software. Mr. Perna also serves as Chairman of the Board of Software.com and on the Board of Trustees of Kettering University. THOMAS L. RINGER has been a director of the Company since August 1996. Since 1990, Mr. Ringer has been actively involved as a member of the boards of directors for various public and private companies. Mr. Ringer is currently Chairman of Wedbush Morgan Securities, Inc., Chairman of Wedbush Capital Corporation, Chairman of M.S. Aerospace, Inc., Chairman of Document Sciences Corporation, a publicly held company, Chairman of the Center for Innovation and Entrepreneurship, Chairman of Camping Business Systems, Inc., and a director of VoiceViewer Technologies, Inc. Prior to 1990, Mr. Ringer served as Chairman, President and Chief Executive Officer of Recognition Equipment, Inc., President and Chief Executive Officer of Fujitsu Systems of America, Inc., and President and Chief Executive Officer of Computer Machinery Corporation. The Company has a Compensation Committee which reviews and makes recommendations to the Board of Directors with respect to the compensation of the Company's executive officers and to administer the Company's Stock Option Plans. The Company also has an Audit Committee which reviews the scope of audit procedures employed by the Company's independent auditors, approves the audit fee charged by the independent auditors, and reviews the audit reports rendered by the Company's independent auditors. The Audit Committee reports to the Board of Directors with respect to such matters and recommends the selection of independent auditors. Officers are appointed by and serve at the discretion of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information under the caption "Executive Compensation" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 2002 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information under the caption "Stock Ownership" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on July 18, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS. Reference is made to the Index to Consolidated Financial Statements on page 33 of this report. (b) FORM 8-K. The Company made no filings on Form 8-K during the three months ended February 28, 2002. (c) EXHIBITS. Reference is made to the Index to Exhibits on pages 63-64 of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on May 31, 2002. CALIFORNIA AMPLIFIER, INC. By: /s/ Fred M. Sturm __________________________ Fred M. Sturm Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Ira Coron Chairman of the Board of May 25, 2002 ______________________ Directors ___________________ Ira Coron /s/ Richard B. Gold Director May 28, 2002 ______________________ ___________________ Richard B. Gold /s/ Arthur H. Hausman Director May 27, 2002 ______________________ ___________________ Arthur H. Hausman /s/ Frank Perna, Jr. Director May 23, 2002 ______________________ ___________________ Frank Perna, Jr. /s/ Thomas L. Ringer Director May 24, 2002 ______________________ ___________________ Thomas L. Ringer /s/ Fred M. Sturm President, Chief Executive May 31, 2002 ______________________ Officer and Director ___________________ Fred M. Sturm (principal executive officer) /s/ Richard K. Vitelle VP Finance, Chief Financial May 31, 2002 ______________________ Officer and Treasurer ___________________ Richard K. Vitelle (principal accounting officer) CALIFORNIA AMPLIFIER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORTS OF INDEPENDENT AUDITORS 34 FINANCIAL STATEMENTS: Consolidated Balance Sheets 36 Consolidated Statements of Operations 37 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) 38 Consolidated Statements of Cash Flows 39 Notes to Consolidated Financial Statements 40 INDEPENDENT AUDITORS' REPORT The Board of Directors California Amplifier, Inc.: We have audited the accompanying consolidated balance sheet of California Amplifier, Inc. and subsidiaries as of March 2, 2002 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Amplifier, Inc. and subsidiaries as of March 2, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP Los Angeles, California May 13, 2002 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To California Amplifier, Inc.: We have audited the accompanying consolidated balance sheet of California Amplifier, Inc. (a Delaware corporation) and subsidiaries as of March 3, 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the two years in the period ended March 3, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Amplifier, Inc. and subsidiaries as of March 3, 2001, and the results of their operations and their cash flows for the two years in the period ended March 3, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Los Angeles, California May 30, 2001 CALIFORNIA AMPLIFIER, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE) February 28, --------------------- 2002 2001 -------- -------- Assets Current assets: Cash and cash equivalents $ 23,156 $ 10,009 Accounts receivable, less allowance for doubtful accounts of $417 and $467 in 2002 and 2001, respectively 8,219 12,370 Inventories, net 9,472 10,373 Deferred income tax asset, net 3,580 2,256 Prepaid expenses and other current assets 1,312 515 -------- -------- Total current assets 45,739 35,523 -------- -------- Equipment and improvements, net of accumulated depreciation and amortization 7,375 10,231 Goodwill, net of accumulated amortization of $765 and $495 in 2002 and 2001, respectively 3,287 3,557 Other assets 287 501 -------- -------- $ 56,688 $ 49,812 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 917 $ 644 Accounts payable 5,713 5,677 Accrued payroll and employee benefits 1,870 1,594 Other accrued liabilities 6,980 7,117 -------- -------- Total current liabilities 15,480 15,032 -------- -------- Long-term debt, less current portion 3,628 4,500 -------- -------- Minority interest in Micro Pulse, Inc. - 656 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 3,000 shares authorized; no shares issued or outstanding - - Common Stock, $.01 par value; 30,000 shares authorized; 13,630 and 13,601 shares issued and outstanding in 2002 and 2001, respectively 136 136 Additional paid-in capital 27,569 23,975 Retained earnings 10,676 6,212 Accumulated other comprehensive loss (801) (699) -------- -------- Total stockholders' equity 37,580 29,624 -------- -------- $ 56,688 $ 49,812 ======== ======== See accompanying notes to consolidated financial statements. CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year ended February 28, ----------------------------- 2002 2001 2000 -------- -------- ------- Sales $100,715 $117,129 $79,429 Cost of goods sold 77,834 93,776 64,296 -------- -------- ------- Gross profit 22,881 23,353 15,133 -------- -------- ------- Operating expenses: Research and development 7,583 6,120 4,685 Selling 2,299 3,255 4,254 General and administrative 7,740 5,869 4,850 -------- -------- ------- Total operating expenses 17,622 15,244 13,789 -------- -------- ------- Operating income 5,259 8,109 1,344 -------- -------- ------- Non-operating income (expense): Settlement of litigation (1,125) - (9,500) Other income (expense), net 47 (359) 60 -------- -------- ------- Total non-operating expense (1,078) (359) (9,560) -------- -------- ------- Income (loss) from continuing operations before income taxes 4,181 7,750 (8,216) Income tax (provision) benefit (1,307) (2,810) 2,950 -------- -------- ------- Income (loss) from continuing operations 2,874 4,940 (5,266) Income (loss) from discontinued operations, net of tax (25) 269 202 Gain on sale of discontinued operations, net of tax 1,615 - - -------- -------- ------- Net income (loss) $ 4,464 $ 5,209 $(5,064) ======== ======== ======= Basic earnings (loss) per share: Income (loss) from continuing operations $ 0.21 $ 0.37 $ (0.44) Income from discontinued operations - 0.02 0.02 Gain on sale of discontinued operations 0.12 - - -------- -------- ------- Net income (loss) $ 0.33 $ 0.39 $ (0.42) ======== ======== ======= Diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.21 $ 0.35 $ (0.44) Income from discontinued operations - 0.02 0.02 Gain on sale of discontinued operations 0.11 - - -------- -------- ------- Net income (loss) $ 0.32 $ 0.37 $ (0.42) ======== ======== ======= Shares used in computing basic and diluted earnings (loss) per share: Basic 13,727 13,507 12,072 ======== ======== ======= Diluted 13,979 14,217 12,072 ======== ======== ======= See accompanying notes to consolidated financial statements. CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) Accum- ulated Other Compre- Common Stock Additional hensive -------------- Paid-in Retained Income Shares Amount Capital Earnings (Loss) Total ------ ------ ------ ------ ------ ------ Balances at February 28, 1999 11,785 $ 118 $14,050 $ 6,067 $ (170) $20,065 Exercise of stock options 873 9 3,327 - - 3,336 Net loss - - - (5,064) - (5,064) Foreign currency translation adjustment - - - - (56) (56) ------ Comprehensive loss (5,120) ------ ------ ------- ------- ------ ------ Balances at February 28, 2000 12,658 127 17,377 1,003 (226) 18,281 Exercise of stock options 353 3 2,207 - - 2,210 Issuances of common stock 590 6 4,391 - - 4,397 Net income - - - 5,209 - 5,209 Foreign currency translation adjustment - - - - (473) (473) ------ Comprehensive income 4,736 ------ ------ ------- ------- ------ ------ Balances at February 28, 2001 13,601 136 23,975 6,212 (699) 29,624 Exercise of stock options 29 - 69 - - 69 Tax benefits from exercise of non- qualified stock options - - 3,525 - - 3,525 Net income - - - 4,464 - 4,464 Foreign currency translation adjustment - - - - (102) (102) ------ Comprehensive income 4,362 ------ ------ ------- ------- ------ ------ Balances at February 28, 2002 13,630 $ 136 $27,569 $10,676 $(801) $37,580 ====== ====== ======= ======= ===== ====== See accompanying notes to consolidated financial statements. CALIFORNIA AMPLIFIER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year ended February 28, ------------------------------ 2002 2001 2000 -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,464 $ 5,209 $(5,064) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts 991 144 37 Depreciation and amortization 4,317 4,250 2,990 Non-cash litigation charge 700 - 9,500 (Gain) loss on sale and disposal of equipment and improvements 58 (41) 3 Increase in equity associated with tax benefit from exercise of stock options 3,525 - - Deferred tax assets, net (2,233) 2,608 (4,252) Minority interest in net income (loss) of Micro Pulse, Inc., net of tax (24) 314 228 Gain on sale of discontinued operation (1,615) - - Changes in operating assets and liabilities: Accounts receivable 2,269 3,524 (11,252) Inventories 283 2,520 (6,267) Prepaid expenses and other assets (880) 184 263 Accounts payable 424 (8,981) 10,014 Accrued liabilities 34 (2,222) 4,615 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 12,313 7,509 815 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and improvements (1,534) (4,337) (5,357) Proceeds from sale of equipment 44 51 7 Net proceeds from sale of discontinued operations 2,956 - - Acquisition of net assets from Gardiner - - (6,170) -------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,466 (4,286) (11,520) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt - 5,000 1,500 Debt repayments (599) (2,742) (596) Proceeds from exercise of stock options 69 2,210 3,336 -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (530) 4,468 4,240 -------- -------- -------- EFFECT OF FOREIGN EXCHANGE RATES (102) (473) (56) -------- -------- -------- Net change in cash and cash equivalents 13,147 7,218 (6,521) Cash and cash equivalents at beginning of year 10,009 2,791 9,312 -------- -------- -------- Cash and cash equivalents at end of year $23,156 $10,009 $ 2,791 ======== ======== ======== See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business California Amplifier, Inc. (the "Company") designs, manufactures and markets microwave equipment used in the reception of video transmitted from satellites and wireless terrestrial transmission sites, and two-way wireless transceivers used for fixed point wireless voice (telephony) and broadband data (Internet) applications. The Company's Satellite business unit designs and markets reception components for the worldwide direct broadcast satellite (DBS) television market as well as a full line of consumer and commercial products for video and data reception. The Wireless Access business unit designs and markets integrated reception and two-way transmission fixed wireless equipment for video, voice, data, telephony and networking applications. As described further in Note 2, in July 2001 the Company sold its 51% interest in Micro Pulse. Micro Pulse designs, manufactures and markets antennas and amplifiers used principally in GPS applications. Accordingly, the results of operations of Micro Pulse, which represented a separate business segment of the Company, have been presented as a discontinued operation for all periods presented in the accompanying consolidated statements of operations. Principles of Consolidation The consolidated financial statements include the accounts of the Company (a Delaware corporation) and its wholly-owned subsidiaries, California Amplifier SARL, the Company's subsidiary in France, and Cal Amp Limited, the Company's Hong Kong subsidiary. All significant intercompany transactions have been eliminated in consolidation. Fiscal Year The Company uses a 52-53 week fiscal year ending on the Saturday closest to February 28, which for fiscal years 2002, 2001 and 2000 fell on March 2, 2002, March 3, 2001 and February 26, 2000, respectively. In these consolidated financial statements, the fiscal year end for all years, including leap years, is shown as February 28 for clarity of presentation. Fiscal year 2001 consisted of 53 weeks, compared to 52 weeks for the fiscal years 2002 and 2000. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable and collection is probable. Generally, these criteria are met at the time product is shipped. Customers do not have rights of return except for defective products returned during the warranty period. In fiscal 2001, the Company adopted Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. In accordance with the requirements of this pronouncement, the Company includes shipping and handling fees billed to customers as sales. Shipping and handling fees included in sales for fiscal years 2002, 2001 and 2000 were $224,000, $446,000 and $567,000, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents. Concentrations of Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market instruments and trade receivables. The Company currently invests its excess cash in money market mutual funds managed by or affiliated with its U.S. commercial bank. The Company had cash and cash equivalents in one U.S. bank in excess of federally insured amounts. Cash and cash equivalents in U.S. and foreign banks is as follows (in thousands): February 28, -------------------- 2002 2001 ------ ------ U.S. banks $22,582 $ 8,983 Foreign banks 574 1,026 ------- ------- $23,156 $10,009 ======= ======= Because the Company sells into markets dominated by a few large service providers, a significant percentage of consolidated sales and consolidated accounts receivable relate to a small number of customers. Sales to significant customers as a percent of consolidated sales are as follows: Year ended February 28, ------------------------------ Customer 2002 2001 2000 -------- ------ ------ ------ A 30.6% 23.9% 20.9% B 25.8% 22.0% 10.7% C 13.5% 10.0% * D 11.7% * * E * * 18.8% Accounts receivable from significant customers as a percent of consolidated net accounts receivable are as follows: February 28, -------------------- 2002 2001 ------ ------ A 30.0% 17.9% B 39.6% * C * 20.6% D * 19.2% Customers A, B, D and E are Satellite customers, while C is a Wireless Access customer. * Customer represents less than 10% of consolidated sales or year-end accounts receivable, as applicable, for period indicated. Allowance for Doubtful Accounts During the second quarter of fiscal 2002, the Company provided a reserve of $1,162,000 for a receivable balance due from a customer of the Wireless Access business unit. In the fourth quarter of fiscal 2002, the Company received approximately 1% of the customer's common stock in full settlement of this receivable balance. The Company recorded a reduction of bad debts expense of $345,000 in the fiscal 2002 fourth quarter as a result of receiving this common stock. The value assigned to the common stock was equal to the quoted price of the shares on the Canadian stock exchange on which the stock is traded. This available-for-sale investment valued at $345,000 is included in prepaid expenses and other current assets in the accompanying balance sheet at February 28, 2002. Inventories Inventories include costs of materials, labor and manufacturing overhead. Inventories are stated at the lower of cost or net realizable value, with cost determined principally by the use of the first-in, first- out method. Investments The Company classifies investments in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to- maturity securities are those securities that the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income until realized. At February 28, 2002, the Company had no trading or held-to-maturity investments. Its available-for-sale investment had a carrying value of $345,000 at February 28, 2002 (see "Allowance for Doubtful Accounts" above). Equipment and improvements Equipment and improvements are stated at cost. The Company follows the policy of capitalizing expenditures which increase asset lives, and charging ordinary maintenance and repairs to operations, as incurred. When assets are sold or disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income (loss) from operations. Depreciation and amortization are based upon the estimated useful lives of the related assets using the straight-line method. Useful lives range from two to five years, and in the case of leasehold improvements over the shorter of the lease term or the useful life of the improvements. Goodwill Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible assets and identifiable intangible assets of businesses acquired. Through the end of fiscal 2002, goodwill was amortized on a straight-line basis over 15 years. As a result of adopting Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Intangible Assets" effective March 3, 2002, beginning in fiscal year 2003 goodwill will no longer be amortized. Instead, goodwill will be evaluated periodically for impairment pursuant to the provisions of this new pronouncement, as described in more detail under "New Authoritative Pronouncements" below. Accounting for Long-Lived Assets The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of an asset may not be recoverable. Recoverability is measured by comparison of carrying amount to the undiscounted future net cash flows an asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount at which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate: Cash and cash equivalents, accounts receivable and accounts payable - The carrying amount is a reasonable estimate of fair value given the short maturity of these instruments. Long-term debt - The carrying value approximates fair value since the interest rate on the long-term debt approximates the interest rate which is currently available to the Company for the issuance of debt with similar terms and maturities. Warranty The Company warrants its products against defects over periods ranging from 3 to 24 months. An accrual for estimated future costs relating to products returned under warranty is recorded as an expense when products are shipped. Foreign Currency Translation and Comprehensive Income (Loss) Historically, the Company's French subsidiary used the local currency as its functional currency. The local currency was the French franc until January 1, 2002 and the Euro beginning on that date. The financial statements of the French subsidiary were translated into U.S. dollars using current or historical exchange rates, as appropriate, with translation gains or losses included in the accumulated other comprehensive income (loss) account in the stockholders' equity section of the consolidated balance sheet. In connection with the conversion of the French subsidiary's local currency from the franc to the Euro, the Company evaluated which currency, the Euro or the U.S. dollar, is best suited to be used as the functional currency. On the basis of this evaluation, management determined that the functional currency should be changed from the Euro to the U.S. dollar, and this change was made effective February 1, 2002. As a result of this change, the foreign currency translation account debit balance of $801,000 included in accumulated other comprehensive income (loss) will remain unchanged until such time as the French subsidiary ceases to be part of the Company's consolidated financial statements. The functional currency of the Company's Hong Kong subsidiary is the U.S. dollar. Earnings (Loss) Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the Company. Accounting for Stock Options As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, the Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and comply with the pro forma disclosure requirements of SFAS 123 (see Note 8). New Authoritative Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Accounting for Business Combinations" ("SFAS 141"). SFAS 141 establishes accounting and reporting standards for business combinations initiated after June 30, 2001. It requires that all business combinations use the Purchase Method of Accounting. Goodwill will continue to be initially recognized as an asset in the financial statements and goodwill will be measured as the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. An intangible asset acquired in a business combination is recognized as an asset apart from goodwill if that asset arises from contractual or other legal rights. The provisions of SFAS 141 are required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS 141 on March 3, 2002 (i.e., the first day of fiscal 2003). The adoption of SFAS 141 will not have a material effect on the Company's results of operations, financial position or liquidity. In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer amortized but rather is tested for impairment at least annually at the reporting unit level. A recognized intangible asset is amortized over its useful life and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") or, upon its adoption, SFAS 144 (see below). A recognized intangible asset with an indefinite useful life is not amortized until its life is determined to be finite. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 on March 3, 2002. As a result of adopting SFAS 142, beginning in fiscal 2003 the Company will no longer record amortization on goodwill of $270,000 per year. The Company has not yet made a determination of how much, if any, of the Company's existing goodwill is impaired under SFAS No. 142 or what charges would have to be recorded upon the Company's adoption of SFAS No. 142. However, management believes that the initial effects of adopting SFAS 142 will not be material to the Company's consolidated financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long- lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company plans on adopting SFAS 143 in March 2003. The Company believes that the adoption of SFAS 143 will not have a material effect on the Company's results of operations, financial position or liquidity. In August 2001, the FASB also issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30") so two accounting models existed for the disposal of long-lived assets. SFAS 144 replaces both SFAS 121 and APB 30, so that only one accounting model exists for the disposal of long-lived assets. SFAS 144 also resolves implementation issues related to SFAS 121. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The provisions of SFAS 144 are to be applied prospectively. The Company adopted SFAS 144 on March 3, 2002. The Company believes that the adoption of SFAS 144 will not have a material effect on the Company's results of operations, financial position or liquidity. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas where significant judgments are made include, but are not limited to: allowance for doubtful accounts, inventory valuation, product warranties and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - DISCONTINUED OPERATIONS On July 31, 2001, the Company sold its 51% ownership interest in Micro Pulse. After giving consideration to disposition costs and cash of $275,000 which remained with the divested operation, the net cash proceeds of this transaction amounted to $2,956,000. The sale generated an after-tax gain of $1,615,000. Micro Pulse was the sole operating unit comprising the Company's Antenna segment. Accordingly, operating results for Micro Pulse have been presented in the accompanying consolidated statements of operations as a discontinued operation, and are summarized as follows (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Sales $ 2,556 $ 7,850 $ 6,988 ======= ======= ======= Operating income (loss) $ (105) $ 766 $ 681 ======= ======= ======= Income (loss) from discontinued operations, net of tax $ (25) $ 269 $ 202 ======= ======= ======= The net assets of Micro Pulse, and the Company's basis in its investment in Micro Pulse, consisted of the following on July 31, 2001, the date of sale (in thousands): Current assets $ 1,845 Property, equipment and improvements, net 269 Other assets 142 Current liabilities (983) ------- Net assets of Micro Pulse 1,273 Less: Minority interest in Micro Pulse (566) ------- Basis in Micro Pulse investment $ 707 ======= The net assets of Micro Pulse at February 28, 2001, which are included in the accompanying consolidated balance sheet at that date, amounted to $1,325,000. The gain on sale of the Company's 51% interest Micro Pulse, shown in the accompanying consolidated statements of operations as "Gain on sale of discontinued operation, net of tax", is comprised as follows (in thousands): Gross sales proceeds $ 3,408 Less disposal costs (177) ------- Net sales proceeds 3,231 Less: Basis in Micro Pulse investment (707) ------- Pre-tax gain on sale 2,524 Income tax provision (909) ------- Gain on sale of discontinued operations, net of tax $ 1,615 ======= NOTE 3 - ACQUISITION On April 19, 1999, the Company acquired the technology and product rights to substantially all of Gardiner Communications Corp.'s (Gardiner) products, inventory, and manufacturing and development related equipment. The total purchase price, including assumption of certain liabilities and certain costs incurred in connection with the acquisition was approximately $9.3 million. The Company paid $6.2 million in cash, and Gardiner received a $3.1 million, 8% one year convertible promissory note due April 19, 2000. In April 2000, a portion of the debt was converted into 525,000 shares of the Company's common stock at $4.25 per share, which approximated the market value at the date of the acquisition, and the remaining balance was paid in cash. As part of the purchase, the Company recorded Goodwill of $4.1 million which was being amortized over 15 years. NOTE 4 - INVENTORIES Inventories consist of the following (in thousands): February 28, ----------------------- 2002 2001 ------ ------ Raw materials $ 6,163 $ 7,174 Work in process - 251 Finished goods 3,309 2,948 ------- ------- $ 9,472 $10,373 ======= ======= NOTE 5 - EQUIPMENT AND IMPROVEMENTS Equipment and improvements consist of the following (in thousands): February 28, ----------------------- 2002 2001 ------ ------ Plant equipment $19,792 $19,790 Office equipment, computers and furniture 4,231 4,564 Tooling 1,694 3,844 Leasehold improvements 1,283 1,401 ------- ------- 27,000 29,599 Less accumulated depreciation and amortization (19,625) (19,368) ------- ------- $ 7,375 $10,231 ======= ======= NOTE 6 - FINANCING ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS Short-term Borrowings and Credit Facilities At February 28, 2002, the Company had a $8 million working capital revolving line of credit with a commercial bank. Borrowings under this line of credit bear interest at LIBOR plus 2.2% or the bank's prime rate (4.75% at February 28, 2002), and are secured by substantially all of the Company's assets. At February 28, 2002 and 2001, no amounts were outstanding under this credit facility. At February 28, 2002, $1 million of the line of credit amount was reserved for an irrevocable stand-by letter of credit issued in February 2002 for the benefit of a foreign supplier. The credit facility contains certain financial covenants and ratios that the Company is required to maintain, including a fixed charge coverage ratio of not less than 1.25 to 1.0, a current ratio of not less than 2.0 to 1.0, a leverage ratio of not more than 2.25 to 1.0, tangible net worth of at least $19,050,000 (such minimum amount increasing by $1 million annually beginning on March 1, 2003), cash and cash equivalents not less than $8 million, and net income of at least $1.00 in each fiscal year. At February 28, 2002, the Company was in compliance with all such covenants. On April 3, 2002, the working capital line of credit was increased from $8 million to $13 million, and on May 2, 2002 the maturity date of this line was extended to from August 2, 2002 to August 3, 2005. In April 1999, in conjunction with the Gardiner acquisition (see Note 3), the Company issued a $3.1 million one-year convertible promissory note bearing interest at 8% due on April 19, 2000. In April 2000, $2,231,250 of the note principal was converted into 525,000 shares of common stock at $4.25 per share and the remaining balance was paid in cash. Long-term Debt Long-term debt consists of the following (in thousands): February 28, ----------------------- 2002 2001 ------ ------ Bank term loan payable, interest at LIBOR plus 2.2%, principal due in sixty monthly payments beginning September 2001 $ 4,545 $ 5,000 Note payable to bank, secured by equipment, bearing interest at LIBOR plus 2.55% (7.80% at February 28, 2001) payable monthly through January 2002 - 144 ------- ------- 4,545 5,144 Less portion due within one year (917) (644) ------- ------- $ 3,628 $ 4,500 ======= ======= The effective rate on the bank term loan was 4.03% and 7.45% at February 28, 2002 and 2001, respectively. On April 2, 2002, the rate on this term loan was fixed for two years at 4.75%. Thereafter, the interest rate will revert to a variable rate of prime plus 0% or LIBOR plus 2.0%. Contractual Cash Obligations Following is a summary of the Company's contractual cash obligations as of February 28, 2002 (in thousands): Future Cash Payments Due by Fiscal Year Contractual ----------------------------------------------- Obligations 2003 2004 2005 2006 2007 Total - --------------- ------ ------ ------ ------ ------ ----- Debt $ 917 $ 967 $1,027 $1,092 $ 542 $4,545 Operating leases 761 756 42 28 - 1,587 ------ ------ ------ ------ ------ ------ Total contractual cash obligations $1,678 $1,723 $1,069 $1,120 $ 542 $6,132 ====== ====== ====== ====== ====== ====== Rent expense under operating leases was $1,062,000, $842,000 and $732,000 for fiscal years 2002, 2001 and 2000, respectively. NOTE 7 - INCOME TAXES The Company's income (loss) from continuing operations before income taxes consists of the following (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Domestic $ 3,930 $ 6,550 $(8,617) Foreign 251 1,200 401 ------- ------- ------- $ 4,181 $ 7,750 $(8,216) ======= ======= ======= The income tax (provision) benefit consists of the following (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Current: Federal $ - $ - $ (419) State (6) (14) (83) Foreign (9) (290) (161) ------ ------ ------ Total current (15) (304) (663) ------ ------ ------ Deferred: Federal (1,899) (2,251) 3,050 State 607 (294) 563 Foreign - 39 - ------- ------- ------- Total deferred (1,292) (2,506) 3,613 ------- ------- ------- $(1,307) $(2,810) $ 2,950 ======= ======= ======= Differences between the income tax (provision) benefit and income taxes computed using the statutory federal income tax rate are as follows (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Income tax at statutory federal rate (34%) $ (1,421) $(2,635) $ 2,793 State income taxes, net of federal income tax effect 194 (201) 150 Foreign taxes (38) - (161) Valuation allowance (230) (157) - Research and development credit 154 - - Extraterritorial income exclusion 102 - - Other, net (68) 183 168 ------- ------- ------- $(1,307) $(2,810) $ 2,950 ======= ======= ======= The components of the net deferred income tax asset for fiscal years 2002 and 2001 are as follows (in thousands): February 28, ---------------------- 2002 2001 ------ ------ Depreciation $ 185 $ 204 Capitalized R&D cost amortization 503 337 Warranties 146 129 Compensation accrual 240 304 Inventory reserve 749 357 Allowance for doubtful accounts 136 145 Litigation settlement accrual 389 1,063 Net operating loss carryforward 6,609 8,692 Research and development credits 2,093 2,284 Other tax credits 1,118 966 Other, net 136 283 ------- ------- 12,304 14,764 Valuation allowance (8,724) (12,508) ------- ------- $ 3,580 $ 2,256 ======= ======= The Company establishes a valuation allowance in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits from its deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be realized. Based on the Company's analysis of its operating performance and the estimated realizability of its deferred tax assets, the Company has recorded valuation allowances of $8,724,000 and $12,508,000 at February 28, 2002 and 2001, respectively. Approximately $5.6 million of the valuation allowance at February 28, 2002 is related to tax assets generated upon the exercise of non-qualified stock options. As such, any future benefit from the recognition of this deferred tax asset will be an adjustment to the valuation allowance and additional paid-in capital. At February 28, 2002, the Company has net operating loss carryforwards of approximately $19.0 million and $3.9 million for federal and state purposes expiring at various dates through 2022 and 2007, respectively. As of February 28, 2002 and 2001, the Company had foreign tax credit carryforwards of $113,000 and $87,000, respectively, expiring at various dates through 2006, research and development tax credit carryforwards for federal and state income tax purposes of $1,423,000 and $1,015,000, respectively, expiring at various dates through 2012, and manufacturing investment credit carryforwards of $940,000 for state income tax purposes expiring in 2012. Consolidated U.S. income before income taxes was $3,930,000 and $6,898,000 for the years ended February 28, 2002 and 2001, respectively. The corresponding income before taxes for non-U.S. based operations was $251,000 and $852,000 for the years ended February 28, 2002 and 2001, respectively. The Company has not provided withholdings and U.S. federal income taxes on approximately $650,000 of undistributed earnings of its foreign subsidiaries because such earnings are or will be reinvested indefinitely in such subsidiaries or will be offset by approximate credits for foreign taxes paid. It is not practical to determine the U.S. federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. NOTE 8 - STOCKHOLDERS' EQUITY Stock Options The Company has two stock option plans for its employees, the 1989 Key Employee Stock Option Plan ("1989 Plan"), and the 1999 Stock Option Plan ("1999 Plan"). Under the 1999 Plan, stock options can be granted at prices not less than 100% of the fair market value at the date of grant. Option grants are exercisable at the discretion of the Compensation Committee, but usually vest over a four-year period. The following table summarizes the option activity for fiscal years 2002, 2001, and 2000 (in thousands except dollar amounts): Weighted Number Average Shares Option Price -------- -------- Outstanding at February 28, 1999 2,017 $ 3.88 Granted 706 19.25 Exercised (873) 3.82 Canceled (165) 3.74 ----- ------ Outstanding at February 28, 2000 1,685 10.36 Granted 564 28.78 Exercised (353) 6.27 Canceled (102) 29.84 ----- ------ Outstanding at February 28, 2001 1,794 $15.85 Granted 754 4.68 Exercised (29) 2.34 Canceled (315) 23.06 ----- ------ Outstanding at February 28, 2002 2,204 $11.17 ===== ====== Options outstanding at February 28, 2002 and related weighted average price and life information is as follows: Weighted Total Average Weighted Weighted Range of Total Remaining Average Average Exercise Options Life Exercise Options Exercise Prices Outstanding (Years) Price Exercisable Price -------- -------- -------- -------- -------- -------- $1.50-$1.88 193,000 6.6 $ 1.79 145,500 $ 1.79 2.06- 2.76 267,250 5.9 2.27 247,250 2.24 3.50- 4.72 835,500 8.3 4.35 244,000 3.97 5.00- 7.22 311,088 6.9 6.24 148,088 6.97 8.00-12.25 84,250 7.1 9.15 63,125 9.18 13.69-19.88 129,500 8.4 19.57 39,000 19.00 20.19-27.44 90,000 7.7 25.86 70,998 26.00 28.00-40.00 141,500 8.0 39.77 68,875 39.88 43.50-50.56 152,000 8.1 44.99 62,000 47.15 ----------- --------- ---- ------ --------- ------ $1.50-$50.56 2,204,088 7.5 $11.17 1,088,836 $10.70 =========== ========= ==== ====== ========= ====== The weighted average fair value for stock options was $4.58, $26.28, and $9.43 for fiscal years 2002, 2001, and 2000, respectively. The number of stock options available for grant under the 1999 Stock Option Plan at the end of each fiscal year was 19,899, 22,834, and 3,852 for 2002, 2001 and 2000, respectively. Pursuant to the Company's 1999 Stock Option Plan, the number of options available to grant is replenished to 500,000 on the first day of each fiscal year. The 1989 Plan expired in May 1999 and no additional options may be granted under this plan. As permitted by SFAS No. 123, the Company continues to apply the accounting rules of APB No. 25 governing the recognition of compensation expense from its Stock Option Plans. Such accounting rules measure compensation expense on the first date at which both the number of shares and the exercise price are known. Under the Company's plans, this would typically be the grant date. To the extent that the exercise price equals or exceeds the market value of the stock on the grant date, no expense is recognized. As options are generally granted at exercise prices not less than the market value on the date of grant, no compensation expense is recognized under this accounting treatment in the accompanying consolidated statements of operations. The fair value of options at date of grant was estimated using the Black-Scholes options pricing model with the following assumptions: Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Expected life (years) 10 5 to 10 10 Dividend yield 0% 0% 0% The range for interest rates is 4.06% to 6.82%, and the range for volatility is 49% to 147%. The estimated stock-based compensation cost calculated using the assumptions indicated totaled $6,713,000, $6,369,000, and $846,000 in fiscal years 2002, 2001, and 2000, respectively. This would result in pro forma net income (loss) and net income (loss) per share, resulting from the increased compensation cost, of ($30,000) or ($.00) per share, $1,113,000 or $.08 per share, and ($5,605,000) or ($.46) per share in fiscal years 2002, 2001, and 2000, respectively. Preferred Stock Purchase Rights At February 28, 2002, 13,630,351 preferred stock purchase rights are outstanding. Each right may be exercised to purchase one-hundredth of a share of Series A Participating Junior Preferred Stock at a purchase price of $50 per right, subject to adjustment. The rights may be exercised only after commencement or public announcement that a person (other than a person receiving prior approval from the Company) has acquired or obtained the right to acquire 20% or more of the Company's outstanding common stock. The rights, which do not have voting rights, may be redeemed by the Company at a price of $.01 per right within ten days after the announcement that a person has acquired 20% or more of the outstanding common stock of the Company. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right shall have the right to receive that number of shares of common stock of the surviving company which at the time of the transaction would have a market value of two times the exercise price of the right. 750,000 shares of Series A Junior Participating Cumulative Preferred Stock, $.01 par value, are authorized. Note 9 - EARNINGS PER SHARE Because the Company reported a net loss for the year ended February 28, 2000, the shares used in computing diluted earnings (loss) per share for that year is equal to the weighted average number of common shares outstanding for the period and excludes the dilutive effect of stock options and convertible debt. Following is a summary of the calculation of basic and diluted weighted average shares outstanding for fiscal 2002 and 2001 (in thousands): Year ended February 28, ------------------- 2002 2001 ------ ------ Weighted average shares: Weighted average number of common shares outstanding 13,605 13,365 Shares issuable for legal settlement 122 142 ------ ------ Basic weighted average number of common shares outstanding 13,727 13,507 Effect of dilutive securities: Stock options 252 631 Convertible debt - 79 ------ ------ Diluted weighted average number of common shares outstanding 13,979 14,217 ====== ====== Options to purchase approximately 828,000 shares of Common Stock at prices ranging from $5.69 to $50.56 were outstanding at February 28, 2002, but were not included in the computation of diluted earnings per share for the year then ended because the exercise price of these options was greater than the average market price of the Common Stock and accordingly the effect of inclusion would be antidilutive. For fiscal year 2001 there were 488,000 stock options not considered in the calculation of diluted weighted average shares since their inclusion would be anti-dilutive. NOTE 10 - OTHER FINANCIAL INFORMATION "Other accrued liabilities" in the consolidated balance sheets consist of the following (in thousands): February 28, ----------------------- 2002 2001 ------ ------ Accrued litigation settlements $ 5,534 $ 4,834 Customer prepayments 92 1,117 Other 1,354 1,166 ------- ------- $ 6,980 $ 7,117 ======= ======= "Net cash provided by operating activities" in the consolidated statements of cash flows includes cash payments for interest and income as follows (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Interest paid $323 $479 $382 Income taxes paid $497 $133 $ 21 Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ Conversion of debt to equity $ - $ 2,231 $ - Issuance of common stock to reduce accrued liability $ - $ 2,166 $ - Note payable issued for acquisition of net assets of Gardiner Communications Corp. $ - $ - $ 3,100 Non-cash income tax benefit associated with non-cash litigation settlement charge of $9,500 $ - $ - $ 3,606 Valuation and Qualifying Accounts and Reserves Following is the Company's schedule of valuation and qualifying accounts and reserves for the last three years (in thousands): Balance at Charged to Balance beginning costs and at end of period expenses Deductions of period --------- -------- --------- --------- Allowance for doubtful accounts: - ------------------------------- Fiscal 2000 $535 $ 37 $ (99) $473 Fiscal 2001 473 144 (150) 467 Fiscal 2002 467 991 (1,041) 417 Warranty reserve: - ---------------- Fiscal 2000 $545 $201 $ (284) $462 Fiscal 2001 462 333 (348) 447 Fiscal 2002 447 144 (215) 376 NOTE 11 - COMMITMENTS The Company leases its corporate and manufacturing facilities in Camarillo, California under operating leases that expire in February 2004. The lease agreements for the Camarillo facilities requires the Company to pay all property taxes and insurance premiums associated with the coverage of the facilities. In addition, the Company leases small offices and/or warehouse space in Dallas, Texas; Chanhassen, Minnesota; Paris, France; Sao Paulo, Brazil; and Hong Kong, China. The Company also leases certain equipment used in the manufacturing operation under operating lease arrangements. A summary of future operating lease commitments is included in the contractual cash obligations table in Note 6. NOTE 12 - LEGAL PROCEEDINGS Yourish class action and RLI Insurance Company litigation: On March 29, 2000 the Company and the individual defendants (present and former officers and directors of the Company) reached a settlement in the matter entitled Yourish v. California Amplifier, Inc., et al., Case No. CIV 173569 shortly after trial commenced in the Superior Court for the State of California, County of Ventura. The terms of the settlement called for the issuance by the Company of 187,500 shares of stock along with a cash payment of $3.5 million, funded in part by insurance proceeds, for a total settlement valued at approximately $11.0 million. Of the total settlement, $9.5 million was accrued in the consolidated financial statements for the year ended February 28, 2000, and the remaining $1.5 million was expected to be funded by the Company's director and officer liability insurance carriers. The common stock portion of the settlement was originally accrued at $7.5 million, or $40 per share, which share price was based on the trading range of the Company's common stock at the time the settlement agreement was reached. By Order dated September 14, 2000, the court approved the terms of the settlement and dismissed the action with prejudice. Upon approval of the settlement agreement by the court, in September 2000 the Company issued 65,625 of the 187,500 shares of common stock and paid $2.5 million of the $3.5 million cash portion of the settlement. T.I.G. Insurance Company ("T.I.G."), one of the Company's liability insurance carriers, paid the remaining $1 million. The fair value of the Company's common stock on September 14, 2000, the date the settlement agreement was approved by the court, was $33.063 per share. Accordingly, at that time the Company reduced its litigation accrual by $1.3 million to revalue the common stock portion of the settlement at $33.063 per share instead of $40 per share. Also in September 2000, the Company accrued $500,000 for additional legal expenses associated with this litigation which had not been previously accrued, and accrued $800,000 for a refund contingently payable to T.I.G., which had contributed $1 million to the settlement under a reservation of rights. In connection with the settlement of the Yourish action, the Company and certain of its former and current officers and directors filed a lawsuit (California Amplifier, Inc., et al. v. RLI Insurance Company, et al., Ventura County Superior Court Case No. CIV196258), against one of its insurance carriers to recover $2.0 million of coverage the insurance carrier has stated was not covered under its policy of insurance. The insurance carrier filed a Motion for Judgment on the Pleadings seeking judgment on the basis, inter alia, that the claims in the Yourish action for alleged violations of Sections 25400 and 25500 of the California Corporation Code were not insurable as a matter of law pursuant to Insurance Code Section 533. The Plaintiffs opposed the motion and a hearing was held on September 22, 2000. On October 18, 2000, the Court entered an Order granting the motion for judgment on the pleadings. Judgment was entered on November 9, 2000, and Notice of Entry of Judgment given on November 15, 2000. California Amplifier filed a Notice of Appeal on November 21, 2000. The matter was fully briefed and argued before the Court of Appeals on September 12, 2001. On December 4, 2001, the Court of Appeals upheld the decision of the lower court in favor of the insurance carrier. The Company filed a petition for review with the California Supreme Court in January 2002, but the petition for review was denied by the State Supreme Court. In March 2002, T.I.G. notified the Company that it intends to seek a refund of its $1 million settlement contribution made under a reservation of rights, based on the adverse outcome of the Company's action against RLI Insurance Company. As discussed above, the Company had previously accrued a reserve of $800,000 for the refund contingently payable to T.I.G. Consequently, at February 28, 2002 the Company accrued an additional $200,000 for the contingent refund payable to T.I.G. The Company's consolidated balance sheet at February 28, 2002 includes an accrued liability of $5.0 million related to the Yourish settlement, which amount represents the remaining 121,875 shares still to be issued, valued at $33.063 per share, and the $1 million reserved for the contingent refund payable to T.I.G. Pursuant to the terms of the court-approved settlement, the Company must wait for instructions from plaintiffs' counsel before issuing the remaining shares of common stock under the settlement. 2001 securities litigation and shareholder derivative lawsuit: Following the announcement by the Company on March 29, 2001 of the resignation of its controller and the possible overstatement of net income for the fiscal year ended February 28, 2000 and the subsequent restatement of the Company's financial statements for fiscal year 2000 and the interim periods of fiscal years 2000 and 2001, the Company and certain officers were named as defendants in twenty putative actions in Federal Court. Caption information for each of the lawsuits is set forth in Item 3 of the Company's Form 10-K for the fiscal year ended February 28, 2001. On June 18, 2001, the twenty actions were consolidated into a single action pursuant to stipulation of the parties, and lead plaintiffs' counsel was appointed. In July 2001, all of the current directors of the Company were named as defendants in the above-entitled shareholder derivative lawsuit filed in Los Angeles Superior Court. The Company was named as a nominal defendant. The complaint alleged claims against the directors for breach of fiduciary duty, abuse of control and gross mismanagement, arising out of the Company's restatement of earnings for fiscal year 2000 and portions of fiscal year 2001. In October 2001, the insurance company that provides the Company's primary director and officer liability coverage applicable to the above matters filed a lawsuit seeking to rescind the policy on the grounds that there was a misstatement in the policy application that incorporated by reference the Company's financial statements prior to their restatement. In December 2001, the parties reached an agreement to settle both the class action litigation and the shareholder derivative lawsuit for the aggregate sum of $1.5 million, subject to final court approval. Of this amount, the Company's primary directors and officers liability insurance carrier agreed to contribute $575,000 toward the settlement, which amount was paid in December 2001, and agreed to withdraw its policy rescission lawsuit. The Company has accrued its $925,000 share of the settlement in the accompanying consolidated financial statements for the year ended February 28, 2002. Of this amount, $425,000 was paid by the Company in December 2001, and the remaining $500,000 is to be paid once the court approves the settlement. At the Company's option, this final settlement installment of $500,000 may be paid in the form of cash or Common Stock. The Stipulation of Settlement seeking preliminary Court approval of the settlement by the Court was filed in May 2002. Once preliminary approval is obtained, plaintiff's counsel will send notice to the class and obtain a hearing date for final approval of the settlement agreement. The Company expects this process to be completed over the next several months. Investigation by the Securities and Exchange Commission: In May 2001, the Company announced that it had received notice from the Securities and Exchange Commission (SEC) that the SEC was conducting an informal inquiry into the circumstances that caused the Company to announce that it would be restating earnings for fiscal year 2000 and certain interim quarters of fiscal year 2001. Subsequently, the Company learned that the SEC adopted an order directing a private investigation and designating officers to take testimony. NOTE 13 - SEGMENT AND GEOGRAPHIC DATA Information by business segment is as follows: Fiscal Year 2002: WIRELESS SATELLITE ACCESS CORPORATE TOTAL ------- ------ ------- ----- Sales $ 78,899 $ 21,816 - $100,715 Gross profit 15,723 7,158 - 22,881 Gross margin 19.9% 32.8% - 22.7% Income (loss) from continuing operations before income taxes 11,847 333 (7,999) 4,181 Identifiable assets 23,565 4,783 28,340 56,688 Fiscal Year 2001: WIRELESS SATELLITE ACCESS CORPORATE TOTAL ------- ------ ------- ----- Sales $ 85,107 $ 32,022 - $117,129 Gross profit 12,920 10,433 - 23,353 Gross margin 15.2% 32.6% - 19.9% Income (loss) from continuing operations before income taxes 8,719 5,259 (6,228) 7,750 Identifiable assets 22,146 8,262 19,404 49,812 Fiscal Year 2000: WIRELESS SATELLITE ACCESS CORPORATE TOTAL ------- ------ ------- ----- Sales $ 60,411 $ 19,018 - $ 79,429 Gross profit 9,146 5,987 - 15,133 Gross margin 15.1% 31.5% - 19.1% Income (loss) from continuing operations before income taxes 5,440 752 (14,408) (8,216) Identifiable assets 21,773 8,349 21,375 51,497 The Company does not have significant long-lived assets outside the United States. Sales information by geographical area for each of the three years in the period ended February 28, 2002 is as follows (000s): Year ended February 28, -------------------------------- 2002 2001 2000 ------ ------ ------ United States $ 84,098 $ 93,764 $60,305 Canada 10,653 11,220 5,419 Europe 2,258 2,895 4,394 Latin America 1,738 2,661 1,240 Middle East 249 1,447 847 Africa 1,309 2,895 1,832 Asia 410 2,247 4,368 Australia - - 1,024 ------- ------- ------- $100,715 $117,129 $79,429 ======= ======= ======= See also "Concentrations of Risk" in Note 1 for sales by major customer. NOTE 14 - QUARTERLY FINANCIAL INFORMATION (unaudited) The following summarizes certain quarterly statement of operations data for each of the quarters in fiscal years 2002 and 2001 (in thousands, except percentages and per share data): First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter 2002 ------- ------- ------- ------- ------ Sales $20,802 $24,654 $32,756 $22,503 $100,715 Gross profits 4,779 6,152 7,546 4,404 22,881 Gross margins 23.0% 25.0% 23.0% 19.6% 22.7% Income from continuing operations 91 465 1,352 966 2,874 Net income 71 2,075 1,352 966 4,464 Net income per diluted share 0.01 0.15 0.10 0.07 0.32 First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter 2001 ------- ------- ------- ------- ------ Sales $29,866 $31,738 $30,902 $24,623 $117,129 Gross profits 5,846 6,100 6,679 4,728 23,353 Gross margins 19.6% 19.2% 21.6% 19.2% 19.9% Income from continuing operations 1,450 1,349 1,816 325 4,940 Net income 1,540 1,419 1,850 400 5,209 Net income per diluted share 0.11 0.10 0.13 0.03 0.37 NOTE 15 - SUBSEQUENT EVENTS On April 5, 2002, the Company acquired substantially all of the assets, properties and rights of Kaul-Tronics, Inc., a Wisconsin corporation, and two affiliated companies (collectively, "KTI"). The operations acquired by the Company involve primarily the design and manufacture of satellite antenna dishes used in the DBS industry. The satellite antenna dishes of the type produced by KTI, and the downconverter/amplifier devices of the type produced by the Company, together comprise the outdoor portion of customer premise equipment for DBS television reception. In calendar year 2001, KTI had revenues of approximately $36 million and pretax income of $4.8 million. KTI's 2001 revenues included approximately $12 million of satellite downconverter/amplifier devices of the type produced by the Company. The aggregate purchase price was approximately $22.7 million, consisting of a cash payment of approximately $16.1 million, issuance of 929,086 shares of the Company's common stock valued at approximately $6.1 million, and transaction costs of approximately $530,000. The acquisition gave rise to goodwill of approximately $17.7 million. The source of funds for the cash payment was the Company's cash on hand and the proceeds of a $12 million drawdown on the Company's existing bank revolving line of credit which had been increased from $8 million to $13 million effective April 3, 2002. On May 2, 2002, the $12 million outstanding principal balance on the revolver was repaid in full from the proceeds of a new $12 million term loan. The new term loan bears interest at LIBOR plus 2.0% or the bank's prime rate. The $12 million term loan provides for interest only payments until April 1, 2003, and thereafter provides for monthly principal reductions of $200,000 plus accrued interest. Also on May 2, 2002, the $13 million revolving line of credit was amended to extend the maturity date to August 3, 2005. INDEX TO EXHIBITS 2.1 Asset Purchase Agreement dated April 5, 2002 between and among the Company, Kaul-Tronics, Inc., NGP, Inc., and Interactive Technologies International, LLC (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated April 5, 2002). 3.1 Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (33-59702) and by this reference is incorporated herein and made a part hereof. 3.1.1 Amendment to Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on September 19, 1996, filed as Exhibit 3.1.1 to the Company's Interim Report on Form 10-Q for the period ended August 31, 1996. 3.2 Bylaws of the Company, as amended, filed as Exhibit 3.2 to the Company's Form 8-K dated February 28, 1992 and by this reference is incorporated herein and made a part hereof. 4.1 Amended and Restated Rights Agreement, amended and restated as of September 5, 2001, by and between California Amplifier, Inc. and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed on September 6, 2001). 10.1 1989 Key Employee Stock Option Plan filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 (33-31427) and by this reference is incorporated herein and made a part hereof. 10.1.1 Amendment No. 1 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (33-36944) and by this reference is incorporated herein and made a part hereof. 10.1.2 Amendment No. 2 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.8 to the Company's Registration Statement on Form S-8 (33-72704) and by this reference is incorporated herein and made a part hereof. 10.1.3 Amendment No. 3 to the 1989 Key Employee Stock Option Plan filed as Exhibit 4.10 to the Company's Registration Statement on Form S-8 (33-60879) and by this reference is incorporated herein and made a part hereof. 10.2 The 1999 Stock Option Plan filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (333-93097) and by this reference is incorporated herein and made a part hereof. 10.3 Building Lease and Rider on building between the Company and Calle San Pablo Property Co. dated January 31, 1989, filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1989 and by this reference is incorporated herein and made a part hereof. 10.3.1 Amendment of Lease on building between the Company and Calle San Pablo Property Co. dated February 9, 1995, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended February 28, 1995. 10.4 Building Lease on building between the Company and The Jennings Bypass Trust, dated September 11, 1996, filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended February 28, 1997. 10.5 Form of Indemnity Agreement filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1988 and by this reference is incorporated herein and made a part hereof. 10.6 Loan and Security Agreement by and between the Company and U.S. Bank National Association dated as of May 2, 2002. 11 Statement re Computation of Per Share Earnings (incorporated by reference to Note 9 of the Company's consolidated financial statements for the year ended February 28, 2002). 13 Annual Report to security holders. 21 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. 23.2 Consent of Arthur Andersen, LLP. 99 Undertaking for Form S-8 Registration Statement. EXHIBIT 21 CALIFORNIA AMPLIFIER, INC. SUBSIDIARIES OF THE REGISTRANT All subsidiaries are 100% owned by California Amplifier, Inc., and are included in the consolidated financial statements. Each subsidiary was organized in the jurisdiction specified under its name in the following list. 1. California Amplifier SARL France 2. Cal Amp Limited Hong Kong EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements (Nos. 33-31427, 33-36944, 33-72704, 33-60879, 333-33925 and 333-93097) on Form S-8 of California Amplifier, Inc. and subsidiaries of our report dated May 13, 2002, relating to the consolidated balance sheet of California Amplifier, Inc. and subsidiaries as of March 2, 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for the year then ended, which report appears in the fiscal year 2002 annual report on Form 10-K of California Amplifier, Inc. /s/ KPMG LLP Los Angeles, California May 29, 2002 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-31427, 33-36944, 33-72704, 33-60879, 333-33925 and 333-93097. /s/ ARTHUR ANDERSEN LLP Los Angeles, California May 29, 2002 EXHIBIT 99 UNDERTAKING FOR FORM S-8 REGISTRATION STATEMENT With respect to the Registration Statements previously filed by California Amplifier, Inc. (the "Company") on Form S-8, the Company hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. EX-10 3 credit_facility-2002.txt EX. 10.6 - BANK CREDIT FACILITY EXHIBIT 10.6 ________________________________________________________________________ LOAN AND SECURITY AGREEMENT by and between CALIFORNIA AMPLIFIER, INC. and U.S. BANK NATIONAL ASSOCIATION DATED AS OF MAY 2, 2002 ________________________________________________________________________ TABLE OF CONTENTS Page(s) 1. DEFINITIONS AND CONSTRUCTION.......................................1 1.1 Definitions..................................................1 1.2 Accounting Terms............................................13 1.3 Code........................................................13 1.4 Construction................................................13 1.5 Schedules and Exhibits......................................14 2. LOAN AND TERMS OF PAYMENT.........................................14 2.1 Revolving Advances..........................................14 2.2 Term Loans..................................................14 2.3 Letters of Credit...........................................15 2.4 Interest Rates, Letter of Credit Fees, Payments, and Calculations....................17 2.5 Crediting Payments; Application of Collections..............18 2.6 Designated Account..........................................19 2.7 Maintenance of Loan Account; Statements of Obligations......19 2.8 Fees........................................................19 2.9 LIBOR Option................................................20 2.10 Overadvances...............................................21 3. CONDITIONS; TERM OF AGREEMENT.....................................22 3.1 Conditions Precedent to the Initial Advance and Term Loan B............................22 3.2 Conditions Precedent to all Advances........................23 3.3 Condition Subsequent........................................23 3.4 Term........................................................24 3.5 Effect of Termination.......................................24 3.6 Early Termination by Borrower...............................24 4. CREATION OF SECURITY INTEREST.....................................24 4.1 Grant of Security Interest..................................24 4.2 Negotiable Collateral.......................................24 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral..................................24 4.4 Delivery of Additional Documentation Required...............25 4.5 Power of Attorney...........................................25 4.6 Right to Inspect............................................25 4.7 Control Agreements..........................................25 5. REPRESENTATIONS AND WARRANTIES....................................25 5.1 No Encumbrances.............................................26 5.2 Equipment...................................................26 5.3 Location of Inventory and Equipment.........................26 5.4 Inventory Records...........................................26 5.5 Location of Chief Executive Office; FEIN....................26 5.6 Due Organization and Qualification; Subsidiaries............26 5.7 Due Authorization; No Conflict..............................26 5.8 Litigation..................................................27 5.9 No Material Adverse Change..................................27 5.10 Solvency....................................................27 5.11 Employee Benefits...........................................27 5.12 Environmental Condition.....................................28 5.13 Intellectual Property.......................................28 5.14 Leases......................................................28 5.15 Complete Disclosure.........................................28 5.16 Indebtedness................................................28 5.17 DDAs........................................................28 6. AFFIRMATIVE COVENANTS.............................................29 6.1 Accounting System...........................................29 6.2 Collateral Reporting........................................29 6.3 Financial Statements, Reports, Certificates.................29 6.4 [Intentionally Omitted].....................................30 6.5 Title to Equipment..........................................30 6.6 Maintenance of Equipment....................................30 6.7 Taxes.......................................................30 6.8 Insurance...................................................30 6.9 No Setoffs or Counterclaims.................................32 6.10 Location of Inventory and Equipment.........................32 6.11 Compliance with Laws........................................32 6.12 Employee Benefits...........................................32 6.13 Leases......................................................32 6.14 Environmental...............................................33 7. NEGATIVE COVENANTS................................................33 7.1 Indebtedness................................................33 7.2 Liens.......................................................34 7.3 Restrictions on Fundamental Changes.........................34 7.4 Disposal of Assets..........................................34 7.5 Change Name.................................................34 7.6 Guarantee...................................................34 7.7 Nature of Business..........................................34 7.8 Prepayments and Amendments..................................34 7.9 Change of Control...........................................34 7.10 Consignments................................................34 7.11 Distributions...............................................35 7.12 Accounting Methods..........................................35 7.13 Investments.................................................35 7.14 Transactions with Affiliates................................35 7.15 Suspension..................................................35 7.16 Deposit Accounts and Securities Accounts....................35 7.17 Use of Proceeds.............................................35 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.......................36 7.19 No Prohibited Transactions Under ERISA......................36 7.20 Financial Covenants.........................................36 8. EVENTS OF DEFAULT.................................................37 8.1 Events of Default...........................................37 8.2 No Advances During Cure Period..............................38 9. BANK'S RIGHTS AND REMEDIES........................................38 9.1 Rights and Remedies.........................................38 9.2 Remedies Cumulative.........................................40 10. TAXES AND EXPENSES................................................40 11. WAIVERS; INDEMNIFICATION..........................................41 11.1 Demand; Protest; etc........................................41 11.2 Bank's Liability for Collateral.............................41 11.3 Indemnification.............................................41 12. NOTICES...........................................................41 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................42 14. DESTRUCTION OF BORROWER'S DOCUMENTS...............................43 15. GENERAL PROVISIONS................................................43 15.1 Effectiveness...............................................43 15.2 Successors and Assigns......................................43 15.3 Section Headings............................................43 15.4 Interpretation..............................................43 15.5 Severability of Provisions..................................43 15.6 Amendments in Writing.......................................43 15.7 Counterparts; Telefacsimile Execution.............................44 15.8 Revival and Reinstatement of Obligations....................44 15.9 Integration.................................................45 SCHEDULES AND EXHIBITS Schedule A-1 Authorized Persons Schedule P-1 Permitted Liens Schedule R-1 Real Property Collateral Schedule 5.6 Subsidiaries Schedule 5.8 Litigation Schedule 5.11 ERISA Benefit Plans Schedule 5.12 Environmental Condition Schedule 5.13 Intellectual Property Schedule 5.16 Indebtedness Schedule 5.17 DDAs Schedule 6.10 Location of Inventory and Equipment Schedule 7.14 Transactions with Affiliates Exhibit C-1 Form of Compliance Certificate Exhibit L-1 Form of LIBOR Notice LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of May 2, 2002, between U.S. BANK NATIONAL ASSOCIATION ("Bank") with a place of business located at 15910 Ventura Boulevard, Suite 1712, Encino, California 91436 and CALIFORNIA AMPLIFIER, INC., a Delaware corporation ("Borrower"), with its chief executive office located at 460 Calle San Pablo, Camarillo, California 93012. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "Accounts" means all currently existing and hereafter arising accounts (as that term is defined from time to time in the Code), contract rights, and all other forms of obligations owing to Borrower, and any and all credit insurance, guaranties, or security therefor. "Advances" has the meaning set forth in Section 2.1(a). "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 10% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agreement" has the meaning set forth in the preamble hereto. "Authorized Person" means any officer or other employee of Borrower listed on Schedule A-1, as amended from time to time. "Bank" has the meaning set forth in the preamble to this Agreement. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Sec. 101 et seq.), as amended, and any successor statute. "Bank Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Bank, (b) fees or charges paid or incurred by Bank in connection with the Bank's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement), real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Bank in the disbursement of funds to or for the account of Borrower (by wire transfer or otherwise), (d) charges paid or incurred by Bank resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by Bank to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) subject to Section 2.8(c), audit fees and expenses of Bank related to audit examinations of the Borrower's Books, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Bank in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Bank's relationship with Borrower, (h) Bank's reasonable fees and expenses (including reasonable attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Bank's reasonable fees and expenses (including reasonable attorneys fees) incurred in terminating, enforcing (including reasonable attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means the board of directors (or comparable managers) of Borrower or any committee thereof duly authorized to act on behalf thereof. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation, and (e) money market mutual funds that invest primarily in the foregoing. "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (c) any Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance or other extension of credit hereunder. "Code" means the California Uniform Commercial Code as it may be amended from time to time. "Collateral" means each of the following: (a) the Accounts, (b) the Borrower's Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Investment Property, (g) the Negotiable Collateral, (h) the Real Property Collateral, (i) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of Bank, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgment agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Bank. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds of Borrower). "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to Bank. "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreements" means one or more account control agreements among Bank, Borrower and a bank (or other depository institution) where Borrower maintains a deposit account, a securities intermediary with respect to a Securities Account of Borrower or a bailee with respect to any bailed property of Borrower. "Current Assets" means, as of any date of determination, the aggregate amount of all current assets of Borrower that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Current Liabilities" means, as of any date of determination, the aggregate amount of all current liabilities of Borrower that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. "Current Ratio" means, as of the end of the most recently concluded fiscal quarter of Borrower, the ratio of (i) the Current Assets of Borrower as of the last day of such fiscal quarter, to (ii) the Current Liabilities of Borrower as of the last day of such fiscal quarter. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by any Borrower including, without limitation, the Designated Account. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means account number 153491933286 of Borrower maintained with Bank. "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Bank regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Bank. "Dollars or $" means United States dollars. "EBITDA" means, with respect to any fiscal period, Borrower's consolidated net earnings (or loss), minus extraordinary gains, minus interest and other investment income, plus extraordinary losses, plus interest expense, income taxes, and depreciation and amortization for such period, as all of the foregoing are determined in accordance with GAAP. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, and (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Borrower or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrower, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC Sec. 1251 et seq; the Toxic Substances Control Act, 15 USC, Sec. 2601 et seq; the Clean Air Act, 42 USC Sec. 7401 et seq.; the Safe Drinking Water Act, 42 USC. Sec. 3803 et seq.; the Oil Pollution Act of 1990, 33 USC. Sec. 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC. Sec. 11001 et seq.; the Hazardous Material Transportation Act, 49 USC Sec. 1801 et seq.; and the Occupational Safety and Health Act, 29 USC. Sec.651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any assets acquired by Borrower with the proceeds of loans made to Borrower under this Agreement, (b) any interest of Borrower in any of the foregoing, and (c) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Excess Cash Flow" means as of the end of each fiscal year of Borrower, the amount equal to EBITDA for such fiscal year, minus all unfinanced capital expenditures during such period, minus all taxes paid during such period, minus the aggregate amount of all principal payments due and payable in respect of long term debt by Borrower during such period, minus all interest payments due and payable by Borrower during such period. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. "FEIN" means Federal Employer Identification Number. "Fixed Charge Coverage Ratio" means, as of the end of the most recently concluded fiscal quarter of Borrower, the ratio of (i) EBITDA for the fiscal year to date annualized for the balance of the then current fiscal year, minus all taxes paid during such period, minus all distributions to shareholders made during such period, plus all shareholder investments in Borrower (whether in the form of Subordinated Debt, capital contributions or otherwise) during such period, minus unfinanced capital expenditures made during such period; to (ii) the aggregate amount of all principal payments due and payable in respect of long term debt by Borrower during such period, plus all interest payments due and payable by Borrower during such period. "Funding Losses" has the meaning set forth in Section 2.9(b)(ii). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles (as that term is defined from time to time in the Code), payment intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, software, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Indebtedness" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of a Borrower's business and repayable in accordance with customary trade practices), and (f) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Intellectual Property Security Agreement" means an intellectual property security agreement executed and delivered by Borrower and Bank, the form and substance of which is reasonably satisfactory to Bank. "Interest Differential" has the meaning set forth in Section 2.4(a). "Interest Period" means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan and ending 1 or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1 or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrower may not elect an Interest Period which will end after the Maturity Date. "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means all of Borrower's presently existing and hereafter acquired or arising investment property (as that term is defined from time to time in the Code) and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "L/C Disbursement" means a payment made by the Bank pursuant to a Letter of Credit. "Letter of Credit" has the meaning set forth in Section 2.3(a). "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding time drafts accepted by the Bank in connection with Letters of Credit. "Leverage Ratio" means, as of the end of the most recently concluded fiscal quarter of Borrower, the ratio of (i) all liabilities of Borrower, minus Subordinated Debt, to (ii) the Tangible Net Worth as of the last day of such fiscal quarter. "LIBOR Deadline" has the meaning set forth in Section 2.9(b)(i). "LIBOR Notice" means a written notice in the form of Exhibit L-1. "LIBOR Rate" has the meaning set forth in Section 2.4(a). "LIBOR Rate Loan" means each portion of an Advance, Term Loan A or Term Loan B that bears interest at a rate determined by reference to the LIBOR Rate. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes. "Loan Account" has the meaning set forth in Section 2.7. "Loan Documents" means this Agreement, the Revolver Note, the Term Note A, the Term Note B, the Intellectual Property Security Agreement, the Mortgages, the Disbursement Letter, Account Control Agreements (if any), any note or notes executed by Borrower and payable to Bank, and any other agreement entered into, now or in the future, between Bank and Borrower or a subordinating creditor in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Bank's ability to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that Bank would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment of the priority of Bank's Liens with respect to the Collateral. "Maximum Revolving Amount" means $13,000,000. "Money Markets" has the meaning set forth in Section 2.4(a). "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, or deeds to secure debt, executed and delivered by Borrower in favor of Bank, in form and substance satisfactory to Bank, that encumber the Real Property Collateral and the related improvements thereto. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of Borrower's present and future letters of credit, letter of credit rights, notes, drafts, instruments, Investment Property, securities (including the shares of stock of Subsidiaries of Borrower), documents, personal property leases (wherein Borrower is the lessor), and chattel paper, and any and all supporting obligations in respect thereof. "Obligations" means all loans (including the Term Loans), Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, Bank Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrower to Bank pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Bank Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Overadvance" has the meaning set forth in Section 2.10. "Participant" means any Person to which Bank has sold a participation interest in its rights under the Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable business judgment consistent with the historical business practices of Bank. "Permitted Dispositions" means (a) sales or other dispositions by Borrower of any Equipment that is substantially worn, damaged, or obsolete in the ordinary course of the Borrower's business, (b) sales by Borrower of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrower in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, and (d) the licensing by Borrower, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of Borrower's business. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, and (d) acquisitions made by Borrower where sole consideration tendered by Borrower is common stock of Borrower (subject to limitations on Change in Control contained in this Agreement). "Permitted Liens" means (a) Liens held by Bank, (b) Liens for unpaid taxes that either (i) are not yet delinquent or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases and purchase money security interests so long as the Lien only attaches to the asset purchased or acquired and only secures the purchase price of the asset, (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or resulting from any judgment or award that would not cause a Material Adverse Change and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review, and in respect of which a stay of execution pending such appeal or proceeding for review has been secured, (j) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with the Mortgages, as accepted by Bank, and (k) licenses and sublicenses which constitute Permitted Dispositions and leases or subleases granted to other Persons in the ordinary course of Borrower's business. "Permitted Protest" means the right of Borrower to protest any Lien (other than any such Lien that secures the Obligations), tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in such amount as is required by GAAP, (b) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (c) Bank is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Bank in and to the Collateral. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all Collateral other than Real Property. "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by Borrower or with respect to which it may incur liability. "Prime Rate" means the prime rate of interest announced from time to time by Bank. "Prime Rate Loan" means any Advance, Term Loan A or Term Loan B (or any portion thereof) made or outstanding hereunder during any period when interest on such Advance, Term Loan A or Term Loan B (or portion thereof) is payable based on the Prime Rate. "Projections" means forecasted: (a) balance sheets of Borrower; (b) profit and loss statements of Borrower; and (c) cash flow statements of Borrower; all in form, scope and substance, including underlying assumptions, if any, and otherwise consistent with the historical financial statements of Borrower previously delivered to Bank. "Purchase Agreement" means that Asset Purchase Agreement, dated April 5, 2002, among Borrower, Kaul-Tronics, Inc., a Wisconsin corporation ("KTI"), New Greenbriar Products, Inc., a Wisconsin corporation ("NGP"), Interactive Technologies International, LLC, a Wisconsin limited liability company ("ITI", together with KTI and NGP, the "Sellers"), and certain shareholders and members of the Sellers. "Purchase Agreement Assignment" means that certain Collateral Assignment of Rights Under Asset Purchase Agreement, of even date herewith, between Borrower and Bank. "Real Property Collateral" means the parcel or parcels of Real Property identified on Schedule R-1 and any Real Property hereafter acquired by Borrower. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC Sec. 9601. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Reserve Percentage" means, on any day, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") by Bank, but so long as Bank is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolver Note" means that certain Revolver Note, in the principal amount of $13,000,000, executed by Borrower to the order of Bank. "Revolving Maturity Date" means August 3, 2005. "Securities Account" means a "securities account" as that term is defined from time to time in the Code. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subordinated Debt" means any Indebtedness that is in any manner subordinated in right of payment to the Obligations on terms and conditions satisfactory to Bank in its Permitted Discretion. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Tangible Net Worth" means, as of any date of determination, the difference of (a) Borrower's total stockholders' equity, plus Subordinated Debt, minus (b) the sum of: (i) all Intangible Assets of Borrower, and (ii) all amounts due to Borrower from Affiliates which did not arise from transactions in the ordinary course of Borrower's business and (iii) all amounts due to Borrower from employees of Borrower that were incurred in the ordinary course of Borrower's business, up to a maximum amount due to Borrower at any one time of $100,000. "Term Loan A" has the meaning set forth in Section 2.2(a). "Term Loan B" has the meaning set forth in Section 2.2(b). "Term Note A" means that certain Term Note which evidences Term Loan A executed by Borrower to the order of Bank. "Term Note B" means that certain Term Note which evidences Term Loan B executed by Borrower to the order of Bank. "Voidable Transfer" has the meaning set forth in Section 15.8. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code, as it is amended from time to time, unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been cured or waived in writing by Bank. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) From the Closing Date to the Revolver Maturity Date, subject to the terms and conditions of this Agreement, Bank agrees to make advances ("Advances") to Borrower in an amount outstanding not to exceed at any one time the Maximum Revolving Amount, less the amount of outstanding Advances, and less the amount of outstanding Letter of Credit Usage, and less the amount of reserves, if any, established from time to time under Section 2.1(b). (b) Bank shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the amount of the outstanding Advances, plus the Letter of Credit Usage, plus any reserves established under Section 2.1(b) to exceed the Maximum Revolver Amount. (c) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement and so long as no Default or Event of Default has occurred and is continuing, reborrowed at any time during the term of this Agreement. 2.2 Term Loans. (a) Term Loan A. Subject to the terms and conditions of this Agreement, on the Closing Date Bank shall amend and restate a term loan ("Term Loan A") previously made to Borrower in September, 2000, in the original principal amount of $5,000,000, and which, as of the date of this Agreement, has an outstanding principal balance equal to $4,380,876.18. Term Loan A shall be evidenced by Term Note A. Term Loan A shall be repaid on the following dates and in the following amounts: Date Installment Amount ___________________________ _________________________________ Commencing on June 2, 2002 Monthly payments of $96,938.25 and continuing on the same representing accrued interest day of each month until then due and the remainder April 2, 2004 applied to principal then outstanding Commencing on May 1, 2004 Monthly principal installments of and continuing on the same $85,223.67 each, day of each month until plus accrued interest July 1, 2006 On August 1, 2006 The unpaid principal balance, plus accrued interest The outstanding unpaid principal balance and all accrued and unpaid interest under Term Loan A shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under Term Loan A shall constitute Obligations. (b) Term Loan B. Subject to the terms and conditions of this Agreement, upon the request of Borrower made on or before May 10, 2002, Bank shall make a term loan ("Term Loan B") to Borrower in an amount equal to $12,000,000. Term Loan B shall be evidenced by Term Note B. The proceeds of Term Loan B shall be used by Borrower to fulfill its purchase obligations under the Purchase Agreement. Term Loan B shall be repaid on the following dates and in the following amounts: Date Installment Amount ___________________________ _________________________________ Commencing on June 1, 2002 Interest only and continuing on the same day of each month until April 1, 2003 Commencing on May 1, 2003 Monthly principal installments and continuing on the same of $200,000 each, day of each month thereafter plus accrued interest until March 1, 2008 On April 1, 2008 The unpaid principal balance, plus accrued interest Within 180 days following the end of each of the Borrower's fiscal years, Borrower shall make a mandatory prepayment of principal on Term Loan B in an amount equal to 25% of the Excess Cash Flow, if any, for the fiscal year just ended. The mandatory prepayments of principal shall be applied to installments of principal due on Term Loan B in their inverse order of maturity. The outstanding unpaid principal balance and all accrued and unpaid interest under Term Loan B shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under Term Loan B shall constitute Obligations. 2.3 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue Letters of Credit for the account of Borrower (each, a "Letter of Credit"). Bank shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the sum of 100% of the aggregate amount of all undrawn and unreimbursed Letters of Credit would exceed $2,000,000; or (ii) the outstanding Advances, plus the sum of 100% of the aggregate amount of all undrawn and unreimbursed Letters of Credit, plus the amount of the reserve, if any, under Section 2.1(b) would exceed the Maximum Revolving Amount. (b) Each Letter of Credit shall have an expiry date no later than the earlier of (y) 120 days following the date of issuance for commercial Letters of Credit and 365 days following the date of issuance of stand by Letters of Credit, or (z) October 3, 2005, and all such Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion. (c) If Bank is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such L/C Disbursement by paying to Bank an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day following the Business Day that Borrower receives such notice, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Prime Rate Loans unless Borrower shall have elected that such Advance be a LIBOR Rate Loan and such Advance qualifies as a LIBOR Rate Loan hereunder, in which event, subject to the procedures for making LIBOR Rate Loans hereunder, the L/C Disbursement shall bear interest at the rate then applicable to Advances that are LIBOR Rate Loans. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrower's obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. (d) Borrower hereby agrees to indemnify, save, defend, and hold Bank harmless from any loss, cost, expense, or liability, including payments made by Bank, expenses, and reasonable attorneys fees incurred by Bank arising out of or in connection with any Letter of Credit; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense or liability that is caused by the gross negligence or willful misconduct of Bank. Borrower agrees to be bound by Bank's standard regulations and operating procedures, including interpretations of any conditions for honoring draws, in connection with each Letter of Credit opened to or for Borrower's account, even though Bank's interpretation may be different from Borrower's own, and Borrower understands and agrees that Bank shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto unless such liability was caused solely by the gross negligence or willful misconduct of Bank. (e) Immediately upon the termination of this Agreement, Borrower agrees to either (x) provide cash collateral to be held by Bank in an amount equal to 105% of the maximum amount of Bank's obligations under outstanding Letters of Credit, (y) cause the issuance of a letter of credit for the benefit of Bank, in an amount equal to 105% of the maximum amount of Bank's obligations under outstanding Letters of Credit, issued by a financial institution acceptable to Bank in its reasonable discretion and containing conditions for making a draw acceptable to Bank in its reasonable discretion or (z) cause to be delivered to Bank releases of all of Bank's obligations under outstanding Letters of Credit. At Bank's discretion, any proceeds of Collateral received by Bank after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.3(d). (f) If by reason of (y) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any Governmental Authority of any such applicable law, treaty, rule, or regulation, or (z) compliance by Bank with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on Bank any other condition regarding any Letter of Credit issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to Bank of issuing, making, or maintaining any Letter of Credit, as applicable, or to reduce the amount receivable in respect thereof by Bank, then, and in any such case, Bank may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as Bank may specify to be necessary to compensate Bank for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate set forth in Section 2.4(a) or (c), as applicable. The determination by Bank of any amount due pursuant to this Section 2.3(e), as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.4 Interest Rates, Letter of Credit Fees, Payments, and Calculations. (a) Interest Rate Options. Interest on all Advances, Term Loan A and Term Loan B, as well as all other monetary Obligations that have been charged to the Loan Account pursuant to the terms hereof, on the Daily Balance thereof, shall accrue at one of the following per annum rates selected by Borrower: (i) upon notice to the Bank, the Prime Rate, as and when such rate changes (a "Prime Rate Loan"); (ii) upon a minimum of two Business Days prior notice, two (2) percentage points in excess of the 1 or 3 month LIBOR rate with respect to Term Loan A and Term Loan B, as appropriate, and two (2) percentage points in excess of the 1 month LIBOR rate with respect to Advances, as quoted by Bank from Telerate Page 3750 or any successor thereto (which shall be the LIBOR rate in effect two Business Days prior to commencement of the portion of Term Loan A, Term Loan B or the Advance to be subject to the LIBOR rate) (the "LIBOR Rate" and each such portion of Term Loan A, Term Loan B, or the Advance is a "LIBOR Rate Loan"). Notwithstanding the foregoing, from the Closing Date through April 2, 2004, Term Loan A shall bear interest at a fixed rate equal to 4.75%, per annum, and shall thereafter be subject to the provisions contained in the immediately preceding sentence. The term "Money Markets" refers to one or more wholesale funding markets available to Bank, including negotiable certificates of deposit, commercial paper, eurodollar deposits, bank notes, federal funds and others. If a LIBOR Rate Loan is prepaid, whether by Borrower or as a result of acceleration upon an Event of Default or otherwise, Borrower agrees to pay all of the Bank Expenses and Interest Differential (as determined by Bank) incurred as a result of such prepayment. The term "Interest Differential" shall mean that sum equal to the greater of 0 or the financial loss incurred by Bank resulting from prepayment, calculated as the difference between the amount of interest the Bank would have earned (from like investments in the Money Markets as of the first day of the subject LIBOR Rate Loan) had prepayment not occurred and the interest the Bank will actually earn (the interest actually earned on the LIBOR Rate Loan from the date such loan was made up to, but not including, the date prepaid, plus the amount the Bank will earn from like investments in the Money Markets as of the date of prepayment through the end of the applicable Interest Period for the LIBOR Rate Loan being prepaid) as a result of the redeployment of funds from the amount prepaid. Because of the short-term nature of this facility, the Borrower agrees that the Interest Differential shall not be discounted to its present value. Any prepayment of a LIBOR Rate Loan shall be in an amount equal to the remaining entire principal balance of such LIBOR Rate Loan. In the event the Borrower does not timely select another interest rate option at least three Business Days before a LIBOR Rate Loan expires, such LIBOR Rate Loan shall renew for the same Interest Period as initially chosen, with the rate (before adding two (2) percentage points) to be determined two Business Days prior to renewal if a LIBOR Rate Loan. The Bank's internal records of applicable interest rates shall be determinative in the absence of manifest error. Each LIBOR rate option selected shall apply to a minimum principal amount of $500,000 and integral multiples of $100,000 in excess thereof. For determining payment dates for LIBOR Rate Loans, the Business Day shall be the standard convention. In the event after the date of initial funding any governmental authority subjects Bank to any new or additional charge, fee, withholding or tax of any kind with respect to any loans hereunder or changes the method of taxation of such loans or changes the reserve or deposit requirements applicable to such loans, the Borrower shall pay to Bank such additional amounts as will compensate Bank for such costs or lost income resulting therefrom as determined by Bank, in its reasonable discretion. (b) Letter of Credit Fee. Borrower shall pay Bank a Letter of Credit fee as follows: (i) with respect to stand by Letters of Credit, a fee which shall accrue at a rate equal to 0.90% per annum times the Daily Balance of the undrawn amount of all outstanding stand by Letters of Credit, and (ii) with respect to commercial Letters of Credit, standard rates and fees charged by Bank in connection with the issuance and negotiation of commercial Letters of Credit as set forth in its standard fee schedule as in effect from time to time. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit), shall bear interest on the Daily Balance at a per annum rate equal to 4 percentage points above the Prime Rate. (d) Payments. Bank shall be entitled to charge Borrower's operating account, or any other deposit account of Borrower maintained with Bank, for all principal and interest payments, as well as letter of credit fees and reimbursement obligations arising as a result of a draw under a Letter of Credit, as they become due and payable under this Agreement. So long as no Event of Default has occurred and is continuing, Bank shall deliver to Borrower an invoice of any and all fees and charges provided for in Section 2.8 and all Bank Expenses incurred by Bank. Borrower shall be obligated to pay to Bank the amount set forth in such invoice within 15 days following Borrower's receipt of such invoice. Following the Closing Date, so long as no Event of Default has occurred and is continuing, Bank shall obtain Borrower's prior written consent, which consent shall not be unreasonably withheld, before incurring an item of expense listed under part (b) of the definition Bank Expenses that is in an amount in excess of $2,000. At any time after the occurrence of an Event of Default and so long as it is continuing, Borrower hereby authorizes Bank, at its option, without prior notice to Borrower, to charge all principal, interest, Bank Expenses (as and when incurred), letter of credit fees, the fees and charges provided for in Section 2.8 (as and when accrued or incurred), or any amounts due under the Loan Document to Borrower as an Advance under this Agreement, which amounts thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (e) Computation. The Prime Rate as of the date of this Agreement is 4.75% per annum. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Prime Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and Bank, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.5 Crediting Payments; Application of Collections. So long as no Event of Default has occurred and is continuing, Bank shall apply payments received from Borrower as directed by Borrower. Any such payment shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds and is made to Bank in accordance with wiring instructions issued by Bank to Borrower or unless and until such payment is honored when presented for payment. Should any payment to Bank not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any payment shall be deemed received by Bank only if it is received into the Bank on a Business Day on or before (i) 11:00 a.m. California time for regular deposits and (ii) 9:30 a.m. California time for deposits covering overdrafts. If any payment is received by Bank on a non- Business Day or after 11:00 a.m. California time on a Business Day, it shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Following the occurrence of an Event of Default and so long as it is continuing, Bank shall apply payments to the Obligations in such order and in such manner as is determined by Bank, in its Permitted Discretion. 2.6 Designated Account. Bank is authorized to make the Advances and Term Loan B under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.4(d). Borrower agrees to establish and maintain the Designated Account for the purpose of receiving the proceeds of Term Loan B and Advances requested by Borrower and made by Bank hereunder. Unless otherwise agreed by Bank and Borrower, Term Loan B and any Advance requested by Borrower and made by Bank hereunder shall be credited to the Designated Account. 2.7 Maintenance of Loan Account; Statements of Obligations. Bank shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Bank to Borrower or for Borrower's account, amounts Borrower is obligated to pay to Bank upon a draw under a Letter of Credit, Term Loan A and Term Loan B. In accordance with Sections 2.2(a), 2.2(b), 2.3(c) and 2.5, the Loan Account will be credited with all payments received by Bank from Borrower or for Borrower's account. Bank shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Bank Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Bank unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Bank written objection thereto describing the error or errors contained in any such statements. 2.8 Fees. Borrower shall pay to Bank the following fees: (a) Closing Fee. On the Closing Date, a closing fee of $60,000. (b) Unused Line Fee. As of the last day of each fiscal quarter of Borrower during the term of this Agreement in which Borrower was not in compliance with the financial covenant contained in Section 7.20(e) as of the last day of such fiscal quarter, Borrower shall pay to Bank a quarterly unused line fee (the "Unused Line Fee") equal to one-quarter (0.25) of one percent of the average daily amount that the Advances and Letters of Credit outstanding during such period were less, in the aggregate, than the Maximum Revolving Amount. Payment of the Unused Line Fee shall be made as of the last day of each such three month period by charging Borrower's Loan Account with the amount of the Unused Line Fee. The Unused Line Fee shall represent an unconditional payment to Bank in consideration of Bank's agreement to extend financial accommodations to Borrower pursuant to this Agreement and shall not reduce or be a deposit on account of the Obligations. (c) Financial Examination, Documentation, and Appraisal Fees. (i) Bank's out-of-pocket expenses for each auditor, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed by personnel employed by Bank; and (ii) Bank's appraisal fees for each appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by personnel employed by Bank; and, (iii) the actual charges paid or incurred by Bank if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower or to appraise the Collateral; provided, however, that the total amount of fees paid under this Section shall not exceed $10,000 in any fiscal year; provided further, however, that the foregoing limitation shall not apply to any of the fees incurred under this Section following the occurrence of an Event of Default and so long as it is continuing. 2.9 LIBOR Option. (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Prime Rate, Borrower shall have the option (the "LIBOR Option") to have interest on all or a portion of Term Loan A (commencing as of April 1, 2004), Term Loan B, and the Advances be charged at the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (I) the last day of each calendar month during the term of each LIBOR Rate Loan, (ii) the last day of the Interest Period applicable thereto, (iii) the occurrence of an Event of Default in consequence of which the Bank elects to accelerate the maturity of the Obligations, or (iv) April 1, 2008, with respect to the LIBOR Rate Loans or the termination of this Agreement pursuant to the terms hereof with respect to all then outstanding LIBOR Rate Loans. On the last day of each applicable Interest Period, unless Borrower properly has exercised a new LIBOR Option or conversion to a Prime Rate Loan with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall continue as another LIBOR Rate Loan for the same Interest Period as the LIBOR Rate Loan that just matured. At any time that an Event of Default has occurred and is continuing, Borrower no longer shall have the option to request that Term Loan A, Term Loan B, or any of the Advances bear interest at the LIBOR Rate and Bank shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Prime Rate Loans hereunder. (b) LIBOR Election. (i) Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Bank prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Borrower's election of the LIBOR Option for a permitted portion of Term Loan A, Term Loan B, and the Advances (so long as Term Loan A, Term Loan B or the Advances, as applicable, have not become due and payable, or will not become due and payable during the proposed Interest Period) shall be made by a LIBOR Notice received by Bank before the LIBOR Deadline, or by telephonic notice received by Bank before the LIBOR Deadline (to be confirmed by delivery to Bank of a LIBOR Notice received by Bank prior to 5:00 p.m. (California time) on the same day). (ii) Each LIBOR Notice shall be irrevocable and binding on Borrower. In connection with each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Bank harmless against any loss, cost, or expense incurred by Bank as a result of (a) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (b) the failure to borrow, convert, or continue any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding Losses shall be deemed to equal the amount determined by Bank to be the excess, if any, of (y) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert, or continue, for the period that would have been the Interest Period therefor), minus (z) the amount of interest that would accrue on such principal amount from like investments in the Money Markets as of the date of such event through the end of the applicable Interest Period. A certificate of Bank delivered to Borrower setting forth any amount or amounts that Bank is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrower shall have not more than 5 LIBOR Rate Loans in effect at any given time. (c) Prepayments. Borrower may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of early termination of the term of this Agreement or acceleration of the Obligations pursuant to the terms hereof, Borrower shall indemnify, defend, and hold Bank harmless against any and all Funding Losses in accordance with clause (b)(ii) above. (d) Special Provisions Applicable to LIBOR Rate. (i) The LIBOR Rate may be adjusted by Bank on a prospective basis to take into account any additional or increased costs to Bank of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, Bank shall give Borrower notice of such a determination and adjustment and, upon its receipt of the notice from Bank, Borrower may, by notice to Bank (y) require Bank to furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of Bank, make it unlawful or impractical for Bank to fund or maintain LIBOR Rate Loans or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, Bank shall give notice of such changed circumstances to Borrower and (y) in the case of any LIBOR Rate Loans that are outstanding, the date specified in Bank's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans thereafter shall accrue interest at the rate then applicable to Prime Rate Loans, and (z) Borrower shall not be entitled to elect the LIBOR Option until Bank determines that it would no longer be unlawful or impractical to do so. (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, Bank is not required to actually acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if Bank had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.10 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 or Section 2.3 is greater than the Dollar limitations set forth in Section 2.1 or Section 2.3, as applicable (an "Overadvance"), then Borrower immediately shall pay to Bank, in cash, the amount of such excess. In addition, Borrower hereby promises to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to Bank as and when due and payable under the terms of this Agreement and the other Loan Documents. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance and Term Loan B. The obligation of Bank to make the initial Advance is subject to the fulfillment, to the satisfaction of Bank and its counsel, of each of the conditions set forth in this Section 3.1 on or before the Closing Date. In addition, the funding of Term Loan B is subject to each of the conditions precedent set forth in this Section 3.1 as well as delivery to Bank of evidence satisfactory to Bank that the transactions contemplated by the Purchase Agreement have been consummated. (a) the Closing Date shall occur on or before May 10, 2002; (b) Bank shall have received searches reflecting the filing of its financing statements and fixture filings; (c) Bank shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Intellectual Property Security Agreement; (ii) the Mortgages in recordable form; (iii) the Revolver Note, Term Note A and Term Note B, (iv) the Disbursement Letter; (d) Bank shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Bank shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Bank shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Bank shall have received certificates of status with respect to Borrower, each dated within 15 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Bank shall have received mortgagee title insurance policies (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company satisfactory to Bank (each a "Mortgage Policy" and, collectively, the "Mortgage Policies") in amounts satisfactory to Bank assuring Bank that the Mortgages on such Real Property Collateral are valid and enforceable first priority mortgage Liens on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policies otherwise shall be in form and substance satisfactory to Bank. (i) Bank shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Bank and its counsel; (j) Bank shall have received such Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Bank may require; (k) Bank shall have received a phase-I environmental report with respect to each parcel composing the Real Property Collateral; the environmental consultants retained for such reports, the scope of the reports, and the results thereof shall be acceptable to Bank; and (l) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Bank and its counsel. 3.2 Conditions Precedent to all Advances. The following shall be conditions precedent to all Advances hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Bank, or any of their Affiliates. 3.3 Condition Subsequent. As a condition subsequent to initial closing hereunder, Borrower shall perform or cause to be performed the following (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) Within 10 days following the written request of Bank, Borrower shall deliver to Bank duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title. (b) Within 30 days of the Closing Date, Bank shall have received mortgagee title insurance policies (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company satisfactory to Bank (each a "Mortgage Policy" and, collectively, the "Mortgage Policies") in amounts satisfactory to Bank assuring Bank that the Mortgages on such Real Property Collateral are valid and enforceable first priority mortgage Liens on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policies otherwise shall be in form and substance satisfactory to Bank. (c) For a period of 30 days following the Closing Date, Borrower shall use its best efforts to cause to be delivered to Bank Collateral Access Agreements with respect to Borrower's business premises located at 460 Calle San Pablo, Camarillo, California 93012, as well as any other location where Collateral is maintained. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Bank and shall continue in full force and effect for a term ending on April 1, 2008, unless sooner terminated pursuant to the terms hereof. The foregoing notwithstanding, Bank shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Bank's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Bank's obligation to provide additional credit hereunder is terminated. When this Agreement has been terminated and all of the Obligations have been fully discharged and Bank's obligations to provide additional credit under the Loan Documents have been terminated, Bank will, at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, copyrights and patents, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, Bank's security interests in the Collateral and all notices of security interests and liens previously filed by Bank with respect to the Obligations. 3.6 Early Termination by Borrower. Borrower has the option, at any time upon 30 days prior written notice to Bank, to terminate this Agreement by paying to Bank, in cash, outstanding Obligations, including, without limitation, any fees payable by Borrower as a result of the prepayment of any LIBOR Rate Loans. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower hereby grants to Bank a continuing security interest in all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Bank's security interests in the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Bank or Borrower. Except as expressly authorized in this Agreement or any other Loan Document and except for Permitted Dispositions, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral without the prior written consent of Bank. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower, immediately upon the request of Bank, shall endorse and deliver physical possession of such Negotiable Collateral to Bank. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time that an Event of Default has occurred and is continuing, Bank or Bank's designee may (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Bank or that Bank has a security interest therein, and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. At any time that an Event of Default has occurred and is continuing, Borrower agrees that it will hold in trust for Bank, as Bank's trustee, any Collections that it receives and immediately will deliver said Collections to Bank in their original form as received by Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Bank, Borrower shall execute and deliver to Bank all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, control agreements, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Bank reasonably may request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral, and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Bank (and any of Bank's officers, employees, or agents designated by Bank) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) endorse Borrower's name on any Collection item that may come into Bank's possession, (d) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Bank, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Bank determines to be reasonable, and Bank may cause to be executed and delivered any documents and releases that Bank determines to be necessary. The appointment of Bank as Borrower's attorney, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Bank's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 4.7 Control Agreements. Borrower agrees that it will not transfer assets out of any DDA or Securities Accounts other than as permitted under the corresponding Control Agreement and under Section 7.16. No arrangement contemplated hereby or by any Control Agreement in respect of any DDA, Securities Accounts or other Investment Property shall be modified by Borrower without the prior written consent of Bank. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any depository institutions and securities intermediary to liquidate the applicable DDA and Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to Bank. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter into this Agreement, Borrower makes the following representations and warranties to Bank which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 Equipment. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes. 5.3 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Bank's prior written consent) and are located only at the locations identified on Schedule 6.10 or otherwise permitted by Section 6.10. 5.4 Inventory Records. Borrower keeps correct and accurate records of the Inventory and Borrower's cost therefor. 5.5 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 95-3647070. 5.6 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of Delaware and is qualified and licensed to do business in, and in good standing in, California and any other state where the failure to be so licensed or qualified reasonably could be expected to cause a Material Adverse Change. (b) Set forth on Schedule 5.6, is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital stock of each such Subsidiary has been validly issued and is fully paid and non- assessable. (c) Except as set forth on Schedule 5.6, no capital Stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital Stock) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. 5.7 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action on the part of Borrower. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and Mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by Borrower to Bank in and to its properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.8 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and, to the best of Borrower's knowledge, there are no pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.8; (c) matters arising after the date hereof that, if decided adversely to Borrower, reasonably could not be expected to result in a Material Adverse Change; and (d) matters that are fully covered by insurance (subject to customary deductions). 5.9 No Material Adverse Change. All financial statements relating to Borrower that have been delivered by Borrower to Bank have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower since the date of the latest financial statements submitted to Bank on or before the Closing Date. 5.10 Solvency. Borrower is Solvent. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.11 Employee Benefits. None of Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 5.11. Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 5.12 Environmental Condition. Except as set forth on Schedule 5.12, (a) to best of Borrower's knowledge, none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law; (b) to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute; (c) Borrower has not received a notice that a Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower; and (d) Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.13 Intellectual Property. Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.13 is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Borrower is the owner or is an exclusive licensee. 5.14 Leases. Borrower enjoys peaceful and undisturbed possession under all leases material to the business of Borrower and to which it is a party or under which it is operating. All of such leases are valid and subsisting and no material default by Borrower exists under any of them. 5.15 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower in writing to Bank (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents, or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower in writing to Bank will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. 5.16 Indebtedness. Set forth on Schedule 5.16 is a true and complete list of all Indebtedness of Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.17 DDAs. Set forth on Schedule 5.17 are all of the DDAs of Borrower, including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower shall do all of the following: 6.1 Accounting System. Maintain a standard and modern system of accounting that enables Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Bank. Borrower also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Bank with the following documents on a quarterly basis by no later than the 20th day following the conclusion of each fiscal quarter of Borrower during the term of this Agreement in form satisfactory to Bank: (a), a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, (b) a detailed aging, by total, of the Accounts, (c) an Inventory report listing all Inventory currently owned by Borrower and its location, (d) upon the request of Bank, copies of invoices in connection with the Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by Borrower, purchase orders and invoices, and (e) such other reports as to the Collateral or the financial condition of Borrower as Bank may request from time to time. 6.3 Financial Statements, Reports, Certificates. Deliver to Bank: (a) as soon as available, but in any event within 45 days after the end of each fiscal quarter of Borrower during each of Borrower's fiscal years, Borrower's 10Q SEC filing and a company prepared balance sheet, income statement, and statement of cash flow covering Borrower's operations during such period; (b) as soon as available, but in any event within 120 days after the end of each of Borrower's fiscal years, Borrower's 10K SEC filing and financial statements of Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Bank and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, and (c) as soon as available, but in any event no later than the end of the each first fiscal quarter of Borrower, company prepared Projections for the then current fiscal year. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. If Borrower is a parent company of one or more Subsidiaries or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present Borrower and each such related entity separately, and on a consolidated basis. Each quarter, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Bank a Compliance Certificate signed by its chief financial officer to the effect that: (i) all financial statements delivered or caused to be delivered to Bank hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) Borrower is in compliance at the end of such period with the applicable financial covenants contained in Section 7.20 (and demonstrating such compliance in reasonable detail), and (iv) on the date of delivery of such certificate to Bank there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any non-compliance, describing such non- compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). The independent certified public accountants of Borrower may communicate with Bank so long as Borrower participates in such communication. 6.4 [Intentionally Omitted]. 6.5 Title to Equipment. Upon Bank's request, Borrower immediately shall deliver to Bank, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.6 Maintenance of Equipment. Maintain the Equipment which is necessary or useful in the proper conduct of Borrower's business in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Closing Date, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, promptly on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower has made such payments or deposits. 6.8 Insurance. (a) At its expense, keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Personal Property Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Bank. All insurance required herein shall be written by companies which are authorized to do insurance business in the State of California. All hazard insurance and such other insurance as Bank shall specify, shall contain a California Form 438BFU endorsement, or an equivalent endorsement satisfactory to Bank, showing Bank as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.8 shall contain an agreement by the insurer that it will not cancel such policy except after 30 days prior written notice to Bank and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Borrower which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment. Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (c) Original policies or certificates thereof satisfactory to Bank evidencing such insurance shall be delivered to Bank at least 30 days prior to the expiration of the existing or preceding policies. Borrower shall give Bank prompt notice of any loss in excess of $100,000 covered by such insurance, and if an Event of Default has occurred and is continuing or the anticipated claim arising from such loss exceeds $5,000,000, then Borrower shall not settle any such claim without the Bank's prior written consent which consent, if an Event of Default has occurred and is continuing, may be withheld in the Bank's sole discretion but otherwise shall not to be unreasonably withheld. In all circumstances other than that described in the preceding sentence Borrower shall be entitled to settle all insurance claims. Any monies received as payment for any loss under any insurance policy (other than liability or, in the case of clauses (ii) and (iii) below, business interruption insurance policies) including the insurance policies mentioned above, shall be paid as follows: (i) if an Event of Default has occurred and is continuing, Bank shall have the option, as determined by Bank in its sole discretion, to (i) apply such monies to the Obligations, in the order and manner as determined by Bank, in its sole discretion, or (ii) disburse such monies to Borrower under stage payment terms satisfactory to Bank for application to the cost of repairs, replacements, or restorations, or (ii) if the monies received are in excess of $5,000,000, to Bank to be held by Bank in a cash collateral account securing the Obligations, which account (a) for a period of one year after the receipt of such monies shall be accessible to Borrower for the purpose of funding the repair, replacement or restoration of the property that was the subject of the insurance claim; provided, however, that Bank shall have the right to condition the release of such monies on the delivery to Bank of evidence satisfactory to Bank, in its Permitted Discretion, that such monies are actually being used to for such purpose, and (b) after the one year anniversary of the receipt of such monies, may be closed to the Borrower and any credit balances maintained therein applied to the Obligations, in the order and manner as determined by Bank, in its sole discretion, or, in the sole discretion of Bank, shall be disbursed to Borrower under stage payment terms satisfactory to Bank for application to the cost of repairs, replacements, or restorations, or (iii) in all other cases, to Borrower. (d) All monies received from liability insurance policies and, subject to clause (c)(i) above, business interruption insurance policies shall be payable to Borrower. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default and so long as it is continuing, Bank shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or manner as Bank shall determine. (e) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Bank is included thereon as named insured with the loss payable to Bank under a standard California 438BFU endorsement, or its local equivalent. Borrower immediately shall notify Bank whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Bank. 6.9 No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.10 Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 6.10 or in transit between such locations in an amount not to exceed at any one time $3,500,000 or Inventory and Equipment located outside the United States in an aggregate amount not to exceed at any one time $3,500,000; provided, however, that Borrower may amend Schedule 6.10 and if required in writing by Bank, Borrower shall deliver to Bank a Collateral Access Agreement. 6.11 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non- compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to cause a Material Adverse Change. 6.12 Employee Benefits. (a) Deliver to Bank: (i) promptly, and in any event within 10 Business Days after Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of the chief financial officer of Borrower describing such ERISA Event and any action that is being taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within three Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within three Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Bank, upon Bank's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower or its Subsidiaries under any Retiree Health Plan. 6.13 Leases. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Bank shall be entitled, in its Permitted Discretion, to reserve against the Maximum Revolving Amount an amount equal to such unpaid amounts. 6.14 Environmental. Keep any property either owned or operated by Borrower free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Bank documentation of such compliance which Bank reasonably requests, (c) promptly notify Bank of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Borrower and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Bank with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against Borrower, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not without the prior written consent of the Bank, which consent may be withheld in Bank's Permitted Discretion, do any of the following: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with outstanding Letters of Credit; (b) Indebtedness set forth on Schedule 5.16; (c) Indebtedness secured by Permitted Liens; (d) Indebtedness of not more than $1,500,000 in any fiscal year of Borrower which is secured by a purchase money security interest or in respect of capital leases; provided, however, that Indebtedness owing to an Affiliate of Bank shall not be included when calculating the total amount of outstanding Indebtedness subject to this subpart (d); (e) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Bank as those applicable to the refinanced Indebtedness; and (f) Guarantees permitted by Section 7.6. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(e) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or reincorporate in a different jurisdiction or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 7.4 Disposal of Assets. Other than Permitted Depositions, sell, lease, assign, transfer, or otherwise dispose of any of Borrower's properties or assets other than sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted. 7.5 Change Name. Change Borrower's name, FEIN, corporate structure (within the meaning of the Code), or identity, or add any new fictitious name; provided, however, that Borrower may change its name upon at least 30 days prior written notice to Bank of such change and so long as at the time of such written notification to Bank, Borrower provides to Bank any financing statements, amendments to financing statements or fixture filings requested by Bank to perfect and to continue the perfection of Bank's security interest in the Collateral. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Bank. 7.7 Nature of Business. Make any change in the principal nature of Borrower's business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(e), prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Except as permitted under Section 7.1(e), directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), or (d). 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Consignments. Except for the delivery of promotional Inventory in accordance with the historical business practices of Borrower, have outstanding consignments of Inventory or sales of Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale in excess, in the aggregate, of $750,000; provided, however, that the foregoing restriction shall not apply to (i) consignments of Inventory which are properly perfected under Section 9324 of the UCC and Borrower has delivered to Bank evidence satisfactorily to Bank, in its Permitted Discretion, that Borrower has properly perfected its rights in such Inventory under Section 9324 of the UCC, and (ii) consignments of Inventory to consignees located outside of the United States so long as the outstanding amount of such consigned Inventory does not, in the aggregate, cause Borrower to be in violation of Section 6.10. 7.11 Distributions. Make distributions, redemptions or declare and pay dividends (in cash or other property, other than common Stock) on Borrower's Stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Bank information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Bank pursuant to or in accordance with this Agreement, and agrees that Bank, subject to the requirements under Section 6.3, may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13 Investments. Other than Permitted Investments, directly or indirectly make, acquire, or incur any Investments (including contingent obligations) in excess of $1,000,000 during any fiscal year of Borrower for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person; provided, however, that Borrower shall not have Permitted Investments in excess of $1,000,000 outstanding at any one time unless Borrower, Bank and the applicable securities intermediary have entered into Control Agreements governing such Permitted Investments, as Bank shall determine in its Permitted Discretion, to perfect (and further establish) the Bank's Liens in such Permitted Investments. 7.14 Transactions with Affiliates. Other than the transaction listed on Schedule 7.14, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Bank, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Deposit Accounts and Securities Accounts. Subject to Section 7.13, establish or maintain any DDA or Securities Account unless Bank shall have received a Control Agreement in respect of such DDA or Securities Account. Borrower may transfer assets out of any DDA or Securities Account for any purpose not prohibited by this Agreement; provided, however, that no such transfers shall be made by Borrower after the occurrence of an Event of Default and so long as it is continuing without the prior written consent of Bank. No Control Agreements shall be required in connection with any DDA maintained with Bank. Borrower agrees and acknowledges that all present and future DDAs maintained with Bank are included in the Collateral. 7.17 Use of Proceeds. Use the proceeds of the Advances made hereunder for any purpose other than (i) on the Closing Date, (x) to refinance the purchase of the Acquisition Assets (as defined in the Purchase Agreement), (y) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (z) to pay transactional costs and expenses incurred in connection with this Agreement, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Bank and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Bank's security interests and also provides to Bank a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party within the United States (subject to the restrictions set forth in Section 6.10) without Bank's prior written consent. 7.19 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA. 7.20 Financial Covenants. Fail to maintain: (a) Fixed Charge Coverage Ratio. A Fixed Charge Coverage Ratio of not less than 1.25:1.0, measured on a fiscal quarter-end basis; (b) Current Ratio. A Current Ratio of not less than of 2.0:1.0, measured on a fiscal quarter-end basis; (c) Leverage Ratio. A Leverage Ratio of not more than 2.25:1.00, measured on a fiscal quarter-end basis; (d) Tangible Net Worth. Tangible Net Worth of at least $19,050,000 from the Closing Date through the end of Borrower's current fiscal year, and increasing by $1,000,000 as of the first day of each subsequent fiscal year of Borrower during the term of this Agreement; (e) Liquidity. Cash and Cash Equivalents of not less than $8,000,000, measured on a fiscal quarter-end basis during the term of this Agreement; and (f) Profitability. Profitability for each fiscal year during the term of this Agreement of not less than $1.00. 8. EVENTS OF DEFAULT. 8.1 Events of Default. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: (a) If Borrower fails to pay within 5 days following the date when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Bank, reimbursement of Bank Expenses, or other amounts constituting Obligations); (b) If Borrower fails to (i) perform, keep, or observe any covenant or other provision contained in Sections 6.1, 6.2, 6.3, 6.5, 6.6, 6.12, and 6.13 of this Agreement and such failure or neglect continues for a period of 15 days after the date on which such failure or neglect first occurs, or (ii) to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in any other Section of this Agreement (other than a Section that is expressly dealt with elsewhere in Section 8 of this Agreement), in any of the other Loan Documents, or in any other present or future agreement between Borrower and Bank. (c) If there is a Material Adverse Change; (d) If properties or assets of Borrower valued, in the aggregate, in excess of $500,000 are attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person and all of such assets of Borrower are not released from such attachment, seizure, writ, warrant, levy or possession within 10 days from the date thereof; (e) If an Insolvency Proceeding is commenced by Borrower; (f) If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Bank shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; (g) If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs and such injunction, restraint or order is not dismissed within 10 days from the date first issued; (h) If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof and such Lien is not discharged within 10 days following the creation of such Lien; (i) If a single judgment or other claim exceeds $500,000 individually, or exceeds $1,000,000 in the aggregate with other judgments or liens, and becomes a Lien or encumbrance upon any portion of Borrower's properties or assets and such Lien is not discharged within 10 days following the creation of such Lien; (j) If there is a default in any agreement to which Borrower is a party with one or more third Persons which gives rise to a claim against Borrower in an amount greater than $500,000 individually, or $1,000,000 in the aggregate with other pending claims against Borrower, and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder; (k) If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; (l) If any material misstatement or misrepresentation exists now or hereafter in any written warranty, representation, statement, Record, or report made to Bank by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; (m) If the obligation of any guarantor under its guaranty or other third Person under any Loan Document is limited or terminated by operation of law or by the guarantor or other third Person thereunder, or any such guarantor or other third Person becomes the subject of an Insolvency Proceeding; or (n) If a combination of events listed in subsection 8.1(d), (i) and (j) occur involving claims, attachments and the like which, in the aggregate, exceed $1,000,000. 8.2 No Advances During Cure Period. Upon the occurrence of any of the events described in Sections 8.1(d), (f), (g), (h), (i) and (n), Bank shall have the right to discontinue making any Advances during the cure period set forth in each of those Sections. 9. BANK'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and Bank; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Bank, but without affecting Bank's rights and security interests in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Bank considers advisable, and in such cases, Bank will credit Borrower's Loan Account with only the net amounts received by Bank in payment of such disputed Accounts after deducting all Bank Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for Bank, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Bank; (f) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if Bank so requires, and to make the Personal Property Collateral available to Bank as Bank may reasonably designate. Borrower authorizes Bank to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Bank's determination appears to conflict with its security interests and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, for up to 120 days in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Bank, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Bank is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Bank shall give notice of the disposition of the Personal Property Collateral as follows: (i) Bank shall give Borrower and each holder of a security interest in the Personal Property Collateral who has filed not less than 20 days prior to the date Bank intends to give notice a financing statement with the appropriate governmental office, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least ten days before the date fixed for the sale, or at least ten days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrower claiming an interest in the Personal Property Collateral shall be sent to such addresses as they have furnished to Bank; (l) Bank may sell Personal Property Collateral at a public or private sale without any representations or warranties, including, without limitation, warranties of merchantability or fitness for a particular purpose; (m) Bank may credit bid and purchase at any public sale; and (n) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Bank to Borrower. 9.2 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Bank determines that such failure by Borrower would reasonably be expected to result in a Material Adverse Change, in its discretion and without prior notice to Borrower, Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.8, and take any action with respect to such policies as Bank deems prudent. Any such amounts paid by Bank shall constitute Bank Expenses. Any such payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. Bank need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 11.2 Bank's Liability for Collateral. So long as Bank complies with its obligations, if any, under the Code or at law, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold Bank, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 12. NOTICES. Unless otherwise specifically provided herein, all notices and service of any process shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or United States mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if confirmed and if transmitted on a Business Day before 4:00 p.m. (Los Angeles time) or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two days after delivery to such courier properly addressed; or (d) if by U.S. mail, four Business Days after depositing in the United States mail, with postage prepaid and properly addressed: If to Borrower: CALIFORNIA AMPLIFIER, INC. 460 Calle San Pablo Camarillo, California 93012 Attn: Richard K. Vitelle, Chief Financial Officer Fax No. 805.482.4582 with copies to: GIBSON, DUNN & CRUTCHER LLP 333 South Grand Avenue Suite 4800 Los Angeles, California 90071 Attn: Peter F. Zeigler, Esq. Fax No. 213.229.7520 If to Bank: U.S. BANK NATIONAL ASSOCIATION 15910 Ventura Boulevard Encino, California 91436 Attn: Karen Brown, Senior Vice President and David Peskin, Vice President Fax No. 818.789.3041 with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street Suite 2400 Los Angeles, California 90017 Attn: William Schoenholz, Esq. Fax No. 213.896.0400 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF BANK, IN ANY OTHER COURT IN WHICH BANK SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND BANK WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND BANK HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF BORROWER AND BANK REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Bank may be destroyed or otherwise disposed of by Bank four months after they are delivered to or received by Bank, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and Bank. 15.2 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Bank's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Bank shall release Borrower from its Obligations. Bank, with the prior written consent of the Borrower, may assign this Agreement and its rights and duties hereunder; provided however that the consent of the Borrower to any proposed assignment shall not be unreasonably withheld in connection with any proposed assignment to an Eligible Assignee; provided further however that the consent of the Borrower shall not be required if any such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of Bank. Bank reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Bank's rights and benefits hereunder. In connection with any such assignment or participation, Bank may disclose all documents and information which Bank now or hereafter may have relating to Borrower or Borrower's business. To the extent that Bank assigns its rights and obligations hereunder to a third Person, Bank thereafter shall be released from such assigned obligations to Borrower and such assignment shall effect a novation between Borrower and such third Person. 15.3 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 15.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Bank or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 15.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 15.6 Amendments in Writing. This Agreement can only be amended by a writing signed by both Bank and Borrower. 15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The provisions of this Section 15.7 shall be applicable to, and shall be deemed incorporated by reference into, the other Loan Documents. 15.8 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Bank of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Bank is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Bank is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Bank related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 15.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. CALIFORNIA AMPLIFIER, INC., a Delaware corporation By: /s/ Richard K. Vitelle ___________________________ Title: VP Finance & CFO U.S. BANK NATIONAL ASSOCIATION By: /s/ David Peskin ___________________________ Title: VP -----END PRIVACY-ENHANCED MESSAGE-----