-----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, FuSwzhuWtQSzrMZNZDJBhisYfnQREoHX+1Rej+Vsx22hluSLL07bazIXek+S/L3z u+1r0XeRxozfnKPMhcczuQ== 0000891618-96-001838.txt : 19960816 0000891618-96-001838.hdr.sgml : 19960816 ACCESSION NUMBER: 0000891618-96-001838 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL MICROWAVE CORP /DE/ CENTRAL INDEX KEY: 0000812703 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770016028 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15895 FILM NUMBER: 96615161 BUSINESS ADDRESS: STREET 1: 170 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430777 MAIL ADDRESS: STREET 1: 170 ROSE ORCHARD WAY CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended Commission file number: 0-15895 June 30, 1996 DIGITAL MICROWAVE CORPORATION (Exact name of registrant specified in its charter) DELAWARE 77-0016028 (State or other jurisdiction (IRS employer of incorporation or organization) identification number) 170 Rose Orchard Way San Jose, CA 95134 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (408) 943-0777 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT JULY 31, 1996 Common Stock - $0.01 par value 15,264,670 Page 1 of 14 2 INDEX PAGE COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8K 12-13 SIGNATURE 14 Page 2 of 14 3 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS DIGITAL MICROWAVE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS 6/30/96 03/31/96 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,459 $ 8,299 Restricted cash 1,427 719 Accounts receivable, net 33,051 33,398 Inventories, net 43,636 35,347 Other current assets 2,933 2,973 ------- ------- Total current assets 83,506 80,736 PROPERTY AND EQUIPMENT, NET 14,854 15,061 ------- ------- Total assets $98,360 $95,797 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Lines of credit $ 3,018 $ 3,106 Current maturities of note payable 3,334 3,334 Current maturities of capital lease obligations 969 1,025 Accounts payable 20,154 16,252 Income taxes payable 1,103 973 Other accrued liabilities 16,547 18,590 ------- ------- Total current liabilities 45,125 43,280 LONG-TERM LIABILITIES: Note payable, net of current maturities 1,111 1,944 Capital lease obligations, net of current maturities 598 838 ------- ------- Total liabilities 46,834 46,062 STOCKHOLDERS' EQUITY 51,526 49,735 ------- ------- Total liabilities and stockholders' equity $98,360 $95,797 ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements. Page 3 of 14 4 DIGITAL MICROWAVE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended June 30, -------- 1996 1995 ---- ---- Net sales $ 36,807 $ 39,693 Cost of sales 24,902 29,708 -------- -------- Gross profit 11,905 9,985 -------- -------- Operating Expenses: Research and development 2,461 2,952 Selling, general and administrative 7,927 6,473 -------- -------- Total operating expenses 10,388 9,425 -------- -------- Operating income 1,517 560 Other income: Interest and other income (expense), net 13 380 Interest expense (282) (671) -------- -------- Income before provision for income taxes 1,248 269 Provision for income taxes 125 27 -------- -------- Net income $ 1,123 $ 242 ======== ======== Net income per share $ 0.07 $ 0.02 ======== ======== Weighted average number of common & common equivalent shares outstanding 16,242 13,823 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. Page 4 of 14 5 DIGITAL MICROWAVE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended June 30, -------- 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 1,123 $ 242 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization 1,117 1,684 Provision for valuation reserves 783 1,070 Provision for warranty reserve 386 282 Changes in assets and liabilities: Decrease (increase) in restricted cash (708) 443 Decrease (increase) in accounts receivable 343 (2,648) Decrease (increase) in inventories (9,074) (162) Decrease (increase) in other current assets 43 (520) (Decrease) increase in accounts payable 3,903 (507) (Decrease) increase in other accrued liabilities (2,296) (103) ------- ------- Net cash used for operating activities (4,380) (219) ------- ------- Cash flows from investing activities: Purchases of property and equipment (746) (1,541) ------- ------- Cash flows from financing activities: Borrowings from (repayments to) bank (922) 3,145 Payment of capital lease obligations (296) (187) Sale of common stock 668 447 ------- ------- Net cash provided by financing activities (550) 3,405 ------- ------- Effect of exchange rate changes on cash (164) 61 ------- ------- Net increase (decrease) in cash and cash equivalents (5,840) 1,706 Cash and cash equivalents at beginning of year 8,299 1,919 ------- ------- Cash and cash equivalents at end of period $ 2,459 $ 3,625 ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements. Page 5 of 14 6 DIGITAL MICROWAVE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Digital Microwave Corporation and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. While the financial information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in connection with the Digital Microwave Corporation financial statements included in the Company's annual report and Form 10-K for the year ended March 31, 1996. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH The Company is required to segregate and maintain certain cash balances as security for letters of credit provided to secure performance or bid bonds under some of the Company's revenue contracts. As of June 30, 1996, the Company was required to segregate and maintain $1.4 million which is included as restricted cash in the accompanying balance sheets. Page 6 of 14 7 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market where cost includes material, labor and manufacturing overhead. Inventories consist of:
(In thousands) June 30, 1996 March 31, 1996 ------------- -------------- (Unaudited) Raw materials 15,202 $11,840 Work in process 17,358 16,342 Finished goods 11,076 7,165 ------- ------- $43,636 $35,347 ======= =======
NET INCOME PER SHARE Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. LITIGATION AND CONTINGENCIES The Company is subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, these proceedings will not have a material adverse effect on the financial position and results of operations of the Company. CONCENTRATION OF CREDIT RISK Trade receivables concentrated with certain customers primarily in the telecommunications industry and in certain geographic locations potentially subject the Company to concentration of credit risk. In addition to sales in Western Europe and North America, the Company actively markets and sells products in the Far East, Eastern Europe and South America. The Company performs on-going credit evaluations of its customers' financial conditions and generally requires no collateral. Page 7 of 14 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth items from the Condensed Consolidated Statements of Operations as percentages of net sales:
Three Months Ended June 30,__ ------------------ 1996 1995 ---- ---- Net sales 100.0% 100.0% Cost of sales 67.7 74.8 ---- ---- Gross profit 32.3 25.2 Research & development 6.7 7.5 Selling, general & administrative 21.5 16.3 ---- ---- Operating income 4.1 1.4 Other expense, net (0.7) (0.7) ---- ---- Income before tax 3.4 0.7 Income before provision for income taxes 0.3 0.1 --- --- Net income 3.1% 0.6% === ===
Net sales for the first quarter of fiscal year 1997 were $36.8 million, compared to $39.7 million reported in the same quarter of fiscal year 1996. The decrease in net sales in the first quarter of fiscal 1997 was primarily due to lower sales in the Asia Pacific region. Sales in the Asia Pacific region declined from $12.8 million in the first quarter of fiscal 1996 to $10.1 in the similar quarter of fiscal 1997. During the first quarter of fiscal 1997, the Company received $34 million in orders shippable over the next twelve months, compared to $36 million in the first quarter of fiscal 1996. The decline was due primarily to the timing of orders from customers, some of which were not booked until July. The twelve month backlog at June 30, 1996 was $81 million, compared to $84 million at March 31, 1996. The Company includes in its backlog purchase orders with respect to which a delivery schedule has been specified for product shipment within one year. Orders in the Company's current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period. Page 8 of 14 9 Gross margin as a percentage of net sales for the first quarter of fiscal 1997 was 32.3% compared to 25.2% in the same quarter of fiscal 1996. The improved margins were the result of lower manufacturing expenses as a result of lower component material costs and improved manufacturing efficiency. In addition, the first quarter of fiscal 1996 had lower gross margins because of the shipment of interim product to E-Plus at no margin due to delays in acceptance of SPECTRUM(TM) II equipment. The Company received SPECTRUM(TM) II product acceptance from E-Plus during the second quarter of fiscal 1996. Research and development expenses decreased by $0.5 million, from $3.0 million in the first quarter of fiscal 1996 to $2.5 million in the same period in fiscal 1997. As a percentage of net sales, research and development expenses were 6.7% in the first quarter of fiscal 1997 compared to 7.5% in the first quarter of fiscal 1996. This decrease was primarily attributable to the lower spending as the SPECTRUM(TM) II product transitioned from development stage to expansion to other bandwidths. Selling, general and administrative expenses were $7.9 million in the first quarter of fiscal 1997 compared to $6.5 million in the first quarter of fiscal 1996. As a percentage of net sales, selling, general and administrative expenses were 21.5% in the first quarter of fiscal 1997 compared to 16.3% in the comparable quarter of fiscal 1996. The increase was mostly attributable to higher head count and related travel expense as the Company continues to increase its sales and worldwide support capability. In addition, there was an increase in bonus expense in the first quarter of fiscal 1997 compared to the prior year due to the improvement of the profitability of the Company. Interest and other income, net was minimal in the first quarter of fiscal 1997 compared to $0.4 million in the similar quarter of fiscal 1996. This decrease was primarily due to an exchange loss in this fiscal year as compared to an exchange gain in the prior fiscal year first quarter on receivables denominated in foreign currencies. Interest expense in the first quarter of fiscal 1997 was $0.3 million compared to $0.7 million in the first quarter of fiscal 1996. The decrease in interest expense was primarily attributable to the lower principal balances outstanding on the line of credit and note payable in fiscal 1997. The Company recorded an income tax provision in the first quarter of both fiscal years 1997 and 1996 at an effective rate of 10%. This was less than the statutory rate primarily due to the utilization of the net operating loss carry forwards. Page 9 of 14 10 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The statements in this Form 10-Q concerning the Company's expenses, revenue, liquidity and cash needs contain forward-looking statements concerning the Company's future operations and financial results. These forward-looking statements are based on current expectations and the Company assumes no obligations to update this information. Numerous factors, such as economic and competitive conditions, incoming order levels, shipment volumes, product margins, and foreign exchange rates, could cause actual results to differ from those described in these statements, and prospective investors and stockholders should carefully consider the factors set forth below in evaluating these forward-looking statements. Sales of the Company's products are concentrated in a small number of customers. For the first quarter of fiscal 1997, the top four customers accounted for 38% of the net sales. As of June 30, 1996, four of the Company's customers accounted for 43% of the backlog, of which 12% was attributable to orders under the E-Plus contract. The worldwide telecommunications industry is dominated by a small number of large corporations, and the Company expects that a significant portion of its future product sales will continue to be concentrated in a limited number of customers. The loss of any existing customer, a significant reduction in the level of sales to any existing customer, or the failure of the Company to gain additional customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a substantial portion of shipments may occur near the end of each quarter. Accordingly, the Company's results are difficult to predict and delays in product delivery or closing of a sale can cause revenues and net income to fluctuate significantly from anticipated levels and from quarter to quarter. The markets for the Company's products are extremely competitive and the Company expects that competition will increase. The Company's existing and potential competitors include large and emerging domestic and international companies, such as California Microwave Corporation, Alcatel, Ericsson, Siemens AG, Harris Corporation, Nokia, NEC, and P-Com, many of which have significantly greater financial , technical, manufacturing, marketing, sales and distribution resources and management expertise than the Company. The Company believes that its ability to compete successfully will depend on a number of factors both within and outside its control, including price, quality, availability, product performance and features; timing of new product introductions by the Company, its customers and its competitors; the ability of its customers to obtain financing; and customer service and technical support. The Company is also experiencing customer demands for shorter delivery cycles. As a result of this, the Company may increase its inventory levels in order to respond to this demand which in turn may increase the risk of obsolescence of the inventories. The Company expects that international sales will continue to account for the majority of its net product sales for the foreseeable future. As a result, the Company is subject to the risks of doing business internationally, including unexpected changes in regulatory requirements; fluctuations in foreign currency rates; imposition of tariffs and other barriers and restrictions; the burdens of complying with a variety of foreign laws and general economic and geopolitical conditions, including inflation and trade relationships. Page 10 of 14 11 Manufacturers of digital microwave telecommunications equipment are experiencing, and are likely to continue to experience, intense price pressure, which has resulted, and is expected to continue to result in downward pricing competition on the Company's products. As a result, the Company has experienced, and expects to continue to experience, declining average sales prices for its products. The Company's future profitability is dependent upon its ability to reduce costs in line with, or faster than, declines in prices. The Company's manufacturing operations are highly dependent upon the delivery of materials by outside suppliers in a timely manner. From time to time the Company has experienced delivery delays from key suppliers which impacted sales. There can be no assurance that the Company will not experience material supply problems or component or subsystem delays in the future. LIQUIDITY AND CAPITAL RESOURCES Net cash used for operating activities in the first quarter of fiscal 1997 was $4.4 million, compared to net cash used for operating activities of $0.2 million in the first quarter of fiscal 1996. Total assets at June 30, 1996 of $98.4 million increased by $2.6 million from $95.8 million at March 31, 1996, principally due to increases in inventory. Inventories increased primarily as a result of increases in inventory purchases in anticipation of a higher volume of shipments. As a result of the increased inventory, cash and cash equivalents, decreased from $8.3 million at March 31, 1996 to $2.5 million at June 30, 1996. Total liabilities at June 30, 1996 of $46.8 million were $0.7 million higher than the $46.1 million at March 31, 1996. The increase was primarily due to higher accounts payable from inventory purchases as explained above. The increase in accounts payable was offset by a reduction in accrued liabilities. At June 30, 1996, the Company's principal sources of liquidity consisted of $2.5 million in cash and cash equivalents and a revolving bank credit facility that provides up to $25.0 million in credit, of which approximately $22.0 million was available and $3.0 million was outstanding at June 30, 1996. The Company's lines of credit and term note payable require the Company to meet certain financial covenants, including minimum tangible net worth, minimum debt coverage ratios and profitability requirements. As of June 30, 1996, the Company was in compliance with the covenants. The Company believes that the liquidity provided by existing cash balances, anticipated future cash flows from operations, and the Company's existing borrowing arrangements will be sufficient to meet both working capital and capital expenditure requirements at least through fiscal 1997. Page 11 of 14 12 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits For a list of exhibits to this Form 10-Q, see exhibit index located on page 13. (b) None. Page 12 of 14 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL MICROWAVE CORPORATION Date: August 14, 1996 By /s/ Carl A. Thomsen --------------------------- --------------------------------------- Carl A. Thomsen Vice President and Chief Financial Officer Page 13 of 14 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-13431)). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended March 31, 1993). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 1988). 4.2 Rights Agreement dated as of October 24, 1991, between the Company and Manufacturers Hanover Trust Company of California, including the Certificate of Designations for the Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 1 of the Company's Current Report on 8-K filed on November 5, 1991). 10.38 Amendment to Loan Agreement dated June 24, 1996, between the Company and CoastFed Business Credit Corporation. 27.1 Financial data schedule Page 14 of 14 EX-10.38 2 AMENDMENT TO LOAN AGREEMENT DATED JUNE 24, 1996 1 LOAN AND SECURITY AGREEMENT BETWEEN COAST BUSINESS CREDIT AND DIGITAL MICROWAVE CORPORATION DATED JUNE 24, 1996 2 COAST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT BORROWER: DIGITAL MICROWAVE CORPORATION ADDRESS: 170 ROSE ORCHARD WAY SAN JOSE, CALIFORNIA DATE: JUNE 24, 1996 THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Loan Agreement"), dated the above date, is entered into at Los Angeles, California, between COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association ("Coast"), a California corporation (successor to Coastfed Business Credit Corporation), with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025, and the borrower named above ("Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). This Loan Agreement amends and restates in its entirety the Loan and Security Agreement between Coast and Borrower dated June 25, 1992 (as amended), effective on the date hereof. The Letter of Credit Collateral Agreement, dated June 25, 1992, between the parties is hereby terminated effective on the date hereof, and the parties acknowledge that there are no letters of credit thereunder presently outstanding. 1. LOANS. 1.1 LOANS, COLLATERAL AGREEMENTS. Borrower has requested and may hereafter request that Coast advance funds or otherwise extend credit to or for the benefit of Borrower ("Loan(s)") in accordance with the terms and provisions of this Loan Agreement and other written agreements ("Collateral Agreement(s)"), including, but not limited to, any one or more of the following described security agreements now or hereafter entered into between Borrower and Coast: (a) Accounts Collateral Security Agreement; (b) Inventory Collateral Security Agreement; (c) Equipment Collateral Security Agreement; and (d) any promissory notes or guaranties. The amount and terms of payment of any Loans by Coast to Borrower shall be determined in accordance with the terms and provisions of this Loan Agreement and of any executed Collateral Agreements. Notwithstanding anything herein or in any Collateral Agreement to the contrary, in no event shall the Borrower permit the total balance of all Loans and all other Obligations outstanding at any one time to exceed $25,000,000; and, if for any reason they do, Borrower shall immediately pay the amount of such excess to Coast in immediately available funds. 1.2 INTEREST. Unless specifically provided to the contrary in any Collateral Agreement, all Loans shall bear interest at a rate equal to the "Prime Rate" (as hereinafter defined), plus 1.00% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for that month shall be based on the highest "Prime Rate" in effect during said month, but in no event shall the rate of interest charged on any Loans in any month be less than 7.00% per annum. "Prime Rate" is defined as the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA ("B of A") whether or not that rate is the lowest interest rate charged by B of A. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the month, as the base rate on corporate loans at large U.S. money center commercial banks. 2. DEFINITIONS OF OBLIGATIONS AND COLLATERAL; GRANT OF SECURITY INTEREST. 2.1 OBLIGATIONS. The term "Obligations" as used in this Loan Agreement, and any and all Collateral Agreements, shall mean and include each and all of the following: the obligation to pay all Loans and all interest thereon when due and to pay and perform when due all other indebtedness, liabilities, obligations, guarantees, covenants, agreements, warranties and representations of Borrower to Coast, whether heretofore, now or hereafter existing, owing or arising; whether primary, secondary, direct, acquired from a third party, absolute, contingent, fixed, secured or unsecured; joint or several, written or oral, monetary or non-monetary; and whether created pursuant to, or caused by Borrower's breach of, this Loan Agreement, a Collateral Agreement or any other present or future agreement or instrument, or created by operation of law or otherwise. 2.2 COLLATERAL. As security and collateral for all Obligations, Borrower hereby grants to Coast a continuing security interest in, and assigns to Coast, all of Borrower's interest in the types of property described below, whether now owned or hereafter acquired and wherever located, together with all proceeds -2- 3 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT (including insurance proceeds), substitutions, accessions and products thereof (collectively referred to as "Collateral "): 2.2(a) ACCOUNTS. All accounts, contract rights*, chattel paper, and instruments, and all other obligations now or hereafter owing to Borrower (hereinafter sometimes collectively referred to as "Accounts"), including, but not limited to, those described in any Accounts Collateral Security Agreement executed by Borrower, and all right, title and interest of Borrower in, and all of Borrower's rights and remedies with respect to, all goods, the sale or other disposition of which gives rise to any Account, including, without limitation, all returned, reclaimed and repossessed goods and all rights of stoppage in transit, replevin, reclamation, and all rights as an unpaid vendor; and *(TO THE EXTENT SUCH CONTRACT RIGHTS ARE ASSIGNABLE WITHOUT BREACH OF THE CONTRACT CREATING THEM) 2.2(b) INVENTORY. All inventory, goods, merchandise, materials, raw materials, work in process, finished goods, advertising, packaging and shipping materials, supplies, and all other tangible personal property which is held for sale or lease or furnished under contracts of service or consumed in Borrower's business, including, without limitation, any and all of the foregoing which are returned, repossessed, reclaimed or stopped in transit, and including, but not limited to, those described in any Inventory Collateral Security Agreement executed by Borrower, and all warehouse receipts and other documents or instruments now or hereafter issued with respect to any of the foregoing; and 2.2(c) EQUIPMENT. All equipment, goods (other than inventory), machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, supplies, materials, tools, machine tools, office equipment, appliances, apparatus, parts, dies, jigs, and chattels, including, but not limited to, those described in any Equipment Collateral Security Agreement executed by Borrower; and 2.2(d) INTANGIBLES. All deposit accounts and general intangibles (including, but not limited to, tax refunds, goodwill, name, drawings, trademarks, blueprints, trade names, trade secrets, customer lists, patents, patent applications, copyrights, security deposits, loan commitment fees, royalties, licenses, processes, and all other rights, privileges and franchises); and All personal property of Borrower which comes into Coast's possession, custody or control; and all tangible and intangible personal property in which Coast now has or hereafter acquires a security interest to secure any or all of the Obligations; and all substitutions, additions and accessions to any or all of the foregoing items of Collateral; and all guaranties of and security for any and all of the foregoing; and all books and records relating to any and all of the foregoing and the equipment containing said books and records. Payment and performance of the Obligations are collateralized by the Collateral and by any security interest created in any other agreement now or hereafter existing between Coast and Borrower unless such other agreement is a deed of trust or other security instrument having real property or rents from real property as its subject matter and expressly provides to the contrary. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. To induce Coast to enter into this Loan Agreement and now and hereafter to enter into any Collateral Agreement, Borrower represents and warrants that each of the following representations and warranties now is and hereafter will continue to be true and correct in all respects and Borrower has and will timely perform each of the following covenants: 3.1 CORPORATE EXISTENCE AND POWER. Borrower, if a corporation, is and will continue to be, duly authorized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which the nature of the business transacted by it, or the ownership or leasing of its property, makes such qualification or licensing necessary, and Borrower has and will continue to have all requisite power and authority to carry on its business as it is now, or may hereafter be, conducted. 3.2 AUTHORITY. Borrower is, and will continue to be, authorized to enter into, to grant security interests in its property pursuant to, and to perform its obligations under, this Loan Agreement, any Collateral Agreement and all other instruments and transactions contemplated herein. The execution, delivery and performance by Borrower of this Loan Agreement, any Collateral Agreement and all other instruments and transactions contemplated herein have been validly authorized, are enforceable against the Borrower in accordance with their terms, and do not violate any law or any provision of, and are not grounds for acceleration under, any agreement, indenture, note or instrument which is binding upon Borrower, or any of its property, including, without limitation, Borrower's Articles of Incorporation, By-Laws and any Shareholder Agreements. 3.3 NAME; TRADE NAMES AND STYLES. Borrower has set forth above its correct name. Listed on the Schedule hereto are all prior names of Borrower and each fictitious name, trade name and trade style by which Borrower has been, or is now, known. Borrower shall provide Coast with fifteen (15) days' advance written notice prior to doing business under any other name, fictitious name, trade name or trade style. Borrower has complied, and will hereafter comply, with all laws relating to the conduct of business under, the ownership of property in, and the renewal or continuation of the right to use, a corporate, fictitious or trade name or trade style. 3.4 PLACE OF BUSINESS; LOCATION OF COLLATERAL. Borrower's sole place of business; or, if Borrower has more than one place of business, Borrower's chief executive office; or, if Borrower is an individual and does not have a separate place of business, Borrower's residence is, and will continue to be, located at Borrower's Address and all of Borrower's books and records, including, but not limited to, the books and records relating to Borrower's Accounts, are and will be maintained at Borrower's Address unless and until Coast shall otherwise consent in writing. In addition to Borrower's Address, Borrower has places of business and Collateral is located only at the locations shown on the Schedule hereto. Borrower will provide Coast with advance written notice if Borrower moves any of the Collateral*, or obtains any additional sites for the conduct of Borrower's business or the location of any Collateral. -3- 4 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT *(OTHER THAN (I) IN CONNECTION WITH SALES OR OTHER DISPOSITIONS OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS, (II) DISPOSAL IN THE ORDINARY COURSE OF BUSINESS OF ITEMS OF COLLATERAL WHICH HAVE BECOME WORN OUT OR OBSOLETE OR WHICH ARE PROMPTLY BEING REPLACED, (III) DISPOSAL OF COLLATERAL OUTSIDE THE ORDINARY COURSE OF BUSINESS NOT EXCEEDING IN THE AGGREGATE OF $100,000 IN ANY FISCAL YEAR, AND (IV) MOVEMENT OF COLLATERAL OF THE TYPE DESCRIBED IN SECTION 2.2(C) ABOVE ("EQUIPMENT") WITHIN ANY OF THE STATES SPECIFIED IN THE SCHEDULE OR WITHIN ANY OTHER JURISDICTION NOTIFIED TO COAST HEREUNDER IN WHICH COAST HAS TAKEN ALL NECESSARY ACTION IN ORDER TO PROTECT AND PERFECT ITS SECURITY INTEREST THEREIN, AND (IV) ANY AND ALL MOBILE GOODS WHICH ARE OF A TYPE NORMALLY USED IN MORE THAN ONE JURISDICTION) 3.5 TITLE TO COLLATERAL; LIENS. Borrower is now, and will at all times hereafter be, the lawful and sole owner of all the Collateral. With the exception of the security interest granted Coast, the Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims*. Without limiting any of Coast's other rights and remedies, if Borrower grants any third party a lien or encumbrance on or security interest in any of the Collateral**, Coast, in its sole discretion, shall have the right to treat such action as a notice of termination by Borrower to Coast under Paragraph 8(d) hereof, as of any date subsequent to such grant selected by Coast, in its sole discretion, and to charge Borrower the termination fee therein provided. Coast now has, and will have, a perfected and enforceable first priority security interest in all of the Collateral***, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to constitute a fixture thereto****. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises++. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, whatever waivers and subordinations that Coast specifies, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. *("LIENS"), OTHER THAN PERMITTED LIENS. AS USED HEREIN, "PERMITTED LIENS" MEANS (I) ANY LIENS EXISTING AS OF THE DATE HEREOF AND DISCLOSED IN THE SCHEDULE; (II) LIENS FOR TAXES, FEES, ASSESSMENTS OR OTHER GOVERNMENTAL CHARGES OR LEVIES, EITHER NOT DELINQUENT OR BEING CONTESTED IN GOOD FAITH BY APPROPRIATE PROCEEDINGS, PROVIDED THE SAME HAS NOT PRIORITY OVER ANY OF COAST'S SECURITY INTERESTS; (III) LIENS OF MATERIALMEN, MECHANICS, WAREHOUSEMEN, CARRIERS, OR EMPLOYEES OR OTHER LIKE LIENS ARISING IN THE ORDINARY COURSE OF BUSINESS AND SECURING OBLIGATIONS EITHER NOT DELINQUENT OR BEING CONTESTED IN GOOD FAITH BY APPROPRIATE PROCEEDINGS; (IV) ANY JUDGMENT, ATTACHMENT OR SIMILAR LIEN, UNLESS THE JUDGMENT IT SECURES IS NOT FULLY COVERED BY INSURANCE AND HAS NOT BEEN DISCHARGED OR EXECUTION THEREOF EFFECTIVELY STAYED AND BONDED AGAINST PENDING APPEAL WITHIN 30 DAYS OF THE ENTRY THEREOF; (V) EASEMENTS, RIGHTS OF WAY, SERVITUDES OR ZONING OR BUILDING RESTRICTIONS AND OTHER MINOR ENCUMBRANCES ON REAL PROPERTY AND IRREGULARITIES IN THE TITLE TO SUCH PROPERTY WHICH DO NOT IN THE AGGREGATE MATERIALLY IMPAIR THE USE OR VALUE OF SUCH PROPERTY OR RISK THE LOSS OR FORFEITURE OF TITLE THERETO; (VI) STATUTORY LANDLORD'S LIENS ON EQUIPMENT AND LEASEHOLD IMPROVEMENTS UNDER LEASES TO WHICH THE BORROWER IS A PARTY; (VII) LIENS (A) UPON OR IN ANY PROPERTY ACQUIRED OR HELD BY THE BORROWER OR ANY OF ITS SUBSIDIARIES TO SECURE THE PURCHASE PRICE OF SUCH PROPERTY OR INDEBTEDNESS INCURRED SOLELY FOR THE PURPOSE OF FINANCING THE ACQUISITION OF SUCH PROPERTY, OR (B) EXISTING ON SUCH PROPERTY AT THE TIME OF ITS ACQUISITION, PROVIDED THAT THE LIEN IS CONFINED SOLELY TO THE PROPERTY SO ACQUIRED AND IMPROVEMENTS THEREON; (VIII) LIENS ON ASSETS OF CORPORATIONS WHICH BECOME SUBSIDIARIES OF THE BORROWER AFTER THE DATE HEREOF, PROVIDED THAT SUCH LIENS EXISTED AT THE TIME THE RESPECTIVE CORPORATIONS BECAME SUBSIDIARIES OF THE BORROWER AND WERE NOT CREATED IN ANTICIPATION THEREOF; AND (IX) LIENS INCURRED IN CONNECTION WITH THE EXTENSION, RENEWAL OR REFINANCING OF THE INDEBTEDNESS SECURED BY LIENS OF THE TYPE DESCRIBED IN CLAUSES (I) , (VII) AND (VIII) ABOVE, PROVIDED THAT ANY EXTENSION, RENEWAL OR REPLACEMENT LIEN SHALL BE LIMITED TO THE PROPERTY ENCUMBERED BY THE EXISTING LIEN AND THE PRINCIPAL AMOUNT OF THE INDEBTEDNESS BEING EXTENDED, RENEWED OR REFINANCED DOES NOT INCREASE. ** (OTHER THAN A PERMITTED LIEN) *** SUBJECT TO PERMITTED LIENS ****, UNLESS SUCH COLLATERAL IS COVERED BY A FIXTURE FILING DULY EXECUTED AND DELIVERED BY THE BORROWER IN FAVOR OF COAST ++ EXCEPT TO THE EXTENT PROVIDED UNDER LEASES EXISTING AS OF THE DATE HEREOF AND DISCLOSED IN THE SCHEDULE. 3.6 MAINTENANCE OF COLLATERAL. Borrower has maintained and will maintain the Collateral and all of its assets in good working condition, at Borrower's expense*. Borrower will not use the Collateral or any of its other properties for any unlawful purpose and will not secrete or abandon the Collateral. Borrower will immediately advise Coast in writing of any material loss or significant decline in value of the Collateral. *EXCEPT FOR ASSETS WHICH HAVE BECOME WORN OUT OR OBSOLETE IN THE ORDINARY COURSE OF BUSINESS 3.7 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records comprising an accounting system in accordance with generally accepted accounting principles. Borrower has not and will not in the future enter into any agreement with any accounting firm, service bureau or third party to prepare or store Borrower's books and records at any location other than Borrower's Address, without first obtaining Coast's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Coast the -4- 5 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT same rights with respect to access to books and records and related rights as Coast has under Paragraph 4.3 of this Loan Agreement. 3.8 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or hereafter delivered to Coast have been, and will be, prepared in conformity with generally accepted accounting principles and now and hereafter will completely and accurately reflect the financial condition of Borrower, at the times and for the periods therein stated. Since the last date covered by any such statement, there has been no material adverse change in the financial condition, operations or any other status of the Borrower. Borrower is now and will continue to be solvent in both the "equity" and "bankruptcy" sense. Borrower will deliver to Coast a copy of all financial statements prepared with respect to Borrower no later than five (5) days after the filing or submission thereof by Borrower. Borrower will cause to be prepared, and will provide Coast within ninety (90) days following the end of Borrower's fiscal year, complete annual financial statements, certified by independent certified public accountants acceptable to Coast. 3.9 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state or local law. Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or hereafter owed by Borrower. Borrower may defer payment of any contested taxes provided that Borrower (i) in good faith contests Borrower's obligation to pay such taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of and any material development in such proceedings, and (iii) posts bonds or takes any other steps required to keep such contested taxes from becoming a lien against or charge upon any of the Collateral or other properties of Borrower. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any * liability of Borrower, including, without limitation, any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. When requested, Borrower will furnish Coast with proof satisfactory to Coast of Borrower's making the payment or deposit of all such taxes and contributions, such proof to be delivered within five (5) days after the due date established by law for each such payment or deposit. If Borrower fails or is unable to pay or deposit such taxes or contributions, Coast may, but is not obligated to, pay the same and treat all such advances as additional Obligations of Borrower. Such advances shall bear interest at the highest interest rate applicable to any of the Obligations. *MATERIAL 3.10 COMPLIANCE WITH LAW. Borrower has complied, and will comply, * with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, conduct and licensing of Borrower's business and employment of Borrower's personnel. *IN ALL MATERIAL RESPECTS 3.11 LITIGATION. *There is no claim, suit, litigation, proceeding or investigation pending or threatened by or against or affecting Borrower in any court or before any regulatory commission, board or other governmental agency (or any basis therefor known to Borrower) which** result, either separately or in the aggregate, in any *** adverse change in the business or condition of Borrower, or in any impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will immediately inform Coast in writing of any claim, proceeding, litigation or investigation hereafter threatened or instituted by or against Borrower****. *EXCEPT AS SET FORTH IN THE SCHEDULE HERETO ** IS REASONABLY LIKELY TO *** MATERIAL **** INVOLVING IN EXCESS OF $500,000 3.12 USE OF PROCEEDS. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." All proceeds of all Loans shall be used solely for lawful business purposes. 3.13 CONTINUING EFFECT. All representations, warranties and covenants of Borrower contained in this Loan Agreement and any Collateral Agreement and any other agreement with Coast shall be true and correct at the time of the effective date of each such agreement and shall be deemed continuing and shall remain true, correct and in full force and effect until payment and satisfaction in full of all of the Obligations, and Borrower acknowledges that Coast is and will be expressly relying on such representations, warranties and covenants in making Loans to Borrower. 4. ADDITIONAL DUTIES OF DEBTOR. 4.1 INSURANCE. Borrower shall, at all times, at Borrower's expense, insure all of the Collateral * and carry such other business insurance with insurers acceptable to Coast, ** in such form and amounts as Coast may *** require. All such insurance policies shall name Coast as an additional loss payee, shall provide that proceeds payable thereunder be payable directly to Coast unless written authority to the contrary is obtained, and shall also provide that no act or default of Borrower or any other person shall affect the right of Coast to recover thereunder and shall contain a lenders loss payee endorsement in form acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole and absolute discretion. If Borrower fails to provide or pay for any such -5- 6 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT insurance, Coast may, but is not obligated to, procure the same at Borrower's expense. Borrower agrees to deliver to Coast, promptly as rendered, copies of all reports made to all insurance companies****. * OTHER THAN ACCOUNTS ** COVERING SUCH PROPERTY AND RISKS AS IS CUSTOMARILY CARRIED BY COMPANIES ENGAGED IN SIMILAR BUSINESSES AND OWNING SIMILAR PROPERTIES IN THE LOCALITIES WHERE THE BORROWER OPERATES, AND ** REASONABLY **** INVOLVING A CLAIM IN EXCESS OF $250,000 4.2 REPORTS. At its expense, Borrower shall report, in form satisfactory to Coast, such information as Coast may from time to time * specify regarding Borrower or the Collateral; such reports shall be rendered with such frequency as Coast may * specify. All reports furnished Coast shall be complete and accurate in all ** respects. *REASONABLY **MATERIAL 4.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At any time Coast, or its agents, shall have immediate access to the Collateral and any other property of Borrower, wherever located. Coast shall have the right to audit and copy Borrower's books and records and accounts including accountants' reports wherever located (hereinafter collectively the "Records"). Borrower hereby irrevocably authorizes and directs any of the officers, agents, accountants and attorneys having possession or control of any of the Records (including computer records) to physically deliver or make same available to Coast upon Coast's request. Borrower waives the benefit of any accountant-client privilege or other evidentiary privilege ** precluding or limiting the disclosure, divulgence or delivery of any of the Records. * Coast shall have the right to possession of, or to move to the premises of Coast or any agent of Coast, for so long as Coast may *** desire, all or any part of the Records. * UPON THE OCCURRENCE AND CONTINUATION OF AN EVENT OF DEFAULT ** (OTHER THAN ATTORNEY-CLIENT PRIVILEGE) *** REASONABLY 4.4 PROHIBITED TRANSACTIONS. Borrower shall not without Coast's prior written consent*: merge, consolidate, dissolve, acquire any other corporation; enter into any transaction not in its usual course of business; guarantee or otherwise become in any way liable with respect to the obligations of another party or entity (except by endorsements of instruments or items of payment for deposit to the general account of Borrower or which are transmitted or turned over to Coast on account of the Obligations**); pay or declare any dividends upon Borrower's stock; redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; make any change in Borrower's name, identity, corporate or capital structure***; sell or transfer any Collateral, except for the sale of finished inventory in the ordinary course of Borrower's business****; lend or distribute any of Borrower's property or assets, or incur any ++ outside of the ordinary course of Borrower's business. *WHICH SHALL BE A MATTER OF COAST'S GOOD FAITH BUSINESS JUDGMENT **, OBLIGATIONS PURSUANT TO THE BORROWER'S BYLAWS OR IN INDEMNIFICATION AGREEMENTS, TO INDEMNIFY OFFICERS, DIRECTORS AND EMPLOYEES OF THE BORROWER, AND GUARANTEES OF THE OBLIGATIONS OF THE BORROWER'S SUBSIDIARIES ***WITHOUT NOTIFYING COAST HEREUNDER ****, SALES OR OTHER DISPOSITIONS OF ASSETS IN THE ORDINARY COURSE OF BUSINESS WHICH HAVE BECOME WORN OUT OR OBSOLETE OR WHICH ARE PROMPTLY BEING REPLACED, AND SALES OR DISPOSITIONS OF ASSETS OUTSIDE THE ORDINARY COURSE OF BUSINESS NOT EXCEEDING IN THE AGGREGATE $100,000 IN ANY FISCAL YEAR ++ INDEBTEDNESS FOR BORROWED MONEY IN EXCESS OF $500,000 IN ANY FISCAL YEAR 4.5 NOTIFICATION OF CHANGES. Borrower will promptly notify Coast in writing of any change of its executive officers, or directors, any purchase * out of the regular course of Borrower's business and any adverse or material change in the business or financial affairs of Borrower. *OF ASSETS OR PROPERTY WITH AN AGGREGATE VALUE EXCEEDING $1,000,000 IN ANY FISCAL YEAR 4.6 CHARGES. Borrower shall pay all charges assessed by Coast, in accordance with Coast's schedule of charges in effect from time to time, and such charges shall be part of the Obligations and shall be payable on demand. 4.7 LITIGATION COOPERATION. Should any suit or proceeding be instituted by or against Coast with respect to any Collateral or for the collection or enforcement of any Account, or in any manner relating to Borrower, Borrower shall, without expense to Coast, and wherever and whenever designated by Coast, make available Borrower and its officers, employees and agents and Borrower's Records to the extent that Coast may deem * necessary in order to prosecute or defend any such suit or proceeding. *REASONABLY 4.8 REMITTANCE OF PROCEEDS. *All proceeds arising from the disposition of the Collateral shall be delivered, in kind, by Borrower to Coast in the original form in which received by Borrower not later than the following business day after receipt by Borrower. *Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Coast may from time to time verify directly with the respective account debtors the validity, amount and any other matters relating to the Accounts by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. *FOLLOWING THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, OR ANY EVENT WHICH, WITH NOTICE OR PASSAGE OF TIME OR BOTH, WOULD CONSTITUTE AN EVENT OF DEFAULT, WITHOUT LIMITING COAST'S OTHER RIGHTS AND REMEDIES, 4.9 EXECUTE ADDITIONAL DOCUMENTATION. Borrower agrees, at its expense, on demand by Coast, to execute all documents in -6- 7 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT form satisfactory to Coast, as Coast, in its sole discretion, may * deem necessary or useful in order to perfect and maintain Coast's perfected first-priority or any other security interest in the Collateral, and in order to fully consummate all of the transactions contemplated under this Loan Agreement and under any Collateral Agreement. *REASONABLY 5. APPLICATION OF PAYMENTS. All forms of payments delivered to Coast on account of the Obligations constitute conditional payment only until such items are actually paid in cash to Coast; solely for the purpose of computing interest earned by Coast, credit therefor and for bank wire transfers shall be given as of the first business day after receipt by Coast in the case of payments received in immediately available funds, and three business days after receipt by Coast in other cases. All payments made by Borrower may be applied, and in Coast's sole discretion reversed and re-applied, in whole or in part to any of the Obligations, in such order and manner as Coast shall determine in its sole discretion. 6. EVENTS OF DEFAULT AND REMEDIES. 6.1 EVENTS OF DEFAULT. If any of the following events shall occur, such an occurrence shall constitute an "Event of Default" and Borrower shall provide Coast with immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents now or hereafter shall be incorrect, false, untrue or misleading in any material respect*****; or (b) Borrower shall fail to repay when due part or all of any Loan or to pay any interest thereon when due; or (c) Borrower shall fail to perform when due any term or condition contained in this Loan Agreement or in any Collateral Agreement, or any other agreement between Coast and Borrower; or (d) Borrower shall fail to pay or perform any other Obligation when due; or (e) Any loss, theft, or substantial damage to, or destruction of, any * or all of the Collateral (unless within five (5) days after the occurrence of any such event, Borrower furnishes Coast with evidence satisfactory to Coast that the amount of any such loss, theft, damage to or destruction of the Collateral is fully insured under policies designating Coast as the additional named insured); or (f) A material impairment of the prospect of payment or performance of the Obligations or a material impairment of the value of the Collateral or any impairment in the priority of Coast's security interest; or (g) Any event shall arise which ** or actually results in the acceleration of the maturity of the indebtedness of Borrower to others under any loan or other agreement or undertaking***; or (h) Any levy, assessment, attachment, seizure, lien or encumbrance for any cause or reason whatsoever, upon all or any part of the Collateral or any other asset of Borrower **** (unless discharged by payment, release or fully bonded against not more than thirty (30) days after such event has occurred); or (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by or against, Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or hereafter in effect ++++; or entry of a court or governmental order which enjoins, restrains or in any way prevents Borrower from conducting all or any part of its business; or failure to pay any foreign, federal, state or local tax or other debt of Borrower unless, with respect to any such tax, Borrower complies with the provisions of Paragraphs 3.9 (i), (ii), and (iii); or (j) A notice of lien, levy or assessment is filed of record with respect to any of Borrower's assets by the United States or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or if any taxes or debts now or hereafter owing to any one or more of them becomes a lien upon all or any of the Collateral or any other assets of Borrower (other than a lien for real property taxes which are not yet due and payable ++++++); or (k) Death, insolvency or incompetency of any guarantor of the Obligations; appointment of a conservator or guardian of the person of any such guarantor; appointment of a conservator, guardian, trustee, custodian or receiver of all or any part of the assets, property or estate of, any such guarantor; revocation or termination of, or limitation of liability upon, any guaranty of the Obligations; or commencement of proceedings by or against any guarantor or surety for Borrower under any bankruptcy or insolvency law; or (l) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations ++++++++ or if any person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (m) Borrower shall generally not pay its debts as they become due or shall enter into any agreement (whether written or oral), or offer to enter into any such agreement, with all or a significant number of its creditors regarding any moratorium or other indulgence with respect to its debts or the participation of such creditors or their representatives in the supervision, management or control of the business of Borrower; or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law, or shall make any transfer of its property to or for the benefit of any creditor at a time when other creditors similarly situated have not been paid. *MATERIAL PORTION OF **PERMITS THE ACCELERATION OF ***FOR BORROWED MONEY ****OTHER THAN A PERMITTED LIEN *****WHEN MADE ++++ , PROVIDED THAT THE FILING OF AN INVOLUNTARY BANKRUPTCY PETITION AGAINST THE BORROWER SHALL NOT BE DEEMED TO BE AN EVENT OF DEFAULT HEREUNDER IF IT IS CURED BY BEING DISMISSED WITHIN 30 DAYS AFTER THE DATE INSTITUTED (ALTHOUGH COAST SHALL HAVE NO OBLIGATION TO MAKE LOANS DURING SUCH 30-DAY CURE PERIOD) ++++++ OR ANY OTHER PERMITTED LIEN ++++++++ OTHER THAN IN COMPLIANCE WITH THE SUBORDINATION AGREEMENT WITH RESPECT HERETO 6.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, Coast, at its option, and without -7- 8 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease advancing money or extending credit to or for the benefit of Borrower under this Loan Agreement, any Collateral Agreement, and any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of the Borrower's premises without hindrance to search for, take possession of, keep, store, or remove any of the Collateral and remain on such premises or cause a custodian to remain thereon in exclusive control thereof without charge for so long as Coast deems necessary in order to complete the enforcement of its rights under this Loan Agreement or any Collateral Agreement, or any other agreement; provided, however, that should Coast seek to take possession of any or all of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of and not dispose of any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at a place or places to be designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete processing, manufacturing or repair of all or any portion of the Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Without limiting any security interest granted Coast in other provisions of this Loan Agreement or in any Collateral Agreement or other agreement, for the purpose of completing manufacturing, processing or repair of Collateral and the disposition thereof, Coast is hereby granted a security interest in, and Coast and any purchaser from Coast may use without charge, all of the Borrower's plant, machinery, equipment, labels, licenses, processes, patents, patent applications, copyrights, names, trade names, trademarks, trade secrets, logos, advertising material and all other assets, and may also utilize all of Borrower's rights under any license or franchise agreement; (f) Sell, ship, reclaim, lease or otherwise dispose of all or any portion of the Collateral in its condition at the time Coast obtains possession or after further manufacturing, processing or repair, at any one or more public and/or private sales (including execution sales), in lots or in bulk, for cash, exchange or other property or on credit and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge for such time or times as Coast deems fit, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and general intangibles comprising part or all of the Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the Records utilized in the preparation thereof or referring thereto. All attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast agree that the following conduct by Coast with respect to any disposition of Collateral shall conclusively be deemed commercially reasonable (but other conduct by Coast, including, but not limited to, Coast's use in its sole discretion of other or different times, places and manners of noticing and conducting any disposition of Collateral shall not be deemed unreasonable): Any public or private disposition as to which on no later than the tenth calendar day prior thereto written notice thereof is mailed or personally delivered to Borrower and, with respect to any public disposition, on no later than the tenth calendar day prior thereto notice thereof describing in general non-specific terms, the Collateral to be disposed of is published once in a newspaper of general circulation in the county where the sale is to be conducted, at any place designated by Coast, with or without the Collateral being present, and which commences at any time between 8:00 a.m. and 5:00 p.m. Without limiting the generality of the foregoing, Borrower expressly agrees that, with respect to any disposition of Accounts, instruments and general intangibles (collectively "Receivables"), it shall be commercially reasonable for Coast to direct any prospective acquirer thereof to ascertain directly from Borrower any and all information (and Coast shall not be required to maintain records of, or answer any inquiries) concerning the Receivables offered for disposition, including, but not limited to, the terms of payment, aging and delinquency, if any, of the Receivables, the financial condition of any obligor or account debtor thereon or guarantor thereof, any collateral therefor and the condition and location of the goods, if any, that are the subject of any of the Receivables. 6.4 APPLICATION OF PROCEEDS. All proceeds realized as the result of any disposition of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Loan Agreement and any Collateral Agreement, second to the interest due upon any of the Obligations and third -8- 9 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT to the principal of the Obligations in any order determined by Coast in its sole discretion. The surplus, if any, shall be paid to Borrower; if any deficiency shall arise, Borrower shall remain liable to Coast therefor. If, as a result of the disposition of any of the Collateral, Coast directly or indirectly enters into a credit transaction with any third party, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of such credit transaction or deferring the reduction thereof until the actual receipt by Coast of cash therefor from such third party. 6.5 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Loan Agreement and any Collateral Agreement, Coast shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under any and all other applicable laws and in any other instrument or agreement now or hereafter entered into between Coast and Borrower and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 7. POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise*: (a) Execute on behalf of Borrower any documents that Coast may, in its sole and absolute discretion, deem advisable in order to perfect, maintain or improve Coast's security interest in the Collateral or other real or personal property intended to constitute Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Loan Agreement, any Collateral Agreement and all other present and future agreements; (b) At any time after the occurrence of an Event of Default, to execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account debtor and any notice to any Account debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Upon the occurrence of any Event of Default, to receive and open all mail addressed to Borrower; and to notify the Post Office authorities to change the address for the delivery of mail addressed to Borrower to such other address as Coast may designate, including, but not limited to, Coast's own address; Coast shall turn over to Borrower all of such mail not relating to the Collateral; (f) Endorse all checks and other forms of remittances received by Coast "Pay to the Order of Coast Business Credit Corporation," or in such other manner as Coast may designate; (g) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim In or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (h) Grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value and execute all releases and other documents in connection therewith; (i) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (j) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (k) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under Paragraph 4.3 of this Loan Agreement; and (l) Take any action or pay any sum required of Borrower pursuant to this Loan Agreement, any Collateral Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Loan Agreement or any Collateral Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. *PROVIDED COAST ACTS IN A COMMERCIALLY REASONABLE MANNER 8. TERMINATION. This Loan Agreement and all Collateral Agreement(s) shall continue in effect until JUNE 30, 1997 (the "initial renewal date") and shall thereafter automatically and continuously renew for successive additional terms of ONE year(s) each unless terminated as to future transactions as hereinafter provided. (The initial renewal date and each subsequent date on which the terms of this Loan Agreement and the Collateral Agreement(s) automatically renew are hereinafter referred to as "renewal dates.") This Loan Agreement and any Collateral Agreement may be terminated, as to future transactions only, as follows: (a) By written notice from either Coast or Borrower to the other, not less than sixty (60) days prior to the next renewal date, in which event termination shall be effective on the next renewal date; or (b) By Coast at any time after the occurrence of an Event of Default, without notice, in which event termination shall be effective immediately; or (c) By sixty (60) days' prior written notice from Borrower to Coast, in which event, termination shall be effective on the sixtieth day after such notice is given; or (d) By the grant by Borrower to any third party of a lien or encumbrance on, or security interest in, any of the Collateral *, as provided in Paragraph 3.5, in which event termination shall be effective on the date selected by Coast pursuant to Paragraph 3.5. On the effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. If -9- 10 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT Borrower attempts to terminate this Loan Agreement under subparagraph (a) or (c) above, but does not pay and perform all *** the effective date of termination, then this Loan Agreement and all Collateral Agreement(s) shall not be terminated and shall continue in full force and effect until the next renewal date and shall automatically renew thereafter as provided above. If termination occurs under subparagraph (b), (c) or (d) above, Borrower shall pay to Coast a termination fee in an amount equal to $20,000 for each month (or portion thereof) from the effective date of termination to the date which would have been the next renewal date had this Loan Agreement not been terminated. Said termination fee shall be included in the Obligations, shall be payable on the effective date of termination, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Notwithstanding any termination of this Loan Agreement or any Collateral Agreement, all of Coast's security interest in all of the Collateral and all of the terms and provisions of this Loan Agreement and all Collateral Agreement(s) shall continue in full force and effect until all Obligations have been paid and performed in full, and no termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast until all of the Obligations have been paid and performed in full. Without limiting the fact that all Loans are discretionary on the part of Coast**, Coast may, in its sole discretion, refuse to make any further Loans after termination. Upon payment and performance in full of all the Obligations, Coast shall promptly deliver to Borrower termination statements, request for reconveyances and such other documents as may be required to fully terminate any of Coast's security interests. *OTHER THAN A PERMITTED LIEN **TO THE EXTENT AND IN THE MANNER PROVIDED HEREIN ***MONETARY OBLIGATIONS IN FULL WITHIN FIVE DAYS AFTER 9. NOTICES. Except as otherwise set forth herein, notices to be given hereunder shall be in writing and shall be served either personally or by depositing the same in the United States mail, postage prepaid, by regular first-class mail, or by certified mail, return receipt requested, addressed to Coast or Borrower at the addresses shown above, or at any other address as shall be designated by one party in a written notice to the other party. Any such notice shall be deemed to have been given upon delivery in the case of notices personally delivered to Borrower or to an officer of Coast, or at the expiration of two (2) business days following the deposit thereof in the United States mail, with postage prepaid (except that any notice of disposition referred to in Paragraph 6.3 hereof that is mailed shall be deemed given at the time of deposit thereof in the United States mail, with postage prepaid). If there is more than one Borrower, notice to any Borrower shall constitute notice to all; if Borrower is a corporation, notices shall be addressed to the attention of the President. 10. GENERAL WAIVERS. The failure of Coast at any time or times hereafter to require Borrower to strictly comply with any of the provisions of this Loan Agreement or any Collateral Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast thereafter to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto. None of the provisions of this Loan Agreement or any Collateral Agreement or other agreement now or hereafter executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an officer of Coast and delivered to Borrower. Borrower waives the benefit of all statute(s) of limitations in any action or proceeding based upon or arising out of this Loan Agreement or any Collateral Agreement or any other present or future instrument or agreement between Coast and Borrower. Borrower waives any and all notices or demands which Borrower might be entitled to receive with respect to this Loan Agreement, any Collateral Agreement, or any other agreement by virtue of any applicable law**. Borrower hereby waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, Account, general intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast unless expressly required by this Loan Agreement or any Collateral Agreement. Borrower hereby ratifies and confirms whatever Coast may do pursuant to this Loan Agreement and any Collateral Agreement and agrees that Coast shall not be liable for (a) the safekeeping of the Collateral or any loss or damage thereto, or diminution in value thereof, from any cause whatsoever *, or (b) any act or omission of any carrier, warehouseman, bailee, forwarding agent or other person, or (c) any act of commission or any omission by Coast or its officers, employees, agents, or attorneys, or any of its or their errors of judgment or mistakes of fact or law***. *(EXCEPT THAT COAST SHALL EXERCISE REASONABLE CARE TO ASSURE THE SAFE CUSTODY OF COLLATERAL IN ITS POSSESSION) **EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN SUCH OTHER AGREEMENT ***OTHER THAN COAST'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT 11. ATTACHMENT WAIVERS. To the extent that Coast, in its sole and absolute discretion, determines, prior to the disposition of all of the Collateral, that the amount to be realized by Coast from the disposition of all of the Collateral may be less than the amount of the Obligations, and to the full extent of any such anticipated deficiency, Borrower waives the benefit of Section 483.010 (b) of the California Code of Civil Procedure and of any and all other statutes requiring Coast to first resort to and exhaust all of the Collateral before seeking or obtaining any attachment remedy against Borrower, and Borrower expressly agrees that, to the extent of such anticipated deficiency, Coast shall have all of the rights of an unsecured creditor, including, but not limited to, the right of Coast, prior to the disposition of all of the Collateral, to obtain a temporary protective order and writ of attachment or other available remedy. Coast shall have no liability to Borrower if the actual deficiency realized by Coast is less than -10- 11 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT the anticipated deficiency on the basis of which Coast obtained a temporary protective order or writ of attachment. In the event Coast should seek a temporary protective order, or writ of attachment, or both, Borrower hereby irrevocably waives any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident or condition precedent to the issuance of any temporary protective order or writ of attachment. 12. ATTORNEYS' FEES AND COSTS. Borrower shall forthwith pay to Coast the amount of all * attorneys' fees and all filing, recording, publication, search and other costs incurred by Coast pursuant to this Loan Agreement, any Collateral Agreement or any other present or future agreement or in connection with any transaction contemplated hereby, or with respect to the Collateral or the defense or enforcement of its interests (whether or not Coast files a lawsuit against Borrower). Without limiting the generality of the foregoing, Borrower shall, with respect to each and all of the foregoing, pay all attorneys' fees and costs Coast incurs in order to: obtain legal advice; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account debtors; commence, intervene in, respond to, or defend any action or proceeding; initiate any complaint to be relieved of the effect of the automatic stay in bankruptcy in order to commence or continue any foreclosure or other disposition of the Collateral or to commence, defend or continue any action or other proceeding in or out of bankruptcy against Borrower or relating to the Collateral; file or prosecute a claim or right in any action or proceeding, including, but not limited to, any probate claim, bankruptcy claim, third-party claim, secured creditor claim or reclamation complaint; examine, audit, count, test, copy, or otherwise inspect any of the Collateral or any of Borrower's books and records; or protect, obtain possession of, lease, dispose of, or otherwise enforce any security interest in or lien on, the Collateral or represent Coast in any litigation with respect to Borrower's affairs. Without limiting the generality of the foregoing, Borrower shall reimburse Coast for its out of pocket costs in connection with Coast's regular quarterly audits of Borrower and shall Borrower shall pay Coast an audit fee of $1,250 for each such quarterly audit. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Loan Agreement or any Collateral Agreement, the prevailing party in such action shall be entitled to recover its costs and attorneys' fees, including, but not limited to, attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Coast may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. *REASONABLE 13. DESTRUCTION OF DEBTOR'S DOCUMENTS; LIMITATION OF ACTIONS. Any documents, schedules, invoices or other papers delivered to Coast may be destroyed or otherwise disposed of by Coast six (6) months after they are delivered to Coast unless Borrower makes written request therefor and pays all expenses attendant to their return, in which event, Coast shall return same when Coast's actual or anticipated need therefor has terminated. Borrower agrees that any claim or cause of action by Borrower against Coast, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any Collateral Agreement, or any other present or future agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Coast, its directors, officers, employees, agents, accountants or attorneys, relating in any way to Borrower, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within six (6) months after * the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Coast, or on any other person authorized to accept service on behalf of Coast, within thirty (30) days thereafter. Borrower agrees that such six-month period of time is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The six-month period provided herein shall not be waived, tolled, or extended except by the written consent of Coast in its sole and absolute discretion. This provision shall survive any termination, however arising, of this Loan Agreement, any Collateral Agreement, and any other present or future agreement. *BORROWER LEARNS OF, OR IN THE EXERCISE OF REASONABLE DILIGENCE SHOULD HAVE LEARNED OF, 14. GENERAL PROVISIONS. 14.1 SEVERABILITY. Should any provision, clause or condition of this Loan Agreement or any Collateral Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Loan Agreement or any Collateral Agreement. 14.2 INTEGRATION. This Loan Agreement and any Collateral Agreements and such other agreements, documents and instruments as may be executed in connection herewith shall be construed as the entire and complete agreement between Borrower and Coast and shall supersede all prior negotiations, all of which are merged and integrated herein. 14.3 AMENDMENT. The terms and provisions of this Loan Agreement and any Collateral Agreement may not be waived or amended except in a writing executed by Borrower and a duly authorized officer of Coast. 14.4 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Loan Agreement and any Collateral Agreement. 14.5 BENEFIT OF AGREEMENT. The provisions of this Loan Agreement and any Collateral Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of the parties hereto; provided, however, that Borrower may not assign or transfer any of its rights under this Loan Agreement or any Collateral Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any -11- 12 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT assignment shall relieve Borrower or any guarantor from its liability for the Obligations. 14.6 JOINT AND SEVERAL LIABILITY. The liability of each Borrower shall be joint and several and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 14.7 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are used herein for convenience only. Borrower acknowledges that the same may not describe completely the subject matter of the applicable paragraph, and the same shall not be used in any manner to construe, limit, define or interpret any term or provision hereof. This Loan Agreement and the Collateral Agreements have been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Loan Agreement or any Collateral Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. * *REFERENCES IN THIS AGREEMENT TO "FOLLOWING THE OCCURRENCE OF AN EVENT OF DEFAULT" SHALL BE DEEMED TO MEAN "FOLLOWING THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT" 14.8 GOVERNING LAW; JURISDICTION; VENUE. This Loan Agreement and any Collateral Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by and in accordance with the laws of the State of California. Any undefined term used in this Loan Agreement or in any Collateral Agreement that is defined in the California Uniform Commercial Code shall have the meaning therein assigned to that term. As a material part of the consideration to Coast to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly hereto shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 14.9 EXECUTION BY COAST. This Loan Agreement and any Collateral Agreement which has been executed and delivered by Borrower to Coast shall not become effective unless and until executed by a duly authorized officer of Coast. 14.10 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS LOAN AGREEMENT OR ANY COLLATERAL AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER. 14.11 CONFIDENTIALITY. COAST COVENANTS AND AGREES, ON A CONTINUING BASIS, TO USE REASONABLE EFFORTS TO MAINTAIN THE CONFIDENTIALITY OF AND NOT TO DISCLOSE TO ANY PERSON OTHER THAN ITS OFFICERS, DIRECTORS, ATTORNEYS AND ACCOUNTANTS AND AFFILIATES, AND SUCH OTHER PERSONS TO WHOM COAST SHALL AT ANY TIME BE REQUIRED TO MAKE SUCH DISCLOSURE IN ACCORDANCE WITH APPLICABLE LAW, ANY AND ALL PROPRIETARY, TRADE SECRET OR CONFIDENTIAL INFORMATION PROVIDED TO OR RECEIVED BY COAST FROM OR ON ACCOUNT OF BORROWER OR ANY AFFILIATE OF BORROWER, INCLUDING BUSINESS PLANS AND FORECASTS, NON-PUBLIC FINANCIAL INFORMATION, CONFIDENTIAL OR SECRET PROCESSES, FORMULAE, DEVICES OR CONTRACTUAL INFORMATION, CUSTOMER LISTS, EMPLOYEE RELATION MATTERS, AND ANY OTHER INFORMATION THE DISCLOSURE OF WHICH COULD REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE IMPACT ON THE BUSINESS, FINANCES OR OPERATIONS OF BORROWER OR ITS AFFILIATES, PROVIDED, HOWEVER, THE FOREGOING PROVISIONS SHALL NOT BE EFFECTIVE REGARDING THE DISPOSITION OF COLLATERAL AFTER AN EVENT OF DEFAULT. 14.12 FINANCIAL COVENANTS: Borrower shall comply with all of the following covenants. Compliance shall be determined as of the end of each fiscal quarter, except as otherwise specifically provided below: TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less than $40,000,000. PROFITABILITY: Borrower shall not incur a loss (after taxes) for any two consecutive calendar quarters or for any fiscal year. DEFINITIONS: "Tangible net worth" means the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, excluding however all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not include indebtedness which is subordinated to the indebtedness to Coast under a subordination agreement in form specified by Coast or by language in the instrument evidencing the indebtedness which is acceptable to Coast. BORROWER: DIGITAL MICROWAVE CORPORATION BY ------------------------------------------------- /S/ VICE PRESIDENT AND CHIEF FINANCIAL OFFICER BY ------------------------------------------------- /S/ TREASURER AND ASSISTANT SECRETARY COAST: COAST BUSINESS CREDIT, A DIVISION OF SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION -12- 13 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT BY -------------------------------- TITLE ------------------------------ 44,536-1 -13- EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS 3-MOS MAR-31-1997 APR-1-1996 JUN-30-1996 1 2459 0 33051 0 43636 83506 14854 0 98360 45125 0 0 0 15908870 0 98360 36807 36807 24902 24902 10388 0 (282) 1248 (125) 1123 0 0 0 1123 0.07 0
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