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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 1996
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OR
/// TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-26946
INTEVAC, INC.
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(Exact name of registrant as specified in its charter)
California 94-3125814
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3550 Bassett Street, Santa Clara, California 95054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 986-9888
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
On September 28, 1996, approximately 12,345,125 shares of the
Registrant's Common Stock, no par value, were outstanding.
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INTEVAC, INC.
<TABLE>
<CAPTION>
NO. INDEX PAGE
- --- ----- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets .................................................. 3
Condensed Consolidated Statements of Income ............................................ 4
Condensed Consolidated Statements of Cash Flows ........................................ 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 19
Item 2. Changes in Securities................................................................... 19
Item 3. Defaults Upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Security-Holders..................................... 19
Item 5. Other Information....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
</TABLE>
SIGNATURES
2
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PART I--FINANCIAL INFORMATION
ITEM I--FINANCIAL STATEMENTS
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Sep. 28, Dec. 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................................. $ 1,253 $20,422
Accounts receivable, net of allowances of $813 and $461 at September 28,
1996 and December 31, 1995, respectively .......................... 7,957 4,439
Inventories ............................................................ 32,041 16,468
Short-term note receivable ............................................. -- 177
Prepaid expenses and other current assets .............................. 369 503
Deferred tax asset ..................................................... 4,311 3,158
Net current assets of discontinued operations .......................... 17 777
------- -------
Total current assets ........................................................ 45,948 45,944
Property, plant and equipment, net .......................................... 5,764 3,479
Investments ................................................................. 2,431 2,431
Goodwill and other intangibles .............................................. 7,842 --
Deferred tax and other assets ............................................... 83 83
------- -------
Total assets ................................................................ $62,068 $51,937
======= =======
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Notes payable .......................................................... $ 4,751 $ --
Accounts payable ....................................................... 4,372 2,681
Accrued payroll and related liabilities ................................ 1,307 1,075
Other accrued liabilities .............................................. 4,277 4,668
Customer advances ...................................................... 15,892 14,436
Net liabilities of discontinued operations ............................. 753 1,757
------- -------
Total current liabilities ................................................... 31,352 24,617
Long-term notes payable ..................................................... 730 --
Deferred tax liability ...................................................... 835 --
Shareholders' equity:
Common stock ........................................................... 15,664 15,304
Retained earnings ...................................................... 13,487 12,016
------- -------
Total shareholders' equity .................................................. 29,151 27,320
------- -------
Total liabilities and shareholders' equity .................................. $62,068 $51,937
======= =======
</TABLE>
See accompanying notes.
3
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 28, Sep. 30, Sep. 28, Sep. 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Disk, flat panel, and other ................ $24,603 $12,071 $59,964 $27,850
MBE ........................................ -- -- -- 695
------- ------- ------- -------
Total net revenues .............................. 24,603 12,071 59,964 28,545
Cost of net revenues:
Disk, flat panel, and other ................ 16,043 7,702 37,474 18,062
MBE ........................................ -- -- -- 434
------- ------- ------- -------
Total cost of net revenues ...................... 16,043 7,702 37,474 18,496
------- ------- ------- -------
Gross profit .................................... 8,560 4,369 22,490 10,049
Operating expenses:
Research and development ................... 2,406 746 5,790 1,666
Selling, general and administrative ........ 2,235 1,106 6,081 3,107
Acquired in-process research and development -- -- 5,835 --
------- ------- ------- -------
Total operating expenses ............... 4,641 1,852 17,706 4,773
------- ------- ------- -------
Operating income ................................ 3,919 2,517 4,784 5,276
Other income, net ............................... 523 186 977 694
------- ------- ------- -------
Income from continuing operations
before income taxes ....................... 4,442 2,703 5,761 5,970
Provision for income taxes ...................... 1,643 973 4,290 2,136
------- ------- ------- -------
Income from continuing operations ............... 2,799 1,730 1,471 3,834
Income from discontinued operations ............. -- -- -- 1,335
------- ------- ------- -------
Net income ...................................... $ 2,799 $ 1,730 $ 1,471 $ 5,169
======= ======= ======= =======
Per share:
Income from continuing operations .......... $ 0.22 $ 0.16 $ 0.11 $ 0.36
Net income ................................. $ 0.22 $ 0.16 $ 0.11 $ 0.49
Shares used in per share amounts ................ 12,956 10,760 12,858 10,528
</TABLE>
See accompanying notes.
4
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INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sep. 28, Sep. 30,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................. $ 1,471 $ 5,169
Adjustments to reconcile net income to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization ..................................... 1,886 676
Acquired in-process research and development ...................... 5,835 --
Loss on disposal of equipment ..................................... 5 90
Gain on disposition of discontinued operations .................... -- (1,398)
Changes in assets and liabilities ................................. (17,903) 39
-------- --------
Total adjustments ...................................................... (10,177) (593)
-------- --------
Net cash and cash equivalents provided by operating activities ......... (8,706) 4,576
INVESTING ACTIVITIES
Purchase of short-term investments ..................................... (2,571) (3,001)
Proceeds from sale of short-term investments ........................... 2,571 7,080
Proceeds from sale of discontinued operation ........................... -- 7,546
Proceeds from sale of Chorus Investment ................................ 177 500
Investment in Cathode Technology Corporation ........................... (1,074) --
Investment in San Jose Technology Corporation .......................... (2,270) --
Investment in Lotus Technologies, Inc. ................................. (8,135) --
Purchase of property and equipment ..................................... (3,022) (2,218)
-------- --------
Net cash and cash equivalents provided by (used in) investing activities (14,324) 9,907
FINANCING ACTIVITIES
Net borrowings under line of credit agreement .......................... 3,501 --
Proceeds from issuance of common stock ................................. 360 171
Repurchase of common stock ............................................. -- (4)
Dividends on common stock .............................................. -- (4,922)
Dividends on redeemable Series 1 Preferred Stock ....................... -- (25)
Exchange of Series A Preferred Stock for common stock .................. -- (9,895)
Redemption of redeemable Series 1 Preferred Stock ...................... -- (6,100)
-------- --------
Net cash and cash equivalents provided by (used in) financing activities 3,861 (20,775)
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (19,169) (6,292)
Cash and cash equivalents at beginning of period ....................... 20,422 9,268
-------- --------
Cash and cash equivalents at end of period ............................. $ 1,253 $ 2,976
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid (received) for:
Interest .......................................................... $ 53 $ --
Income taxes ...................................................... 7,500 2,272
Income tax refund ................................................. (250) --
Other non-cash changes:
Investment in Cathode Technology Corporation through assumption
of notes payable ................................................ $ 1,980 $ --
</TABLE>
See accompanying notes.
5
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INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Intevac, Inc. ("Intevac" or the "Company") is a leading supplier of
static sputtering systems and related manufacturing equipment used to
manufacture thin-film disks for computer hard disk drives. The Company's
principal product, the MDP-250B system enables disk manufacturers to achieve
high coercivities, high signal-to-noise ratios, minimal disk defects, durability
and uniformity, all of which are necessary in the production of high
performance, high capacity disks. The Company sells its static sputtering
systems to both captive and merchant thin-film disk manufacturers. The Company
sells and markets its products directly in the United States, and through
exclusive distributors in Japan, Taiwan and Korea. The Company supports its
customers in Southeast Asia through its wholly owned subsidiary in Singapore.
The financial information at September 28, 1996 and for the three- and
nine-month periods ended September 28, 1996 and September 30, 1995 is unaudited,
but includes all adjustments (consisting only of normal recurring accruals) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included or incorporated
by reference in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The results for the three- and nine-month periods ended September 28,
1996 are not considered indicative of the results to be expected for any future
period or for the entire year.
2. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
Sep. 28, Dec. 31,
1996 1995
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(in thousands)
<S> <C> <C>
Raw Materials $ 9,218 $ 2,900
Work in Progress 19,243 10,818
Finished Goods 3,580 2,750
------- -------
$32,041 $16,468
======= =======
</TABLE>
A significant portion of the finished goods inventory is represented by
completed units at customer sites undergoing installation and acceptance
testing.
3. INCOME TAXES
The effective tax rates used for the nine-month periods ending
September 28, 1996 and September 30, 1995 were 37.0% (after excluding the $5.8
million of non-tax deductible acquisition related in-process research and
development expense) and 35.8% of pretax income, respectively. This rate is
based on the estimated annual tax rate complying with Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
6
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INTEVAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from stock options
(using the treasury stock method). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common stock and common equivalent shares
issued by the Company at prices below the assumed initial public offering (IPO)
price during the twelve-month period preceding the date of the initial filing of
the registration statement have been included in the calculation of common
equivalent shares, using the treasury stock method based on an assumed IPO
price, as if they were outstanding for all periods presented prior to the IPO
date.
6. PUBLIC OFFERING
During the second quarter of 1996, the Company filed a registration
statement for a public offering of the Company's common stock. On August 13,
1996 the registration statement was withdrawn. During the third quarter of 1996,
the Company wrote off $282,000 of expenses related to the offering.
7. LINE OF CREDIT
In September 1996, the Company entered into a Loan and Security
Agreement with two banks which provides for a total of $20.0 million in
available borrowings based on eligible receivables and inventory. This agreement
replaces the Company's prior line of credit. The agreement is for a revolving
line of credit, which is available until May 1, 1997, when the outstanding
principal will be payable. The line of credit bears interest, at the option of
the Company, at the prime rate, or the London Interbank Offering Rate (LIBOR)
plus two and one-half percent per annum for receivable advances and at the prime
rate plus one percent, or the LIBOR plus three and one-half percent per annum
for inventory advances. Interest on outstanding Prime Rate Advances is due
monthly and interest on LIBOR Advances is due at the end of the Interest Period
as elected by the borrower. The Interest Period can be one, three or six months.
In the event of default, interest on the outstanding loan increases to 5.00%
above the interest rate applicable immediately prior to the default. At
September 28, 1996, $3.5 million of borrowings was outstanding under the
agreement.
8. ACQUISITIONS
On May 3, 1996, the Company completed the acquisition of the
outstanding stock of San Jose Technology Corp. ("SJT"), a supplier of thin-film
disk lubrication systems. The total purchase price was $3,715,000. On June 6,
1996, the Company completed the acquisition of the outstanding stock of Lotus
Technologies, Inc. ("LTI"), a supplier of contact stop/start equipment for
computer hard disk drives and components. The total purchase price was
$8,335,000. The following unaudited pro-forma information assumes the
acquisitions occured at the beginning of the nine months presented:
<TABLE>
<CAPTION>
Nine Months Ended
Sep. 28, Sep. 30,
1996 1995
---------- ----------
<S> <C> <C>
Net sales ...................................... $ 63,670 $ 31,773
Net income from continuing operations .......... 7,104 3,100
Net income from discontinued operations ........ -- 1,335
Per share:
Income from continuing operations ......... $ 0.55 $ 0.29
Net income ................................ $ 0.55 $ 0.42
</TABLE>
The proforma information excludes the $5.8 million write-off of acquired in
process research and development.
7
<PAGE> 8
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward looking statements
that are accompanied by cautionary statements that identify important factors
that could cause actual results to differ materially from those in the forward
looking statement as a result of certain of the risk factors set forth elsewhere
in this Quarterly Report on Form 10-Q and other documents the Company files from
time to time with the Securities and Exchange Commission, specifically the
Company's Annual Report on Form 10-K filed in March 1996, Form 10-Q's and Form
8-K's.
OVERVIEW
Intevac is a leading supplier of static sputtering systems and related
manufacturing equipment used to manufacture thin film-disks for computer hard
disk drives. Sputtering is a complex vacuum deposition process used to deposit
multiple thin-film layers on a disk. The Company has three primary sources of
net revenues: sales of disk sputtering systems and related disk manufacturing
equipment; sales of system components; and contract research and development
activities. Disk sputtering systems and related disk manufacturing equipment
generally represent the majority of the Company's revenue, and are sold to
vertically integrated disk drive manufacturers and to original equipment
manufacturers that sell disk media to disk drive manufacturers. Intevac's
systems component business consists primarily of sales of spare parts and
after-sale service to purchasers of the Company's disk sputtering systems, as
well as sales of components to other manufacturers of vacuum equipment. Contract
research and development revenues have been primarily derived from contracts
with ARPA for development projects for the flat panel display ("FPD") industry.
Revenues from the sale of FPD products have not been material.
Through the first quarter of 1995, the Company also received revenues
from the sales of molecular beam epitaxi ("MBE") systems. The Company acquired
the MBE business from Varian in February 1991 and sold the business to a third
party in October 1993. MBE revenues in the first quarter of 1995 were derived
from the sales of used MBE equipment that had not been sold with the business.
The Company does not expect any MBE revenues in the future.
Income from discontinued operations represents results from the sales
of night vision products, primarily of night vision goggles and devices and the
sale of the night vision business to Litton Systems, Inc. in May 1995.
In the first quarter of 1996, Intevac acquired Cathode Technology
Corporation ("CTC"), a developer of advanced sputter source technology for the
production of disks used in computer hard disk drives, for $1.1 million in cash
and $2.0 million in notes.
On May 3, 1996, Intevac acquired San Jose Technology Corp. ("SJT"), a
supplier of thin-film disk lubrication systems, for $3.7 million in cash.
On June 6, 1996, Intevac acquired Lotus Technologies, Inc. ("LTI"), a
supplier of contact stop/start test equipment for computer hard disk drives and
components, for $8.3 million.
The Company's backlog was $66.1 million and $55.3 million at September
28, 1996 and September 30, 1995, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
Net revenues. Disk, flat panel and other net revenues consist primarily
of sales of the Company's disk sputtering systems and related equipment used to
manufacture thin-film disks for computer hard disk drives, and to a lesser
extent, system components and contract research and development. Net revenues
from the sales of sputtering systems are recognized upon customer acceptance.
Sales of related equipment and system components
8
<PAGE> 9
are recognized upon product shipment, and contract research and development is
recognized in accordance with contract terms, typically as costs are incurred.
MBE net revenues consist primarily of system sales. Net revenues increased by
104% to $24.6 million for the three months ended September 28, 1996 from $12.1
million the three months ended September 30, 1995. The increase in net revenues
was primarily due to an increase in the sales of disk sputtering systems and to
a lesser extent, sales of products acquired in the acquisitions of SJT and LTI
and increased sales of system components.
International revenues increased by 97% to $7.4 million for the three
months ended September 28, 1996 from $3.8 million for the three months ended
September 30, 1995. The increase in revenues from international sales was
primarily due to an increase in sales of disk sputtering systems. International
sales constituted 30% of net revenues for the three months ended September 28,
1996 and 32% of net revenues for the three months ended September 30, 1995.
Gross margin. Cost of net revenues consists primarily of purchased
materials, fabrication, assembly, test, installation, international distributor
costs, warranty costs, scrap and costs attributable to contract research and
development. Gross margin from disk, flat panel and other sales was 34.8% for
the three months ended September 28, 1996 as compared to 36.2% for the three
months ended September 30, 1995. The reduction in gross margins was primarily
due the sale of two used systems at discounted prices and the write-down of
inventory related to the Company's 5 1/4" product, the MDP-250C disk sputtering
system. The MDP-250C inventory was written down as a result of the uncertain
market for 5 1/4" disk drives which caused the Company to put production of this
product on hold.
Research and development. Research and development expense consists
primarily of prototype materials, salaries and related costs of employees
engaged in ongoing research, design and development activities for disk
sputtering equipment, flat panel manufacturing equipment, and research by the
Company's Advanced Technology Division. Company funded research and development
expense increased to $2.4 million for the three months ended September 28, 1996
from $0.7 million for the three months ended September 30, 1995, representing
9.8% and 6.2%, respectively, of net revenue. The increase was primarily the
result of increased development expense in disk manufacturing products and, to a
lesser extent, increased development expense in laser texturing products.
Research and development expense does not include costs of $0.6 million
and $0.2 million in the three months ended September 28, 1996 and September 30,
1995, respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese flat panel
manufacturing equipment ("D-Star") development partner. In addition, research
and development expense does not include expenditures in connection with
contract research and development activities since these are charged to cost of
sales.
Selling, general and administrative. Selling, general and
administrative expense consists primarily of selling, marketing, financial,
travel, management, legal and professional services. Domestic sales are made by
the Company's direct sales force whereas international sales are made by
distributors that typically provide sales, installation, warranty and ongoing
customer support. International distributor costs are included in cost of net
revenues. Selling, general and administrative expense increased by 102% to $2.2
million for the three months ended September 28, 1996 from $1.1 million for the
three months ended September 30, 1995 representing 9.1% and 9.2%, respectively,
of net revenue. The increase in selling, general and administrative expense was
primarily the result of increased expense associated with the marketing and
support of disk sputtering systems, and to a lesser extent, the result of the
write-off of $282,000 of offering expenses related to the withdrawal of the
Company's secondary stock offering on August 19, 1996 and increased public
company costs subsequent to the Company's initial public offering in November
1995. Selling, general and administrative headcount grew to 71 employees at
September 28, 1996 from 41 employees at September 30, 1995.
Other income, net. Other income primarily consists of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, interest
income on the Company's short term investments net of any interest expense, and
early payment discounts on the purchase of inventories, goods and services.
Other income increased by 181% to $0.5 million for the three months ended
September 28, 1996 from $0.2 million for the three months ended September 30,
1995. The increase in other income was primarily the result of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, a
manufacturer of molecular beam epitaxi products.
9
<PAGE> 10
Provision for income taxes. Income tax expense as a percentage of
pretax income for the three months ended September 28, 1996 and September 30,
1995, was 37% and 36%, respectively. The increase in the tax rate was the result
of non-tax deductible goodwill amortization related to the acquisitions of SJT
and LTI. The Company's tax rate for these periods differs from the applicable
statutory rates primarily due to the benefit received from the Company's Foreign
Sales Corporation and state income taxes.
NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
Net revenues. Net revenues increased by 110% to $60.0 million for the
nine months ended September 28, 1996 from $28.5 million for the nine months
ended September 30, 1995. The increase in net revenues was primarily due to an
increase in the sales of disk sputtering systems and to a lesser extent as the
result of the sale of new products acquired in the acquisitions of SJT and LTI.
There were no net revenues from the sale of MBE systems for the nine
months ended September 28, 1996 as compared to net revenues of $0.7 million for
the nine months ended September 30, 1995. The Company wound down the MBE
business following the exchange of substantially all of the assets related to
this business with a third party for stock in late 1993. MBE revenues in the
first quarter of 1995 were derived from the sales of used MBE equipment that had
not been sold with the business.
International revenues increased by 172% to $21.3 million for the nine
months ended September 28, 1996 from $7.8 million for the nine months ended
September 30, 1995. The increase in revenues from international sales was
primarily due to an increase in the sales of disk sputtering systems.
International revenues constituted 35% of net revenues for the nine months ended
September 28, 1996 and 27% of net revenues for the nine months ended September
30, 1995.
Gross margin. Gross margin from disk, flat panel and other sales was
37.5% for the nine months ended September 28, 1996 as compared to 35.2% for the
nine months ended September 30, 1995. The improvement in gross margins was
primarily due to increased manufacturing efficiencies resulting from higher
production volume. The Company believes that gross margins experienced in the
first nine months of 1996 were higher than should generally be expected and are
not indicative of margins in future periods.
Research and development. Company funded research and development
expense increased to $5.8 million for the nine months ended September 28, 1996
from $1.7 million for the nine months ended September 30, 1995, representing
9.7% and 5.8%, respectively, of net revenue. The increase was primarily the
result of increased development expense in disk manufacturing products and, to a
lesser extent, increased development expense in flat panel display manufacturing
products and laser texturing products.
Research and development expense does not include costs of $1.3 million
and $0.7 million in the nine months ended September 28, 1996 and September 30,
1995, respectively, reimbursed to the Company under the terms of a research and
development cost sharing agreement with the Company's Japanese D-Star
development partner. On February 14, 1996, this research and development cost
sharing agreement was amended to increase the development partner's total
funding commitment from $4.3 million to $5.5 million. Under the terms of the
research and development cost sharing agreement, Intevac and its development
partner each pay half of all D-Star development costs. At September 28, 1996,
all of the $5.5 million development funding committed by the Company's
development partner had been spent on the D-Star development project. There can
be no assurance that the Company's development partner will provide any further
funding. In addition, research and development expenses do not include
expenditures in connection with contract research and development activities
since these are charged to cost of sales.
Selling, general and administrative. Selling, general and
administrative expense increased by 96% to $6.1 million for the nine months
ended September 28, 1996 from $3.1 million for the nine months ended September
30, 1995 representing 10.1% and 10.9%, respectively, of net revenue. The
increase in selling, general and administrative expense was primarily the result
of increased expense associated with the marketing and support of disk
sputtering systems. To a lesser extent, selling general and administrative
costs rose as a result of the acquisition of SJT on May 3, 1996 and LTI on June
6, 1996 and increased public company costs subsequent to the Company's initial
public offering in November 1995. Selling, general and administrative headcount
grew to 71 employees at September 28, 1996 from 41 employees at September 30,
1995.
10
<PAGE> 11
Acquired In-Process Research and development. The increase of $5.8
million was the result of a write-off of acquired in-process research and
development related to the acquisitions of SJT and LTI.
Other income, net. Other income primarily consists of income related to
the sale of the Company's 20% interest in the capital stock of Chorus, interest
income on the Company's short term investments net of any interest expense, and
early payment discounts on the purchase of inventories, goods and services.
Other income increased by 41% to $0.9 million for the nine months ended
September 28, 1996 from $0.6 million for the nine months ended September 30,
1995, primarily as the result income related to the sale of the Company's 20%
interest in the capital stock of Chorus .
Discontinued operations. In March 1995, the Company adopted a formal
plan to discontinue its night vision business. The Company sold its night vision
business to Litton Systems, Inc. in May of 1995. Accordingly, the results of
operations data for the nine months ended September 30, 1995 reflect the night
vision business as a discontinued operation. Net revenues included in
discontinued operations for the nine months ended September 30, 1995 were $4.2
million. Included in income from discontinued operations for the nine months
ended September 30, 1995 is a net gain after taxes of approximately $1.4
million, net of a reserve of approximately $2.6 million to provide for estimated
closing, environmental remediation and warranty costs from the sale of the night
vision business. As of September 28, 1996, the Company had completed closure of
the night vision business' Palo Alto facility and $0.8 million remained in the
Company's closure reserve to provide for any additional expenses which may be
incurred.
Provision for income taxes. Income tax expense as a percentage of
pretax income for the nine months ended September 28, 1996 and September 30,
1995, was 37% (after excluding the $5.8 million of non-tax deductible
acquisition related in-process research and development expense) and 36%,
respectively. The increase in the tax rate was the result of non-tax deductible
goodwill amortization related to the acquisitions of SJT and LTI. The Company's
tax rate for these periods differs from the applicable statutory rates primarily
due to the benefit received from the Company's Foreign Sales Corporation and
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $8.7 million for the
nine months ended September 28, 1996. The cash used in operations was driven
primarily by increases in inventory and receivables of $14.6 million and $2.7
million, respectively. This was partially offset by a $5.8 million non-cash
acquisition related write-off of acquired in-process research and development,
$1.9 million of depreciation and amortization and $1.5 million of net income.
The Company's investing activities used cash of $14.3 million for the
nine months ended September 28, 1996 due to $11.5 million for the acquisitions
of LTI, SJT and CTC and the purchase of $3.0 million of fixed assets. This was
partially offset by proceeds of $0.2 million from the sale of the Chorus capital
stock.
The Company's financing activities provided cash of $3.9 million for
the nine months ended September 28, 1996, due to $3.5 million of net borrowings
under the Company's line of credit and $0.4 million received from sales of stock
under the Company's employee stock purchase and stock option programs.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
FLUCTUATIONS OF RESULTS OF OPERATIONS
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company derives most of its
net revenues from the sale of a small number of sputtering systems. The number
of systems accepted by customers in any particular quarter has varied from zero
to seven and, as a result, the Company's net revenues and operating results for
a particular period could be materially adversely affected if an anticipated
order for even one system is not received in time to permit shipment and
customer acceptance during that accounting period. The Company's backlog at the
beginning of a quarter may not include all system orders needed to
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achieve the Company's revenue objectives for that quarter. Orders in backlog are
subject to cancellation, and although the Company generally requires a deposit
on orders for its systems, such deposits may not be sufficient to cover the
expenses incurred by the Company for the manufacture of the canceled systems or
fixed operating expenses associated with such systems to the date of
cancellation. From time to time, in order to meet anticipated customer demand,
the Company has manufactured disk sputtering systems in advance of the receipt
of orders for such systems. The Company expects to continue this practice in the
future. In the event that anticipated orders are not received as expected, then
the Company could be materially adversely affected as the result of higher
inventory levels and increased exposure to surplus and obsolete inventory
write-offs. Orders may be subject to delay, deferral or rescheduling by a
customer. From the date the Company receives an order, it often takes more than
six months before the net revenues from such order are recognized and even
longer before final payment is received. The relatively long manufacturing
cycles of many of the Company's products have caused and could cause shipments
of such products to be delayed from one quarter to the next, which could
materially adversely affect the Company's business, financial condition and
results of operations for a particular quarter. Announcements by the Company or
its competitors of new products and technologies could cause customers to defer
purchases of the Company's existing systems, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Installing and integrating new sputtering systems into the thin-film
disk manufacturing process requires a substantial investment by a customer.
Therefore, customers often require a significant number of product presentations
and demonstrations, as well as substantial interaction with the Company's senior
management, before making a purchasing decision. Accordingly, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management time and effort with no assurance that a sale
will result. Furthermore, the Company's expense levels are based, in part, on
its expectations as to future net revenues. If revenue levels are below
expectations, operating results are likely to be adversely affected. Net income,
if any, may be disproportionately affected by a reduction in net revenues
because a proportionately smaller amount of the Company's expenses varies with
its net revenues. The impact of these and other factors on the Company's
revenues and operating results in any future period cannot be forecasted with
certainty. Due to all of the foregoing factors, the Company expects its
quarterly operating results to fluctuate significantly and may in certain
quarters be below the expectations of public market analysts and investors. In
such event it is likely the price of the Company's Common Stock would be
materially adversely affected.
The Company believes that its operating results will continue to
fluctuate on a quarterly and annual basis due to a variety of factors. These
factors include the cyclicality of the thin-film disk manufacturing and disk
drive industries, patterns of capital spending by customers, the timing of
significant orders, order cancellations and shipment reschedulings, market
acceptance of the Company's products, unanticipated delays in design,
engineering or production or in customer acceptance of product shipments,
changes in pricing by the Company or its competitors, the timing of product
announcements or introductions by the Company or its competitors, discounts
offered by the Company to sell demonstration units, the mix of systems sold, the
relative proportions of sputtering systems, system components and subassemblies,
and contract research and development net revenues, the availability and cost of
components and subassemblies, changes in product development costs, expenses
associated with any acquisitions and exchange rate fluctuations. Over the last
ten quarters the Company's gross margin and operating income (loss) as a
percentage of net revenues has fluctuated from approximately 27% to 41% of net
revenues and (32)% to 27% of net revenues, respectively. The Company anticipates
that its gross and operating margins will continue to fluctuate. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
CYCLICALITY OF THE MEDIA MANUFACTURING INDUSTRY
The Company's business depends upon capital expenditures by
manufacturers of thin-film disks, including manufacturers that are opening new
fabrication facilities, expanding or upgrading existing facilities or replacing
obsolete equipment, which in turn depend upon the current and anticipated market
demand for hard disk drives. The disk drive industry is cyclical and
historically has experienced periods of oversupply. Within the past year, many
media manufacturers have undertaken programs to increase capacity. In addition,
Hyundai has announced plans to commence media manufacturing. This industry-wide
increase in capacity may lead to a period of oversupply of thin-film disks,
resulting in significantly reduced demand for thin-film disk production and for
the capital equipment used in such production, including the systems
manufactured and marketed by the Company. In recent years, particularly in very
recent periods, the disk drive industry has experienced significant growth,
which, in turn, has caused significant growth in the capital equipment industry
supplying manufacturers of thin-film disks. There can be no assurance that such
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growth will continue. The Company anticipates that a significant portion of new
orders will depend upon demand from thin-film disk manufacturers building or
expanding fabrication facilities, and there can be no assurance that such demand
will exist. The Company's business, financial condition and results of
operations could be materially adversely affected by downturns or slowdowns in
the disk drive market.
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to replace obsolete equipment or to increase
manufacturing capacity by upgrading or expanding existing manufacturing
facilities or constructing new manufacturing facilities, all of which typically
involve a significant capital commitment. In addition, the cyclicality of the
disk drive industry, among other factors, may cause prospective customers to
postpone decisions regarding major capital expenditures, including purchases of
the Company's systems. In the event customers delay the purchase of the
Company's systems, the Company's business, financial condition and results of
operations could be materially adversely affected.
INTENSE COMPETITION
The Company experiences intense competition worldwide from three
principal competitors, Ulvac Japan, Ltd. ("Ulvac"), Leybold A.G. ("Leybold") and
Anelva Corporation ("Anelva"), each of which is a large manufacturer of complex
vacuum equipment and thin-film disk manufacturing systems and has sold a
substantial number of thin-film disk sputtering machines worldwide. Ulvac is a
manufacturer of in-line systems, Leybold is a manufacturer of static and in-line
sputtering systems and Anelva is a manufacturer of static systems, and each has
substantially greater financial, technical, marketing, manufacturing and other
resources than the Company. The Company also experiences competition from other
manufacturers of in-line sputtering systems used in thin-film disk fabrication
facilities as well as the manufacturers of thin-film disks that have developed
the capability to manufacture their own sputtering systems. There can be no
assurance that the Company's competitors will not develop enhancements to, or
future generations of, competitive products that will offer superior price or
performance features or that new competitors will not enter the Company's
markets and develop such enhanced products. Furthermore, the failure of
manufacturers of thin-film disks currently using in-line machines and
manufacturers using internally developed sputtering systems to switch to static
sputtering systems in the future could adversely affect the Company's ability to
increase its sputtering system market share.
In addition, the Company's three principal competitors are based in
foreign countries and have cost structures and system prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies. Currency fluctuations could also increase the
Company's cost structure relative to those of its competitors, which could make
it more difficult for the Company to maintain its competitiveness.
Given the lengthy sales cycle and the significant investment required
to integrate a disk sputtering system into the manufacturing process, the
Company believes that once a thin-film disk manufacturer has selected a
particular supplier's disk sputtering equipment, the manufacturer generally
relies upon that equipment for the specific production line application and
frequently will continue to purchase its other disk sputtering equipment from
the same supplier. The Company expects to experience difficulty in selling to a
particular customer for a significant period of time if that customer selects a
competitor's disk sputtering equipment. Accordingly, competition for customers
in the disk sputtering equipment industry is particularly intense, and suppliers
of disk sputtering equipment may offer pricing concessions and incentives to
attract new customers, which could adversely affect the Company's business,
financial condition and results of operations. Because of these competitive
factors, there can be no assurance that the Company will be able to compete
successfully in the future.
CUSTOMER CONCENTRATION
Historically, a significant portion of the Company's revenues in any
particular period have been attributable to sales to a limited number of
customers. The Company's largest customers change from period to period as large
thin-film disk fabrication facilities are completed and new projects are
initiated. Seagate, HMT Technology, and Matsubo accounted for 40%, 20% and 17%,
respectively, of the Company's total net revenues in 1995, and Trace Storage
Technology, Matsubo, Seagate, Varian Associates and Komag accounted for 25%,
15%, 13%, 12% and 10%, respectively, of the Company's total net revenues during
1994. Western Digital, Matsubo and Trace Storage Technology accounted for 21%,
14% and 11%, respectively, of the Company's total net revenues during 1993.
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The Company expects that sales of its products to relatively few
customers will continue to account for a high percentage of its net revenues in
the foreseeable future. For example, a portion of the Company's backlog at
September 28, 1996 represented orders from Seagate for a new facility Seagate is
constructing in Singapore. In the event Seagate, or any other customer with
multiple units on order, experiences a delay in the construction of a new
facility or defers the completion of its construction, the Company's net
revenues and operating results could be materially adversely affected. None of
the Company's customers has entered into a long-term agreement requiring it to
purchase the Company's products. As purchases related to a particular new or
expanded fabrication facility are completed, sales to that customer may decrease
sharply or cease altogether. If completed contracts are not replaced on a timely
basis by new orders from the same or other customers, the Company's net revenues
could be adversely affected. The loss of a significant customer, any reduction
in orders from any significant customer or the cancellation of a significant
order from a customer, including reductions or cancellations due to customer
departures from recent buying patterns, financial difficulties of a customer or
market, economic or competitive conditions in the disk drive industry, could
materially adversely affect the Company's business, financial condition and
results of operations.
LIMITED NUMBER OF OPPORTUNITIES
The Company's business depends upon capital expenditures by
manufacturers of thin-film disks, of which there are a limited number worldwide.
According to TrendFOCUS, an independent market research firm, as of the end of
1995 there were 187 installed disk sputtering lines (sputtering systems and
related equipment such as plating, polishing, texturing, lubrication and test
equipment as well as related handling equipment) worldwide and only 14 companies
in the world with five or more installed disk sputtering lines. Therefore,
winning or losing an order from any particular customer could significantly
affect the Company's operating results. In addition, the Company's opportunities
to sell its systems are further limited by the fact that many of the
manufacturers of thin-film disks have adopted an in-line approach as opposed to
the Company's static approach to thin-film disk manufacturing. These
manufacturers have invested significant amounts of capital in their in-line
systems, and there may be significant resistance to change to a static approach
in the future. At times the Company has derived a significant proportion of its
net revenues from sales of its systems to manufacturers constructing new
thin-film disk fabrication facilities. The construction of new thin-film disk
fabrication facilities involves extremely large capital expenditures, resulting
in few thin-film disk fabrication facilities being constructed worldwide at any
particular time. A substantial investment is also required by disk manufacturers
to install and integrate additional thin-film disk manufacturing equipment in
connection with upgrading or expanding their existing fabrication facilities.
These costs are far in excess of the cost of purchasing the Company's system.
The magnitude of such capital expenditures has caused certain thin-film disk
manufacturers to forego purchasing significant additional thin-film disk
manufacturing equipment. Consequently, only a limited number of opportunities
for the Company to sell its systems may exist at any given time.
RAPID TECHNOLOGICAL CHANGE
The disk drive industry in general, and the thin-film disk
manufacturing industry in particular, are characterized by rapid technological
change and evolving industry standards. As a result, the Company must continue
to enhance its existing systems and to develop and manufacture new systems with
improved capabilities. This has required and will continue to require
substantial investments by the Company in research and development to advance
its technologies. The failure to develop, manufacture and market new systems, or
to enhance existing systems, would have a material adverse effect on the
Company's business, financial condition and results of operations. In the past,
the Company has experienced delays from time to time in the introduction of, and
certain technical difficulties with, certain of its systems and enhancements. In
addition, the Company's competitors can be expected to continue to develop and
introduce new and enhanced products, any of which could cause a decline in
market demand for the Company's systems or a reduction in the Company's margins
as a result of intensified price competition.
Changes in the manufacturing processes for thin-film disks could also
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company anticipates continued changes in the
requirements of the disk drive industry and thin-film disk manufacturing
technologies. There can be no assurance that the Company will be able to
develop, manufacture and sell systems that respond adequately to such changes.
In addition, the data storage industry is subject to constantly evolving
technological standards. There can be no assurance that future technological
innovations will not reduce demand for thin-film disks. The Company's
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business, financial condition and results of operations could be materially
adversely affected by any trend toward technology that would replace thin-film
disks as a storage medium.
The Company's success in developing and selling new and enhanced
systems depends upon a variety of factors, including accurate prediction of
future customer requirements, technology advances, cost of ownership,
introduction of new products on schedule, cost-effective manufacturing and
product performance in the field. The Company's new product decisions and
development commitments must anticipate the requirements for the continuously
evolving disk drive industry approximately two or more years in advance of
sales. Any failure to accurately predict customer requirements and to develop
new generations of products to meet those requirements would have a sustained
material adverse effect on the Company's business, financial condition and
results of operations. New product transitions could adversely affect sales of
existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products decline. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or enhancements of existing products.
MANAGEMENT OF EXPANDING OPERATIONS
The Company has recently experienced a period of rapid expansion in its
operations that has placed, and could continue to place, a significant strain on
the Company's management and other resources. The Company's ability to manage
its expanding operations effectively will require it to continue to improve its
operational, financial, and management information systems, and to train,
motivate and manage its employees. If the Company's management is unable to
manage its expanding operations effectively, the Company's results of operations
could be adversely affected.
The Company's operating results will depend in significant part upon
its ability to retain and attract qualified management, engineering,
manufacturing, marketing, customer support and sales personnel. Competition for
such personnel is intense and the Company has difficulties attracting such
personnel, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The failure to attract and retain such
personnel could make it difficult to undertake or could significantly delay the
Company's research and development efforts and the expansion of its
manufacturing capabilities or other activities, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING RISKS
The Company's systems have a large number of components and are highly
complex. The Company may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. In addition, some of the systems built by the Company must be
customized to meet individual customer site or operating requirements. The
Company has limited manufacturing capacity and may be unable to complete the
development or meet the technical specifications of its new systems or
enhancements or to manufacture and ship these systems or enhancements in a
timely manner. Such an occurrence would materially adversely affect the
Company's business, financial condition and results of operations as well as its
relationships with customers. In addition, the Company may incur substantial
unanticipated costs early in a product's life cycle, such as increased cost of
materials due to expediting charges, other purchasing inefficiencies and greater
than expected installation and support costs which cannot be passed on to the
customer. Any of such events could materially adversely affect the Company's
business, financial condition and results of operations. Due to increases in
demand, the average time between order and shipment of the Company's systems may
increase substantially in the future. The Company's ability to quickly increase
its manufacturing capacity in response to short-term increases in demand could
be limited given the complexity of the manufacturing process, the lengthy lead
times necessary to obtain critical components and the need for highly skilled
personnel. The failure of the Company to satisfy any such short-term increases
in demand and to keep pace with customer demand would lead to further extensions
of delivery times, which could deter customers from placing additional orders,
and could adversely affect product quality, which could have a materially
adverse effect on the Company's business, financial condition and results of
operations.
In certain instances, the Company is dependent upon a sole supplier or
a limited number of suppliers, or has qualified only a single or limited number
of suppliers, for certain complex components or sub-assemblies utilized in its
products. In addition, the Company makes extensive use of suppliers serving the
semiconductor
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equipment business and such suppliers may choose to give priority to their
semiconductor equipment customers that are much larger than the Company. Any
prolonged inability to obtain adequate deliveries could require the Company to
pay more for inventory, parts and other supplies, seek alternative sources of
supply, delay its ability to ship its products and damage relationships with
current and prospective customers. Any such delay or damage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company conducts substantially all of its manufacturing activities
at its leased facilities in Santa Clara, California. The Company's Santa Clara
facility is located in a seismically active area. A major catastrophe (such as
an earthquake or other natural disaster) could result in a prolonged
interruption of the Company's business.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT
In 1995, the Company spent approximately $2.5 million on various
programs to fund the development of equipment and processes for use in the flat
panel display ("FPD") industry, approximately 72% which was paid for by the
Company's development partners. In exchange for certain development funding, the
Company has granted to one of its development partners the exclusive rights to
manufacture and market the Company's FPD sputtering systems in Japan. The
Company has limited experience in the development, manufacture, sale and
marketing of FPD manufacturing equipment, having sold two Rapid Thermal
Processing ("RTP") systems to date and having not yet completed development of
its FPD sputtering system. There can be no assurance that the market for FPD
manufacturing equipment targeted by the Company will develop as quickly or to
the degree the Company currently anticipates, or that the Company's proposed FPD
manufacturing equipment will achieve customer acceptance or that the Company
will achieve any net revenues from the sale of its proposed FPD manufacturing
equipment. There can be no assurance the Company will receive additional
customer sponsored research and development funding in the future. The failure
to receive additional customer sponsored research and development funds could
result in the Company internally funding the development of such FPD
manufacturing equipment, and the costs of such research and development may have
a material adverse effect on the Company's results of operations. There can be
no assurance that the Company in any event will continue to fund research and
development in the FPD area.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted
for 32%, 40% and 20% of revenues in 1993, 1994 and 1995, respectively. The
Company anticipates that international sales will continue to account for a
substantial portion of net revenues in the future. In addition, the Company has
orders from Seagate, a domestic customer, to deliver and install a significant
number of machines in Seagate's manufacturing facility in Singapore. In order to
effectively service customers located in Singapore and the surrounding region,
the Company has established a sales and service operation in Singapore. Sales
and operating activities outside of United States are subject to certain
inherent risks, including fluctuations in the value of the United States dollar
relative to foreign currencies, tariffs, quotas, taxes and other market
barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's business, financial
condition or results of operations. In particular, although the Company's
international sales have been denominated in United States dollars, such sales
and expenses may not be denominated in dollars in the future, and currency
exchange fluctuations in countries where the Company does business could
materially adversely affect the Company's business, financial condition and
results of operations.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently has 22 patents issued in the United States, and
has pending patent applications in the United States and foreign countries. Of
the 22 patents, seven relate to sputtering, 10 relate to RTP, one relates to
lubrication systems and four relate to other areas not in Intevac's mainstream
business. The Company has the right to utilize certain patents under licensing
arrangements with Litton Industries, Varian Associates, Stanford University,
Lawrence Livermore Laboratories and Alum Rock Technology. There can be no
assurance that any of the Company's patent applications will be allowed or that
any of the allowed applications will be issued as patents. There can be no
assurance that any patent owned by the Company will not be invalidated, deemed
unenforceable, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with claims of the scope
sought by the Company, if
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at all. Furthermore, there can be no assurance that others will not develop
similar products, duplicate the Company's products or design around the patents
owned by the Company. In addition, there can be no assurance that foreign patent
rights, intellectual property laws or the Company's agreements will protect the
Company's intellectual property rights. Failure to protect the Company's
intellectual property rights could have a material adverse effect upon the
Company's business, financial condition and results of operations.
There have also been substantial amounts of litigation in the
technology industry regarding intellectual property rights. The Company has from
time to time received claims that it is infringing third parties' intellectual
property rights. In August 1993, Rockwell International Corporation ("Rockwell")
sued the Federal government alleging infringement of certain patent rights with
respect to the contracts the Federal government has had with a number of
companies, including Intevac. The Federal government has notified Intevac that
it may be liable to the Federal government in connection with contracts for
certain products from the Company's discontinued night vision business. Although
the Company believes it will have no material liability to the Federal
government under these contracts, there can be no assurance that the resolution
of the claims by Rockwell with the Federal government will not have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company has recently become aware that a third party
has sent correspondence to a consortium, of which the Company is a party, in a
proposed government sponsored research and development program claiming that the
work to be done under this program may infringe patents owned by this third
party. The Company and its subcontractors have reviewed the correspondence and
patents and believe these claims are without merit; however, there can be no
assurance that litigation will not result from such development program. There
can be no assurance that other third parties will not in the future claim
infringement by the Company with respect to current or future patents,
trademarks, or other proprietary rights relating to the Company's disk
sputtering systems, flat panel manufacturing equipment or other products. Any
present or future claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. Any of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
In addition, the Company believes that one of its competitors may be
infringing the Company's patent rights in connection with products currently
being offered by this competitor. Although the Company has not undertaken formal
legal proceedings, the Company has informed this competitor that the Company
believes its patent rights are being infringed and that the Company may
undertake litigation to protect its patent rights if necessary. If undertaken,
such litigation could be costly, time-consuming and result in legal claims being
made against the Company. This could have a material adverse effect on the
Company's business, operating results and financial condition, and, in addition,
there could be no assurance that the Company would ultimately prevail in any
such litigation.
ACQUISITIONS
The Company's business strategy includes acquiring technologies or
businesses that enable it to expand its current product offerings in the
thin-film disk manufacturing market. The Company has completed three
acquisitions during 1996 and expects that it may pursue additional acquisitions
in the future. Any future acquisition may result in potentially dilutive
issuance of equity securities, the incurrence of debt and contingent liabilities
and amortization expense related to intangible assets acquired, any of which
could materially adversely affect the Company's business, financial condition
and results of operations. In particular, the Company will not be able to use
the "pooling of interests" method of accounting due to a shareholder being
greater than a 50% holder of the Company's Common Stock prior to the Company's
initial public offering, in connection with any acquisition consummated prior to
November 21, 1997 and the Company will therefore be required to amortize any
intangible assets acquired in connection with any acquisition consummated during
that period.
The Company incurred a charge to operations of $5.8 million in the
quarter ended June 29, 1996, to reflect the purchase of in-process research and
development pursuant to the two acquisitions completed in the second quarter. In
addition, the Company intends to amortize intangible assets of approximately
$8.8 million of costs relating to the two acquisitions completed in the second
quarter as well as the acquisition completed during the first quarter of 1996.
The amortization period for such costs will be over useful lives, which range
from two years to seven years. Additional, unanticipated expenses may be
incurred relating to the integration of technologies and research and
development and administrative functions. Any acquisition will involve numerous
risks, including difficulties in the assimilation of the acquired company's
employees, operations and products, uncertainties associated with operating in
new markets and
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working with new customers, the potential loss of the acquired company's key
employees as well as the costs associated with completing the acquisition and
integrating the acquired company.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations
relating to the use, storage, discharge, handling, emission, generation,
manufacture, treatment and disposal of toxic or other hazardous substances,
chemicals, materials or waste. Any failure to comply with current or future
regulations could result in substantial civil penalties or criminal fines being
imposed on the Company or its officers, directors or employees, suspension of
production, alteration of its manufacturing process or cessation of operations.
Such regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to properly manage the
use, disposal or storage of, or adequately restrict the release of, hazardous or
toxic substances could subject the Company to significant liabilities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.13 Loan and Security Agreement, dated
September 3, 1996
Exhibit 11.1 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTEVAC, INC.
Date: November 5, 1996 By: /s/ NORMAN H. POND
-------------------------------------
Norman H. Pond
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date: November 5, 1996 By: /s/ CHARLES B. EDDY III
-----------------------------------------
Charles B. Eddy III
Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER
10.13 Loan and Security Agreement, dated September 3, 1996
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
21
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_______________________________________________________________________________
INTEVAC, INC.
LOAN AND SECURITY AGREEMENT
_______________________________________________________________________________
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TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . 1
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . 9
2.1 Advances . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . 12
2.3 Interest Rates, Payments, and Calculations . . . . . 13
2.4 Crediting Payments . . . . . . . . . . . . . . . . . 13
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . 14
2.6 Additional Costs . . . . . . . . . . . . . . . . . . 14
2.7 Conversion/Continuation of Advances . . . . . . . . . 14
2.8 Additional Requirements/Provisions Regarding
LIBOR Rate Advances . . . . . . . . . . . . . . . . . 15
2.9 Term . . . . . . . . . . . . . . . . . . . . . . . . 17
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . 17
3.1 Conditions Precedent to Initial Advance . . . . . . . . 17
3.2 Conditions Precedent to all Advances . . . . . . . . . 17
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . 17
4.1 Grant of Security Interest . . . . . . . . . . . . . . 17
4.2 Delivery of Additional Documentation Required . . . . 18
4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . 18
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 18
5.1 Due Organization and Qualification . . . . . . . . . . 18
5.2 Due Authorization; No Conflict . . . . . . . . . . . . 18
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . 18
5.4 Merchantable Inventory . . . . . . . . . . . . . . . . 18
5.5 Name; Location of Chief Executive Office . . . . . . . 18
5.6 Litigation . . . . . . . . . . . . . . . . . . . . . . 18
5.7 No Material Adverse Change in Financial Statements . . 18
5.8 Solvency . . . . . . . . . . . . . . . . . . . . . . . 19
5.9 Regulatory Compliance . . . . . . . . . . . . . . . . 19
5.10 Environmental Condition . . . . . . . . . . . . . . . 19
5.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 19
5.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . 19
5.13 Government Consents . . . . . . . . . . . . . . . . . 19
5.14 Full Disclosure . . . . . . . . . . . . . . . . . . . 19
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 19
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . 20
6.2 Government Compliance . . . . . . . . . . . . . . . . 20
6.3 Financial Statements, Reports, Certificates . . . . . 20
6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . 20
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 21
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . 21
6.7 Principal Depository . . . . . . . . . . . . . . . . . 21
6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . 21
6.9 Debt-Tangible Net Worth Ratio . . . . . . . . . . . . 21
6.10 Tangible Net Worth . . . . . . . . . . . . . . . . . . 21
6.11 Profitability . . . . . . . . . . . . . . . . . . . . 21
6.12 Further Assurances . . . . . . . . . . . . . . . . . . 22
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7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . 22
7.2 Change in Business . . . . . . . . . . . . . . . . . . 22
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . 22
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . 22
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . 22
7.6 Distributions . . . . . . . . . . . . . . . . . . . . 22
7.7 Investments . . . . . . . . . . . . . . . . . . . . . 23
7.8 Transactions with Affiliates . . . . . . . . . . . . . 23
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . 23
7.10 Compliance . . . . . . . . . . . . . . . . . . . . . . 23
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 23
8.1 Payment Default . . . . . . . . . . . . . . . . . . . 23
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . 23
8.3 Material Adverse Change . . . . . . . . . . . . . . . 23
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . 23
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . 24
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . 24
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . 24
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . 24
8.9 Misrepresentations . . . . . . . . . . . . . . . . . . 24
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . 24
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . 24
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . 25
9.3 Bank Expenses . . . . . . . . . . . . . . . . . . . . 25
9.4 Remedies Cumulative . . . . . . . . . . . . . . . . . 25
9.5 Demand; Protest . . . . . . . . . . . . . . . . . . . 25
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . 26
12. INTERCREDITOR PROVISIONS . . . . . . . . . . . . . . . . . . . 26
12.1 Proportionate Interests . . . . . . . . . . . . . . 26
12.2 Designation of Service Agent . . . . . . . . . . . . 26
12.3 Resignation . . . . . . . . . . . . . . . . . . . . 27
12.4 Servicing Agent as Bank . . . . . . . . . . . . . . 27
12.5 No Agency . . . . . . . . . . . . . . . . . . . . . 27
12.6 No Reliance . . . . . . . . . . . . . . . . . . . . 27
13. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 27
13.1 Successors and Assigns . . . . . . . . . . . . . . . 27
13.2 Indemnification . . . . . . . . . . . . . . . . . . 28
13.3 Time of Essence . . . . . . . . . . . . . . . . . . 28
13.4 Severability of Provisions . . . . . . . . . . . . . 28
13.5 Amendments in Writing, Integration . . . . . . . . . 28
13.6 Counterparts . . . . . . . . . . . . . . . . . . . . 28
13.7 Survival . . . . . . . . . . . . . . . . . . . . . . 29
13.8 Confidentiality . . . . . . . . . . . . . . . . . . 29
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This LOAN AGREEMENT is entered into as of September 3, 1996 by and
among SILICON VALLEY BANK ("SVB") as Servicing Agent and a Bank and BANK OF
HAWAII ("BofH;" SVB and BofH are referred to individually herein as a "Bank,"
and collectively as the "Banks") and INTEVAC, INC., a Delaware corporation
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Banks, and
Banks desire to advance credit to Borrower. This Agreement sets forth the
terms on which Banks will lend to Borrower, and Borrower will repay the
advances to Banks.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
" Accounts" means all now existing and hereafter
arising accounts, contract rights, royalties, license rights and all other
forms of obligations owing to Borrower arising out of the sale or lease of
goods, the licensing of technology or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a Receivables Advance
or an Inventory Advance.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person
that controls or is controlled by or is under common control with such Person,
and each of such Person's senior executive officers, directors, and partners.
"Backlog" means backlog as reported by Borrower on a
basis consistent with past practice. Backlog represents valid purchase orders
with a scheduled delivery date.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement
of the Loan Documents; and each Bank's reasonable attorneys' fees and expenses
incurred in amending, enforcing or defending the Loan Documents, whether or not
suit is brought.
"Borrower's Books" means all of Borrower's books and
records relating to its property.
"Borrowing Base" means an amount equal to Eighty Percent (80%) of Eligible
Accounts.
"Business Day" means a day of the year (a) that is
not a Saturday, Sunday or other day on which banks in the States of California
or Hawaii or the City of London are authorized or required to close and (b) on
which dealings are carried on in the interbank market in which Banks
customarily participate.
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"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on
Exhibit A.
"Committed Line" means Twenty Million Dollars
($20,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted
or sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to
the stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith; provided, however, that such amount shall not in any
event exceed the maximum amount of the obligations under the guarantee or other
support arrangement.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
excluding all outstanding Advances made under Section 2.1 hereof, but including
all other Indebtedness that is payable upon demand or within one year from the
date of determination thereof unless such Indebtedness is renewable or
extendable at the option of Borrower or any Subsidiary to a date more than one
year from the date of determination.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of
Borrower's representations and warranties to Banks set forth in Section 5.4;
provided, that standards of eligibility may be fixed and revised from time to
time by Banks in Banks' reasonable judgment and upon thirty (30) days prior
written notification thereof to Borrower in accordance with the provisions
hereof. Unless otherwise agreed to by Banks, Eligible Accounts shall not
include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower, except that Accounts from
Kaiser Aerospace & Electronics and its subsidiaries are not excluded from
"Eligible Accounts" under this clause (c);
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(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate of Borrower, except that Accounts from Kaiser Aerospace
& Electronics and its Subsidiaries are not excluded from "Eligible Accounts"
under this clause (e);
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(g) Accounts with respect to which the account
debtor is the United States or any department agency, or instrumentality of the
United States, except to the extent Borrower has filed notices under the
Assignment of Claims Act in a form acceptable to Banks;
(h) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower, except advances and deposits from
customers are not excluded from "Eligible Accounts" under this clause (h);
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except for the accounts of
Seagate for which the applicable percentage shall be fifty percent (50%) and
others as pre-approved by Banks in writing;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Servicing Agent reasonably believes, in its sole discretion, that there may be
a basis for dispute (but only to the extent of the amount subject to such
dispute or claim), or is subject to any Insolvency Proceeding, or becomes
insolvent, or goes out of business; and
(k) Accounts the collection of which Servicing
Agent reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis including those Accounts of Matsubo
(which Bank has pre-approved).
"Eligible Inventory" means Inventory as reported by
Borrower on a consistent basis in accordance with GAAP.
"Equipment" means machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments.
"Equivalent Amount" means the equivalent in United
States Dollars of an Optional Currency, calculated at the spot rate for the
purchase of such Optional Currency by BofH.
"Exchange Contracts" means the foreign exchange
contracts entered into pursuant to Section 2.1.2.
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"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including without limitation reimbursement and other obligations with respect
to surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, extension generally
with all or substantially all creditors, or proceedings seeking general
reorganization, arrangement, or other relief.
"Interest Period" means for each LIBOR Rate Advance,
a period of approximately one, three or six months as Borrower may elect,
provided that the last day of an Interest Period for a LIBOR Rate Advance shall
be determined in accordance with the practices, of the LIBOR interbank market
as from time to time in effect, provided, further, in all cases such period
shall expire not later than the applicable Maturity Date.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and
any documents of title representing any of the above, and Borrower's Books
relating to any of the foregoing.
"Inventory Advance" means a cash advance pursuant to
Section 2.1(b).
"Inventory Borrowing Base" means an amount equal to
Twenty Five Percent (25%) of the net book value of the Eligible Inventory.
"Inventory Facility" means the facility under which
Borrower may request Banks to issue cash advances, as specified in Section
2.1.3(b).
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Issuing Bank" means the Bank issuing a Letter of
Credit pursuant to Section 2.1.1. SVB shall be the Issuing Bank, except that
BofH shall be the Issuing Bank if (i) SVB is unable to issue a Letter of Credit
or (ii) a Letter of Credit issued by SVB would require confirmation by another
bank under circumstances in which a Letter of Credit issued by BofH would not
require confirmation.
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"LIBOR Base Rate" means, for any Interest Period for
a LIBOR Rate Advance, the rate of interest per annum determined by SVB to be
the per annum rate of interest at which deposits in United States Dollars are
offered to SVB in the London interbank market in which SVB customarily
participates at 11:00 A.M. (local time in such interbank market) three (3)
Business Days before the first day of such Interest Period for a period
approximately equal to such Interest Period and in an amount approximately
equal to the amount of such Advance.
"LIBOR Rate" shall mean, for any Interest Period for
a LIBOR Rate Advance, a rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period
divided by (ii) 1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advance" means a LIBOR Rate Receivables
Advance or a LIBOR Rate Inventory Advance.
"LIBOR Rate Inventory Advance" means an Inventory
Advance bearing interest at a rate equal to the LIBOR Rate plus three and one
half percent (3 1/2%).
"LIBOR Rate Receivables Advance" means a Receivables
Advance bearing interest at a rate equal to the LIBOR Rate plus two and one
half percent (2 1/2%).
"Lien" means any mortgage, lien, deed of trust,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Banks in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or financial condition of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower, taken as a
whole, to repay the Obligations.
"Maturity Date" means May 1, 1997.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to the Banks by Borrower pursuant to this
Agreement, whether absolute or contingent, due or to become due (including any
interest accruing after the commencement of an Insolvency Proceeding and any
interest that would have accrued but for the commencement of an Insolvency
Proceeding), now existing or hereafter arising.
"Percentage Share" means, as to each Bank, the
percentage calculated in accordance with Section 12.1 hereof.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to either Bank pursuant to the terms and provisions of any instrument, or
agreement now or hereafter in existence between Borrower and such Bank.
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"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Indebtedness to trade creditors and with respect
to surety bonds and similar obligations incurred in the ordinary cause of
business;
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary
and Contingent Obligations of any Subsidiary with respect to obligations of
Borrower (provided that the primary obligations are not prohibited hereby), and
Indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);
(f) Indebtedness secured by Permitted Liens;
(g) Capital leases or indebtedness incurred
solely to purchase equipment which is secured in accordance with clause (c) of
"Permitted Liens" below and is not in excess of the lesser of the purchase
price of such equipment or the fair market value of such equipment on the date
of acquisition; and
(h) Extensions, refinancings, modifications,
amendments and restatements of any of items of Permitted Indebtedness (a)
through (g) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower or its Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the date
of creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by Bank, and (iv) any Investments permitted by
Borrower's investment policy, as amended from time to time, provided that such
investment policy (any such amendment thereto) has been approved by Bank;
(c) Investments consisting of the endorsement of
negotiable instrument for deposit or collection or similar transaction in the
ordinary course of business;
(d) Investments accepted in connection with
Transfers permitted by Section 6.1;
(e) Investments (whether consisting of the
purchase or securities, loans, capital contribution, or otherwise) of
Subsidiaries in or to other Subsidiaries or in Borrower;
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(f) Investments consisting of (i) compensation of
employees, officers and directors of Borrower or its Subsidiaries so long as
the Board of Directors of Borrower determines that such compensation is in the
best interests of Borrower, (ii) travel advances, employee relocation loans and
other employee loans and advances in the ordinary course of business, and (iii)
loans to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plans or agreements approved by Borrower's Board of Directors;
(g) Investments (including debt obligations)
received in connection with the bankruptcy or reorganization of customers or
suppliers and in settlement of delinquent obligations of, and other disputes
with, customers or suppliers arising in the ordinary course of business;
(h) Investments pursuant to or arising under
currency agreements or interest rate agreements entered into in the ordinary
course of business;
(i) Investments consisting of notes receivable
of, or prepaid royalties and other credit extensions, to customers and
suppliers who are not Affiliates, in the ordinary course of business; provided
that this paragraph (i) shall not apply to Investments by Borrower in any
Subsidiary;
(j) Investments constituting acquisitions
permitted under Section 7.3;
(k) Deposit accounts of Borrower in which Banks
have a Lien prior to any other Lien; and
(l) Investments made in accordance with
Borrower's investment policy, as reviewed by Banks and approved from time to
time by Borrower's board of directors.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule;
(b) 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 have no priority over
any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such Equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such Equipment;
(d) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely
for the purpose of financing the lease of such Equipment (including Liens
pursuant to leases permitted pursuant to Section 7.1 and Liens arising from UCC
financing statements regarding leases permitted by this Agreement);
(e) Leases or subleases and license and
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor, licensor
or under any lease or license;
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(f) Liens on assets (including the proceeds
thereof and accessions thereto) that existed at the time such assets were
acquired by Borrower or any Subsidiary (including Liens on assets of any
corporation that existed at the time it became or becomes a Subsidiary);
provided such Liens are not granted in contemplation of or in connection with
the acquisition of such asset by Borrower or a Subsidiary;
(g) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Section
8.8;
(h) Easements, reservations, rights-of-way,
restrictions, minor defects or irregularities in title and other similar
charges or encumbrances affecting real property not constituting a Material
Adverse Effect;
(i) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of customs duties in
connection with the importation of goods;
(j) Liens that are not prior to the Lien of Bank
which constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered in to with banks in the
ordinary course of business;
(k) Earn-out and royalty obligations existing on
the date hereof or entered into in connection with an acquisition permitted by
Section 7.3;
(l) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a), (c), (d), (e), (f) and (k) 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; and
(m) Liens on insurance proceeds in favor of
insurance companies granted solely as security for financed premiums.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by SVB as its "prime rate," or by BofH as its
"base rate," as applicable to the Advances made hereunder by each Bank, whether
or not such announced rate is the lowest rate available from such Bank.
"Prime Rate Advance" means a Prime Rate Receivables
Advance or a Prime Rate Inventory Advance.
"Prime Rate Inventory Advance" means an Inventory
Advance bearing interest at a rate equal to the Prime Rate plus 1 percent.
"Prime Rate Receivables Advance" means a Receivables
Advance bearing interest at a rate equal to the Prime Rate.
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"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments with maturities not to exceed twelve (12)
months of Borrower determined in accordance with GAAP.
"Receivables Advance" means a cash advance pursuant
to Section 2.1(a).
"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the Corporate Controller of
Borrower.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Schedule" means the schedule of exceptions, if any,
attached hereto.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock
of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which
any determination is being made, be owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(ii) Total Liabilities.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances.
(a) Receivables Advances. Subject to and upon
the terms and conditions of this Agreement, each Bank agrees to make
Receivables Advances to Borrower in an aggregate amount not to exceed such
Bank's Percentage Share of the lesser of (i) the Committed Line minus the face
amount of all outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) minus the outstanding amount of the Foreign Exchange Reserve
and minus the outstanding Inventory Advances, or (ii) the Borrowing Base minus
the face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) minus the outstanding amount of the Foreign
Exchange Reserve and minus the outstanding Inventory Advances. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term of this
Agreement.
(b) Inventory Advances. Subject to and upon the
terms and conditions of this Agreement, each Bank agrees to make Inventory
Advances to Borrower in an aggregate amount not to exceed such Bank's
Percentage Share of the lesser of (i) the Committed Line minus the outstanding
Receivables Advances minus the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) and minus the outstanding
amount of the
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Foreign Exchange reserve or (ii) the Inventory Borrowing Base; provided that in
any case the outstanding Inventory Advances shall not exceed the lesser of (i)
Six Million Dollars ($6,000,000) or (ii) Thirty Percent (30%) of the aggregate
outstanding Receivables Advances plus Inventory Advances, and provided further
that Inventory Advances may be outstanding only for so long as the Inventory
Backlog exceeds Twenty-four Million Dollars ($24,000,000).
(c) Requests for Advances. Whenever Borrower
desires an Advance, Borrower will notify Servicing Agent by facsimile
transmission or telephone no later than 3:00 p.m. California time on the
Business Day that a Prime Rate Advance is to be made and 3:00 p.m. California
time on the Business Day that is three (3) Business Days prior to the Business
Day on which a LIBOR Rate Advance is to be made. Servicing Agent shall
promptly deliver such notice to the Banks. Each Bank may make Advances under
this Agreement, based upon instructions received by Servicing Agent from a
Responsible Officer, or without instructions if in Servicing Agent's discretion
such Advances are necessary to meet Obligations under this Agreement which have
become due and remain unpaid. Each Bank shall be entitled to rely on any
notice by telephone or otherwise given by a person who Servicing Agent
reasonably believes to be a Responsible Officer, and Borrower shall indemnify
and hold such Bank harmless for any damages or loss suffered by such Bank as a
result of such reliance. Such Bank will wire or credit, as appropriate, the
amount of Advances in United States Dollars made under this Section 2.1 to
Borrower's deposit account held by Servicing Agent.
Each such notice shall specify:
(i) the date such Advance is to be made, which
shall be a Business Day;
(ii) the amount of such Advance;
(iii) whether such Advance is to be a Receivables
Advance or an Inventory Advance;
(iv) whether such Advance is to be a Prime Rate
Advance or a LIBOR Rate Advance;
(v) if the Advance is to be a LIBOR Rate Advance,
the Interest Period for such Advance.
Each written request for an Advance, and each confirmation of a telephone
request for such an Advance, shall be in the form of an Advance Request Form in
the form of Exhibit B for a Prime Rate Advance, and an Advance Request Form in
the form of Exhibit C-1 for a LIBOR Rate Advance, in each case executed by
Borrower.
(d) Prime Rate Advances. Each Prime Rate Advance
shall be in an amount not less than Twenty Five Thousand Dollars ($25,000).
The outstanding principal balance of each Prime Rate Receivables Advance shall
bear interest (computed daily on the basis of a 360 day year and actual days
elapsed), at a rate per annum equal to the Prime Rate. The outstanding
principal balance of each Prime Rate Inventory Advance shall bear interest
(computed daily on the basis of a 360 day year and actual days elapsed) at a
rate per annum equal to the Prime Rate plus One Percent (1%). Borrower shall
pay the entire outstanding principal amount of each Prime Rate Advance on the
Maturity Date.
(e) LIBOR Rate Advances. Each LIBOR Rate Advance
shall be in an amount of not less than Five Hundred Thousand Dollars
($500,000). The outstanding principal balance of each LIBOR Rate Receivables
Advance shall bear interest until principal is due (computed daily on the basis
of a 360 day year and actual days elapsed) at a rate per annum equal to the
LIBOR
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Rate plus 250 basis points for such LIBOR Rate Advance. The outstanding
principal balance of each LIBOR Rate Inventory Advance shall bear interest
(computed daily on the basis of a 360 day year and actual days elapsed) at a
rate per annum equal to the LIBOR rate plus 350 basis points. The entire
outstanding principal amount of each LIBOR Rate Advance shall be due and
payable on the last day of the LIBOR Rate Interest Period for such LIBOR Rate
Advance. Not more than ten (10) LIBOR Rate Advances shall be outstanding at
any time.
(f) Prepayment of the Advances. Borrower may at
any time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in
part. Each partial prepayment for a LIBOR Rate Advance shall be in an amount
not less than Two Hundred Fifty Thousand Dollars ($250,000). Each prepayment
shall be made upon the irrevocable written or telephone notice of Borrower
received by Servicing Agent not later than 10:00 a.m. California time on the
date of the prepayment of a Prime Rate Advance, and not less than three (3)
Business Days prior to the date of the prepayment of a LIBOR Rate Advance. The
notice of prepayment shall specify the date of the prepayment, the amount of
the prepayment, and the Advance or Advances to be prepaid. Each prepayment of
a LIBOR Rate Advance shall be accompanied by the payment of accrued interest on
the amount prepaid and any amount required by Section 2.8.
The Revolving Facility shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 and other amounts due under this
Agreement shall be immediately due and payable.
2.1.1 Letters of Credit.
(a) At Borrower's written request,
Issuing Bank shall issue Letters of Credit for Borrower's account. Each Bank
severally agrees to participate in Letters of Credit, in accordance with such
Bank's Percentage Share.
(b) Issuing Bank shall issue the Letter
of Credit upon receipt of a Borrower's written request and Issuing Bank's
standard form of application, stating (a) the date such Borrower wishes to
receive the Letter of Credit (which shall be a Business Day); (b) the requested
amount of such Letter of Credit; (c) the aggregate amount of all Advances and
Letters of Credit then outstanding; (d) if appropriate, the conditions
requested by Borrower under which the Letter of Credit may be drawn upon; and
(e) any other information Issuing Bank might need to issue the Letter of
Credit. Issuing Bank shall promptly notify all of the Banks upon receipt of a
request for a Letter of Credit.
(c) The maximum aggregate obligation at
any one time for undrawn and drawn but unreimbursed Letters of Credit shall be
Five Million Dollars ($5,000,000). Each Letter of Credit shall be issued
pursuant to the terms and conditions of this Agreement and of the Issuing
Bank's standard form of application and security agreement for letters of
credit. Each Letter of Credit shall (a) expire no later than the Maturity
Date, and (b) be otherwise in form and substance satisfactory to Issuing Bank,
provided that a Letter of Credit may expire after the Maturity Date for so long
as Borrower's reimbursement obligation in connection therewith is secured by
cash on terms acceptable to Banks. Upon issuing a Letter of Credit, the
Issuing Bank shall immediately notify the other Bank of such issuance and
shall, on a continuing basis, keep the other Bank informed of the drawn and
undrawn but unreimbursed amount of each Letter of Credit for so long as such
Letter of Credit is outstanding. With respect to standby Letters of Credit,
Borrower shall pay to Issuing Bank a nonrefundable issuance fee not to exceed
one and one-half percent (11/2%) of the face amount of the Letter of Credit at
the time Borrower requests the Letter of Credit. The Issuing Bank shall retain
a fee equal to one-eighth of one percent (0.125%) of the face amount of the
Letter of Credit, and shall share the balance of such issuance fee equally with
the other Bank. With respect to commercial Letters of Credit, Borrower shall
pay to Issuing Bank a nonrefundable issuance fee equal to one-eighth of one
percent (0.125%) of the face amount of the Letter of Credit at the time
Borrower requests the Letter of Credit and a negotiation fee equal to
one-eighth of one percent (0.125%) of the face amount of the
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Letter of Credit at the time a draw is made on the Letter of Credit. The
Issuing Bank shall retain an issuance fee of One Hundred Dollars ($100) and a
negotiation fee of One Hundred Dollar ($100), and shall share the balance of
such issuing fee and negotiation fee equally with the other Bank. On the day
on which Issuing Bank honors any drawing made by the beneficiary of a Letter of
Credit, Borrower shall pay to Issuing Bank the full amount of the drawing so
honored, or at Borrower's option, shall treat the amount of such drawing as an
Advance under Section 2.1. The obligation to reimburse Issuing Bank for the
amount of such drawing is absolute, unconditional, and irrevocable.
(d) Borrower may request that Issuing
Bank issue a Letter of Credit payable in a currency other than United States
Dollars. If a demand for payment is made under any such Letter of Credit,
Issuing Bank shall treat such demand as an Advance to Borrower of the
Equivalent Amount thereof. Upon the issuance of any Letter of Credit payable
in a currency other than United States Dollars, Banks shall create a reserve
under the Committed Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to twenty percent (20%) of the face amount
of such Letter of Credit. The amount of such reserve may be amended by Banks
from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount
of such reserve for so long as such Letter of Credit remains outstanding.
2.1.2 Foreign Exchange Contract; Foreign Exchange
Settlements.
(a) Subject to the terms of this
Agreement, Borrower may utilize up to One Million Dollars ($1,000,000) for
Exchange Contracts, pursuant to which a Bank shall sell to or purchase from
Borrower foreign currency on a spot or future basis. All Exchange Contracts
must provide for delivery of settlement on or before the Maturity Date. The
limit available at any time shall be reduced by the following amounts (the
"Foreign Exchange Reserve") on each day (the "Determination Date"): (i) on all
outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed more than two business days from the Determination Date, 10%
of the gross amount of the Exchange Contracts; plus (ii) on all outstanding
Exchange Contracts on which delivery is to be effected or settlement allowed
within two business days after the Determination Date, 100% of the gross amount
of the Exchange Contracts. In lieu of the Foreign Exchange Reserve for 100% of
the gross amount of any Exchange Contract, Borrower may request that Bank treat
such amount as an Advance under the Committed Line.
(b) Bank may, in its discretion,
terminate the Exchange Contracts at any time (a) that an Event of Default
occurs or (b) that there is no sufficient availability under the Committed Line
and Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and
without limitation of any applicable indemnities, Borrower agrees to reimburse
Bank for any and all fees, costs and expenses relating thereto or arising in
connection therewith.
(c) Borrower shall not permit the total
gross amount of all Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more than One Million
Dollars ($1,000,000) nor shall Borrower permit the total gross amount of all
Exchange Contracts to which Borrower is a party, outstanding at any one time,
to exceed Ten Million Dollars ($10,000,000).
(d) Borrower shall execute all standard
form applications and agreements of Bank in connection with the Exchange
Contracts and, without limiting any of the terms of such applications and
agreements, Borrower will pay all standard fees and charges of Bank in
connection with the Exchange Contracts.
2.2 Overadvances. If. at any time or for any
reason, the sum of (i) Receivables Advances owed by Borrower to Banks pursuant
to Section 2.1(a) of this Agreement plus (ii) the face
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amount of Letters of Credit issued under Section 2.1.1 (including undrawn and
drawn but unreimbursed Letters of Credit) plus (iii) the reserve, if any, taken
under Section 2.1.1(d) plus (iv) the Foreign Exchange Reserve is greater than
the lesser of the Borrowing Base or the Committed. Line, Borrower shall
immediately pay to Servicing Agent, in cash, the amount of such excess, for
payment to the Banks according to their respective Percentage Shares. If, at
any time or for any reason, the amount of the Inventory Advances owed by
Borrower to Banks pursuant to Section 2.1(b) of this Agreement is greater than
the least of (i) Six Million Dollars ($6,000,000) or (ii) the Inventory
Borrowing Base or (iii) Thirty Percent (30%) of the outstanding Advances,
Borrower shall immediately pay to Servicing Agent in cash the amount of such
excess, for payment to the Banks according to their respective Percentage
Shares.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in
Section 23(b), any Advances of each Bank shall bear interest, on the average
Daily Balance, at the rates specified in Sections 2.1(d), and 21(e),
respectively.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Accrued interest shall be due and
payable in arrears upon the earlier of (i) with respect to any LIBOR Advance,
the end of the Interest Period or (ii) any payment of principal or (iii) on the
first day of each calendar month. Servicing Agent shall, at the option of
Servicing Agent, charge such interest, all Bank Expenses, and all Periodic
Payments against Borrower's deposit account held at SVB or against the
Committed Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of
a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an
Event of Default, each Bank shall credit a wire transfer of funds, check, or
other item of payment to such deposit account or Obligation as Borrower
specifies. After the occurrence and during the continuation of an Event of
Default, the receipt by a Bank of any wire transfer of funds, check, or other
item of payment shall be immediately applied to conditionally reduce
Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such
check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any wire transfer or
payment received by a Bank after noon California time shall be deemed to have
been received by such Bank as of the opening of business on the immediately
following Business Day. Whenever any payment to a Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
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2.5 Fees. Borrower shall pay to Banks the following:
(a) Facility Fee. An annual Facility Fee equal
to one tenth of one percent (0.1%) of the Committed Line plus one half of one
percent (0.5%) of the Inventory Line, pro-rated.
(b) Financial Examination and Appraisal Fees.
Each Bank's customary fees and out-of-pocket expenses for such Bank's audits
of Borrower's Accounts, and for each appraisal of Collateral and financial
analysis and examination of Borrower performed from time to time by such Bank
or its agents; and
(c) Bank Expenses. Upon the date hereof, all
Bank Expenses incurred through the date hereof, including reasonable
attorneys' fees and expenses, and, within thirty (30) days of demand, other
Bank Expenses as they become due from time to time hereunder.
2.6 Additional Costs. In case any law, regulation, treaty
or official directive or the written interpretation or application thereof by
any court or any governmental authority charged with the administration thereof
or the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects any Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of such Bank imposed by the United
States of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, any Bank;
or
(c) imposes upon any Bank any other material
condition with respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such Bank
with respect to any loans, such Bank shall notify Borrower thereof in writing.
Borrower shall pay to such Bank the amount of such increase in cost, reduction
in income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by such Bank of a statement of the
amount and setting forth such Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest
error; provided, however, that Borrower shall not be liable for any such amount
attributable to any period prior to 180 days prior to the date of such
certificate.
2.7 Conversion/Continuation of Advances.
(a) Borrower may from time to time submit in
writing a request that Prime Rate Advances be converted to LIBOR Rate Advances
or that any existing LIBOR Rate Advances continue for an additional Interest
Period. Such request shall specify the amount of the Prime Rate Advances that
will constitute LIBOR Rate Advances (subject to the limits set forth below) and
the Interest Period to be applicable to such LIBOR Rate Advances. Each written
request for a conversion to a LIBOR Rate Advance or a continuation of a LIBOR
Rate Advance shall be substantially in the form of a LIBOR Rate
Conversion/Continuation Certificate as set forth on Exhibit C-2, which shall
be duly executed by a Responsible Officer. Subject to the terms and conditions
contained herein, three (3) Business Days after Servicing Agent's receipt of
such a request from Borrower, such Prime Rate Advances shall be converted to
LIBOR Rate Advances or such LIBOR Rate Advances shall continue, as the case may
be provided that:
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(i) no Event of Default or event which
with notice or passage of time or both would constitute an Event of Default
exists;
(ii) no party hereto shall have sent any
notice of termination of the Agreement;
(iii) Borrower shall have complied with
such customary procedures as Banks have established from time to time for
Borrower's requests for LIBOR Rate Advances;
(iv) the amount of a Prime Rate Advance
shall be $25,000 or more, and the amount of a LIBOR Rate Advance shall be
$500,000 or such greater amount which is an integral multiple of $50,000; and
(v) Servicing Agent shall have determined
that the Interest Period or LIBOR Rate is available to Banks as of the date of
the request for such LIBOR Rate Advance.
Any request by Borrower to convert Prime Rate Advances to LIBOR Rate
Advances or continue any existing LIBOR Rate Advances shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Banks shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances,
but the provisions hereof shall be deemed to apply as if Banks had purchased
such deposits to fund the LIBOR Rate Advances.
(b) Any LIBOR Rate Advances shall
automatically convert to Prime Rate Advances upon the last day of the
applicable Interest Period, unless Banks have received and approved a complete
and proper request to continue such LIBOR Rate Advance at least three (3)
Business Days prior to such last day in accordance with the terms hereof. Any
LIBOR Rate Advances shall, at Banks' option, convert to Prime Rate Advances in
the event that an Event of Default shall exist. Borrower shall pay to Banks,
upon demand by Banks (or Servicing Agent may, at its option, charge Borrower's
deposit account) any amounts required to compensate Banks for any loss
(including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of LIBOR Rate Advances to Prime Rate
Advances pursuant to any of the foregoing.
2.8 Additional Requirements/Provisions Regarding LIBOR
Rate Advances.
(a) If for any reason (including voluntary or
mandatory prepayment or acceleration), Banks receive all or part of the
principal amount of a LIBOR Rate Advance prior to the last day of the Interest
Period for such LIBOR Rate Advance Borrower shall on demand by Servicing Agent,
pay Servicing Agent the amount (if any) by which (i) the additional interest
which would have been payable on the amount so received had it not been
received until the last day of such Interest Period or term exceeds (ii) the
interest which would have been recoverable by Banks by placing the amount so
received on deposit in the certificate of deposit markets or the offshore
currency interbank markets or United States Treasury investment products, as
the case may be, for a period starting on the date on which it was so received
and ending on the last day of such Interest Period or term at the interest rate
determined by Servicing Agent in its reasonable discretion. Servicing Agent's
determination as to such amount shall be conclusive absent manifest error.
(b) Borrower shall pay to a Bank, upon demand
by a Bank, from time to time such amounts as such Bank may reasonably determine
to be necessary to compensate it for any costs incurred by such Bank that such
Bank determines are attributable to its making or maintaining of any amount
receivable by such Bank hereunder in respect of any Advances relating thereto
(such increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), in each case resulting from any Regulatory Change
which:
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(i) changes the basis of taxation
of any amounts payable to such Bank under this Agreement in respect of any
Advances (other than changes which affect taxes measured by or imposed on the
overall net income of such Bank by the jurisdiction in which such Bank has its
principal office); or
(ii) imposes or modifies any
reserve, special deposit or similar requirements relating to any extensions of
credit or other assets of, or any deposits with or other liabilities of such
Bank (including any Advances or any deposits referred to in the definition of
"LIBOR Base Rate"); or
(iii) imposes any other material
condition affecting this Agreement (or any of such extensions of credit or
liabilities).
Such Bank will notify Borrower of any event occurring after the date of the
Agreement which will entitle such Bank to compensation pursuant to this section
as promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Such Bank will furnish Borrower with a statement
setting forth the basis and amount of each request by such Bank for
compensation under this Section 2.8. Determinations and allocations by a Bank
for purposes of this Section 2.8 of the effect of any Regulatory Change on its
costs of maintaining its obligations to make Advances or of making or
maintaining Advances or on amounts receivable by it in respect of Advances, and
of the additional amounts required to compensate such Bank in respect of any
Additional Costs, shall be conclusive absent manifest error.
(c) Borrower shall pay to a Bank, upon
the request of such Bank, such amount or amounts as shall be sufficient (in the
sole good faith opinion of such Bank) to compensate it for any reasonable loss,
costs or expense incurred by it as a result of any failure by Borrower to
borrow a LIBOR Rate Advance on the date for such borrowing specified in the
relevant notice of borrowing hereunder.
(d) If a Bank shall determine that the
adoption or implementation of any applicable law, rule, regulation or treaty
regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by Bank (or its applicable lending office) with any
respect or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on capital of such Bank or
any person or entity controlling Bank (a "Parent") as a consequence of its
obligations hereunder to a level below that which Bank (or its Parent) could
have achieved but for such adoption, change or compliance (taking into
consideration its policies with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, within 15 days after
demand by such Bank, Borrower shall pay to Bank such additional amount or
amounts as will compensate such Bank for such reduction. A statement of such
Bank claiming compensation under this Section and setting forth the additional
amount or amounts to be paid to it hereunder shall be conclusive absent
manifest error.
(e) If at any time a Bank, in its sole
and absolute discretion, determines that: (i) the amount of the LIBOR Rate
Advances for periods equal to the corresponding Interest Periods or any other
period are not available to such Bank in the offshore currency interbank
markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of
lending the LIBOR Rate Advance, then such Bank shall promptly give notice
thereof to Borrower, and upon the giving of such notice such Bank's obligation
to make the LIBOR Rate Advances shall terminate, unless Banks and Borrower
agree in writing to a different interest rate applicable to LIBOR Rate
Advances. If it shall become unlawful for a Bank to continue to fund or
maintain any Advances, or to perform its obligations hereunder, upon demand by
such Bank, Borrower shall prepay the Advances in full with accrued
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interest thereon and all other amounts payable by Borrower hereunder
(including, without limitation, any amount payable in connection with such
prepayment pursuant to Section 2.8(a)).
2.9 Term. This Agreement shall become effective upon the
date hereof and shall continue in full force and effect for a term ending on
the Maturity Date. Notwithstanding the foregoing, Banks shall have the right
to terminate any obligation to make Advances and Inventory Advances under this
Agreement immediately and without notice upon the earlier of (i) the occurrence
and during the continuance of an Event of Default or (ii) the Maturity Date.
On the date of termination, all Obligations shall become immediately due and
payable in cash or by wire transfer.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The
obligation of either Bank to make the initial Advance or Inventory Advance
subject to the condition precedent that such Bank shall have received, in form
and substance satisfactory to such Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower
with respect to incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) payment of the fees and Bank Expenses then
due specified in Section 2.5 hereof, provided reasonably detailed invoices are
received; and
(d) such other documents, and completion of such
other matters, as Banks may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation
of any Bank to make each Advance or Inventory Advance, including the initial
Advance, is further subject to the following conditions:
(a) timely receipt by Servicing Agent of the Loan
Payment/Advance Request Form or LIBOR Rate Advance Request Form, as applicable,
as provided in Section 2.1; and
(b) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of
the date of such Loan Payment/Advance Request Form or LIBOR Rate Advance
Request Form, as applicable, and on the effective date of each Advance as
though made at and as of each such date (except to the extent they relate
specifically to an earlier date, in which case such representations and
warranties shall continue to have been true and accurate as of such date), and
no Event of Default shall have occurred and be continuing, or would result from
such Advance.
The making of each Advance and each Inventory Advance shall be deemed to
be a representation and warranty by Borrower on the date of such Advance or
Inventory Advance as to the accuracy of the facts referred to in this Section
3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and
pledges to Banks a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower
of each of its covenants and duties under the Loan Documents. Except as set
forth in the Schedule, such security interest constitutes a valid, first
priority security interest in the presently existing
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Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver to Servicing Agent, at the
request of Servicing Agent, all Negotiable Collateral, all financing statements
and other documents that Servicing Agent may reasonably request, in form
satisfactory to Servicing Agent, to perfect and continue perfected Banks'
security interests in the Collateral and in order to fully consummate all of
the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Any Bank (through any of its
officers, employees, or agents) shall have the right, upon reasonable prior
notice, from time to time during Borrower's usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower's financial condition or the amount,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants (subject to the disclosures
and exceptions set forth in Borrower's prospectus dated June 7, 1996) as
follows:
5.1 Due Organization and Qualification. Borrower and
each Subsidiary is a corporation duly existing and in good standing under the
laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its business
or its ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Articles of Incorporation or Bylaws,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 Merchantable Inventory. All Inventory valued by
Borrower in accordance with GAAP is in all material respects of good and
marketable quality, free from all material defects.
5.5 Name; Location of Chief Executive Office. Borrower
has not done business under any name other than that specified on the signature
page hereof. The chief executive office of Borrower is located at the address
indicated in Section 9 hereof.
5.6 Litigation. There are no actions or proceedings
pending by or against Borrower or any Subsidiary before any court or
administrative agency in which an adverse decision could have a Material
Adverse Effect. Borrower does not have knowledge of any such pending or
threatened actions or proceedings.
5.7 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and any Subsidiary
that have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
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5.8 Solvency. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.9 Regulatory Compliance. Borrower and each Subsidiary
has met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result in
Borrower's incurring any liability that could have a Material Adverse Effect.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of the important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T and U of the Board of
Governors of the Federal Reserve System). Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. Borrower has not violated
any statutes, laws, ordinances or rules applicable to it, violation of which
could have a Material Adverse Effect.
5.10 Environmental Condition. Except as disclosed in
Borrower's prospectus dated June 7, 1996, none of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.11 Taxes. Borrower and each Subsidiary have filed or
caused to be filed all tax returns required to be filed, and have paid, or have
made adequate provision for the payment of, all taxes reflected therein.
5.12 Subsidiaries. Borrower does not own any stock.,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.13 Government Consents. Borrower and each Subsidiary
have obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of their respective
businesses as currently conducted.
5.14 Full Disclosure. No representation, warranty or
other statement made by Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading (it being recognized by Bank,
except as provided in Section 5.12, that the projections and forecasts provided
by Borrower are not viewed as facts and that the actual results during the
period or periods covered by any such projections or forecasts may differ from
the projected or forecasted results).
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as a Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each
of its Subsidiaries' corporate existence and good standing in its jurisdiction
of incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect.
6.3 Financial Statements, Reports, Certificates.
Borrower shall deliver to Banks: (a) within five (5) days upon becoming
available or, if earlier, to the extent applicable, forty-five (45) days
after the end of each fiscal quarter, copies of all statements, reports and
notices sent or made available generally by Borrower to its security holders or
to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed
with the Securities and Exchange Commission; (b) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more; and (c)
such budgets, sales projections, operating plans or other financial information
as Bank may reasonably request from time to time.
Within twenty (20) days after the last day of each fiscal
month, Borrower shall deliver to Servicing Agent Borrowing Base Certificates
signed by a Responsible Officer in substantially the form of Exhibit D and
Exhibit D-1 hereto, together with aged listings of accounts receivable and
accounts payable and a backlog report. Within five (5) days of the last day of
each week when an Inventory Advance is outstanding, Borrower shall deliver to
Servicing Agent such Borrowing Base Certificates, together with aged listings
of accounts receivable.
Borrower shall deliver to Banks with the quarterly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit E hereto.
As a condition to Borrower's requesting any Advances that
would cause the aggregate outstanding balance of cash Advances to exceed Two
Million Dollars ($2,000,000), Servicing Agent shall have a right to audit
Borrower's Accounts at Borrower's expense.
Any Bank shall have a right from time to time hereafter to
audit Borrower's Accounts at Borrower's expense, provided that such audits will
be conducted no more often than annually unless an Event of Default has
occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all
Inventory in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrower and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Servicing Agent of all returns and
recoveries and of all disputes and claims, where the return" recovery, dispute
or claim involves more than Two Million Dollars ($2,000,000).
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6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law,
and will execute and deliver to Banks, on demand, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability,
and local, state, and federal income taxes, and will, upon request, furnish
Banks with proof satisfactory to Banks indicating that Borrower or a Subsidiary
has made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is contested in
good faith by appropriate proceedings and is reserved against (to the extent
required by GAAP) by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep its
business insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of its assets in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably satisfactory
to Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Banks, showing Banks as an
additional loss payee thereof and all liability insurance policies shall show
Banks as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Banks before canceling its policy for any
reason. Upon a Servicing Agent's request, Borrower shall deliver to Servicing
Agent certified copies of such policies of insurance and evidence of the
payments of all premiums therefor. After the occurrence of an Event of
Default, all proceeds payable under any such policy shall, at the option of
Banks, be payable to Banks to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its
principal depository and operating accounts with SVB.
6.8 Quick Ratio. Borrower shall maintain, as of the last
day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities
(excluding non-refundable customer deposits) of at least 0.6 to 1.0 through
September 30, 1996, and at least 0.75 to 1.00 thereafter.
6.9 Debt-Tangible Net Worth Ratio. Borrower shall
maintain, as of the last day of each fiscal quarter, a ratio of Total
Liabilities (excluding non-refundable customer deposits) less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than 1.9 to 1.0
through September 30, 1996, and not more than 1.5 to 1.0 thereafter.
6.10 Tangible Net Worth. Borrower shall maintain, as of
the last day of each fiscal quarter, a Tangible Net Worth of not less than
Nineteen Million Dollars ($19,000,000) through September 30, 1996, and at least
Twenty Two Million Dollars ($22,000,000) thereafter.
6.11 Profitability. Beginning with the quarter ended
September 30, 1996, Borrower shall have a minimum net profit of One Dollars
($1.00) for each fiscal quarter, except Borrower may suffer a loss in one
fiscal quarter.
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6.12 Further Assurances. At any time and from time to
time Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, without the prior written
consent of Banks, which may be withheld in Banks' sole discretion, so long as
any credit hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as a Bank may have any commitment to
make any Advances, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or
obsolete Equipment, or Equipment financed by other vendors; (iv) Transfers
which constitute liquidation of Investments permitted under Section 7.7; and
(v) other Transfers not otherwise permitted by this Section 7.1 not exceeding
Five Hundred Thousand Dollars ($500,000) in the aggregate in any fiscal year.
7.2 Change in Business. Engage in any business, or
permit any of its Subsidiaries to engage in any business, other than the
businesses currently engaged in by Borrower and any business substantially
similar or related thereto (or incidental thereto), or suffer a material change
in Borrower's ownership other than the sale of additional Common Stock of the
Company. Borrower will not, without thirty (30) days prior written
notification to Banks, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person [where the aggregate consideration paid in any fiscal year with respect
to such mergers, consolidations and acquisitions exceeds Eight Million Dollars
($8,000,000) or where the cash payments made in connection with such mergers,
consolidations or acquisitions during the twelve month period following the
date of this Agreement exceeds Five Million Dollars ($5,000,000)]; provided
that this Section 7.3 shall not apply to (i) the purchase of inventory,
equipment or intellectual property rights in any transaction valued at less
than One Hundred Thousand Dollars ($100,000) in the ordinary course of business
or (ii) transactions among Subsidiaries or among Borrower and its Subsidiaries
in which Borrower is the surviving entity.
7.4 Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any accounts
receivable, or permit any of its Subsidiaries so to do, except for Permitted
Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock; provided, that (i) Borrower may declare and make any
dividend payment or other distribution payable in its equity securities, (ii)
Borrower may convert any of its convertible securities into other securities
pursuant to the terms of such convertible securities or otherwise in exchange
therefor, and (iii) Borrower may repurchase stock for so long as an Event of
Default has not occurred and will not exist after giving effect to such
repurchase.
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7.7 Investments. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries
so to do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person except for transactions with a Subsidiary that are upon fair and
reasonable terms and transactions constituting Permitted Investments.
7.9 Subordinated Debt. Make any payment in respect of
any Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the Subordinated
Debt without Banks' prior written consent.
7.10 Compliance. Become an "investment company"
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the
principal of, or any interest on,, any Advances when due and payable; or fails
to pay any portion of any other Obligations not constituting such principal or
interest, including without limitation Bank Expenses, within thirty (30) days
of receipt by Borrower of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any
obligation under Sections 6.8, 6.9, 6.10, 6.11 or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and a
Bank and as to any default under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure such default within
ten (10) days after Borrower receives notice thereof or any officer of Borrower
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure
period);
8.3 Material Adverse Change. If in a Bank's reasonable
judgement there is a material impairment of the prospect of repayment of any
portion of the Obligations;
8.4 Attachment. If any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or
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levy has not been removed, discharged or rescinded within thirty (30) days, or
if Borrower is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs, or
if a judgment or other claim becomes a lien or encumbrance upon any material
portion of Borrower's assets, or if a notice of lien, levy, or assessment is
filed of record with respect to any of Borrower's assets by the United States
Government or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within twenty (20) days after Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith
contest by Borrower (provided that no Advances will be required to be made
during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of Five
Hundred Thousand Dollars ($500,000) or that could have a Material Adverse
Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the
payment of money in an amount, individually or in the aggregate, of at least
Five Hundred Thousand Dollars ($500,000) shall be rendered against Borrower and
shall remain unsatisfied and unstayed for a period of ten (10) days (provided
that no Advances will be made prior to the satisfaction or stay of such
judgment); or
8.9 Misrepresentations. If any material
misrepresentation or material misstatement exists now or hereafter in any
warranty or representation set forth herein or in any certificate delivered to
Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to
enter into this Agreement or any other Loan Document.
9. BANKS RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during
the continuance of an Event of Default, Bank may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other
agreement between Borrower and Bank; and
(c) Demand that Borrower (i) deposit cash with
Bank in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be
paid or payable over the remaining term of the Letters of Credit;
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(d) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to Borrower set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank.
9.2 Power of Attorney. Effective only upon the
occurrence and during the continuance of an Event of Default, Borrower hereby
irrevocably appoints Bank (and any of Bank's designated officers, or employees)
as Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) make, settle, and adjust all claims under and
decisions with respect to Borrower's policies of insurance; and (e) settle and
adjust disputes and claims respecting the Accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable.
The appointment of Bank as Borrower's attorney in fact, and each and every one
of Bank's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully repaid and Bank's obligation to
provide Advances hereunder is terminated.
9.3 Bank Expenses. If Borrower fails to pay any amounts
or furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then a Bank may do any or all of
the following: (a) make a payment of the same or any parts thereof; (b) set up
such reserves under the Revolving Facility as Banks deem necessary to protect
Banks from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by a Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided. Any payments made by a Bank shall not constitute an
agreement by a Bank to make similar payments in the future or a waiver by a
Bank of any Event of Default under this Agreement.
9.4 Remedies Cumulative. Banks' rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. A Bank shall have all other rights and remedies not inconsistent
herewith as provided under applicable law. No exercise by a Bank of one right
or remedy shall be deemed an election, and no waiver by a Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by a
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
a Bank shall be effective unless made in a written document signed on behalf of
a Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.5 Demand; Protest. Subject to any requirement under
other sections of this Agreement, Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by a Bank on which Borrower may
in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight
25
<PAGE> 29
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to a Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Intevac, Inc.
3550 Bassett Street
Santa Clara, CA 95054
Attn: Chief Financial Officer
FAX: (408) 727-5739
If to Servicing Agent Silicon Valley Bank
or SVB 3003 Tasman Drive
Santa Clara, CA 95054
Attn: Tom Vertin
FAX: (408) 748-9478
If to BofH: Bank of Hawaii
111 South King Street
Honolulu, HI 96813
Attn: Bruce Helberg
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard
to principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. INTERCREDITOR PROVISIONS
12.1 Proportionate Interests. Except as otherwise
provided in this Agreement, the rights, interests, and obligations of each Bank
under this Agreement and the Loan Documents at any time shall be shared in the
ratio of (a) the maximum amount the Bank has committed to advance as set forth
on the signature page signed by the Bank to (b) the Committed Line. Any
reference in this Agreement or the Loan Documents to an allocation between or
sharing by the Banks of any right, interest, or duty "ratably,"
"proportionally," "pro rata," or in similar terms shall refer to this ratio.
No Bank is obligated to advance any funds in lieu of or for the account of the
other Bank if the latter Bank fails to make such Advance.
12.2 Designation of Service Agent. To facilitate the
administration of this Agreement, SVB shall act as "Servicing Agent" for itself
and BofH. Servicing Agent shall have only such duties as are expressly set
forth in this Agreement, or as otherwise agreed in writing by the
26
<PAGE> 30
Banks. Servicing Agent shall be deemed to act on behalf of both Banks whenever
Servicing Agent acts under this Agreement.
12.3 Resignation. Servicing Agent may resign as Servicing
Agent, upon thirty (30) day's written notice to the other Banks and to Borrower
and appointment of a successor Servicing Agent. Upon receipt of notice of
resignation, the Banks shall appoint a successor Servicing Agent. The
resigning Servicing Agent shall cooperate fully in delivering to the successor
Servicing Agent the Loan Documents and copies of all records relating to the
Advances and payments made hereunder that the successor Servicing Agent
reasonably requests.
12.4 Servicing Agent as Bank. SVB shall have the same
rights and powers under this Agreement as any other Bank and may exercise the
same as though it were not Servicing Agent. The term "Banks" includes
Servicing Agent in Servicing Agent's individual capacity. Servicing Agent and
its Subsidiaries and Affiliates may accept deposits from, lend money to, act as
agent or trustee for other lenders to, and generally engage in any kind of
banking, trust, or other business with, any Borrower or any Subsidiary or
Affiliates as if Servicing Agent were not Servicing Agent.
12.5 No Agency. EXCEPT AS SPECIFIED HEREIN, NEITHER BANK
IS AN AGENT OF THE OTHER. NEITHER BANK HAS ANY AUTHORITY TO ACT OR FAIL TO ACT
FOR THE OTHER. THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO BANK
SHALL BE LIABLE FOR THE FAILURE OF ANY OTHER BANK TO PERFORM ITS OBLIGATIONS
HEREUNDER.
12.6 No Reliance. The provisions of this Article 12 are
solely for the benefit of Banks in specifying their rights and obligations with
respect to each other, and not for the benefit of any Borrower or its assigns
or successors.
13. GENERAL PROVISIONS
13.1 Successors and Assigns.
(a) This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without a Bank's prior written consent,
which consent may be granted or withheld in such Bank's sole discretion.
Subject to the terms of any agreement between Banks, a Bank shall have the
right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participations in all or any part of, or any interest in
such Bank's obligations, rights and benefits hereunder, subject to the
provisions of this Section 13.1.
(b) A Bank may sell, negotiate or grant
participations to other financial institutions in all or part of the
obligations of the Borrower outstanding under the Loan Documents, without
notice to or the approval of Borrower; provided that any such sale, negotiation
or participation shall be in compliance with the applicable federal and state
securities laws and the other requirements of this Section 13.1.
Notwithstanding the sale, negotiation or grant of participations, such Bank
shall remain solely responsible for the performance of its obligations under
this Agreement, and Borrower shall continue to deal solely and directly with
such Bank in connection with this Agreement and the other Loan Documents.
(c) The grant of a participation interest shall
be on such terms as a Bank determines are appropriate, provided only that (1)
the holder of such a participation interest shall not have any of the rights of
such Bank under this Agreement except, if the participation agreement so
provides, rights to demand the payment of costs of the type described in
Section 2.6, provided that the aggregate amount that the Borrower shall be
required to pay under Section 2.6 with respect to any ratable share of the
Committed Line or any Advance (including amounts paid to participants) shall
27
<PAGE> 31
not exceed the amount that Borrower would have had to pay if no participation
agreements had been entered into, and (2) the consent of the holder of such a
participation interest shall not be required for amendments or waivers of
provisions of the Loan Agreement other than those which (i) increase the amount
of the Committed Line, (ii) extend the term of this Agreement, (iii) decrease
the rate of interest or the amount of any fee or any other amount payable to a
Bank under this Agreement, (iv) reduce the principal amount payable under this
Agreement, or (v) extend the date fixed for the payment of principal or
interest or any other amount payable under this Agreement.
(d) A Bank may assign, from time to time, all or
any portion of the Committed Line to an Affiliate of such Bank or to The
Federal Reserve Bank or, subject to the prior written approval of Borrower
(which approval will not be unreasonably withheld), to any other financial
institution; provided, that (i) the amount of the Committed Line being assigned
pursuant to each such assignment shall in no event be less than $500,000 and
shall be an integral multiple of $250,000 and (ii) the parties to each such
assignment shall execute and deliver to Borrower an assignment agreement in a
form reasonably acceptable to each. Upon such execution and delivery, from and
after the effective date specified in such assignment agreement (x) the
assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such assignment
agreement, have the rights and obligations of a Bank hereunder and (y) Bank
shall, to the extent that rights and obligations hereunder have been assigned
by it pursuant to such assignment agreement, relinquish its rights and be
released from its obligations under this Agreement (other than pursuant to this
Section 13.1(d)), and, in the case of an assignment agreement covering all or
the remaining portion of Bank's rights and obligations under this Agreement,
Bank shall cease to be a party hereto. In the event of an assignment
hereunder, the parties agree to amend this Agreement to the extent necessary to
reflect the mechanical changes which are necessary to document such assignment.
Each party shall bear its own expenses (including without limitation attorneys'
fees and costs) with respect to such an amendment.
13.2 Indemnification. Borrower shall defend, indemnify
and hold harmless each Bank and its officers, employees, and agents against (a)
all obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by this Agreement,
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by a
Bank as a result of, or in any way arising out of, following, or consequential
to, transactions between such Bank and Borrower, whether under this Agreement
or otherwise, (including without limitation reasonable attorneys fees and
expenses), except for losses caused by such Bank's gross negligence or willful
misconduct.
13.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
13.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
13.5 Amendments in Writing, Integration. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
13.6 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
28
<PAGE> 32
13.7 Survival. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations (excluding Obligations under Section 2.6 and 13.2 to
the extent they remain inchoate at the time the outstanding payment Obligations
are paid in full) remain outstanding. The obligations of Borrower to indemnify
a Bank with respect to the expenses, damages, losses, costs and liabilities
described in Section 13.2 shall survive until all applicable statute of
limitations periods with respect to actions that may be brought against such
Bank have run.
13.8 Confidentiality. In handling any confidential
information each Bank shall exercise the same degree of care that it exercises
with respect to its own proprietary information of the same types to maintain
the confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Advances, provided that they
have entered into a comparable confidentiality agreement in favor of Borrower
and have delivered a copy to Borrower, (iii) as required by law, regulations,
rule or order, subpoena, judicial order or similar order (iv) as may be
required in connection with the examination, audit or similar investigation of
Bank and (v) as Bank may deem appropriate in the exercise of its remedies under
this Agreement. Confidential information hereunder shall not include
information that either: (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank
by a third party, provided Bank does not have actual knowledge that such third
party is prohibited from disclosing such information. Notwithstanding any
provision of this Agreement to the contrary, neither Borrower nor any of its
Subsidiaries will be required to disclose, permit the inspection, examination,
copying or making extracts of, or discussions of: any document, information or
other matter (i) prior to the occurrence of an Event of Default that
constitutes non-financial trade secrets or non-financial proprietary
information (provided that the terms of agreements that generate Accounts shall
not be deemed to be "non-financial trade secrets or non-financial proprietary
information"), or (ii) in respect to which disclosure to Bank (or designated
representative) is then prohibited by (a) law, or (b) an agreement binding upon
Borrower or any Subsidiary that was not entered into by Borrower or such
Subsidiary for the primary purpose of concealing information from Bank.
29
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
INTEVAC, INC.
By: /SIG/
-------------------------------------
Title: CFO
-------------------------------------
SILICON VALLEY BANK
By: /SIG/
-------------------------------------
Title: SVP
-------------------------------------
BANK OF HAWAII
By: /SIG/
-------------------------------------
Title: Corporate Banking Officer
-------------------------------------
30
<PAGE> 34
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired;
(d) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above
and all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not include
trademarks, servicemarks, trade styles, trade names, patents, patent
applications, leases, license agreements, franchise agreements, blueprints,
drawings, purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, copyright rights,
copyright applications, copyright registrations and like protections in each
work of authorship and derivative work thereof, whether published or
unpublished, now owned or hereafter acquired; all trade secret rights,
including all rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing.
31
<PAGE> 35
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M. PACIFIC TIME
TO: CENTRAL CLIENT SERVICE DIVISION DATE:______________________________
FAX#: (408) 496-2426 TIME: ______________________________
FROM:_________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:_________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:__________________________________________________
PHONE NUMBER:__________________________________________________________
FROM ACCOUNT #___________________ TO ACCOUNT #____________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $___________________________________
PRINCIPAL PAYMENT (ONLY) $___________________________________
INTEREST PAYMENT (ONLY) $___________________________________
PRINCIPAL AND INTEREST (PAYMENT) $___________________________________
OTHER INSTRUCTIONS:___________________________________________________
_______________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Loan
Payment/Advance Form; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment
transfer/loan advance on the advance designated account and is known
to me.
______________________________ ___________________________
Authorized Requester Phone #
______________________________ ___________________________
Received By (Bank) Phone #
______________________________________________
Authorized Signature (Bank)
32
<PAGE> 36
EXHIBIT C-1
LIBOR RATE ADVANCE REQUEST FORM
The undersigned hereby certifies as follows:
I, ______________ , am the duly elected and acting__________________
of Intevac, Inc. ("Borrower").
This certificate is delivered to Silicon Valley Bank, as Servicing
Agent, pursuant to Section 2 of that certain Loan Agreement by and between
Borrower and Banks (the "Agreement"). The terms used in this LIBOR Rate
Advance Request Form that are defined in the Agreement have the same meaning
herein as ascribed to them therein.
Borrower hereby requests a LIBOR Rate Advance as follows:
(a) The Advance is to be a Receivables Advance/Inventory Advance
[strike one].
(b) The date on which the Advance is to be made is __________,
19_____.
(c) The amount of the Advance is to be_______________($__________),
in the form of a LIBOR Rate Advance for an Interest Period of__________months.
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Advance Request Form is executed
by the undersigned as of this ____________ day of_____________________,19____.
INTEVAC, INC.
By:____________________________________
Title:_________________________________
For Internal Bank Use Only
___________________________________________________________________________
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
___________________________________________________________________________
____%
33
<PAGE> 37
EXHIBIT C-2
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I,_______________ am the duly elected and acting________________ of
Intevac, Inc. ("Borrower").
This certificate is delivered to Silicon Valley Bank, as Servicing
Agent, pursuant to Section 2 of that certain Loan Agreement by and between
Borrower and Banks (the "Agreement"). The terms used in this LIBOR Rate
Conversion/Continuation Certificate that are defined in the Agreement have the
same meaning herein as ascribed to them therein.
Borrower hereby requests on________,19______a LIBOR Rate Advance
(the "Advance") as follows:
(a) - (i) A rate conversion of an existing Prime Rate
Advance from a Prime Rate Advance to a LIBOR
Rate Advance; or
- (ii) A continuation of an existing LIBOR Rate
Advance as a LIBOR Rate Advance.
[Check (i) or (ii) above]
(b) The date on which the Advance is to be made is________________,
19_____.
(c) The amount of the Advance is to be_________($______), for an
Interest Period of ___________ month(s).
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation
Certificate is executed by the undersigned as of this______day of___________
___,19___.
INTEVAC, INC.
By:_________________________________
Title:______________________________
For Internal Bank Me Only
--------------------------------------------------------------------------
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
--------------------------------------------------------------------------
____%
34
<PAGE> 38
EXHIBIT D
BORROWING BASE CERTIFICATE
- -------------------------------------------------------------------------------
Borrower: Intevac, Inc.
Commitment Amount: $20,000,000
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1 . Gross Accounts Receivable as of $_________
2 . Additions (please explain on reverse) $_________
3 . TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due (Distributors over 60) $____________
5. Balance of 50% over 90 day accounts $____________
6. Concentration Limits $____________
7. Foreign Accounts $____________
8. Governmental Accounts $____________
9. Contra Accounts $____________
10. Promotion or Demo Accounts $____________
11. Intercompany/Employee Accounts $____________
12. Other (please explain on reverse) $____________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____________
14. Eligible Accounts (#3 minus #13) $__________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $__________
BALANCES
16. Maximum Loan Amount $20,000,000
17. Total Funds Available (Lesser of #16 or #15) $__________
18. Present balance owing on Line of Credit $__________
19. Outstanding under Sublimits $__________
(Letters of Credit and Foreign Exchange Contracts) $__________
20. RESERVE POSITION (#17 minus #18 minus #19) $__________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete
and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations and warranties set forth in the
Loan and Security Agreement among the undersigned, Silicon Valley Bank and Bank
of Hawaii.
COMMENTS:
BANK USE ONLY
Rec'd By:__________________
Auth. Signer
INTEVAC INC. Date:______________________
Verified:__________________
By:__________________________ Auth. Signer
Authorized Signer
Date:______________________
______________________
35
<PAGE> 39
EXHIBIT D-1
INVENTORY BORROWING BASE CERTIFICATE
- -------------------------------------------------------------------------------
Borrower: Intevac, Inc.
- -------------------------------------------------------------------------------
INVENTORY
1. TOTAL INVENTORY BOOK VALUE $__________
2. LOAN VALUE OF INVENTORY (25% of #1) $__________
BALANCES
3. Maximum Loan Amount $20,000,000
4. Maximum Inventory Loan Amount (Lesser
of #2 or $6,000,000) $__________
5. Outstanding Advances plus Sublimits $__________
6. Maximum Inventory Advances (42% of #5) $__________
7. Outstanding Receivables Advances $__________
8. Outstanding Inventory Advances $__________
9. RESERVE POSITION (Lowest of: #3
minus #5; #4 minus #8; or #6) $__________
The undersigned represents and warrants that foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement among the undersigned, Silicon Valley Bank and Bank of
Hawaii.
COMMENTS:
BANK USE ONLY
Rec'd By:__________________
Auth. Signer
INTEVAC, INC. Date:______________________
Verified:__________________
By:__________________________ Auth. Signer
Authorized Signer
Date:______________________
______________________
36
<PAGE> 40
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK, BANK OF HAWAII
FROM: INTEVAC, INC.
The undersigned authorized officer of Intevac, Inc. hereby certifies
that in accordance with the terms and conditions of the Loan Agreement between
Borrower and Banks (the "Agreement"), (i) Borrower is in complete compliance
for the period ending_____________________with all required covenants except as
noted below and (ii) all representations and warranties of Borrower stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P agings, BBC Monthly within 20 days(1) Yes No
A/R Audit Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Quarterly Basis:
Minimum Quick Ratio(2) 0.6:10/.75:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $19,000,000/ $_______ Yes No
$22,000,000
Maximum Debt(2)/Tangible
Net Worth 1.9:1.0/1.5:1.0 ______1.0 Yes No
Profitability: Quarterly $1.00(3) $________ Yes No
1. Weekly BBC and A/R agings within 5 days when Inventory Advances
outstanding
2. Excluding deferred revenues from customer advances
3. Borrower may suffer one quarterly loss.
COMMENTS REGARDING EXCEPTIONS: See Attached.
BANK USE ONLY
Received By:__________________
Authorized Signer
Sincerely, Date:_________________________
Verified:_____________________
__________________________ Authorized Signer
SIGNATURE
__________________________ Date:_________________________
TITLE
Compliance Status: Yes No
__________________________
DATE
37
<PAGE> 1
INTEVAC, INC. EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 28, Sep. 30, Sep. 28, Sep. 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares used in Calculation of Net Income Per Share:
Average common shares outstanding ................... 12,314 2,905 12,273 1,798
Net effect of dilutive stock options ................ 642 115 585 122
Shares related to SAB Nos. 55, 64 and 83:
Stock options ................................... -- 217 -- 217
Ordinary shares issued .......................... -- 579 -- 579
Series A convertible preferred shares as-if-converted -- 6,944 -- 7,812
------- ------- ------- -------
12,956 10,760 12,858 10,528
======= ======= ======= =======
Income (loss) from continuing operations ................. $ 2,799 $ 1,730 $ 1,471 $ 3,834
Net income (loss) ........................................ $ 2,799 $ 1,730 $ 1,471 $ 5,169
Income (loss) per share from continuing operations ....... $ 0.22 $ 0.16 $ 0.11 $ 0.36
Net income (loss) per share .............................. $ 0.22 $ 0.16 $ 0.11 $ 0.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALABCE SHEET AT SEPTEMBER 28, 1996 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE NINE MONTHS ENDED
SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 1,523
<SECURITIES> 0
<RECEIVABLES> 8,770
<ALLOWANCES> 813
<INVENTORY> 32,041
<CURRENT-ASSETS> 45,948
<PP&E> 8,465
<DEPRECIATION> 2,701
<TOTAL-ASSETS> 62,068
<CURRENT-LIABILITIES> 31,352
<BONDS> 730
0
0
<COMMON> 15,664
<OTHER-SE> 13,487
<TOTAL-LIABILITY-AND-EQUITY> 62,068
<SALES> 59,964
<TOTAL-REVENUES> 59,964
<CGS> 37,474
<TOTAL-COSTS> 37,474
<OTHER-EXPENSES> 17,250
<LOSS-PROVISION> 456
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 5,761
<INCOME-TAX> 4,290
<INCOME-CONTINUING> 1,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,471
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
