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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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: 000-24647
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TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0328533
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [_] Yes [X] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 16,405,571 at November 6, 1998
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the "safe harbor" created
by those sections. The forward-looking statements include, but are not limited
to: statements related to industry trends and future growth in the markets for
cable modem systems; Terayon Communication Systems, Inc.'s (the "Company's")
strategies for reducing the cost of its products; the Company's product
development efforts; the effect of GAAP accounting pronouncements on the
Company's recognition of revenues; the Company's future research and
development; business trends; and, future quarter profitability. Discussions
containing such forward-looking statements may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in such forward-
looking statements. The Company disclaims any obligation to update these
forward-looking statements as a result of subsequent events. The business risks
on pages 15 through 17, among other things, should be considered in evaluating
the Company's prospects and future financial performance.
2
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TERAYON COMMUNICATION SYSTEMS, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1998
and December 31, 1997....................................... 4
Condensed Consolidated Statements of Operations -- Three and
Nine Months Ended September 30, 1998 and 1997............... 5
Condensed Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998 and 1997........................... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................. 17
Item 2. Changes in Securities and Use of Proceeds..................... 17
Item 3. Defaults Upon Senior Securities............................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
Signature..................................................... 18
3
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $29,636 $1,569
Short-term investements 2,948 418
Accounts receivable, less allowance for doubtful
accounts of $464 in 1998 and $20 in 1997 1,629 574
Accounts receivable from related parties 3,057 362
Inventory 5,833 1,322
Prepaid expenses 1,052 409
Other current assets 798 281
--------- ---------
Total current assets 44,953 4,935
--------- ---------
Property and equipment, net 3,349 3,615
Other assets 228 228
--------- ---------
Total assets $48,530 $8,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities
Accounts payable $9,875 $2,232
Accrued payroll and related expenses 1,717 1,052
Other accrued liabilities 3,642 1,621
Advance from related party - 2,000
Current portion of long-term debt and capital lease obligations - 2,877
--------- ---------
Total current liabilities 15,234 9,782
--------- ---------
Non-current liabilities 130 170
Redeemable common stock, $.001 par value - 13
Redeemable common stockholder's note receivable - (13)
--------- ---------
Total redeemable common stock - -
Stockholders' equity (net capital deficiency)
Preferred stock, $.001 par value - -
Convertible preferred stock, $.001 par value - 35,807
Common Stock, $.001 par value 16 458
Additional paid in capital 113,907 -
Accumulated deficit (78,906) (37,163)
Deferred compensation (1,829) (216)
Notes receivable-stockholders (22) (60)
--------- ---------
Total stockholders' equity (net capital deficiency) 33,166 (1,174)
--------- ---------
Total liabilities and stockholders' equity (net capital deficiency) $48,530 $8,778
========= =========
</TABLE>
See accompanying notes
4
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TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product revenues $5,853 $578 $10,131 $671
Related party product revenues 3,547 84 8,645 84
--------- --------- --------- ---------
Total revenues 9,400 662 18,776 755
--------- --------- --------- ---------
COST OF GOODS SOLD:
Cost of product revenues 7,327 1,638 14,196 2,120
Cost of related party product revenues 3,179 123 7,827 123
--------- --------- --------- ---------
Total cost of goods sold 10,506 1,761 22,023 2,243
--------- --------- --------- ---------
GROSS LOSS (1,106) (1,099) (3,247) (1,488)
OPERATING EXPENSES:
Research and development 2,779 2,695 7,702 8,581
Sales and marketing 1,846 1,192 4,815 2,715
General and administrative 813 610 2,095 1,715
--------- --------- --------- ---------
Total operating expenses 5,438 4,497 14,612 13,011
--------- --------- --------- ---------
Loss from operations (6,544) (5,596) (17,859) (14,499)
Interest income 235 75 381 305
Interest expense (177) (68) (355) (175)
Net loss (6,486) (5,589) (17,833) (14,369)
Series F convertible preferred stock dividend - - 23,910 -
--------- --------- --------- ---------
Net loss applicable to common stockholders ($6,486) ($5,589) ($41,743) ($14,369)
========= ========= ========= =========
Historical basic and diluted net loss per share
applicable to common stockholders ($0.63) ($1.29) ($6.39) ($3.39)
Shares used in computing historical basic and
diluted net loss per share applicable to common
stockholders 10,306 4,341 6,530 4,235
========= ========= ========= =========
Pro forma basic and diluted net loss per share
applicable to common stockholders ($0.44) ($0.51) ($3.21) ($1.35)
Shares used in computing pro forma basic and
diluted net loss per share applicable to common
stockholders 14,631 10,912 12,991 10,640
========= ========= ========= =========
</TABLE>
See accompanying notes
5
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES ($15,042) ($12,520)
INVESTING ACTIVITIES:
Purchase of short-term investments (2,948) (10,594)
Proceeds from sales and maturities of short term investments 418 9,254
Purchases of property and equipment (1,221) (2,507)
---------- ----------
Net cash used in investing activities (3,751) (3,847)
FINANCING ACTIVITIES:
Principal payments on capital leases (54) (111)
Principal payments on long-term debt (2,812) (718)
Advance from related party 2,000
Exercise of option to purchase common stock 635 105
Proceeds from long-term debt - 1,328
Proceeds from issuance of preferred stock 6,387 9,818
Proceeds from issuance of redeemable preferred stock 7,500 -
Principal payments on common stockholder notes receivable 60 -
Proceeds from issuance of common stock 35,144 -
---------- ----------
Net cash provided by financing activities 46,860 12,422
---------- ----------
Net increase (decrease) in cash and cash equivalents 28,067 (3,945)
Cash and cash equivalents at beginning of period 1,569 8,356
---------- ----------
Cash and cash equivalents at end of period $29,636 $4,411
========== ==========
</TABLE>
See accompanying notes
6
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TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with 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 complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial statements at September 30, 1998 and for the three
and nine month periods ended September 30, 1998 and 1997 have been included.
The condensed consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries, Terayon Communication Systems
Europe and Terayon do Brasil. The minority interest in net losses of Terayon
Communication Systems Europe and Terayon do Brasil were not significant for all
periods presented. All material intercompany balances and transactions have
been eliminated.
Results for the three and nine months ended September 30, 1998 are not
necessarily indicative of results for the entire fiscal year or future periods.
These financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's
Registration Statement on Form S-1 (No. 333-56911), including the related
prospectus dated August 17, 1998 as filed with the SEC. The accompanying
balance sheet at December 31,1997 is derived from audited financial statements
at that date.
Certain prior year amounts on the condensed consolidated financial statements
have been reclassified to conform to the 1998 presentation.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months but less
than a year are classified as short-term investments. At September 30, 1998,
all of the Company's total cash equivalents and short-term investment were
classified as available-for-sale and were obligations issued by U.S. government
agencies and U.S. corporations, maturing within one year.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market. The
components of inventory are as follows (in thousands):
September 30, December 31,
1998 1997
---------- ----------
Inventory:
Finished goods.............. $4,331 $ 163
Work-in-process............. 646 366
Raw materials............... 856 793
---------- ----------
$5,833 $1,322
========== ==========
7
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TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
Net Loss Per Share
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrants,
restricted stock and preferred stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
Pro forma net loss per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
preferred stock that automatically converted upon the closing of the Company's
initial public offering (using the as-if-converted method).
A reconciliation of shares used in the calculation of historical and
pro forma basic and diluted net loss per share follows (in thousands, except per
share date):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- --------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss........................ ($6,486) ($5,589) ($17,833) ($14,369)
Series F convertible preferred
stock dividend (Note 2)......... - - (23,910) -
------------- ------------- ------------- -------------
Net loss applicable to common
stockholders..................... ($6,486) ($5,589) ($41,743) ($14,369)
============= ============= ============= =============
Shares used in computing
historical basic and diluted net
loss applicable to common
stockholders..................... 10,306 4,341 6,530 4,235
============= ============= ============= =============
Historical basic and diluted net
loss per share applicable to
common stockholders.............. ($0.63) ($1.29) ($6.39) ($3.39)
============= ============= ============= =============
Shares used in computing
historical basic and diluted net
loss per share applicable to
common stockholders.............. 10,306 4,341 6,530 4,235
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
convertible preferred stock
outstanding applicable to common
stockholders..................... 4,325 6,571 6,461 6,405
------------- ------------- ------------- -------------
Shares used in computing pro
forma basic and diluted net loss
per share applicable to common
stockholders..................... 14,631 10,912 12,991 10,640
============= ============= ============= =============
Pro forma basic and diluted net
loss per share applicable to
common stockholders.............. ($0.44) ($0.51) ($3.21) ($1.35)
============= ============= ============= =============
</TABLE>
8
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997 and has been adopted by the Company in 1998. The Company's comprehensive
net loss was the same as its net loss for the three and nine months ended
September 30, 1998 and 1997.
In addition, during June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" (FAS 131). FAS 131 replaces FAS 14,
"Financial Reporting for Segments of a Business Enterprise" and changes the way
public companies report segment information. FAS 131 is effective for fiscal
years beginning after December 15, 1997 and will be adopted by the Company for
the year ended December 31, 1998.
2. STOCKHOLDERS' EQUITY
Series F Convertible Preferred Stock Dividend
Under EITF No. 96-13, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock", the Company recorded a
dividend of $23.9 million in the nine months ended September 30, 1998,
representing the fair value of a warrant to purchase 3,000,000 shares of the
Company's common stock issued to Shaw Communications, Inc. (the "Shaw Warrant").
The Shaw Warrant was issued in connection with the sale of $5.0 million of
convertible preferred stock to Shaw (the "Shaw Financing"). The Company's
accounting conclusion with respect to the Shaw Warrant is based on management's
conclusion that the sale of preferred stock was a financing transaction and not
the issuance of equity instruments in exchange for goods or services.
Delaware Reincorporation
In June 1998, the Company's Board of Directors authorized the reincorporation
of the Company in Delaware and an increase in the authorized number of shares of
common stock from 20,000,000 shares to 35,000,000 shares. The Company's
shareholders approved the reincorporation in July 1998 and the reincorporation
was effective as of July 8, 1998. The par value of the preferred and common
stock is $.001 per share. The reincorporation resulted in the transfer of
$40,116,000 from convertible preferred stock and $30,401,000 from common stock
to additional paid in capital.
Initial Public Offering
In August 1998, the Company completed its initial public offering and
issued 3,000,000 shares of its Common Stock to the public at a price of $13.00
per share. The Company received net proceeds of approximately $35.1 million in
cash. Upon the closing of the offering, all of the outstanding shares of
convertible preferred stock and redeemable convertible preferred stock
outstanding were converted into an aggregate of 8,360,635 shares of common
stock.
9
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
3. DEBT AGREEMENT
In August 1998, the Company entered into an agreement with a bank to
provide a line of credit in an amount up to $5.0 million based on a combination
of eligible accounts receivable and customer purchase orders. The agreement
provides for interest at a rate equal to prime rate plus 2% per annum and
matures two years from the date of the agreement. At September 30, 1998, there
were no outstanding borrowings under this agreement.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements as a result of certain
factors included in this report.
OVERVIEW
Terayon develops, markets and sells cable modem systems based upon its S-CDMA
technology. Since its inception in January 1993, the Company has focused on the
development of its S-CDMA technology, as well as certain other core
technologies, to enable broadband transmission of data over cable networks. The
Company commenced the specifications and design of its first ASIC in October
1994 and produced the first version of this ASIC in June 1996. The Company
concurrently developed an end-to-end broadband access system, the TeraComm
system, around the ASIC. During late 1996 and through 1997, the Company
commenced limited field trials of the TeraComm system with several cable
operators. In the first quarter of 1998, the Company commenced volume shipments
to a small number of cable operators. The Company recognized revenues of $9.4
million for the three months ended September 30, 1998 and $18.8 million for the
nine months ended September 30, 1998. The Company generally recognizes product
revenues upon shipment of products to customers. Future agreements with certain
distribution partners may contain price protection provisions and certain return
rights. The Company's existing agreements currently do not contain such
provisions.
The Company sells its products both in the United States and internationally
and markets its products primarily to cable operators and distributors. To date,
a small number of customers have accounted for all of the Company's sales. In
the three months ended September 30,1998, sales to Cablevision Systems, Shaw
Communications and Sumitomo Corporation represented approximately 28%, 24% and
14%, respectively, of the Company's total revenues. In the first nine months of
1998, sales to Shaw, Cablevision and Sumitomo represented approximately 32%, 19%
and 14%, respectively, of the Company's total revenues. The Company expects that
sales to a limited number of customers will continue to account for a
substantial portion of the Company's sales for the foreseeable future. If orders
from significant customers are delayed, cancelled or otherwise fail to occur in
any particular period, or if any significant customer delays payment or fails to
pay, the Company could experience significant operating losses in such period.
As a result, the Company expects to experience significant fluctuations in its
operating results on a quarterly and annual basis.
The market for broadband access products and services is intensely competitive
and is characterized by rapid technological change, new product development and
product obsolescence, evolving industry standards and significant price erosion
of products over time. The Company has experienced and expects to continue to
experience downward pressure on its unit average selling price (ASP). The
Company has had negative gross margins since inception. While the Company has
initiated cost reduction programs to offset pricing pressures on its products,
there can be no assurance that these cost reduction efforts will continue to
keep pace with competitive price pressures or lead to improved gross margins. If
the Company is unable to reduce costs efficiently, its gross margin and
profitability will continue to be adversely affected. The Company's gross margin
also is affected by the sales mix of TeraLink 1000 Master Controllers, TeraLink
Gateways and TeraPro cable modems, as the TeraPro modems have significantly
lower margins than the TeraLink 1000 Master Controllers and TeraLink Gateway
headend products. As a result, the Company's gross margin is affected by the
maturity of TeraComm deployments in any quarter, because new deployments of the
TeraComm system involve the sale of headend equipment (which has higher margins)
and generally involve smaller quantities of product, which typically are sold at
higher margins than the larger volume sales of product associated with more
mature deployments of the TeraComm system. For the foreseeable future, the
Company expects to achieve negative or nominal margins on TeraPro cable modems
11
<PAGE>
and expects that sales of TeraPro cable modems will continue to constitute a
significant portion of its revenues. As a result of these factors, the Company's
gross margins and operating results are likely to be adversely affected in the
near term. The Company's components are sold together as part of an entire
system, and the Company accordingly does not report revenue derived from each
component.
The Company's ability to generate revenues also depends on guaranteeing the
availability of supplies from its sole sources, increasing the manufacturing and
testing capacity of its products by a contractor while ensuring product quality,
and continuing deployment of its products by existing and new customers. In the
first quarter of 1998, the Company transitioned its manufacturing operations
from CMC California, Inc. ("CMC") to Solectron Corporation ("Solectron"). The
Company recorded a charge of $1.3 million in the first quarter of 1998 relating
to the write-off of inventory as a result of transitioning manufacturing
operations to Solectron. A portion of the charge consisted of $750,000 of raw
material components that were deemed obsolete due to a design change in the
Company's bill of materials during the quarter ended March 31, 1998. The charge
also consisted of a $550,000 write down of parts repurchased from CMC and then
resold to Solectron, as Solectron could purchase the related parts at a lower
cost than the Company had valued the inventory. Therefore, the Company wrote
down the inventory to the lower of cost or market as part of selling the
inventory to Solectron. The Company currently tests and assembles the TeraLink
1000 Master Controller and the TeraLink Gateway headend equipment at its Santa
Clara facility. Finished TeraPro cable modems are drop shipped by Solectron to
Terayon customers.
The Company sustained net losses of $6.5 million and $41.7 million for the
three and nine months ended September 30, 1998, respectively. As a result, the
Company had an accumulated deficit of $78.9 million as of September 30, 1998.
The Company's operating expenses are based in part on its expectations of future
sales, and the Company expects that a significant portion of its expenses will
be committed in advance of sales. As a result, net income may be adversely
affected by a reduction in sales if the Company is unable to adjust expenses
quickly in response to any decrease in sales. The Company expects to increase
significantly expenditures in technical development, sales and marketing and
manufacturing as it engages in activities related to product enhancement, cost
reduction and commercialization of new products. Additionally, the Company
expects to increase capital expenditures and other operating expenses in order
to support and expand the Company's operations. The Company anticipates that it
will spend approximately $4.0 million on capital expenditures and approximately
$12.0 million on research and development during the twelve months ended
September 30, 1999. Anticipated capital expenditures consist of purchases of
additional test equipment to support higher levels of production, a customer
demonstration and training center, computer hardware, software and equipment for
newly hired employees and enhancements to the Company's operating systems to
support its activities as a public company.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 and 1998
Revenues. The Company's revenues increased from $662,000 for the three months
ended September 30, 1997 to $9.4 million for the same period in 1998 and from
$755,000 for the nine months ended September 30, 1997 to $18.8 million for the
nine months ended September 30, 1998. Revenues consist primarily of sales of
cable modems and headend equipment to new and existing customers. The Company
did not commence selling its products until June 1997.
Cost of Goods Sold. Cost of goods sold consists of direct product costs and
the cost of the Company's manufacturing operations group, which cost consists of
assembly, test and quality assurance for products, warranty costs and associated
costs of personnel and equipment. For the three months ended September 30, 1997,
the Company incurred $1.8 million in cost of goods sold compared to $10.5
million for the three months ended September 30, 1998. For the nine months ended
September 30, 1997, the Company incurred $2.2 million in cost of goods sold,
which included the cost of the manufacturing group for the entire period as it
readied the Company's products for commercialization, compared to $22.0 million
for the nine months ended September 30, 1998, which included the costs of the
manufacturing
12
<PAGE>
group and a charge of $1.3 million relating to the write-off of
obsolete inventory and the transition of manufacturing operations to Solectron.
Gross Loss. The Company incurred a gross loss of $1.1 million for each of the
three months ended September 30, 1997 and 1998. Higher revenues in 1998 were
partially offset by a change in product mix towards a higher volume of lower
margin cable modems. The Company incurred a gross loss of $1.5 million for the
nine months ended September 30, 1997 due to costs associated with the Company's
manufacturing operations group. The Company incurred a gross loss of $3.2
million for the nine months ended September 30, 1998, primarily due an increased
mix of lower margin cable modems and a charge of $1.3 million relating to the
write-off of obsolete inventory and the transition of manufacturing operations
to Solectron.
In the third quarter of 1998, the Company completed manufacturing
qualification of a lower cost, single-board modem. The Company expects to
complete the transition to the cost-effective modem product in the fourth
quarter of 1998; however, the Company anticipates that decreases in the average
sales price of its cable modems will partially offset the benefits obtained from
the cost-reduced modem.
Research and Development. Research and development expenses consist primarily
of personnel costs, as well as design expenditures, equipment and supplies
required to develop and enhance the Company's products. Research and development
costs increased slightly from $2.7 million for the three months ended September
30, 1997 to $2.8 million for the three months ended September 30, 1998. Research
and development expenses decreased from $8.6 million for the nine months ended
September 30, 1997 to $7.7 million for the nine months ended September 30, 1998
as a result of timing of the Company's development projects. The Company intends
to increase investment in research and development programs in future periods
for the purpose of enhancing current products, reducing the cost of current
products and developing new products.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries for sales, marketing and support personnel and costs related to
tradeshows, consulting and travel. Sales and marketing expenses increased from
$1.2 million for the three months ended September 30, 1997 to $1.8 million for
the three months ended September 30, 1998 and from $2.7 million for the nine
months ended September 30, 1997 to $4.8 million for the nine months ended
September 30, 1998. The increase in sales and marketing expenses was primarily
due to increased payroll costs related to additional sales and support personnel
for commercial trials and deployment of the Company's products. The Company
expects sales and marketing expenses to increase in the future as the Company
expands its customer base.
General and Administrative. General and administrative expenses consist
primarily of salary and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General and
administrative expenses increased from $610,000 for the three months ended
September 30, 1997 to $813,000 for the three months ended September 30, 1998 and
from $1.7 million for the nine months ended September 30, 1997 to $2.1 million
for the nine months ended September 30, 1998. The increase was primarily a
result of the additional reporting requirements imposed on the Company as a
public company and increased infrastructure to support expanded activities of
the Company. The Company expects that general and administrative expenses will
continue to increase in the near term as a result of these factors.
Net Interest Income. Net interest income was $7,000 for the three months ended
September 30, 1997 compared to $58,000 for the three months ended September 30,
1998. The increase was due to higher cash balances resulting from the proceeds
of the Company's initial public offering completed in August 1998. Net interest
income was $130,000 for the nine months ended September 30, 1997 compared to
$26,000 for the nine months ended September 30, 1998. The decrease was primarily
a result of lower interest income on lower average cash balances and higher
interest expense on term debt in the nine months ended September 30, 1998.
Income Taxes. The Company has not generated net income to date and therefore
has not accrued any income taxes since its inception.
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Series F Convertible Preferred Stock Dividend. Under EITF No. 96-13,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock," the Company recorded a dividend of $23.9
million for the nine months ended September 30, 1998, representing the fair
value of a warrant to purchase 3,000,000 shares of the Company's common stock
issued to Shaw. See Note 2 of Notes to Condensed Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had approximately $29.6 million in cash and
cash equivalents, $2.9 million in short-term investments and a $5.0 million
revolving line of credit. On August 17, 1998, the Company completed an initial
public offering of 3,000,000 shares of common stock at a price of $13.00 per
share. The net proceeds to the Company from the offering were approximately
$35.1 million.
Cash used in operating activities in the first nine months of 1997 was $12.5
million compared to $15.0 million in the first nine months of 1998. Cash used in
investing activities was $3.8 million for first nine months of 1997 and 1998.
Investment activities consisted primarily of the purchase of hardware, software
and test equipment in 1997 and 1998 and the purchase of short-term investments
in 1998. Cash provided by financing activities was $12.4 million and $46.9
million for in the nine months ended September 30, 1997 and 1998, respectively.
Financing activities consisted primarily of proceeds from issuance of preferred
stock and advances from related parties in 1997 and proceeds from the issuance
of common stock and preferred stock in 1998.
As of September 30, 1998, the Company had approximately $11.4 million of
unconditional purchase obligations. The Company anticipates that it will pay
approximately $8.5 million of such obligations by December 31, 1998. The Company
intends to make these payments out of available working capital.
The Company believes that its cash balances will be sufficient to satisfy its
cash requirements for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
time to fund its operations and it may seek to raise such additional funds
through the sale of public or private equity or debt financing or from other
sources. The sale of additional equity or debt securities may result in
additional dilution to the Company's stockholders. There can be no assurance
that any additional financing will be available to the Company on acceptable
terms, or at all, when required by the Company.
YEAR 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000 Issue").
Computer programs that have such date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
The Company is heavily dependent upon the proper functioning of its own
computer or data-dependent systems. This includes, but is not limited to, its
systems in information, business, finance, operations, manufacturing and
service. Any failure or malfunctioning on the part of these or other systems
could adversely affect the Company in ways that are not currently known,
discernable, quantifiable or otherwise anticipated by the Company.
The Company recently formed an internal task force to evaluate those areas
of the Company that may be affected by the Year 2000 Issue. The task force will
devise a plan for the Company to become Year 2000 compliant in a timely manner
(the "Plan"). The Plan will include independent validation of the Company's
Year 2000 assessment procedures, initiating formal communications with all of
its significant suppliers, large customers and development partners to determine
the extent to which the Company is vulnerable to those third parties' failure to
remedy their own Year 2000 issues and the development of
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contingency plans to address situations that may result if the Company is unable
to achieve Year 2000 readiness of its critical operations. The Company
anticipates addressing the critical Year 2000 issues by mid-1999, prior to any
anticipated impacts on its operating systems. The Company expects that it may
address non-critical Year 2000 issues beyond the Year 2000.
To date, the Company has not incurred incremental material costs associated
with its efforts to become Year 2000 compliant, as the majority of the costs
have occurred as a result of normal upgrade procedures. Furthermore, the
Company believes that future costs associated with its Year 2000 compliance
efforts will not be material.
The Company currently has only limited information on the Year 2000 compliance
of its key suppliers and customers. The operations of the Company's key
suppliers and customers could be adversely affected in the event they do not
successfully and timely achieve Year 2000 compliance. The Company's business
and results of operations could experience material adverse effects if its key
suppliers were to experience Year 2000 issues that caused them to delay
manufacturing or shipment of key components to the Company. In addition, the
Company's results of operations could be materially adversely affected if any of
the Company's key customers encounter Year 2000 issues that cause them to delay
or cancel substantial purchase orders or delivery of the Company's product.
There can be no assurance that the Company will be able to develop a plan to
address the Year 2000 Issue in a timely manner or to upgrade any or all of its
major systems in accordance with such plan. In addition, there can be no
assurance that any such upgrades will effectively address the Year 2000 Issue.
If required upgrades are not completed timely or are not successful, the Company
may be unable to conduct its business or manufacture its products, which would
have a material impact on the operations of the Company. Furthermore, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company. The Company intends to, but
has not yet established a contingency plan detailing actions that will be taken
in the event that the assessment of the Year 2000 Issue is not successfully
completed on a timely basis.
CERTAIN BUSINESS RISKS
The Company has only been shipping products in volume since the first
quarter of 1998. Most commercial shipments of the Company's products through
December 1997 were in limited quantities to customers deploying cable modems in
pre-commercial trials. Accordingly, the Company has a very limited operating
history, which makes the prediction of future operating results difficult. The
Company has incurred significant losses since inception and the Company believes
that it will continue to experience net losses for the foreseeable future. In
addition, the Company has had negative gross margins since inception, and there
can be no assurance that any growth in revenues will result in positive gross
margins or operating profits. At September 30, 1998, the Company had an
accumulated deficit of $78.9 million
The Company's quarterly revenues will be difficult to predict due to a number
of factors and the Company expects to experience significant fluctuations in its
operating results on a quarterly and an annual basis for the foreseeable future.
Revenues will vary depending on the timing of orders and shipments. Orders by
the same customer can vary in size over time, depending on whether the Company's
products are intended for trial or commercial deployment purposes, and depending
on the geographic area covered by the customer's deployment. Customers that have
forecast deployment plans and product orders may delay orders for many customer-
specific reasons, such as changes in customer marketing plans, delays in
completing any infrastructure or billing system upgrades required to offer new
services, variations in capital spending budgets and delays in obtaining
regulatory approval for commercial deployment. Customers also may delay orders
for industry-wide reasons such as the adoption of new technologies by cable
operators, telephone or wireless telecommunications companies, or changes in
U.S. and international regulations. For example, the Company's product shipments
to date to a customer in Brazil have been significantly lower than anticipated
due to delays in certain regulatory approvals in Brazil. There can be no
assurance that similar delays will not occur in other countries in which the
Company is marketing or
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planning to market its products. Any such delays would have a material adverse
effect on the Company's operating results for a particular period. In addition,
cable operators in certain parts of Asia are required to obtain licenses prior
to deploying data services over cable, and delays in obtaining such licenses by
the Company's customers could have an adverse impact on the Company's operating
results for a particular period. Competitive factors may affect both Company
revenues and profitability. Customers may delay orders due to new product
announcements by the Company or its competitors. The Company's average selling
prices for its products may be lower than expected as a result of competitive
pricing pressures, the Company's promotional programs and customers who
negotiate price reductions in exchange for longer term purchase commitments. The
Company's expenses generally will vary from quarter to quarter depending on the
level of actual and anticipated business activities. Research and development
expenses will vary as the Company commences development of new products and as
development programs move to wafer fabrication, which results in higher
engineering expenses.
The timing and volume of customer orders are difficult to forecast because
cable operators require a long sales cycle before placing orders. In addition,
cable operators typically require delivery of products within 90 days.
Accordingly, the Company has a limited backlog of orders, and net sales for any
future quarter are difficult to predict. Supply, manufacturing or testing
constraints could result in delays in the delivery of the Company's products.
Further, sales generally are made pursuant to purchase orders, which can be
rescheduled, reduced or cancelled with little or no penalty. Any delay in the
product deployment schedule of one or more of the cable operators targeted by
the Company would have an adverse effect on the Company's operating results for
a particular period. In addition, due to the relatively large dollar size of the
Company's typical transaction, any delay in the closing of a transaction could
have a significant impact on the Company's operating results for a particular
period.
The Company has had limited experience selling its products to cable operators
and only a limited number of cable operators have purchased the Company's
products for commercial deployment. The market for the Company's products has
only recently begun to develop, is rapidly changing and is characterized by an
increasing number of competitors and competing technologies, as well as evolving
industry standards. The Company's future success, operating results and
financial condition will be substantially dependent upon whether cable modems
gain widespread commercial acceptance by cable operators and end users of
broadband access services. Because cable operators have only recently begun to
deploy broadband access services based on cable modem technology, the market for
services based on such technology has not yet developed and the Company cannot
accurately predict the future growth rate, if any, or the ultimate size of the
cable modem market. Critical issues concerning the use of cable modems,
including security, reliability, cost, ease of deployment and administration,
and Quality of Service, remain largely unresolved and may adversely affect the
Company's growth and the market acceptance of its products. The market for cable
modems may be affected by the development of other technologies that enable the
provisioning of broadband access services. The failure of broadband access
services based on cable modem technology to gain widespread commercial
acceptance by cable operators and end users of broadband access services would
have a material adverse effect on the Company's business, operating results and
financial condition.
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements, all of
which are outside the control of the Company. The Company believes that its
future success will depend upon its ability to enhance its existing products and
to develop and introduce new products that meet a wide range of evolving cable
operator and end-user needs and achieve market acceptance. There can be no
assurance that the Company's potential customers, specifically cable operators,
will not adopt alternative technologies or deploy alternative services that are
incompatible with the Company's products, since the Company's products currently
are not interoperable with other suppliers' products. The occurrence of either
of the foregoing events would have a material adverse affect on the Company's
business, operating results and financial condition.
The Company has had only limited experience manufacturing its products to
date, and there can be no assurance that the Company, Solectron or any other
manufacturer of the Company's products will be successful in increasing the
volume of its manufacturing efforts. The Company's limited operating history
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and the early stage of the cable modem market make it difficult for the Company
to accurately forecast demand for its products. The Company's inability to
accurately forecast the actual demand for its products could result in supply,
manufacturing or testing capacity constraints. Such constraints could result in
delays in the delivery of the Company's products or the loss of existing or
potential customers, either of which could have a material adverse effect on the
Company's business, operating results or financial condition. In addition, the
Company has unconditional purchase obligations of approximately $11.4 million as
of September 30, 1998, primarily to Solectron, to purchase minimum quantities of
materials and components used to manufacture the Company's products. If demand
for the Company's products is lower than anticipated, the fulfillment of these
obligations by the Company could adversely affect the Company's business,
operating results or financial conditions.
The Company will require substantial capital resources to continue to develop,
manufacture and market its products, to expand its product line and to fund its
future operations. The Company also may require additional capital resources to
enter into corporate partnerships, strategic alliances or joint ventures. There
can be no assurance that such financing will be available when needed, if at
all, or on terms favorable to the Company. Failure to generate or raise
sufficient funds may require the Company to delay or abandon some or all of its
planned future expansion or expenditure, which could have a material adverse
effect on the Company's business, operating results or financial condition.
Also inherent in the Company's business are additional risks, which include
but are not limited to: competition in the market for broadband access services;
the Company's ability to achieve cost reductions; the Company's dependence on
contract manufacturers and sole source suppliers; the Company's dependence on
cable operators; risks associated with the development of products, whether such
delays are within the control of the Company or not; uncertainties regarding
protection of intellectual property rights, including the potential for
trademark and patent infringement litigation; dependence on key personnel; and
risks associated with the Company's international business activities, which
account for a substantial portion of its total revenues.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
In August 1998, the Company issued 13,000 shares of Common Stock valued at
$13.00 per share to a former employee. The issuance and sale of such shares was
intended to be exempt from registration under the Securities Act of 1933 by
virtue of Section 4(2) thereof. The purchaser of such shares represented its
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends are affixed to the stock
certificate. The purchaser received adequate information about the Company.
(d) Use of Proceeds from Sales of Registered Securities. The Company's
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-
56911) was declared effective on August 17, 1998. The managing underwriters in
the public offering were BT Alex. Brown, Hambrecht & Quist, Lehman Brothers and
Salomon Smith Barney (the "Underwriters"). Pursuant to the Registration
Statement, the Company sold 3,000,000 shares of its Common Stock for an
aggregate offering price of $39,000,000.
In connection with the public offering, the Company incurred expenses of
approximately $3.9 million, of which approximately $2.7 million represented
underwriting discounts and commission and approximately $1.2 million represented
expenses related to the public offering. As of September 30, 1998, the Company
has invested the remainder of the net proceeds in short-term, interest bearing,
investment grade securities. The use of the proceeds from the public offering
does not represent a material change in the use of proceeds described in the
Company's Registration Statement.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company between March 17,
1999 and April 16, 1999 (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended.)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Loan and Security Agreement dated August 10, 1998 between
the Company and Silicon Valley Bank
10.2 Schedule to Loan and Security Agreement dated August 10, 1998
between the Company and Silicon Valley Bank
27.1 Financial Data Schedule for the 9 months ended September 30,
1997
27.2 Financial Data Schedule
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ RAY M. FRITZ Date: November 11, 1998
--------------------------------
Ray M. Fritz
Chief Financial Officer
(Principal Accounting and Financial Officer)
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SILICON VALLEY BANK EXHIBIT 10.1
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: TERAYON COMMUNICATION SYSTEMS, INC.
ADDRESS: 2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
DATE: AUGUST 10, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon.
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 LETTERS OF CREDIT. [Not Applicable]
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral"). Notwithstanding the foregoing provisions, the term "Collateral"
shall not include the following (the "Nonassignable Rights") any general
intangibles of Borrower consisting of licenses under which Borrower is a
licensee, to the extent that (i) such general intangibles are not assignable
or capable of being
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encumbered as a matter of law or under the terms of the license or other
agreement applicable thereto (but solely to the extent that any such
restriction shall be enforceable under applicable law), without the consent of
the licensor thereof and (ii) such consent has not been obtained; provided,
however, that, in all events, the foregoing grant of security interest shall
extend to, and the term "Collateral" shall include (A) any general intangible
which is a Receivable or a proceed of, or otherwise related to the enforcement
or collection of, any Receivable, or goods which are the subject of any
Receivable, (B) any and all proceeds of any general intangibles which are
otherwise excluded, and (C) upon obtaining the consent of any such licensor or
other applicable party's consent with respect to any such otherwise excluded
general intangibles, such general intangibles as well as any and all proceeds
thereof that might have theretofore been excluded from such grant of a
security interest and the term "Collateral". Borrower warrants that on the
date hereof there are no Nonassignable Rights, except as set forth on Exhibit
A hereto.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except
as enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement
or instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or
its property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under
a fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give Silicon at least 30
days prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on
the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all
claims of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral
and no such lease now prohibits, restrains, impairs or will prohibit, restrain
or impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has
an interest (whether as owner, mortgagee, beneficiary under a deed of trust,
lien or otherwise), Borrower shall, whenever requested by Silicon, use its
best efforts to cause such third party to execute and deliver to Silicon, in
form acceptable to Silicon, such waivers and subordinations as Silicon shall
specify, so as to ensure that Silicon's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any
lease of real property where any of the Collateral now or in the future may be
located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
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<PAGE>
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or
business of Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not and
will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to,
any such plan which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency. Borrower shall, at all times, utilize the services
of an outside payroll service providing for the automatic deposit of all
payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers on behalf of Borrower have the capacity to
contract. All sales and other transactions underlying or giving rise to each
Receivable shall fully comply with all applicable laws and governmental rules
and regulations. To the best of Borrower's knowledge, all signatures and
endorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their
terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day. Together with
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each such schedule and assignment, or later if requested by Silicon, Borrower
shall furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence
of delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial
balance in such form and at such intervals as Silicon shall request. In
addition, if necessary to perfect Silicon's security interest, or if an Event
of Default has occurred and is continuing, Borrower shall deliver to Silicon
the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as
received, with all necessary indorsements, all of which shall be with
recourse. Borrower shall also provide Silicon with copies of all credit memos
within two days after the date issued.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to
the Obligations in such order as Silicon shall determine and in the event the
monetary Obligations have been reduced to zero, Silicon shall remit any excess
to Borrower. Silicon may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Silicon may specify, pursuant to a blocked account
agreement in such form as Silicon may specify. Silicon or its designee may, at
any time, notify Account Debtors that the Receivables have been assigned to
Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence and during the continuance of an Event of Default, settle or adjust
disputes or claims directly with Account Debtors for amounts and upon terms
which Silicon considers advisable in its reasonable credit judgment and, in
all cases, Silicon shall credit Borrower's Loan account with only the net
amounts received by Silicon in payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence and during the continuance of any Event of Default,
Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii)
segregate all returned Inventory from all of Borrower's other property, (iii)
conspicuously label the returned Inventory as Silicon's property, and (iv)
immediately notify Silicon of the return of any Inventory, specifying the
reason for such return, the location and condition of the returned Inventory,
and on Silicon's request deliver such returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable.
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Nothing herein shall, however, relieve Silicon from liability for its own
gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$200,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for the sale of obsolete or unneeded Equipment
in the ordinary course of business; (v) store any Inventory or other Collateral
with any warehouseman or other third party; (vi) sell any Inventory on a sale-
or-return, guaranteed sale, consignment, or other contingent basis; (vii) make
any loans of any money or other assets except for loans to employees in the
ordinary course of business in an aggregate amount outstanding at any one time
not to exceed $200,000; (viii) incur any debts, outside the ordinary course
of business, which would have a material, adverse effect on Borrower or on the
prospect of repayment of the Obligations; (ix) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (x) pay or
declare any dividends on Borrower's stock (except for dividends payable solely
in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire,
directly or indirectly, any of Borrower's stock except for stock repurchases
in connection with agreements that permit Borrower to repurchase shares upon
termination of services to Borrower or in exercise of Borrower's right of
first refusal upon a proposed transfer, provided that the aggregate paid in
all of the foregoing transactions shall not exceed $100,000 in the aggregate
in any fiscal year; (xii) make any change in Borrower's capital structure
which would have a material adverse effect on Borrower or on the prospect of
repayment of the Obligations; or (xiii) or (xiv) dissolve or elect to
dissolve. Transactions permitted by the foregoing provisions of this Section
are only permitted if no Default or Event of Default would occur as a result
of such transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with
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respect to any Collateral or in any manner relating to Borrower, Borrower
shall, without expense to Silicon, make available Borrower and its officers,
employees and agents and Borrower's books and records, to the extent that
Silicon may deem them reasonably necessary in order to prosecute or defend any
such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to $50,000 if termination occurs on or before the first anniversary of
the date of this Agreement, and $25,000 if termination occurs after the first
anniversary of the date of this Agreement and on or before the second
anniversary of the date of this Agreement. No termination fee shall be charged
if the Obligations are paid in full from the proceeds of loans made by another
lending division of Silicon. The termination fee shall be due and payable on the
effective date of termination and thereafter shall bear interest at a rate equal
to the highest rate applicable to any of the Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right
or remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
within 5 Business Days after the date due; or (f) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien securing indebtedness of more than
$25,000, which is not cured within any applicable cure period or waived in
writing by the holder of the Permitted Lien; or (h) Borrower breaches any
material contract or obligation, which has or may reasonably be expected to
have a material adverse effect on Borrower's business or financial condition;
or (i) Dissolution, termination of existence, insolvency or business failure
of Borrower; or appointment of a receiver, trustee or custodian, for all or
any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in
effect; or (j) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any juris-
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diction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n); or (o) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be a material adverse change in Borrower's business or
financial condition; or (q). Silicon may cease making any Loans hereunder during
any of the above cure periods, and thereafter if an Event of Default has
occurred.
7.2 REMEDIES. Upon the occurrence and during the continuance of any Event
of Default, and at any time thereafter, Silicon, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following: (a) Cease making Loans or
otherwise extending credit to Borrower under this Agreement or any other
document or agreement; (b) Accelerate and declare all or any part of the
Obligations to be immediately due, payable, and performable, notwithstanding
any deferred or installment payments allowed by any instrument evidencing or
relating to any Obligation; (c) Take possession of any or all of the
Collateral wherever it may be found, and for that purpose Borrower hereby
authorizes Silicon without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store,
or remove any of the Collateral, and remain on the premises or cause a
custodian to remain on the premises in exclusive control thereof, without
charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of
any of the Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required by any
statute, court rule or otherwise as an incident to such possession; (ii) any
demand for possession prior to the commencement of any suit or action to
recover possession thereof; and (iii) any requirement that Silicon retain
possession of, and not dispose of, any such Collateral until after trial or
final judgment; (d) Require Borrower to assemble any or all of the Collateral
and make it available to Silicon at places designated by Silicon which are
reasonably convenient to Silicon and Borrower, and to remove the Collateral to
such locations as Silicon may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Silicon shall have the right
to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (f) Sell, lease or otherwise dispose of any of
the Collateral, in its condition at the time Silicon obtains possession of it
or after further manufacturing, processing or repair, at one or more public
and/or private sales, in lots or in bulk, for cash, exchange or other
property, or on credit, and to adjourn any such sale from time to time without
notice other than oral announcement at the time scheduled for sale. Silicon
shall have the right to conduct such disposition on Borrower's premises
without charge, for such time or times as Silicon deems reasonable, or on
Silicon's premises, or elsewhere and the Collateral need not be located at the
place of disposition. Silicon may directly or through any affiliated company
purchase or lease any Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition. Any sale or
other disposition of Collateral shall not relieve Borrower of any liability
Borrower may have if any Collateral is defective as to title or physical
condition or otherwise at the time of sale; (g) Demand payment of, and collect
any Receivables and General Intangibles comprising Collateral and, in
connection therewith, Borrower irrevocably authorizes Silicon to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and
remove therefrom payments made with respect to any item of the Collateral or
proceeds thereof, and, in Silicon's sole discretion, to grant extensions of
time to pay, compromise claims and settle Receivables and the like for less
than face value; (h) Offset against any sums in any of
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Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards and applicable law will
conclusively be deemed to be commercially reasonable: (i) Notice of the sale
is given to Borrower at least seven days prior to the sale, and, in the case
of a public sale, notice of the sale is published at least seven days before
the sale in a newspaper of general circulation in the county where the sale is
to be conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price
in cash or by cashier's check or wire transfer is required; (vi) With respect
to any sale of any of the Collateral, Silicon may (but is not obligated to)
direct any prospective purchaser to ascertain directly from Borrower any and
all information concerning the same. Silicon shall be free to employ other
methods of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of
any Event of Default, without limiting Silicon's other rights and remedies,
Borrower grants to Silicon an irrevocable power of attorney coupled with an
interest, authorizing and permitting Silicon (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to
do any or all of the following, in Borrower's name or otherwise, but Silicon
agrees to exercise the following powers in a commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Silicon may, in its sole
discretion, deem advisable in order to perfect and maintain Silicon's security
interest in the Collateral, or in order to exercise a right of Borrower or
Silicon, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements; (b) Execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Silicon's Collateral or
in which Silicon has an interest; (c) Execute on behalf of Borrower, any
invoices relating to any Receivable, any draft against any Account Debtor and
any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice
of Lien, claim of mechanic's, materialman's or other lien, or assignment or
satisfaction of mechanic's, materialman's or other lien; (d) Take control in
any manner of any cash or non-cash items of payment or proceeds of Collateral;
endorse the name of Borrower upon any instruments, or documents, evidence of
payment or Collateral that may come into Silicon's possession; (e) Endorse all
checks and other forms of remittances received by Silicon; (f) Pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim in
or to any of the Collateral, or any judgment based thereon, or otherwise take
any action to terminate or discharge the same; (g) Grant extensions of time to
pay, compromise claims and settle Receivables and General Intangibles for less
than face value and execute all releases and other documents in connection
therewith; (h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both; (i) Settle and adjust, and
give releases of, any insurance claim that relates to any of the Collateral
and obtain payment therefor; (j) Instruct any third party having custody or
control of any books or records belonging to, or relating to, Borrower to give
Silicon the same rights of access and other rights with respect thereto as
Silicon has under this Agreement; and (k) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. In no
event shall Silicon's rights under the foregoing power of attorney or any of
Silicon's other rights under this Agreement be deemed to indicate that Silicon
is in control of the business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in
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its sole discretion, of either reducing the Obligations by the principal
amount of purchase price or deferring the reduction of the Obligations until
the actual receipt by Silicon of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE
FOLLOWING MEANINGS:
"Account Debtor" means the obligor on a Receivable.
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"Affiliate" means, with respect to any Person, a relative, partner,
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shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both,
-------
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Inventory" [NOT APPLICABLE].
------------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its good faith business judgment, shall deem eligible for
borrowing, based on such considerations as Silicon may from time to time deem
appropriate. Without limiting the fact that the determination of which
Receivables are eligible for borrowing is a matter of Silicon's good faith
business judgment, the following (the "Minimum Eligibility Requirements") are
--------------------------------
the minimum requirements for a Receivable to be an Eligible Receivable unless
Silicon consents to a change thereto in writing: (i) the Receivable must not
be outstanding for more than 90 days from its invoice date, (ii) the
Receivable must not represent progress billings, or be due under a fulfillment
or requirements contract with the Account Debtor, (iii) the Receivable must
not be subject to any contingencies (including Receivables arising from sales
on consignment, guaranteed sale or other terms pursuant to which payment by
the Account Debtor may be conditional), (iv) the Receivable must not be owing
from an Account Debtor with whom the Borrower has any dispute (whether or not
relating to the particular Receivable), (v) the Receivable must not be owing
from an Affiliate of Borrower (except that Shaw Communications shall not be
deemed to be an "Affiliate" for purposes of this clause), (vi) the Receivable
must not be owing from an Account Debtor which is subject to any insolvency or
bankruptcy proceeding, or whose financial condition is not acceptable to
Silicon, or which, fails or goes out of a material portion of its business,
(vii) the Receivable must not be owing from the United States or any
department, agency or instrumentality thereof (unless there has been
compliance, to Silicon's satisfaction, with the United States Assignment of
Claims Act), (viii) the Receivable must not be owing from an Account Debtor
located outside the United States or Canada (unless pre-approved by Silicon in
its discretion in writing, or backed by a letter of credit satisfactory to
Silicon, or FCIA insured satisfactory to Silicon), (ix) the Receivable must
not be owing from an Account Debtor to whom Borrower is or may be liable for
goods purchased from such Account Debtor or otherwise. Receivables owing from
one Account Debtor will not be deemed Eligible Receivables to the extent they
exceed 25% of the total eligible Receivables outstanding. In addition, if more
than 50% of the Receivables owing from an Account Debtor are outstanding more
than 90 days from their invoice date (without regard to unapplied credits) or
are otherwise not eligible Receivables, then all Receivables owing from that
Account Debtor will be deemed ineligible for borrowing. Silicon may, from time
to time, in its discretion, revise the Minimum Eligibility Requirements, upon
written notice to the Borrower.
"Equipment" means all of Borrower's present and hereafter acquired
---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all
-9-
<PAGE>
choses in action, causes of action, corporate or other business records,
Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent
applications, trademarks and the goodwill of the business symbolized thereby,
names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether
in contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and
all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification
and all other intangible property of every kind and nature (other than
Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
---------------
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon may
--------
from time to time establish and revise in good faith reducing the amount of
Loans and Letters of Credit which would otherwise be available to Borrower under
the lending formula(s) provided in the Schedule: (a) to reflect events,
conditions, contingencies or risks which, as determined by Silicon in good
faith, do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines
-10-
<PAGE>
in good faith constitutes an Event of Default or may, with notice or passage
of time or both, constitute an Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon,
and Silicon shall promptly notify Borrower of any such charge to Borrower's
Deposit Accounts.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall absent manifest error be deemed correct,
accurate and binding on Borrower and an account stated (except for reverses
and reapplications of payments made and corrections of errors discovered by
Silicon), unless Borrower notifies Silicon in writing to the contrary within
thirty days after each account is rendered, describing the nature of any
alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
-----------------
understandings, representations or agreements between the parties which are not
- -------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
- --------------------------------------------------------------------------------
in connection herewith. Notwithstanding the foregoing, the commitments set
- -----------------------
forth in the letter agreement dated July 7, 1998 under the heading "Facility
B" and in the letter agreement dated July 8, 1998 concerning "A $5,000,000
Senior Secured Subordinated Loan Facility" remain in full force and effect and
are not superseded by this Agreement.
9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of
-11-
<PAGE>
any action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
-----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
- --------------------------------------------------------------------
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
- --------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
- ------------------------------------------------------------------------------
only Silicon and not Borrower in connection with this Agreement. If either
- ----------------------------------------------------------------
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees
and costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within two years after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such two-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The two-year period provided herein shall not be waived, tolled,
or extended except by the written consent of Silicon in its sole discretion.
This provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
-12-
<PAGE>
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
TERAYON COMMUNICATION SYSTEMS, INC.
BY_______________________________
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE______________________________
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<PAGE>
SILICON VALLEY BANK EXHIBIT 10.2
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: TERAYON COMMUNICATION SYSTEMS, INC.
ADDRESS: 2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
DATE: AUGUST 10, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of $5,000,000 at any
one time outstanding (the "Maximum Credit Limit") or the
sum of (A) and (B) below:
(A) RECEIVABLE LINE. 80% of the amount of Borrower's
---------------
Eligible Receivables (as defined in Section 8
above) (the "Receivable Line"); plus
(B) PURCHASE ORDER LINE. An amount equal to the lesser
-------------------
of $2,000,000 or 25% of "Eligible Purchase Orders"
(as defined below) (the "Purchase Order Line").
As used herein, "Eligible Purchase Orders" means, at any
date, firm purchase orders held by Borrower which are
acceptable to Silicon in its sole discretion in all
respects and are for products due to be shipped within
the following six months.
Upon the next issuance of equity or subordinated debt
securities by Borrower, the proceeds thereof shall be
used to repay in full all sums due under the Purchase
Order Line, and thereafter no further Loans will be
available under the Purchase Order Line.
In the event the Commitment which the Borrower has
received from Silicon dated July 7, 1998 for mezzanine
financing terminates or is terminated for any reason, all
sums due under the Purchase Order Line shall become due
and payable, and thereafter no further Loans will be
available under the Purchase Order Line.
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<PAGE>
================================================================================
2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in effect from time to
time, plus 2% per annum. Interest shall be calculated
on the basis of a 360-day year for the actual number of
days elapsed. "Prime Rate" means the rate announced
from time to time by Silicon as its "prime rate;" it is
a base rate upon which other rates charged by Silicon
are based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable to
the Obligations shall change on each date there is a
change in the Prime Rate.
MINIMUM MONTHLY INTEREST (Section 1.2): none
================================================================================
3. FEES (Section 1.4):
Loan Fee: $50,000, payable concurrently herewith. (any commitment
fee previously paid by the borrower in connection with
this loan shall be credited against this fee.)
Purchase Order
Facility Fee: $10,000, payable on the date of the first Loan with
respect to Eligible Purchase Orders.
Unused Line Fee: Commencing on the first anniversary date of this
Agreement, in the event, in any calendar month (or
portion thereof at said date and at the end of the term
hereof), the average daily principal balance of the Loans
outstanding during the month is less than $5,000,000,
Borrower shall pay Silicon an unused line fee in an
amount equal to 0.25% per annum on the difference between
$5,000,000 and the average daily principal balance of the
Loans outstanding during the month, which unused line fee
shall be computed and paid monthly, in arrears, on the
first day of the following month.
Collateral
Monitoring
Fee: $500 per month, payable in arrears, for the first four
full calendar months during the term hereof and
prorated for any partial calendar month at the
beginning of the term hereof, and thereafter $1,000 per
month, payable in arrears (prorated for any partial
calendar month at end of the term of this Agreement).
================================================================================
4. MATURITY DATE
(Section 6.1): Two years from the date of this Agreement, subject to
automatic renewal as provided in Section 6.1 above, and
early termination as provided in Section 6.2 above.
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<PAGE>
================================================================================
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the end
of each month, except as otherwise specifically
provided below:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of not
less than a deficit $1,000,000.
DEFINITIONS. For purposes of the foregoing financial covenants, the
following terms shall have the following meanings:
"Tangible Net Worth" shall mean the excess of total
assets over total liabilities, determined in accordance
with generally accepted accounting principles, with the
following adjustments:
(A) there shall be excluded from assets: (i) notes,
accounts receivable and other obligations owing to the
Borrower from its officers or other Affiliates (except
that Shaw Communications shall not be deemed to be an
"Affiliate" for purposes of this clause), and (ii) all
assets which would be classified as intangible assets
under generally accepted accounting principles,
including without limitation goodwill, licenses,
patents, trademarks, trade names, copyrights,
capitalized software and organizational costs, licenses
and franchises
(B) there shall be excluded from liabilities: all
indebtedness which is subordinated to the Obligations
under a subordination agreement in form specified by
Silicon or by language in the instrument evidencing the
indebtedness which is acceptable to Silicon in its
discretion.
================================================================================
6. REPORTING.
(Section 5.3): Borrower shall provide Silicon with the following, in
such form as Silicon shall specify:
1. Monthly Receivable agings, aged by invoice date,
within fifteen days after the end of each month.
2. Monthly accounts payable agings, aged by invoice date,
and outstanding or held check registers, if any,
within fifteen days after the end of each month.
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<PAGE>
3. Monthly reconciliations of Receivable agings (aged by
invoice date), transaction reports, and general ledger,
within fifteen days after the end of each month.
4. Monthly lists of all extended term invoices and a
Backlog/Purchase Order Report, within fifteen days
after the end of each month.
5. Monthly unaudited financial statements, as soon as
available, and in any event within thirty days after the
end of each month.
6. Monthly Compliance Certificates, within thirty days after
the end of each month, in such form as Silicon shall
reasonably specify, signed by the Chief Financial Officer
of Borrower, certifying that as of the end of such month
Borrower was in full compliance with all of the terms and
conditions of this Agreement, and setting forth
calculations showing compliance with the financial
covenants set forth in this Agreement and such other
information as Silicon shall reasonably request,
including, without limitation, a statement that at the
end of such month there were no held checks.
7. Quarterly unaudited financial statements, as soon as
available, and in any event within forty-five days after
the end of each fiscal quarter of Borrower.
8. Annual operating budgets (including income statements,
balance sheets and cash flow statements, by month) for
the upcoming fiscal year of Borrower within thirty days
prior to the end of each fiscal year of Borrower.
9. Annual financial statements, as soon as available, and in
any event within 120 days following the end of Borrower's
fiscal year, certified by independent certified public
accountants acceptable to Silicon.
================================================================================
7. COMPENSATION
(Section 5.5): [Intentionally omitted]
================================================================================
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): See Representations and Warranties of Borrower dated July
7, 1998. (Since said date, Borrower has re-incorporated
in Delaware under its current name.)
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): See Representations and Warranties of Borrower dated
July 7, 1998
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): See Representations and Warranties of Borrower dated
July 7, 1998
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<PAGE>
OTHER LOCATIONS AND
ADDRESSES
(Section 3.3): See Representations and Warranties of Borrower dated
July 7, 1998
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None
================================================================================
9. OTHER COVENANTS
(Section 5.1): Borrower shall at all times comply with all of the
following additional covenants:
(1) BANKING RELATIONSHIP. Borrower shall at all times
maintain its primary banking relationship with
Silicon.
Borrower: Silicon:
TERAYON COMMUNICATION SYSTEMS, INC. SILICON VALLEY BANK
By_______________________________ By_______________________________
President or Vice President Title____________________________
By_______________________________
Secretary or Ass't Secretary
-5-
<PAGE>
EXHIBIT A TO LOAN AND SECURITY AGREEMENT
NONASSIGNABLE RIGHTS (SECTION 2.1)
Rights under that certain License No. 7881 between Borrower and Wind River
Systems, Inc., 1010 Atlantic Avenue, Alameda CA 94501
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 755
<TOTAL-REVENUES> 755
<CGS> 2,243
<TOTAL-COSTS> 2,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> (14,369)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,369)
<EPS-PRIMARY> (3.39)
<EPS-DILUTED> (3.39)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,636
<SECURITIES> 2,948
<RECEIVABLES> 4,686
<ALLOWANCES> 464
<INVENTORY> 5,833
<CURRENT-ASSETS> 44,953
<PP&E> 3,349
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,530
<CURRENT-LIABILITIES> 15,234
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 33,150
<TOTAL-LIABILITY-AND-EQUITY> 48,530
<SALES> 18,776
<TOTAL-REVENUES> 18,776
<CGS> 22,023
<TOTAL-COSTS> 22,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 355
<INCOME-PRETAX> (41,743)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,743)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,743)
<EPS-PRIMARY> (6.39)
<EPS-DILUTED> (6.39)
</TABLE>
