<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED OCTOBER 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
510 COTTONWOOD DRIVE, MILPITAS, CA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 1999, 113,231,782 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding.
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<PAGE> 2
MAXTOR CORPORATION
FORM 10-Q
OCTOBER 2, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- October 2, 1999 and
December 26, 1998........................................... 3
Condensed Consolidated Statements of Operations -- Three
months and nine months ended October 2, 1999, and September
26, 1998.................................................... 4
Condensed Consolidated Statements of Cash Flows -- Nine
months ended October 2, 1999, and September 26, 1998........ 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 6. Exhibits and Reports on Form 8-K............................ 28
Signature Page....................................................... 29
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 26,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 171,811 $ 214,126
Marketable securities..................................... 113,205 13,503
Accounts receivable, net of allowance of doubtful accounts
of $10,959 at October 2, 1999 and $8,409 at December
26, 1998............................................... 219,187 317,758
Inventories, net.......................................... 123,490 153,192
Prepaid expenses and other................................ 17,849 45,198
---------- ---------
Total current assets.............................. 645,542 743,777
Property, plant and equipment, net.......................... 146,259 108,290
Goodwill, net............................................... 47,654 --
Other intangible assets, net................................ 10,079 --
Other assets................................................ 12,806 11,346
---------- ---------
Total assets...................................... $ 862,340 $ 863,413
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 9,770 $ 5,261
Accounts payable.......................................... 374,382 427,737
Accrued and other liabilities............................. 114,647 115,937
---------- ---------
Total current liabilities......................... 498,799 548,935
Long-term debt due affiliate................................ -- 55,000
Long-term debt.............................................. 113,173 90,046
---------- ---------
Total liabilities................................. 611,972 693,981
Commitments and contingencies
Common stock, $0.01 par value, 250,000,000 shares
authorized; 113,231,782 shares issued and outstanding at
October 2, 1999 and 94,293,499 shares issued and
outstanding at December 26, 1998.......................... 1,117 943
Additional paid-in capital.................................. 1,042,246 880,175
Accumulated deficit......................................... (795,922) (741,780)
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... 2,927 30,094
---------- ---------
Total stockholders' equity........................ 250,368 169,432
---------- ---------
Total liabilities and stockholders' equity........ $ 862,340 $ 863,413
========== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenue.......................... $ 589,321 $ 599,797 $ 1,795,499 $ 1,680,679
Total cost of revenue................ 575,488 526,600 1,678,916 1,482,751
------------ ----------- ------------ -----------
Gross profit......................... 13,833 73,197 116,583 197,928
Operating expenses:
Research and development............. 46,472 40,189 141,897 110,285
Selling, general and
administrative.................... 21,092 18,643 63,211 52,958
Stock compensation expense........... 520 1,160 2,017 11,068
Acquired in-process technology....... 7,028 -- 7,028 --
Amortization of goodwill and other
intangible assets................. 598 -- 598 --
------------ ----------- ------------ -----------
Total operating expenses..... 75,710 59,992 214,751 174,311
------------ ----------- ------------ -----------
Income (loss) from operations.......... (61,877) 13,205 (98,168) 23,617
Interest expense....................... (3,349) (6,573) (9,970) (24,109)
Interest and other income.............. 3,088 1,537 11,508 3,936
Gain on sale of investment............. 21,995 -- 44,120 --
------------ ----------- ------------ -----------
Income (loss) before income taxes...... (40,143) 8,169 (52,510) 3,444
Provision for income taxes............. 132 2,091 1,632 2,269
------------ ----------- ------------ -----------
Net income (loss)...................... (40,275) 6,078 (54,142) 1,175
Unrealized gain (loss) on investments
in equity securities................. 187 (11,688) 16,831 (3,028)
Less: reclassification adjustment for
gain included in net loss............ (21,995) -- (44,120) --
------------ ----------- ------------ -----------
Comprehensive income (loss)............ $ (62,083) $ (5,610) $ (81,431) $ (1,853)
============ =========== ============ ===========
Net income (loss) per share -- basic... $ (0.38) $ 0.10 $ (0.53) $ 0.06
Net income (loss) per
share -- diluted..................... $ (0.38) $ 0.08 $ (0.53) $ 0.02
Shares used in per share calculation
-- basic............................. 106,713,093 59,515,691 102,890,681 19,991,259
-- diluted........................... 106,713,093 76,860,814 102,890,681 55,491,542
</TABLE>
See accompanying notes.
4
<PAGE> 5
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 2, SEPTEMBER 26
1999 1998
---------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (54,142) $ 1,175
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 58,295 48,454
Amortization of goodwill and other intangible assets...... 598 --
Acquired in-process technology............................ 7,028 --
Stock compensation expense................................ 2,017 11,068
Inventory reserves for lower of cost or market............ -- 7,852
Loss (gain) on sale of property, plant and equipment and
other assets............................................ (596) 5,897
Gain on sale of investment................................ (44,120) --
Change in assets and liabilities:
Accounts receivable..................................... 99,683 13,417
Inventories............................................. 29,950 (4,492)
Other current assets.................................... (4,857) (4,459)
Accounts payable........................................ (54,835) 132,841
Accrued and other liabilities........................... (6,275) 10,362
--------- ---------
Net cash provided by operating activities.......... 32,746 222,115
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment......... 316 3,059
Purchase of property, plant and equipment................... (95,523) (61,600)
Cash acquired from acquisition.............................. 710 --
Purchase of marketable securities........................... (99,702) --
Proceeds from sale of investment............................ 44,404 --
Other....................................................... (1,566) 3,175
--------- ---------
Net cash used in investing activities.............. (151,361) (55,366)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
borrowings................................................ 28,175 69,775
Principal payments of debt, including short-term
borrowings................................................ (55,280) (308,849)
Principal payments under capital lease obligations.......... (27) --
Net payments under accounts receivable securitization....... -- (111,816)
Proceeds from issuance of common stock from public offering,
employee stock purchase plan and stock options
exercised................................................. 103,432 329,441
--------- ---------
Net cash provided by (used in) financing activities... 76,300 (21,449)
--------- ---------
Net change in cash and cash equivalents..................... (42,315) 145,300
Cash and cash equivalents at beginning of period............ 214,126 16,925
--------- ---------
Cash and cash equivalents at end of period.................. $ 171,811 $ 162,225
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 7,636 $ 24,047
Income taxes.............................................. $ 122 $ 985
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment financed by
accounts payable.......................................... $ -- $ 7,404
Purchase of property, plant and equipment financed by
capital leases............................................ $ -- $ 16
Decrease in receivable from affiliates...................... $ (3,563) $ --
Retirement of debt in exchange for bond redemption.......... $ 5,000 $ --
Decrease in unrealized gain on investments in equity
securities................................................ $ (27,167) $ (3,028)
Common stock issued for acquisition......................... $ 81 $ --
</TABLE>
See accompanying notes.
5
<PAGE> 6
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements include the accounts of Maxtor Corporation ("Maxtor" or the
"Company") and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. All adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a fair
statement of the results for the interim periods have been made. It is
recommended that the interim financial statements be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the fiscal year ended December 26, 1998 incorporated in the Company's annual
report on Form 10-K. Interim results are not necessarily indicative of the
operating results expected for later quarters or the full fiscal year.
2. INVENTORIES
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 26,
1999 1998
---------- ------------
<S> <C> <C>
Inventories comprised (in thousands):
Raw materials............................................. $ 31,381 $ 51,680
Work-in-process........................................... 3,774 6,308
Finished goods............................................ 88,335 95,204
-------- --------
$123,490 $153,192
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY
In February 1999, the Company completed a secondary public offering of 7.8
million shares of the Company's common stock. The Company received net proceeds
of approximately $95.8 million from the offering, after deducting the
underwriting discounts and estimated expenses payable by the Company. A portion
of the proceeds from the secondary offering were used to prepay without penalty
outstanding aggregate principal indebtedness of $55.0 million owing to Hyundai
Electronics America under a subordinated note due July 31, 2001 (see Note 10).
In June 1999, the Board of Directors amended the Company's Amended and
Restated 1996 Stock Option Plan (the "Amended Option Plan"), subject to
shareholder approval, to (1) increase the maximum number of shares issuable
under the Amended Option Plan by 3,676,367 shares, to a total of 17,475,685
shares, and (2) permit the award of restricted stock grants. In connection
therewith, the Board of Directors granted a total of 1,680,000 shares of
restricted stock to certain executive officers and key employees under the
Amended Option Plan. Restricted stock awarded under this plan vests three years
from the date of grant and is subject to forfeiture in the event of termination
of employment with the Company. Compensation cost based on the fair market value
of the Company's stock at the date of grant is reported as compensation expense
on a ratable basis over the vesting periods. The Company's stockholders approved
the amendments to the Amended Option Plan at the Company's Annual Meeting of
Stockholders on August 11, 1999.
4. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.
During the quarter ended October 2, 1999, the Company acquired all the
outstanding common stock of Creative Design Solutions, Inc. ("CDS"), in exchange
for 8,129,682 shares of the Company's stock and assumption of outstanding CDS
stock options for an aggregate purchase price of approximately $57.6 million,
including acquisition expenses.
6
<PAGE> 7
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the acquisition date of September 10, 1999.
Approximately $2.7 million of the aggregate recognized purchase price was
allocated to net tangible assets consisting primarily of cash, accounts
receivable, inventory, prepaids, and property, plant and equipment, and $10.4
million to short-term borrowings, accounts payable, accrued liabilities and
deferred revenue. The historical carrying amounts of such net assets
approximated their fair values. Approximately $7 million was allocated to
acquired in-process technology and was immediately charged to operations at the
acquisition date because it had no alternative future use. Approximately $10.3
million was allocated to current products and technology, workforce and customer
list, which are amortized over their estimated useful lives ranging from 1 to 7
years. The purchase price in excess of the fair value of identified tangible and
intangible assets and liabilities assumed in the amount of $48.1 million was
allocated to goodwill and is being amortized over its estimated useful life of 7
years. The Company will evaluate the periods of amortization continually to
determine whether later events and circumstances warrant revised estimates of
useful lives.
The following unaudited pro forma consolidated amounts give effect to the
acquisition of CDS as if it had occurred on December 28, 1997 by consolidating
the results of operations of CDS with the results of the Company for the three
and nine months ended October 2, 1999 and September 26, 1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................ $ 589,657 $ 600,001 $ 1,796,022 $ 1,681,084
Net income (loss)................... (38,593) 1,393 (67,284) (18,522)
Net income (loss) per share:
Basic............................. (0.34) 0.02 (0.64) (0.66)
Diluted........................... (0.34) 0.02 (0.64) (0.66)
Shares used in per share calculation
Basic............................. 112,877,358 67,645,373 104,945,436 28,120,941
Diluted........................... 112,877,358 84,990,496 104,945,436 28,120,941
</TABLE>
The above unaudited pro forma consolidated amounts are not necessarily
indicative of the actual results of operations that would have been reported if
the event described above had occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such pro forma amounts have been made.
5. GAIN ON SALE OF INVESTMENTS
In September 1999, the Company sold its remaining equity investment in
Celestica Inc. resulting in approximately a $22 million gain, which was included
in other income for the quarter and for the nine months ended October 2, 1999.
6. NET INCOME (LOSS) PER SHARE
In accordance with the disclosure requirements of Statements of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", a reconciliation of
the numerator and denominator of the basic and
7
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MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
diluted net income (loss) per share calculations is provided as follows (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)................... $ (40,275) $ 6,078 $ (54,142) $ 1,175
============ =========== ============ ===========
Net income (loss) available to
common stockholders............... $ (40,275) $ 6,078 $ (54,142) $ 1,175
============ =========== ============ ===========
DENOMINATOR
Basic weighted average common shares
outstanding....................... 106,713,093 59,515,691 102,890,681 19,991,259
Effect of dilutive securities:
Common stock options.............. -- 1,200,781 -- 731,324
Convertible preferred stocks...... -- 16,144,342 -- 34,768,959
------------ ----------- ------------ -----------
Diluted weighted average common
shares............................ 106,713,093 76,860,814 102,890,681 55,491,542
============ =========== ============ ===========
Basic net income (loss) per share... $ (0.38) $ 0.10 $ (0.53) $ 0.06
============ =========== ============ ===========
Diluted net income (loss) per
share............................. $ (0.38) $ 0.08 $ (0.53) $ 0.02
============ =========== ============ ===========
</TABLE>
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Convertible preferred stock......... -- 16,144,342 -- 34,768,959
Common stock options................ 432,269 1,200,781 2,164,073 731,324
</TABLE>
7. CONTINGENCIES
The Company is currently involved in a dispute with StorMedia Incorporated
("StorMedia"), which arose out of an agreement among Maxtor, StorMedia and
Hyundai Electronics Industries Co. Ltd. ("HEI") which became effective on
November 17, 1995. In that agreement, StorMedia agreed to supply disk media to
Maxtor. StorMedia's disk media did not meet our specifications and functional
requirements as required by the agreement and we ultimately terminated the
agreement.
After a class action securities lawsuit was filed against StorMedia by
certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun
Chung (HEI's chairman), Dr. Chong Sup Park (Hyundai Electronics America's
("HEA") President and the individual who signed the StorMedia Agreement on
behalf of Maxtor) and K.S. Yoo (the individual who signed the StorMedia
Agreement on behalf of HEI) (collectively the "Original Defendants") in federal
court (the "Federal Suit"). In the Federal Suit, StorMedia alleged that at the
time HEI entered into the StorMedia Agreement, it knew that it would not and
could not purchase the volume of products it committed to purchase, and that
failure to do so caused damages to StorMedia in excess of $206 million.
8
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MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In December 1996, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal Suit. The Federal Suit was permanently dismissed early
in February 1998. On February 24, 1998, StorMedia filed a new complaint in a
California state court for $206 million, alleging fraud and deceit against the
Original Defendants and negligent misrepresentation against HEI and Maxtor (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against Maxtor since it filed for bankruptcy protection.
We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that may ultimately be
incurred either in the context of a trial or as a result of a negotiated
settlement. The litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not have a material adverse effect on our
business, financial position and results of operations.
We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which relate to
motors that we purchase from motor vendors and the use of such motors in hard
disk drives. We filed our Answer and Counterclaim on May 19, 1999, alleging
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. We have also filed a motion
to bifurcate for early discovery the license, exhaustion and misuse defenses. At
hearing on July 21, 1999, the Court stayed further action in the case pending
the outcome of a motion filed by Papst on July 13, 1999, seeking coordination
and transfer of this case with several other actions involving Papst patents.
This motion was filed with the Judicial Panel on Multidistrict Litigation in
Washington, D.C. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. No
proceedings have been scheduled as yet in that court. While the final outcome of
these claims cannot be determined at this time, we believe that resolution of
these claims will not have a material adverse effect on our business, financial
condition or results of operations. This statement should be read in conjunction
with our Registration Statement on Form S-3 as well as our periodic reports
filed with the SEC.
No amounts have been reserved in the accompanying condensed consolidated
financial statements for any legal claims or actions.
8. LOAN AGREEMENT
In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd
entered into a 4-year loan agreement with the Economic Development Board (the
"Board") of Singapore for SGD48 million, which will amortize in 7 equal
semi-annual installments beginning March 2001. Interest will be charged by the
Board at
9
<PAGE> 10
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year. This loan requires a guarantee which is supported by a
2-year guarantee from the Bank of Nova Scotia at an interest rate of 0.15% per
year.
9. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to current year classifications.
10. RELATED PARTY TRANSACTION
During the quarter ended April 3, 1999, the Company paid off a $55.0
million note payable to HEA and incurred $2.3 million of interest expense
related to the note (see Note 3). As of October 2, 1999, the Company has no
outstanding indebtedness to HEA.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., a wholly owned subsidiary of HEA, amounting to $42 million for
the quarter ended October 2, 1999 and $121.3 million for the nine months ended
October 2, 1999. The cost of component parts purchased from MMC was $33.8
million for the quarter ended September 26, 1998 and $95 million for the nine
months ended September 26, 1998. The cost of revenue also includes certain
component parts purchased from HEI which to date have not been significant.
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations: "Results of Operations"; "Liquidity and
Capital Resources"; "Certain Factors Affecting Future Performance"; and
elsewhere in this report. In this report, the words "anticipate," "believe,"
"expect," "intend," "future" and similar expressions also identify forward-
looking statements. We make these forward-looking statements based upon
information available on the date hereof, and we have no obligation to update
any such forward-looking statements. Our actual results could differ materially
from those anticipated in this report as a result of certain factors including,
but not limited to, those set forth in the following risk factors and elsewhere
in this report.
Maxtor(R) and No Quibble(R) are registered trademarks of Maxtor. The Maxtor
logo, DiamondMax(TM), Formula 4(TM) and MaxAttach(TM) are trademarks of Maxtor.
All other brand names and trademarks appearing in this report are the property
of their respective holders.
10
<PAGE> 11
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Part I.
Financial Information, Item 1. Condensed Consolidated Financial Statements of
this report.
ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.
The Company acquired privately held Creative Design Solutions, Inc.
("CDS"), a leading participant in the emerging network attached storage market,
in the third quarter of 1999. The Company is transitioning from being solely a
supplier of hard disk drives for the desktop personal computer market to a
company positioned to provide storage solutions in networked environments. See
Note 4 to the Condensed Consolidated Financial Statements.
Maxtor has formed its Maxtor Network Systems Group ("MNSG") around CDS.
MNSG will concentrate in the near future on products and offerings in or related
to the Network Attached Storage ("NAS") market segment. NAS is defined as:
"A specialized, network-based hardware device designed to perform a single
or specialized set of server functions and characterized by running a
minimal operating architecture, requiring no per-seat network operating
system license and client access independent of any operating system or
proprietary protocol. In addition, the device is a 'closed box' delivering
extreme ease of installation, minimal maintenance and can be managed
remotely by the client via a Web browser." (Source: Dataquest/Gartner)
In October, Maxtor announced MaxAttach(TM), MNSG's first NAS product. The
MaxAttach network storage appliance is a network file sharing solution for a
broad range of office and workgroup environments.
The CDS acquisition has been accounted for using the purchase method of
accounting. A portion of the purchase price has been allocated to the tangible
and identifiable intangible assets acquired and liabilities assumed based on the
respective fair values on the acquisition date. Identifiable intangible assets
include (i) amounts allocated to acquired in-process technology and immediately
charged to operations; (ii) amounts allocated to current products and
technologies and amortized on a straight-line basis over the estimated useful
lives of the technology, which ranges from 1 to 3.5 years; and (iii) amounts
allocated to workforce and customer list and amortized on a straight-line basis
over the estimated period of benefit, which ranges from 6 to 7 years. The
portion of the purchase price in excess of tangible and identifiable intangible
assets and liabilities assumed has been allocated to goodwill and amortized on a
straight line basis over 7 years. The results of operations of CDS are
consolidated with those of the Company as of the date the Company acquired
effective control of the entity, which occurred upon the formal legal closing of
the transaction.
REVENUE AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 CHANGE 1999 1998 CHANGE
---------- ------------- ------ ---------- ------------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue.................... $589.3 $599.8 $(10.5) $1,795.5 $1,680.7 $114.8
Gross profit..................... $ 13.8 $ 73.2 $(59.4) $ 116.6 $ 197.9 $(81.3)
Net Income (loss)................ $(40.3) $ 6.1 $(46.4) $ (54.1) $ 1.2 $(55.3)
AS A PERCENTAGE OF REVENUE:
Total revenue.................... 100.0% 100.0% 100.0% 100.0%
Gross profit..................... 2.3% 12.2% 6.5% 11.8%
Net Income (loss)................ (6.8)% 1.0% (3.0)% 0.1%
</TABLE>
11
<PAGE> 12
Revenue
Total revenue for the third quarter of fiscal year 1999 decreased 1.8%
compared to the same quarter in fiscal year 1998 primarily due to the continuing
decrease in average unit prices, partially offset by an increase in total units
shipped during the third fiscal quarter of 1999. Total shipments for the third
fiscal quarter 1999 were 5.9 million units, which was 1.6 million units or 36.3%
higher compared to the third fiscal quarter a year ago. Maxtor remains focused
on OEM customers. Revenue from the OEM channel for the quarter ended October 2,
1999 represented 76.2% of total revenue compared to 77.8% for the corresponding
quarter in 1998. Revenue from the distribution and retail channel represented
23.7% of total revenue for the third quarter in 1999 compared to 22.2% for the
same quarter in fiscal year 1998.
For the nine months ended October 2, 1999, total revenue increased by 6.8%
compared to the nine months ended September 26, 1998. Revenue and unit volume
growth in 1999 were favorably impacted by better time to market performance,
expansion of the OEM customer base, and increased penetration of the
distribution channel, offset by the continuing decline in average unit prices
from $139 in the third quarter of fiscal 1998 to $100 in the current quarter.
Gross Profit
Gross profit as a percentage of revenue decreased to 2.3% in the third
quarter of 1999 from 12.2% in the same quarter of 1998, and gross profit for the
first nine months of 1999 declined to 6.5% compared to 11.8% million for the
same period a year ago. The continuing decrease in gross profit is due mainly to
the deterioration in average unit selling prices throughout the first three
quarters of fiscal year 1999. The rapid price erosion is partially offset by the
increase in unit volumes and the timely introduction of new, higher margin
products such as MaxAttach(TM), which achieved market acceptance and higher
manufacturing yields. Gross margin was also favorably affected by improved
product designs, which led to improved manufacturing yields and lower component
costs. We expect to continue volume growth for the remainder of the fiscal year
based on the strength of the OEM portion of our business and the market
acceptance of our new products.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 CHANGE 1999 1998 CHANGE
---------- ------------- ------ ---------- ------------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Research and development............ $46.5 $40.2 $ 6.3 $141.9 $110.3 $31.6
Selling, general and
administrative.................... $21.1 $18.6 $ 2.5 $ 63.2 $ 53.0 $10.2
Stock compensation expense.......... $ 0.5 $ 1.2 $(0.7) $ 2.0 $ 11.1 $(9.1)
Acquired in-process technology...... $ 7.0 $ -- $ 7.0 $ 7.0 $ -- $ 7.0
Amortization of goodwill and other
intangible assets................. $ 0.6 $ -- $ 0.6 $ 0.6 $ -- $ 0.6
AS A PERCENTAGE OF REVENUE:
Research and development............ 7.9% 6.7% 7.9% 6.6%
Selling, general and
administrative.................... 3.6% 3.1% 3.5% 3.2%
Stock compensation expense.......... 0.1% 0.2% 0.1% 0.7%
Acquired in-process technology...... 1.2% -- 0.4% --
Amortization of goodwill and other
intangible assets................. 0.1% -- 0.0% --
</TABLE>
Research and Development (R&D)
R&D expense as a percentage of revenue increased to 7.9% in the third
quarter of 1999 compared to 6.7% for the same quarter in 1998. Similarly, R&D
expense for the nine months ended October 2, 1999 as a percentage of revenue
increased to 7.9% compared to 6.6% for the same period a year ago. The absolute
dollar level of R&D expenditures increased significantly due primarily to our
efforts to develop new products for the
12
<PAGE> 13
desktop computer market, including our efforts to transition from the
magneto-resistive head technology to the giant magneto-resistive head
technology, as well as new market segments. Over the past nine months, we have
introduced several hard disk drive products including the DiamondMax Plus 5120
and 6800 series, and the cost-optimized DiamondMax VL Lines.
Selling, General and Administrative (SG&A)
SG&A expense increased, in terms of absolute dollars and as a percentage of
revenue, both for the third quarter of 1999 and the first nine months of fiscal
1999 when compared to the same periods of fiscal year 1998. The increase is
primarily due to the costs associated with supporting Maxtor's higher sales
volume.
Stock Compensation
In 1996 we adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which substantially all of our domestic employees and certain international
employees received options which were required to be accounted for as variable
options. These options, which were granted between May 1996 and October 1997,
required remeasurement of any intrinsic compensation element at each reporting
date determined by the difference between the estimated current fair value of
our stock and the exercise price of the options. In the first quarter of 1998,
we amended and restated the Plan to remove the variable features and all grants
subsequent to October 1997 have been subject to fixed terms. In the second
quarter of 1998, we offered and re-issued new fixed-award options in exchange
for options previously issued under variable terms, thereby eliminating the
requirement to remeasure these options in subsequent periods. In connection
therewith, we recorded compensation expense related to the difference between
the estimated fair market value of our stock as of March 28, 1998 and the stated
value of our options. Compensation cost was reflected in accordance with
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Accordingly, we recorded non-cash compensation expense of $11.1 million in the
first nine months of 1998 and $2 million in the first nine months of 1999. The
remaining unrecognized compensation element will be reflected in quarterly
charges, decreasing sequentially through the second quarter of 2001.
Acquired in-process technology
The acquired in-process technology charge of $7 million resulted from the
acquisition of CDS. The value of the acquired in-process technology was
determined using a combination of risk-adjusted income approaches and an
independent valuation. The total amount of $7 million was charged to operations
as the technology had not reached the stage of technological feasibility at the
date of acquisition and had no future alternative use to the Company.
Amortization of goodwill and other intangible assets
Amortization of goodwill and other intangible assets also includes
workforce, customer list and other current products and technology in the amount
of $0.6 million, which results from the acquisition of CDS.
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<PAGE> 14
INTEREST EXPENSE, INTEREST INCOME AND GAIN ON SALE OF INVESTMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 CHANGE 1999 1998 CHANGE
---------- ------------- ------ ---------- ------------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest expense.................... $(3.3) $(6.6) $ 3.3 $(10.0) $(24.1) $14.1
Interest and other income........... $ 3.1 $ 1.5 $ 1.6 $ 11.5 $ 3.9 $ 7.6
Gain on sale of investment.......... $22.0 $ -- $22.0 $ 44.1 $ -- $44.1
AS A PERCENTAGE OF REVENUE:
Interest expense.................... (0.6)% (1.1)% (0.6)% (1.4)%
Interest and other income........... 0.5% 0.3% 0.6% 0.2%
Gain on sale of investment.......... 3.7% -- 2.5% --
</TABLE>
Interest Expense
Interest expense as a percentage of revenue declined from 1.1% in the third
quarter of 1998 to 0.6% in the third quarter of 1999, and from 1.4% in the first
nine months of 1998 to 0.6% in the first nine months of 1999. In absolute dollar
terms, interest expense decreased by $3.3 million in the third quarter of 1999
and decreased by $14.1 million for the first nine months of 1999. The decrease
in interest expense was due primarily to the retirement of debt as a result of
proceeds generated from our public offerings in July 1998 and February 1999. Our
total short-term and long-term outstanding borrowings were $150.3 million as of
September 26, 1998 and $123.1 million as of October 2, 1999.
Interest and Other Income
Interest and other income in the third quarter of 1999 and the first nine
months of 1999 increased in both absolute dollar amount and as a percentage of
revenue when compared to the third quarter of 1998 and to first nine months of
1998. The increase was primarily due to the increase in total cash and cash
equivalents and marketable securities, which were generated from our public
offerings in July 1998 and February 1999. Our total cash and cash equivalents
and marketable securities were $162.2 million as of September 26, 1998 compared
to $285 million as of October 2, 1999.
Gain on Sale of Investment
In September 1999, the Company sold its remaining equity investment in
Celestica Inc. resulting in approximately a $22 million gain. For the nine
months ended October 2, 1999, total gain from the sale of investment amounted to
$44.1 million.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 CHANGE 1999 1998 CHANGE
---------- ------------- ------ ---------- ------------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before provision for
income taxes..................... $(40.1) $8.2 $(48.3) $(52.5) $3.4 $(55.9)
Provision for income taxes......... $ 0.1 $2.1 $ (2.0) $ 1.6 $2.3 $ (0.7)
</TABLE>
The provision for income taxes consists primarily of federal alternative
minimum tax and foreign taxes. Due to our net operating losses (NOL), NOL
carryforwards and favorable tax status in Singapore, we have not incurred any
significant foreign, U.S. federal, state or local income taxes for prior fiscal
periods. Future tax benefits from current operating losses have not been
recognized in the current year because of the uncertainty concerning their
realization.
14
<PAGE> 15
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE DESCRIBED
Many currently installed computer systems and software products are coded
to accept, store or report only two digit entries in date code fields. Beginning
in the Year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. This is the "Year
2000 Issue." As a result, computer systems and/or software used by many
companies, including Maxtor and our vendors and customers, will need to be
upgraded to comply with such Year 2000 requirements. We could be impacted by
Year 2000 Issues occurring in our own infrastructure or faced by our major
distributors, suppliers, customers, vendors and financial service organizations.
Such Year 2000 Issues could include information errors, significant information
system failures, or failures of equipment, vendors, suppliers or customers. Any
disruption in our operations as a result of Year 2000 Issues, whether by us or a
third party, could have a material adverse effect on our business, financial
condition and results of operations.
OUR PRODUCTS COMPLY
Hard Disk Drives
Our hard disk drives are able to operate in the Year 2000 and beyond. The
Year 2000 Issue is only relevant to hardware and software components that use or
affect time and date data or system settings. In the case of our hard disk
drives, the ability to operate correctly in the next century is dependent on the
software and programming loaded on our hard disk drives by the system. Since our
hard disk drives have no inherent time or date function, they will not determine
whether a given system, or any software on a given system, will operate
correctly or incorrectly in the next century. As a result, all of our hard disk
drives are able to receive, store and retrieve data, and operate with a system
or software that is Year 2000 compliant without modification.
MaxAttach Products
Our new Network Attached Systems ("NAS") products (developed by the
recently acquired Creative Design Solutions, Inc. -- CDS company) are also Y2K
compliant and not affected by the actual turn of the century. Our NAS operating
system software uses ANSI C time specifications, which stores time as number of
seconds since January 1, 1970 using a signed 32-bit number, which is unaffected
in or by the Year 2000, but which will roll over in the Year 2038.
OUR STATE OF READINESS
Overview. To address Year 2000 readiness, we have implemented a corporate
program to coordinate efforts across all business functions and geographic
areas, which includes addressing risks associated with business partners and
other third-party relationships. Our internal Year 2000 readiness program is
separated into four phases: (1) Awareness, (2) Inventory, (3) Assessment and (4)
Resolution. Additionally, we have formed a Year 2000 Program Office to
coordinate the foregoing corporate program and also have engaged external Year
2000 consultants to assist with methodology and process of the inventory,
assessment and resolution phases. There can be no assurance that we will be able
to complete all four phases in a timely manner, or that the process will
adequately address the Year 2000 Issue.
Core IT Systems. We have implemented the R3 system from SAP A.G. The SAP
system is designed to automate more fully our business processes and is
certified by SAP A.G. as Year 2000 compliant. The SAP implementation is now
complete for all SAP modules, with the implementation of the SAP Human Resources
module for the US and Singapore in July.
Other Information Technology Systems. Our other information technology
systems include factory information and control systems, computer aided design
systems, banking interface systems, electronic data interchange systems, credit
card processing, customer call management, human resources systems, non-United
States payroll processing, and shipment and just in time delivery management
systems. SAP A.G. software supports all of our human resources systems, call
management system, non-United States payroll
15
<PAGE> 16
processing and supplier just-in-time delivery management systems which, as a
result, are now Year 2000 compliant. The inventory and assessment portion of our
networked PC's has been completed and we are now in the remediation stage for
the hardware and software applications. We will assign the highest resolution
priority to repair or replace items that affect new product development, volume
production and distribution.
Networking Systems. In a recent corporate level business decision, we
concluded that instead of upgrading our current Banyan Vines based networking
system, it would be much more beneficial to us if we implemented NT-servers and
Microsoft Exchange Mailman System. The NT-server/Microsoft Exchange migration
was completed by September 30th 1999 (according to plan) and, as a result, all
our network attached PC user systems are now Y2K ready.
Non-Information Technology Systems. Our non-information technology systems
include departmental and personal automated applications used in all of our
functional areas, building systems such as heating, cooling, and air
purification, component and hard disk drive test equipment, and manufacturing
equipment. We have completed the assessment of all our non-information
technology systems as of June 30th of this year.
Vendors and Suppliers. Our vendors and suppliers include the sources of
materials used in our hard disk drives, the JIT (Just In Time) and forward
carrier logistics operations, the sources of the equipment and supplies used by
us in the conduct of our business, as well as our landlords, financial
institutions, and other service providers. Inventory of our material suppliers
has been completed and on site assessments of our logistics suppliers have been
completed for our disk drive products. The Maxtor Year 2000 Program Office has
created an extensive repository of detailed data and information collected from
our inventory and remediation activities as well as our supplier assessments.
Assessments include determination of the level of risk of business interruption
associated with a failure of a vendor or supplier because of the Year 2000 Issue
and assignment of priority to resolution activities.
Maxtor Network Storage Group ("MNSG"). MNSG is Maxtor's internal
designation for the newly acquired CDS company. The Y2K Program Office has
already assessed MNSG's PCs and Embedded Systems and recommended that a number
of PCs be upgraded to newer Y2K compliant models. This capital request has been
approved and is in the process of being implemented. In addition, all the
mission critical software applications are based on Microsoft Windows 95/98 and
Windows NT and, as a result, are Y2K ready. The Embedded Systems in the MNSG
facility were assessed to not have a Y2K dependency.
Customers. Our assessment of our Year 2000 issues with our customers will
dovetail with similar activities which our customers will engage in with respect
to Maxtor. Several of our customers, Dell and IBM for example, have requested
written and/or in person assurances that our ability to supply product to them
in volume will not be affected by the Year 2000 Issue. At this time we have
completed several on site audits and responded to a number of follow up
questionnaires. We are still receiving occasional Y2K questionnaires from
primarily Asian customers.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We made capital expenditures of approximately $33.0 million and incurred
related expenses of approximately $7.5 million in fiscal 1998 in connection with
our implementation of the SAP system. For our Y2K program we initially estimated
capital expenditures of approximately $10.0 million and expenses of
approximately $4.0 million in fiscal 1999 in connection with the resolution of
our Year 2000 issues. During the first ten months ended October 30, 1999, we
incurred approximately $1.5 million in capital expenditures and approximately
$3.0 million in expenses related to our Year 2000 issues. Considering that we
are about six weeks away from the actual transition, we do not expect that these
costs will not change significantly. No significant system projects have been
deferred due to Year 2000 issues. In addition, our cost estimates do not include
potential costs related to any customer or other claims resulting from our
failure to adequately correct our Year 2000 issues.
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<PAGE> 17
THE RISKS OF OUR YEAR 2000 ISSUES
We believe that resolution of our Year 2000 Issues has been and will be
complex, expensive and time intensive. In addition, resolution of our Year 2000
Issues could be adversely affected by various risk factors, including without
limit:
- any failure to provide adequate training to employees;
- any failure to retain skilled personnel to implement the SAP system or
find suitable replacements for such personnel;
- any expansion of the scope of the implementation plan due to
unanticipated changes in our business;
- any failure to devise and run appropriate testing procedures that
accurately reflect the demands that will be placed on new systems
following implementation;
- any failures by vendors or other third parties to accurately assess their
own Year 2000 readiness or the Year 2000 readiness of their respective
vendors and other third parties and any resulting failures;
- any failures by the power companies to supply power to our plans and
facilities; and
- any failure to develop and implement adequate fall-back, work around or
other contingency plans in the event that difficulties or delays arise.
It has been widely predicted that a significant amount of litigation surrounding
business interruptions will arise out of Year 2000 Issues. It is uncertain
whether, or to what extent, we may be affected by such litigation. Because our
hard disk drives and network storage appliance products are able to operate in
the Year 2000 and beyond, we do not anticipate exposure to material product
defect or similar litigation. Any such litigation, however, could have a
material adverse effect on our business, financial condition and results of
operations. We also may not receive any assistance, damages or other relief as a
result of our initiation of any litigation related to the Year 2000 Issue. Our
inability to implement our Year 2000 plans or to otherwise address Year 2000
Issues in a timely manner could have a material adverse effect on our business,
financial condition and results of operations.
OUR CONTINGENCY PLANS
As part of the four-step process outlined above, 51 specific contingency
plans have been developed in connection with the assessment and resolution of
the risks identified. These plans cover information technology, material
shortages and logistics related delays, which we identified as potential
occurrences as a result of our on-site supplier assessments. We have also
developed a Command Center plan, which will serve as a communications center for
the entire company on Y2K related events occurring during the actual transition
to the new year, that could affect Maxtor's business. There is no assurance that
our contingency plans will address risks which may actually arise or that any
such contingency plans will properly address their intended purposes if they are
implemented. In addition, we do not have and do not anticipate obtaining any
insurance policy to provide material coverage for potential injuries or damages
related to or caused by the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
As of October 2, 1999, we had $285 million in cash and cash equivalents and
marketable securities as compared to $227.6 million as of December 26, 1998. In
February 1999, we completed an underwritten secondary public offering of
7,800,000 newly-issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.
Operating activities provided net cash of $32.7 million for nine months
ended October 2, 1999. The cash provided from operating activities was
principally generated from collection of accounts receivable and decreases in
inventory purchases, which was partially offset by the decrease in accounts
payable, accrued expenses. We used $151.4 million in investing activities during
the first nine months of 1999, principally for the purchase of marketable
securities and property, plant and equipment. During the nine months ended
October 2, 1999, we reduced short and long-term debt by $60.0 million using
approximately $55.0 million of the proceeds from our February 1999 public
offering and cash from operations.
17
<PAGE> 18
In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd
entered into a 4-year term loan agreement with the Economic Development Board of
Singapore for SGD48 million, which will amortize in 7 equal semi-annual
installments beginning March 2001. This loan requires a guarantee which is
supported by a 2-year guarantee from the Bank of Nova Scotia.
As of October 2, 1999, our outstanding debt comprised primarily $90.0
million of publicly-traded Subordinated Debentures, due March 1, 2012. Our
outstanding 5.75% Subordinated Debentures are entitled to annual sinking fund
payments of $5.0 million, which commenced March 1, 1998. These debentures are no
longer convertible into our common stock or any other security of the Company.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. As of October 2, 1999,
$100.0 million of accounts receivable was securitized under the program and
excluded from our accounts receivable balance.
We believe the existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next 12 months. We require substantial working
capital to fund our business, particularly to finance accounts receivable and
inventory, and to invest in property, plant and equipment. During 1999, capital
expenditures are expected to be between approximately $120.0 million and $125.0
million, to be used principally for adding manufacturing capacity and
implementing new and updating existing information technology systems. We intend
to seek financing arrangements, including a line of credit, to fund our future
capacity expansion plans, as necessary. However, our ability to generate cash
will depend on, among other things, demand in the desktop hard disk drive market
and pricing conditions. If we need additional capital, there can be no assurance
that such additional financing can be obtained, or, if obtained, that it will be
available on satisfactory terms. See discussion below under the heading "Certain
Factors Affecting Future Performance".
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $795.9 MILLION
We have a history of significant losses. During each of the 19 consecutive
quarters ended September 27, 1997, we incurred significant operating losses
ranging from $125.5 million to $3.1 million per quarter, with net losses ranging
from $130.2 million to $4.5 million. These losses were primarily a result of the
following:
- delayed product introductions;
- product performance and quality problems;
- low manufacturing yields and under-utilization of manufacturing capacity;
- high operating and interest expenses; and
- overall market conditions in the hard disk drive industry, including
fluctuations in demand and declining average selling prices.
We also had a net loss of $40.3 million for the quarter ended October 2,
1999 due primarily to a significant decrease in average unit selling prices.
OUR AVERAGE SELLING PRICES ARE DECLINING
We anticipate that average selling prices in the hard disk drive industry
will continue to decline for the foreseeable future. The average selling price
of a hard disk drive rapidly declines over its commercial life due to
technological enhancement, productivity improvement, and also increase in
industry supply. This is true even for those products that are competitive and
introduced into the market in a timely manner. Average selling prices decline
even further when competitors lower prices to absorb excess capacity, liquidate
excess inventories, restructure or attempt to gain market share. These factors
make it very challenging to achieve and maintain profitability and revenue
growth in the hard disk drive industry.
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<PAGE> 19
UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a
qualification opportunity, we may not have another opportunity to do business
with that manufacturer until we introduce our next generation of products. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume manufacturers of personal computers. If we do not
reach the market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.
SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET
While there has been significant growth in the demand for desktop computers
over the past several years, according to International Data Corporation, the
growth rate in the desktop computer market has slowed in recent quarters.
Because of our reliance on the desktop segment of the personal computer market,
we will be affected more by changes in market conditions for desktop computers
than would a company with a broader range of products. Any decrease in the
demand for desktop computers could cause a decrease in the demand for our
products.
Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have to
reengineer some of our existing technology and develop new technology. Certain
of our competitors have significant advantages over us in one or more of these
and other potentially significant new or growing market segments. Any failure by
us to successfully develop and introduce new products to address specifically
these additional market segments could have a material adverse effect on our
business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
nine months ended October 2, 1999, two customers, Dell and IBM, accounted for
approximately 25.4% and 9.0%, respectively, of our revenue, and our top ten
customers accounted for approximately 67.2% of our revenue. During the nine
months ended September 26, 1998, two customers, Dell and IBM, accounted for
approximately 27.0% and 16.2%, respectively, of our revenue, and our top ten
customers accounted for approximately 79.7% of our revenue.
We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could
19
<PAGE> 20
continue to increase in the future. These customers have a wide variety of
suppliers to choose from and therefore can make substantial demands on us. Even
if we successfully qualify a product for a given customer, such customer
generally is not obligated to purchase any minimum volume of products from us
and generally is able to terminate its relationship with us at any time. Our
ability to maintain strong relationships with our principal customers is
essential to our future performance. If we lose a key customer or if any of our
key customers reduce their orders of our products or require us to reduce our
prices before we are able to reduce costs, our business, financial condition and
results of operations could be materially and adversely affected.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY
Our quarterly results may not be indicative of our future performance. Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate significantly in the future. Our future performance will depend on
many factors, including the following:
- our ability to be consistently among the first to volume-production with
competitive products;
- the average unit selling price of our products;
- fluctuations in the demand for hard disk drives as a result of the
cyclical and seasonal nature of the desktop computer industry;
- the availability of and efficient use of manufacturing capacity;
- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allows us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
20
<PAGE> 21
OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of our largest personal computer manufacturing
customers, are starting to adopt build-to-order manufacturing models that reduce
their component inventories and related costs and enable them to tailor their
products more specifically to the needs of their customers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our products in inventory longer, which increases our
risk of inventory obsolescence and average selling price decline. These changing
models also increase our capital requirements and costs, complicate our
inventory management strategies, and make it difficult for us to match our
manufacturing plans with projected customer demand.
THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE
The hard disk drive market in general is intensely competitive even during
periods when demand is stable. We compete primarily with manufacturers of
3.5-inch hard disk drives for the personal computer industry, including:
- Fujitsu Limited;
- Quantum Corporation;
- Samsung Electronic Company Limited;
- Seagate Technology, Inc.; and
- Western Digital Corporation.
We also could face significant competition from other companies, such as
International Business Machines Corporation, in our current markets or in other
markets into which we may expand our product portfolio.
Many of our competitors have a number of significant advantages over us,
including:
- a larger market share;
- a broader array of product lines;
- preferred vendor status with some of our customers;
- extensive name recognition and marketing power; and
- significantly greater financial, technical and manufacturing resources.
Unlike us, some of our competitors make many of their own components which
may provide them with certain benefits including lower costs. Our competitors
also may:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
In addition, new competitors could emerge and rapidly capture market share.
21
<PAGE> 22
If we fail to compete successfully against current or future competitors,
our business, operating results and financial condition may be materially and
adversely affected.
DEMAND FOR OUR PRODUCTS FLUCTUATES
We currently offer a single product family that is designed for desktop
computers. As a result, the demand for our products depends on the overall
demand for desktop computers. The desktop computer and hard disk drive markets
tend to go through periods of rapid growth followed by periods of oversupply and
rapid price and gross margin erosion. This environment makes it difficult for us
and our customers to reliably forecast demand for our products. We do not have
long-term supply contracts with our customers, and our customers often can defer
or cancel orders with limited notice and without significant penalty.
WE MUST EFFECTIVELY RESPOND TO CHANGING TECHNOLOGY; WE MUST EFFECTIVELY
TRANSITION TO GIANT MAGNETO-RESISTIVE HEAD TECHNOLOGY
Our future performance will depend on our ability to enhance current
products and to develop and introduce volume production of new competitive
products on a timely and cost-effective basis. We also must keep pace with and
correctly anticipate technological developments and evolving industry standards
and methodologies. Advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could lead to new competitive products
that have better performance and/or lower prices than our products. Examples of
such new technologies include giant magneto-resistive head technology (which
already has been introduced by IBM and Fujitsu and which Western Digital
reportedly will use in its products under an agreement with IBM) and
optically-assisted recording technologies (which currently are being developed
by companies such as TeraStor Corporation and Seagate). We have incorporated
giant magneto-resistive head technology into our newest product. We have decided
not to pursue optically-assisted recording technologies at this time. Our
inability to introduce or achieve volume production of new competitive products,
(regardless of whether they include giant magneto-resistive head technology) on
a timely and cost-effective basis has in the past and in the future could have a
material adverse effect on our business, financial condition and results of
operations.
TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third parties. Consequently, the success of our products depends
on our ability to gain access to and integrate parts that use leading-edge
technology. To successfully manage these integration projects we must:
- obtain high quality parts;
- hire skilled personnel;
- effectively integrate different products from a variety of vendors; and
- manage difficult scheduling and delivery problems.
Our success will depend on our ability to develop and maintain relationships
with key suppliers.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS
A number of the parts used in our products are available from only one or a
limited number of outside suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies Inc. As we have experienced in the past, some of the parts we
require may periodically be in short supply. As a result, we must allow for
significant ordering lead times for certain parts. In addition, we may have to
pay significant cancellation charges to suppliers if we cancel orders for parts
because we reduce production due to production cut-backs caused by market
oversupply, reduced demand, transition to new products or technologies or for
other reasons. We order the majority of our parts on a purchase order basis and
only have limited long-term
22
<PAGE> 23
volume purchase agreements with certain existing suppliers. If we cannot obtain
sufficient quantities of high quality parts when we need them, our business,
financial condition and results of operations could be materially and adversely
affected.
WE DEPEND ON OUR KEY PERSONNEL
Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. We also do not have key
person life insurance on any of our personnel. Most of our senior management and
a significant number of our other employees have been with us for less than
three years. Worldwide competition for skilled employees in the hard disk drive
industry is extremely intense. We believe that some of our competitors recently
have made targeted efforts to recruit employees from us and such efforts have
resulted in us losing some skilled managers. There is no guarantee that we will
be successful in retaining our key employees. If we are unable to retain our
existing employees or to hire and integrate new employees, our business,
financial condition and results of operations could be materially and adversely
affected.
WE HAVE ONLY ONE MANUFACTURING FACILITY AND WILL NEED ADDITIONAL CAPACITY IN THE
FUTURE
Our volume manufacturing operations currently is based in one facility in
Singapore. A fire, flood, earthquake or other disaster or condition affecting
our facility could have a material adverse effect on our business, financial
condition and results of operations. Although we have taken steps to ensure that
manufacturing facilities will be available, our inability to obtain a facility
or facilities which allow us to meet our customers' demands in a timely manner
will limit our growth and could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS
CAPITAL INTENSIVE
Our business is capital intensive, and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to support facilities upgrades and
product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
We may issue additional equity to raise capital. Any future equity
financing will decrease existing stockholders' percentage equity ownership and
may, depending on the price at which the equity is sold, result in significant
economic dilution to such stockholders. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.
While we currently do not have a revolving credit facility, it is our goal
to obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
has decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities, in many cases, are restrictive
and/or costly. Consequently, the terms and conditions under which we might
obtain such a facility are uncertain. Any failure to obtain adequate credit
facilities on acceptable terms could have a material and adverse effect on our
business, financial condition and results of operations.
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<PAGE> 24
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE FACE RISK OF THIRD PARTY
CLAIMS OF INFRINGEMENT
We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such patents may not provide us with any
competitive advantages. Finally, our competitors may develop or otherwise
acquire equivalent or superior technology.
We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary rights and the proprietary rights of others. Enforcing or
defending our proprietary rights could be expensive and might not bring us
timely and effective relief.
We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
protective measures in these countries may be inadequate to protect our
proprietary rights. Any failure to enforce and protect our intellectual property
rights could have a material adverse effect on our business, financial condition
and results of operations.
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. We may not
be able to obtain similar rights in the future on terms as favorable.
We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. The
lawsuit, which was filed in the United States District Court for the Northern
District of California, has been transferred to the United States District Court
for the Eastern District of Louisiana for coordination or consolidation with
pre-trial proceedings with three other actions involving Papst patents. The
alleged infringement claimed by Papst involves 15 of the hard disk drive motor
patents referenced above and relates to motors that we purchase from motor
vendors and the use of such motors in hard disk drives. While we believe that we
have valid defenses to the Papst claim, the results of any litigation are
inherently uncertain and there is no assurance that Papst will not assert other
infringement claims relating to current patents, pending patent applications and
future patents or patent applications. Additionally, there is no assurance that
we will be able to successfully defend ourselves against any such lawsuit. A
favorable outcome for Papst in the lawsuit could result in the issuance of an
injunction against us or our products and/or the payment of monetary damages
equal to a reasonable royalty or recovered lost profits or, in the case of a
finding of a willful infringement, treble damages and could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR
INTERNATIONAL SALES
We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers.
Our dependence on revenue from international sales and our need to manage
international operations each involves a number of inherent risks, including:
- economic slowdown and/or downturn in the computer industry in such
foreign markets;
- international currency fluctuations;
- general strikes or other disruptions in working conditions;
- political instability;
- trade restrictions;
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<PAGE> 25
- changes in tariffs;
- the difficulties associated with staffing and managing international
operations;
- generally longer periods to collect receivables;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse taxes; and
- delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.
The specific economic conditions in each country will impact our
international sales. For example, our international contracts are denominated
primarily in U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could cause our products to become
relatively more expensive to distributors and retailers in those countries. In
addition, we attempt to manage the impact of foreign currency exchange rate
changes by entering into short-term, foreign exchange contracts. If we do not
effectively manage the risks associated with international operations and sales,
our business, financial condition and results of operations could be materially
and adversely affected.
WE HAVE EXPOSURE FROM OUR WARRANTIES
Our products may contain defects. We generally warrant our products for
three years. Our standard warranty contains a limit on damages and an exclusion
of liability for consequential damages and for negligent or improper use of the
product. We establish a reserve, at the time of product shipment, in an amount
equal to our estimated warranty expenses. We had warranty reserves of $45.9
million as of October 2, 1999 and $31.6 million as of September 26, 1998. While
we believe that our warranty reserves will be sufficient, the failure to
maintain sufficient warranty reserves or the unenforceability of our liability
limitations could have a material adverse effect on our business, financial
condition and results of operations.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE
Our stock price and the number of shares traded each day has varied
greatly. We expect these fluctuations to continue due to factors including:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors;
- gains or losses of significant customers;
- changes in stock market analysts' estimates;
- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
Our stock price also may be affected by events relating to Hyundai
Electronics America and Hyundai Electronics Industries, including sales of our
common stock by Hyundai Electronics America or the perception that such sales
may occur (due to the financial condition of Hyundai Electronics America or
otherwise). There have been reports that Hyundai Electronics Industries is
planning to sell some operations that do not directly relate to its core
semiconductor business. Hyundai Electronics America and Hyundai Electronics
Industries have informed Maxtor that following the closing of its February 1999
public offering and the expiration of the 90-day period during which Hyundai
Electronics America has agreed not to offer or sell additional shares without
the consent of Salomon Smith Barney Inc., they may consider selling additional
Maxtor shares at a time they deem appropriate. Finally, our stock price may be
subject to extreme fluctuations in response to general economic conditions in
the U.S., Korea, Southeast Asia and elsewhere, such as interest rates, inflation
rates, exchange rates, unemployment rates, and trade surpluses and deficits. It
is likely that in
25
<PAGE> 26
some future quarter or quarters our operating results will be below the
expectations of stock market analysts or investors. In such event, our stock
price probably will decline.
In February 1999, DECS Trust IV, a newly-formed trust, sold 12,500,000
DECS. The terms of the DECS provide that DECS Trust IV may distribute shares of
our common stock owned by Hyundai Electronics America on or about February 15,
2002, or upon earlier liquidation of DECS Trust IV under certain circumstances.
We do not know how or whether investors in the DECS offering will resell the
DECS. Any market that develops for the DECS could reduce the demand for our
common stock or otherwise negatively affect the market for our common stock.
UNCERTAINTY AND RISKS RELATING TO INTEGRATION OF CREATIVE DESIGN SOLUTIONS, INC.
AND RISKS RELATING TO ACQUISITIONS GENERALLY
Part of Maxtor's strategy is to grow through the acquisition of related
businesses, such as the recent acquisition of CDS. This strategy involves a
number of risks, including the substantial management time devoted to such
activities, risks related to the integration of the acquired business,
undisclosed liabilities, and failure to achieve anticipated benefits, such as
cost savings and synergies.
Maxtor intends to combine CDS' operations with Maxtor's operations as
quickly as practicable. Maxtor and CDS have different systems and procedures in
many operational areas that must be rationalized and integrated. Among other
things, Maxtor must integrate product offerings, and coordinate development and
sales and marketing efforts. There may be substantial difficulties associated
with integrating two separate companies, and there can be no assurance that such
integration will be accomplished expeditiously or successfully. The integration
of certain operations following an acquisition will require the dedication of
management resources that may temporarily detract attention from the day-to-day
business of Maxtor. Any costs associated with this type of integration may have
an adverse effect on Maxtor's operating results in the periods in which they are
incurred. Failure to accomplish the integration of the operations of Maxtor and
CDS, or market place uncertainty regarding the acquisition, could have a
material adverse effect on Maxtor's business, financial condition and results of
operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, we are currently involved in a dispute with
StorMedia Incorporated ("StorMedia"), which arose out of an agreement among
Maxtor, StorMedia and Hyundai Electronics Industries Co. Ltd. ("HEI") in which
StorMedia agreed to supply disk media to the Maxtor. There have been no material
developments in the StorMedia lawsuits during this reporting period.
We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that may ultimately be
incurred either in the context of a trial or as a result of a negotiated
settlement. The litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not have a material adverse effect on our
business, financial position and results of operations.
We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. As
previously reported, the lawsuit alleges infringement of 15 of the hard disk
drive motor patents, which relate to motors that we purchase from motor vendors
and the use of such motors in hard disk drives. Our Answer and Counterclaim,
alleging defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others,
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<PAGE> 27
was filed on May 19, 1999. We also filed a motion to bifurcate for early
discovery the license, exhaustion and misuse defenses. At hearing on July 21,
1999, the Court stayed further action in the case pending the outcome of a
motion filed by Papst on July 13, 1999, seeking coordination and transfer of
this case with several other actions involving Papst patents. This motion was
filed with the Judicial Panel on Multidistrict Litigation in Washington, D.C. On
August 5, 1999, we filed our opposition to the motion. No hearing date has been
set in that proceeding.
While we believe that our defenses to the Papst claim are valid, the
results of any litigation are inherently uncertain and there is no assurance
that Papst will not assert other infringement claims relating to current
patents, pending patent applications and future patents or patent applications.
Additionally, there is no assurance that we will be able to successfully defend
ourselves against any such lawsuit. A favorable outcome for Papst in the lawsuit
could result in the issuance of an injunction against us or our products and/or
the payment of monetary damages equal to a reasonable royalty or recovered lost
profits or, in the case of a finding of a willful infringement, treble damages
and could have a material adverse effect on our business, financial condition
and results of operations.
No amounts have been reserved in the accompanying condensed consolidated
financial statements for any legal claims or actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
In February 1999, we completed a secondary public offering of 7.8 million
shares of our common stock. We received net proceeds of approximately $95.8
million from the offering, after deducting the underwriting discounts and
estimated expenses payable by the Company. During the nine months ended October
2, 1999, we used approximately $55 million of the proceeds and cash from
operations to reduce short and long-term debt by $60 million. The remaining
proceeds have been applied to working capital.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended October 2, 1999, Creative Design Solutions, Inc.
("CDS"), a California corporation merged with and into a wholly owned subsidiary
of Maxtor, which subsidiary then merged with and into Maxtor. We issued
approximately 8,129,700 shares of our common stock in return for all of the
outstanding capital stock of CDS as of the date of the acquisition. The issuance
was deemed to be exempt from registration with the SEC in reliance upon
Regulation D promulgated under the Securities Act of 1933, as amended, based
upon the limited number of persons receiving shares and the knowledge and
experience of such persons or their representatives in evaluating the proposed
investment. In addition, we have reserved approximately 825,000 shares of our
common stock for issuance upon exercise of outstanding stock options of CDS,
which we assumed in the acquisition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on August 11, 1999, the
stockholders elected each of the nominees for Class I director on the Board of
Directors. The votes were as follows:
<TABLE>
<CAPTION>
WITHHELD
NOMINEE FOR AUTHORITY
------- --- ---------
<S> <C> <C>
Charles Hill 90,120,528 7,842,567
C.S. Chung 90,154,534 7,808,561
</TABLE>
The following directors' terms of office continue until the annual meeting
indicated: Thomas Chun, Roger W. Johnson and Y.H. Kim (Class II term expires at
the 2000 annual meeting); and C.S. Park, Michael R. Cannon and Charles F. Christ
(Class III term expires at the 2001 annual meeting).
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<PAGE> 28
The following matters were also submitted to and approved by a vote of the
stockholders with the results of the voting being as shown:
<TABLE>
<CAPTION>
BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
-------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Approval of the Company's 1996 Stock Option
Plan, as amended, for the purposes of Section
162(m) of the Internal Revenue Code, and to
(i) increase by 3,676,367 the aggregate
number of shares of Common Stock authorized
for issuance under the plan, (ii) increase
the size of certain options granted to
non-employee directors and (iii) provide for
the grant of restricted stock................ 78,535,122 19,118,139 89,997 219,837
Approval of the Company's 1998 Employee Stock
Purchase Plan, as amended, to increase by
700,000 the aggregate number of shares of
Common Stock authorized for issuance under such
plan........................................... 97,054,081 844,330 64,684 --
Approval and ratification of the selection of
PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal
year ending January 1, 2000.................. 97,766,731 106,759 89,605 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. See Index to Exhibits on page 30 hereof.
b. On September 24, 1999, we filed a current report on Form 8-K to report
the completion of a merger pursuant to which CDS became a wholly owned
subsidiary of Maxtor and issuance of Maxtor common stock in exchange for all
outstanding shares of CDS capital stock.
ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
MAXTOR CORPORATION
By: /s/ Paul J. Tufano
------------------------------------
Paul J. Tufano
Senior Vice President, Finance,
Chief Financial Officer and
Principal Accounting Officer
Date: November 15, 1999
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<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C>
10.169 Executive Retention Incentive Agreement between Michael R.
Cannon and Registrant dated June 23, 1999...................
10.170 Promissory Note between Michael R. Cannon and Registrant
dated June 23, 1999.........................................
10.171* Amendment One to Supply Agreement between MMC Technology,
Inc. and Registrant.........................................
10.172 Capital Assistant Scheme Loan Agreement between Maxtor
Peripherals (S) Pte Ltd and the Economic Development Board
of Singapore dated September 9, 1999........................
10.173 Guarantee Facility Agreement between Maxtor Peripherals (S)
Pte Ltd and the Bank of Nova Scotia, Singapore branch dated
August 31, 1999.............................................
27 Financial Data Schedule.....................................
</TABLE>
* Indicates confidential treatment has been requested for this exhibit.
<PAGE> 1
EXECUTIVE RETENTION INCENTIVE AGREEMENT
This Executive Retention Agreement (the "Agreement") is made and entered
into as of June 23, 1999 (the "Effective Date"), by and between Maxtor
Corporation, a Delaware corporation (the "Company") and Michael R. Cannon
("Executive").
R E C I T A L S
A. Executive is the president and chief executive officer of the Company
and possesses valuable knowledge of the Company, its business and
operations, and the markets in which the Company competes.
B. The Company draws upon the knowledge, experience and advice of Executive
in order to manage its business for the benefit of the Company's
stockholders.
C. Executive and the Company have entered into a Retention Agreement dated
May 29, 1998 setting forth certain incentives for Executive to remain
employed with the Company (the "May 1998 Retention Agreement").
D. The Compensation Committee of the Board of Directors desires to
supplement Executive's retention arrangements so as to provide
additional compensation and benefits to the Executive to encourage
Executive to continue to devote his full attention and dedication to the
Company and to create additional incentives to continue his employment
with the Company.
1. Loan.
(a) As of the Effective Date of this Agreement, the Company will
loan Executive the sum of Five Million ($5,000,000.00) (the "Loan"). Except as
otherwise provided in this Agreement, the Loan shall be subject to the terms and
conditions of the promissory note, attached hereto as Exhibit 1 (the "Promissory
Note").
(b) Notwithstanding any other provisions in the Promissory Note
to the contrary:
(i) In consideration of Executive's future services, on
June 22, 2002, Executive's obligation to pay the then outstanding balance of the
Loan (including unpaid principal and accrued interest thereon) shall be forgiven
and the Promissory Note shall be canceled, provided Executive remains
continuously employed through such date;
(ii) Upon the occurrence of a termination of Executive's
employment by the Company for other than Cause, as that term is defined in the
May 1998 Retention Agreement, Executive's obligation to pay the then outstanding
balance of the Loan (including unpaid principal and accrued interest thereon)
shall be forgiven and the Promissory Note shall be canceled;
(iii) Upon the occurrence of a Termination Upon a Change
of Control, as that term is defined in the May 1998 Retention Agreement,
Executive's obligation to pay the
1
<PAGE> 2
then outstanding balance of the Loan (including unpaid principal and accrued
interest thereon) shall be forgiven and the Promissory Note shall be canceled;
(iv) In the event Executive becomes Permanently Disabled,
as that term is defined in the May 1998 Retention Agreement, or dies,
Executive's obligation to pay the then outstanding balance of the loan
(including unpaid principal and accrued interest thereon) shall be forgiven and
the Promissory Note shall be canceled.
2. Payment of Taxes. All payments made to Executive under this Agreement
shall be subject to all applicable federal and state income, employment and
payroll taxes. At the time the Promissory Note is canceled or any payment
thereunder is forgiven, in whole or in part, or at any time thereafter as
requested by the Company, Executive hereby authorizes withholding from payroll
and any other amounts payable to him, and otherwise agrees to make adequate
provision for any sums required to satisfy the federal, state, local and foreign
tax withholding obligations of the Company, which may arise in connection with
such forgiveness or cancellation. Executive acknowledges that, notwithstanding
any other provision of the Agreement, no obligations under the Promissory Note
shall be forgiven or canceled unless the tax withholding obligations of the
Company are satisfied.
3. Parachute Payment. If due to the benefits provided under this
Agreement, Executive is subject to any excise tax due to characterization of any
amounts payable hereunder as excess parachute payments pursuant to Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), the Company
agrees to offer the Executive the option of (i) receiving the full parachute
payment subject to the excise tax, or (ii) receiving a reduced parachute payment
that would not be subject to the excise tax (which in some circumstances may
maximize the net benefit to Executive). Unless the Company and Executive
otherwise agree in writing, any calculation required under this Section 3 shall
be made in writing by independent public accountants agreed to by the Company
and Executive (the "Accountants"), whose calculation shall be conclusive and
binding upon Executive and the Company for all purposes. For purposes of
calculating the Executive's options under this Section 3 the Accountants may
rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and Executive shall furnish to
the Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section 3 The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 3
4. Arbitration. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Santa Clara County,
California or elsewhere by mutual agreement. The selection of the arbitrator and
the arbitration procedure shall be governed by the Commercial Arbitration Rules
of the American Arbitration Association. All costs and expenses of arbitration
or litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the Executive, shall be paid by the Company. Judgment may
be entered on the award of the arbitration in any court having jurisdiction.
5. Interpretation. Executive and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California, without regard to such state's conflict of laws rules.
2
<PAGE> 3
6. Conflict in Benefits. This Agreement and the Promissory Note shall
supersede all prior arrangements, whether written or oral, and understandings
regarding the Loan. This Agreement is not intended to and shall not affect,
limit or terminate the May 1998 Retention Agreement which is supplemented hereby
and which shall remain in full force and effect as supplemented hereby.
Notwithstanding any other provision in the May 1998 Retention Agreement to the
contrary, the benefits payable under the May 1998 Retention Agreement upon a
Termination Upon Change of Control shall NOT be reduced by any amount of the
Loan which may be forgiven upon a Termination Upon Change of Control. Moreover,
this Agreement is not intended to and shall not limit (i) any plans, programs,
or arrangements of the Company that are regularly made available to a
significant number of employees of the Company, (ii) the Company's 1998
Restricted Stock Plan, (iii) any agreement or arrangement with the Executive
that has been reduced to writing and which does not relate to the subject matter
hereof, (iv) any agreements or arrangements hereafter entered into by the
parties in writing, all of which shall remain in full force and effect in
accordance with the terms thereof. With respect to the Loan, this Agreement and
the Note are the entire agreement and no other documents, understanding or
discussion has been relied upon in entering this Agreement or the Note or
contain any term or condition of this Agreement or Note.
7. Successors and Assigns.
(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction constitutes a material breach
of this Agreement by the Company. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor or assign to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 7 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
(b) Heirs of Executive. This Agreement shall inure to the benefit
of and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
8. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Maxtor Corporation
2190 Miller Drive
Longmont, Colorado 80501
Attn: General Counsel
and if to the Executive at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
3
<PAGE> 4
9. Validity. If any one or more of the provisions (or any part thereof)
of this Agreement shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.
10. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by Executive and the Company. Executive
has had the opportunity to consult counsel of Executive's own choosing prior to
entering into this Agreement and Note.
11. Ratification. The parties hereto ratify and reaffirm the May 1998
Retention Agreement and the Promissory Note dated June 23, 1999, both of which
are incorporated herein by reference.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
MAXTOR CORPORATION
Date: June 30, 1999 By: /s/ Glenn H. Stevens
------------------------ ------------------------------------
Vice President, General Counsel
Title: and Secretary
---------------------------------
EXECUTIVE:
Date: June 30, 1999 /s/ Michael R. Cannon
------------------------ ----------------------------------------
Michael R. Cannon
Address for Notice:
- -------------------------
- -------------------------
- -------------------------
4
<PAGE> 1
PROMISSORY NOTE
$5,000,000.00 Milpitas, California
June 23, 1999
The undersigned, Michael R. Cannon ("Borrower"), hereby unconditionally
promises to pay to the order of Maxtor Corporation, a Delaware corporation (the
"Lender"), the sum of Five Million Dollars ($5,000,000.00) plus interest, in
accordance with the terms of the Executive Retention Agreement by and between
Lender and Borrower effective June 23, 1999 (the "June 1999 Retention
Agreement").
The outstanding principal balance of this Note, together with all
accrued and unpaid interest hereon, shall be due and payable on June 22, 2002,
or upon termination for "Cause" or voluntary termination of employment for
reasons other than "Good Reason" as those terms are defined in the June 1999
Retention Agreement. Interest shall accrue on unpaid principal from the date
hereof until maturity at a rate of 4.98%, compounded annually.
This Note may be prepaid, in whole or in part, at any time or from time
to time, without penalty or premium. Any prepayment of principal must be
accompanied by then accrued but unpaid interest. Interest shall cease to accrue
on amounts of principal so prepaid. Any prepayment of interest shall include all
interest accrued to the date of payment, but need not include any payment of
principal.
All payments of principal or interest shall be made in lawful money of
the United States of America to the Lender at the offices of the Lender, or at
such other address as the Lender shall specify to Borrower in writing. Any
payment shall be deemed made upon receipt by Lender.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Borrower for cancellation.
Borrower waives its rights to impose any defense (other than payment),
set-off, counterclaim or cross-claim in any action brought on this Note.
Borrower waives presentment, demand for performance, notice of performance,
protest, notice of protest, and notice of dishonor.
1
<PAGE> 2
If the indebtedness represented by this Note or any part hereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Borrower agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' and collection fees and costs.
This Note is being delivered in and shall be construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and
year first above written.
/s/ Michael R. Cannon
-----------------------------------
Michael R. Cannon
2
<PAGE> 1
Exhibit 10.171
/***/ INDICATES REDACTED INFORMATION FOR WHICH CONFIDENTIAL TREATMENT IS
REQUESTED
Amendment One
Supply Agreement
This Amendment One ("Amendment") amends the Supply Agreement, dated August
18, 1998 ("Agreement"), is effective /***/ ("Effective Date") and is made by and
between Maxtor Corporation, a Delaware corporation, having principal places of
business at 510 Cottonwood Drive, Milpitas, California 95035 and 2190 Miller
Drive, Longmont, Colorado 80501 ("Maxtor") and MMC Technology, Inc., a
California corporation, having its principal place of business at 2001 Fortune
Drive, San Jose, California 95131 ("MMC").
WHEREAS, Maxtor is willing to offer an additional share of its business to
MMC, which share would be in addition to the share already provided for in the
Agreement; and
WHEREAS, Maxtor and MMC have also agreed to change the terms of sale of
all media, such that /***/;
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND OF
WHICH IS HEREBY ACKNOWLEDGED, AND IN CONSIDERATION OF THE ABOVE PREMISES AND
THE MUTUAL PROMISES CONTAINED IN THIS AGREEMENT, THE PARTIES AGREE TO AMEND THE
AGREEMENT AS FOLLOWS:
Paragraph 1.4.2 of the Agreement is amended to read as follows, effective
the first day of Maxtor's fourth fiscal quarter of 1999:
1.4.2 Terms of Sale. The terms of sale are as follows:
(i) For sales to Maxtor's research, engineering, qualification,
development, or NPI facilities, or in any case which is not Just in Time
("JIT"): /***/
(ii) For sales to Maxtor's factory facilities under JIT terms:
/***/
The parties understand and agree that New World Freight, Inc. ("New
World") is currently performing as the common carrier and warehouser for MMC in
the delivery of Product to Maxtor. /***/
Paragraph 1.4.1(A) is amended to read as follows, effective the first day
of Maxtor's fourth fiscal quarter of 1999:
1.4.1. Product Price. /***/
Paragraph 2.3.1(A) is amended to read as follows, effective the first day
of Maxtor's fourth fiscal quarter of 1999:
2.3.1 Volume Commitment. /***/
<PAGE> 2
THIS AMENDMENT, INCLUDING THE AGREEMENT OF WHICH IT IS A PART, IS A
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, WHICH
SUPERSEDES ALL PRIOR OR CONCURRENT PROPOSALS AND UNDERSTANDINGS, WHETHER ORAL OR
WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO ITS
SUBJECT MATTER. NOTWITHSTANDING ANYTHING CONTRARY IN THE AGREEMENT, IN THE EVENT
OF A CONFLICT BETWEEN THIS AMENDMENT AND THE AGREEMENT, THIS AMENDMENT SHALL
PREVAIL. ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED AND ARE RATIFIED
HEREBY.
IN WITNESS WHEREOF, the parties have executed this Amendment as of its
Effective Date.
MAXTOR CORPORATION MMC TECHNOLOGY, INC.
By: /s/ DAVE BEAVER By: /s/ N. PIGNATI
----------------------------------- --------------------------------
(signature) (signature)
Dave Beaver N. Pignati
----------------------------------- --------------------------------
(print name) (print name)
Vice President, Worldwide Materials President & CEO
----------------------------------- --------------------------------
(title) (title)
<PAGE> 1
If the indebtedness represented by this Note or any part hereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Borrower agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' and collection fees and costs.
This Note is being delivered in and shall be construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and
year first above written.
/s/ Michael R. Cannon
-----------------------------------
Michael R. Cannon
2
<PAGE> 2
Dated this 9th day of September, 1999
CAPITAL ASSISTANCE SCHEME LOAN
BETWEEN
MAXTOR PERIPHERALS (S) PTE LTD
AND
ECONOMIC DEVELOPMENT BOARD
<PAGE> 3
THIS AGREEMENT is made the 9th day of September One thousand Nine
Hundred and Ninety [ Nine ] (1999 ) Between:
MAXTOR PERIPHERALS (S) PTE LTD, a company incorporated in Singapore and having
its place of business at 2, Ang Mo Kio Street 63, Ang Mo Kio Industrial Park 3
Singapore 569111 (hereinafter called "the Company") of the one part; And
ECONOMIC DEVELOPMENT BOARD, a Corporate Body established in the Republic of
Singapore by the Economic Development Board Act (Cap. 85) of 250, North Bridge
Road, #24-00 Raffles City Tower Singapore 179101 (hereinafter called "the
Board") of the other part.
WHEREAS:
(1) The Company has applied to the Board for a term loan up to a maximum
aggregate principal amount of Singapore Dollars Forty-Eight Million
(S$48,000,000) under the Capital Assistance Scheme of the Board.
(2) The Board is willing to grant the term loans to the Company, upon the terms
and subject to the conditions hereinafter set forth.
NOW THIS AGREEMENT WITNESSETH AS FOLLOWS:-
1. DEFINITIONS
1.1 In this Agreement, unless the context otherwise requires, the following
words or expressions shall have the following meanings respectively:-
(a) "Business Day" means a day on which banks in Singapore are open for
business excluding Sunday.
(b) "Day" means a calendar day.
(c) "Dollars" and the sign "$" respectively mean the lawful currency of
the Republic of Singapore.
(d) "Drawing" means any, each or all (as the context may require) of the
drawings made by the Company under the Term Loan and includes the
First Drawing as defined hereof.
(e) "Event of Default" and "Events of Default" mean any, each or all (as
the context may require) of the Events of the Default described in
Clause 15 hereof.
(f) "First Drawing" means the first of the drawing made by the Company
under the Term Loan.
<PAGE> 4
(g) "Fixed Productive Assets" means the building, facilities and
equipment, for the manufacture and repair of magnetic disk drives
for desktop computer systems.
(h) "Guarantee" means a bank guarantee to be issued by a prime bank in
Singapore and duly executed under seal and signed by the said bank's
authorised signatories, in favour of the Board and in the form and
containing terms acceptable to the Board.
(i) "Interest Rate" means the rate of interest determined in accordance
with Clause 7.2 hereof.
(j) "Interest Payment Dates" means the day falling on the first Business
Day of March or the first Business Day of September as the case may
be and the first Interest Payment Date shall be the Interest Payment
Date immediately following the date of the First Drawing of the Term
Loan.
(k) "Interest Period" means the period or periods determined as
follows:-
(i) the Interest Period in relation to the First Drawing shall
begin on the date on which that Drawing is made hereunder and
shall end on the first Interest Payment Date;
(ii) the Interest Period in respect of any subsequent Drawing shall
begin on the date on which the relevant subsequent Drawing is
made and shall end on the Interest payment Date falling
immediately thereafter;
(iii) each successive Interest Period shall begin on the last
Interest Payment Date and shall end on the Interest payment
Date falling six (6) months immediately following;
(iv) if any Interest Period would otherwise end on a day which is
not a Business Day that Interest Period shall be extended to
the next succeeding day which is a Business Day;
(v) if any Interest Period is extended by the application of (iv)
above, the following Interest Period shall (without prejudice
to the application of (iv) above) end on the day on which it
would have ended if the preceding Interest Period had not been
so extended; and
(vi) any amount to be repaired under clause 8 shall have a final
Interest Period expiring on the relevant Repayment Date
(l) "Month" means a calendar month.
(m) "person" shall include a company, body of persons, association or
body corporate or unincorporated.
<PAGE> 5
(n) "Repayment Dates" means the first Day of March and the first Day of
September of each year.
(o) "Term Loan" means the loan facility in the aggregate amount of
Singapore Dollars Forty-Eight Million (S$48,000,000) to be made
available to the Company by the Board in accordance with the terms
and conditions set out in this Agreement and shall also be deemed to
include the whole or any part thereof.
(p) "Year" means a calendar year.
1.2 Unless the context otherwise requires, words importing the singular number
include the plural number and vice versa.
1.3 The words "hereof", "herein", "hereon" and "hereafter" and words of
similar import, when used in this Agreement, refer to this Agreement as a whole
and not to any particular provision of this Agreement.
1.4 The headings to the Clauses hereof shall not be deemed part thereof or be
taken in consideration in the interpretation or construction thereof or of this
Agreement.
1.5 Reference herein to Clauses are references to Clauses of this Agreement.
2. TERM LOAN
Subject to the provisions of this Agreement and in particular those of
Clause 3 hereof, the Board will make available to the Company the Term Loan at
the times and in the manner as hereinafter provided. The Term Loan shall be for
a period of 4 years, inclusive of a 1 year grace period for repayment of the
Term Loan as provided in Clause 8 herein.
3. CONDITIONS PRECEDENT AND AVAILABILITY
The right of the Company to make any Drawing or Drawings under the Term
Loan, and the obligations of the Board to make available the same shall be
subject to the following conditions precedent, that is to say:-
(a) There shall not exist at or prior to any Drawing, any Event of
Default or any condition, event or act which, with the giving of
notice or lapse of time, or both, would, constitute such an Event of
Default.
(b) All representations, warranties and statements contained herein, or
otherwise made in writing in connection herewith or in any
certificate or statement furnished pursuant to any provision of this
Agreement or in any document referred to herein made by the Company
shall be true and
<PAGE> 6
correct with the same effect as though made on the date on which the
Drawing is to be made.
(c) The Board shall have received, in form and substance satisfactory to
the Board, the following:-
(i) A copy of the Memorandum and Articles of Association of the
Company duly certified by a Director and the Secretary of the
company to be a true copy thereof;
(ii) A copy, certified by a Director and Secretary of the Company,
of the resolution of the Board of Directors of the Company,
which is in full force and effect, approving the terms and
conditions contained in this Agreement and authorising a
person or persons to sign this Agreement and any other
document to be given to the Board from time to time by the
Company;
(iii) Specimen signatures of the persons authorised to sign this
Agreement on behalf of the Company, and to sign the notices of
Drawing and any other document to be given from time to time
by the Company, such specimens to be certified be a Director
or the Secretary of the Company to be the true signatures of
such persons respectively; and
(iv) The Guarantee relating to the Term Loan to be made and duly
executed.
(d) All acts, conditions and things required to be done and performed
and to have happened precedent to the execution and delivery of this
Agreement and the Guarantee and to constitute this Agreement and the
Guarantee legal, valid and binding obligations enforceable in
accordance with their respective terms, shall have been done and
performed and have happened in compliance with all applicable laws.
(e) There is no breach by the Company of any of the terms, conditions
and undertakings herein contained.
4. PURPOSE OF THE TERM LOAN
4.1 Subject to the terms and conditions herein contained and in particular to
those of the Clause 3, the Term Loan will be made available by the Board to the
Company for financing the purchase of machinery and a new building. Under this
Agreement, the Company shall be required to invest a minimum of Singapore
Dollars One Hundred and Sixty-five Million (S$165,000,000) cumulatively in Fixed
Productive Assets (excluding land) by 30 September 2003.
4.2 Upon advance of a Drawing under Clause 5, the Company shall apply all the
proceeds thereof for the purposes described in Clause 4.1 above and for no other
purpose whatsoever.
<PAGE> 7
5. DRAWINGS OF TERM LOAN
5.1 Subject to the terms and conditions of this Agreement and in particular to
all the conditions of Clause 3 being complied with the Board will make available
drawings under the Term Loan in accordance with a disbursement schedule
submitted by the Company and approved by the Board at least 45 days before the
First Drawing of the Term Loan.
5.2 The Company shall give notice of Drawing to the Board not later than
thirty (30) Business Days prior to the intended date of Drawing and each notice
of Drawing shall be substantially in the form set out in the Appendix I hereto
and shall:-
(i) state the date (which must be a Business Day) and the amount of the
proposed Drawing;
(ii) be irrevocable;
(iii) commit the Company to borrow the amount and on the date stated; and
(iv) constitute a representation and warranty that at the date thereof
the warranties and representations set out in Clause 12 are true and
no Event of Default and no even or act which with the giving of
notice or lapse of time or both would constitute such an Event of
Default has occurred.
5.3 The First Drawing shall be made not later than 31 December 1999 or such
later date as may be approved by chairman EDB or his lawful representative.
6. AVAILABILITY OF TERM LOAN
The Term Loan shall be available for Drawing for a period of 18 months
from the date of the First Drawing after which date any part of the Term Loan
not drawn shall be cancelled.
7. INTEREST
7.1 The Company shall pay to the Board on each Interest Payment Date interest
in arrears on the amounts drawn and outstanding under the term Loan from time to
time in respect of each Interest Period relating thereto determined in
accordance with clause 1.1(k) and at the Interest Rate determined in accordance
with sub-clause 7.2 hereof.
<PAGE> 8
7.2 Interest will be charged by the Board at the rate 1% above the prevailing
CPF lending rate, subject to a minimum of 3.5% per annum (the "Interest Rate")
and shall be payable in arrears at six-monthly intervals, the first payment to
be made on the Interest Payment Date as defined in Clause 1.1 (j) hereof.
7.3 The amount of interest payable on the drawings under the Term Loan from
time to time owing and outstanding shall be calculated at the Interest Rate on
the basis of a year of three hundred and sixty five (365) Days for the actual
number of Days elapsed.
7.4 The certificate of the Board in writing as to the determination of the
amount of interest payable on each Interest Payment Date shall be conclusive and
binding upon the parties hereto, save for manifest error.
7.5 The Company recognises and accepts that it is commercial practice for
interest on amounts in default to be charged and that the rate of interest to be
applied by the Board on the amounts in default shall be three per cent (3%) per
annum above the average prevailing prime interest rate as reported by the
Monetary Authority of Singapore compounded on a monthly basis, which will
represent a genuine estimate of the damage the Board would suffer in the event
of a failure by the Company in the payment on the due date of any principal
and/or interest on the amounts due and payable to the Board.
8. REPAYMENT OF THE TERM LOAN
The company shall repay the principal of the amounts drawn under the
Term Loan in 7 consecutive six-monthly instalments on the Repayment Dates. The
first of such instalments shall be paid on the first Repayment Date following 1
year from the date of the First Drawing of the Term Loan or such other later
date as the Board may determine in its absolute discretion.
9. PAYMENT PROVISIONS
9.1 All payments to be made by the Company under this Agreement shall be made
not later than 11 a.m. (Singapore time) on the relevant day to the Board at its
address described above or at such other address as the Board may from time to
time designate by notice in writing to the Company not less that ten (10)
Business Days prior to the date of any such payment hereunder.
9.2 If any sum becomes due for payment under this Agreement on a day which is
not a Business Day, such payment shall be made on the next succeeding Business
Day and all calculation of interest shall be adjusted accordingly.
10. PREPAYMENT
10.1 The Company may prepay in the inverse order of maturity any part of the
Term Loan or the entire Term Loan before maturity on paying a fee amounting to a
quarter of
<PAGE> 9
one percent (1/4 of 1%) of the amount prepaid for every period of six (6) months
or any lesser period before maturity or one percent (1%) of the amount prepaid,
whichever is the lesser amount.
10.2 The Company shall give the Board seven (7) Days' prior written notice of
the intention to prepay any amount described in Clause 10.1.
10.3 In the event the Company is required to prepay the principal sum owing
under the Term Loan pursuant to Clause 15.2 (a) hereof the Company shall pay to
the Board the fee at the rate described in Clause 10.1 above on the principal
sum owing.
11. SECURITY
Prior to each Drawing of the Term Loan, the Company shall procure the
requisite Guarantee from a Prime Bank with a credit rating which satisfies the
Board's requirements and in the event that during the currency of this Agreement
the credit rating of the Prime Bank falls below the Board's requirements, the
Company shall immediately take steps to replace the Guarantee with one from an
approved Prime Bank with the requisite rating. It is also agreed that should the
coverage given by the Guarantee(s) be in the Board's opinion insufficient to
secure the principal amount, interest and default interest, the Board reserves
the right to demand that the Company, within a reasonable time after
notification by the Board, furnish fresh security by way of guarantee from an
approved Prime Bank(s) for any outstanding amounts. Any failure to meet this
demand within the time period allowed by the Board shall constitute an Event of
Default under Clause 15 of this Agreement. It is further agreed that if the
validity period of the Guarantee is shorter than the length of the Term Loan as
defined in Clause 2 of this Agreement, the Company shall furnish a fresh
Guarantee at least 6 months prior to the expiration of the existing Guarantee. A
failure to replace the Guarantee in the specified time or such other time agreed
to by the Board shall result in the entire Term Loan and all outstanding
interest amounts becoming immediately due and payable to the Board upon receipt
of the Board's written notice for such payment.
12. WARRANTIES AND REPRESENTATIONS
12.1 The Company hereby warrants and represents to the Board as follows:-
(a) that it is lawfully incorporated, validly existing and in good
standing under the laws of the Republic of Singapore;
(b) that it has the corporate power and authority to carry on the
business as now being conducted;
(c) that it has the corporate power to execute and perform this
Agreement and to borrow hereunder;
(d) that the execution, delivery and performance of the Agreement and
the borrowings hereunder have been duly authorised by all requisite
<PAGE> 10
corporate action and will not violate any provision of any agreement
or other instrument to which the Company is a party;
(e) that its latest balance sheet and financial statements submitted to
the Board are correct and complete and accurately represent the
financial condition of the Company on the date thereof and the
results of its operation for the period then ended and each such
balance sheet shows all known present and future liabilities, direct
or contingent, of the Company as of the date thereof and each
financial statement referred to herein was prepared in accordance
with generally accepted accounting principles;
(f) that there has been no material adverse change in the business
activities, operations or financial condition of the Company since
the date of the latest financial statements referred to in
sub-paragraph (e) above;
(g) save as otherwise disclosed to the Board, there are no actions,
suits or proceedings pending or, to the knowledge of the Company
threatened against the Company or its parent or any of its
subsidiaries at law or in equity (whether or not purportedly on
behalf of the Company, its parent or any of its subsidiaries) before
any court or competent body adjudicating such matters, which involve
the possibility of an judgement or liability which may result in any
material adverse change in the business, operations, properties or
assets, or in the condition, financial or otherwise of the Company
or its parent or any of its subsidiaries an d adversely affect the
Company's ability to make repayment of the Term Loan;
(h) that to the best of the knowledge of the Company no steps have been
taken or are being taken to appoint a receiver and/or manager or
judicial manager or liquidator or any other person over it or any of
its assets or in any winding up action
12.2 Each of the warranties and representations contained in the preceding
sub-clause shall survive and continue to have full force and effect after the
execution of this Agreement and that they will be true and correct and fully
observed as though made on the date of Drawing or each Interest Payment Date
with reference to the facts and circumstances then subsisting.
13. AFFIRMATIVE UNDERTAKING
The Company hereby undertakes and agrees with the Board as follows:-
(a) that the Term Loan granted by the Board under the provisions of this
Agreement and every part thereof shall be used solely for the
purpose and in the manner hereinbefore stipulated and not for any
other purpose or manner save with the prior written consent of the
Board.
<PAGE> 11
(b) that it will carry on and conduct its business and affairs with due
diligence and efficiency in accordance with sound technical
financial industrial and managerial standards and practices
including the maintenance of adequate records with qualified
personnel and in accordance with its Memorandum and Articles of
Association.
(c) that it will furnish and provide the Board with and permit the Board
to obtain all such statements information explanation and data,
except information of a confidential nature, as the Board may
reasonably require, by prior written notice, regarding the affairs
operations administration financial of other whatsoever state or
condition of the Company or any of the matters in the Clause
mentioned.
(d) that it will furnish to the Board particulars of any kind of
immovable property hereafter acquired by the Company.
(e) that the Board shall have the right as it may reasonably request, by
prior written notice, to inspect any land or premises where the
Company carries on its business and inspect the same and all
property and assets whatsoever therein or thereon and all accounts
records and statements wherever the same may be situate and to make
inventories and record thereof.
(f) that it will supply to the Board certified copies of all resolutions
passed which materially affect the financial state and condition of
the Company at general and/or special meetings of the Company within
seven (7) Days from the date of the passing of such resolutions.
(g) that it will deliver to the Board every year immediately after the
issue of a copy of the Company's audited balance sheet and profit
and loss accounts audited by a firm of auditors of international
reputed together with Auditors' and Directors' Reports and will also
deliver to the Board a copy of the annual return which the Company
is required by law to file with the Registrar of Companies.
(h) that it shall punctually pay all rents rates assessments taxes and
all outgoings payable in respect of any land/or premises belonging
to the Company or at which it carries on business and obtain all
necessary licences and comply with all regulations rules and orders
relating to the carrying on of its business on such premises.
(i) that it will keep all its plant machinery equipment buildings
constructions fixtures fittings implements and other effects in good
and substantial repair and proper working condition to the
satisfaction of the Board.
(j) that it shall not dismantle pull down or remove any part of the
buildings fixtures plant machinery and equipment, except in cases
where such dismantling pulling down or removal shall in the opinion
of the Company be rendered necessary by reason of the same being
obsolete
<PAGE> 12
worn out or damaged, in which case the Company shall give sufficient
written notice to the Board and will replace such property by
property of similar nature and value after giving intimation to the
Board.
(k) that it shall give to the Board such written authorities or other
directions and provide such facilities and access as the Board may
require for the aforesaid inspection and shall pay all costs fees
travelling and other out-of-pocket expenses whether legal or
otherwise in respect of such inspection.
(l) that insofar as may be necessary the Company shall amend its
Memorandum and Articles of Association so as to enable it to observe
and perform all the covenants undertakings terms stipulations
conditions and other provisions of this Agreement.
14. NEGATIVE UNDERTAKINGS
The Company hereby undertakes and agrees with the Board that it shall
not without the written consent of the Board, which consent shall not be
unreasonably withheld:-
(a) embark on any new project or substantial expansion or
diversification of its present business and operations, which are
not related to its present business activities;
(b) invest its funds by way of deposits (other than deposits with banks
licensed by the Monetary Authority of Singapore), loans, share
capital or otherwise in any other concern or issue or give
guarantees for the account or on behalf of any person or otherwise
become contingently liable for on in connection with any obligations
or indebtedness of any person;
(c) effect any form of reconstruction including amalgamation with
another company which will result in a change in the control of the
Company;
(d) create or permit to arise or subsist, any mortgage, charge (whether
fixed or floating), pledge, lien or other encumbrances whatsoever
(except those which have been specifically disclosed to and approved
by the Board respectively) on any of its properties or assets, both
present and future whatsoever and wheresoever situate;
(e) declare or pay any dividend or make any income or capital
distribution, whether in cash or in specie, to its shareholders or
any of them; or
(f) raise, borrow, take, make, issue or give as the case may be, any
loans, debentures, bonds or credits from or to any persons.
15. EVENTS OF DEFAULT
<PAGE> 13
15.1 If any one or more of the following Events of Default shall occur, that
is to say:
(a) save as otherwise approved by the Board, if the Company shall fail
to pay or otherwise discharge when due any sums of money, whether
principal, interest, fees otherwise, payable under this Agreement;
(b) if the Company shall default in the payment of (a) any principal or
interest beyond any period of grace provided in respect thereof of
any commercial loans from banks or financial institutions or (b) any
other indebtedness to its creditors which the Board has determined
that such is unjustified in law or circumstance;
(c) if any representation or warranty made in or in pursuance of this
Agreement or in any certificate, statement or other document
delivered in connection with the execution and delivery hereof or in
pursuance of this Agreement shall be or become incorrect in any
material respect;
(d) if the Company defaults in the due performance of any undertaking,
condition or obligation on its part to be performed and observed
hereunder (other than the payment of any sum due hereunder) and such
default (if capable of being rectified) shall not be rectified for a
period of thirty (30) Days after the date of receipt by the Company
of written notice of such default from the Board;
(e) if a petition is presented in any court of competent jurisdiction of
a resolution is passed for the winding-up of the Company or its
parent or for the filing or any application for placing the Company
or its parent under judicial management or any similar or analogous
proceedings are taken against any of them and are not withdrawn
within thirty (30) Days after being presented;
(f) if any encumbrancer or lessor shall take possession or a receiver
and/or manager, judicial manager, liquidator or other similar
officer is appointed of the whole of the undertaking, property or
assets, or any part thereof, of the Company or its parent;
(g) if a distress or execution is levied or enforced upon or sued out
against any part of the property or assets of the Company and is not
discharged within thirty (30) Days of being levied and the Board is
of the reasonable opinion that such an event will be materially
prejudicial to the interests of the Board;
(h) if a judgement or order is made against the Company and is not
discharged within sixty (60) Days or if legal proceedings suits or
actions of any kind whatsoever (whether criminal or civil) shall be
instituted against the parent of the Company and the Board is in
that case of the reasonable opinion that the said legal proceedings
suits or actions will materially affect the Company's ability to
perform and observe its obligations under this Agreement;
<PAGE> 14
(i) if the Company becomes insolvent or is unable or deemed unable to
pay its debts or admits in writing its inability to pay its debts,
as they mature, or enters into composition, compromise or
arrangement with its creditors or makes a general assignment for the
benefit of its creditors and the Board is of the opinion that any
such event will be materially prejudicial to the interests of the
Board;
(j) if a winding -up petition is presented by or against the guarantor
of any Guarantee or analogous proceedings shall be taken by or
against it and is not discharged within thirty (30) Days after being
presented;
(k) if the Company ceases or threatens to cease to carry on its business
and the Board is of the opinion that it will materially affect the
ability of the Company to perform and observe its obligations under
this Agreement;
(l) if any license, consent or approval of any authority at any time
necessary to enable to Company to comply with and perform its
obligations under this Agreement to a material extent shall be
revoked, withheld or materially modified or shall otherwise not be
granted or fail to remain in full force and effect;
(m) if any of the consents, authorities, approvals, waivers or
resolutions referred to in Clause 3 shall be modified in a manner
unacceptable to the Board or shall be wholly or partly revoked,
withdrawn, suspended or terminated or shall expire and not be
renewed or shall otherwise fail to remain in full force and its
effect and such circumstances are considered by the Board to be
material;
(n) if without the prior written consent of the Board there is any
change in the shareholding of the Company which will result in a
change in the control of the Company;
(o) if a situation shall have arisen, which in the Board's opinion makes
it unlikely that the Company will be able to perform its obligations
under this Agreement;
(p) if the Board determines in its discretion that its interests under
the Guarantee is or are in jeopardy;
then and in any of such event, the Board may, by notice in writing to the
Company declare that an Event of Default has occurred and such declaration shall
be deemed to take effect from the date of such an Event of Default.
15.2 Upon the declaration by the Board that an Event of Default has occurred:-
(a) the whole of the principal sum drawndown and owing under the Term
Loan, interest thereon and all other sums agreed to be paid this
Agreement shall immediately become due and payable without any
demand or notice of any kind by the Board to the Company; and
<PAGE> 15
(b) it shall be lawful for the Board to exercise all or any rights,
powers or remedies under this Agreement, the Guarantee given to the
Board or any one or more of them.
15.3 In the event on an occurrence of an Event of Default before the Term Loan
shall have been fully drawn or utilised hereunder, the Board's obligations
hereunder shall automatically and forthwith cease.
15.4 After the declaration by the Board that an event of an Event of Default
has occurred, all moneys received or recovered by the Board (whether such moneys
shall have been received or recovered as a result of or arising from its
exercise of all or any rights, powers or remedies under this Agreement, the
Guarantee or any one or more of them or by way of a set-off or otherwise) shall
be held by it and shall be applied as follows:-
(a) Firstly, in or towards payment of all costs charges and expenses, if
any, incurred in enforcing this Agreement, the Guarantee or any one
or more of them.
(b) Secondly, in or towards payment to the Board of all moneys and
liabilities for the time being due, owing or outstanding under this
Agreement and where such moneys and liabilities are of a contingent
nature, in or towards making full and adequate provisions for
payment of such moneys and liabilities as and when they become due
and payable; and
(c) Thirdly, any surplus shall be paid to the Company.
16. NOTICES
16.1 Except as otherwise expressly provided herein, any notice, request, demand
or other communication to be given or served hereunder by one of the parties
hereto to or on the other or others may be delivered at or sent by prepaid
registered post or by facsimile to the address or addresses herein specified of
the other party or parties and shell be deemed to be duly served:
(a) if it is delivered, at the time of delivery,
(b) if it is sent by prepaid registered post, one (1) Day after posting
thereof, or
(c) if it is sent by facsimile, immediately after transmission thereof,
if the date of transmission is a Business Day, and if such a date is
not a Business Day, then the notice by facsimile shall be deemed to
be served on the next succeeding Business Day.
<PAGE> 16
Except as otherwise expressly provided herein, all notices, requires, demands or
other communications which are required by this Agreement to be in writing may
be made by facsimile.
16.2 For the purpose of this Clause 16 each of the parties hereto shall from
time to time notify the other party in writing of an address in Singapore where
such notice, request, demand or other communications as aforesaid can be given
or served and such notification shall be effective only when it is actually
received. In the absence of such notification, the notice, request, demand or
other communication aforesaid may be given or served at the addresses or the
respective parties as stated above.
17. WAIVER NOT TO PREJUDICE RIGHT OF BOARD
The board may from time to time and at any time waive either
unconditionally or on such terms and conditions as it may deem fit any breach by
the Company of any of the undertakings stipulations terms and conditions herein
contained and any modification thereof but without prejudice to its powers
rights and remedies for enforcement thereof, provided always that:-
(a) no neglect of forbearance of the Board to require and enforce and
enforce payment of any moneys hereunder or the performance and
observance of any undertaking stipulation term or condition herein
contained, nor any time which may be given powers or remedies of the
Board at any time afterwards to act strictly in accordance with the
provisions hereof;
(b) no such waiver of any such breach as aforesaid shall prejudice the
rights of the Board in respect of any other or subsequent breach of
any of the undertakings stipulations terms or conditions aforesaid.
18. INDULGENCE OF THE BOARD
The liability of the Company hereunder shall not be impaired or
discharged by reason of any time or other indulgence being granted by or with
the consent of the Board to any person who or which may be in any way liable to
pay any of the moneys secured hereby by any other security in favour of the
Board or by reason of any arrangement being entered into or composition accepted
by the Board which has the effect of modifying the operation of law or otherwise
its rights and remedies under the provisions of the Agreement.
19. SEVERABILITY
In case any provision in this Agreement shall be, or at any time shall
become invalid, illegal or unenforceable in any respect under any law, such
invalidity, illegality or unenforceability shall not in any way affect or impair
the other provisions of this
<PAGE> 17
Agreement but this Agreement shall be construed as if such invalid or illegal or
unenforceable provision contained herein or therein did not form a part of this
Agreement.
20. GOVERNING LAW
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the Republic of Singapore.
21. MISCELLANEOUS
21.1 All legal and other professional fees, out-of-pocket expenses, charges and
expenses of and in connection with this Agreement shall be paid by the Company.
21.2 The Company shall further pay all legal fees as between solicitor and
client and other costs and disbursements incurred in connection with or
demanding and enforcing payment of moneys due under this Agreement and Guarantee
and otherwise howsoever in enforcing the performance of any other undertakings
stipulations terms conditions or provisions of hereof and thereof.
21.3 A certificate signed by a duly authorised officer for the time being of
the Board as to the amount of moneys and liabilities for the time being due to
the Board or incurred by the Board under this Agreement and Guarantee shall be
conclusive and binding on the Company, save for any computation or clerical
error.
21.4 This Agreement shall be binding upon the successor of the Company and
shall ensure to the benefit of the Board and its successors and assigns.
<PAGE> 18
IN WITNESS WHEREOF the parties hereto have hereunto affixed their
respective common seals.
The Common Seal of
MAXTOR PERIPHERALS (S) PTE LTD
was hereunto affixed in the
presence of:-
-----------------
TEH KEE HONG
Director
-----------------
PATRICIA SEET
Secretary
The Common Seal of the ECONOMIC
DEVELOPMENT BOARD was
hereunto affixed in the presence of:-
-----------------
Philip Yeo
Chairman
-----------------
SUSAN WANG
Secretary
<PAGE> 19
APPENDIX 1
ECONOMIC DEVELOPMENT BOARD
250 North Bridge Road
#24-00 Raffles City tower
Singapore 179101
Dear Sirs,
NOTICE OF DRAWING
TERM LOAN OF S$ [ ]
Pursuant to Clause 5 of the EDB Loan Agreement dated 199[ ] in respect
of the above Term Loan we hereby give you notice for a Drawing of Dollars [ ]
($ ) on 19
We confirm--
(i) that the conditions precedent under Clause 3 of the EDB Loan
Agreement have been complied with in every respect;
(ii) that each of the representations and warranties contained in Clause
12 of the EDB Loan Agreement are true and accurate in all respects
as though made on the date of this Notice with reference to facts
and circumstances presently subsisting and will be true and accurate
in all respects on the date of the intended Drawing as though made
on the date of the intended Drawing with reference to facts and
circumstances then subsisting; and
(iii) that as at the date hereof no Event of Default has occurred and no
event has occurred which, with the giving of notice and/or the lapse
of time and/or upon you making any necessary determination under
Clause 15 of the EDB Loan Agreement, might constitute an Event of
Default, and we undertake that no Event of Default and none of the
events aforesaid will exist at the date of the intended Drawing.
In addition to the above documents kindly let us know if you require copies of
any opinion approval or other documents.
Dated this __ day of _____________19
Yours faithfully
Director/Authorised Signatory
19
<PAGE> 1
EXHIBIT 10.173
Execution Copy
MAXTOR PERIPHERALS (S) PTE. LIMITED
as Borrower
THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH
as Bank
---------------------------------------------------------------------------
S$48,000,000
GUARANTEE FACILITY AGREEMENT
---------------------------------------------------------------------------
CLIFFORD CHANCE
<PAGE> 2
Execution Copy
CONTENTS
<TABLE>
<CAPTION>
CLAUSE PAGE
<S> <C>
1. DEFINITIONS AND INTERPRETATION..........................................1
2. THE FACILITY............................................................8
3. UTILIZATION OF THE FACILITY.............................................9
4. GUARANTEE COMMISSION....................................................9
5. BORROWER'S LIABILITIES IN RELATION TO BANK GUARANTEE...................10
6. CANCELLATION...........................................................11
7. TAXES..................................................................11
8. TAX RECEIPTS...........................................................12
9. INCREASED COSTS........................................................13
10. ILLEGALITY.............................................................13
11. MITIGATION.............................................................14
12. REPRESENTATIONS........................................................14
13. SECURITY...............................................................18
14. FINANCIAL INFORMATION..................................................19
15. FINANCIAL CONDITION....................................................21
16. COVENANTS..............................................................22
17. EVENTS OF DEFAULT......................................................25
18. COMMITMENT COMMISSION AND FEES.........................................29
19. COSTS AND EXPENSES.....................................................30
20. DEFAULT INTEREST AND BREAK COSTS.......................................30
</TABLE>
<PAGE> 3
Execution Copy
<TABLE>
<S> <C>
21. BORROWER'S INDEMNITIES.................................................31
22. CURRENCY OF ACCOUNT AND PAYMENT........................................32
23. PAYMENTS...............................................................32
24. SET-OFF................................................................32
25. ASSIGNMENTS............................................................33
26. EVIDENCE OF DEBT.......................................................34
27. REMEDIES AND WAIVERS, PARTIAL INVALIDITY...............................34
28. NOTICES................................................................34
29. GOVERNING LAW..........................................................35
30. JURISDICTION...........................................................35
</TABLE>
SCHEDULE 1 - CONDITIONS PRECEDENT
SCHEDULE 2 - UTILIZATION REQUEST
SCHEDULE 3
PART 1 - FORM OF PARENT COMPLIANCE CERTIFICATE
SCHEDULE 3
PART 2 - FORM OF BORROWER COMPLIANCE CERTIFICATE
SCHEDULE 4 - FORM OF BANK GUARANTEE
<PAGE> 4
THIS AGREEMENT is made as of August 31, 1999
BETWEEN
(1) MAXTOR PERIPHERALS (S) PTE. LIMITED registered no. 199000789E (the
"BORROWER"); and
(2) THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH (the "BANK").
IT IS AGREED as follows.
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement:
"ACCOUNT" means the account securing the Bank under the Account Charge.
"ACCOUNT BANK" means The Bank of Nova Scotia, Hong Kong Branch as
account bank under the Account Charge.
"ACCOUNT CHARGE" means the account charge dated on or about the same
date hereof between the Borrower as chargor, the Bank as secured party
and the Account Bank.
"AUTHORIZED SIGNATORY" means, in relation to the Borrower or the Parent,
any person who is duly authorized (in such manner as may be reasonably
acceptable to the Bank) and in respect of whom the Bank has received a
certificate signed by a director or another Authorized Signatory of the
Borrower or the Parent, as the case may be, setting out the name and
signature of such person and confirming such person's authority to act.
"AVAILABILITY PERIOD" means the period from and including the date
hereof to and including the earlier of (a) the day which is three months
after the date hereof and (b) the first Business Day on which the
Available Facility is zero.
"AVAILABLE FACILITY" means, at any time and save as otherwise provided
herein, S$48,000,000 less the maximum principal amount of the EDB Loan
guaranteed by the Bank pursuant to the Bank Guarantee which has then
been issued hereunder.
"BANK GUARANTEE" means a guarantee issued or to be issued by the Bank
pursuant to Clause 3 (Utilization of the Facility) substantially in the
form set out in Schedule 4 (Form of Bank Guarantee) or in such other
form requested by the Borrower which is acceptable to the Bank.
"BANK GUARANTEE COMMISSION" means the guarantee commission payable
pursuant to Clause 4 (Guarantee Commission).
<PAGE> 5
"BANK GUARANTEE COMMISSION RATE" means, if Class A Security is in
effect, 0.15% per annum flat and, if Class B Security is in effect, the
rate agreed between the Bank and the Borrower, in each case, calculated
on the maximum principal amount of the EDB Loan guaranteed by the Bank
pursuant to the Bank Guarantee which has then been issued hereunder.
"BUSINESS DAY" means a day (other than a Saturday or Sunday) which is
not a public holiday and on which banks are open for general business in
Hong Kong, New York and Singapore.
"CASH DEPOSITS" means on any date the Singapore dollar deposits
maintained by the Borrower with the Account Bank and secured in favor of
the Bank pursuant to the Account Charge.
"CLASS A SECURITY" means the Cash Deposits.
"CLASS B SECURITY" means the assets of the Borrower subject to a first
priority security interest to be mutually agreed between the Borrower
and the Bank and such other collateral to be mutually agreed between the
Borrower and the Bank, all such security to be in form, value and
substance satisfactory to the Bank.
"COMPLIANCE CERTIFICATE" means, in respect of the Parent, a certificate
substantially in the form set out in Part 1 of Schedule 3 (Form of
Parent Compliance Certificate) and, in respect of the Borrower, a
certificate substantially in the form set out in Part 2 of Schedule 3
(Form of Borrower Compliance Certificate).
"COMPUTER SYSTEM" means any computer hardware or software or any
equipment operated by electronic means.
"DISPUTE" means any dispute referred to in Clause 30 (Jurisdiction).
"EDB" means the Economic Development Board of Singapore.
"EDB LOAN" means the term loan made under the EDB Loan Agreement in an
aggregate principal amount up to S$48,000,000 to be granted to the
Borrower by EDB under its capital assistance scheme upon the terms and
conditions set out in the EDB Offer Letter and the EDB Loan Agreement.
"EDB LOAN AGREEMENT" means the agreement to be entered into between the
Borrower and EDB pursuant to which EDB will grant the EDB Loan to the
Borrower.
"EDB OFFER LETTER" means the letter from EDB to the Borrower dated
August 7, 1999 offering to make available the EDB Loan.
"ENCUMBRANCE" means (a) a mortgage, charge, pledge, lien or other
encumbrance securing any obligation of any person, (b) any arrangement
under which money or claims to, or the benefit of, a bank or other
account may be applied, set off or made subject to a combination of
accounts so as to effect discharge of any sum owed or
<PAGE> 6
payable to any person or (c) any other type of preferential arrangement
(including any title transfer and retention arrangement) having a
similar effect.
"ENVIRONMENTAL CLAIM" means any claim, proceeding or investigation by
any person pursuant to any Environmental Law.
"ENVIRONMENTAL LAW" means any applicable law in any jurisdiction in
which the Borrower conducts business which relates to the pollution or
protection of the environment or harm to or the protection of human
health or the health of animals or plants.
"ENVIRONMENTAL PERMITS" means any permit, licence, consent, approval and
other authorisation and the filing of any notification, report or
assessment required under any Environmental Law for the operation of the
business of the Borrower conducted on or from the properties owned or
used by the Borrower.
"EVENT OF DEFAULT" means any circumstance described as an event of
default in Clause 17 (Events of Default).
"FACILITY" means the Singapore dollar guarantee issuance facility
granted to the Borrower hereunder.
"FACILITY OFFICE" means the lending office of the Bank identified under
the Bank's signature below or such other lending office as it may from
time to time select by notice to the Borrower.
"FINANCE DOCUMENTS" means this Agreement, any Security Document, any fee
letter delivered pursuant to Clause 18 (Commitment Commission and Fees),
the Bank Guarantee and any document(s) delivered or to be delivered
pursuant to any of the foregoing.
"FINANCIAL INDEBTEDNESS" means, without duplication, any indebtedness
for or in respect of:
(a) Indebtedness for Borrowed Money;
(b) any documentary or standby letter of credit facility other than
those supporting trade payables in the ordinary course of
business due not later than 90 days after the date of
determination;
(c) any interest rate swap, currency swap, forward foreign exchange
transaction, cap, floor, collar or option transaction or any
other treasury transaction or any combination thereof or any
other transaction entered into in connection with protection
against or benefit from fluctuation in any rate or price (and
the amount of the Financial Indebtedness in relation to any such
transaction shall be calculated by reference to the
mark-to-market valuation of such transaction at the relevant
time); and
<PAGE> 7
(d) any guarantee or indemnity for any of the items referred to in
paragraphs (a) to (c) above.
"GROUP" means the Parent and its subsidiaries.
"INDEBTEDNESS FOR BORROWED MONEY" means, without duplication, any
indebtedness for or in respect of:
(e) moneys borrowed;
(f) any amount raised by acceptance under any acceptance credit
facility;
(g) any amount raised pursuant to any note purchase facility or the
issue of bonds, notes, debentures, loan stock or any similar
instrument;
(h) any amount raised pursuant to any issue of shares which are
expressed to be redeemable at the option of the holder thereof;
(i) the amount of any liability in respect of any lease or hire
purchase contract which would, in accordance with generally
accepted accounting principles in the relevant jurisdiction, be
treated as a capital lease;
(j) the amount of any liability in respect of any advance or
deferred purchase agreement if one of the primary reasons for
entering into such agreement is to raise finance, other than
trade payables in the ordinary course of business due not later
than 90 days after the date of determination;
(k) receivables sold or discounted (other than (i) on a non-recourse
basis or (ii) pursuant to the asset securitization program
currently in effect with Fleet National Bank, as administrator,
and any renewal or replacement thereof on substantially similar
terms);
(l) any agreement to re-acquire an asset if one of the primary
reasons for entering into such agreement is to raise finance;
(m) any amount raised under any other transaction (including any
forward sale or purchase agreement) having the effect of a
borrowing; and
(n) the amount of any liability in respect of any guarantee or
indemnity for any of the items referred to in paragraphs (a) to
(i) above.
"INTEREST PERIOD" means, save as otherwise provided herein, in relation
to an Unpaid Sum, any of those periods mentioned in Clause 20.1 (Default
Interest Periods).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or
prospects of the Borrower or the Parent, as the case may be; (b) the
ability of the Borrower to perform its obligations under this Agreement;
or (c) the validity or enforceability of this
<PAGE> 8
Agreement or any of the other Finance Documents or the rights or
remedies of the Bank hereunder or thereunder.
"MATERIAL SUBSIDIARY" means one or more subsidiaries of the Parent whose
consolidated assets constitute at least 5% of the total assets of the
Group or whose consolidated revenues constitute at least 20% of the
total revenue of the Group.
"MINISTRY OF TRADE" means the Ministry of Trade and Industry of the
Republic of Singapore (or any successor thereto).
"ORIGINAL FINANCIAL STATEMENTS" means, in respect of the Borrower, the
audited financial statements of the Borrower for its financial year
ended December 26, 1998 and, in respect of the Parent, the audited
consolidated financial statements of the Parent and its consolidated
subsidiaries for its financial year ended December 26, 1998.
"PARENT" means Maxtor Corporation, a Delaware corporation.
"PERMITTED ENCUMBRANCE" means (i) any Encumbrance created under the
Finance Documents, (ii) Encumbrances for taxes, fees, assessments or
other governmental charges which are not delinquent or remain payable
without penalty, (iii) Encumbrances of materialmen, mechanics,
warehousemen, carriers or similar other Encumbrances arising in the
ordinary course of business and securing obligations which are not yet
delinquent, (iv) judgment or attachment Encumbrances and (v)
Encumbrances arising solely by virtue of any statutory or common law
provision relating to bankers' liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained
with a creditor depository institution.
"PIONEER STATUS" means that the Borrower shall continue (i) to be
certified as a pioneer enterprise by the Ministry of Trade, (ii) to be
entitled to the benefits of the Economic Expansion Incentives (Relief
from Income Tax) Act (CAP. 86) of the Republic of Singapore and (iii) to
comply with the conditions set forth in Certificate No. 1228 dated June
3, 1998 issued by the Ministry of Trade in order to maintain such
certification and entitlement.
"POTENTIAL EVENT OF DEFAULT" means any event which may become (with the
passage of time, the giving of notice, the making of any determination
hereunder or any combination thereof) an Event of Default.
"REPAYMENT DATE" means each of the dates specified as such in the EDB
Loan Agreement.
"SECURITY" means the Class A Security or the Class B Security as
selected by the Borrower pursuant to Clause 13 (Security).
<PAGE> 9
"SECURITY DOCUMENTS" means any document creating or evidencing a
security interest in favor of the Bank (including, without limitation,
the Account Charge) and any document(s) delivered pursuant to any of the
foregoing.
"UNPAID SUM" means the unpaid balance of any of the sums referred to in
Clause 20.1 (Default Interest Periods).
"UTILIZATION DATE" means the date on which the Bank Guarantee is issued.
"UTILIZATION REQUEST" means a notice substantially in the form set out
in Schedule 2 (Utilization Request).
"YEAR 2000 COMPLIANT" means, in relation to any Computer System, that
any reference to or use of a date before, on or after December 31, 1999
in the operation of that Computer System will not have an adverse effect
on the use of that Computer System.
1.2 INTERPRETATION
Any reference in this Agreement to:
the "BANK" shall be construed so as to include its and any subsequent
successors in accordance with their respective interests;
"CONTINUING", in relation to an Event of Default, shall be construed as
a reference to an Event of Default which has not been waived in
accordance with the terms hereof and, in relation to a Potential Event
of Default, one which has not been remedied within the relevant grace
period or waived in accordance with the terms hereof;
a "HOLDING COMPANY" of a company or corporation shall be construed as a
reference to any company or corporation of which the first-mentioned
company or corporation is a subsidiary;
"INDEBTEDNESS" shall be construed so as to include any obligation
(whether incurred as principal or as surety) for the payment or
repayment of money, whether present or future, actual or contingent;
a "LAW" shall be construed as any law (including common or customary
law), statute, constitution, decree, judgment, treaty, regulation,
directive, bye-law, order or any other legislative measure of any
government, supranational, local government, statutory or regulatory
body or court;
a "MONTH" is a reference to a period starting on one day in a calendar
month and ending on the numerically corresponding day in the next
succeeding calendar month save that,
(a) if any such numerically corresponding day is not a Business Day,
such period shall end on the immediately succeeding Business Day
to occur in that next
<PAGE> 10
succeeding calendar month or, if none, it shall end on the immediately
preceding Business Day; and
(b) if there is no numerically corresponding day in that next
succeeding calendar month, that period shall end on the last
Business Day in that next succeeding calendar month;
a "PERSON" shall be construed as a reference to any person, firm,
company, corporation, government, state or agency of a state or any
association or partnership (whether or not having separate legal
personality) of two or more of the foregoing;
"REPAY" (or any derivative form thereof) shall, subject to any contrary
indication, be construed to include "PREPAY" (or, as the case may be,
the corresponding derivative form thereof);
a "SUBSIDIARY" of a company or corporation shall be construed as a
reference to any company or corporation:
(c) which is controlled, directly or indirectly, by the
first-mentioned company or corporation;
(d) more than half the issued share capital of which is beneficially
owned, directly or indirectly, by the first-mentioned company or
corporation and which is consolidated with the first-mentioned
company or corporation in such company or corporation's
financial accounts; or
(e) which is a subsidiary of another subsidiary of the
first-mentioned company or corporation
and, for these purposes, a company or corporation shall be treated as
being controlled by another if that other company or corporation is able
to direct its affairs and/or to control the composition of its board of
directors or equivalent body;
a "SUCCESSOR" shall be construed so as to include an assignee or
successor in title of such party and any person who under the laws of
its jurisdiction of incorporation or domicile has assumed the rights and
obligations of such party under this Agreement or to which, under such
laws, such rights and obligations have been transferred;
"TAX" shall be construed so as to include any tax, levy, impost, duty or
other charge of a similar nature (including any penalty or interest
payable in connection with any failure to pay or any delay in paying any
of the same);
"VAT" shall be construed as a reference to value added tax including any
similar tax which may be imposed in place thereof from time to time; and
the "WINDING-UP", "DISSOLUTION" or "ADMINISTRATION" of a company or
corporation shall be construed so as to include any equivalent or
analogous proceedings under the law of the jurisdiction in which such
company or corporation is incorporated or any
<PAGE> 11
jurisdiction in which such company or corporation carries on business
including the seeking of liquidation, winding-up, re-organisation,
dissolution, administration, arrangement, adjustment, protection or
relief of debtors.
1.3 CURRENCY SYMBOLS
"S$" and "SINGAPORE DOLLARS" denote lawful currency of the Republic of
Singapore and "US$" and "US DOLLARS" denote lawful currency of the
United States of America.
1.4 AGREEMENTS AND STATUTES
Any reference in this Agreement to:
1.4.1 this Agreement or any other agreement or document shall be
construed as a reference to this Agreement or, as the case may
be, such other agreement or document as the same may have been,
or may from time to time be, amended, varied, novated or
supplemented; and
1.4.2 a statute or treaty shall be construed as a reference to such
statute or treaty as the same may have been, or may from time to
time be, amended or, in the case of a statute, re-enacted.
1.5 HEADINGS
Clause and Schedule headings are for ease of reference only.
1.6 TIME
Any reference in this Agreement to a time of day shall, unless a
contrary indication appears, be a reference to Singapore time.
1.7 BASIS OF ACCRUAL
Except as otherwise provided in this Agreement, interest, Bank Guarantee
Commission, commitment commission and fees shall accrue from day to day
and shall be calculated on the basis of a year of 360 days and the
actual number of days elapsed.
2. THE FACILITY
2.1 GRANT OF THE FACILITY
The Bank grants to the Borrower through the Facility Office, upon the
terms and subject to the conditions hereof, a Singapore dollar guarantee
issuance facility in an aggregate amount of S$48,000,000.
<PAGE> 12
2.2 PURPOSE
The Facility is intended to support the obligations of the Borrower
under the EDB Loan and accordingly, the Borrower shall utilise the Bank
Guarantee solely for this purpose and the Bank shall not be obliged to
concern itself with such application.
3. UTILIZATION OF THE FACILITY
The Bank Guarantee will be issued by the Bank at the Borrower's request
if:
3.1.1 not more than ten nor less than two Business Days before the
proposed date for the issuance of the Bank Guarantee, the Bank
has received a completed Utilization Request;
3.1.2 the proposed date for the issuance of the Bank Guarantee is a
Business Day within the Availability Period;
3.1.3 no prior Bank Guarantee has been issued by the Bank;
3.1.4 the proposed maximum principal amount of the EDB Loan to be
guaranteed by the Bank pursuant to the Bank Guarantee is equal
to the amount of the Available Facility;
3.1.5 the proposed term of the Bank Guarantee is a period not
exceeding two years from the Utilization Date and the proposed
form of the Bank Guarantee is satisfactory to the Bank; and
3.1.6 on and as of the proposed date for the issuance of the Bank
Guarantee (a) the Bank has received all of the documents and
other evidence listed in Schedule 1 (Conditions Precedent) and
that each is, in form and substance, satisfactory to the Bank,
(b) the EDB Loan Agreement is in full force and effect and all
conditions precedent (other than the issuance of the Bank
Guarantee) specified therein have been complied with and (c) no
Event of Default or Potential Event of Default is continuing.
4. GUARANTEE COMMISSION
The Borrower shall, in respect of the Bank Guarantee requested by it,
pay to the Bank a guarantee commission at the Bank Guarantee Commission
Rate on the maximum principal amount of the EDB Loan guaranteed by the
Bank under the Bank Guarantee (taking into account any prior repayments
or prepayments under the EDB Loan). Such guarantee commission shall be
paid in advance in respect of each successive period of three months (or
such shorter period as shall end on the next succeeding Repayment Date)
which begins during the period from the Utilization Date until the date
on which the Bank's obligations under the Bank Guarantee are terminated,
the first such payment to be made on the Utilization Date for the Bank
Guarantee and thereafter on the first day of each such period.
<PAGE> 13
5. BORROWER'S LIABILITIES IN RELATION TO BANK GUARANTEE
5.1 BORROWER'S INDEMNITY TO BANK
The Borrower shall irrevocably and unconditionally as a primary
obligation indemnify (on demand of the Bank) the Bank against:
5.1.1 any sum paid or due and payable by the Bank under the Bank
Guarantee; and
5.1.2 all liabilities, costs (including, without limitation, any costs
incurred in funding any amount which falls due from the Bank
under the Bank Guarantee or in connection with the Bank
Guarantee), claims, losses and expenses which the Bank may at
any time incur or sustain in connection with or arising out of
the execution, delivery or performance by the Bank of the Bank
Guarantee or the other Finance Documents, provided that such
amounts shall not include any amounts payable under Clause 19.1
(Transaction Expenses) or 19.2 (Preservation and Enforcement of
Rights).
5.2 PRESERVATION OF RIGHTS
Neither the obligations of the Borrower set out in this Clause 5 nor the
rights, powers and remedies conferred on the Bank by this Agreement or
by law shall be discharged, impaired or otherwise affected by:
5.2.1 the winding-up, dissolution, administration or re-organisation
of the Bank or any other person or any change in its status,
function, control or ownership;
5.2.2 any of the obligations of the Bank or any other person hereunder
or under the Bank Guarantee or under any other security taken in
respect of its obligations hereunder or otherwise taken in
connection with the Bank Guarantee being or becoming illegal,
invalid, unenforceable or ineffective in any respect;
5.2.3 time or other indulgence being granted or agreed to be granted
to the Bank or any other person in respect of its obligations
hereunder or under or in connection with the Bank Guarantee or
under any Security;
5.2.4 any amendment to, or any variation, waiver or release of, any
obligation of the Bank or any other person under any Security;
or
5.2.5 any other act, event or omission which, but for this Clause 5,
might operate to discharge, impair or otherwise affect any of
the obligations of the Borrower set out in this Clause 5 or any
of the rights, powers or remedies conferred upon the Bank by
this Agreement or by law.
The obligations of the Borrower set out in this Clause 5 shall be in
addition to and independent of every other security which the Bank may
at any time hold in respect of the Borrower's obligations hereunder.
<PAGE> 14
5.3 SETTLEMENT CONDITIONAL
Any settlement or discharge between the Borrower and the Bank shall be
conditional upon no security or payment to the Bank by the Borrower, or
any other person on behalf of the Borrower, being avoided or reduced by
virtue of any laws relating to bankruptcy, insolvency, liquidation or
similar laws of general application and, if any such security or payment
is so avoided or reduced, the Bank shall be entitled to recover the
value or amount of such security or payment from the Borrower
subsequently as if such settlement or discharge had not occurred.
5.4 RIGHT TO MAKE PAYMENTS UNDER BANK GUARANTEE
The Bank shall be entitled to make any payment in accordance with the
terms of the Bank Guarantee without any reference to or further
authority from the Borrower or any other investigation or enquiry. The
Borrower irrevocably authorises the Bank to comply with any demand under
the Bank Guarantee which is valid on its face.
6. CANCELLATION
6.1 CANCELLATION
The Borrower may, by giving to the Bank not less than ten Business Days'
prior notice to that effect, cancel the whole or any part (being an
amount or integral multiple of S$1,000,000) of the Available Facility.
6.2 NOTICE OF CANCELLATION
Any notice of cancellation given by the Borrower pursuant to Clause 6.1
(Cancellation) shall be irrevocable, shall specify the date upon which
such cancellation is to be made and the amount of such cancellation.
7. TAXES
7.1 TAX GROSS-UP
All payments to be made by the Borrower to the Bank under the Finance
Documents shall be made free and clear of and without deduction for or
on account of tax unless the Borrower is required to make such a payment
subject to the deduction or withholding of tax, in which case the sum
payable by the Borrower (in respect of which such deduction or
withholding is required to be made) shall be increased to the extent
necessary to ensure that the Bank receives a sum net of any deduction or
withholding equal to the sum which it would have received had no such
deduction or withholding been made or required to be made.
7.2 TAX INDEMNITY
Without prejudice to Clause 7.1 (Tax Gross-up), if the Bank is required
to make any payment of or on account of tax on or in relation to any sum
received or receivable
<PAGE> 15
under any Finance Document (including any sum deemed for purposes of tax
to be received or receivable by the Bank whether or not actually
received or receivable) or if any liability in respect of any such
payment is asserted, imposed, levied or assessed against the Bank, the
Borrower shall, upon demand of the Bank, promptly indemnify the Bank
against such payment or liability, together with any interest,
penalties, costs and expenses payable or incurred in connection
therewith, PROVIDED THAT this Clause 7.2 shall not apply to:
7.2.1 any tax imposed on and calculated by reference to the net income
actually received or receivable by the Bank by the jurisdiction
in which the Bank is incorporated; or
7.2.2 any tax imposed on and calculated by reference to the net income
of the Facility Office of the Bank actually received or
receivable by the Bank by the jurisdiction in which the Facility
Office is located.
7.3 CLAIMS BY THE BANK
If the Bank intends to make a claim pursuant to Clause 7.2 (Tax
Indemnity), it shall notify the Borrower of the event giving rise to
such claim.
8. TAX RECEIPTS
8.1 NOTIFICATION OF REQUIREMENT TO DEDUCT TAX
If, at any time, the Borrower is required by law to make any deduction
or withholding from any sum payable by it under the Finance Documents
(or if thereafter there is any change in the rates at which or the
manner in which such deductions or withholdings are calculated), the
Borrower shall promptly notify the Bank.
8.2 EVIDENCE OF PAYMENT OF TAX
If the Borrower makes any payment under the Finance Documents in respect
of which it is required to make any deduction or withholding, it shall
pay the full amount required to be deducted or withheld to the relevant
taxation or other authority within the time allowed for such payment
under applicable law and shall deliver to the Bank, within thirty days
after it has made such payment to the applicable authority, an original
receipt (or a certified copy thereof) issued by such authority
evidencing the payment to such authority of all amounts so required to
be deducted or withheld in respect of such payment.
8.3 TAX AND OTHER AFFAIRS
No provision of this Agreement shall interfere with the right of the
Bank to arrange its tax or any other affairs in whatever manner it
thinks fit, oblige the Bank to claim any credit, relief, remission or
repayment in respect of any payment under Clause 7 (Taxes) in priority
to any other credit, relief, remission or repayment available to it
<PAGE> 16
nor oblige the Bank to disclose any information relating to its tax or
other affairs or any computations in respect thereof.
9. INCREASED COSTS
9.1 INCREASED COSTS
If, by reason of (a) any change in law or in its interpretation or
administration and/or (b) compliance with any request or requirement
relating to the maintenance of capital or any other request from or
requirement of any central bank or other fiscal, monetary or other
authority:
9.1.1 the Bank or any holding company of the Bank is unable to obtain
the rate of return on its capital which it would have been able
to obtain but for the Bank's entering into or assuming or
maintaining a commitment, issuing the Bank Guarantee or
performing its obligations under the Finance Documents;
9.1.2 the Bank or any holding company of the Bank incurs a cost as a
result of the Bank's entering into or assuming or maintaining a
commitment, issuing the Bank Guarantee or performing its
obligations under the Finance Documents; or
9.1.3 there is any increase in the cost to the Bank or any holding
company of the Bank of funding or maintaining any Unpaid Sum or
the Bank Guarantee,
then the Borrower shall, from time to time on demand of the Bank,
promptly pay to the Bank amounts sufficient to indemnify the Bank or to
enable the Bank to indemnify its holding company from and against, as
the case may be, (i) such reduction in the rate of return of capital,
(ii) such cost or (iii) such increased cost.
9.2 INCREASED COSTS CLAIMS
If the Bank intends to make a claim pursuant to Clause 9.1 (Increased
Costs), it shall notify the Borrower of the event giving rise to such
claim.
9.3 EXCLUSIONS
Notwithstanding the foregoing provisions of this Clause 9, the Bank
shall not be entitled to make any claim in respect of any cost,
increased cost or liability compensated by Clause 7 (Taxes).
10. ILLEGALITY
If, at any time, it is or will become unlawful for the Bank to make,
fund or allow to remain outstanding all or part of the Bank Guarantee,
then the Bank shall, promptly after becoming aware of the same, deliver
to the Borrower a notice to that effect and:
<PAGE> 17
10.1.1 the Bank shall not thereafter be obliged to issue the Bank
Guarantee and the amount of the Available Facility shall be
immediately reduced to zero; and
10.1.2 if the Bank so requires, the Borrower shall on such date as the
Bank shall have specified ensure that the liabilities of the
Bank under or in respect of the Bank Guarantee issued by it is
reduced to zero.
11. MITIGATION
If circumstances arise which would or would upon the giving of notice
result in:
11.1.1 an increase in any sum payable to it or for its account pursuant
to Clause 7.1 (Tax Gross-up);
11.1.2 a claim for indemnification pursuant to Clause 7.2 (Tax
Indemnity) or Clause 9.1 (Increased Costs); or
11.1.3 the reduction of the Available Facility to zero or any repayment
to be made by the Borrower pursuant to Clause 10 (Illegality),
then, without in any way limiting, reducing or otherwise qualifying the
rights of the Bank or the obligations of the Borrower under any of the
Clauses referred to above, the Bank shall promptly upon becoming aware
of such circumstances notify the Borrower thereof and, in consultation
with the Borrower to the extent that it can do so lawfully and without
prejudice to its rights hereunder, take reasonable steps (including a
change of location of the Facility Office or the transfer of its rights,
benefits and obligations hereunder to another financial institution
acceptable to the Borrower and willing to participate in the Facility)
to mitigate the effects of such circumstances, PROVIDED THAT the Bank
shall be under no obligation to take any such action if, in the opinion
of the Bank, to do so might have any adverse effect upon its business,
operations or financial condition (other than any minor costs and
expenses of an administrative nature).
12. REPRESENTATIONS
The Borrower makes the representations and warranties set out in Clause
12.1 (Status) to Clause 12.23 (Year 2000) and acknowledges that the Bank
has entered into this Agreement in reliance on those representations and
warranties.
12.1 STATUS
It is a corporation duly organised under the laws of Singapore.
12.2 GOVERNING LAW AND JUDGMENTS
In any proceedings taken in its jurisdiction of incorporation in
relation to this Agreement, the choice of New York law as the governing
law of this Agreement and any judgment obtained in New York will be
recognised and enforced.
<PAGE> 18
12.3 BINDING OBLIGATIONS
It has duly executed and delivered each of the Finance Documents and the
obligations expressed to be assumed by it under the Finance Documents
are legal and valid obligations binding on it and enforceable against it
in accordance with the terms thereof.
12.4 EXECUTION OF THIS AGREEMENT
Its execution of the Finance Documents and the EDB Loan Agreement and
its exercise of its rights and performance of its obligations thereunder
do not and will not:
12.4.1 conflict with any agreement, mortgage, bond or other instrument
or treaty to which it is a party or which is binding upon it or
any of its assets unless such conflict would not have a Material
Adverse Effect;
12.4.2 conflict with its constitutive documents; or
12.4.3 conflict with any applicable law.
It has the power to enter into the Finance Documents and the EDB Loan
Agreement and all corporate and other action required to authorise the
execution of the Finance Documents and the EDB Loan Agreement and the
performance of its obligations thereunder has been duly taken.
12.5 NO WINDING-UP
Neither the Borrower nor, to the best of the Borrower's knowledge and
belief, the Parent has taken any corporate action nor have any other
steps been taken or legal proceedings been started or (to the best of
its knowledge and belief) threatened against the Borrower or the Parent
for its winding-up, dissolution, administration or re-organisation
(whether by voluntary arrangement, scheme of arrangement or otherwise)
or for the appointment of a receiver, administrator, administrative
receiver, conservator, custodian, trustee or similar officer of it or of
any or all of its assets or revenues.
12.6 NO MATERIAL DEFAULTS
Neither the Borrower nor, to the best of the Borrower's knowledge and
belief, the Parent is in breach of or in default under any agreement to
which it is a party or which is binding on it or any of its assets to an
extent or in a manner which might have a Material Adverse Effect.
12.7 NO MATERIAL PROCEEDINGS
No action or administrative proceeding of or before any court or agency
which would reasonably be expected to have a Material Adverse Effect has
been started or, to the best of the Borrower's knowledge and belief,
threatened against the Borrower or, to
<PAGE> 19
the best of the Borrower's knowledge and belief, the Parent except as
disclosed in a filing with the Securities and Exchange Commission.
12.8 AUDITED FINANCIAL STATEMENTS
The most recent audited financial statements of the Borrower and, to the
best of the Borrower's knowledge and belief, the most recent audited
consolidated financial statements of the Parent:
12.8.1 were prepared in accordance with accounting principles generally
accepted in Singapore (in the case of the Borrower) and the
United States of America (in the case of the Parent) and
consistently applied; and
12.8.2 save as disclosed therein, are true, accurate and complete and
fairly present the financial condition and operations of the
Borrower or the Parent (as the case may be) during the relevant
financial year.
12.9 NO MATERIAL ADVERSE CHANGE
Since the date as at which the most recent audited financial statements
of the Borrower and the most recent audited consolidated financial
statements of the Parent were stated to be prepared, there has been no
material adverse change in the business or financial condition of any
member of the Group which has not been disclosed to the Bank or
disclosed in a filing with the Securities and Exchange Commission.
12.10 DEBT AGREEMENTS
Each of the Borrower and, to the best of the Borrower's knowledge and
belief, the Parent is in compliance with its respective material
obligations under any agreement in respect of Financial Indebtedness in
excess of US$10,000,000.
12.11 PIONEER STATUS
It has obtained Pioneer Status.
12.12 WRITTEN INFORMATION
All written information supplied by any member of the Group is true,
complete and accurate in all material respects as at the date it was
given and is not misleading in any respect.
12.13 VALIDITY AND ADMISSIBILITY IN EVIDENCE
All acts, conditions and things required to be done, fulfilled and
performed in order (a) to enable it lawfully to enter into, exercise its
rights under and perform and comply with the obligations expressed to be
assumed by it in the Finance Documents and the EDB Loan Agreement, (b)
to ensure that the obligations expressed to be assumed by it in the
Finance Documents and the EDB Loan Agreement are legal,
<PAGE> 20
valid, binding and enforceable and (c) to make the Finance Documents and
the EDB Loan Agreement admissible in evidence in its jurisdiction of
incorporation have been done, fulfilled and performed.
12.14 CLAIMS PARI PASSU
Under the laws of its jurisdiction of incorporation in force at the date
hereof, the claims of the Bank against it under the Finance Documents
will rank at least pari passu with the claims of all its unsecured and
unsubordinated creditors save those whose claims are preferred solely by
any bankruptcy, insolvency, liquidation or other similar laws of general
application.
12.15 NO FILING OR STAMP TAXES
Under the laws of its jurisdiction of incorporation in force at the date
hereof, it is not necessary that the Finance Documents be filed,
recorded or enrolled with any court or other authority in such
jurisdiction or that any stamp, registration or similar tax be paid on
or in relation to the Finance Documents except such filings, recordings,
enrollment or payments as have been made.
12.16 ENCUMBRANCES
Save for Permitted Encumbrances, no Encumbrance exists over all or any
part of the Security.
12.17 NO DEDUCTION OR WITHHOLDING
Under the laws of its jurisdiction of incorporation in force at the date
hereof, it will not be required to make any deduction or withholding
from any payment it may make under the Finance Documents to the Bank in
Singapore.
12.18 ENVIRONMENTAL COMPLIANCE
The Borrower has duly performed and observed in all material respects
all Environmental Law, Environmental Permits and all other material
covenants, conditions, restrictions or agreements directly or indirectly
concerned with any contamination, pollution or waste or the release or
discharge of any toxic or hazardous substance in connection with any
real property which is or was at any time owned, leased or occupied by
the Borrower or on which the Borrower has conducted any activity where
failure to do so might reasonably be expected to have a Material Adverse
Effect.
12.19 ENVIRONMENTAL CLAIMS
No Environmental Claim has been commenced or (to the best of the
Borrower's knowledge and belief) is threatened against the Borrower
where such claim would be reasonably likely, if determined against the
Borrower, to have a Material Adverse Effect.
<PAGE> 21
12.20 TAX RETURN
It has filed all tax returns required to be filed by it under all
applicable laws and has paid all taxes due and payable by it PROVIDED
THAT it has not filed a tax return for the fiscal years ending in 1997
and 1998. The Borrower represents and warrants that any fines due and
payable as a result of such late filing will be immaterial in amount.
12.21 MATERIAL ADVERSE EFFECT
No event has occurred or, to the best of its knowledge, is reasonably
anticipated to occur, which is likely to have a Material Adverse Effect.
12.22 OWNERSHIP OF THE BORROWER
The Parent owns, directly or indirectly, 100 percent of the issued share
capital of the Borrower.
12.23 YEAR 2000
The Borrower believes (having undertaken a comprehensive review and
assessment) that all Computer Systems used by any member of the Group
are Year 2000 Compliant. The Borrower (having made due enquiry) believes
that each of the Group's suppliers and customers (which are of material
importance to the business and operations of the Group) will also, on a
timely basis, ensure that their Computer Systems are Year 2000
Compliant.
13. SECURITY
13.1 SECURITY
The Borrower shall ensure that the Class A Security is in full force and
effect from the Utilization Date and at all times thereafter until the
Class A Security is replaced with the Class B Security pursuant to
Clause 13.2 (Change of Security). The Borrower may elect to replace the
Class A Security with the Class B Security or the Class B Security with
the Class A Security in accordance with Clause 13.2 (Change of
Security). The Borrower shall ensure that at all times during which the
Class A Security is in effect, the amount of the Cash Deposits shall
equal at least (a) if on such date the interest rate at which the EDB
Loan is accruing interest is less than 7.5 percent per annum,
S$50,400,000 less (i) 105 percent multiplied by (ii) the aggregate
amount of all repayments and prepayments of principal made by the
Borrower under the EDB Loan Agreement and (b) if on such date the rate
at which the EDB Loan is accruing interest is equal to or greater than
7.5 percent per annum, (i) the sum of (x) 100 percent and (y) such
interest rate multiplied by (ii) the aggregate principal amount of the
EDB Loan outstanding on such date. By way of example and for the
avoidance of doubt, if on a day the rate at which the EDB Loan is
accruing interest is 8 percent per annum and no prepayments or
repayments shall have been made under the EDB
<PAGE> 22
Loan, then the amount of the required Cash Deposits shall equal 108
percent multiplied by S$48,000,000, or S$51,840,000.
13.2 CHANGE OF SECURITY
The Security provided by the Borrower may be changed at the Borrower's
request if:
13.2.1 not more than 90 nor less than 30 days before the next due date
for payment of the Bank Guarantee Commission, the Bank has
received a written request from the Borrower to change the
Security from Class A Security to Class B Security or vice
versa;
13.2.2 the proposed date for the change of Security shall be a date on
which the Bank Guarantee Commission is payable pursuant to
Clause 4 (Guarantee Commission);
13.2.3 the Borrower has not already requested a change of Security
during the immediately preceding three month period PROVIDED
THAT the Borrower shall be entitled to make an additional three
requests for a change of Security during the effectiveness of
this Agreement;
13.2.4 the Bank is satisfied in its sole discretion that its rights
under the Facility and in respect of the Security shall not be
prejudiced in any way by the change of Security requested by the
Borrower;
13.2.5 in the case of a requested change from Class A Security to Class
B Security, the identity, value, form and substance of the Class
B Security and the related Security Documents and the amount of
the applicable Bank Guarantee Commission Rate have been mutually
agreed to the satisfaction of the Bank; and
13.2.6 on and as of the proposed date of the change of Security, no
Event of Default or Potential Event of Default is continuing,
then, save as otherwise provided herein or in the existing Security
Documents, the Security will be changed on the next due date for the
payment of the Bank Guarantee Commission by the Borrower delivering
replacement Security Documents and complying with all other matters
required therein.
14. FINANCIAL INFORMATION
14.1 ANNUAL STATEMENTS
The Borrower shall as soon as the same become available, but in any
event within 180 days after the end of each of its or, as the case may
be, the Parent's financial years, deliver to the Bank its consolidated
financial statements and the Parent's consolidated financial statements
for such financial year, audited by an internationally
<PAGE> 23
recognised firm of independent auditors licensed to practise in
Singapore (in the case of the Borrower) and the United States of America
(in the case of the Parent).
14.2 QUARTERLY STATEMENTS
The Borrower shall as soon as the same become available but in any event
within 90 days after the end of each quarter of each of the Parent's
financial years deliver to the Bank the Parent's consolidated statements
for such period.
14.3 REQUIREMENTS AS TO FINANCIAL STATEMENTS
The Borrower shall ensure that each set of financial statements
delivered by it pursuant to this Clause 14 is:
14.3.1 prepared on the same basis as was used in the preparation of its
Original Financial Statements and in accordance with accounting
principles generally accepted in Singapore (in the case of the
Borrower) or United States of America (in the case of the
Parent) and consistently applied; and
14.3.2 certified by an Authorized Signatory of the Borrower or the
Parent (as the case may be) as being true, accurate and complete
and fairly presenting its financial condition as at the end of
the period to which those financial statements relate and of the
results of its operations during such period subject, in the
case of the financial statements delivered pursuant to Clause
14.2 (Quarterly Statements), to year-end audit adjustments.
14.4 COMPLIANCE CERTIFICATES
The Borrower shall ensure that each set of consolidated financial
statements delivered by it pursuant to Clause 14.1 (Annual Statements)
or Clause 14.2 (Quarterly Statements) is accompanied by a Compliance
Certificate signed by a director or senior financial officer of the
Borrower and, in the case of the Parent's financial statements, a
Compliance Certificate signed by a director or senior financial officer
of the Parent.
14.5 OTHER INFORMATION
The Borrower shall furnish and provide the Bank with and permit the Bank
to obtain all such statements, information, explanations and data,
except information of a confidential nature, as the Bank may reasonably
require, by prior written notice, regarding the affairs, operations,
administration, financial or other state or condition of the Borrower.
14.6 ACCOUNTING POLICIES
The Borrower shall ensure that each set of financial statements
delivered pursuant to this Clause 14 is prepared using accounting
policies, practices, procedures and reference period consistent with
those applied in the preparation of the Original Financial Statements
unless, in relation to any such set of financial statements, the
<PAGE> 24
Borrower notifies the Bank that there have been one or more changes in
any such accounting policies, practices, procedures or reference period
and the Borrower's or the Parent's (as the case may be) auditors
provide:
14.6.1 a description of the changes and the adjustments which would be
required to be made to those financial statements in order to
cause them to use the accounting policies, practices, procedures
and reference period upon which the Original Financial
Statements were prepared; and
14.6.2 sufficient information, in such detail and format as may be
reasonably required by the Bank, to enable it to make an
accurate comparison between the financial position indicated by
those financial statements and the Original Financial
Statements,
and any reference in this Agreement to those financial statements shall
be construed as a reference to those financial statements as adjusted to
reflect the basis upon which the Original Financial Statements were
prepared.
15. FINANCIAL CONDITION
15.1 FINANCIAL CONDITION
The Borrower covenants that:
15.1.1 Consolidated Cash Balance shall not at any time be less than
US$75,000,000.
15.1.2 Consolidated Tangible Net Worth shall not at any time be less
than 50 percent of Consolidated Tangible Net Worth as at July 3,
1999 (or such other date as may be agreed between the parties)
plus 75 percent of consolidated positive net income for each
successive quarter ended thereafter in respect of which the
Parent has issued its consolidated financial statements pursuant
to Clause 14.1 (Annual Statements) or 14.2 (Quarterly
Statements).
15.2 FINANCIAL DEFINITIONS
In Clause 15.1 (Financial Condition) the following terms have the
following meanings.
"CONSOLIDATED CASH BALANCE" means the aggregate amount of cash, cash
equivalents and marketable securities (provided that any marketable
securities maturing later than 90 days after the date of determination
shall be marked to market every 90 days) held by the Parent and its
consolidated subsidiaries (excluding the Cash Deposits and any drawings
under any short term or revolving term bank facilities other than the
Parent's asset securitization program currently in effect with Fleet
National Bank, as administrator, and any renewal or replacement thereof
on substantially similar terms).
"CONSOLIDATED TANGIBLE NET WORTH" means, without duplication, at any
time consolidated shareholders' equity of the Parent and its
consolidated subsidiaries (net of
<PAGE> 25
any unrealized gains or losses on assets) less (to the extent included)
any amount shown in respect of goodwill (including goodwill arising only
on consolidation), franchise, licences, patents, tradenames, copyright,
service marks, brandnames or other intangible assets of the Parent and
its consolidated subsidiaries.
"RELEVANT PERIOD" means each period of twelve months ending on the last
day of each quarter of the Parent's financial year.
15.3 FINANCIAL TESTING
The financial covenants set out in Clause 15.1 (Financial Condition)
must be complied with at all times and shall be reported upon quarterly
by reference to each of the Parent's consolidated financial statements
and each Compliance Certificate delivered pursuant to Clause 14
(Financial Information).
15.4 ACCOUNTING TERMS
All accounting expressions which are not otherwise defined herein shall
be construed in accordance with generally accepted accounting principles
in the United States of America.
16. COVENANTS
16.1 MAINTENANCE OF LEGAL VALIDITY
The Borrower shall obtain, comply with the terms of and do all that is
necessary to maintain in full force and effect all authorisations,
approvals, licences and consents required in or by the laws of its
jurisdiction of incorporation to enable it lawfully to operate its
business and enter into and perform its obligations under the Finance
Documents and the EDB Loan Agreement and to ensure the legality,
validity, enforceability or admissibility in evidence in its
jurisdiction of incorporation of the Finance Documents and the EDB Loan
Agreement, except for such authorisations, approvals, licenses and
consents the failure of which to obtain would not be reasonably likely
to have a Material Adverse Effect.
16.2 INSURANCE
The Borrower shall maintain insurances on and in relation to its
business and assets with reputable underwriters or insurance companies
against such risks and to such extent as is usual for companies carrying
on a business such as that carried on by it.
16.3 ENVIRONMENTAL COMPLIANCE
The Borrower shall comply in all material respects with all
Environmental Law and obtain and maintain any Environmental Permits and
take all reasonable steps in anticipation of known or expected future
changes to or obligations under the same, breach of which (or failure to
obtain, maintain or take which) might reasonably be expected to have a
Material Adverse Effect.
<PAGE> 26
16.4 ENVIRONMENTAL CLAIMS
The Borrower shall inform the Bank in writing as soon as reasonably
practicable upon becoming aware of the same if any Environmental Claim
has been commenced or (to the best of the Borrower's knowledge and
belief) is threatened against the Borrower in any case where such claim
would be reasonably likely, if determined against the Borrower, to have
a Material Adverse Effect or of any facts or circumstances which will or
are reasonably likely to result in any Environmental Claim being
commenced or threatened against the Borrower in any case where such
claim would be reasonably likely, if determined against the Borrower, to
have a Material Adverse Effect.
16.5 NOTIFICATION OF EVENTS OF DEFAULT, MATERIAL ADVERSE CHANGE, LITIGATION,
ETC.
The Borrower shall promptly and, in any event not more than 7 days after
it becomes aware of such occurrence inform the Bank of the occurrence
of:
16.5.1 any Event of Default, Potential Event of Default or default or
event of default under the EDB Loan Agreement and, upon receipt
of a written request to that effect from the Bank, confirm to
the Bank that, save as previously notified to the Bank or as
notified in such confirmation, no Event of Default, Potential
Event of Default or default or event of default under the EDB
Loan Agreement has occurred;
16.5.2 any material adverse change in its condition (financial or
otherwise) or of any of its related corporations as reasonably
determined by the Borrower, except as disclosed in a filing with
the Securities and Exchange Commission; and
16.5.3 the institution of any action or administrative proceeding of or
before any court or agency claiming an amount in excess of
US$25,000,000.
The Borrower shall provide the Bank with copies of all notices,
documents or other information provided to, or received from, EDB
pursuant to the EDB Loan Agreement.
16.6 CLAIMS PARI PASSU
The Borrower shall ensure that at all times the claims of the Bank
against it under the Finance Documents rank at least pari passu with the
claims of all its unsecured and unsubordinated creditors save those
whose claims are preferred by any bankruptcy, insolvency, liquidation or
other similar laws of general application.
16.7 NEGATIVE PLEDGE
The Borrower shall not create or permit to subsist any Encumbrance over
all or any part of the Security other than Permitted Encumbrances.
<PAGE> 27
16.8 TAXES
The Borrower shall duly pay and discharge all rents, rates, taxes,
assessments and government charges levied upon the Borrower or against
the Borrower's properties prior to the date on which penalties accrue
thereon, the non-payment of which would reasonably be likely to have a
Material Adverse Effect, unless and to the extent only that the same
shall be contested in good faith and in appropriate proceedings by the
Borrower. The Borrower shall file tax returns for the fiscal year ending
in 1997 by December 31, 1999 and for the fiscal year ending in 1998 by
March 31, 2000, and in each case shall pay all applicable fines, if any,
arising as a result of such late filing.
16.9 INSPECTION
The Borrower shall permit, upon reasonable prior written request of the
Bank, the Bank to inspect any land or premises where the Borrower
carries on its business and inspect the same and all property and assets
whatsoever therein or thereon and all accounts records and statements
wherever the same may be situate and to make inventories and record
thereof.
16.10 EQUIPMENT
The Borrower shall keep all its plant, machinery, equipment, buildings,
constructions, fixtures, fittings, implements and other effects in good
and substantial repair and proper working condition in accordance with
good business practice.
16.11 DISPOSAL OF ASSETS
The Borrower shall not sell, transfer or otherwise dispose of all or any
part of its assets or properties (whether in a single transaction or in
a number of related transactions), except for:
(a) disposals in the ordinary course of business on an arms' length
basis;
(b) disposals of obsolete, worn out or damaged assets; and
(c) disposals of assets which, together with all such other
disposals of assets pursuant to this clause (c) occurring after
the date hereof, do not exceed in the aggregate US$25,000,000.
16.12 INSPECTION AUTHORITIES
The Borrower shall give to the Bank such written authorisations or other
directions and provide such facilities and access as the Bank may
require for the inspection referred to in Clause 16.9 (Inspection) and,
during the continuance of an Event of Default, shall pay all costs,
fees, travelling and other out-of-pocket expenses whether legal or
otherwise in respect of such inspection.
<PAGE> 28
16.13 MEMORANDUM AND ARTICLES OF ASSOCIATION
Insofar as may be necessary the Borrower shall amend its Memorandum and
Articles of Association so as to enable it to observe and perform all
the covenants, undertakings, terms, stipulations, conditions and other
provisions of this Agreement.
16.14 YEAR 2000
The Borrower shall procure that all Computer Systems used by any member
of the Group are (or will by no later than September 30, 1999 be) Year
2000 Compliant.
17. EVENTS OF DEFAULT
Each of Clause 17.1 (Failure to Pay) to Clause 17.19 (Material Adverse
Change) describes circumstances which constitute an Event of Default for
the purposes of this Agreement.
17.1 FAILURE TO PAY
The Borrower fails to pay any sum due from it under any Finance Document
or the EDB Loan Agreement at the time, in the currency and in the manner
specified therein within three days after the due date thereof.
17.2 MISREPRESENTATION
Any representation or statement made or deemed to be made by the
Borrower or the Parent in any Finance Document or in any notice or other
document, certificate or statement delivered by it pursuant thereto or
in connection therewith is or proves to have been incorrect or
misleading in any material respect when made or deemed to be made.
17.3 SPECIFIC COVENANTS
The Borrower fails duly to perform or comply with any of the obligations
expressed to be assumed by it in Clause 13 (Security), Clause 14
(Financial Information) or Clause 16.5 (Notification of Events of
Default, etc.) and, in the case of the obligations under Clause 13
(Security), the failure, if capable of remedy, is not remedied within
two Business Days after the Borrower becomes aware thereof.
17.4 PIONEER STATUS
The Borrower ceases at any time to maintain its Pioneer Status and fails
to reacquire Pioneer Status within 30 days thereafter.
17.5 OTHER OBLIGATIONS
The Borrower fails duly to perform or comply with any other obligation
expressed to be assumed by it in any Finance Document and such failure,
if capable of remedy, is
<PAGE> 29
not remedied within fifteen days after the Bank has given notice thereof
to the Borrower.
17.6 CROSS DEFAULT
Any Financial Indebtedness of any member of the Group is not paid when
due or any creditor of any member of the Group becomes entitled to
declare any Financial Indebtedness of any member of the Group due and
payable prior to its specified maturity, PROVIDED THAT it shall not
constitute an Event of Default if the aggregate amount (or its
equivalent in another currency) of all such Financial Indebtedness of
all members of the Group is less than US$50,000,000.
17.7 CROSS ACCELERATION
Any Financial Indebtedness of any member of the Group is declared to be
or otherwise becomes due and payable prior to its specified maturity,
PROVIDED THAT it shall not constitute an Event of Default if the
aggregate amount (or its equivalent in another currency) of all such
Financial Indebtedness of all members of the Group is less than
US$10,000,000.
17.8 INSOLVENCY AND RESCHEDULING
Any of the Borrower, the Parent or any Material Subsidiary is unable to
pay its debts as they fall due, commences negotiations with any one or
more of its creditors with a view to the general readjustment or
rescheduling of its indebtedness or makes a general assignment for the
benefit of or a composition with its creditors.
17.9 WINDING-UP
Any of the Borrower, the Parent or any Material Subsidiary takes any
corporate action or other steps are taken or legal proceedings are
started for its winding-up, dissolution, administration or
re-organisation (whether by way of voluntary arrangement, scheme of
arrangement or otherwise) for the benefit of or a composition with its
creditors or for the appointment of a liquidator, receiver,
administrator, administrative receiver, conservator, custodian, trustee
or similar officer of it or of any or all of its revenues and assets.
17.10 EXECUTION OR DISTRESS
Any execution or distress is levied against, or an encumbrancer takes
possession of, the whole or any part of, the property, undertaking or
assets of any of the Borrower, the Parent or any Material Subsidiary or
any event occurs which under the laws of any jurisdiction has a similar
or analogous effect and is not discharged in full within 30 days of
having been so levied.
<PAGE> 30
17.11 FAILURE TO COMPLY WITH FINAL JUDGMENT
Any member of the Group fails to comply with or pay any sum due from it
under any final judgment or any final order made or given by any court
of competent jurisdiction in an amount which, together with all such
other amounts owing by any other members of the Group, exceeds in the
aggregate US$25,000,000 (or its equivalent in another currency) and such
judgment or order is not satisfied, discharged or stayed pending appeal
within 30 days.
17.12 GOVERNMENTAL INTERVENTION
By or under the authority of any government, (a) the management of the
Borrower is wholly or partially displaced or the authority of the
Borrower in the conduct of its business is wholly or partially curtailed
or (b) all or a majority of the issued shares of the Borrower or 5% of
its consolidated assets or 20% of its consolidated revenues is seized,
nationalised, expropriated or compulsorily acquired.
17.13 OWNERSHIP OF THE BORROWER
The Parent ceases to own, directly or indirectly, 100 percent of the
issued share capital of the Borrower.
17.14 THE GROUP'S BUSINESS
Any member of the Group ceases to carry on the business it carries on at
the date hereof or enters into any unrelated business if the assets of
such unrelated business constitute more than 50 percent of the assets of
the Group after giving effect to such unrelated business.
17.15 REPUDIATION
The Borrower repudiates any Finance Document or the EDB Loan Agreement
or does or causes to be done any act or thing evidencing an intention to
repudiate any Finance Document or the EDB Loan Agreement.
17.16 ILLEGALITY
At any time it is or becomes unlawful for the Borrower to perform or
comply with any or all of its obligations under any Finance Document or
the EDB Loan Agreement or any of the obligations of, or any of the
security created by, the Borrower thereunder are not or cease to be
legal, valid, binding and enforceable.
17.17 MERGER
The Parent merges or consolidates with any other person (where the
Parent is not the surviving company), enters into any demerger
transaction or participates in any other similar type of corporate
reconstruction.
<PAGE> 31
17.18 EDB LOAN
17.18.1 The Borrower shall fail to duly and punctually comply with any
of its obligations under the EDB Loan Agreement and such
failure, if capable of remedy, is not remedied within 30 days
after the Bank has given notice to the Borrower requiring the
Borrower to remedy such failure.
17.18.2 Any amendment or waiver is made under the EDB Loan Agreement
without the Bank's prior written consent which relates to change
in the principal amount or currency of the EDB Loan, or a change
in any repayment date, or a reduction in the principal amount
due on any repayment date; or a change in the currency of any
payment of interest in respect of the EDB Loan.
17.19 MATERIAL ADVERSE CHANGE
To the extent not contemplated by any of the foregoing Clause 17.1
(Failure to Pay) to Clause 17.18 (EDB Loan), any event or circumstance
occurs which the Bank reasonably believes might have a material adverse
effect on the ability of the Borrower to perform or comply with its
obligations under any of the Finance Documents or the EDB Loan
Agreement.
17.20 ACCELERATION AND CANCELLATION
During the continuance of an Event of Default (other than an event with
respect to the Borrower described in Clause 17.8 (Insolvency and
Rescheduling), Clause 17.9 (Winding-up) or Clause 17.10 (Execution or
Distress)) and at any time thereafter, the Bank may by notice to the
Borrower:
17.20.1 require the Borrower to procure that the liability of the Bank
under the Bank Guarantee is promptly reduced to zero and/or
declare all or any part of the amounts outstanding and unpaid by
the Borrower under the Finance Documents and all liabilities of
the Borrower thereunder, present or future, matured or
unmatured, contingent or absolute to be immediately due and
payable without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower
(whereupon the same shall become so payable together with
accrued interest thereon and any other sums then owed by the
Borrower thereunder) or declare all such amounts to be due and
payable on demand of the Bank; and/or
17.20.2 declare that any unutilised portion of the Facility shall be
cancelled, whereupon the same shall be cancelled and the
Available Facility shall be reduced to zero; and/or
17.20.3 exercise any rights of the Bank under the Account Charge.
and in the case of any event with respect to the Borrower described in
Clause 17.8 (Insolvency and Rescheduling), 17.9 (Winding-up) or Clause
17.10 (Execution or
<PAGE> 32
Distress), the Available Facility shall automatically reduce to zero and
all moneys outstanding and unpaid by the Borrower under the Finance
Documents and all liabilities of the Borrower thereunder, present or
future, matured or unmatured, contingent or absolute shall automatically
become due and payable, without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
17.21 ADVANCES DUE ON DEMAND
If, pursuant to Clause 17.20 (Acceleration and Cancellation), the Bank
declares all or any part of the amounts outstanding and unpaid by the
Borrower under the Finance Documents and all liabilities of the Borrower
thereunder, present or future, matured or unmatured, contingent or
absolute to be due and payable on demand of the Bank, then, and at any
time thereafter, the Bank may by notice to the Borrower:
17.21.1 require repayment of all or such part of such amount on such
date as it may specify in such notice, without presentation,
demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower (whereupon the same shall become
due and payable on the date specified together with accrued
interest thereon and any other sums then owed by the Borrower
thereunder) or withdraw its declaration with effect from such
date as it may specify; and/or
17.21.2 select as the duration of any Interest Period which begins while
such declaration remains in effect a period of six months or
less.
18. COMMITMENT COMMISSION AND FEES
18.1 COMMITMENT COMMISSION
The Borrower shall pay to the Bank a commitment commission on the amount
of the Available Facility from day to day during the Availability
Period, such commitment commission to be calculated at the rate of 0.25
percent per annum and payable in arrears on the last day of each
successive period of three months which ends during the Availability
Period and on the last day of the Availability Period PROVIDED THAT if
(a) the Class A Security is in full force and effect on the date hereof,
(b) the amount of the Cash Deposits is at least equal to S$50,400,000
and (c) the Class A Security is provided by the Borrower throughout the
Availability Period, the payment of the commitment commission will be
waived.
18.2 CLOSING FEE AND ADMINISTRATION FEE
The Borrower shall pay to the Bank the closing fee and administration
fee specified in the commitment letter dated August 12, 1999 from the
Bank to the Borrower and the Parent at the times, and in the amounts,
specified in such letter.
<PAGE> 33
19. COSTS AND EXPENSES
19.1 TRANSACTION EXPENSES
The Borrower shall, from time to time on demand of the Bank, reimburse
the Bank for all reasonable costs and expenses (including legal fees)
together with any VAT thereon incurred by it in connection with the
negotiation, preparation and execution of the Finance Documents, any
change of Security requested pursuant to Clause 13 (Security), any other
document referred to in the Finance Documents and the completion of the
transactions therein contemplated.
19.2 PRESERVATION AND ENFORCEMENT OF RIGHTS
The Borrower shall, from time to time on demand of the Bank, reimburse
the Bank for all costs and expenses (including legal fees) on a full
indemnity basis together with any VAT thereon incurred in or in
connection with the preservation and/or enforcement of any of the rights
of the Bank under the Finance Documents and any other document referred
to in the Finance Documents (including, without limitation, in the event
that the Bank reasonably believes that an Event of Default or Potential
Event of Default has occurred, any costs and expenses relating to any
investigation thereof or any steps necessary or desirable in connection
with any proposal for remedying or otherwise resolving such Event of
Default or Potential Event of Default).
19.3 STAMP TAXES
The Borrower shall pay all stamp, registration and other taxes to which
this Agreement, any other document referred to in this Agreement or any
judgment given in connection therewith is or at any time may be subject
and shall, from time to time on demand of the Bank, indemnify the Bank
against any liabilities, costs, claims and expenses resulting from any
failure to pay or any delay in paying any such tax.
19.4 AMENDMENT COSTS
If the Borrower requests any amendment, waiver or consent then the
Borrower shall, within five Business Days of demand by the Bank,
reimburse the Bank for all reasonable costs and expenses (including
legal fees) together with any VAT thereon incurred by such person in
responding to or complying with such request.
20. DEFAULT INTEREST AND BREAK COSTS
20.1 DEFAULT INTEREST PERIODS
If any sum due and payable by the Borrower hereunder is not paid on the
due date therefor in accordance with Clause 23 (Payments) or if any sum
due and payable by the Borrower under any judgment of any court in
connection herewith is not paid on the date of such judgment, the period
beginning on such due date or, as the case may
<PAGE> 34
be, the date of such judgment and ending on the date upon which the
obligation of the Borrower to pay such sum is discharged shall be
divided into successive periods, each of which (other than the first)
shall start on the last day of the preceding such period and the
duration of each of which shall (except as otherwise provided in this
Clause 20) be selected by the Bank.
20.2 DEFAULT INTEREST
An Unpaid Sum shall bear interest during each Interest Period in respect
thereof at the rate per annum which is two percent per annum above the
rate per annum equal to the cost to the Bank of funding such Unpaid
Amount from whatever sources it may select.
20.3 PAYMENT OF DEFAULT INTEREST
Any interest which shall have accrued under Clause 20.2 (Default
Interest) in respect of an Unpaid Sum shall be due and payable and shall
be paid by the Borrower on demand of the Bank.
21. BORROWER'S INDEMNITIES
21.1 BORROWER'S INDEMNITY
The Borrower undertakes to indemnify the Bank against:
21.1.1 any cost, claim, loss, expense (including legal fees) or
liability (including, without limitation, any break costs)
together with any VAT thereon, whether or not reasonably
foreseeable, which it may sustain or incur as a consequence of
the occurrence of any Event of Default; and
21.1.2 any cost or loss (including, without limitation, any break
costs) it may suffer or incur as a result of its issuing or
making arrangements to issue the Bank Guarantee requested by the
Borrower but not made by reason of the operation of any one or
more of the provisions hereof.
21.2 CURRENCY INDEMNITY
If any sum (a "SUM") due from the Borrower under this Agreement or any
other Finance Document is paid in a currency (the "FIRST CURRENCY")
other than the currency (the "SECOND CURRENCY") in which such Sum is
payable or any order or judgment given or made in relation hereto has to
be converted from the First Currency into the Second Currency, the
Borrower shall indemnify the Bank from and against any loss suffered or
incurred as a result of any discrepancy between (a) the rate of exchange
used for such purpose to convert such Sum from the First Currency into
the Second Currency and (b) the rate or rates of exchange available to
the Bank at the time of receipt of such Sum.
<PAGE> 35
22. CURRENCY OF ACCOUNT AND PAYMENT
The Singapore dollar is the currency of account and payment for each and
every sum at any time due from the Borrower hereunder, PROVIDED THAT:
22.1.1 each payment in respect of costs and expenses shall be made in
the currency in which the same were incurred; and
22.1.2 each payment pursuant to Clause 7.2 (Tax Indemnity), Clause 9.1
(Increased Costs) or Clause 21.1 (Borrower's Indemnity) shall be
made in the currency specified by the Bank.
23. PAYMENTS
23.1 PAYMENTS TO THE BANK
On each date on which this Agreement requires an amount to be paid by
the Borrower, the Borrower shall make the same available to the Bank for
value on the due date at such time and in such funds and to such account
with such bank as the Bank shall specify from time to time.
23.2 ALTERNATIVE PAYMENT ARRANGEMENTS
If, at any time, it shall become impracticable (by reason of any action
of any governmental authority or any change in law or any similar event)
for the Borrower to make any payments in the manner specified in Clause
23.1 (Payments to the Bank), then the Borrower may agree with the Bank
alternative arrangements for such payments to be made, PROVIDED THAT, in
the absence of any such agreement, the Borrower shall be obliged to make
all payments due to the Bank in the manner specified herein.
23.3 NO SET-OFF
All payments required to be made by the Borrower hereunder shall be
calculated without reference to any set-off or counterclaim and shall be
made free and clear of and without any deduction for or on account of
any set-off or counterclaim.
24. SET-OFF
24.1 SET-OFF
The Bank may, from time to time, apply any credit balance to which the
Borrower is entitled on any account of the Borrower with the Bank in
satisfaction of any sum due and payable from the Borrower to the Bank
hereunder but unpaid PROVIDED THAT such rights of set-off will not
extend to any amounts maintained at, or in the possession of, the Bank
that relate to vendor remittances being made by the Bank on behalf of
any member of the Group and which are contained in Account No.
08213004213 or Account No. 01213004213 at the Bank or any sub-account or
successor account
<PAGE> 36
thereto. For this purpose, the Bank is authorized to purchase with the
moneys standing to the credit of any such account such other currencies
as may be necessary to effect such application.
24.2 SET-OFF NOT MANDATORY
The Bank shall not be obliged to exercise any right given to it by
Clause 24.1. (Set-off).
25. ASSIGNMENTS
25.1 BINDING AGREEMENT
This Agreement shall be binding upon and enure to the benefit of each
party hereto and its or any subsequent successors and permitted assigns.
25.2 NO ASSIGNMENTS AND TRANSFERS BY THE BORROWER
The Borrower shall not be entitled to assign or transfer all or any of
its rights, benefits and obligations hereunder.
25.3 ASSIGNMENTS BY THE BANK
The Bank may, at any time, assign any of its rights and benefits
hereunder to a bank or financial institution PROVIDED THAT the Bank
shall not make any such assignment of more than 50% of the amount of the
Bank Guarantee without the prior written consent of the Borrower, which
consent shall not be unreasonably withheld or delayed.
25.4 DISCLOSURE OF INFORMATION
The Bank may disclose to any person:
25.4.1 to (or through) whom the Bank assigns (or may potentially
assign) all or any of its rights, benefits and obligations
hereunder;
25.4.2 with (or through) whom the Bank enters into (or may potentially
enter into) any sub-participation in relation to, or any other
transaction under which payments are to be made by reference to,
this Agreement or the Borrower; or
25.4.3 to whom information may be required to be disclosed by any
applicable law,
such information about the Borrower or the Group and this Agreement as
the Bank shall consider appropriate PROVIDED THAT the Bank shall notify
the Borrower of any such disclosure and PROVIDED FURTHER THAT prior to
the Bank disclosing any information which is subject to a
confidentiality undertaking by the Bank in favor of any member of the
Group, the Bank shall first obtain an equivalent confidentiality
undertaking from the proposed recipient of such information except in
connection with any such disclosure pursuant to Clause 25.4.3.
<PAGE> 37
26. EVIDENCE OF DEBT
26.1 EVIDENCE OF DEBT
The Bank shall maintain in accordance with its usual practice accounts
evidencing the amounts from time to time paid by it under the Bank
Guarantee and owing to it hereunder.
26.2 PRIMA FACIE EVIDENCE
In any legal action or proceeding arising out of or in connection with
this Agreement, the entries made in the accounts maintained pursuant to
Clause 26.1 (Evidence of Debt) shall be prima facie evidence of the
existence and amounts of the specified obligations of the Borrower.
26.3 CERTIFICATES OF THE BANK
A certificate of the Bank as to (a) the amount by which a sum payable to
it hereunder is to be increased under Clause 7.1 (Tax Gross-up), (b) the
amount for the time being required to indemnify it against any such
cost, payment or liability as is mentioned in Clause 7.2 (Tax
Indemnity), Clause 9.1 (Increased Costs) or Clause 21.1 (Borrower's
Indemnity) shall, in the absence of manifest error, be prima facie
evidence of the existence and amounts of the specified obligations of
the Borrower.
27. REMEDIES AND WAIVERS, PARTIAL INVALIDITY
27.1 REMEDIES AND WAIVERS
No failure to exercise, nor any delay in exercising, on the part of the
Bank any right or remedy hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right or remedy prevent
any further or other exercise thereof or the exercise of any other right
or remedy. The rights and remedies herein provided are cumulative and
not exclusive of any rights or remedies provided by law.
27.2 PARTIAL INVALIDITY
If, at any time, any provision hereof is or becomes illegal, invalid or
unenforceable in any respect under the law of any jurisdiction, neither
the legality, validity or enforceability of the remaining provisions
hereof nor the legality, validity or enforceability of such provision
under the law of any other jurisdiction shall in any way be affected or
impaired thereby.
28. NOTICES
28.1 COMMUNICATIONS IN WRITING
Each communication to be made hereunder shall be made in writing and,
unless otherwise stated, shall be made by fax or letter.
<PAGE> 38
28.2 DELIVERY
Any communication or document to be made or delivered by one person to
another pursuant to this Agreement shall:
28.2.1 if by way of fax (unless that other person has by fifteen days'
notice specified another number) be made to such other person to
the fax number identified with its signature below and shall be
deemed to have been received when transmission has been
completed and receipt has been confirmed by telephone; and
28.2.2 if by way of letter (unless that other person has by fifteen
days' notice specified another address) be delivered to that
other person at the address identified with its signature below
and shall be deemed to have been delivered when left at that
address or, as the case may be, ten days after being deposited
in the post postage prepaid in an envelope addressed to it at
that address,
PROVIDED THAT any communication or document to be made or delivered to
the Bank shall be effective only when received by the Bank.
28.3 ENGLISH LANGUAGE
Each communication and document made or delivered by one party to
another pursuant to this Agreement shall be in the English language or
accompanied by a translation thereof into English certified (by an
officer of the person making or delivering the same) as being a true and
accurate translation thereof.
29. GOVERNING LAW
This Agreement and all matters arising from or connected with it are
governed by the law of the State of New York.
30. JURISDICTION
30.1 SUBMISSION TO JURISDICTION
Each party hereto hereby agrees that any suit, action or proceeding with
respect to this Agreement, the other Finance Documents or any judgment
entered by any court in respect thereof may be brought in the courts of
the State of New York, County of New York or the United States District
Court for the Southern District of New York; and each party hereto
hereby irrevocably submits to the jurisdiction of such courts for the
purpose of any such suit, action, proceeding or judgment. Each party
hereto further submits, for the purpose of any such suit, action,
proceeding or judgment brought or rendered against it, to the
appropriate courts of the jurisdiction of its domicile.
<PAGE> 39
30.2 PROCESS AGENT
The Borrower hereby agrees that service of all writs, process and
summonses in any such suit, action or proceeding brought in the State of
New York may be made upon CT Corporation at 1633 Broadway, New York, NY
10017 (or at such other address or at the office of such other
authorized agent as the Borrower may designate by written notice to the
Bank) (the "PROCESS AGENT"), and the Borrower hereby confirms and agrees
that the Process Agent has been duly and irrevocably appointed as its
agent and true and lawful attorney-in-fact in its name, place and stead
to accept such service of any and all such writs, process and summonses,
and agrees that the failure of the Process Agent to give any notice of
any such service of process to the Borrower shall not impair or affect
the validity of such service or of any judgment based thereon. The
Borrower hereby further irrevocably consents to the service of process
in any suit, action or proceeding in such courts by the mailing thereof
by the Bank by registered or certified mail, postage prepaid, at its
address set forth beneath its signature hereto.
30.3 OTHER SERVICE
Nothing herein shall in any way be deemed to limit the ability of the
Bank to serve any such writs, process or summonses in any other manner
permitted by applicable law or to obtain jurisdiction over the Borrower
in such other jurisdictions, and in such manner, as may be permitted by
applicable law.
30.4 WAIVER OF VENUE
The Borrower hereby irrevocably waives any objection that it may now or
hereafter have to the laying of the venue of any suit, action or
proceeding arising out of or relating to this Agreement or any other
Finance Document brought in the courts of the State of New York, County
of New York or the United States District Court for the Southern
District of New York, and hereby further irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
30.5 WAIVER OF JURY TRIAL
EACH OF THE BORROWER AND THE BANK HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
30.6 NO IMMUNITY
To the extent that the Borrower may be or become entitled, in any
jurisdiction in which judicial proceedings may at any time be commenced
with respect to this Agreement or any other Finance Document, to claim
for itself or its assets or
<PAGE> 40
revenues any immunity from suit, court jurisdiction, attachment prior to
judgment, attachment in aid of execution of a judgment, execution of a
judgment or from any other legal process or remedy relating to its
obligations under this Agreement, or any other Finance Document, and to
the extent that in any such jurisdiction there may be attributed such an
immunity (whether or not claimed), the Borrower hereby irrevocably
agrees not to claim and hereby irrevocably waives such immunity to the
fullest extent permitted by the laws of such jurisdiction.
30.7 INTEGRATION
This Agreement, together with the other Finance Documents (but only
paragraphs 5 and 6 of the commitment letter dated August 12, 1999 from
the Bank to the Borrower and the Parent), embodies the entire agreement
and understanding among the Borrower and the Bank, and supersedes all
prior or contemporaneous agreements and understandings of such persons,
verbal or written, relating to the subject matter hereof and thereof.
30.8 COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument and
any of the parties hereto may execute this Agreement by signing any such
counterpart.
<PAGE> 41
WITNESS the hands of the duly authorized representatives of the parties hereto
the day and year first before written.
THE BORROWER
MAXTOR PERIPHERALS (S) PTE. LTD.
By:
--------------------------------
Name:
Title:
Address: 36 Robinson Road, #18-01
City House
Singapore 068877
Tel: (65) 480-1850
Fax: (65) 480-1852
Attention: C.S. Tiong
THE BANK
THE BANK OF NOVA SCOTIA, SINGAPORE BRANCH
By:
--------------------------------
Name:
Title:
Address: #15-01, Ocean Building
10 Collyer Quay
Singapore 049315
Tel: (65) 539-4628
Fax: (65) 532-2440
Attention: Manager
In addition, a copy of all notices shall be sent to:
The Bank of Nova Scotia, Hong Kong Branch
25th Floor, United Centre
95 Queensway
Hong Kong
Tel: (852) 2861-4828
Fax: (852) 2527-2527
Attention: Vice President & Manager
<PAGE> 42
SCHEDULE 1
CONDITIONS PRECEDENT
1. A copy, certified as a true and up-to-date copy by an Authorized Signatory
of the Borrower, of its memorandum and articles of association and
certificate of incorporation.
2. A copy, certified as a true and up-to-date copy by an Authorized Signatory
of the Borrower, of a board resolution of the Borrower approving the
execution, delivery and performance of the Finance Documents and the EDB
Loan Agreement and the terms and conditions hereof and authorising a named
person or persons to sign the Finance Documents and any documents to be
delivered by the Borrower pursuant hereto.
3. A certificate of an Authorized Signatory of the Borrower setting out the
names and signatures of the persons authorized to sign, on behalf of the
Borrower, the Finance Documents and any documents to be delivered by the
Borrower pursuant hereto.
4. A certificate of an Authorized Signatory of the Borrower confirming that
utilization of the Facility would not breach any restriction on its
borrowing powers.
5. A copy, certified as a true copy by an Authorized Signatory of the
Borrower, of each consent and approval required in connection with the
execution, delivery and performance by the Borrower of the Finance
Documents.
6. An opinion of the Borrower's New York counsel satisfactory in form and
substance to the Bank.
7. An opinion of the Borrower's Singapore counsel satisfactory in form and
substance to the Bank.
8. An opinion of Clifford Chance, counsel to the Bank.
9. A copy, certified as a true copy by an Authorized Signatory of the
Borrower, of the Original Financial Statements of the Borrower.
10. A copy, certified as a true copy by an Authorized Signatory of the Parent,
of the Original Financial Statements of the Parent.
11. Evidence that the fees, costs and expenses required to be paid by the
Borrower pursuant to Clause 18.1 (Commitment Commission), Clause 18.2
(Closing Fee and Administration Fee), Clause 19.1 (Transaction Expenses)
and 19.3 (Stamp Taxes) have been paid.
12. Evidence that CT Corporation has agreed to act as the agent of the Borrower
for the service of process in New York.
<PAGE> 43
13. Evidence that the Cash Deposits have been deposited with the Account Bank
at least one day prior to the Utilization Date.
14. A duly executed copy of the Account Charge.
15. A copy, certified as a true and up-to-date copy by an Authorized Signatory
of the Borrower, of the EDB Offer Letter and the acceptance thereof by the
Borrower.
16. A duly executed copy of the EDB Loan Agreement and the letter dated
September 6, 1999 from Barry Sim, Director, Electronics at EDB, to CS
Tiong, Vice President, Finance at the Borrower, each certified as a true
and up-to-date copy by an Authorized Signatory of the Borrower.
17. A copy of the certificate of Pioneer Status, Certificate No. 1228, issued
by the Ministry of Trade on June 3, 1998, certified as a true and
up-to-date copy by an Authorized Signatory of the Borrower.
<PAGE> 44
SCHEDULE 2
UTILIZATION REQUEST
From: Maxtor Peripherals (S) Pte. Ltd.
To: The Bank of Nova Scotia, Singapore Branch
Dated:
Dear Sirs,
1. We refer to the agreement (the "Facility Agreement") dated [ ] 1999 and
made between Maxtor Peripherals (S) Pte. Ltd. as borrower and The Bank of
Nova Scotia, Singapore Branch as bank. Terms defined in the Facility
Agreement shall have the same meaning in this notice.
2. This notice is irrevocable.
3. We hereby give you notice that, pursuant to the Facility Agreement and on
[date of proposed utilization], we wish the Bank to issue a Bank Guarantee
in the aggregate amount of S$[ ] upon the terms and subject to the
conditions contained therein.
4. We confirm that, at the date hereof, no Event of Default or Potential Event
of Default is continuing.
Yours faithfully
-----------------------------
Authorized Signatory
for and on behalf of
Maxtor Peripherals (S) Pte. Ltd.
<PAGE> 45
SCHEDULE 3
PART 1
FORM OF PARENT COMPLIANCE CERTIFICATE
To: The Bank of Nova Scotia, Singapore Branch
Date:
Dear Sirs,
We refer to an agreement (the "Facility Agreement") dated [ ], 1999 and made
between Maxtor Peripherals (S) Pte. Ltd. and The Bank of Nova Scotia, Singapore
Branch as bank.
Terms defined in the Facility Agreement shall bear the same meaning herein.
We confirm that:
(a) the Consolidated Cash Balance as at [ ] is US$[ ]; and
(b) the Consolidated Tangible Net Worth as at [ ] is US$[ ] which is equal
to at least 50 percent of Consolidated Tangible Net Worth as at July 3,
1999 plus 75 percent of consolidated positive net income for each
successive quarter ended thereafter in respect of which the Parent has
issued its consolidated financial statements pursuant to Clause 14.1
(Annual Statements) or 14.2 (Quarterly Statements) of the Facility
Agreement.
Signed:
------------------- ---------------------------------
Director Director/Senior Financial Officer
<PAGE> 46
SCHEDULE 3
PART 2
FORM OF BORROWER COMPLIANCE CERTIFICATE
To: The Bank of Nova Scotia, Singapore Branch
Date:
Dear Sirs,
We refer to an agreement (the "Facility Agreement") dated [ ], 1999 and made
between Maxtor Peripherals (S) Pte. Ltd. and The Bank of Nova Scotia, Singapore
Branch as bank.
Terms defined in the Facility Agreement shall bear the same meaning herein.
We confirm that, as at the date hereof, we are in compliance with all terms and
conditions of the Facility Agreement and the EDB Loan Agreement and no Event of
Default or Potential Event of Default has occurred and is continuing [or
describe any non-compliance or default].
Signed:
------------------- ---------------------------------
Director Director/Senior Financial Officer
<PAGE> 47
SCHEDULE 4
FORM OF BANK GUARANTEE
BANK GUARANTEE
To: Singapore Economic Development Board
1. In consideration of your advancing to maxtor peripherals (s) pte.
limited (the "company") a loan facility in an aggregate amount not
exceeding singapore dollars 48,000,000 pursuant and subject to the terms
and conditions of the edb loan agreement ("loan agreement") entered into
by yourselves and the company dated ______________, we the bank whose
name appears in the signature pages hereto unconditionally and
irrevocably guarantee as follows:
(a) We shall, in respect of the principal amount, in the event that
the Company defaults in the repayment of such part or all of the
amount of the Guaranteed Principal Sum which is due or owing to
you under the terms of the Loan Agreement (including due or
owing by reason of your having exercised your rights under
Clause 15 of the Loan Agreement) (the "DEFAULTED PRINCIPAL
AMOUNT"), pay the Defaulted Principal Amount to yourselves
within 3 Business Days of our receipt of such demand, unless
such demand is received on a day which is not a Business Day (as
defined in the Loan Agreement) or after 12 noon on any Business
Day, in which event payment shall be made within 3 Business Days
from the next immediately succeeding Business Day. For the
purposes of this Guarantee, "GUARANTEED PRINCIPAL SUM" shall
mean the principal amount outstanding under the Loan Agreement
from time to time. For the avoidance of doubt, the Guaranteed
Principal Sum shall equal zero upon termination of this
Guarantee pursuant to Clause 10.
(b) We shall, in respect of all interest accrued, due or owing under
the Loan Agreement (including all default interest), in the
event that the Company defaults in the payment of such part or
all of the amount of the interest which is accrued, due or owing
to you under the terms of the Loan Agreement (including due or
owing by reason of your having exercised your rights under
Clause 15 of the Loan Agreement) (the "DEFAULTED INTEREST
AMOUNT"), pay the Defaulted Interest Amount to yourselves within
3 Business Days of our receipt of such demand, unless such
demand is received on a day which is not a Business Day or after
12 noon on any Business Day, in which event payment shall be
made within 3 Business Days from the next immediately succeeding
Business Day.
<PAGE> 48
2. We also agree as primary obligation to indemnify you on demand from and
against any loss, cost or expense incurred by you as a result of the
obligations guaranteed pursuant hereto being or becoming void, voidable,
unenforceable or ineffective for any reason whatsoever, whether or not
known to you, the amount of such loss being the amount which you would
otherwise have been entitled to recover from us under this guarantee.
3. We represent and warrant that we have full power to enter into this
guarantee and have taken all necessary steps to authorise its execution
on our behalf and have obtained all necessary governmental and other
consents required to enable us to perform our obligations and hereunder
and that this guarantee is legal, valid and binding on us.
4. Subject to clause 10 below, this guarantee and indemnity shall be a
continuing security and accordingly (i) shall extend to cover the
balance of the guaranteed principal sum and interest due at any time
from the company to you and (ii) shall not be discharged by an
intermediate payment or settlement of account between the borrower and
you.
5. It is agreed that a certificate from you as to the amount due from the
company by way of principal or interest under the loan agreement at the
date of such certificate shall, in the absence of manifest error, be
conclusive evidence of the amounts so due for all purposes.
6. You may not assign your rights under this guarantee without our prior
written consent.
7. This guarantee shall not be affected by any change in your constitution
or the constitution of the company.
8. Any demand to be made on us hereunder shall be made by facsimile or
letter to <name of bank> singapore branch, <address>, <fax no> and shall
specify whether such demand is made in respect of principal or interest
or both.
9. This guarantee shall remain in full force and effect until the earliest
of (i) the date on which you certify that there is no amount owing, due
or payable by the company to you by way of principal under the loan
agreement and no amount of interest accrued but unpaid; (ii) the date on
which this guarantee is specified to be terminated by us pursuant to a
notice given by us following termination of the guarantee issuance
facility entered into between ourselves and the company, such notice to
be given at least [30] days prior to the termination date; and (iii) the
date following two years from the date hereof of (or such later date as
may be mutually agreed among the company, maxtor corporation and
ourselves).
10. This guarantee shall be governed by and construed in accordance with the
laws of the republic of singapore.
<PAGE> 49
Dated the
--------------------------
Signed:
For and on behalf of
<Name of Bank>
Singapore Branch
[NAME]
<DESIGNATION>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> DEC-27-1998
<PERIOD-END> OCT-02-1999
<CASH> 171,811
<SECURITIES> 113,205
<RECEIVABLES> 230,146
<ALLOWANCES> 10,959
<INVENTORY> 123,490
<CURRENT-ASSETS> 645,542
<PP&E> 387,392
<DEPRECIATION> 241,133
<TOTAL-ASSETS> 862,340
<CURRENT-LIABILITIES> 497,441
<BONDS> 114,531
0
0
<COMMON> 1,117
<OTHER-SE> 249,251<F1>
<TOTAL-LIABILITY-AND-EQUITY> 862,340
<SALES> 1,795,499
<TOTAL-REVENUES> 1,795,499
<CGS> 1,678,916
<TOTAL-COSTS> 1,678,916
<OTHER-EXPENSES> 214,751<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,970
<INCOME-PRETAX> (52,510)
<INCOME-TAX> 1,632
<INCOME-CONTINUING> (54,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,142)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
<FN>
<F1>Other SE includes additional paid-in capital of $1,042,246 accumulated deficit
of $(795,922), and cumulative other comprehensive income of $2,927.
<F2>Other expenses include R&D of $141,897, SG&A of $63,211, stock compensation
expense of $2,017, acquired in-process technology of $7,028, and amortization
of goodwill and other intangible assets of $598.
</FN>
</TABLE>
