<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995
COMMISSION FILE NUMBER 0-17393
MEGATEST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2422195
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1321 RIDDER PARK, SAN JOSE, CALIFORNIA 95131
(408) 437-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Registrant's Common Stock as of May 31,
1995, was 7,196,872.
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MEGATEST CORPORATION
FORM 10-Q
NINE MONTHS ENDED MAY 31, 1995
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
May 31, 1995 and August 31, 1994................................. 3
Condensed Consolidated Statements of Operations for
the three-month and nine-month periods ended
May 31, 1995 and May 31, 1994.................................... 4
Condensed Consolidated Statements of Cash Flows
for the nine-month periods ended May 31, 1995 and
May 31, 1994..................................................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signatures ................................................................. 13
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEGATEST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
May 31, AUGUST 31,
1995 1994
------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 2,014 $ 19,404
Short-term investments..................................................... -- 10,069
Accounts receivable, less allowances of $261 and $262...................... 25,625 23,064
Inventories................................................................ 33,924 23,531
Deferred taxes............................................................. 4,132 3,532
Prepaid expenses and other current assets.................................. 697 668
-------- ----------
Total current assets................................................ 66,392 80,268
Property & equipment, net.................................................... 18,481 12,122
Other assets................................................................. 10,273 8,693
-------- ----------
Total assets...................................... $ 95,146 $ 101,083
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................................. $ 8,500 $ --
Current portion of long-term obligations................................... 52 66
Accounts payable and accrued liabilities................................... 19,227 18,075
Income taxes payable....................................................... 1,938 4,198
Customer advances and deferred revenues.................................... 4,090 2,083
-------- ----------
Total current liabilities........................................... 33,807 24,422
-------- ----------
Long-term obligations ....................................................... 376 414
-------- ----------
Stockholders' equity:
Common stock: $0.001 par value per share;
Shares outstanding: 7,197 and 7,171..................................... 7 7
Additional paid-in capital................................................ 80,674 80,656
Accumulated deficit....................................................... (19,718) (4,416)
-------- ----------
Total stockholders' equity ......................................... 60,963 76,247
-------- ----------
Total liabilities and stockholders' equity........ $ 95,146 $ 101,083
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MEGATEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NINE MONTHS ENDED MAY 31,
-------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product sales.................................... $ 28,941 $ 26,633 $ 59,390 $ 71,958
Development revenues............................. -- 376 -- 789
-------- --------- ---------- ---------
Net revenues............................ 28,941 27,009 59,390 72,747
-------- --------- ---------- ---------
Cost of sales ................................... 16,776 15,919 37,812 40,784
Engineering and product development.............. 5,200 3,918 14,674 11,498
Selling, general and administrative.............. 5,741 4,443 14,838 13,079
Write-off of acquired in-process technology...... -- -- 8,837 --
-------- --------- ---------- ---------
Total costs and expenses................ 27,717 24,280 76,161 65,361
-------- --------- ---------- ---------
Income (loss) from operations.................... 1,224 2,729 (16,771) 7,386
Other income/(expense)........................... (202) 321 151 825
-------- --------- ---------- ---------
Income (loss) before income taxes................ 1,022 3,050 (16,620) 8,211
(Provision) benefit for income taxes............. (230) (519) 1,318 (1,811)
-------- --------- ---------- ---------
Income (loss) before accounting change........... 792 2,531 (15,302) 6,400
Cumulative effect of adopting
new accounting for income taxes............... -- -- -- 1,700
-------- --------- ---------- ---------
Net income (loss)................................ $ 792 $ 2,531 $ (15,302) $ 8,100
======== ========= ========== =========
Income (loss) per share before
accounting change............................. $ 0.11 $ 0.34 $ (2.13) $ 0.90
======== ========= ========== =========
Net income (loss) per share...................... $ 0.11 $ 0.34 $ (2.13) $ 1.13
======== ========= ========== =========
Average common and common equivalent
shares outstanding............................. 7,361 7,381 7,180 7,149
======== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MEGATEST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. ($15,302) $ 5,569
Reconciliation to net cash provided by (used for)
operating activities:
Cumulative effect of change in accounting for income taxes -- (1,700)
Write-off of acquired in-process technology .............. 8,837 --
Depreciation and amortization ............................ 3,274 2,266
Provision for deferred taxes ............................. (600) --
Other .................................................... 400 --
Changes in:
Accounts receivable .................................. (2,561) 884
Inventories .......................................... (4,732) (5,305)
Prepaid expenses and other current assets ............ (29) (881)
Accounts payable and accrued liabilities ............. (948) 3,663
Income taxes payable ................................. (2,260) --
Customer advances and deferred revenues .............. 2,007 (462)
Other ................................................ -- (541)
-------- --------
Net cash provided by (used for) operating activities .......... (11,914) 6,024
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of tester product line and related technology ..... (13,897) --
Investment in equity securities ............................... (1,500) --
Purchases of restricted investments ........................... -- (7,872)
Proceeds from sale of short-term investments .................. 10,069 6,419
Property and equipment purchases .............................. (8,479) (3,405)
Other assets, net ............................................. (135) --
-------- --------
Net cash used for investing activities ........................ (13,942) (4,858)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock .......................................... 18 13,616
Borrowings under notes payable ................................ 8,500 --
Repayments of long-term obligations ........................... (52) (4)
-------- --------
Net cash used for financing activities ........................ 8,466 13,612
-------- --------
Net increase (decrease) in cash and cash equivalents .......... (17,390) 14,778
CASH AND CASH EQUIVALENTS:
Beginning of the period ....................................... 19,404 17,278
-------- --------
End of the period ............................................. $ 2,014 $ 32,056
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
as of May 31, 1995 and for the three-month and nine-month periods ended May 31,
1995 and May 31, 1994 have been prepared on substantially the same basis as the
annual consolidated financial statements and reflect all adjustments (consisting
of only normal recurring adjustments) which are necessary for a fair statement
of the results for the periods presented. The statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission, but
omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended August
31, 1994.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MAY 31, 1995 AUGUST 31, 1994
------------ ---------------
<S> <C> <C>
Purchased parts................................................ $11,153 $ 5,705
Assemblies in process.......................................... 7,442 8,285
Finished goods................................................. 15,329 9,541
------- -------
Inventories........................................... $33,924 $23,531
======= =======
</TABLE>
NOTE 3 - INCOME TAXES
Effective September 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." The cumulative effect of adopting FAS 109 resulted in a one-time
credit to net income of $1,700, or $0.24 per share for fiscal 1994. FAS 109 is
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or income tax
returns. In estimating future tax consequences, FAS 109 generally considers all
expected future events other than enactments of changes in the tax law or rates.
In applying the provisions of FAS 109, management fully reserved net
deferred tax assets that may be realized beyond one year after the balance sheet
date because of the uncertainty regarding their realization. The resulting
reduction in the valuation allowance for deferred tax assets of $600 has been
reflected as an increase in the benefit for income taxes.
NOTE 4 - ACQUISITION
On November 22, 1994, the Company acquired the 1149 Tester product line
and follow-on in-process technology (the "Voyager") of Micro Component
Technology, Inc. ("MCT"). The assets acquired include substantially all of the
equipment, inventory and intellectual property including the follow-on
in-process technology, and the assumption of certain liabilities associated with
the Voyager. Of the amount paid, $2,000 was placed in escrow (i) to indemnify
the Company in the event of a breach of any of the representations and
warranties made by MCT in the purchase agreement, (ii) to secure performance of
MCT's obligations under the purchase agreement, and (iii) to insure against any
shortfalls discovered in the equipment or inventory intended to be acquired
through the Company's post-closing audit of the assets acquired.
6
<PAGE> 7
MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The acquisition of the Voyager has been accounted for as a purchase
and, accordingly, the results of operations and cash flows of the Voyager have
been included only from the date of acquisition. Excluding the one-time
write-off of in-process technology of $8,837, the results of operations for the
Voyager from the date of acquisition through May 31, 1995 increased Megatest's
loss from operations for the nine-month period ended May 31, 1995 approximately
$1,100. The total purchase price of the acquisition was as follows:
<TABLE>
<S> <C>
Cash paid to MCT $ 12,800
Other acquisition costs 1,097
---------
$ 13,897
=========
</TABLE>
The allocation of the Company's purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed is based on
preliminary estimates from information currently available. A final allocation
of the purchase price will be determined during the year when appraisals and
other studies are completed. The preliminary purchase price allocation is
summarized as follows:
<TABLE>
<S> <C>
Inventories $ 5,661
Property and equipment 1,038
In-process technology 8,837
Goodwill 461
-------
Assets acquired 15,997
-------
Accounts payable 1,903
Accrued warranty 197
-------
Liabilities assumed 2,100
-------
Net assets acquired $13,897
=======
</TABLE>
The in-process technology was charged to income during the quarter
ended November 30, 1994. In addition, the Company purchased 315,790 shares of
MCT's nonvoting Series A Preferred Stock at a price of $4.75 per share for a
total of $1,500 cash on November 23, 1994. The investment in equity securities
is included in other assets at May 31, 1995.
NOTE 5 - NOTES PAYABLE
On December 15, 1994, the Company obtained a $7,500 domestic bank line
of credit which expires in January 1996. The agreement provides for borrowings
up to the lesser of 80% of eligible domestic accounts receivable or the $7,500
committed credit amount. In addition, on February 9, 1995, the Company obtained
an additional $5,000 line of credit guaranteed by the Export-Import Bank of the
United States to support export sales. This agreement provides for borrowings up
to the lesser of 90% of eligible foreign accounts receivable plus 70% of
eligible inventory to support such receivables, or the $5,000 committed credit
amount. Borrowings under these lines bear interest at prime (9.0% at May 31,
1995) plus 1.0% and 0.5% for the domestic and foreign lines of credit,
respectively, and are collateralized by a security interest in substantially all
of the Company's previously unencumbered tangible and intangible assets. The
terms of the credit agreements require, among other terms, quarterly
profitability, minimum amounts of tangible net worth, a minimum ratio of current
assets to current liabilities, and a maximum ratio of indebtedness to net worth.
The credit agreements preclude the Company from taking certain actions without
prior bank approval. Transactions subject to such prohibition include the
declaration of cash dividends, certain significant asset acquisitions or
dispositions, incurrence of certain additional indebtedness, and changing the
nature of the Company's business. At May 31, 1995, the Company had borrowed
$8,500 under these lines of credit, but was in violation of certain covenants.
Subsequent to May 31, 1995, the Company received a waiver of such non-compliance
and increased the domestic line of credit to $10 million.
7
<PAGE> 8
MEGATEST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - LITIGATION
On March 27, 1995, Credence Systems Corporation ("Credence") named the
Company as a defendant in a patent infringement lawsuit originally filed by
Credence against MCT in the U.S. District Court for the Northern District of
California (the "Court"). The suit alleges that the Company's manufacture and
sale of certain Voyager assets acquired by the Company from MCT infringe a U.S.
patent held by Credence. On April 24, 1995, the Company filed with the Court a
counterclaim against Credence for a declaratory judgment that the Credence
patent is invalid and unenforceable, and that the manufacture and sale of
Voyager assets do not infringe the Credence patent. The Company intends to
vigorously defend the patent infringement claim and pursue its counterclaims
against Credence.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
In the third quarter of fiscal 1995, Megatest reported net revenues of
$28.9 million and record orders and backlog for the second consecutive quarter.
The $28.9 million in revenue was a 58.6% increase from the $18.2 million in the
Company's second quarter of fiscal 1995 and a 7.2% increase over last year's
third fiscal quarter. As a result, the Company reported a return to
profitability, with net income totaling $0.8 million for the three months ending
May 31, 1995.
Acquisition of Product Line
On November 22, 1994, the Company acquired the 1149 Tester product line
and follow-on in-process technology (the "Voyager") from Micro Component
Technology, Inc. ("MCT") for $12.8 million. In addition, the Company incurred
acquisition related expenses of $1.1 million. The purchase of the product line
includes substantially all of the assets and intellectual property and the
assumption of certain liabilities, approximating $2.1 million, associated with
the Voyager. The Voyager features a lower cost logic IC test system that is
expected to complement the Company's Polaris logic test systems, and opens
markets in which the Company has not previously participated with its existing
products, such as FPGAs, PLDs and certain microcontrollers. As a result of the
acquisition of the Voyager, the Company incurred a one-time write-off of
in-process technology of $8.8 million, which contributed to the Company's first
quarter loss. Excluding the one-time write-off of in-process technology, the
results of operations for the Voyager from the date of acquisition through May
31, 1995 increased Megatest's loss from operations for the nine-month period
ended May 31, 1995 approximately $1.1 million.
Net Revenues
The Company's net revenues for the three-month period ended May 31,
1995 increased 58.6% from the prior quarter and 7.2% from the corresponding
period in the prior fiscal year. Net revenue for the nine months ended May 31,
1995 was 18.4% below the corresponding period last year. The decline in sales
experienced by the Company early in fiscal 1995 was attributed primarily to
order delays by its customers; both logic and memory sales have rebounded in all
geographic areas during the second and third quarters of fiscal 1995, with
record incoming orders achieved in each of those quarters. Service revenue,
which includes product revenue from sales of spare parts and service contracts,
returned to historical levels at 20% of total net revenue for the third quarter
of fiscal 1995.
Cost of Sales and Gross Margin on Product Sales
Gross margin as a percent of net revenues for the three-month and
nine-month periods ended May 31, 1995 was 42.0% and 36.3%, respectively. For the
third quarter, the 42.0% gross margin represents a 1.0 percentage point
improvement from the same period of fiscal 1994, and an improvement of 12.9
percentage points from the second quarter of fiscal 1995. The gross margin
improvement in the third quarter of fiscal 1995 resulted primarily from the
return to the shipment level anticipated in the Company's annual budget and
resource allocation plan and a favorable product mix. Margin improvement related
to strong sales of the Company's higher-margin memory products were partially
mitigated by additional costs incurred to expedite deliveries of critical
components and overtime charges incurred to complete products for timely
customer shipments.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Engineering and Product Development Expense
Engineering and product development expense for the three-month and
nine-month periods ended May 31, 1995 increased 32.7% and 27.6%, respectively,
from the corresponding periods in fiscal 1994. As a percentage of net revenue,
engineering and product development expenses increased 3 percentage points to
18.0% from the corresponding three-month period of fiscal 1994, and increased 9
percentage points to 24.7% from the corresponding nine-month period of fiscal
1994. The increase in engineering and product development expenditures includes
$0.8 million related to the Voyager, certain premium costs associated with
bringing the Company's recently introduced Vega series logic tester to market in
time to meet accelerating customer demands, and the Company's continuing
commitment to maintaining a high level of engineering and product development
effort. The Company intends to continue to invest significant resources in the
development of next generation products for both memory and logic applications.
Selling, General and Administrative Expenses
Selling, general and administrative expense for the third quarter of
fiscal 1995 increased 29.2% from the same quarter of the prior fiscal year. For
the nine months ended May 31, 1995, selling, general, and administrative
expenses increased 13.4% from the corresponding nine-month period of fiscal
1994. The year-to-year increase in dollar expenditures was attributable
primarily to increased hiring and employee compensation, and the addition of the
Voyager product line. Selling, general and administrative expenses are expected
to continue to increase both sequentially and year-to-year due to anticipated
headcount growth and costs associated with new product introductions.
Other Income and Expense
Other expense was $0.2 million for the quarter ended May 31, 1995,
compared to other income of $0.3 million for the same quarter in fiscal 1994.
Other expense consists primarily of interest expense on notes payable and the
amortization of goodwill related to the acquisition of the Voyager, offset by
interest income from the investment of the Company's cash balances. The increase
in net interest expense during fiscal 1995 is attributable to lower cash
balances and the interest expense incurred on line-of-credit borrowings.
Income Taxes
The Company's effective tax rate for the third quarter of fiscal 1995
was 22.5% compared to 17% for the same quarter of the prior fiscal year. The
Company anticipates that the quarterly effective tax rate for the remainder of
fiscal 1995 and for fiscal 1996 will be in the range of 20% to 25%. This
increasing rate trend is primarily related to the extent to which the Company
can offset projected taxable income with net operating loss and tax credit
carryforwards, and the extent to which such net operating loss and tax credit
carryforwards have previously been reflected in the Company's tax provision
under FAS 109.
Net Income/(Loss)
The Company returned to profitability in the third quarter of fiscal
1995, posting net income of $0.8 million compared to a net loss of $3.6 million
for the three-months ended February 28, 1995, and net income of $2.5 million for
the corresponding period in fiscal 1994. For the nine months ended May 31, 1995,
the Company reported a net loss of $15.3 million, which included an $8.8 million
write-off in the first quarter of in-process technology associated with the
purchase of the Voyager from MCT on November 22, 1994, compared to net income of
$8.1 million for the same period in the prior fiscal year. Net income (loss) per
share was $0.11 for the three-month period and ($2.13) for the nine-month period
ended May 31, 1995, versus net income per share of $0.34 and $1.13,
respectively, for the same periods in the prior fiscal year.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's current assets were 2.0 times current liabilities at May
31, 1995, compared to 3.3 times at August 31, 1994 and 4.1 times at May 31,
1994. The Company used $13.9 million of its available cash to acquire the
Voyager on November 22, 1994, and made a subsequent investment in preferred
stock of MCT of $1.5 million on November 23, 1994. The Voyager acquisition
included $5.7 million of inventory, $1.0 million of equipment and other fixed
assets, and the assumption of $2.1 million of trade payables, warranty and other
liabilities associated with the Voyager product line.
Accounts receivable increased $2.6 million during the first nine months
of fiscal 1995 due to the record revenue level recorded for the third quarter
and because shipments were disproportionately strong in the final month of the
quarter due to the lack of availability of certain components and sub-assemblies
earlier in the quarter. Excluding the $5.7 million of Voyager inventory acquired
from MCT, inventories increased $4.7 million during the first nine months of
fiscal 1995, primarily due to the manufacture and installation of strategic
demonstration units at certain customer sites. The Company continues to monitor
inventory levels carefully based on current and projected sales levels and has
implemented programs to improve inventory utilization going forward.
Investing activities used $13.9 million in the nine months ended May
31, 1995, compared to $4.9 million in the comparable period last year. Excluding
cash payments to acquire the Voyager and MCT Preferred Stock, investing
activities consisted primarily of purchases of $8.5 million of property and
equipment, offset by the sale of $10.1 million of short-term investments to fund
the Voyager acquisition. Financing activities provided $8.5 million in the first
half of fiscal 1995, representing draw-downs on the Company's lines of credit.
At May 31, 1995, the Company's cash, cash equivalents and short-term
investments were $2.0 million, compared to $29.5 million at August 31, 1994. The
decrease primarily reflects the cash used to acquire the Voyager from MCT and to
fund operations during fiscal 1995. On December 15, 1994, the Company obtained a
$7,500 domestic bank line of credit which expires in January 1996. The agreement
provides for borrowings up to the lesser of 80% of eligible domestic accounts
receivable or the $7.5 million committed credit amount. In addition, on February
9, 1995, the Company obtained an additional $5.0 million line of credit
guaranteed by the Export-Import Bank of the United States to support export
sales. This agreement provides for borrowings up to the lesser of 90% of
eligible foreign accounts receivable plus 70% of eligible inventory to support
such receivables, or the $5.0 million committed credit amount. Borrowings under
these lines bear interest at prime (9.0% at May 31, 1995) plus 1.0% and 0.5% for
the domestic and foreign lines of credit, respectively, and are collateralized
by a security interest in substantially all of the Company's previously
unencumbered tangible and intangible assets. The terms of the credit agreements
require, among other terms, quarterly profitability, minimum amounts of tangible
net worth, a minimum ratio of current assets to current liabilities, and a
maximum ratio of indebtedness to net worth. The credit agreements also preclude
the Company from taking certain actions without prior bank approval.
Transactions subject to such prohibition include the declaration of cash
dividends, certain significant asset acquisitions or dispositions, incurrence of
certain additional indebtedness, and changing the nature of the Company's
business. At May 31, 1995, the Company had borrowed $8,500 under these lines of
credit, but was in violation of certain covenants. Subsequent to May 31, 1995,
the Company received a waiver of such non-compliance and increased the domestic
line of credit to $10 million.
The Company believes that its cash flow from operations, together with
its cash balances and funds available under working capital lines of credit,
will provide sufficient financing resources to meet both working capital and
capital expenditure requirements through fiscal 1995 based on recent order rates
and anticipated revenue levels. However, the Company is also in discussions to
secure asset-based long-term debt financing to further enhance its liquidity and
to provide additional flexibility to fund future growth. It is anticipated that
such long-term borrowings could total up to $18 million by August 31, 1995, and
that a portion of the proceeds would be used to pay off amounts borrowed under
the Company's short-term lines of credit.
11
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 27, 1995, Credence Systems Corporation ("Credence") named the
Company as a defendant in a patent infringement lawsuit originally filed by
Credence against MCT in the U.S. District Court for the Northern District of
California (the "Court"). The suit alleges that the Company's manufacture and
sale of certain Voyager assets acquired by the Company from MCT infringe a U.S.
patent held by Credence. On April 24, 1995, the Company filed with the Court a
counterclaim against Credence for a declaratory judgment that the Credence
patent is invalid and unenforceable, and that the manufacture and sale of
Voyager assets do not infringe the Credence patent. The Company intends to
vigorously defend the patent infringement claim and pursue its counterclaims
against Credence.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.11 Loan and Security Agreement between the Registrant and Bank of the West dated
July 6, 1995.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
All other items specified by Part II of this report are
inapplicable and accordingly have been omitted.
12
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MEGATEST CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of San Jose and State of
California, on July 11, 1995.
MEGATEST CORPORATION
Date: July 11, 1995 By: \s\ John E. Halter
-------------------
John E. Halter
President
Chief Executive Officer
Date: July 11, 1995 By: \s\ Paul W. Emery II
---------------------
Paul W. Emery II
Vice President, Finance
Chief Financial Officer
13
<PAGE> 1
EXHIBIT 10.11
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MEGATEST CORPORATION
LOAN AND SECURITY AGREEMENT
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TABLE OF CONTENTS
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1. DEFINITIONS AND CONSTRUCTION................................... 1
1.1 Definitions............................................ 1
1.2 Accounting Terms....................................... 8
2. LOAN AND TERMS OF PAYMENT...................................... 8
2.1 Advances............................................... 8
2.2 Overadvances........................................... 9
2.3 Interest Rates, Payments, and Calculations............. 9
2.4 Crediting Payments..................................... 10
2.5 Fees................................................... 10
2.6 Additional Costs....................................... 10
2.7 Term................................................... 11
3. CONDITIONS OF LOANS............................................ 11
3.1 Conditions Precedent to Initial Advance................ 11
3.2 Conditions Precedent to all Advances................... 11
4. CREATION OF SECURITY INTEREST.................................. 11
4.1 Grant of Security Interest............................. 11
4.2 Delivery of Additional Documentation Required.......... 12
4.3 Right to Inspect....................................... 12
5. REPRESENTATIONS AND WARRANTIES................................. 12
5.1 Due Organization and Qualification..................... 12
5.2 Due Authorization; No Conflict......................... 12
5.3 No Prior Encumbrances.................................. 12
5.4 Bona Fide Eligible Accounts............................ 12
5.5 Merchantable Inventory................................. 12
5.6 Name; Location of Chief Executive Office............... 12
5.7 Litigation............................................. 13
5.8 No Material Adverse Change in Financial Statements..... 13
5.9 Solvency............................................... 13
5.10 Regulatory Compliance.................................. 13
5.11 Environmental Condition................................ 13
5.12 Taxes.................................................. 13
5.13 Subsidiaries........................................... 13
5.14 Government Consents.................................... 13
5.15 Full Disclosure........................................ 14
6. AFFIRMATIVE COVENANTS.......................................... 14
6.1 Good Standing.......................................... 14
6.2 Government Compliance.................................. 14
6.3 Financial Statements, Reports, Certificates............ 14
6.4 Inventory; Equipment................................... 15
6.5 Taxes.................................................. 15
6.6 Insurance.............................................. 15
6.7 Principal Depository................................... 16
6.8 Quick Ratio............................................ 16
6.9 Debt-Net Worth Ratio................................... 16
6.10 Tangible Net Worth..................................... 16
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6.11 Profitability.......................................... 16
6.12 Further Assurances..................................... 16
7. NEGATIVE COVENANTS............................................. 16
7.1 Dispositions........................................... 16
7.2 Change in Business..................................... 16
7.3 Mergers or Acquisitions................................ 16
7.4 Indebtedness........................................... 17
7.5 Encumbrances........................................... 17
7.6 Distributions.......................................... 17
7.7 Investments............................................ 17
7.8 Capital Improvements................................... 17
7.9 Total Compensation..................................... 17
7.10 Transactions with Affiliates........................... 17
7.11 Subordinated Debt...................................... 17
7.12 Inventory.............................................. 17
7.13 Compliance............................................. 17
8. EVENTS OF DEFAULT.............................................. 18
8.1 Payment Default........................................ 18
8.2 Covenant Default....................................... 18
8.3 Material Adverse Effect................................ 18
8.4 Attachment............................................. 18
8.5 Insolvency............................................. 18
8.6 Other Agreements....................................... 18
8.7 Judgments.............................................. 18
8.8 Misrepresentations..................................... 18
9. BANK'S RIGHTS AND REMEDIES..................................... 19
9.1 Rights and Remedies.................................... 19
9.2 Power of Attorney...................................... 20
9.3 Accounts Collection.................................... 20
9.4 Bank Expenses.......................................... 20
9.5 Bank's Liability for Collateral........................ 20
9.6 Remedies Cumulative.................................... 20
9.7 Demand; Protest; Application........................... 20
10. NOTICES........................................................ 21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..................... 21
12. GENERAL PROVISIONS............................................. 21
12.1 Successors and Assigns................................. 21
12.2 Indemnification........................................ 21
12.3 Time of Essence........................................ 22
12.4 Severability of Provisions; Headings................... 22
12.5 Amendments in Writing, Integration..................... 22
12.6 Counterparts........................................... 22
12.7 Survival............................................... 22
12.8 Confidentiality........................................ 22
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This LOAN AND SECURITY AGREEMENT is entered into as of July 6, 1995, by
and between BANK OF THE WEST ("Bank") and MEGATEST CORPORATION ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will lend to Borrower, and Borrower will repay the loan to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means an Advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought. The term "Bank Expenses" shall not include any items covered by
Sections 2.6 or 12.2.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1
hereof.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A
attached hereto.
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"Committed Line" means Ten Million Dollars ($10,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current assets on
the consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed at
the end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4, provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay
within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty
percent (50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts arising out of cash on delivery or credit cards
sales or with respect to which goods are placed on consignment, guaranteed sale,
sale or return, sale on approval, bill and hold (except to the extent Borrower
provides evidence satisfactory to Bank that an account
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debtor has irrevocably accepted the goods giving rise to an Account), or other
terms by reason of which the payment by the account debtor may be conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate;
(f) Accounts with respect to which the account debtor's
principal place of business is not in the United States (except that Accounts
that would be Eligible Accounts but for the foregoing restriction will be deemed
Eligible Accounts to the extent they arise from (i) products shipped to or
services provided to branches or offices located in the United States of foreign
account debtors and (ii) invoices that are directed to, and paid from, such
branches or offices located in the United States).
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed thirty
percent (30%) of all Eligible Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"ERISA" means the Employment Retirement Income Security Act
of 1974, as amended, and the regulations thereunder.
"Ex-Im Line" means the credit facility made available to
Borrower pursuant to the Ex-Im Loan Agreement.
"Ex-Im Loan Agreement" means that certain Loan and Security
Agreement (Export-Import Bank) between Bank and Borrower.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Foreign Subsidiary" means all Subsidiaries of Borrower
other than Subsidiaries that are incorporated under the laws of any state of the
United States.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations; provided that the term "Indebtedness" shall not include the
deferred purchase price of property or services incurred in the ordinary course
of business.
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"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, security
interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any
note or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition of Borrower and its Subsidiaries taken
as a whole, (ii) the ability of Borrower to repay the Obligations or otherwise
perform its obligations under the Loan Documents, (iii) the validity or
enforceability of the Loan Documents, or (iv) the rights and remedies of Bank
under the Loan Documents.
"Maturity Date" means January 15, 1996.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts (including all amounts charged to Borrower's loan
account pursuant to any agreement authorizing Bank to charge Borrower's loan
account) owed to the Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising (including all interest accruing after the commencement of an
Insolvency Proceeding).
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
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"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Subordinated Debt;
(c) Capital leases or indebtedness incurred solely to
purchase equipment, which is secured in accordance with clause (c) of "Permitted
Liens" below and is not in excess of the lesser of the purchase price of such
equipment or the fair market value of such equipment on the date of acquisition;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business.
(e) Indebtedness set forth on the Schedule.
(f) Indebtedness of Borrower to any Subsidiary and
Contingent Obligations of any Subsidiary with respect to obligations of Borrower
(provided that the primary obligations are not prohibited hereby), and
Indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);
(g) Indebtedness secured by Permitted Liens;
(h) Other Indebtedness not otherwise permitted by Section
7.4 not exceeding Three Hundred Thousand Dollars ($300,000) in the aggregate
outstanding at any time;
(i) Indebtedness and purchase orders entered into in the
ordinary course of business by Micro Component Technology, Inc., in each case to
the extent assumed in connection with Borrower's acquisition of Micro Component
Technology, Inc., in an aggregate amount not to exceed Six Million Dollars
($6,000,000); and
(j) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (i) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiaries, as the case may be.
"Permitted Investment" means:
(a) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank and (iv) any Investments permitted by
Borrower's investment policy, as amended from time to time, provided that such
investment policy (and any such amendment thereto) has been approved by the
Bank, which approval shall not be unreasonably withheld;
(b) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
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(c) Investments (whether consisting of the purchase of
securities, loans, capital contributions, or otherwise) of Subsidiaries in or to
other Subsidiaries or in Borrower;
(d) Subject to Section 7.9, Investments consisting of
receivables owing to Borrower or its Subsidiaries by Persons and advances to
customers or suppliers, in each case, if created, acquired or made in the
ordinary course of business; provided that this paragraph (d) shall not apply to
Investments owing by Subsidiaries to Borrower;
(e) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower
or its Subsidiaries, and (iv) other loans to officers and employees approved by
the Board of Directors, provided that the outstanding aggregate principal
balance of the advances and loans set forth in (ii), (iii) and (iv) shall not at
any time exceed One Hundred Thousand Dollars ($100,000).
(f) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(g) Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions to, customers and suppliers who
are not Affiliates in the ordinary course of business;
(h) Investments constituting acquisitions permitted under
Section 7.3;
(i) Deposit accounts of any Subsidiaries maintained in the
ordinary course of business;
(j) Investments accepted in connection with Transfers
permitted by Section 7.1;
(k) Investments in the stock of Micro Component Technology,
Inc. acquired in connection with the Purchase Agreement between Borrower and
Micro Component Technology, Inc.;
(l) A payroll account maintained in the ordinary course of
Borrower's business with Bank of America and money market and similar accounts
holding deposits for cash management not in excess of Two Hundred Thousand
Dollars ($200,000); and
(m) Investments (whether consisting of the purchase of
securities, loans, capital contributions or otherwise) of Borrower in or to
Subsidiaries, provided the aggregate of such Investments shall not exceed Three
Hundred Thousand Dollars ($300,000) in any calendar month.
"Permitted Liens" means the following:
(a) Any liens existing as of the date hereof and disclosed
on the Schedule, the first priority Lien granted under the Ex-Im Loan Agreement
in the export-related Inventory and export-related Accounts, and any Liens
arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
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(c) Liens upon or in any equipment acquired by Borrower or
any of its Subsidiaries after the date hereof to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
(d) Liens on Equipment leased by Borrower or any Subsidiary
pursuant to an operating lease in the ordinary course of business (including
proceeds thereof and accessions thereto) incurred solely for the purpose of
financing the lease of such Equipment (including Liens pursuant to leases
permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and licenses and sublicenses granted
to others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.8;
(g) Easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not constituting a Material Adverse Effect;
(h) Earn-out and royalty obligations existing on the date
hereof or entered into in connection with an acquisition permitted by Section
7.3;
(i) Liens on assets acquired from Micro Component
Technology, Inc.; and
(j) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c), and (d) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, limited
liability company, partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, Chief Financial Officer and Corporate Controller of Borrower.
"Revolving Facility" means the facility under which Borrower
may request Bank to issue cash advances, as specified in Section 2.1 hereof.
"Schedule" means the schedule of exceptions attached hereto.
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"Subordinated Debt" means any debt incurred by Borrower that
is subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank.
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, is owned by Borrower, either directly or through an
Affiliate. Unless the context otherwise requires, any reference to Subsidiary
shall be a reference to Subsidiary of Borrower.
"Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the consolidated total assets of Borrower
and its Subsidiaries minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all reserves
not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances. Subject to the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the lesser of (i) the Committed Line or (ii) the Borrowing Base, in
each case minus the face amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). For purposes of this Agreement,
"Borrowing Base" shall mean an amount equal to Eighty Percent (80%) of Eligible
Accounts.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 11:00 a.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Borrowing Certificate in a form acceptable to Bank. Bank
is authorized to make Advances under this Agreement, based upon instructions
received from a Responsible Officer, or without instructions if in Bank's
discretion such Advances are necessary to meet Obligations which have become due
and remain unpaid. Bank shall be entitled to rely on any telephonic notice given
by a person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss suffered
by Bank as a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1 to Borrower's loan account.
Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1 may be repaid and reborrowed at any time during the
term of this Agreement. Amounts borrowed pursuant to this Section 2.1 may be
repaid and reborrowed at any time during the term of this Agreement so long as
no Event of Default has occurred and is continuing.
2.1.1 Letters of Credit. Subject to the terms and conditions
of this Agreement, Bank agrees to issue or cause to be issued letters of credit
for the account of Borrower in an aggregate face amount not to exceed (i) the
lesser of the Committed Line or the Borrowing Base
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minus (ii) the then outstanding principal balance of the Advances minus (iii)
the face amount of the then outstanding Letters of Credit; provided that the
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) shall not at any time exceed Five Million Dollars
($5,000,000). All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms,
conditions and fees provided for in Bank's form of application and letter of
credit agreement. Borrower shall indemnify, defend and hold Bank harmless from
any loss, cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any letters of credit,
except for losses caused by Bank's gross negligence or willful misconduct. All
amounts actually paid by Bank in respect to a letter of credit shall, when paid,
constitute an Advance under this Agreement.
2.1.2 Letter of Credit Reimbursement; Reserve.
(a) Borrower may request that Bank issue a letter of
credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such letter of credit, Bank shall treat such demand as
an advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable
in a currency other than United States Dollars, Bank shall create a reserve
under the Committed Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to Ten Percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Line shall be reduced by the amount of such reserve
for so long as such letter of credit remains outstanding.
2.2 Overadvances. If, at any time or for any reason, the amount of
Obligations (including the face amount of all outstanding Letters of Credit)
owed by Borrower to Bank pursuant to Section 2.1 of this Agreement is greater
than the lesser of (i) the Committed Line or (ii) the Borrowing Base, Borrower
shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average Daily Balance, at a rate equal
to one percentage point (1.0%) above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
the fifth calendar day of each month during the term hereof. Bank may, at its
option, charge such interest, all Bank Expenses, and all Periodic Payments
against Borrower's loan account or against the Committed Line, in which case
those amounts shall thereafter accrue interest at the rate then applicable
hereunder. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime
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Rate. All interest chargeable under the Loan Documents shall be computed on the
basis of a three hundred sixty (360) day year for the actual number of days
elapsed.
2.4 Crediting Payments. The receipt by Bank of any wire transfer
of funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds and is
made to the appropriate deposit account of Bank or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 11:00 a.m. California time shall be deemed to have been received
by Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Ten Thousand
Dollars ($10,000), which fee shall be due upon the date of this Agreement and
upon each anniversary of the date hereof and shall be fully earned and
nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
incurred through the date hereof, including reasonable attorneys' fees and
expenses.
2.6 Additional Costs. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments
of principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect
to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
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2.7 Term. This Agreement shall become effective upon the date
hereof and shall continue in full force and effect for a term ending on the date
that all of Borrower's Obligations to Bank have been satisfied. Notwithstanding
the foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the earlier of
(i) the occurrence and during the continuance of an Event of Default or (ii) the
Maturity Date. Borrower shall have a right to terminate this Agreement upon
prior written notice to Bank, without any prepayment penalty or premium. On the
date of termination, all Obligations shall become immediately due and payable in
cash or by wire transfer. Notwithstanding termination, until all Obligations
have been satisfied, Bank shall retain its Lien in the Collateral to secure
satisfaction of such Obligations.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation
of Bank to make the initial Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect
to incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) financing statement (Form UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified
in Section 2.5 hereof;
(f) audit of Borrower's Accounts and Inventory; and
(g) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank
to make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Borrowing Certificate as
provided in Section 2.1; and
(b) the representations and warranties contained in Section
5 shall be true and correct in all material respects on and as of the date of
such Borrowing Certificate and on the effective date of each Advance as though
made at and as of each such date, Bank shall have timely received the
statements, reports and certificates specified in Section 6.3, and no Event of
Default shall have occurred and be continuing, or would exist immediately after
giving effect to such Advance.
The making of each Advance shall be deemed to be a representation and
warranty by Borrower on the date of such Advance as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each
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of its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Notwithstanding the foregoing, Bank's security interest in the export-related
Inventory and export-related Accounts granted in the Ex-Im Agreement shall
remain superior in priority to the security interest in such collateral granted
under the Agreement.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except for such states
as to which any failure to so qualify would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona
fide existing obligations of Borrower's account debtors, created by the sale or
lease of goods, the licensing of rights, or the rendition of services to account
debtors in the ordinary course of Borrower's business, and unconditionally owed
to Borrower. The property giving rise to such Eligible Accounts has been
delivered to the account debtor or to the account debtor's agent for immediate
shipment to and unconditional acceptance by the account debtor. Borrower has not
received notice of actual or imminent Insolvency Proceeding of any account
debtor that is included in any Borrowing Base Certificate as an Eligible
Account.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Borrower has not
done business under any name other than that specified on the signature page
hereof. The chief executive office of Borrower is located at the address
indicated in Section 10 hereof.
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5.7 Litigation. Except as disclosed in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. Except as
disclosed in the Schedule, all consolidated financial statements related to
Borrower that have been delivered by Borrower to Bank fairly present in all
material respects Borrower's consolidated financial condition as of the date
thereof and Borrower's consolidated results of operations for the period then
ended. There has not been a material adverse change in the consolidated
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has complied with all statutes, laws,
ordinances, and government rules and regulations to which it is subject,
non-compliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
5.11 Environmental Condition. Except as disclosed in the Schedule,
none of Borrower's or any Subsidiary's properties or assets has ever been used
by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by
previous owners or operators, in the disposal of, or to produce, store, handle,
treat, release, or transport, any hazardous waste or hazardous substance other
than in accordance with applicable law; to the best of Borrower's knowledge,
none of Borrower's properties or assets has ever been designated or identified
in any manner pursuant to any environmental protection statute as a hazardous
waste or hazardous substance disposal site, or a candidate for closure pursuant
to any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal or state governmental
agency concerning any action or omission by Borrower or any Subsidiary relating
to the release or disposal of hazardous waste or hazardous substances.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
filed all material tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Except as disclosed in the Schedule, Borrower
does not own any stock, partnership interest or other equity securities of any
Person, except for Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary has
obtained all material consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted.
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5.15 Full Disclosure. The representations, warranties and other
statements included in the documents, certificates and written statements
furnished by Borrower to Bank prior to or as of the date of this Agreement for
use in connection with the transactions contemplated by this Agreement, taken as
a whole, do not contain any untrue statement of a material fact or omit to state
a material fact (known to Borrower, in the case of any document not furnished by
it) necessary in order to make the statements contained herein or therein not
misleading (it being recognized by Bank that the projections and forecasts
provided by Borrower are not to be viewed as facts and that actual results
during the period or periods covered by any such projections and forecasts may
differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower has not withdrawn from,
and no termination or partial termination has occurred with respect to any
deferred compensation plan, and Borrower has not withdrawn from any
multi-employer plan under ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws, ordinances and government rules
and regulations to which it is subject, noncompliance with which could have a
Material Adverse Effect or a material adverse effect on the Collateral or the
priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
maintain a standard system of accounting in accordance with GAAP. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within fifty (50)
days after the end of each quarter, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, certified by an officer of Borrower reasonably acceptable to Bank,
and all reports on Form 10-Q filed with the Securities and Exchange Commission;
(b) as soon as available, but in any event within ninety-five (95) days after
the end of Borrower's fiscal year, audited consolidated financial statements of
Borrower prepared in accordance with GAAP, consistently applied, together with
an unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank and all reports on Form
10-K filed with the Securities and Exchange Commission; (c) within five (5) days
upon becoming available, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders or to any holders
of Subordinated Debt; (d) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time. Borrower shall maintain as Bank's custodian copies of
Borrower's sales journals, customer purchase orders and evidence of shipping
arrangements, and shall deliver copies thereof to Bank at Bank's request.
Within twenty (20) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in a form and substance acceptable to
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Bank, together with aged listings of accounts receivable and accounts payable
and a detailed inventory listing, all in form and substance acceptable to Bank.
Borrower shall deliver to Bank with the Borrowing Base Certificate and
quarterly financial statements a Compliance Certificate signed by a Responsible
Officer in form and substance acceptable to Bank.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts and Inventory at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
Bank may destroy or otherwise dispose of any documents delivered to
Bank six (6) months after Bank's receipt thereof.
6.4 Inventory; Equipment. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000). Borrower shall keep accurate records describing the
kind, quality and quantity of Inventory, Borrower's cost therefor and selling
price thereof, and daily withdrawals therefrom and additions thereto, all of
which shall be available to Bank for inspection and copying upon Bank's request.
Borrower shall keep all equipment used in Borrower's business in good operating
condition, normal wear and tear excepted, except for the abandonment of worn-out
or obsolete equipment in the ordinary course of business. Borrower shall
maintain a list of such equipment showing date of purchase, identifying numbers,
and records of maintenance, and shall deliver such list from time to time to
Bank upon Bank's request. Upon five (5) days' notice, Bank shall have the right
from time to time during Borrower's usual business hours to inspect such
equipment.
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's business and ownership of Borrower's property in amounts
and of a type that are customary to businesses similar to Borrower's (including
errors and omissions policies on behalf of Borrower's officers and directors for
a coverage amount not less than $7,000,000).
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as reasonably satisfactory to Bank. All
such policies of property
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insurance shall contain a lender's loss payable endorsement, in a form
satisfactory to Bank, showing Bank as an additional loss payee thereof and all
liability insurance policies shall show the Bank as an additional insured, and
shall specify that the insurer must give at least twenty (20) days notice to
Bank before canceling its policy for any reason. Borrower shall deliver to Bank
certified copies of such policies of insurance and evidence of the payments of
all premiums therefor. All proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 Quick Ratio. Beginning the fiscal quarter ending August 31,
1995, Borrower shall maintain, as of the last day of each fiscal quarter, a
ratio of Quick Assets to Current Liabilities of at least 1.0 to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain on a quarterly
basis a ratio of Total Liabilities to Tangible Net Worth plus Subordinated Debt
of not more than 0.85 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last
day of each fiscal quarter, a Tangible Net Worth of not less than Fifty-Five
Million Dollars ($55,000,000), plus Fifty Percent (50%) of Borrower's net
earnings after taxes from the immediately preceding fiscal quarter.
6.11 Profitability. Borrower shall be profitable after taxes for
each fiscal quarter, beginning the fiscal quarter ending on May 31, 1995.
6.12 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfer of non-exclusive
licenses and similar arrangements for the use of property in the ordinary course
of business; (iii) Transfers of worn-out or obsolete equipment; (iv) Transfers
which constitute liquidation of Investments permitted under Section 7.7; (v)
Transfers from any Subsidiary to another Subsidiary or Borrower and any
Transfers from Borrower to a Subsidiary that are Permitted Investments; and (vi)
Transfers of other assets in an aggregate amount not to exceed Two Hundred Fifty
Thousand Dollars ($250,000) in any fiscal year.
7.2 Change in Business. Suspend or go out of business, engage in
any business, or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto), or suffer a
material change in Borrower's ownership. Borrower will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or
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permit any of its Subsidiaries to acquire, all or a substantial portion of the
capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock; provided that (i) Borrower may declare and make any
dividend payment or other distribution payable in its equity securities, and
(ii) Borrower may convert any of its convertible securities into other
securities pursuant to the terms of such convertible securities or otherwise in
exchange therefor.
7.7 Investments. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Capital Improvements. Make any plant or fixed capital
expenditure, or any commitment therefor, or purchase or lease any real or
personal property in any fiscal year in an amount in excess of Seventeen
Million, Five Hundred Thousand Dollars ($17,500,000).
7.9 Total Compensation. Pay total cash compensation, in whatever
form, during any fiscal year to Borrower's five highest paid executives,
officers and directors in an aggregate amount in excess of Twenty Percent (20%)
of those paid in the prior fiscal year.
7.10 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person and
except for transactions with a Subsidiary that are upon fair and reasonable
terms and transactions constituting Permitted Investments.
7.11 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with any applicable subordination agreement or with the
terms of such Subordinated Debt, or amend any provision contained in any
documentation relating to the Subordinated Debt without Bank's prior written
consent.
7.12 Inventory. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement when
requested to perfect Bank's security interest; provided that Borrower may
deliver Inventory to prospective customers in the ordinary course of Borrower's
business for testing or demonstration, so long as Borrower gives Bank prior
notice of any Inventory so maintained with a value greater than Two Million
Dollars ($2,000,000) and Borrower cooperates with Bank in perfecting Bank's
security interest in such Inventory.
7.13 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the
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purpose of purchasing or carrying margin stock, or use the proceeds of any
Advance for such purpose. Fail to meet the minimum funding requirements of
ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA,
to occur, permit any condition to exist that would entitle any Person to obtain
a decree adjudicating that any Plan under ERISA must be terminated, fail to
comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event
of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay any Obligations when
due and payable;
8.2 Covenant Default. If Borrower fails or neglects to perform,
keep, or observe any other term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank;
8.3 Material Adverse Effect. If there occurs an event that has a
Material Adverse Effect or a material impairment of the value or priority of
Bank's security interest in the Collateral;
8.4 Attachment. If all or any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
portion of Borrower's assets, or if a notice of lien, levy, or assessment is
filed of record with respect to any of Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within ten (10) days after Borrower receives notice thereof; provided that none
of the foregoing shall constitute an Event of Default where such action or event
is stayed or an adequate bond has been posted pending a good faith contesting by
Borrower (provided that no Advances will be required to be made during such cure
period);
8.5 Insolvency. If an Insolvency Proceeding is commenced by
Borrower, or if an Insolvency Proceeding is commenced against Borrower and is
not dismissed or stayed within ten (10) days (provided that no Advances will be
made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000), or which default could have a Material Adverse Effect;
8.7 Judgments. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.8 Misrepresentations. If misrepresentation or misstatement
exists now or hereafter in any warranty or representation set forth herein or in
any certificate delivered to Bank by
18
<PAGE> 22
any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including without limitation Bank's or
Borrower's premises) as Bank determines is reasonable;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
19
<PAGE> 23
9.2 Power of Attorney. Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the
continuation of an Event of Default or an event which, with the giving of notice
or lapse of time or both, would constitute an Event of Default, Bank may notify
any Person owing funds to Borrower of Bank's security interest in such funds.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless in writing.
9.7 Demand; Protest; Application. Borrower waives demand,
protest, notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrower may in any way
be liable. Borrower waives any right to direct the application of any amount
received by Bank.
20
<PAGE> 24
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized,
overnight delivery service or by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: Megatest Corporation
1321 Ridder Park Drive
San Jose, CA 95131-2306
Attn: Mel Flanigan
FAX: (408) 451-3202
If to Bank: Bank of the West
50 West San Fernando St., 2nd Fl.
7-064-2
San Jose, CA 95113
Attn: Daniel W. Corry
FAX: (408) 947-5117
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participations in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a
21
<PAGE> 25
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower, whether under this Agreement or any
other Loan Document (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance
of all obligations set forth in this Agreement.
12.4 Severability of Provisions; Headings. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
Headings are set forth in this Agreement for convenience only.
12.5 Amendments in Writing, Integration. This Agreement cannot be
changed or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents. Without limiting the generality of the
foregoing, that certain Loan and Security Agreement dated as of December 15,
1994 between Borrower and Bank is terminated and shall have no further force or
effect; provided that the financing statement (Form UCC-1) filed in connection
therewith shall serve to perfect the security interest granted hereunder.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
Section 12.7 have been satisfied, and Bank shall have no commitment to make any
Advances or to make any other loans to Borrower, Bank shall release all security
interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 Confidentiality. In handling any confidential information,
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees, participants or purchasers of any interest in the Loans, provided
that they have entered into a comparable confidentiality agreement in favor of
Borrower, (iii) as required by law, regulations, rules or order, subpoena,
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Bank. Confidential
information hereunder shall not include any information that either: (a) is in
the public domain or in the knowledge or possession of Bank when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank through no
fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does
not have actual knowledge that such third party is prohibited from disclosing
such information.
22
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MEGATEST CORPORATION
By: \s\ MELVIN L. FLANIGAN
____________________________
Title: Corporate Controller
_________________________
By:_____________________________
Title:__________________________
BANK OF THE WEST
By: \s\ DANIEL W. CORRY
____________________________
Title: Vice President
_________________________
23
<PAGE> 27
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit (other than 35% of the securities of Foreign Subsidiaries), certificates
of deposit, instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Collateral shall not include:
(i) That amount held in deposit account with Marine Midland Bank, N.A.
not to exceed Eight Million Dollars ($8,000,000), plus interest accruing from
time to time, securing obligations in accordance with that certain Pledge
Agreement dated November 30, 1993 between Borrower and The Hongkong and Shanghai
Banking Corporation Limited; or
24
<PAGE> 28
(ii) All buildings, structures, facilities, landscaping and other
improvements now or hereafter located on the Land (as defined in the Deed of
Trust by Borrower and Wolverine Leasing Corp. for the benefit of The Hongkong
and Shanghai Banking Corporation Limited dated as of November 30, 1993), and all
building materials, building equipment and fixtures of every kind and nature now
or hereafter located on the Land or attached to, contained in or used in
connection with any such buildings, structures, facilities, landscaping or other
improvements, and all appurtenances and additions thereto and betterments,
renewals, substitutions and replacements thereof.
25
<PAGE> 29
SCHEDULE A
LITIGATION
On March 27, 1995, Credence Systems Corporation ("Credence") named the
Company as a defendant in a patent infringement lawsuit originally filed by
Credence against MCT in the U.S. District Court for the Northern District of
California (the "Court"). The suit alleges that the Company's manufacture and
sale of certain Voyager assets acquired by the Company from MCT infringe a U.S.
patent held by Credence. On April 24, 1995, the Company filed with the Court a
counterclaim against Credence for a declaratory judgment that the Credence
patent is invalid and unenforceable, and that the manufacture and sale of
Voyager assets do not infringe the Credence patent. The Company intends to
vigorously defend the patent infringement claim and pursue its counterclaims
against Credence.
<PAGE> 1
EXHIBIT 11.1
MEGATEST CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------- ------------------
MAY 31, 1995 MAY 31, 1995
------------ ------------
<S> <C> <C>
Weighted average number of common shares outstanding 7,187 7,180
Common share equivalents:
Dilutive effect of stock options ................ 174 --
-------- --------
Total average common and common
equivalent shares ....................... 7,361 7,180
======== ========
Net income ......................................... $ 792 $(15,302)
======== ========
Net income per common and common equivalent share .. $ 0.11 $ (2.13)
======== ========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1994 MAY 31, 1994
------------ ------------
<S> <C> <C>
Weighted average number of common shares outstanding 7,157 6,955
Common share equivalents:
Dilutive effect of stock options ................ 224 194
-------- --------
Total average common and common
equivalent shares ....................... 7,381 7,149
======== ========
Income before accounting change .................... $ 2,531 $ 6,400
======== ========
Net income ......................................... $ 2,531 $ 8,100
======== ========
Income per common and common equivalent share
before accounting change .................. $ 0.34 $ 0.90
======== ========
Net income per common and common equivalent share .. $ 0.34 $ 1.13
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 2014
<SECURITIES> 0
<RECEIVABLES> 25625
<ALLOWANCES> (261)
<INVENTORY> 33924
<CURRENT-ASSETS> 66392
<PP&E> 18481
<DEPRECIATION> 0
<TOTAL-ASSETS> 95146
<CURRENT-LIABILITIES> 33807
<BONDS> 376
<COMMON> 7
0
0
<OTHER-SE> 60956
<TOTAL-LIABILITY-AND-EQUITY> 95146
<SALES> 59390
<TOTAL-REVENUES> 59390
<CGS> 37812
<TOTAL-COSTS> 37812
<OTHER-EXPENSES> 38349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> (16620)
<INCOME-TAX> (1318)
<INCOME-CONTINUING> (15302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15302)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
