SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
(Mark One)
| X | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For quarter period ended September 30, 1994
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15012
CHIPS AND TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0047943
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(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
2950 Zanker Road, San Jose, California 95134
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (408)434-0600
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Former name, former address and former fiscal year.
If changed since last report.
Indicate by check 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
At September 30, 1994, the registrant had 16,915,476 shares of common
stock outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Unaudited Condensed Consolidated Financial Statements 3
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Not applicable
Securities
Item 4. Submission of Matters to a Vote of Security Holders Not applicable
Item 5. Other Information Not applicable
Item 6. Exhibits and Reports on Form 8-K 15
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PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CHIPS AND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts) SEPTEMBER, 1994 JUNE 30, 1994
--------------- -------------
ASSETS (UNAUDITED)
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Current Assets:
Cash and cash equivalents $ 17,923 $ 17,372
Short-term investments 5,173 5,171
Accounts receivable, net of allowances for doubtful accounts of $1,016 10,302 8,437*
and $1,269, respectively
Inventory 8,410 5,845
Prepaid and other assets 2,814 3,100
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Total current assets 44,622 39,925
Property, plant and equipment, net 10,835 10,325
Other assets 688 1,050
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$ 56,145 $ 51,300
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,737 $ 7,081
Current portion of capitalized lease obligations 720 571
Accrued compensation 1,693 1,567
Accrued liabilities to manufacturers representatives 511 372*
Other accrued liabilities 4,207 4,221*
Deferred gross profit 643 690*
Accrued restructuring costs 1,346 1,542
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Total current liabilities 18,857 16,044
Long-term capitalized lease obligations, less current portion 868 100
Noncurrent notes payable 900 919
Convertible debentures 7,910 7,910
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Total liabilities 28,535 24,973
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Stockholders' Equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares 1 1
authorized; 123,000 shares issued and outstanding
Common stock $.01 par value, 100,000,000 shares authorized; 16,916,000 169 169
and 16,881,000 shares issued
Capital in excess of par value 59,348 59,222
Notes receivable from officer (101) --
Unrealized gain on investments 2 --
Retained deficit (31,809) (33,065)
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Total stockholders' equity 27,610 26,327
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$ 56,145 $ 51,300
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<FN>
* Accounts have been reclassified for comparative purposes (see Note 5)
See notes to Unaudited Condensed Consolidated Financial Statements
</FN>
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CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands except per share amounts) 1994 1993
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NET REVENUE $ 20,373 $ 21,171
Cost of sales and other manufacturing expenses 12,735 13,113
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Gross margin 7,638 8,058
Operating expenses
Research and development 3,008 3,258
Marketing and selling 2,805 3,117
General and administrative 997 1,671
Restructuring recovery (372) 0
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Total operating expenses 6,438 8,046
Income from operations 1,200 12
Interest income and other, net 110 344
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Income before taxes 1,310 356
Provision for income taxes (54) (34)
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NET INCOME $ 1,256 $ 322
========= =========
NET INCOME PER SHARE $ 0.07 $ 0.02
========= =========
Weighted average common shares
and dilutive share equivalents
outstanding 17,020 16,403
========= =========
See notes to Unaudited Condensed Consolidated Financial Statements
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CHIPS AND TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30,
(In thousands) 1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,256 $ 322
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 645 1,018
Provision for losses on accounts receivable 75 225
Provision for losses on inventory 206 --
Other (1) 9
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (1940) (2,477)
Inventory (2,771) (506)
Accounts payable 2,656 2,010
Other assets and liabilities 820 (575)
Accrued restructuring costs (331) (8,858)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 615 (8,832)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,146) (519)
Sale of short-term investment -- 7,436
Proceeds from sale of fixed assets 163 653
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (983) 7,570
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to capital lease obligations, net of principle payment 917 (1,133)
Proceeds from (repayment of) note payable principle (19) 942
Proceeds from issuance of stock 121 1,052
Loan issued to officer (100) (5)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 919 856
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Net increase (decrease) in cash and cash equivalents 551 (406)
Cash and cash equivalents at beginning of period 17,372 20,742
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CASH AND CASH EQUIVALENTS AT PERIOD-END $ 17,923 $ 20,336
=========== ===========
Supplemental disclosure cash flow information: Cash paid during the period for:
Interest $ 82 $ 119
Income taxes 145 37
Additions to capital lease obligations 1229 --
<FN>
See notes to Unaudited Condensed Consolidated Financial Statements
</FN>
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the financial position, operating results and cash flows for those
periods presented. These consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements, and notes
thereto for the year ended June 30, 1994, included in the Company's 1994 Annual
Report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the entire year.
NOTE 2. PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
NOTE 3. SHORT-TERM INVESTMENTS
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS 115, the Company's management determines
the appropriate classification of debt and equity securities, based on the
nature of the securities and the intent and investment goals of the Company, as
of each balance sheet date.
The Company classified all investments at September 30, 1994 as
available-for-sale. The Company has the intent and ability to hold the
securities until maturity; however, the sale of such securities may be required
prior to the maturity date. The fair value and the amortized cost of the
securities at September 30, 1994 are presented in the table below. The
investments were adjusted to fair value and the unrealized gain was recorded as
a separate component of stockholders' equity.
Unrealized Unrealized
(In thousands) Amortized Holding Holding Fair
Cost Gain Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury Bills $ 675 13 -- $ 688
Corporate Obligations 1,000 -- -- 1,000
U.S. Government Obligations 2,496 -- (11) 2,485
Money Market Preferred 1,000 -- -- 1,000
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Total $ 5,171 13 (11) $5,173
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NOTE 4. NET INCOME PER SHARE
Shares used in the primary net income per share computation are the
weighted average number of common shares outstanding plus dilutive common stock
equivalents. The fully diluted computation also includes other dilutive
convertible securities. Common stock equivalents consist of stock options,
warrants and convertible preferred stock; other dilutive convertible securities
consist of convertible subordinated debentures. Dual presentation of primary and
fully diluted earnings per share is not shown on the face of the income
statement because the differences are insignificant.
NOTE 5. REVENUE RESERVES
During the first quarter fiscal 1995, the Company reclassified certain
distributor revenue reserves to conform with general industry practice.
Previously classified as current liabilities, these reserves are now classified
as reductions to accounts receivable and prior periods have been reclassified
for comparative purposes.
NOTE 6. ACCRUED RESTRUCTURING COSTS
During the quarter ended September 30, 1994, $0.2 million was charged
against the reserve mainly related to the Company's consolidations of
operations, which consisted of payments for costs related to the closure of
foreign sales offices and legal fees. The following table summarizes the status
of the restructuring reserves at September 30, 1994:
(In thousands) Consolidations of Reduction of
Operations & other Workforce Total
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Balance at 6/30/94 $ 1,442 $ 100 $ 1,542
Charges against reserves (143) (53) (196)
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Balance at 9/30/94 $ 1,299 $ 47 $ 1,346
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Net Revenues and Gross Margins for the first quarter of fiscal 1995 have
improved compared to the prior quarter and are substantially the same as for the
same quarter a year ago. Revenues from graphics controllers continue to
represent the majority of the Company's revenues. Operating expenses in the
first quarter of fiscal 1995 have decreased compared to the same quarter a year
ago largely as a result of the Company's restructuring programs.
NET REVENUE
Net revenues were $20.4 million for the first quarter of fiscal 1995 compared to
$15.4 million in the prior quarter and $21.2 million in the first quarter a year
ago. Approximately 60% of the Company's revenues are derived from graphics
controller products. Unit sales volume of graphics controllers in the first
quarter of fiscal 1995 have increased compared to the previous quarter and the
first quarter of fiscal 1994. Sales of older discrete system logic peripheral
products have declined from a year ago as the Company continues to transition
its core logic product strategy towards high integration solutions.
Approximately 40% of the Company's revenues are generated from core logic and
I/O products.
GROSS MARGIN
The gross margin percentage for the first quarter of fiscal 1995 was 37%,
compared to 32% in the prior quarter and 38% in the first quarter a year ago.
The gross margin percentage is substantially the same compared to the first
quarter a year ago while improving over the prior quarter. Although the
proportion of revenues from the Company's lower margin desktop graphics products
has grown over prior quarters, increased overall revenues and strong sales of
higher margin portable graphics controllers caused the improvement in margins
over the previous quarter.
RESEARCH AND DEVELOPMENT EXPENSES
R&D expenses were $3.0 million in the first quarter of fiscal 1995 compared to
$3.3 million in the first quarter of fiscal 1994. R&D spending can fluctuate
<PAGE>
from period to period due to the timing of spending on prototype fabrication.
The Company intends to continue investing in new product development and high
level design methodologies at substantially the same rate.
SALES AND MARKETING EXPENSES
Sales and marketing costs were $2.8 million in the first quarter of fiscal 1995
compared to $3.1 million in the first quarter of fiscal 1994. The decline in
expenses is attributable to further consolidation of the Company's foreign sales
offices resulting in reductions in labor and facility costs.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses were $1.0 million in the first quarter of fiscal 1995 compared to
$1.7 million in the first quarter of fiscal 1994. The reduced expense level was
attributable to lower labor costs arising from reductions in headcount
associated with the Company's restructuring programs, decreases in depreciation
costs and reductions in bad debt provisions.
RESTRUCTURING COSTS
During the first quarter of fiscal 1995, the Company received the second of four
scheduled payments of $0.4 million against a note receivable recorded in respect
of the sale of certain of the Company's product lines which were discontinued
and fully reserved in fiscal 1993. The Company records income as cash is
collected on the note and $0.4 million was recognized as income in the first
quarter of fiscal 1995. Subsequent to the end of the first quarter of fiscal
1995, the Company received the remaining principal payment of $0.9 million for
the note receivable. The Company will recognize this payment to income for the
second quarter of fiscal 1995.
During the first quarter of fiscal 1995, charges to the restructuring reserve
were made primarily in respect of the Company's consolidation of operations
activities, consisting of the closure of certain foreign sales offices. The
majority of these charges consisted of cash payments made for office closures
and professional service fees.
OTHER INCOME (EXPENSE)
Other income for the first quarter of fiscal 1995 is lower than first quarter
fiscal 1994 because the prior year included the receipt of $0.4 million related
to a settlement and technology license.
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LIQUIDITY AND CAPITAL RESOURCES
Due to the completion of a significant portion of the Company's restructuring
during fiscal 1994, usage of cash for restructuring programs was not significant
for the first quarter of fiscal 1995. The Company does expect to make additional
cash payments in respect of its restructuring activities during the second
quarter of fiscal 1995; however, the Company believes these payments will not be
material to liquidity or financial condition. The Company intends to fund
payments for its restructuring programs through existing working capital
resources.
During the first quarter of fiscal 1995, accounts receivable increased $1.9
million, inventory increased $2.6 million and current liabilities increased $2.8
million. Accounts receivable increased because of higher sales during the
quarter. Inventories have increased to support higher sales of the Company's
flat panel graphics controller products. The increase in current liabilities is
largely due to the higher level of trade accounts payable required to support
the increases in inventories. Long term debt increased $0.8M during the first
quarter of fiscal 1995 mainly due to additional capitalized lease obligations in
respect of the financing of certain capital equipment expenditures. The Company
has $1.1 million in standby letters of credit outstanding to secure the lease
financing arrangement.
The Company has two revolving line of credit agreements allowing borrowings of
up to $13.0 million at the banks' reference rates. There were no borrowings
outstanding against these lines at September 30, 1994 and both agreements expire
in October 1995. Based on the current levels of working capital and available
borrowing capacity, the Company believes that its present capital resources are
sufficient to meet its needs for the remainder of the fiscal year.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company anticipates its revenues increasing sequentially during the next two
quarters; however it is expected that the rate of increase will be lower than
that achieved in the first quarter of fiscal 1995. The largest portion of the
Company's sales are comprised of portable graphics controllers and the Company
expects that the majority of its revenues over the next two quarters will be
made up of portable graphics controllers. However, the Company's revenues are
directly affected by customer demand for its products. Customer demand
fluctuates, sometimes dramatically, based on the customers' buildup of internal
inventory, seasonal factors, and product transitions, among other things. While
the Company makes every effort to be consistently informed of customers'
expected demand for its products, customers from time to time make unexpected
changes in product purchasing forecasts and in existing orders. Customer
rescheduling, reduction in quantities and cancellations of orders could have a
material adverse impact on the Company's revenues and results of operations. The
Company also relies on obtaining and maintaining design wins for its products
with leading personal computer manufacturers. To the extent that the Company is
<PAGE>
unable to retain existing designs or to acquire new design wins and the
associated revenues generated from them, for the Company's existing and future
products, there could be a material adverse effect on the Company's results of
operations.
The Company believes it currently maintains a leadership position in the
portable graphics market and anticipates its competition will aggressively price
alternative solutions to attempt to gain or maintain market position. To the
extent that the Company must reduce prices to meet competition, maintain market
share or meet customer requirements, gross margins achieved during the first
quarter may not be sustainable. The Company expects gross margin percentages for
the next two quarters to remain between the level of those achieved in the
fourth quarter of fiscal 1994 and the first quarter of fiscal 1995. The Company
anticipates its future operating expenses, including research and development
expenses, will increase in absolute dollar amounts over the next two quarters.
However, the Company believes that operating expenses will decline as a
percentage of sales over the next two quarters.
Because the Company uses subcontract vendors for the manufacture of its product,
the Company must place orders with its suppliers far in advance of shipment to
its end customers. The reliance on subcontract vendors presents risks including
the lack of guaranteed production capacity, delays in delivery, susceptibility
to disruption in supply and reduced control over product costs and manufacturing
yields. Long production lead times and limited control over the manufacturing
process could adversely affect the Company to the extent it is not able to
anticipate its inventory supply requirements and as a result generates excess or
insufficient product inventories. The Company intends to implement certain of
its future product designs in 0.6u semiconductor fabrication geometries to
achieve lower production costs and greater product availability. Inability to
obtain sufficient supply or restrictions on access to 0.6u semiconductor
fabrication technology could have a materially adverse effect on the Company's
operating results.
The personal computer industry is subject to certain seasonal fluctuations. It
is acknowledged within both the computer and semiconductor industries that sales
and purchases may vary significantly within a particular period. The Company
attempts to anticipate the impact of seasonal aspects on its business. However,
if unexpected seasonal fluctuations occur, they may cause volatility in customer
order patterns and have a material effect on future operating results.
The market price of the Company's common stock has been volatile in the past,
and may be volatile in the future. Factors affecting volatility include
variations in the Company's quarterly operating results, announcements by the
Company or its competitors concerning products and/or design wins, financial
market perceptions of conditions in the personal computer marketplace, and
actual conditions in the personal computer marketplace. The market price of the
Company's stock may also be affected by factors influencing the stock market in
general or the market for stocks of high technology companies. Any of these
factors could cause the price of the Company's stock to fluctuate substantially.
<PAGE>
The statements asserted in this section do not contain all the conditions which
may affect the Company's future operating results. For simplicity of
presentation the Company has not repeated in its Quarterly Report all factors
affecting future operating results that were contained in its Annual Report on
Form 10-K. Therefore, the Company's Quarterly Report on Form 10-Q should be read
in combination with the Company's Annual Report on Form 10-K for fiscal year
1994.
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities Not applicable
Item 3. Defaults upon Senior Securities Not applicable
Item 4. Submission of Matters to a Vote of Security Holders Not applicable
Item 5. Other Information Not applicable
Item 6. Exhibits 15
Reports on Form 8-K Not applicable
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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.
CHIPS AND TECHNOLOGIES, INC.
(Registrant)
/s/ James F. Stafford
-----------------------------------
James F. Stafford
President & Chief Executive Officer
/s/ Timothy R. Christoffersen
-----------------------------------
Timothy R. Christoffersen
Vice President of Finance
Chief Financial Officer and
Principal Accounting Officer
Date: November 8, 1994
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INDEX TO EXHIBITS
Exhibit
Number Description Page
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4.1 (1) Stockholders' Rights Agreement dated August 23, 1989.
4.2 (7) Registration Rights Agreement dated October 10, 1985 and amendment thereto dated
January 24, 1986.
10.1 (3) * Amended and Restated 1985 Stock Option Plan, as amended November 5, 1991.
10.2 (4) * Amended and Restated Employee Stock Purchase Plan, as amended July 27, 1992.
10.3 (4) Lease Termination Agreement and related exhibit between the Company and The Equitable Life
Assurance Society dated September 10, 1993.
10.4 (2) * Amended and Restated Qualified Investment Plan dated January 1, 1989.
10.5 (6) * First Amended 1988 Nonqualified Stock Option Plan for Outside Directors dated October 1,
1993.
10.6 (4) * Promissory Note to the Company from Marc E. Jones dated February 3, 1993.
10.7 (2) Form of Indemnity Agreement between the Company and each of its directors and executive
officers.
10.8 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Ravi Bhatnagar dated December 18, 1992.
10.9 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Nancy S. Dusseau, dated September 1, 1993.
10.10 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Jeffrey H. Grammer, dated September 2, 1993.
10.11 (4) * Confidential Termination Agreement and General Release of Claims between the Company and
Gary P. Martin, dated April 19, 1993.
10.12 (5) * Confidential Resignation and Consulting Agreement and General Release of Claims between the
Company and Gordon A. Campbell dated September 30, 1993.
10.13 (4) Convertible Promissory Notes and Preferred Stock Purchase Agreement dated as of July 16,
1992.
10.14 (4) Amendment to Convertible Promissory Notes and Preferred Stock Purchase Agreement.
10.15 (4) Form of Convertible Subordinated Debentures Due June 30, 2002.
10.16 (4) Amendment to 8 1/2% Convertible Subordinated Debentures Due, June 30, 2002
</TABLE>
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INDEX TO EXHIBITS
Exhibit
Number Description Page
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10.17 (5) Agreement for Sale and Purchase of Assets between Techfarm, Inc. and Chips and
Technologies, Inc., dated September 24, 1993.
10.18 (8) Restated Secured Promissory Note, Secured Continuing Guarantee, and Restated Loan and
Security Agreement between Techfarm, Inc. and Chips and Technologies, Inc. dated March 31,
1994.
10.19 (8) * Promissory note to the Company from Keith Angelo dated August 1, 1994.
10.20 (8) * Independent Contractor Services Agreement between the Company and Henri Jarrat dated August
11, 1994.
10.21 Equipment financing agreement between the Company and New England Capital Corporation dated 17
July 29, 1994.
11.1 Statement re: Calculation of Earnings Per Share. 29
27.0 Financial Data Schedule for the year ended September 30, 1994. 30
<FN>
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1990.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1993.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1993.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March
31, 1994.
(7) Incorporated by reference to Registration Statement No. 33-8005 effective October 8, 1986.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30,
1994.
* Denotes management contracts or compensatory plans or arrangements
covering executive officers or directors of Chips and Technologies,
Inc.
</FN>
</TABLE>
NEW ENGLAND CAPITAL CORPORATION
EQUIPMENT FINANCING AGREEMENT
THIS EQUIPMENT FINANCING AGREEMENT ("agreement") is dated as of the
date set forth at the foot hereof and is between NEW ENGLAND CAPITAL
CORPORATION, a New Hampshire Corporation, ("Secured Party") and the debtor
designated at the foot hereof ("Debtor").
1. EQUIPMENT SECURITY INTEREST. The terms and conditions of this agreement
cover each item of machinery, equipment and other property (individually
an "Item" or "Item of Equipment" and collectively the "Equipment")
described in a schedule now or hereafter executed by the parties hereto
and made a part hereof (individually a "Schedule" and collectively the
"Schedules"). Debtor hereby grants Secured Party a security interest in
and to all Debtor's right, title and interest in and to the Equipment
under the Uniform Commercial Code, such grant with respect to an Item of
Equipment to be as of Debtor's execution of a related equipment financing
commitment referencing this agreement or, if Debtor then has no interest
in such Item, as of such subsequent time as Debtor acquires an interest;
in the Item. Such security interest is granted by Debtor to secure
performance by Debtor of Debtor's obligations to Secured Party hereunder
and under any other agreements under which Debtor has or may hereafter
have obligations to Secured Party. Debtor wilt ensure that such security
interest will be and remain a sole and valid first lien security interest
subject only to the lien of current taxes and assessments not in default
but only if such taxes are entitled to priority as a matter of law.
2. DEBTOR'S OBLIGATIONS. The obligations of Debtor under this agreement
respecting an Item of Equipment, except the obligation to pay installment
payments with respect thereto which will commence as set forth in
paragraph 3 below, commence upon the grant to Secured Party of a security
interest in the Item. Debtor's obligations hereunder with respect to an
Item of Equipment and Secured Party's security interest therein will
continue until payment of all amounts due, and performance of all terms
and conditions required, hereunder with respect thereto; provided,
however, that if this agreement is then in default said obligations and
security interest will continue during the continuance of said default.
Upon termination of Secured Party's security interest in an Item of
Equipment Secured Party will execute such release of interest with
respect thereto as Debtor reasonably requests.
3. INSTALLMENT PAYMENTS AND OTHER PAYMENTS. Debtor will repay advances
Secured Party makes on account of the Equipment in installment payments
in the amounts and at the times set forth in the Schedules, whether or
not Secured Party has rendered an invoice therefor, at the office of
Secured Party set forth at the foot hereof, or to such person and/or at
such other place as Secured Party may from time to time designate on
notice to Debtor. Any other amounts required to be paid Secured Party by
Debtor hereunder are due upon Debtor's receipt of Secured Party's invoice
therefor and will be payable as directed in the invoice. Payments under
this agreement may be applied to Debtor's then accrued obligations to
Secured Party in such order as Secured Party may choose.
4. NET AGREEMENT; OFFSET; SURVIVAL. This agreement is a net agreement, and
Debtor will not be entitled to any abatement of installment payments or
other payments due hereunder or any reduction thereof under any
circumstances or for any reason whatsoever. Debtor hereby waives any and
all existing and future claims, as offsets, against any installment
payments or other payments due hereunder and agrees to pay the
installment payments and other amounts due hereunder as and when due
regardless of any offset or claim which maybe asserted by Debtor or on
its behalf. The obligations and liabilities of Debtor hereunder will
survive the termination of this agreement.
5. DISCLAIMER OF WARRANTIES. THIS AGREEMENT IS SOLELY A FINANCING AGREEMENT.
DEBTOR ACKNOWLEDGES THAT THE EQUIPMENT HAS OR WILL HAVE BEEN SELECTED AND
ACQUIRED SOLELY BY DEBTOR FOR DEBTOR'S PURPOSES, THAT SECURED PARTY IS
NOT AND WILL NOT BE THE VENDOR OF ANY EQUIPMENT AND THAT SECURED PARTY
HAS NOT MADE AND WILL NOT MAKE ANY AGREEMENT, REPRESENTATION OR WARRANTY
<PAGE>
WITH RESPECT TO THE MERCHANTABlLITY, CONDITION, QUALIFICATION OR FITNESS
FOR A PARTICULAR PURPOSE OR VALUE OF THE EQUIPMENT OR ANY OTHER MATTER
WITH RESPECT THERETO IN ANY RESPECT WHATSOEVER.
6. NO AGENCY. DEBTOR ACKNOWLEDGES THAT NO AGENT OF THE MANUFACTURER OR OTHER
SUPPLIER OF AN ITEM OF EQUIPMENT OR OF ANY FINANCIAL INTERMEDIARY IN
CONNECTION WITH THIS AGREEMENT IS AN AGENT OF SECURED PARTY. SECURED
PARTY IS NOT BOUND BY A REPRESENTATION OF ANY SUCH PARTY AND, AS
CONTEMPLATED IN PARAGRAPH 27 BELOW, THE ENTIRE AGREEMENT OF SECURED PARTY
AND DEBTOR CONCERNING THE FINANCING OF THE EQUIPMENT IS CONTAINED IN THIS
AGREEMENT AS IT MAY BE AMENDED AS PROVIDED IN THAT PARAGRAPH.
7. ACCEPTANCE. Execution by Debtor and Secured Party of a Schedule covering
the Equipment or any Items thereof will conclusively establish that such
Equipment has been included under and will be subject to all the terms
and conditions of this agreement.
8. LOCATION; INSPECTION; USE. Debtor will keep or permanently garage, as
appropriate, and not remove from the United States, each Item of
Equipment in Debtor's possession and control at the Equipment Location
designated in the applicable Schedule, or at such other location to which
such Item may have been moved with the prior written consent of Secured
Party. Whenever requested by Secured Party, Debtor will advise Secured
Party as to the exact location of an Item of Equipment. Secured Party
will have the right to inspect the Equipment and observe its use during
normal business hours and to enter into and upon the premises where the
Equipment may be located for such purpose. The Equipment will at all
times be used solely for commercial or business purposes and operated in
a careful and proper manner and in compliance with all applicable laws,
ordinances, rules and regulations, all conditions and requirements of the
policy or policies of insurance required to be carried by Debtor under
the terms of this agreement and all manufacturer's instructions and
warranty requirements. Any modifications or additions to the Equipment
required by any such governmental edict or insurance policy will be
promptly made by Debtor.
9. ALTERATIONS; SECURITY INTEREST COVERAGE. Without the prior written
consent of Secured Party, Debtor will not make any alterations, additions
or improvements to any Item of Equipment which detract from its economic
value or functional utility, except as may be required pursuant to
paragraph 8 above. Secured Party's security interest in the Equipment
will include all modifications and additions thereto and replacements and
substitutions therefor, in whole or in part. Such reference to
replacements and substitutions will not grant Debtor greater rights to
replace or substitute than are provided in paragraph 10 below or as may
be allowed upon the prior written consent of Secured Party.
10. MAINTENANCE. Debtor will maintain the Equipment in good repair, condition
and working order. Debtor will also cause each Item of Equipment for
which a service contract is generally available to be covered by such a
contract which provides coverages typical at to property of the type
involved and is issued by a competent servicing entity.
11. LOSS AND DAMAGE; CASUALTY VALUE. In the event of the loss of, theft of,
requisition of, damage to or destruction of an Item of Equipment
("Casualty Occurrence") Debtor will give Secured Party prompt notice
thereof and will thereafter place such Item in good repair, condition and
working order; provided, however, that if such Item is determined by
Secured Party to be lost, stolen, destroyed or damaged beyond repair, is
requisitioned or suffers a constructive total loss as defined in any
applicable insurance policy carried by Debtor in accordance with
paragraph 14 below, Debtor, at Secured Party's option, will (a) replace
such Item with like equipment in good repair, condition and working order
whereupon such replacement equipment will be deemed such Item for all
purposes hereof or (b) pay Secured Party the "Casualty Value" of such
Item which will equal the total of (i) all installment payments and other
amounts due from Debtor to Secured Party at the time of such payment and
(ii) each future installment payment due with respect to such Item
discounted at six percent (6.0%) per annum simple interest from the date
due to the date of such payment. Upon such replacement or payment, as
appropriate, this agreement and Secured Party's security interest will
terminate with, and only with, respect to the Item of Equipment so
replaced or as to which such payment is made in accordance with paragraph
2 above.
<PAGE>
12. TITLING; REGISTRATION. Each Item of Equipment subject to title
registration laws will at all times be titled and/or registered by Debtor
as Secured Party's agent and attorney-in-fact with full power and
authority to register (but without power to affect title to) the
Equipment in such manner and in such jurisdiction or jurisdictions as
Secured Party directs. Debtor will promptly notify Secured Party of any
necessary or advisable retitling and/or reregistration of an Item of
Equipment in a jurisdiction other than one in which such Item is then
titled and/or registered. Any and all documents of title will be
furnished or caused to be furnished Secured Party by Debtor within sixty
(60) days of the date any titling or registering or retitling or
reregistering, as appropriate, is directed by Secured Party.
13. TAXES. Debtor will make all filings as to and pay when due all personal
property and other ad valorem taxes and all other taxes, fees, charges
and assessments based on the ownership or use of the Equipment and will
pay as directed by Secured Party or reimburse Secured Party for all other
taxes, including, but not limited to, gross receipts taxes (exclusive of
federal and state taxes based on Secured Party's net income, unless such
net income taxes are in substitution for or relieve Debtor from any taxes
which Debtor would otherwise be obligated to pay under the terms of this
paragraph 13), fees, charges and assessments whatsoever, however
designated, whether based on the installment payments or other amounts
due hereunder, levied, assessed or imposed upon the Equipment or
otherwise related hereto or to the Equipment, now or hereafter levied,
assessed or imposed under the authority of a federal, state or local
taxing jurisdiction, regardless of when and by whom payable. Filings with
respect to such other amounts will, at Secured Party's option, be made by
Secured Party or by Debtor as directed by Secured Party.
14. INSURANCE. Debtor will procure and continuously maintain all risk
insurance against loss of or damage to the Equipment from any cause
whatsoever for not less than the full replacement value thereof naming
Secured Party as Loss Payee. Such insurance will be in a form and with
companies approved by Secured Party, will provide at least ten (10) days
advance written notice to Secured Party of cancellation, change or
modification in any term, condition or amount of protection provided
therein, will provide full breach of warranty protection and will provide
that the coverage is "primary coverage" (does not require contribution
from any other applicable coverage). Debtor will provide Secured Party
with an original policy or certificate evidencing such insurance. In the
event of an assignment of this agreement of which Debtor has notice,
Debtor will cause such insurance to provide the same protection to the
assignee as its interests may appear. The proceeds of such insurance, at
the option of Secured Party or such assignee, as appropriate, will be
applied toward (a) repair or replacement of the appropriate Item or Items
of Equipment, (b) payment of the Casualty Value thereof or (c) payment
of, or as provision for, satisfaction of any other accrued obligations of
Debtor hereunder. Debtor hereby appoints Secured Party as Debtor's
attorney-in-fact with full power and authority to do all things,
including, but not limited to, making claims, receiving payments and
endorsing documents, checks or drafts, necessary to secure payments due
under any policy contemplated hereby on account of a Casualty Occurrence.
Debtor and Secured Party contemplate that the jurisdictions where the
Equipment will be located will not impose any liability upon Secured
Party for personal injury and/or property damage resulting out of the
possession, use, operation or condition of the Equipment. In the event
Secured Party determines that such is not or may not be the case with
respect to a given jurisdiction, Debtor will provide Secured Party with
public liability and property damage coverage applicable to the Equipment
in such amounts and in such form as Secured Party requires.
15. SECURED PARTY'S PAYMENT. If Debtor fails to pay any amounts due hereunder
or to perform any of its other obligations under this agreement, Secured
Party may, at its option, but without any obligation to do so, pay such
amounts or perform such obligations, and Debtor will (a) reimburse
Secured Party the amount of such payment or cost of such performance and
(b) pay Secured Party a service charge calculated as provided in
paragraph 23 below.
16. INDEMNITY. Debtor does hereby assume liability for and does agree to
indemnify, defend, protect, save and keep harmless Secured Party from and
against any and all liabilities, losses, damages, penalties, claims,
actions, suits, costs, expenses and disbursements, including court costs
and legal expenses, of whatever kind and nature, imposed on, incurred by
or asserted against Secured Party (whether or not also indemnified
against by any other person) in any way relating to or arising out of
this agreement or the manufacture, financing, ownership, delivery,
possession, use, operation, condition or disposition of the Equipment by
Secured Party or Debtor, including, without limitation, any claim
alleging latent and other defects, whether or not discoverable by Secured
Party or Debtor, and any other claim arising out of strict liability in
tort, whether or not in either instance relating to an event occurring
<PAGE>
while Debtor remains obligated under this agreement; and any claim for
patent, trademark or copyright infringement. Debtor agrees to give
Secured Party and Secured Party agrees to give Debtor notice of any claim
or liability hereby indemnified against promptly following learning
thereof.
17. DEFAULT. Any of the following will constitute an event of default
hereunder: (a) Debtor's failure to pay when due any installment payment
or other amount due hereunder, which failure continues for seven (7) days
after the due date thereof; (b) Debtor's default in performing any other
obligation, term or condition of this agreement or any other agreement
between Debtor and Secured Party or default under any further agreement
providing security for the performance by Debtor of its obligations
hereunder, provided such default has continued for more than twenty (20)
days, except as provided in (c) and (d) hereinbelow, or default under any
lease or any mortgage or other instrument contemplating the provision of
financial accommodation applicable to the real estate where an Item of
Equipment is located; (c) any writ or order of attachment or execution or
other legal process being levied on or charged against any Item of
Equipment and not being released or satisfied within ten (10) days; (d)
Debtor's failure to comply with its obligations under paragraph 14 above
or any transfer by Debtor in violation of paragraph 21 below; (e) a
non-appealable judgment for the payment of money in excess of $100,000
being rendered by a court of record against Debtor which Debtor does not
discharge or make provision for discharge in accordance with the terms
thereof within ninety (90) days from the date of entry thereof; (f) death
or judicial declaration of incompetency of Debtor, if an individual; (g)
the filing by Debtor of a petition under the Bankruptcy Act or any
amendment thereto or under any other insolvency law or law providing for
the relief of debtors, including, without limitation, a petition for
reorganization, arrangement or extension, or the commission by Debtor of
an act of bankruptcy; (h) the filing against Debtor of any such petition
not dismissed or permanently stayed within thirty (30) days of the filing
thereof; (i) the voluntary or involuntary making of an assignment of a
substantial portion of its assets by Debtor for the benefit of creditors,
appointment of a receiver or trustee for Debtor or for any of Debtor's
assets, institution by or against Debtor or any other type of insolvency
proceeding (under the Bankruptcy Act or otherwise) or of any formal or
informal proceeding for dissolution, liquidation, settlement of claims
against or winding up of the affairs of Debtor, Debtor's cessation of
business activities or the making by Debtor of a transfer of all or a
material portion of Debtor's assets or inventory not in the ordinary
course of business; (j) the occurrence of any event described in parts
(e), (f), (g), (h) or (i) hereinabove with respect to any guarantor or
other party liable for payment or performance of this agreement; (k) any
certificate, statement, representation, warranty or audit heretofore or
hereafter furnished with respect hereto by or on behalf of Debtor or any
guarantor or other party liable for payment or performance of this
agreement proving to have been false in any material respect at the time
as of which the facts therein set forth were stated or certified or
having omitted any substantial contingent or unliquidated liability or
claim against Debtor or any such guarantor or other party; (l) breach by
Debtor of any lease or other agreement providing financial accommodation
under which Debtor or its property is bound or (m) a transfer of
effective control of Debtor, if an organization.
18. REMEDIES. Upon the occurrence of an event of default, Secured Party will
have the rights, options, duties and remedies of a secured party, and
Debtor will have the rights and duties of a debtor, under the Uniform
Commercial Code (regardless of whether such Code or a law similar thereto
has been enacted in a jurisdiction wherein the rights or remedies are
asserted) and without limiting the foregoing, Secured Party may exercise
any one or more of the following remedies: (a) declare the Casualty Value
(or such lesser amount as may be set by law) immediately due and payable
with respect to any or all Items of Equipment without notice or demand to
Debtor; (b) sue from time to time for and recover all installment
payments and other payments then accrued and which accrue during the
pendency of such action with respect to any or all Items of Equipment;
(c) take possession of and, if deemed appropriate, render unusable any or
all Items of Equipment, without demand or notice, wherever same may be
located, without any court order or other process of law and without
liability for any damages occasioned by such taking of possession and
remove, keep and store the same, or use and operate or lease the same
until sold; (d) require Debtor to assemble any or all Items of Equipment
at the Equipment Location therefor, such location to which such Equipment
may have been moved with the written consent of Secured Party or such
other location in reasonable proximity to either of the foregoing as
Secured Party designates; (e) upon ten (10) days notice to Debtor or such
other notice as maybe required by law, sell or otherwise dispose of any
Item of Equipment, whether or not in Secured Party's possession, in a
<PAGE>
commercially reasonable manner at public or private sale at any place
deemed appropriate and apply the net proceeds of such sale, after
deducting all costs of such sale, including, but not limited to, costs of
transportation, repossession, storage, refurbishing, advertising and
brokers fees, to the obligations of Debtor to Secured Party hereunder or
otherwise, with Debtor remaining liable for any deficiency and with any
excess being returned to Debtor; (f) upon thirty (30) days notice to
Debtor, retain any repossessed or assembled Items of Equipment as Secured
Party's own property in full satisfaction of Debtor's liability for the
installment payments due hereunder with respect thereto, provided that
Debtor will have the right to redeem such Items by payment in full of its
obligations to Secured Party hereunder or otherwise or to require Secured
Party to sell or otherwise dispose of such Items in the manner set forth
in subparagraph (e) hereinabove upon notice to Secured Party within such
thirty (30) day period or (g) utilize any other remedy available to
Secured Party under the Uniform Commercial Code or similar provision of
law or otherwise at law or in equity.
No right or remedy conferred herein is exclusive of any other right or
remedy conferred herein or by law; but all such remedies are cumulative
of every other right or remedy conferred hereunder or at law or in
equity, by statute or otherwise, and may be exercised concurrently or
separately from time to time. Any sale contemplated by subparagraph (e)
of this paragraph 18 maybe adjourned from time to time by announcement at
the time and place appointed for such sale, or for any such adjourned
sale, without further published notice, and Secured Party may bid and
become the purchaser at any such sale. Any sale of an Item of Equipment,
whether under said subparagraph or by virtue of judicial proceedings,
will operate to divest all right, title, interest, claim and demand
whatsoever, either at law or in equity, of Debtor in and to said Item and
will be a perpetual bar to any claim against such Item, both at law and
in equity, against Debtor and all persons claiming by, through or under
Debtor.
19. DISCONTINUANCE OF REMEDIES. If Secured Party proceeds to enforce any
right under this agreement and such proceedings are discontinued or
abandoned for any reason or are determined adversely, then and in every
such case Debtor and Secured Party will be restored to their former
positions and rights hereunder.
20. SECURED PARTY'S EXPENSES. Debtor will pay Secured Party all costs and
expenses, including attorneys' fees and court costs and sales costs not
offset against sales proceeds under paragraph 18 above, incurred by
Secured Party in exercising any of its rights or remedies hereunder or
enforcing any of the terms, conditions or provisions hereof. This
obligation includes the payment or reimbursement of all such amounts
whether an action is ultimately filed and whether an action filed is
ultimately dismissed.
21. ASSIGNMENT. Without the prior written consent of Secured Party, Debtor
will not sell, lease, pledge or hypothecate, except as provided in this
agreement, any Item of Equipment or any interest therein or assign,
transfer, pledge or hypothecate this agreement or any interest in this
agreement or permit the Equipment to be subject to any lien, charge or
encumbrance of any nature except the security interest of Secured Party
contemplated hereby. Debtor's interest herein is not assignable and will
not be assigned or transferred by operation of law. Consent to any of the
foregoing prohibited acts applies only in the given instance and is not a
consent to any subsequent like act by Debtor or any other person.
All rights of Secured Party hereunder may be assigned, pledged,
mortgaged, transferred or otherwise disposed of, either in whole or in
part, without notice to Debtor but always, however, subject to the rights
of Debtor under this agreement. If Debtor is given notice of any such
assignment, Debtor will acknowledge receipt thereof in writing. In the
event Secured Party assigns this agreement or the installment payments
due or to become due hereunder or any other interest herein, whether as
security for any of its indebtedness or otherwise, no breach or default
by Secured Party hereunder or pursuant to any other agreement between
Secured Party and Debtor, should there be one, will excuse performance by
Debtor of any provision hereof, it being understood that in the event of
such default or breach by Secured Party that Debtor will pursue any
rights on account thereof solely against Secured Party. No such assignee,
unless such assignee agrees in writing, will be obligated to perform any
duty, covenant or condition required to be performed by Secured Party in
connection with this agreement.
Subject always to the foregoing, this agreement inures to the
benefit of, and is binding upon, the heirs, legatees, personal
representatives, successors and assigns of the parties hereto.
<PAGE>
22. MARKINGS; PERSONAL PROPERTY. If Secured Party supplies Debtor with
labels, plates, decals or other markings stating that Secured Party has
an interest in the Equipment, Debtor will affix and keep the same
prominently displayed on the Equipment or will otherwise mark the
Equipment or its then location or locations, as appropriate, at Secured
Party's request to indicate Secured Party's security interest in the
Equipment. The Equipment is, and at all times will remain, personal
property notwithstanding that the Equipment or any Item thereof may now
be, or hereafter become, in any manner affixed or attached to, or
embedded in, or permanently resting upon real property or any improvement
thereof or attached in any manner to what is permanent as by means of
cement, plaster, nails, bolts, screws or otherwise. If requested by
Secured Party, Debtor will obtain and deliver to Secured Party waivers of
interest or liens in recordable form satisfactory to Secured Party from
all persons claiming any interest in the real property on which an Item
of Equipment is or is to be installed or located.
23. LATE CHARGE. If Debtor fails to pay any installment payment or any other
sum to be paid by Debtor to Secured Party when due, Debtor will pay to
Secured Party (a) Secured Party's collection costs paid third parties
relevant to the collection thereof, (b) interest on such unpaid
installment or other amount at the rate of eighteen percent (18%) per
annum, or at such lesser contract rate as maybe applicable, computed from
the date due to the date paid and (c) a service charge equal to the
product of $25.00 and the greater of the number of commitments or billing
locations affected during each month or portion thereof during which such
failure will continue as compensation for Secured Party's internal
operating expenses arising as a result of such failure. It is understood
that only $25.00 will be due under subparagraph (c) in any given month as
to a given commitment or billing location notwithstanding the number of
related installment or other payments which are past due during such
month.
24. NON-WAIVER. No covenant or condition of this agreement can be waived
except by the written consent of Secured Party. Forebearance or
indulgence by Secured Party in regard to any breach hereunder will not
constitute a waiver of the related covenant or condition to be performed
by Debtor.
25. ADDITIONAL DOCUMENTS. In connection with and in order to perfect and
evidence the security interest in the Equipment granted Secured Party
hereunder Debtor will execute and deliver to Secured Party such financing
statements and similar documents as Secured Party requests. Debtor
authorizes Secured Party where permitted by law to make filings of such
financing statements without Debtor's signature. Debtor further will
furnish Secured Party (a) a fiscal year end financial statement including
balance sheet and profit and loss statement within one hundred twenty
(120) days of the close of each fiscal year, (b) any other information
normally provided by Debtor to the public and (c) such other financial
data or information relative to this agreement and the Equipment,
including, without limitation, copies of vendor proposals and purchase
orders and agreements, as Secured Party may from time to time reasonably
request. Debtor will procure and/or execute, have executed, acknowledge,
have acknowledged, deliver to Secured Party, record and file such other
documents and showings as Secured Party deems necessary or desirable to
protect its interest in this agreement and the Equipment. Debtor will pay
as directed by Secured Party or reimburse Secured Party for all filing,
search, title report and other fees incurred by Secured Party in
connection with any documents to be provided by Debtor pursuant to this
paragraph or paragraph 22 and any further similar documents Secured Party
may procure.
26. DEBTOR'S WARRANTIES. Debtor certifies and warrants that the financial
data and other information which Debtor has submitted, or will submit, to
Secured Party in connection with this agreement is, or will be at time of
delivery, as appropriate, a true and complete statement of the matters
therein contained. Debtor further certifies and warrants: (a) this
agreement has been duly authorized by Debtor and when executed and
delivered by the person signing on behalf of Debtor below will constitute
the legal, valid and binding obligation, contract and agreement of Debtor
enforceable against Debtor in accordance with its respective terms; (b)
this agreement and each and every showing provided by or on behalf of
Debtor in connection herewith may be relied upon by Secured Party in
accordance with the terms thereof notwithstanding the failure of Debtor
or other applicable party to ensure proper attestation thereto, whether
by absence of a seal or acknowledgment or otherwise; (c) Debtor has the
right, power and authority to grant a security interest in the Equipment
to Secured Party for the uses and purposes herein set forth and (d) each
Item of Equipment will, at the time such item becomes subject hereto, be
in good repair, condition and working order.
<PAGE>
27. ENTIRE AGREEMENT. This instrument constitutes the entire agreement
between Secured Party and Debtor and will not be amended, altered or
changed except by a written agreement signed by the parties hereto.
[Debtor may not retire debtor's installment payment obligations with
respect to the equipment prior to their maturity without secured party's
prior written consent.]
28. NOTICES. Notices under this agreement must be in writing and must be
mailed by United States mail, certified mail with return receipt
requested, duly addressed, with postage prepaid, to the party involved at
its respective address set forth at the foot hereof or at such other
address as such party may provide on notice to the other from time to
time. Notices will be effective when deposited upon receipt. Each party
will promptly notify the other of any change in the first party's
address.
29. GENDER, NUMBER; JOINT AND SEVERAL LIABILITY. Whenever the context of this
agreement requires, the neuter gender includes the feminine or masculine
and the singular number includes the plural; and whenever the words
"Secured Party" are used herein, they include all assignees of Secured
Party, it being understood that specific reference to "assignee" in
paragraph 14 above is for further emphasis. If there is more than one
Debtor named in this agreement, the liability of each will be joint and
several.
30. TITLES. The titles to the paragraphs of this agreement are solely for the
convenience of the parties and are not an aid in the interpretation of
the instrument.
31. GOVERNING LAW; VENUE. This agreement will be governed by and construed in
accordance with the law of the State of Connecticut. Venue for any action
related to this agreement will be in an appropriate court in Hartford
County, Connecticut, to which Debtor consents, or in another court
selected by Secured Party which has jurisdiction over the parties. In the
event any provision hereof is declared invalid, such provision will be
deemed severable from the remaining provisions of this agreement which
will remain in full force and effect.
32. TIME. Time is of the essence of this agreement and each and all of its
provisions.
IN WITNESS WHEREOF, the undersigned have executed these presents as of
July 29, 1994
NEW ENGLAND CAPITAL CORPORATION CHIPS & TECHNOLOGIES INC.
By: By: /s/ Timothy R. Christoffersen
-------------------------------- ------------------------------
Title: President Title: VP & CFO
By:
------------------------------
Title:
P.0. Box 755 Address: 2950 Zanker Road
Avon, Connecticut 06001 San Jose, CA 95134
(Corporate Seal*; Individual or
Partnership Notarial AcknowIedgement)
*Failure to affix not to affect validity.
[[F 1/94
<PAGE>
NEW ENGLAND CAPITAL CORPORATION
EQUIPMENT FINANCING COMMITMENT
Subject to the terms set forth in this commitment, the following equipment
financing transaction is agreed to by the undersigned Debtor and New England
Capital Corporation ("Secured Party") in connection with the terms of the
Equipment Financing Agreement herein referenced (the "Agreement").
Equipment Financing Agreement: dated as of July 29, 1994
Equipment (all Equipment to be acceptable to Secured Party):
New and used software, computer hardware and test equipment.
Commitment Amount: $2,000,000.00
Installment Payments: 36 (thirty-six) payments of 3.2098 % of Advance Amount
payable monthly in advance, with the first payment due and payable in advance
and as more fully described in the attached Exhibit A. Plus a pro rata
installment payment calculated on a basis of a thirty (30) day month for the
period from the date of the applicable Schedule to the commencement date listed
on a Schedule.
Commitment Expiration Date: June 29, 1995
Debtor will comply with, procure, execute and/or have executed, acknowledge,
have acknowledged, deliver to Secured Party, record and file any documents set
forth in Exhibit A or accompanying this commitment. The form, substance and
sufficiency of all documents and showings employed in documenting the
contemplated financing transaction must be acceptable to Secured Party and its
counsel. Debtor will do likewise as to such further documents and showings as
Secured Party and its counsel may now or hereafter reasonably deem necessary or
advisable to protect Secured Party's rights under the Agreement and interest in
the Equipment. Debtor will pay as directed by Secured Party or reimburse Secured
Party for all searches, filings, attorney's services and other charges incurred
by Secured Party in connection with all such documents and showings and any
similar documents and showings Secured Party may procure.
Debtor shall furnish Secured Party with evidence satisfactory to Secured Party
of Debtor's ownership of all the Equipment to be financed by Secured Party, and
such evidence shall show the Equipment to be free of any liens or encumbrances
and shall show Debtor to be the sole owner of such Equipment. It is understood
that Secured Party will search the records maintained by appropriate county or
state authority to insure that any Equipment to be financed by Secured Party is
free of any liens. Should there be a lien on any such Equipment, Debtor shall
obtain the release of the party holding such lien, and the release shall be
satisfactory to Secured Party.
Secured Party may, at its option, terminate its obligations to Debtor hereunder
with respect to any and all Items of Equipment for which a Schedule to the
Agreement has not been executed (a) at or subsequent to the Commitment
Expiration Date, (b) upon the advent of a material adverse change in Debtor's
financial condition or Debtor's probable ability to perform its obligations
under the Agreement or (c) if the Agreement or any other agreement under which
Debtor has obligations to Secured Party is in default or an event which with the
giving of notice or lapse of time or both would constitute such a default has
occurred and is continuing by giving Debtor written notice of such termination.
ACCEPTED AND AGREED TO THIS 26TH ACCEPTED AND AGREED TO THIS 29TH
<PAGE>
day of August, 1994 day of July, 1994
NEW ENGLAND CAPITAL CORPORATION CHIPS & TECHNOLOGIES, INC.
P.O. Box 755 (Debtor)
Avon, Connecticut 06001
Address: 2950 Zanker Road
San Jose, CA 95134
By: By:/s/ Timothy R. Christoffersen
------------------------------ -------------------------------
President Title: VP & CFO
(FC 5/92)
<PAGE>
Page 1 of 2
EXHIBIT A TO EQUIPMENT FINANCING COMMITMENT
ACCEPTED BY DEBTOR AS OF JuIy 29, 1994
Debtor shall reimburse Secured Party for all Uniform Commercial Code
costs, as well as, any costs incurred by Secured Party in filing or recording
this agreement or any supplemental documents with a minimum cost reimbursement
of $250.00.
Commitment Fee: $20,000.00, which amount shall accompany this Equipment
Financing Commitment upon its return to Secured Party. This amount shall be
applied to the first installment payment due under a schedule in the ratio that
the original cost of the equipment covered by such schedule bears to the
Commitment Amount. Any portion at the Commitment Fee not so applied shall be
retained by Secured Party in consideration for the costs, expenses and other
losses incurred by Secured Party incident to the transaction contemplated
hereby. Receipt of $20,000.00 of said Commitment Fee is hereby acknowledged.
It is Secured Party's understanding that Debtor has already advanced a
portion of the cost of the Equipment in the amount of $509,208.04. In addition,
Debtor has requested that Secured Party advance an approximate, additional
$600,000.00 in connection with Debtor's actual or anticipated obligation for
additional Equipment purchases the purchase price of which is or will be payable
in July and August l994. Debtor has advised Secured Party that all such
Equipment constitutes software. Upon satisfaction of the various preconditions
set forth in this Commitment, including provision of copies of invoices or
purchase orders for respectively the applicable delivered and to be delivered
Equipment, Secured Party will present Debtor an initial schedule contemplating
an advance of $1,109,208.04. With further respect to such preconditions , no UCC
searches will be required on any Equipment which is software.
Debtor has agreed to pledge the following additional security:
a. In conjunction with each scheduling Debtor will provide Secured Party a
letter of credit (at debtors expense) in the amount of the related
Advance and similarly satisfactory to Secured Party and securing the
Agreement.
The letters of credit may be annually renewable and reduced in amount
upon renewal as follows:
1. The letters of credit provided with each Schedule can be reduced to
the Net Book Value, as provided to Debtor at the time of scheduling,
respecting the Equipment then covered by such Schedules of the renewal.
The reductions in the amounts of the letters of credit are contingent
upon no event at default or event which with the giving of notice of
lapse of time or both having occurred and continuing under the Agreement.
b. Legal fees and expenses incurred by Secured Party in the preparation and
delivery of the original documentation will be Secured Party's
responsibility.
Legal fees and expenses incurred by Debtor will be Debtor's responsibility.
Secured Party will attempt to answer, in a timely manner, any of Debtor's legal
or operational questions covering the documentation or otherwise related to the
contemplated transaction. However, in the event that Debtor's questions
regarding Secured Party's documentation cannot be answered internally end
require outside legal counsel to be retained be Secured Party, Debtor will
reimburse Secured Party's reasonable costs of such counsel.
c. Debtor may prepay a given Schedule on the following basis:
1. All amounts owing from Debtor to Secured Party shall be current as of
prepayment.
2. 45 30 day advance written notice from Debtor shall have been received
by Secured Party.
<PAGE>
Page 2 of 2
EXHIBIT A TO EQUIPMENT FINANCING COMMITMENT
ACCEPTED BY DEBTOR AS OF July 29, 1994
3. Debtor shall have remitted to Secured Party a termination
amount equal to the Casualty Value. (as defined in the Equipment Financing
Agreement [Paragraph 11]) of the Equipment covered by such Schedule as of
prepayment.
Debtor represents and warrants that the financial statements of Debtor
for the year ended June 30, 1993 (copies of which have been furnished to secured
Party) have been prepared in accordance with generally accepted accounting
principles, consistently applied, and accurately and completely present the
financial condition of Debtor and the results of their operations as of the date
of and for the period covered by such statements, and since the date of such
statements there has been no material adverse change in such conditions or
operations.
Payments: When the 3 year US Treasury Note yield is 6.31% as per the
most recent issue of The Wall Street Journal (hereinafter referred to as the
"Base Rate" or its equivalent) Debtor shall pay Secured Party payments as
described on the Equipment Financing Commitment. In the event the Base Rate is
higher or lower than the Base Rate listed above, Debtor shall pay a
correspondingly greater or lesser amount which corresponds with the Base Rate in
effect on the date of schedule preparation. At the time of scheduling, the
installment payment factor will be fixed for the term of the financing.
For all advances Debtor shall provide to Secured Party an irrevocable
letter of credit for a term equal to the loan term in an amount equal to the
Equipment cost of each schedule takedown. The form, substance and initiating
financial institution must be acceptable to Secured Party.
Debtor has only advanced to third parties those monies associated with
this agreement disclosed to Secured Party herein. If any additional monies have
been remitted to any party whatsoever in conjunction with this agreement, Debtor
shall disclose same to Secured Party. It is understood that Debtor has advanced
and secured Party has received a $20,000.00 commitment fee from Capital Finance
Group. This $20,000.00 will be applied in a pro-rata basis towards the
takedowns.
Each schedule to the agreement shall cover Equipment with a cost to
Secured Party of at least $25,000.00.
If this commitment and the related documents are not fully executed and received
by Secured Party by August 29, 1994, Secured Party may at its option terminate
its obligation hereunder.
<PAGE>
ADDENDUM TO EQUIPMENT FINANCING AGREEMENT
BETWEEN NEW ENGLAND CAPITAL CORPORATION, AS SECURED PARTY,
AND CHIPS AND TECHNOLOGIES, INC., AS DEBTOR,
DATED AS OF JULY 29, 1994.
The aforementioned Secured Party and Debtor hereby wish to amend the
Equipment Financing Agreement dated July 29, 1994 as follows:
Paragraph 17, Line 25: Following the words, ". . . if an organization"
the following shall be inserted, "(n) (i) if at anytime throughout the term of
this agreement, the issuing institution of the Letter of Credit issues to
Secured Party a notice of non-renewal of its outstanding Letter of Credit, or
(ii) a material adverse change in the financial condition of the issuing
institution of the Letter of Credit"
This instrument represents the agreement between both parties to amend
the Equipment Financing Agreement as stated hereinabove. In all other respects
said agreement shall remain unamended and in full force and effect.
Dated 23 day of August, l994.
NEW ENGLAND CAPITAL CORPORATION CHIPS AND TECHNOLOGIES, INC.
(Secured Party) (Debtor)
By: By: /s/ Timothy R. Christoffersen
----------------------------- -------------------------------
Title: President Title: VP & CFO
<TABLE>
<CAPTION>
Exhibit 11.1
CHIPS AND TECHNOLOGIES, INC.
CALCULATION OF EARNINGS PER SHARE - UNAUDITED
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands except per share amounts) 1994 1993
-------- --------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $ 1,256 $ 322
======== ========
Average number of common and common equivalent shares:
Weighted average common shares outstanding 16,897 16,145
Dilutive common stock equivalents:
Common stock options and warrant, using treasury stock method * 135
Convertible preferred stock 123 123
-------- --------
Common and common equivalent shares used in the
calculation of net income per share: 17,020 16,403
======== ========
Primary earnings per share: $ 0.07 $ 0.02
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 1,256 $ 322
======== ========
Average number of common and common equivalent shares:
Weighted average common shares outstanding 16,897 16,145
Dilutive common stock equivalents:
Common stock options and warrant, using treasury stock method * 2,536
Convertible preferred stock 123 123
Convertible debentures * *
-------- --------
Common and common equivalent shares used in the
calculation of net income per share: 17,020 18,804
======== ========
Fully diluted earnings per share: $ 0.07 $ 0.02
======== ========
<FN>
* Antidilutive
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 34436
<SECURITIES> 0
<RECEIVABLES> 79423
<ALLOWANCES> 0
<INVENTORY> 48467
<CURRENT-ASSETS> 174428
<PP&E> 173977
<DEPRECIATION> 124732
<TOTAL-ASSETS> 228454
<CURRENT-LIABILITIES> 62882
<BONDS> 23996
<COMMON> 17336
0
0
<OTHER-SE> 124240
<TOTAL-LIABILITY-AND-EQUITY> 141576
<SALES> 84287
<TOTAL-REVENUES> 84287
<CGS> 49519
<TOTAL-COSTS> 49519
<OTHER-EXPENSES> 26555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291
<INCOME-PRETAX> 7922
<INCOME-TAX> 2536
<INCOME-CONTINUING> 5386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5386
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.61
</TABLE>
