SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 0-19027
SIMTEK CORPORATION
(Exact name of registrant as specified in its charter)
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Colorado 84-1057605
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1465 Kelly Johnson Boulevard, Suite 301, Colorado Springs, Colorado 80920
(Address of principal executive offices) (Zip Code)
(719) 531-9444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value OTC Bulletin Board
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(Title of Class)
Class B Redeemable Warrants Not Listed
--------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this form 10-KSB. [X]
The registrant's revenues for its most recent fiscal year were $6,180,550.
The aggregate market value of the 20,377,841 shares of voting stock held by
non-affiliates of the registrant was approximately $3,668,011, based upon the
closing sale price of the Common Stock on March 5, 1999 of $ 0.18 per share as
reported by the OTC Electronic Bulletin Board. The calculation of such market
value should not be construed as an admission or conclusion by the registrant
that any person is in fact an affiliate of the registrant.
The total number of shares of Common Stock issued and outstanding as of March
12, 1999 was 28,955,226.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
<S> <C> <C>
PART I
Item 1: Business.......................................................................................... 3
Item 2: Properties........................................................................................ 13
Item 3: Legal Proceedings................................................................................. 13
Item 4: Matters Submitted to a Vote of Security Holders................................................... 13
PART II
Item 5: Market for Registrant's Common Stock and Related Security Holder Matters.......................... 14
Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................................. 15
Item 7: Financial Statements and Supplementary Data....................................................... 21
Item 8: Changes in and Disagreements with Accountants on Accounting Financial
Disclosure..................................................................................... 38
PART III
Item 9: Directors and Executive Officers of the Registrant................................................ 39
Item 10: Executive Compensation............................................................................ 42
Item 11: Security Ownership of Certain Beneficial Owners and Management.................................... 44
Item 12: Certain Relationships and Related Transactions.................................................... 46
Item 13: Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 47
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PART I
ITEM 1: BUSINESS
GENERAL
Simtek Corporation ("Simtek" or the "Company") designs, develops, produces
and markets high performance nonvolatile semiconductor memories. Nonvolatility
prevents loss of programs and data when electrical power is removed. The
Company's nonvolatile memory products feature fast data access and programming
speeds and electrical reprogramming capabilities. Simtek's products are targeted
for use in commercial electronic equipment markets such as industrial control
systems, office automation, medical instrumentation, telecommunication systems,
cable television, and numerous military systems, including communications,
radar, sonar and smart weapons.
Since completing product qualification in September 1991, the Company has
received and filled more than 3,200 customer evaluation requests for its
products. The Company has accepted purchase orders from many Fortune 500
companies. As of December 31, 1998, the Company's backlog for released purchase
orders was approximately $500,000, all of which is expected to be shipped by
June 30, 1999. Orders are cancelable without penalty at the option of the
purchaser prior to 30 days before scheduled shipment and therefore are not
necessarily a measure of future product revenue. Since inception, in 1987
through December 31, 1998, the Company has generated net revenue of
approximately $25,310,000 from the sale of products. Of this amount,
approximately $6,181,000 was generated during the year ended December 31, 1998.
The Company has completed the development and is in production of its first
four families of products, 256 kilobit, 64 kilobit, 16 kilobit and 4 kilobit
nonvolatile static random access memories ("nvSRAMs"). The Company's 256 kilobit
nvSRAM was qualified in 1997 for sales into the commercial and industrial
markets and in 1998 for shipment into the military market. The Company's 64
kilobit nvSRAMs meet or exceed the requirements for sales into commercial,
industrial and military markets. The Company's 16 kilobit and 4 kilobit nvSRAMs
have been qualified for sales into commercial and industrial markets. Simtek
believes its 256 kilobit nvSRAMs offer lower cost per bit, greater memory
capacity and faster data access speeds than other existing single-chip
nonvolatile SRAMs. Simtek's 64 kilobit, 16 kilobit and 4 kilobit nvSRAMs provide
even lower cost solutions for customers who do not require 256 kilobits of
memory. The Company's nvSRAMs are physically smaller and require less
maintenance than SRAM devices that achieve nonvolatility through the use of
internal batteries and are more convenient to use than SRAM devices that achieve
nonvolatility by being combined with additional chips.
The Company reduces capital requirements by subcontracting all phases of
the manufacturing process. Chartered Semiconductor Manufacturing Plc. of
Singapore ("Chartered") began providing silicon wafers for the Company's nvSRAM
products in September 1993 and continues to provide wafers based on the
Company's 0.8 and 1.2 micron product technology. Integra Technologies provides
final test services for the products built on the wafers purchased from
Chartered. Through the first half of 1998, the Company continued to purchase 64
kilobit and 256 kilobit finished units based on the Company's 0.8 micron product
technology from Zentrum Mikroelektronik Dresden GmbH ("ZMD") of Dresden,
Germany. During the second half of 1998, the Company ceased purchases from ZMD
and began purchasing wafers from Chartered in order to produce their own
nvSRAMs.
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During 1998, Company purchases from Chartered were for wafers based on 1.2
micron and 0.8 micron wafer technology. Sales of nvSRAMs generated from these
wafers accounted for approximately 50% of the Company's revenue for 1998. In the
fourth quarter of 1997 and the second quarter of 1998, the Company qualified the
0.8 micron technology from Chartered for use in the Company's commercial and
military product, respectively.
The Company along with ZMD completed development and product qualification
of the Company's 256 kilobit product based on 0.8 micron product technology in
the second quarter of 1997. Sales of the 256 kilobit and 64 kilobit product
based on 0.8 micron product technology accounted for approximately 50% of the
Company's sales for 1998.
Simtek currently has three sales and marketing offices, one in Colorado
Springs, Colorado, one in Bristol, England and one in Atlanta, Georgia. The
Company has engaged 15 independent representative organizations with 38 sales
offices and 28 distributor organizations with 60 sales offices. These
organizations have multiple sales offices and sales people covering a specific
territory. Through these organizations and their sales offices Simtek is capable
of serving a worldwide market
INDUSTRY AND PRODUCT BACKGROUND
The semiconductor memory market is very large and highly differentiated.
The market covers a wide range of product densities, speeds, features and
prices. The ideal memory would have (1) high bit density per chip to minimize
the number of chips required in a system; (2) fast data read and write speeds to
allow a system's microprocessor to access data without having to wait; (3) the
ability to read and modify data an unlimited number of times; (4) the ability to
retain its data indefinitely when power is interrupted (i.e. nonvolatility); (5)
availability in a variety of package types for modern assembly techniques; and
(6) the ability to be tested completely by the manufacturer to ensure the
highest quality and reliability. Although customers would like to have memory
components with all of these attributes it currently is not technically
feasible. Therefore, the memory market is segmented with different products
combining different mixes of these attributes.
Semiconductor memories can be divided into two main categories, volatile
and nonvolatile. Volatile memories generally offer high densities and fast data
access and programming speeds, but lose data when electrical power is
interrupted. Nonvolatile memories retain data in the absence of electrical
power, but typically have been subject to speed and testing limitations and wear
out if they are modified too many times. There are a number of common volatile
and nonvolatile product types, as set forth below. The list of products under
"Combinations" is limited to single packages and does not include combinations
of the listed memories in separate packages, such as SRAMs in combination with
EPROMs and EEPROMs.
Volatile Nonvolatile Combinations
-------- ----------- ------------
SRAM EEPROM nvSRAM
DRAM Flash Memory NVRAM
EPROM SRAM plus lithium battery ("Batram")
PROM
ROM
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VOLATILE MEMORIES. Rewritable semiconductor memories store varying amounts
of electronic charge within individual memory cells to perform the memory
function. In a Dynamic Random Access Memory (DRAM), the charge must be
electrically refreshed many times per second or data are lost even when power is
continuously applied. In a Static Random Access Memory (SRAM), the charge need
not be refreshed, but data can be retained only if power is not interrupted.
NONVOLATILE MEMORIES. A Read Only Memory (ROM) is programmed (written) once
in the later stages of the manufacturing process and cannot be reprogrammed by
the user. Programmable Read Only Memory (PROM) can be programmed once by the
user, while Erasable PROM (EPROM) may be reprogrammed by the user a limited
number of times if the EPROM is removed from the circuit board in the equipment.
Both Flash memory and Electrically Erasable PROM (EEPROM) may be reprogrammed
electrically by the user without removing the memory from the equipment.
However, the reprogramming time on both EEPROM and Flash memory is excessively
long compared to the read time such that in most systems the microprocessor must
stop for a relatively long time to rewrite the memory.
COMBINATIONS. Many customers use a combination of volatile and nonvolatile
memory functions to achieve the desired performance for their electronic
systems. By using SRAMs in combination with EPROM and EEPROM chips, customers
can achieve nonvolatility in their systems and still retain the high data read
and write speeds associated with SRAM memories. This approach, however, is not
desirable in many applications because of the size and cost disadvantages
associated with using two or more chips to provide a single memory function.
Also, it may take up to several seconds to transfer the data from the SRAM to
the EEPROM, an excessive time at power loss. As a result, attempts have been
made to combine nonvolatile and volatile memory features in a single package or
silicon chip. One approach combines an SRAM with lithium batteries in a single
package.
Nonvolatile random access memories (NVRAMs) combine volatile and
nonvolatile memory cells on a single chip and do not require a battery. The
Company believes its nvSRAM represents a significant advance over existing
products that combine volatility and nonvolatility on a single silicon chip.
Simtek combines an SRAM memory cell with an EEPROM memory cell to create a small
nvSRAM memory cell. The Company's unique and patented memory cell design enables
the nvSRAM to be produced at densities higher than existing NVRAMs and at a
lower cost per bit. In addition to high density and nonvolatility, the nvSRAM
has fast data access and program speeds and the SRAM portion of the memory can
be modified an unlimited number of times without wearing out.
TECHNOLOGY
The Company uses an advanced implementation of
silicon-nitride-oxide-semiconductor (SNOS) technology. SNOS technology stores
electrical charge within an insulator, silicon nitride, and uses a thin tunnel
oxide layer to separate the silicon nitride layer from the underlying silicon
substrate. SNOS technology prevents tunnel oxide rupture in the memory cell from
causing an immediate loss of data. Oxide rupture has been a major cause of
failures in Flash and EEPROMs using floating gate technology, where charge is
stored on a polysilicon conductor surrounded by insulators. To protect against
these failures, many floating gate EEPROMs have required error correction
circuitry and redundant memory cells. This increases product cost by requiring
more silicon area. Error correction and redundancy are not required for the
Company's products to protect against tunnel oxide rupture. In addition, the
Company's product designs incorporate a special test feature which can predict
data retention time for every individual memory cell based on measuring the rate
of charge loss out of the silicon nitride.
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The SNOS technology coupled with the Company's nvSRAM memory cell allows
high performance nonvolatile SRAMs to be manufactured using complementary metal
oxide semiconductor (CMOS) technology. The SNOS technology used by the Company
has proven to be highly reliable, as demonstrated by the Company's product
qualification results to date.
PRODUCTS
nvSRAMs (NONVOLATILE STATIC RANDOM ACCESS MEMORIES). The Company's 256
kilobit, 64 kilobit, 16 kilobit and 4 kilobit nvSRAM product families consist of
nonvolatile memories that combine fast SRAM and nonvolatile EEPROM
characteristics within each memory cell on a single chip of silicon. The SRAM
portion of the nvSRAM is operated in the same manner as most existing SRAM
products. The SRAM can be written to and read from an unlimited number of times.
The EEPROM can be programmed, depending upon device type, by user control or
automatically by transferring the SRAM contents into the EEPROM. The EEPROM data
can be transferred back into the SRAM by user control or automatically.
Simtek's nvSRAMs have fast data access speeds of 20, 25, 35 and 45
nanoseconds. These data access speeds correspond to those of fast SRAMs and meet
the requirements of much of the fast SRAM market. The high speed characteristics
of Simtek's nvSRAMs allow them to be used in applications with various high
performance microprocessors and digital signal processors such as those
manufactured by Intel Corp., Texas Instruments and Motorola. The Simtek nvSRAM
can be used to replace SRAMs with lithium batteries and multiple chip solutions
such as SRAM plus EEPROM or Flash Memory.
The Company finalized commercial and industrial qualification of two
versions of its initial 64 kilobit nvSRAM product offering in September 1991 and
April 1992, respectively. The Company completed military qualification of its
initial nvSRAM in May 1992. The Company began sales into the commercial market
of its initial 16 kilobit nvSRAM product family in 1992. The nvSRAM product
family also includes the 4 kilobit version. The Company completed the
development and product qualification of the 64 kilobit AutoStoreTM nvSRAM in
1993. The AutoStoreTM version automatically detects power loss and transfers the
data from the SRAM cells into the EEPROM cells. This device does not require
instructions or intervention from the system microprocessor to notify it of the
power loss. Commercial and industrial qualification of the Company's 256 kilobit
occurred in 1997 and military qualification of its 256 kilobit nvSRAM was
completed in the second quarter of 1998.
In addition to its qualified product sales, the Company has shipped nvSRAM
samples to more than 3,200 prospective customers for evaluation and currently
has a worldwide customer base of over 450 companies in products ranging from
utility meters to military aircraft.
NEW INTRODUCTIONS: The Company began shipping production qualified 256
kilobit nvSRAM products in mid-1997. These products are 16 times denser than the
nearest competitor with a monolithic solution. The Company believes its 256
kilobit products will expand the market for Simtek products.
In October 1998, the Company introduced a 1 megabit module using 4 of the
256 kilobit products on a single substrate. This device is intended for use by
customers requiring additional density prior to availability of the monolithic
(single-chip) version.
PACKAGE TYPES: The Company currently supplies its nvSRAMs in plastic and
ceramic dual-in-line packages, ceramic leadless chip carriers and plastic small
outline integrated circuit surface mount packages. Supplying the products in a
number of different package types increases the available market for Simtek
products at a relatively low development cost.
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PRODUCT WARRANTIES. Simtek presently provides a one-year limited warranty
on its products. Simtek currently offers the high performance nvSRAMs listed
below:
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nvSRAMs Supplied
Product Description Speed Package Flow
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<S> <C> <C> <C> <C>
STK20C04 4K (512x8) HW Store 30,35,45 ns 600-P Comm./Ind.
STK22C48 16K (2Kx8) AutoStoreTM 30,35,45 ns 600-P Comm./Ind.
STK25C48 16K (2Kx8) AutoStoreTM 30,35,45 ns 600-P Comm./Ind.
STK10C48 16K (2Kx8) HW Store 30,35,45ns PDIP Comm./Ind.
SOIC Comm./Ind.
600-P Comm./Ind.
STK11C48 16K (2Kx8) SW Store 30,35,45ns PDIP Comm./Ind.
SOIC Comm./Ind.
600-P Comm./Ind.
STK10C68 64K (8Kx8) HW Store 25,30,35,45 ns CDIP Comm./Ind./Mil.
PDIP Comm./Ind.
SOIC Comm./Ind.
LCC Comm./Ind./Mil.
STK11C68 64K (8Kx8) SW Store 25,30,35,45 ns CDIP Comm./Ind./Mil.
PDIP Comm./Ind.
SOIC Comm./Ind.
LCC Comm./Ind./Mil.
STK12C68 64K (8Kx8) AutoStoreTM 25,30,35,45 ns CDIP Comm./Ind./Mil.
PDIP Comm./Ind.
SOIC Comm./Ind.
LCC Comm./Ind./Mil.
STK15C68 64K (8Kx8) AutoStoreTM 25,35,45 ns 600-P Comm./Ind.
PDIP Comm./Ind.
SOIC Comm./Ind.
STK11C88 256K (32Kx8) SW Store 25,35,45 ns PDIP Comm./Ind.
SOIC Comm./Ind.
600-P Comm./Ind.
STK14C88 256K (32Kx8) AutoStoreTM 25,35,45 ns PDIP Comm./Ind.
SOIC Comm./Ind.
CDIP Comm./Ind./Mil
LCC Comm./Ind./Mil
STK15C88 256K (32Kx8) AutoStoreTM 25,35,45 ns PDIP Comm./Ind.
SOIC Comm./Ind.
600-P Comm./Ind.
STK25CA8 1Mbit (128Kx8) AutoStoreTM 45,55 ns Module Comm./Ind.
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RESEARCH AND DEVELOPMENT
Many of the Company's research and development activities are centered
around developing new products and reducing the cost of its nvSRAM products.
Cost reduction is being done principally by introducing its 0.8 micron
technology. This technology shrinks the size of the 64 kilobit nvSRAM chip and
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has enabled the Company to develop a cost effective 256 kilobit nvSRAM. The
Company is continuing its efforts to improve yield on the 0.8 micron technology
along with maintaining the existing yield on the Company's 1.2 micron
technology. In order to further reduce costs, the Company engaged Lucent
Technologies in the fourth quarter 1997 for testing of its 0.8 micron products.
The Company has a test floor used for evaluation of its technologies, product
designs and product quality. The test floor is also used for production testing
of incoming wafers.
The Company's research and development expenditures for the years ended
December 31, 1998 and 1997 were $1,380,649 and $1,180,100, respectively. The
Company intends to continue expenditures on research and development; however,
the percentage of research and development expenditures is expected to decrease
relative to expenditures relating to the commercial production of its existing
products.
MANUFACTURING AND QUALITY CONTROL
The Company's manufacturing strategy is to use subcontractors whose
production capabilities meet the requirements of the Company's product designs
and technologies.
In 1992, the Company and Chartered entered into a manufacturing agreement
(the "Chartered Manufacturing Agreement") to provide the Company with silicon
wafers for the Company's products. Under the Chartered Manufacturing Agreement,
Chartered has installed a manufacturing process for versions of the Company's
current and future products.
Finished wafer procurement reverted to Chartered during 1998 as the
Company ceased purchasing finished 0.8 micron units from ZMD. The current
Chartered Manufacturing Agreement enables the Company to purchase 600 six-inch
silicon wafers per month for the production of its 16 kilobit, 64 kilobit and
256 kilobit nvSRAM product. During 1998, approximately 50% of the Company's
product sales were based on wafers purchased from Chartered. All 0.8 micron
products have been successfully qualified at Chartered.
Device packaging continued at the Amkor facilities in the Philippines and
South Korea. Final test for 0.8 micron products was established successfully at
Integra Technologies in Wichita, Kansas.
The Company's subcontractors provide quality control for the manufacture of
the Company's products. The Company maintains its own quality assurance
personnel and testing capability to assist the subcontractors with their quality
programs and to perform periodic audits of the subcontractors' facilities and
finished products to ensure product integrity.
The Company's quality and reliability programs were audited by several
commercial and military customers during 1998 as part of routine supplier
certification procedures. All such audits were completed satisfactorily.
The Company believes the gross margins on military sales of its products
meet or exceed average gross margins on military sales for the semiconductor
industry. At the present time, the Company believes the gross margins on
commercial sales of its products meet industry standards.
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MARKETS
Simtek products are targeted at fast nonvolatile SRAM markets, SRAM plus
EEPROM markets and other nonvolatile memory products broadly used in commercial,
industrial and military electronic systems.
The Company's product families are standard products designed for many
applications in contrast to products designed for specific applications
("ASIC's", or Application Specific Integrated Circuits). Therefore, management
believes that its products will address very broad markets. The Company has
received orders and inquiries regarding its nvSRAMs from over 10,000 potential
customers as a result of exposure of the Company's products at trade shows,
articles appearing in industry trade journals, direct advertising and the
Company's sales network. The Company has sold product, received requests and
sent samples of its nvSRAM products to approximately 3,200 potential customers
for applications such as:
Airborne and Space Computers Lighting
Automotive Control & Monitoring Medical Instruments
Portable Telephone Modems Control Systems
Portable Computers Currency Changers
Postal Meters Data Monitoring Equipment
Printers Disk Drives
Process Control Equipment Facsimile Machines
Radar and Sonar Systems Gaming
Telecommunications Systems GPS Navigational Systems
Terminals Guidance and Targeting Systems
Test Equipment High Performance Workstations
Utility Meters Laser Printers
Vending Machines Mainframe Computers
Weapon Control Systems CD Writers
Security Systems Copiers
Broadcast Equipment Cable TV Set Top Converter Boxes
Studio Recording Equipment
SALES AND DISTRIBUTION
The Company's strategy is to generate sales through the use of independent
sales representative agencies and distributors. Management believes this
strategy provides the fastest and most cost effective way to assemble a large
and professional sales force.
Simtek currently has three sales and marketing offices, one in Colorado
Springs, Colorado, one in Bristol, England and one in Atlanta, Georgia. The
Company has engaged 15 independent representative organizations with 38 sales
offices and 28 distributor organizations with 60 sales offices. Both
organizations have multiple sales offices and sales people covering a specific
territory. Through these organizations and their sales offices Simtek is capable
of serving a worldwide market.
Independent sales representatives typically sell a limited number of
noncompeting products to semiconductor users in particular geographic assigned
territories. Distributors inventory and sell products from a larger number of
product lines to a broader customer base. These sales channels are
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complementary, as representatives and distributors often work together to
consummate a sale, with the representative receiving a commission from the
Company and the distributor earning a markup on the sale of the products. The
Company supplies sales materials to the sales representatives and distributors.
For its marketing activities, the Company evaluates external marketing
surveys and forecasts and performs internal studies based, in part, on inputs
from its independent sales representative agencies. The Company prepares
brochures, data sheets and application notes on its products.
CUSTOMERS AND BACKLOG
The Company has shipped qualified nvSRAM products to customers directly and
through distributors since the September 1991 commercial product qualification;
the majority of its customers are Fortune 500 companies. Approximately 17% of
the Company's net product sales during 1998 were to customers in the Pacific Rim
and approximately 16% were to customers in Europe. The remaining product sales
were to customers in North America.
As of December 31, 1998, the Company had a backlog of unshipped customer
orders of approximately $500,000, which is expected to be filled by June 30,
1999. Orders are cancelable without penalty at the option of the purchaser prior
to 30 days before scheduled shipment and therefore are not necessarily a measure
of future product revenue.
During 1998, the Company continued to receive initial and scheduled
production orders on its 64 kilobit product. Management believes the Company
will continue to receive volume production orders on its 64 kilobit product and
that production orders on its 256 kilobit product will continue to grow.
LICENSES
PRODUCT AND TECHNOLOGY LICENSE SALES. The Company has sold product and
technology licenses to Nippon Steel, Plessey and ZMD. Based on prior actions by
Nippon Steel and Plessey, the Company doesn't anticipate any future activity on
the licenses with Nippon Steel and Plessey.
ZMD. In June of 1994, the Company signed a joint development agreement with
ZMD to install the 1.2 micron products for manufacture at ZMD and to jointly
develop the 0.8 micron technology at Chartered. The Agreement was modified in
August of 1994 by a Letter of Intent between the two Companies to bypass the
installation of 1.2 micron technology at ZMD and instead modify the 0.8 micron
technology to run in the ZMD factory. ZMD has paid Simtek all the monetary
requirements under this agreement including any royalties they may receive from
sales of these jointly developed products.
CHARTERED. In September of 1992, the Company entered into a manufacturing
agreement with Chartered. This agreement grants Chartered the right to
manufacture silicon wafers containing the Simtek products solely for sale to the
Company. Chartered also has the right to manufacture silicon wafers in
connection with future technology licenses that the Company may enter into with
third parties.
FUTURE LICENSE SALES. The Company intends to sell product and technology
licenses on a selective basis. Management will continue to seek licensing
partners who can contribute to the development of the nvSRAM market and provide
a meaningful level of revenue to Simtek while not posing an undue threat in the
marketplace.
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COMPETITION
The Company's products compete on the basis of several factors, including
data access and programming speeds, density, data retention, reliability,
testability, space savings, manufacturability, ease of use and price.
Products that compete with the Company's family of nvSRAMs fall into three
categories. The first category of products that compete with Simtek's nvSRAMs
are volatile and nonvolatile chips used in combination, such as fast SRAMs used
with EPROMs, EEPROMs, or Flash memory. Management believes that Simtek has
advantages in these applications because the nvSRAM allows data to be stored in
milliseconds as compared to seconds for chips used in pairs. The Company's
single chip solution provides a space savings and easier manufacturing. The
Company's single chip solution generally provides increased reliability versus
multiple chips. Simtek believes it will be able to compete with many solutions
requiring density up to 256 kilobit; however, in those instances where the
density requirement is beyond 256 kilobits the nvSRAM does not compete.
Competitors in the multiple chip category include Cypress Semiconductor Corp.,
Integrated Technology, Inc., Toshiba, Fujitsu, Advanced Micro Devices, Inc.,
Atmel and National Semiconductor Corp.
The second category of products that compete with the Company's nvSRAMs are
products that combine SRAMs with lithium batteries in specially adapted
packages. These products generally are slower in access speeds than the
Company's nvSRAMs due in part to limitations caused by life of the lithium
battery when coupled with a faster SRAM. The Company's nvSRAMs are offered in
standard, smaller, less expensive packages, and do not have the limitation on
lifetime imposed on the SRAM/battery solutions by the lithium battery. The
Company's nvSRAMs can also be used for wave soldered automatic insertion circuit
board assembly since they do not have the temperature limitations of lithium
batteries. However, lithium battery-backed SRAM products are available in
densities of 1 megabit and greater per package. Companies currently supplying
products with lithium batteries include Dallas Semiconductor Corp., ST
Microelectronics and Benchmarq Microelectronics, Inc.
The third category consists of NVRAMs that combine SRAM memory cells and
EEPROM memory cells on a monolithic chip of silicon. The Company's current
product offerings are of higher density, faster access times and the Company
believes can be manufactured at lower costs per bit than NVRAMS. Another company
that is currently supplying NVRAMs is Xicor, Inc. The Company believes that
Xicor's highest density single chip part is 16 kilobit.
ZMD, through their license agreement with Simtek, has the worldwide right
to sell under the ZMD label nvSRAMs developed jointly by Simtek and ZMD. With
volume production established at ZMD using the 0.8 micron product, ZMD has begun
selling such nvSRAMs. This may have a positive impact for Simtek by creating a
second source for Simtek's nvSRAM products. However, a potentially negative
impact to Simtek may be the presence of ZMD as a competitor to Simtek.
The Company's management is aware of other semiconductor technologies for
nonvolatile memory products. These technologies include ferroelectric memory and
thin film magnetic memory. Ramtron, Raytheon, Symetrix, National Semiconductor
and others are developing ferroelectric products. Honeywell, Inc. is developing
magnetic film products.
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PATENTS AND INTELLECTUAL PROPERTY
The Company undertakes to protect its product designs and technologies
under the relevant intellectual property laws as well as by utilizing internal
disclosure safeguards. Under the Company's licensing programs, the Company
exercises control over the use of its protected intellectual property and has
not permitted its licensees to sublicense the Company's nvSRAM products or
technology.
It is common in the semiconductor industry for companies to obtain
copyright, trademark and patent protection of their intellectual property.
Management believes that patents are significant in its industry, and the
Company is seeking to build a patent portfolio. The Company expects to enter
into patent license and cross-license agreements with other companies. The
Company has been issued seven patents in the United States on its nvSRAM memory
cell and other circuit designs. These patents have terms that expire through
2008 to 2013. The Company has also taken steps to obtain international patents
on certain of its products. The Company has two applications pending and intends
to prepare patent applications on additional circuit designs it has developed.
In 1998, the Company received notification of a claim for an unspecified
amount from a foundation that owns approximately 180 patents and 70 pending
applications. The foundation claims that certain machines and processes used in
the building of the Company's semiconductor devices infringe on the foundation's
patents. The Company and its counsel are presently discussing the terms of a
license agreement with the foundation's counsel, and no formal actions have been
taken by either party. The Company believes this matter can be resolved between
the parties without a material financial impact upon the Company. However, in
the unlikely event this matter should result in litigation, the ultimate outcome
would be unknown.
However, as with many companies in the semiconductor industry, it may
become necessary or desirable in the future for the Company to obtain licenses
from others relating to its products.
The Company has received federal registration of the term "Novcel" it uses
to describe its technology. The Company has not sought federal registration of
any other trademarks, including "Simtek" or its logo.
EMPLOYEES
As of the date of this Form 10-KSB, the Company has 23 full-time employees
and one temporary employee. Of these employees eight are engaged in design and
engineering activities, five in sales and marketing, eight in product operations
and quality assurance, and three in management and administration. The Company
also uses the resources of selected consultants from time to time. The Company
considers that its relations with its employees are generally satisfactory.
12
<PAGE>
ITEM 2. PROPERTIES
- -------------------
Simtek leases approximately 9,170 square feet of space in Colorado Springs,
Colorado. This space includes a product engineering test floor of approximately
2,350 square feet. The lease covering the Company's facilities expires on
December 31, 2001. Management believes that its existing facilities will be
adequate to meet its reasonably foreseeable needs or that, upon expiration of
the current lease, alternative facilities will be available to it on acceptable
terms to meet its requirements.
Item 3. Legal Proceedings
- --------------------------
In 1998, the Company received notification of a claim for an unspecified
amount from a foundation that owns approximately 180 patents and 70 pending
applications. The foundation claims that certain machines and processes used in
the building of the Company's semiconductor devices infringe on the foundation's
patents. The Company and its counsel are presently discussing the terms of a
license agreement with the foundation's counsel, and no formal actions have been
taken by either party. The Company believes this matter can be resolved between
the parties without a material financial impact upon the Company. However, in
the unlikely event this matter should result in litigation, the ultimate outcome
would be unknown.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------
There were no matters submitted to a vote in 1998.
13
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
- -------------------------------------------------------------------------
The Common Stock is listed on the OTC Electronic Bulletin Board under the
symbol SRAM. The Common Stock was listed on the NASDAQ Small-Cap Market until
July 18, 1995 and then transferred to the OTC Electronic Bulletin Board because
the Company no longer met the requirements for inclusion on the NASDAQ Small-Cap
Market. In order for the Company to have its Common Stock relisted on the
National Market System, the Company must meet all the requirements for an
initial listing.
Securities not included in the NASDAQ Small-CAP Market are covered by the
Securities and Exchange Commission rule that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and receive the purchaser's
written agreement to the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell the Company's securities, which
will have an adverse effect on the ability of the Company's security holders to
sell their securities and the possibility of the Company's ability to raise
additional capital.
Shown below is the closing high bid and the closing low offer as reported
by the OTC Electronic Bulletin Board on the last day of the quarter.
Common Stock
----------------------
High Bid Low Offer
-------- ---------
1997
First Quarter................................ .21 .23
Second Quarter............................... .51 .53
Third Quarter................................ .41 .46
Fourth Quarter............................... .35 .39
1998
First Quarter................................ .39 .41
Second Quarter............................... .32 .36
Third Quarter................................ .22 .23
Fourth Quarter............................... .15 .16
As of December 31, 1998, there were 309 shareholders of record, not
including shareholders who beneficially own Common Stock held in nominee or
"street name."
The Company has not paid any dividends on its Common Stock since inception
and does not intend to pay any in the foreseeable future.
14
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. DISCUSSION CONTAINING SUCH FORWARD-LOOKING
STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH BELOW AND UNDER "BUSINESS," AS
WELL AS WITHIN THE ANNUAL REPORT GENERALLY. IN ADDITION, WHEN USED IN THIS
ANNUAL REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS," "PLANS,"
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS AND STATEMENTS OF EXPECTATIONS, PLANS AND
INTENT ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS IN THE
FUTURE COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS, AS A RESULT, AMONG OTHER THINGS, OF CHANGES IN TECHNOLOGY, CUSTOMER
REQUIREMENTS AND NEEDS, AMONG OTHER FACTORS. THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-
LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
RESULTS OF OPERATIONS
GENERAL. Simtek has designed and developed nonvolatile semiconductor
products since it commenced business operations in May 1987. The Company has
concentrated on the design and development of the 4, 16, 64 and 256 kilobit
nvSRAM product families and technologies, the design of a 256 kilobit EEPROM,
marketing, distribution channels, and sources of supply, including production at
subcontractors.
In September 1991, the Company began the sale of certain commercially
qualified 64 kilobit nvSRAM products based on a 1.2 micron technology. After
initial qualification of its first product in 1991, the Company began expanding
the 64 kilobit nvSRAM product family. By the end of 1993, the Company had
qualified the complete product family for commercial, industrial and military
markets and had commenced sales of these products. During 1995, the Company
developed its 64 kilobit nvSRAM product on a 0.8 micron technology,
qualification of this product occurred in 1996. In late 1996 and into 1997, the
Company along with assistance from ZMD completed the design, installation and
qualification of its 256 kilobit product based on 0.8 micron technology into
ZMD's wafer fab. In 1997, the Company installed the 256 kilobit nvSRAM product
based on 0.8 micron technology in Chartered's wafer fab. Qualification of this
product for use in the commercial and industrial market occurred in 1997 and
qualification for use in the military market occurred in the second quarter of
1998. In the fourth quarter 1997, the Company qualified the 64 kilobit nvSRAM
product built on 0.8 micron technology for sale in the commercial and industrial
market. Sales from product built on wafers purchased from Chartered and finished
units purchased from ZMD each accounted for approximately 50% of the Company's
revenue for 1998. However, during 1998 the Company ceased purchasing finished
units from ZMD.
In 1998, the Company recorded net product sales of $6,180,550 for the year
ended December 31, 1998 down from the $6,632,186 recorded for the year ended
December 31,1997. The decrease in product sales was a reflection of lower
product demand for semiconductor memories, primarily in Japan and other areas of
the Far East. Management of the Company believes the lower product demand was
primarily due to depressed market conditions in Japan and to the unfavorable
conversion rate of the dollar to the yen.
REVIEW OF 1998 OPERATIONS. During 1998, the Company focused on the
objectives of its business plan which were aimed at making Simtek's operation
more efficient. Highlights of the plan include: 1) annual sales revenue of
15
<PAGE>
$9,000,000; 2) maintain positive gross margins; 3) qualification of the 256
kilobit product for use in the military market; 4) qualify the 64 kilobit nvSRAM
based on 0.8 micron technology in Chartered's wafer fab; 5) find a source of
additional funding to support the production and marketing of the 256 kilobit
nvSRAM product. Described below is how the Company performed against its goals:
Total product sales for 1998 were $6,180,550 which was less than the
Company anticipated. The shortage was primarily due to lower product demand for
semiconductor memories, primarily in Japan and other areas of the Far East. Many
individual customers that had anticipated placing production orders in 1998
postponed schedules or canceled projects which included Simtek's nvSRAM's.
However, the Company believes that during the first half of 1999 the market will
recover. Sales of the Company's 16 kilobit product as a percent of total revenue
remained at approximately the same level in 1998 as compared to 1997. Sales of
the Company's 64 kilobit commercial and military product as a percent of total
revenue decreased approximately 26% in 1998 as compared to 1997. This decrease
was primarily due to increased sales of the 256 kilobit commercial product and
the introduction and availability of the 256 kilobit military product which saw
an increase as a percent of total revenue of approximately 26% in 1998 as
compared to 1997.
The Company was able to maintain approximately the same gross margin
percentages through 1998 as in 1997. The Company had gross margins of $2,702,689
during 1998 compared to $2,955,754 during 1997.
In the second quarter 1998, the Company met it's goal to qualify the 256
kilobit product for use in the military market. Sales from this product account
for approximately 13% of the Company's net product sales for 1998.
In the fourth quarter 1998, the Company announced availability of its 1-Meg
module which incorporates four of the 256 kilobit nvSRAM's in a single package.
In the fourth quarter 1998, the Company also began work on the development of a
Real Time Clock technology that combines its nvSRAM with a miniature
capacitor-powered oscillator. Announcement of this product technology occurred
in the first quarter of 1999.
In June 1998, the Company closed a $1,500,000 financing transaction with
two funds. See "Liquidity and Capital Resources" for details of the financing
arrangement.
YEARS ENDED DECEMBER 31, 1998 AND 1997. Simtek's net product sales for 1998
totaled $6,180,550 compared to $6,632,186 for 1997. The decrease in net product
sales for the year ended December 31, 1998 was due primarily to the impact that
the struggling Far East economy had on product demand along with reduced systems
demand and excess manufacturing capacity. During 1998, sales of the Company's
1.2 micron 64 kilobit and 0.8 micron 256 kilobit nvSRAM military products
accounted for approximately 39% of the Company's sales, while sales of the 256
kilobit and 64 kilobit nvSRAM product based on 0.8 micron technology accounted
for approximately 56%. Sales of the Company's 4 kilobit and 16 kilobit nvSRAM
products accounted for the balance of the sales in 1998. Three distributors of
the Company's nvSRAM products and one direct customer accounted for
approximately 44% and 20%, respectively, of the Company's net product sales for
the year ended December 31, 1998.
The Company had a net income of $162,781 for the year ended December 31,
1998 compared to $788,618 for the year ended December 31, 1997. The Company
realized a positive gross margin of $2,702,689 in 1998 compared to $2,955,754 in
1997 for percentages of 44% and 45%, respectively.
16
<PAGE>
Operating expenses were approximately $446,000 greater for the year ended
December 31, 1998 than for the year ended December 31, 1997. Of this increase,
approximately $201,000 related to research and development, which was due to the
costs associated with yield improvement on the Company's 64 kilobit and 256
kilobit 0.8 micron technology built at Chartered's wafer fab. The approximate
$128,000 increase in sales and marketing was attributed to an increase in
advertising, travel, and sales commissions. The approximate $117,000 increase in
administration was due primarily to increased payroll and benefit costs and an
accrual for an estimated settlement regarding possible patent infringement. See
Note 6 "Commitments and Contingencies"
The increase in other income was due primarily to a reversal of an accrued
expense that managment believes is no longer valid.
FUTURE RESULTS OF OPERATIONS
The Company's ability to maintain profitability will depend primarily on
its ability to continue reducing its manufacturing costs and increase net
product sales by increasing the availability of existing products, by the
introduction of new products and by expanding its customer base.
As of December 31, 1998, the Company had a backlog of unshipped customer
orders of $500,000 expected to be filled by June 30, 1999. Orders are cancelable
without penalty at the option of the purchaser prior to 30 days before scheduled
shipment and therefore are not necessarily a measure of future product revenue.
In 1998, the Company purchased all of its 0.8 micron and 1.2 micron
technology wafers from a single supplier, Chartered. Approximately 50% of the
Company's sales for 1998 were from finished units produced from these wafers.
The Company has an agreement with Chartered to provide wafers through September
1998, as of the date of this filing, this agreement has not been extended.
Through the first half of 1998, the Company also purchased finished units from
ZMD based on 0.8 micron technology; sales from these products accounted for the
remainder of the Company's sales for 1998. Any disruptions in the Company's
relationship with Chartered could have an adverse impact on the Company's
operating results.
ZMD, through their license agreement with Simtek, has the worldwide right
to sell nvSRAM's developed jointly by Simtek and ZMD. With volume production
being established at ZMD using the 0.8 micron product, ZMD has begun selling
such nvSRAMs. In the past few months, the Company has seen a slight erosion of
sales due to ZMD. However, due to ZMD creating a second source for nvSRAM
products, the Company believes that their presence may have a positive impact
because many large manufacturers require two sources to purchase product from.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, the Company raised approximately
$32,100,000 of gross proceeds from the sale of convertible debt and equity
securities. From inception through December 31, 1998, the Company generated
$10,085,000 of gross revenue from the sale of product and technology licenses,
approximately $25,300,000 from net product sales and $600,000 in royalty income.
Under the Cooperation Agreement entered into with ZMD in September 1995,
ZMD had the right to convert all financing into shares of Common Stock at a
price of $0.175 per share for all monies paid in 1995 and at the average share
price of the quarter the monies were paid for all monies paid in 1996. In 1996,
17
<PAGE>
the Company received $378,551 under this agreement of which $248,398 was
converted into 1,353,374 shares of Common Stock at a price of $.1548 and 165,000
shares of Common Stock at a price of $.2358. The balance of $130,153 remains as
a payable to ZMD on the balance sheet as of December 31, 1998. ZMD currently
owns approximately 30% of the Company's Common Stock and may not exceed 30%
without the approval of Simtek's Board of Directors.
In October 1997, the Company filed an S-3 Registration Statement to
register the shares underlying the warrants that are shown as outstanding in the
notes to the financial statements in this Form-10KSB. The Company will receive
approximately $6,200,000 if all such outstanding warrants are exercised. There
can be no assurance, however, that all or any portion of those outstanding
warrants will be exercised. The warrants have exercise prices ranging from $.50
to $ 2.97 per share, which is substantially greater than the recent trading
price of the Company's stock. Simtek's Board of Directors passed a resolution on
September 1, 1998 to further extend the warrants that were to expire on October
26, 1997 and February 12, 1998 to March 31, 1999, respectively. The terms and
conditions of all the other warrants remain the same.
On June 12, 1998, the Company closed a $1,500,000 financing transaction
with two funds advised by Renaissance Capital Group of Dallas, Texas
("Renaissance"). The funding from Renaissance consists of $1,500,000 of
convertible debentures with a seven year term at a 9 percent per annum interest
rate (the"Debenture"). If the Debenture is not redeemed or converted prior to
June 12, 2001, monthly installment payments of $10 per $1,000 owing will begin.
Under certain conditions, Renaissance may require the Company to redeem the
debenture. The Company also has the right under certain conditions to redeem or
require conversion of the debenture.
The debentures are convertible into Simtek common stock at $0.35 per share.
The agreement allows for a one-time adjustment to the $0.35 conversion price if
the Company does not achieve a pre-tax income of $700,000, excluding
extraordinary gains and interest related to the debenture, for the fiscal year
ended December 31, 1998. The new per share conversion price would be calculated
by taking the volume-weighted average closing bid price of the Company's common
stock for the 30 consecutive trading days following the Company's public press
release of its December 31, 1998 fiscal year-end financial results. The
following other conditions allow for an adjustment to the conversion price; 1)
issuance or sales of shares at less than the conversion price; 2) stock
dividends and 3) stock splits, subdivisions or combinations.
The terms of the Debenture require the Company to file a "shelf"
registration statement covering all of the common stock issuable upon conversion
of the debentures. The Company anticipates filing this registration statement in
April 1999. The terms of the Debenture allow for piggy-back registration rights
if the Company proposes to register any of its common stock under the 1933 Act
in connection with the public offering of such securities for its own account or
for the account of its security holders.
The Debenture agreement also allows for Renaissance to designate a nominee
to serve as a member of the Company's Board of Directors. In the event of a
monetary default under the Debenture agreement, Renaissance may appoint an
additional nominee to serve as a member of the Company's Board of Directors. As
of the date of this filing, Renaissance has not designated a nominee to serve as
a member of the Company's Board of Directors. The Debenture also requires that
the Company pay Renaissance a monitoring fee of $1,000 per month for consulting
and monitoring services.
The Company's cash balance at December 31, 1998 was $2,149,820.
18
<PAGE>
The Company's liquidity will depend on its revenue growth and its ability
to sell its products at positive gross margins and control its operating
expenses.
For the year ended December 31, 1998, cash flow used in operations was
$476,250, which is primarily attributable to a decrease in accounts payable,
accrued expenses and a reversal of accrued expenses totaling $666,518, an
increase in inventory of $268,590 which was offset with a net income of
$162,781, depreciation and amortization of $137,107 and an increase in accounts
receivable of $181,387. The large decrease in accounts payable and accrued
expenses was due to the Company paying ZMD for past due invoices after a price
dispute was settled between the Company and ZMD in the first quarter of 1998.
The increase in inventory is due to the Company switching from purchasing
finished units from ZMD to producing finished units from wafers purchased from
Chartered. This change in procurement requires the Company to maintain a larger
wafer and work-in-progress inventory along with a finished goods inventory.
The use of cash flows in investing activities was due to purchases of
equipment related to the testing of the Company's 64 kilobit and 256 kilobit
products built on 0.8 micron technology from wafers purchased from Chartered and
from the purchase of a restricted certificate of deposit. The $180,400 of
equipment purchased consisted primarily of test fixtures and burn-in boards to
support products manufactured at Chartered. A $100,000 certificate of deposit
was established to secure a $250,000 line of credit. Cash flow from financing
activities is primarily due to the $1,500,000 financing transaction that the
Company closed in June 1998.
For the year ended December 31, 1997, cash flow from operations was
$564,075, which is primarily attributable to a net income of $788,618, plus
depreciation and amortization of $127,444. The increase in accounts receivable
of $383,263 was primarily offset by an increase in accounts payable and accrued
expenses totaling $300,202. Inventory increased by $362,960 to accommodate
anticipated increases in sales in 1998. Net cash used in investing activities of
$76,257 was the result of purchases of equipment and furniture. Net cash flow
from financing activities of $23,325 was primarily the result of proceeds from
the exercise of stock options.
In 1998, Statement of Financial Accounting Standards 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits and Statement of
Financial Accounting Standards 133, Accounting for Derivative Instruments and
Hedging Activities were issued. Statement 132 revises the disclosure requirement
for pensions and other postretirement benefits. This statement is effective for
the Company's financial statements for the year ended December 31, 1998 and the
adoption of this standard is not expected to have a material effect on the
Company's financial statements. Statement 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
as fair value. This statement is effective for the Company's financial
statements for the year ended December 31, 2000 and the adoption of this
standard is not expected to have a material effect on the Company's financial
statements.
19
<PAGE>
YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of a
single century, the 1900s. Any program so created may read or attempt to read,
"00" as the year 1900. There are two other related issues which could also, lead
to incorrect calculations or failure, such as (i) some systems' programming
assigns special meaning to certain dates, such as 9/9/99 and (ii) the year 2000
is a leap year. Accordingly, some computer hardware and software including
programs embedded within machinery and parts will need to be modified prior to
the year 2000 in order to remain functional. To address the issue, the Company
created an internal task force to assess its state of readiness for possible
"Year 2000" issues and take the necessary actions to ensure Year 2000
compliance. The task force has and continues to evaluate internal business
systems, production equipment, software and other components which affect the
Company's products, and the Company's vulnerability to possible "Year 2000"
exposures due to suppliers' and other third parties' lack of preparedness for
the year 2000.
The Company is in the process of assessing its production equipment and its
information system and does not anticipate any material Year 2000 issues from
its equipment or its own information system, databases or programs. Certain
software packages are currently being upgraded to compliant versions. The costs
incurred to date and expected to be incurred in the future are not material to
the Company's financial condition or result of operations. In addition, the
Company has been in contact with its suppliers and other third parties to
determine the extent to which they may be vulnerable to "Year 2000" issues. As
this assessment progresses, matters may come to the Company's attention, which
could give rise to the need for remedial measures which have not yet been
identified. As a contingency, the Company may replace the suppliers and third
party vendors who cannot demonstrate to the Company that their products or
services will be Year 2000 compliant. The Company cannot currently predict the
potential effect of third parties' "Year 2000" issues on its business. The
Company is currently purchasing from one manufacturer 100% of the wafers from
which the Company's nvSRAM's are produced. If this supplier or certain of the
Company's other suppliers used in the manufacture of their products or certain
large customers have Year 2000 issues it may have a materially adverse effect on
the Company's revenues and operations.
The Company believes that its Year 2000 compliance project will be
completed in advance of the Year 2000 date transition and will not have a
material adverse effect on the Company's financial condition or overall trends
in the results of operations. However, there can be no assurance that unexpected
delays or problems, including the failure to ensure Year 2000, compliance by
systems or products supplied to the Company by a third party, will not have an
adverse effect on the Company, its financial performance, or the competitiveness
or customer acceptance of its products.
INFLATION
The impact of inflation on the Company's business has not been material.
20
<PAGE>
SIMTEK CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report............................................. 22
Balance Sheet - December 31, 1998........................................ 23
Statements of Operations and Comprehensive Income - For the Years
Ended December 31, 1998 and 1997..................................... 24
Statements of Changes in Shareholders' Equity - For the Years
Ended December 31, 1998 and 1997..................................... 25
Statements of Cash Flows - For the Years Ended
December 31, 1998 and 1997........................................... 26
Notes to Financial Statements............................................ 27
21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Simtek Corporation
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Simtek Corporation as of
December 31, 1998 and the related statements of operations and comprehensive
income, changes in shareholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simtek Corporation as of
December 31, 1998, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1998, in conformity with
general accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 8, 1999
22
<PAGE>
<TABLE>
<CAPTION>
SIMTEK CORPORATION
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 2,149,820
Restricted certificate of deposit 100,000
Accounts receivable - trade, net of allowance for doubtful accounts
and return allowances of $42,838 744,754
Inventory 915,905
Prepaid expenses and other 47,703
-----------
Total current assets 3,958,182
EQUIPMENT AND FURNITURE, net 221,119
OTHER ASSETS 60,616
-----------
TOTAL ASSETS $ 4,239,917
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 251,015
Accrued expenses 232,837
Accrued wages 222,948
Accrued vacation payable 70,743
Payable to ZMD 130,153
-----------
Total current liabilities 907,696
-----------
CONVERTIBLE DEBENTURES 1,500,000
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 2,000,000 shares authorized,
none issued -
Common stock, $.01 par value; 80,000,000 shares authorized,
28,745,226 shares issued and outstanding 287,452
Additional paid-in capital 29,760,875
Accumulated deficit (28,216,106)
-----------
Total shareholders' equity 1,832,221
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,239,917
===========
</TABLE>
See accompanying notes to these financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
SIMTEK CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 6,180,550 $ 6,632,186
Cost of sales 3,477,861 3,676,432
----------- -----------
GROSS MARGIN 2,702,689 2,955,754
OPERATING EXPENSES:
Research and development costs 1,380,649 1,180,100
Sales and marketing 803,868 675,361
General and administrative 486,718 369,718
----------- -----------
Total operating expenses 2,671,235 2,225,179
----------- -----------
INCOME FROM OPERATIONS 31,454 730,575
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 78,587 55,610
Other income 128,906 5,668
Interest expense (76,166) (3,235)
----------- -----------
Total other income 131,327 58,043
----------- -----------
NET INCOME AND COMPREHENSIVE INCOME $ 162,781 $ 788,618
=========== ===========
NET INCOME PER COMMON SHARE:
Basic $ .01 $ .03
=========== ===========
Diluted $ .01 $ .03
=========== ===========
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:
Basic 28,727,276 28,598,514
=========== ===========
Diluted 30,250,334 30,854,897
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
SIMTEK CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock Additional Total
------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 28,506,685 $285,067 $29,730,728 $(29,167,505) $ 848,290
Exercise of stock options 172,500 1,725 21,600 - 23,325
Net income - - - 788,618 788,618
---------- -------- ----------- ------------ ----------
BALANCES, December 31, 1997 28,679,185 286,792 29,752,328 (28,378,887) 1,660,233
Exercise of stock options 66,041 660 8,547 - 9,207
Net income - - - 162,781 162,781
---------- -------- ----------- ------------ ----------
BALANCES, December 31, 1998 28,745,226 $287,452 $29,760,875 $(28,216,106) $1,832,221
========== ======== =========== ============ ==========
See accompanying notes to these financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SIMTEK CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
<S> <C> <C>
Net income $ 162,781 $ 788,618
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 137,107 127,444
Reversal of accrued liability (110,000) -
Net change in reserve accounts (10,394) 86,144
Deferred financing fees 6,528 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 181,387 (383,263)
Inventory (268,590) (362,960)
Prepaid expenses and other (18,551) 7,890
Increase (Decrease) in:
Accounts payable (657,208) 386,805
Accrued expenses 100,690 (86,603)
---------- ----------
Net cash (used in) provided by operating activities (476,250) 564,075
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture (180,400) (76,257)
Increase in restricted cash (100,000) -
---------- ----------
Net cash used in investing activities (280,400) (76,257)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debenture, net of deferred financing fees 1,421,664 -
Exercise of stock options 9,207 23,325
---------- ----------
Net cash provided by financing activities 1,430,871 23,325
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 674,221 511,143
CASH AND CASH EQUIVALENTS, beginning of year 1,475,599 964,456
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $2,149,820 $1,475,599
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 76,187 $ 3,235
========== ==========
Cash paid for income taxes $ 16,245 $ -
========== ==========
</TABLE>
See accompanying notes to these financial statements.
26
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------
NATURE OF BUSINESS OPERATIONS - Simtek Corporation (the "Company") has been
involved in the design and development of nonvolatile semiconductor
products since it commenced business operations in 1987. The Company's
operations have concentrated on the design and development of the 256
kilobit, 64 kilobit, and 16 kilobit nvSRAM product families and associated
products and technologies as well as the development of sources of supply
and distribution channels. As discussed throughout the notes to the
financial statements, the Company has entered into several significant
transactions with Zentrum Mikroelektronik Dresden GmbH (ZMD), a
manufacturer of silicon wafers.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 1998, all of the Company's cash and cash
equivalents were held by a single bank, of which approximately $2,174,000
was in excess of Federally insured amounts.
REVENUE RECOGNITION - Product sales revenue is recognized when a valid
purchase order has been received and the products are shipped to customers,
including distributors. Customers receive a one year product warranty and
sales to distributors are subject to a product right of return and product
pricing protection in the event of changes in the Company's product price.
The Company provides a reserve for possible product returns, price changes
and warranty costs at the time the sale is recognized.
INVENTORY - The Company records inventory using the lower of cost
(first-in, first-out) or market. Inventory at December 31, 1998 includes:
Raw materials $ 36,144
Work in process 716,025
Finished goods 283,798
---------
1,035,967
Less reserves (120,062)
---------
$ 915,905
=========
DEPRECIATION - Equipment and furniture are recorded at cost. Depreciation
is provided over the assets' estimated useful lives of three to seven years
using the straight-line and accelerated methods. The cost and accumulated
depreciation of furniture and equipment sold or otherwise disposed of are
removed from the accounts and the resulting gain or loss is included in
operations. Maintenance and repairs are charged to operations as incurred
and betterments are capitalized.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged
to operations in the period incurred.
INCOME PER SHARE - The income per share is presented in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. SFAS No. 128 replaced the presentation of primary and
fully diluted earnings (loss) per share (EPS) with a presentation of basic
27
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
EPS and diluted EPS. Basic EPS is calculated by dividing the income or loss
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. The actual results could
differ from those estimates. The Company's financial statements are based
upon a number of estimates, including the allowance for doubtful accounts,
technological obsolescence of inventories, the estimated useful lives
selected for property and equipment, sales returns, warranty reserve, and
the valuation allowance on the deferred tax assets. Due to the
uncertainties inherent in the estimation process, it is at least reasonably
possible that the estimates for these items could be further revised in the
near term and such revisions could be material.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of assets or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
STOCK-BASED COMPENSATION - As permitted under the Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, the Company accounts for its stock-based compensation in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees. As such, compensation
expense is recorded on the date of grant if the current market price of the
underlying stock exceeds the exercise price. Certain pro forma net income
and EPS disclosures for employee stock option grants are also included in
the notes to the financial statements as if the fair value method as
defined in SFAS No. 123 had been applied. Transactions in equity
instruments with non-employees for goods or services are accounted for by
the fair value method.
INCOME TAXES - The Company accounts for income taxes under the liability
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. Deferred tax expense represents the change in the
deferred tax asset/liability balance. Valuation allowances are recorded for
deferred tax assets that are not expected to be realized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998.
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for the Company's financial statements
for the year ended December 31, 2000 and the adoption of this standard is
not expected to have a material effect on the Company's financial
statements.
SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, was issued in February 1998. This statement
revises the disclosure requirement for pensions and other postretirement
benefits. This statement is effective for the Company's financial
statements for the year ended December 31, 1998 and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
28
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. EQUIPMENT AND FURNITURE:
-----------------------
Equipment and furniture at December 31, 1998 consists of the following:
Research and development equipment and software $1,002,869
Computer equipment and software 810,234
Office furniture 23,982
Other equipment 75,144
----------
1,912,229
Less accumulated depreciation and amortization (1,691,110)
----------
$ 221,119
==========
The cost of equipment and furniture acquired for research and development
activities that has alternative future use is capitalized and depreciated
over its estimated useful life.
Depreciation and amortization expense of $137,107 and $127,444 was charged
to operations for the years ended December 31, 1998 and 1997, respectively.
3. PAYABLE TO ZMD:
--------------
Under the terms of a cooperation agreement with ZMD, the Company received
$378,551 during 1996 from ZMD. Of the $378,551 received during 1996,
$248,398 was converted into 1,518,374 shares of common stock. Because the
cooperation agreement specifies that ZMD's ownership of the Company may not
exceed 30% without the approval of the Company's Board of Directors, the
additional $130,153 that was received from ZMD in 1996 was not converted
into common stock and is recorded as a liability at December 31, 1998.
Pursuant to the terms of the cooperation agreement, ZMD is allowed to have
two members on the Company's Board of Directors.
4. REVOLVING LINE-OF-CREDIT AND LETTER-OF-CREDIT:
---------------------------------------------
As of December 31, 1998, the Company had a $250,000 revolving
line-of-credit (LOC). The LOC bears interest at prime plus .75% (8.25% at
December 31, 1998). Subsequent to December 31, 1998, the Company increased
its LOC to $350,000, which matures in March 2000. The LOC requires the
Company to maintain a $100,000 certificate of deposit as collateral. The
LOC is also collateralized by substantially all assets of the Company. At
December 31, 1998, the Company had no balance outstanding.
Subsequent to year-end, one of the Company's suppliers revised their credit
terms whereby the Company is now required to have a $250,000
letter-of-credit in the event of default on payments by the Company. This
letter-of-credit requires the Company to maintain a $250,000 certificate of
deposit as collateral.
29
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. CONVERTIBLE DEBENTURES:
----------------------
During June 1998, the Company received proceeds of $1,500,000 from the
issuance of convertible debentures (the "Debentures"). The Debentures are
convertible into shares of common stock of the Company at a conversion
price of $.35 per share.
The Debentures conversion price will be adjusted to the average price of
the Company's common stock for 30 trading days subsequent to a press
release of the Company's 1998 financial results, if the average price is
below $.35 per share. Certain other events may trigger a downward
adjustment of the Debenture conversion price, including common stock
offerings whereby the common stock is sold for less than the conversion
price. The Debentures mature in June 2005, however, may be redeemed earlier
by the holder under certain limiting circumstances. Interest at 9% is paid
monthly, with monthly principal payments of $15,000 beginning in June 2001.
All outstanding principal and interest is due in June 2005. The Debentures
are collateralized by substantially all the assets of the Company.
6. COMMITMENTS AND CONTINGENCIES:
-----------------------------
OFFICES LEASES - The Company leases office space under a lease which
expires on December 31, 2001. Monthly lease payments are approximately
$9,000.
The Company leases furniture and equipment under operating leases which
expire over the next three years. Monthly lease payments, including sales
tax, are approximately $18,000. At December 31, 1998, future minimum lease
payments under the equipment, furniture and office leases described above
are approximately as follows:
Year
----
1999 $241,936
2000 166,813
2001 142,599
--------
$551,348
========
Office rent and equipment lease expense totaled $273,905 and $274,241 for
the years ended December 31, 1998 and 1997, respectively.
PATENT CONTINGENCIES - In 1998, the Company received notification of a
claim for an unspecified amount from a foundation that owns approximately
180 patents and 70 pending applications. The foundation claims that certain
machines and processes used in the building of the Company's semiconductor
devices infringe on the foundation's patents. The Company and its counsel
are presently discussing the terms of a license agreement with the
foundation's counsel, and no formal actions have been taken by either
party. The Company believes this matter can be resolved between the parties
without a material financial impact upon the Company. However, in the
unlikely event this matter should result in litigation, the ultimate
outcome would be unknown.
30
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
ACCRUED SALARY - Due to limited working capital of the Company, the
Company's former CFO agreed with the Company's Board of Directors to defer
his salary from April 1, 1994 through December 31, 1996. As of December 31,
1998, a total of $210,000 was accrued and unpaid.
EMPLOYMENT AGREEMENTS - During the year ended December 31, 1998, the
Company entered into an employment agreement with the Company's President
and Chief Executive Officer. As of December 31, 1998, the base salary under
this agreement is $120,000 per year, and expires June 1, 2001. The Company
may terminate the agreement for good cause. If terminated for any other
reason, the Company will pay the continuation of the base salary and
benefits, mitigated by income earned by the employee, for the remainder of
the term of the agreement.
REVERSAL OF ACCRUED LIABILITY - In 1994 and 1995, the Company accrued a
$110,000 liability for services, the value of which were disputed by the
Company. During 1998, the Company reevaluated this liability and determined
it was highly unlikely it would ever be paid and, therefore, recognized
$110,000 of other income for the reversal of the claim.
7. SHAREHOLDERS' EQUITY:
--------------------
COMMON STOCK - During 1997, the shareholders approved an increase in the
number of authorized common shares from 40,000,000 to 80,000,000.
31
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
EARNINGS PER SHARE - The following is a reconciliation of basic and diluted
EPS:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS -
Income available to common shareholders $162,781 28,727,276 $.01
Effect of dilutive options - 1,523,058 ====
-------- ----------
Diluted EPS -
Income available to common shareholders
plus assumed conversions $162,781 30,250,334 $.01
======== ========== ====
For the Year Ended December 31, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS -
Income available to common shareholders $788,618 28,598,514 $.03
Effect of dilutive options - 2,256,383 ====
-------- ----------
Diluted EPS -
Income available to common shareholders
plus assumed conversions $788,618 30,854,897 $.03
======== ========== ====
</TABLE>
Options to purchase 4,137,736 and 3,844,150 shares of common stock were
outstanding at December 31, 1998 and 1997, respectively. Of that total,
2,559,986 and 3,649,150 had a dilutive effect on the 1998 and 1997,
respectively, EPS. For purposes of calculating diluted EPS, those options
resulted in 1,523,058 and 2,256,383 incremental shares for 1998 and 1997,
respectively, determined using the treasury stock method. The remaining
1,577,750 and 195,000 options had an anti-dilutive effect on 1998 and 1997,
respectively, and were therefore excluded from the computation of diluted
EPS. These options had exercise prices ranging from $.19 to $.56 per share
for 1998 and $.50 to $.65 per share for 1997.
The Company also had warrants outstanding at December 31, 1998 to purchase
approximately 5,274,888 shares of common stock. All of these warrants had
an anti-dilutive effect on the diluted EPS for 1997 and 1998, and were
therefore excluded from the calculation. See the warrant table below for a
summary of warrants outstanding at December 31, 1998.
The Company also had two convertible debentures outstanding at December 31,
1998 to purchase common stock at a conversion price of $.35 per share (see
Note 5). The conversion of these debentures had an anti-dilutive effect on
the diluted EPS and were, therefore, excluded from the calculation.
WARRANTS - The Company issued Class B warrants, redeemable at the Company's
option, in connection with its February 1993, public offering. The Company
has also issued Representative warrants to the underwriters of its public
offerings. In 1989 and 1990, the Company issued warrants to certain of its
shareholders. The Company's warrants contain certain anti-dilutive
provisions which will result in adjustment to the warrant terms upon
32
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
certain events occurring. During 1998, the Company extended the expiration
date for its outstanding warrant to March 31, 1999. All other terms of the
warrants were unchanged.
A summary of the warrants outstanding as of December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
Number of
Shares Dollars
Per Issuable Upon
Number Expira- Warrant Number Per Share Upon Exercise Exercise
Issue of Warrants tion Exercise of Shares Purchase of all of All
Description Date Outstanding Date(1) Price per Warrant price Warrants(2) Warrants
- ----------- ---- ----------- ------- -------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B Warrant 2/17/93 1,725,000 3/31/99 $1.80 1.51 $1.19 2,604,750 $3,105,000
Class B Warrant 2/25/93 81,333 3/31/99 $1.80 1.51 1.19 122,813 146,399
---------- --------- ----------
Total Class B 1,806,333 2,727,563 $3,251,399
========== ========= ==========
Other Warrants:
Petritz 9/29/89 63,300 3/31/99 $ .50 1.00 $ .50 63,300 $ 31,650
Petritz 9/27/90 52,751 3/31/99 $ .50 1.00 $ .50 52,751 26,376
TTLP 9/29/89 126,600 3/31/99 $ .50 1.00 $ .50 126,600 63,300
TTLP 9/27/90 105,499 3/31/99 $ .50 1.00 $ .50 105,499 52,750
---------- --------- ----------
Total Other 348,150 348,150 $ 174,076
========== ========= ==========
Representative Warrant 3/6/91 195,000 3/31/99 $ .50 1.00 $ .50 195,000 $ 97,500
Representative Warrant 3/6/91 195,000 3/31/99 $ .50 1.00 $ .50 195,000 97,500
Representative Warrant 10/30/92 300,000 3/31/99 $ .50 1.00 $ .50 300,000 150,000
Representative Warrant(3) 2/25/93 517,500 3/31/99 $2.48 1.60 $1.55 828,000 1,283,400
Representative Warrant(4) 2/25/93 172,500 3/31/99 $2.97 1.63 $1.82 281,175 511,739
Representative Warrant 1/31/94 400,000 3/31/99 $1.60 1.00 $1.60 400,000 640,000
---------- --------- ----------
Total Representative Warrants 1,780,000 2,199,175 $2,780,139
========== ========= ==========
Total Warrants 3,934,483 5,274,888 $6,205,614
========== ========= ==========
</TABLE>
- -------------------
(1) During 1998, the expiration date of all warrants issued was extended to
March 31, 1999. All other terms and conditions of the warrants remained the
same.
(2) All shares underlying the warrants were registered under an S-3
registration statement that was filed with the Securities and Exchange
Commission on October 14, 1997.
(3) The original 172,500 Representative Warrants granted on February 25, 1993
were actually units consisting of three shares of common stock and a Class
B Warrant for a price of $7.425 per unit. The units will eventually split
up thus creating 517,500 shares of common stock at an exercise price of
$2.475. These shares contain anti-dilution provisions detailed in the
Representative Warrant Agreement.
(4) The Warrant within the Representative Warrants granted on February 25, 1993
was for an exercise price of $2.97 with anti-dilution provisions.
33
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
STOCK OPTION PLANS - The Company has approved two stock option plans that
authorize an aggregate of 5,500,000 shares for stock options that may be
granted to directors, employees, and consultants. The plans permit the
issuance of incentive and non-statutory options and provide for a minimum
exercise price equal to 100% of the fair market value of the Company's
common stock on the date of grant. The maximum term of options granted
under the plans is 10 years and options granted to employees expire three
months after the termination of employment. None of the options may be
exercised during the first six months of the option term. No options may be
granted after 10 years from the adoption date of each plan. The Incentive
Stock Option Plan was adopted in 1991, and the NonQualified Stock Option
Plan was adopted in 1994. Following is a summary of activity under these
stock option plans for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 3,844,150 $.16 3,147,500 $.14
Granted, including exchanges 504,100 .37 904,650 .33
Expired (7,000) .18 -
Exercised (66,041) (.14) (172,500) .14
Canceled (137,473) (.47) (35,500) .27
--------- ---------
Outstanding, end of year 4,137,736 $.19 3,844,150 $.16
========= =========
</TABLE>
For all options granted during 1998 and 1997, the weighted average fair
value was $.30 and $.27, respectively. At December 31, 1998, options for
3,362,196 shares were exercisable and options of the remaining options,
449,097, 243,926, and 82,517 shares will become exercisable in 1999, 2000,
and 2001, respectively. If not previously exercised or forfeited, options
outstanding at December 31, 1998, will expire as follows:
Weighted
Average
Number Exercise
Year Ending December 31, of Shares Price
------------------------ --------- --------
1999 42,000 $.15
2000 184,800 .15
2001 915,765 .14
2002 1,345,921 .14
2003 381,500 .15
2004 765,150 .30
2005 502,600 .37
--------- ----
4,137,736 $.20
========= ====
34
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
PRO FORMA STOCK-BASED COMPENSATION DISCLOSURES - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost has been recognized for grants of options and warrants to employees
since the exercise prices were not less than the market value of the
Company's common stock on the grant dates. Had compensation cost been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FAS 123, the Company's net income
and EPS would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net income (loss) applicable to common shareholders:
As reported $162,781 $788,618
Pro forma 32,981 676,314
Net income (loss) per common shareholders:
As reported - basic and diluted $ .01 $ .03
Pro forma - basic and diluted - .02
</TABLE>
The fair value of each option granted in 1998 and 1997 was estimated on the
date of grant, using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Options Granted During
----------------------
1998 1997
------ ------
Expected volatility 125.4% 128.2%
Risk-free interest rate 5.5% 5.5%
Expected dividends - -
Expected terms (in years) 4.0 4.0
OTHER - Preferred Stock may be issued in such series and preferences as
determined by the Board of Directors.
35
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. SIGNIFICANT CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS, AND OTHER RISKS
---------------------------------------------------------------------------
AND UNCERTAINTIES:
-----------------
Sales to foreign customers and sales of military products for the years
ended December 31, 1998 and 1997 were as follows (as a percentage of
sales):
1998 1997
---- ----
Foreign customers 33% 47%
Military products sales 39% 33%
Sales to unaffiliated customers which represent 10% or more of the
Company's sales for the years ended December 31, 1998 and 1997 were as
follows (as a percentage of sales):
Customer 1998 1997
-------- ---- ----
A 15% 30%
B 14% 11%
C 15% -%
D 20% 22%
The Company frequently sells large quantities of inventory to its
customers. At December 31, 1998, the Company had gross trade receivables
totaling approximately $366,798 due from two customers.
In 1997 and 1998, the Company purchased all of its wafers, based on 1.2
micron technology from a single supplier located in Singapore.
Approximately 50% and 43% of the Company's sales for 1998 and 1997,
respectively, were from finished units produced from these wafers. The
Company has an agreement with this supplier to provide wafers through
September 1998. This agreement has not been extended or terminated,
however, this supplier still provides wafers to the Company. In 1998 and
1997, the Company also purchased finished units from ZMD for $1,715,867 and
$2,304,859, respectively, and sales from these products accounted for
approximately 50% and 57% of the Company's sales for 1998 and 1997,
respectively. At December 31, 1998 and 1997, ZMD owned approximately 30% of
the Company. Any disruptions in the Company's relationships with these
suppliers could have an adverse impact on the Company's operating results.
Assuming an alternate manufacturer of the Company's products could be
procured, management believes there could be significant delays in
manufacturing while the manufacturer incorporates the Company's products
and processes.
36
<PAGE>
SIMTEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES:
Under SFAS 109, deferred taxes result from temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. The components of deferred taxes are as follows:
Deferred Tax
Assets (Liability)
------------------
Current:
Accounts receivable $ 6,000
Inventories 128,000
Accrued expenses 155,000
------------
Total 289,000
Valuation allowance (289,000)
------------
Total current deferred tax $ -
============
Non-current:
Property and equipment $ (5,000)
Net operating losses 9,395,000
R&D credit carryforward 1,312,000
AMT credit 62,000
------------
Net deferred tax asset before valuation allowance 10,764,000
Valuation allowance (10,764,000)
------------
Total non-current deferred tax asset $ -
=============
The net current and non-current deferred tax assets have a 100% valuation
allowance resulting from the inability to predict sufficient future taxable
income to utilize the assets. The valuation allowance for 1998 and 1997
increased $253,000 and $13,000.
At December 31, 1998, the Company has approximately $25,000,000 available
in net operating loss carryforwards which begin to expire from 2004 to
2010.
Total income tax expense for 1998 and 1997 differed from the amounts
computed by applying the U.S. Federal statutory tax rates to pre-tax income
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Total expense computed by applying the U.S. statutory rate (34%) $58,000 $194,000
Effect of changes in reserve accounts 3,000 33,000
Tax compensation on options exercised (4,000) (23,000)
Effect of net operating loss carryforward (43,000) (206,000)
Other (6,000) 2,000
------- --------
Provision for income taxes (rounded) $ 8,000 $ -
======= ========
</TABLE>
37
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None in 1998.
38
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Douglas M. Mitchell.............................. 49 Director, Chief Executive Officer and President,
Chief Financial Officer (acting)
Klaus C. Wiemer.................................. 61 Director
Robert H. Keeley................................. 57 Director
Harold Blomquist................................. 47 Director
John Heightley................................... 62 Director
</TABLE>
DOUGLAS M. MITCHELL, served as the Company's Chief Operating Officer from
July 1, 1997 until January 1, 1998 at which time he became Chief Executive
Officer, President and a director of the Company. Mr. Mitchell has over 18 years
of experience in the semiconductor and electronics systems industry holding
various marketing and sales management positions. Prior to joining Simtek, he
was President and Chief Executive Officer of a wireless communications company,
Momentum Microsystems. Prior to this Mr. Mitchell was Vice President of
Marketing with SGS-Thomson Microelectronics, responsible for marketing and
applications engineering of Digital Signal Processing, transputer,
microcontroller and graphics products in North America. SGS-Thomson had acquired
Inmos Corporation where Mr. Mitchell had been Manager, US Marketing and Sales.
Mr. Mitchell has held management positions at Texas Instruments and Motorola and
has been responsible for various product definition and product development. Mr.
Mitchell holds a Bachelors degree in electrical engineering from the University
of Texas and a Masters of Business Administration degree from National
University.
KLAUS C. WIEMER, has served as a director of the Company since May 1993. He
also serves on the boards of Neomagic Corp (NMGC) of Santa Clara, CA and
InterFET Corp of Garland, TX. From July 1993 to May 1994, Dr. Wiemer served as
President and Chief Executive Officer of the Company. From May 1994, Dr. Wiemer
has been an independent consultant for the Company. From April 1991 to April
1993, Dr. Wiemer was President and Chief Executive Officer of Chartered
Semiconductor Manufacturing Pte., Ltd. in Singapore, and from July 1987 to March
1991, Dr. Wiemer was President and Chief Operating Officer of Taiwan
Semiconductor Manufacturing Company. Prior to 1987, Dr. Wiemer was a consultant
for the Thomas Group specializing in the area of integrated circuit
manufacturing and previously worked for fifteen years with Texas Instruments.
Dr. Wiemer holds a Bachelors degree in physics from Texas Western College, a
Masters degree in physics from the University of Texas and a Ph.D. in physics
from Virginia Polytechnic Institute.
ROBERT H. KEELEY, has served as a director of the Company since May 1993.
He is currently the El Pomar Professor of Finance at the University of Colorado
at Colorado Springs. From 1986 until he joined the faculty at the University of
Colorado at Colorado Springs in 1992, Dr. Keeley was a professor in the
Department of Industrial Engineering and Engineering Management at Stanford
University. Prior to joining Stanford, he was a professor at the Wharton School
39
<PAGE>
of Business at the University of Pennsylvania and a general partner of Hill and
Carmen (formerly Hill, Keeley and Kirby), a venture capital firm. Dr. Keeley
holds a Bachelors degree in electrical engineering from Stanford University, an
M.B.A. from Harvard University and a Ph.D. in business administration from
Stanford University. Dr. Keeley is also a director of Analytical Surveys, Inc.
and a number of private companies.
HAROLD A. BLOMQUIST, was appointed as a director of the Company in May
1998. Mr. Blomquist is currently president of American Microsystems ("AMI")
Japan, Ltd. in Toyko; senior managing director and board chairman of AMI GmbH in
Dresden, Germany; senior vice president of AMI's business operations worldwide;
and a member of the board of directors for both AMI and AMI's holding company,
GA Tech, Inc. Before joining AMI in April 1990, Mr. Blomquist held a series of
increasingly responsible positions in engineering, sales, and marketing for
several semiconductor firms, including Texas Instruments, Inmos and General
Semiconductor. Mr. Blomquist was granted a BSEE degree from the University of
Utah and also attended the University of Houston, where he pursued a joint Juris
Doctor/MBA course of study.
JOHN HEIGHTLEY, was appointed as a director of the Company in September
1998. Mr. Heightley is currently executive vice president and chief technology
officer for United Memories of Colorado Springs. From 1990 to 1996, Mr.
Heightley was president and chief executive officer of Adaptive Solutions, Inc.
In 1986 and 1987, he held the position of president and chief executive officer
of Gigabit Logic, Inc.; in 1987 he was appointed chairman of Gigabit along with
his responsibilities as president and chief executive officer. Mr. Heightley
held these positions until 1990. Prior to Gigabit, Mr. Heightley served as
president and chief executive officer of Ramtron Corporation from 1985 to 1986
and from 1978 to 1985 he served as a member of the board of directors,
president, chief operating officer and vice president of memory products for
Inmos International, plc. Mr. Heightley was granted a B.S. degree in Engineering
Science from Penn State University and earned a M.S. degree in Electrical
Engineering from M.I.T.
RICHARD L. PETRITZ, founder of the Company and Chairman of the Board
retired in August 1998. Dr. Petritz had a long and distinguished semiconductor
career that began in 1958 at Texas Instruments before he went on to found such
other semiconductor companies as Mostek and Inmos International, plc. As of the
date of this filing, a replacement as Simtek's Chairman of the Board has not
been named.
Subject to the requirement that the Board of Directors be classified if it
consists of six or more persons, directors serve until the next annual meeting
or until their successors are elected and have qualified. Officers serve at the
discretion of the Board of Directors. Vacancies on the Board of Directors are
filled by the existing directors. Under the agreement entered into with ZMD in
1994, ZMD has the right to appoint two members to the Board of Directors. At
this time ZMD has no representation on Simtek's Board of Directors. The
Debenture agreement entered into with Renaissance also allows for Renaissance to
designate a nominee to serve as a member of the Company's Board of Directors. In
the event of a monetary default under the Debenture agreement, Renaissance may
appoint an additional nominee to serve as a member of the Company's Board of
Directors. As of the date of this filing, Renaissance has not designated a
nominee to serve as a member of the Company's Board of Directors.
40
<PAGE>
SPECIAL PROVISIONS IN ARTICLES OF INCORPORATION
The Company's articles of incorporation contain a provision limiting the
liability of directors of the Company to the fullest extent permitted under the
Colorado Corporation Code (the "Code"). The Code allows a corporation to limit
the personal liability of a director to the corporation or its shareholders for
monetary damages for breaches of fiduciary duty as a director except for (a)
breaches of the director's duty of loyalty, (b) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(c) certain other acts specified in the Code, and (d) transactions from which
the director derived an improper benefit. The provisions of the Code will not
impair the Company's ability to seek injunctive relief for breaches of fiduciary
duty. Such relief, however, may not always be available as a practical matter.
The Company's articles of incorporation also contain a provision that
requires the Company to indemnify, to the fullest extent permitted under the
Code, directors and officers of the Company against all costs and expenses
reasonably incurred in connection with the defense of any claim, action, suit or
proceeding, whether civil, criminal, administrative, investigative or other, in
which such person may be involved by virtue of being or having been a director,
officer or employee.
41
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for each of the
Company's last three fiscal years with respect to the annual and long-term
compensation of the only individual acting as the Company's Chief Executive
Officer during the fiscal year ended December 31, 1998. No other executive
officers of the Company as of December 31, 1998 had combined annual salary and
bonus for the fiscal year ended December 31, 1997 that exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------
Name Other Restricted
and Annual Stock LTIP All Other
Principal Compen- Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) sation($) ($) SARs(#) ($) sation($)
- --------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas M. Mitchell(1) 1998 $120,000 -- -- -- -- -- --
Chief Executive 1997 $ 60,716(2) -- -- -- -- -- --
Officer and
President
</TABLE>
(1) Mr. Mitchell replaced Dr. Petrtiz upon the announcement of his
resignation as the Company's Chief Executive Officer and President.
(2) Mr. Mitchell was hired in May 1997, the salary reflected was paid in his
capacity as Chief Operating Officer and Executive Vice President.
OPTION GRANT TABLE
The following table sets forth certain information with respect to options
granted by the Company during the fiscal year ended December 31, 1998 to the
individual named in the summary compensation table above.
<TABLE>
<CAPTION>
Shares Potential
subject to Market Realizable Value
Options/SAR's Price at Assumed
Shares Granted to Exercise per Annual Rate of
subject to Employees Price Share on Stock Price
Options/SAR's in Fiscal Per Date of Expiration Appreciation for
Name Granted % of Total Share Grant Date Option Term
- ---------------------- ---------------- --------------------------- --------------------------------------------------
5% 10%
-----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas M. Mitchell 250,000(1) 56.29% $0.37 $0.37 6/5/2005 37,657 87,756
</TABLE>
(1) 225,000 options were granted to Mr. Mitchell in his capacity as Chief
Executive Officer and President, these options vest at 1/36th per month over 3
years. 25,000 options were granted to Mr. Mitchell in his capacity as a
director, these options are exercisable in total after six months of service
completed after June 5, 1998.
42
<PAGE>
YEAR-END OPTION TABLE
The following table sets forth as of December 31, 1998 the number of shares
subject to unexercised options held by the individual named in the summary
compensation table above. None of the options had exercise prices less than the
last sale price of the Common Stock underlying the options as reported by the
OTC Electronic Bulletin Board on the last trading day of the fiscal year ended
December 31, 1998. No options were exercised by the individual during the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Value of Unexercised
Number of Unexercised in-the-money
Options/SARs at Fiscal Options/SARs
Shares Value Year-End at Fiscal Year-End
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($) (#) (#) ($) ($)
- ---------------------------------------- -------------------------------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Douglas M. Mitchell - - 269,444 380,556 - -
</TABLE>
EMPLOYMENT AGREEMENTS
DOUGLAS M. MITCHELL. Mr. Mitchell is employed as the Company's President
and Chief Executive Officer pursuant to an employment agreement with the
Company. Under the terms of the employment agreement, Mr. Mitchell receives and
annual salary of $120,000 and such additional benefits that are generally
provided other employees. Mr. Mitchell's employment agreement expires June 1,
2001 but is automatically renewed for successive one-year terms unless the
Company or Mr. Mitchell elects not to renew. If the Company terminates the
employment of Mr. Mitchell without cause, Mr. Mitchell is entitled to
continuation of his base salary and benefits, mitigated by income Mr. Mitchell
may earn, for the remainder of the term of the agreement. Mr. Mitchell is
subject to a noncompetition covenant for a period of one year from the date of
termination.
CONFIDENTIALITY AND NONDISCLOSURE AGREEMENTS
The Company generally requires its employees to execute confidentiality and
nondisclosure agreements upon the commencement of employment with the Company.
The agreements generally provide that all inventions or discoveries by the
employee related to the Company's business and all confidential information
developed or made known to the employee during the term of employment shall be
the exclusive property of the Company and shall not be disclosed to third
parties without the prior approval of the Company.
DIRECTORS' COMPENSATION
Each director of the Company who is not also an employee of the Company
receives $1,000 for each meeting of the Board, attended in person, and $500 for
each meeting of a committee of the Board. Directors are also reimbursed for
their reasonable out-of-pocket expenses incurred in connection with their duties
to the Company. During the fiscal year ended December 31, 1998, 5,000 stock
options were granted each to Dr. Klaus Wiemer and Dr. Robert Keeley and 25,000
stock options were granted each to Mr. Douglas Mitchell and Mr. Harold
Blomquist.
43
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The table below sets forth certain information regarding ownership of the
Company's Common Stock as of February 28, 1999 by each person who is known by
the Company to beneficially own more than five percent of the Common Stock, by
each director of the Company, by each executive officer named in the summary
compensation table and by all directors and executive officers of the Company as
a group. Shares issuable within sixty days after February 28, 1999 upon the
exercise of warrants or options are deemed outstanding for the purpose of
computing the percentage ownership of persons beneficially owning such warrants
or options or holding such notes but are not deemed outstanding for the purpose
of computing the percentage ownership of any other person. The number of shares
issuable upon exercise of outstanding Class B Redeemable Warrants gives effect
to anti-dilution provisions triggered by issuances of the Company's securities
through December 31, 1998. After giving effect to these anti-dilution
provisions, each Class B Redeemable Warrant entitles the holder thereof to
purchase 1.51 shares of Common Stock at an effective purchase price of $1.19 per
share. To the knowledge of the Company, the persons listed below have sole
voting and investment power with respect to the shares indicated as owned by
them subject to community property laws where applicable and the information
contained in the notes to the table.
<TABLE>
<CAPTION>
Name and Amount and Nature
Address of of Beneficial Percent of
Beneficial Owner Ownership Class
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Zentrum Mikroelektronik Dresden GmbH 8,547,385 29.73%
Grenzstra e 28
01109 Dresden, Germany
Douglas M. Mitchell 338,889 (1) 1.17%
205 Ridge Dr.
Woodland Park, CO 80863
Klaus C. Wiemer 115,000 (2) *
5705 Archer Court
Dallas, TX 75252
Robert H. Keeley 100,000 (3) *
12630 Milan Road
Colorado Springs, CO 80908
Harold Blomquist 25,000 (4) *
5740 Arrowhead Dr.
Pocatello, ID 83204
All officers and directors as a group
(4 persons) 578,889 (5) 1.97%
</TABLE>
- ---------------------------
* Less than one percent.
44
<PAGE>
(1) Represents 338,889 shares issuable upon exercise of options.
(2) Represents 115,000 shares issuable upon exercise of options.
(3) Includes 90,000 shares issuable upon exercise of options.
(4) Represents 25,000 shares issuable upon exercise of options.
(5) Includes 568,889 shares issuable upon exercise of stock options.
45
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
ZMD currently owns approximately 30% of the Company. The Company's
purchases of product from ZMD in 1998 and 1997 were $1,715,867 and $2,304,859,
respectively, and sales from these products accounted for approximately 50% and
57% of the Company's sales for 1998 and 1997, respectively.
46
<PAGE>
PART IV
ITEM 13: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
Documents filed as part of this report:
A: (1) Financial Statements
Reference is made to the listing on page 21 for an index of all
financial statements filed as part of this report.
(2) All other schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the
financial statements or the notes thereto.
B. Reports on Form 8-K:
The following table lists all reports filed on Form 8-K for the fourth
quarter of 1998.
Date Item
---- ----
October 26, 1998 Other information - Press Release -
"Simtek Announces Financial Results for
the Third Quarter of 1998"
December 1, 1998 Other information - Third Quarter 1998
Interim Report to Shareholders
C. Exhibits:
Exhibit Index regarding exhibits filed in accordance with Item 601, at page
49 hereof.
D. Other Financial Statements:
All other schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the financial
statements or the notes thereto.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Colorado
Springs, State of Colorado, United States of America, on March 19,1999.
SIMTEK CORPORATION
By: /S/DOUGLAS M. MITCHELL
-------------------------------
Douglas M. Mitchell
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 19, 1999 by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE
/S/DOUGLAS M. MITCHELL
- --------------------------- Chief Executive Officer and
Douglas M. Mitchell President
/S/DOUGLAS M. MITCHELL
- --------------------------- Chief Financial Officer
Douglas M. Mitchell (acting)
/S/DOUGLAS M. MITCHELL
- --------------------------- Director
Douglas M. Mitchell
/S/ROBERT H. KEELEY
- --------------------------- Director
Robert H. Keeley
/S/JOHN HEIGHTLEY
- ---------------------------- Director
John Heightley
48
<PAGE>
EXHIBIT INDEX TO FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
Exhibits:
All exhibits listed below incorporated herein by reference.
-----------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation.(2)
3.2 Amended and Restated Articles of Incorporation November 1997.(10) 3.3
Bylaws.(2)
4.1 1987-I Employee Restricted Stock Plan.(1)
4.2 Form of Restricted Stock Agreement between the Company and
Participating Employees.(1)
4.3 Warrant Agreement between the Company and Josephthal Lyon & Ross
Incorporated.(3)
4.4 Stock Purchase Warrant issued by the Company to Transitions Three
Limited Partnership.(1)
4.5 Stock Purchase Warrant issued by the Company to Richard L. Petritz.(1)
4.6 Stock Purchase Warrant issued by the Company to Transitions Three
Limited Partnership.(1)
4.7 Stock Purchase Warrant issued by the Company to Richard L. Petritz.(1)
4.8 Stock Purchase Warrant issued by the Company to Transitions Three
Limited Partnership.(1)
4.9 Stock Purchase Warrant issued by the Company to Richard L. Petritz.(1)
4.10 Stock Purchase Warrant issued by the Company to Transitions Three
Limited Partnership.(2)
4.11 Stock Purchase Warrant issued by the Company to Richard L. Petritz.(2)
4.12 Stock Purchase Warrant issued by the Company to Transitions Three
Limited Partnership.(2)
4.13 Stock Purchase Warrant issued by the Company to Richard L. Petritz.(2)
4.14 Warrant Agreement between the Company and Continental Stock Transfer &
Trust Company.(3)
4.15 Form of Common Stock Certificate.(3)
4.16 Form of Warrant Certificate.(3)
4.17 Simtek Corporation 1991 Stock Option Plan.(4)
4.18 Form of Incentive Stock Option Agreement between the Company and
Eligible Employees.(4)
4.19 Form of Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company.(6)
4.20 Form of Representative's Warrant Agreement between the Company and
Berkeley Securities Corporation.(6)
4.21 Form of Unit Certificate.(7)
4.22 Form of Representative's Warrant Agreement (with form of warrant
attached).(7)
4.23 1994 Non-Qualified Stock Option Plan.(8 )
4.24 Amendment to the 1994 Non-Qualified Stock Option Plan.(9)
10.1 Form of Non-Competition and Non-Solicitation Agreement between the
Company and certain of its employees.(1)
10.2 Form of Employee Invention and Patent Agreement between the Company
and certain of its employees.(1)
10.3 Warrant Agreement between the Company and Continental Stock Transfer &
Trust Company.(5)
10.4 Form of Warrant issued by the Company in the October 1992 and January
1993 private placements.(7)
10.5 Convertible Secured Note Purchase Agreement between the Company and
Continental Stock Transfer & Trust Company.(7)
10.6 Product License Development and Support Agreement between Simtek
Corporation and Zentrum Mikroelektronik Dresden GmbH dated June 1,
1994(8)
10.7 Letter of Intent Corporation Agreement between Simtek Corporation and
Zentrum Mikroelektronik Dresden GmbH dated August 26, 1994(8)
10.8 Letter Intent between Simtek Corporation and Zentrum Mikroelektronik
Dresden GmbH dated July 21, 1995(9)
10.9 Cooperation Agreement between Simtek Corporation and Zentrum
Mikroelektronik Dresden GmbH dated September 14, 1995(9)
10.10 Subscription Agreement between Simtek Corporation and Zentrum
Mikroelektronik Dresden GmbH dated February 28, 1995(9)
10.11 Subscription Agreement between Simtek Corporation and Zentrum
Mikroelektronik Dresden GmbH dated December 31, 1995(9)
10.12 Manufacturing Agreement between Chartered Semiconductor Manufacturing,
PTE, LTD. and Simtek Corporation dated September 16, 1992(9)
49
<PAGE>
10.13 Employment agreement between the Simtek Corporation and Douglas M.
Mitchell
10.14 Convertible Loan Agreement between Simtek Corporation and Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US Growth &
Income Trust, PLC as lenders and Renaissance Capital Group, Inc. as
agent for the lenders dated June 12, 1998
10.15 Convertible Debenture Agreement between Simtek Corporation and
Renaissance Capital Growth & Income Fund III, Inc. dated 12, 1998
10.16 Convertible Debenture Agreement between Simtek Corporation and
Renaissance US Growth & Income Trust, PLC dated June 12, 1998
27.1 Financial Data Schedule
- --------------------
(1) Incorporated by reference to the Company's Form S-1 Registration
Statement (Reg. No. 33-37874) filed with the Commission on November
19, 1990.
(2) Incorporated by reference to the Company's Amendment No.1 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission
on February 4, 1991.
(3) Incorporated by reference to the Company's Amendment No.2 to Form S-1
Registration Statement (Reg. No. 33-37874) filed with the Commission
on March 4, 1991.
(4) Incorporated by reference to the Company's Form S-1 Registration
Statement (Reg. No. 33-46225) filed with the Commission on March 6,
1992.
(5) Incorporated by reference to the Company's Form S-1 Registration
Statement (Reg. No. 33-55516) filed with the Commission on December
10, 1992.
(6) Incorporated by reference to the Company's Amendment No.1 to Form S-1
Registration Statement (Reg. No. 33-55516) filed with the Commission
on January 29, 1993.
(7) Incorporated by reference to the Company's Amendment No.2 to Form S-1
Registration Statement (Reg. No. 33-55516) filed with the Commission
on February 10, 1993.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K
filed with the Commission on March 25, 1995
(9) Incorporated by reference to the Company's Annual Report on Form 10-K
filed with the Commission on March 27, 1996
(10) Incorporated by reference to the Company's Annual Report on Form 10-K
filed with the Commission on March 24, 1998
50
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
Klaus C. Wiemer (1)(2)(3)
Douglas M. Mitchell
Robert Keeley (1)(2)(3)
Harold Blomquist (1)(2)(3)
John Heightley
Board of Directors Committees
(1) Compensation Committee
(2) Stock Committee
(3) Audit Committee
CORPORATE OFFICERS
Douglas M. Mitchell
Chief Executive Officer, President
and Acting Chief Financial Officer
CORPORATE COUNSEL
Holme Roberts & Owen LLP
1700 Lincoln St. Suite 1400
Denver, CO 80203
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Hein + Associates LLP
717 Seventeenth Street, Suite 1600
Denver, Colorado 80202-3338
REGISTRAR AND TRANSFER AGENT
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
OTC ELECTRONIC BULLETIN BOARD
SYMBOL
Common Stock: SRAM
CORPORATE OFFICES
1465 Kelly Johnson Boulevard
Colorado Springs, Colorado 80920
Tel: (719) 531-9444
Fax: (719) 531-9481
51
EMPLOYMENT AGREEMENT
--------------------
THIS Employment Agreement ("the Agreement") is entered into between MR. DOUGLAS
MITCHELL (the "Executive") and SIMTEK CORPORATION, a Colorado corporation (the
"Company"), referred to collectively as the "Parties."
Article I.
Duties
------
1.1. The Executive shall be employed as President and Chief Executive Officer of
the Company, shall report to the Company's Board of Directors (the "Board"),
shall perform such Duties as the Board would reasonably require of a person so
appointed, and shall use his best efforts to carry into effect the policy and
strategy of the Company as determined by the Board. The Executive shall have
such powers and authority as are necessary in the performance of his Duties, as
well as those that are appropriate to the office he shall hold.
l.2. Executive shall well and faithfully serve the Company and use his best
efforts to promote its interests. Executive shall at all times give the Company
the full benefit of his loyalty, knowledge, expertise, energies, attention,
technical skill and ingenuity in the performance of his Duties and the exercise
of his powers and authority.
1.3. The Company may not, except after Notice of intent not to renew by either
Party or Notice of termination by Executive or the Company, redefine the
Executive's Duties, powers and authority without his prior written consent.
1.4. The parties contemplate that the Executive will serve as a director on the
boards of other companies and may, on occasion, provide consulting services to
other companies ("Outside Activities"). The Executive will notify the Board of
all such Outside Activities. In no event may such Outside Activities involve a
business or interest in competition with the company. To the extent such Outside
Activities will or may generate earned income, the Executive must obtain prior
approval by the Board.
Article II.
Term
----
2.1. Upon execution by the Parties, this Agreement is effective retroactive to
June 1, 1998, and shall continue through June 1, 2001 (the "Initial Term") ,
unless terminated sooner as provided by this Agreement.
2.2. The Agreement shall be automatically renewed for successive periods of one
year each (the "Renewal Term"), unless (a) otherwise terminated as provided in
Articles VII or VIII or (b) either party gives to the other Notice of intent not
to renew at least ninety days prior to the expiration of the Initial or any
Renewal Term.
<PAGE>
Article III.
Base salary
-----------
3.1. The Company shall pay the Executive U.S $120,000.00 per annum (the "Base
Salary") in accordance with the payroll practices of the Company.
Article IV.
Expenses
--------
4.1. The Company shall reimburse Executive, within thirty days of voucher, the
amount of all travel, hotel, entertainment and other Expenses reasonably
incurred in furtherance of his Duties.
4.2. The Company will provide the Executive such offices and secretarial and
other support as shall be appropriate to accomplish his Duties.
Article V.
Benefits
--------
5.1. Executive shall be entitled to twenty business days of paid vacation each
year. Vacation days shall be accrued and earned at the rate of 1.67 days each
month. Executive shall be entitled to carry any unused vacation days over to the
next calendar year. However, in no event will Executive's accrued but unused
vacation exceed forty days. Any accrued but unused vacation in excess of forty
days shall be forfeited. Executive will be credited with ten days of accrued but
unused vacation upon execution of this Agreement by both Parties.
5.2. Executive shall be entitled, in addition to the vacation days identified
above, to all holidays generally afforded other employees of the Company.
5.3. The Company shall, upon proof of insurability, purchase, or cause to be
purchased, a policy or policies insuring the life of the Executive payable to
the Executive's designated beneficiary(s) consistent with that life insurance
generally provided other employees of the Company.
5.4. Company shall acquire and pay for, or reimburse the Executive for,
hospitalization, dental, major medical or other health insurance for the benefit
of the Executive and his dependents consistent with that generally provided
other employees under the Company's group health insurance plan(s).
5.5. During any period in which the Executive is absent from work as a result of
personal injury, sickness or other disability, the Board may, by majority vote,
appoint an acting President and Chief Executive Officer to serve for the
duration of Executive's absence. The Company will, while such period continues
or for six months, whichever is shorter, and unless right to payment is waived
by Executive, provide the Executive his full Base salary and Benefits. Executive
will also be entitled to additional disability benefits such as may be generally
provided to other employees.
5.6. Executive shall, in accordance with it or their terms and provisions, be
entitled to participate in any pension, retirement, profit, performance bonus or
other qualified plans adopted by the Company for the benefit of its employees.
<PAGE>
5.7. Executive has or shall have such options to purchase shares of stock in the
Company at a price derived in accordance with the Company's Stock Option Plan,
as may be approved by the Company stock Option Committee.
Article VI.
Covenant Not To Compete and Restrictions on Executive
-----------------------------------------------------
6.1. Executive shall not, during his employment and for five years thereafter,
other than in the proper performance of his Duties, remove from the offices of,
voluntarily divulge to any person, firm or company, and shall endeavor to
prevent the publication or disclosure of, any confidential information
concerning the business accounts, customers, clients or finances of the Company,
or concerning any of the secrets, research, dealings, transactions, internal
structure or affairs of the Company which have previously come to his knowledge
or which may come to his knowledge during his employment. "Confidential
information" shall not include information which was known to the Executive
prior to his employment by Simtek or to information which is in or hereafter
comes into the public domain without fault of or through means other than the
Executive.
6.2. Executive hereby transfers and assigns without compensation, to the Company
or to any person, or entity designated by the Company, the entire right, title
and interest of the Executive in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and copyrightable material, made
or conceived by the Executive, solely or jointly, or in whole or in part, during
his employment which (i) relate to methods, apparatus, designs, products,
processes or devices sold, leased, or under construction or development by the
Company; or (ii) otherwise relate to or pertain to the business, functions or
operations of the Company; or (iii) arise (wholly or partly) from the efforts of
the Executive in performing his Duties. The Executive shall communicate promptly
and disclose to the Company, in such form as the Company requests, all
information, details, and data pertaining to the aforementioned inventions,
ideas, disclosures and improvements, and, whether during his employment or
thereafter, the Executive shall execute and deliver to the Company such formal
transfers and assignments and such other papers and documents as may be required
of the Executive to permit the Company or any person or entity designated by the
Company to file and prosecute patent applications covering any of such
inventions, ideas, disclosures or improvements and, as to such inventions,
ideas, disclosures or improvements as constitute copyrightable material, to
obtain copyright thereof. Any Invention by the Executive covered by (i), (ii) or
(iii) of this Section 6.2 within six months after his employment shall be deemed
to fall within the provisions of this Section 6.2 unless proved by the Executive
to have been first conceived and made after his employment ended.
6.3. Executive will not disclose to the Company any trade secrets, dealings,
transactions, affairs, financial information or other proprietary information of
or concerning any prior employer of the Executive.
6.4. During his employment, and for one year thereafter, the Executive may not
directly or indirectly work for, affiliate with in any manner, operate, acquire
or maintain any business or interest in competition (whether as an employee,
contractor, officer, director, agent, a five percent or greater security holder,
creditor, consultant, or otherwise) with the company.
6.5. Executive will not ever use or cause any person to use any corporate
name(s) or trade name(s) intended or likely to be confused with any corporate
name(s) or registered trade name(s) used by the Company.
<PAGE>
6.6. During his employment, and for one year thereafter, Executive shall not,
either personally, by his agent or by letters, circulars or advertisement, and
whether for himself or on behalf of any other person, company or firm:
(a) Directly or indirectly solicit orders for goods of a type
similar to those being manufactured or dealt with during his employment, or for
services similar to those being provided during his employment by the Company to
any person, company or firm, who or which is, at the Executive's last day of
employment, or has at any time within the year prior to the Executive's last day
of employment, been a customer or client of the Company, except a solicitation
that is in the normal course of business of the Company; or
(b) Induce or cause any employee of the Company to leave such
employment except in the normal course of business of the Company.
6.7. Executive will request a determination from the Board as to whether any
business is a competitor of the Company before the Executive undertakes any
action potentially prohibited by this Article. Such determination shall be made
by the Board acting in good faith and notice of same shall be provided to
Executive.
6.8. Executive recognizes that competitors of the Company exist throughout the
United States and in many other countries. Once a business is identified as a
competitor of the Company, its geographic location is irrelevant.
6.9. The Executive agrees that the duration and geographic scope of his Covenant
and Restrictions are reasonable and he waives any right to contest
enforceability of his Covenant or the Restrictions based on such defenses.
6.10. While Executive has given up substantial rights to practice his chosen
profession in competition with the Company, he is an Executive within the
meaning of CR5. 8-2-113(2)(d), and the salary at which the Executive is employed
by the Company has been arrived at in specific recognition of this fact and is
accepted by the Executive as full and adequate consideration for his Covenant
and the Restrictions.
6.11. The existence of any claim or cause of action of the Executive against the
Company will not be recognized as justification for any breach of his Covenant
or the Restrictions by the Executive.
6.12. Executive agrees any breach of his Covenant or the Restrictions may cause
irreparable harm to the Company and that monetary damages alone may not provide
full and adequate compensation for a breach or threatened breach. The Company
shall be entitled, in its discretion, to seek injunctive relief in any court for
any breach or threatened breach of this Article, in addition to its remedies
under the Dispute Resolution Article below.
<PAGE>
Article VII.
Termination by the Company
--------------------------
7.1. Executive shall serve at the will of the Board.
7.2. The Board may, by majority vote without the Executive's participation,
remove Executive and terminate his employment on thirty days notice for any
reason.
7.3. Should the Company exercise this right of termination, Executive shall,
unless termination is for Good Cause, as defined below, be entitled to
continuation of his Base salary and Benefits, mitigated by income the Executive
may earn, for the remainder of the Term of the Agreeement as defined in Article
2.1 and 2.2.
7.4. Following such notice, the Company may redefine Executive's Duties and/or
may, at its option, place the Executive in a leave status.
7.5. The Board may, by unanimous vote without the Executive's participation,
remove Executive and terminate his employment immediately for Good Cause.
7.6. Good Cause shall mean any material breach of this Agreement by Executive or
any action by Executive which brings or may bring discredit to the Company.
7.7. All further Duties and obligations of the Company under this Agreement
shall cease immediately upon a vote to remove the Executive for Good Cause.
Article VIII.
Termination By Executive
------------------------
8.1. Executive shall have the right to terminate his employment for any reason
upon thirty days notice to the Company.
8.2. Following such notice, the Company may redefine Executive's Duties and/or
may, at its option, place the Executive in a leave status.
8.3. Executive's Base salary and Benefits shall continue during the notice
period, after which all further Duties and obligations of the Company under this
Agreement shall cease.
Article IX.
Death
-----
9.1. If not earlier terminated, this Agreement shall terminate upon the death of
the Executive and the Company shall have no further obligation to the Executive
or his estate, except to pay the Executive's estate any Base Salary accrued but
remaining unpaid prior to his death, any Expenses accrued but remaining unpaid
prior to his death, and any Benefits accrued but remaining unpaid prior to his
death.
<PAGE>
Article X.
Miscellaneous
-------------
10.1. Except where otherwise provided, neither Party waives any right, duty or
obligation otherwise created by law, including equitable remedies.
10.2. This Agreement shall be binding upon and inure to the benefit of the
Parties hereto and their respective heirs, personal representatives, successors
and assigns, provided that neither Party shall assign any of its rights or
privileges hereunder without the prior written consent of the other Party except
to a successor in ownership of all or substantially all the assets of the
Company, and in the event such successor shall expressly assume in writing the
performance of all terms and conditions of this Agreement.
10.3. Should any part or provision of this Agreement be held unenforceable, the
validity cf the remaining parts or provisions shall not be affected by such
holding, unless such unenforceability substantially impairs the benefit of the
remaining portions of the Agreement.
10.4. No failure or delay on the part of either Party in the exercise of any
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or privilege preclude other or
further exercise thereof or of any other right or privilege.
10.5. The validity, construction and performance of this Agreement and the
transactions to which it relates shall be governed by the laws of the State of
Colorado, without regard to conflict of laws principles.
10.6. This Agreement embodies the entire understanding of the Parties as it
relates to the subject matter contained herein and as such, supersedes any prior
agreement or understandings between the Parties. No amendment or modification of
this Agreement shall be valid or binding upon the Parties except by a statement
in writing signed by both Parties.
10.7. Executive acknowledges that the Company satisfactorily performed and/or
discharged all Duties and obligations to the Executive arising prior to and
contemporaneous with the execution of this Agreement. The Executive forever
waives and releases any and all claims he may have against the Company relating
in any way to such Duties and obligations.
10.8. Any notice required by this Agreement shall be effective when delivered in
person to Executive or Chairman of the Board of the Company three days after
being placed in the U.S. Mail addressed to Executive at his last address of
record or to the Chairman of the Board at the Company's business address.
10.9. Executive's obligations under Article VI shall survive any termination of
this Agreement.
Article XI.
Dispute Resolution
------------------
11.1. All disputes arising out of or related in any way to this Agreement, other
than as specified in Article VI, will be resolved by arbitration in El Paso
County in accordance with the Model Employment Arbitration Procedures of the
American Arbitration Association then in effect except as modified in this
Agreement. One arbitrator shall constitute the arbitration panel and shall
<PAGE>
be provided this Agreement. Written demand for arbitration shall be served on
the other party within sixty days after any claim or dispute arises. Any
hearings will be closed to the public. The award rendered by the arbitrator
shall be final, confidential and shall identify a winning party. The fees and
expenses of the arbitrator and the winning party's reasonable attorneys fees and
costs shall be paid by the nonwinning party. Judgment may be entered on the
award in El Paso County District Court if any amount found due is not paid or
any action required is not taken within sixty days of the award.
IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement
as at the day or dates and year below.
"Company" "Executive"
/S/ Richard L. Petritz /s/ Douglas Mitchell
- --------------------------------- --------------------------------------
Richard L. Petritz Douglas Mitchell
Chairman President and Chief Executive Officer
CONVERTIBLE LOAN AGREEMENT
DATED JUNE 12, 1998
BY AND AMONG
SIMTEK CORPORATION
AS BORROWER
AND
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
AND
RENAISSANCE US GROWTH & INCOME TRUST, PLC
AS LENDERS
AND
RENAISSANCE CAPITAL GROUP, INC.
AS AGENT FOR THE LENDERS
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
ARTICLE I - DEFINITION OF TERMS................................................................................ 1
Section 1.01. Definitions............................................................................. 1
Section 1.02. Other Definition Provisions............................................................. 7
ARTICLE II - LOAN PROVISIONS................................................................................... 7
Section 2.01. The Loan................................................................................ 7
Section 2.02. Obligations of Lenders.................................................................. 8
Section 2.03. Interest Rate and Interest Payments..................................................... 8
Section 2.04. Maturity................................................................................ 8
Section 2.05. Mandatory Principal Repayment........................................................... 8
Section 2.06. Redemption.............................................................................. 9
Section 2.07. Fees and Expenses....................................................................... 9
Section 2.08. Finder's Fees........................................................................... 9
Section 2.09. Taxes................................................................................... 9
Section 2.10. Conversion Rights....................................................................... 10
Section 2.11. Collateral, Security Agreements......................................................... 10
ARTICLE III - CONDITIONS PRECEDENT............................................................................. 10
Section 3.01. Document Requirements................................................................... 10
Section 3.02. Other Conditions........................................................................ 12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER........................................................ 12
Section 4.01. Organization and Good Standing.......................................................... 12
Section 4.02. Authorization and Power................................................................. 12
Section 4.03. No Conflicts or Consents................................................................ 12
Section 4.04. Enforceable Obligations................................................................. 13
Section 4.05. No Liens................................................................................ 13
Section 4.06. Financial Condition..................................................................... 13
Section 4.07. No Default.............................................................................. 13
Section 4.08. Material Agreements..................................................................... 13
Section 4.09. No Litigation........................................................................... 14
Section 4.10. Taxes................................................................................... 14
Section 4.11. Capitalization.......................................................................... 14
Section 4.12. Use of Proceeds......................................................................... 15
Section 4.13. Employee Matters........................................................................ 15
Section 4.14. Employee Benefit Plans.................................................................. 16
Section 4.15. Compliance with Laws.................................................................... 16
Section 4.16. Licenses and Permits.................................................................... 16
Section 4.17. Contracts............................................................................... 17
Section 4.18. Shares Issuable Upon Conversion......................................................... 17
Section 4.19. Insider................................................................................. 17
Section 4.20. Subsidiaries............................................................................ 17
Section 4.21. Casualties.............................................................................. 18
Section 4.22. Investment Company Act.................................................................. 18
Section 4.23. Sufficiency of Capital.................................................................. 18
Section 4.24. Corporate Names......................................................................... 18
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<PAGE>
Section 4.25. Insurance............................................................................... 18
Section 4.26. Intellectual Property................................................................... 18
Section 4.27. Real Property........................................................................... 19
Section 4.28. Environmental........................................................................... 19
Section 4.29. Survival of Representations and Warranties.............................................. 21
Section 4.30. Full Disclosure......................................................................... 21
ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER.................................................................. 21
Section 5.01. Financial Statements, Reports and Documents............................................. 21
Section 5.02. Preparation of Budgets.................................................................. 22
Section 5.03. Payment of Taxes and Other Indebtedness................................................. 23
Section 5.04. Maintenance of Existence and Rights; Conduct of Business................................ 23
Section 5.05. SEC Filings............................................................................. 23
Section 5.06. Notice.................................................................................. 23
Section 5.07. Compliance with Loan Documents.......................................................... 24
Section 5.08. Compliance with Material Agreements..................................................... 24
Section 5.09. Operations and Properties............................................................... 24
Section 5.10. Books and Records; Access............................................................... 24
Section 5.11. Compliance with Law..................................................................... 24
Section 5.12. Insurance............................................................................... 24
Section 5.13. Authorizations and Approvals............................................................ 25
Section 5.14. ERISA Compliance........................................................................ 25
Section 5.15. Further Assurances...................................................................... 25
Section 5.16. Indemnity by Borrower................................................................... 25
Section 5.17. Reservation of Shares................................................................... 26
Section 5.18. Incentive Compensation Plan and Senior Management....................................... 26
Section 5.19. Retention of Stock Ownership............................................................ 27
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER.................................................................... 27
Section 6.01. Limitation on Indebtedness.............................................................. 27
Section 6.02. Limitation on Liens..................................................................... 27
Section 6.03. Limitation on Investments............................................................... 27
Section 6.04. Alteration of Material Agreements....................................................... 28
Section 6.05. Transactions with Affiliates............................................................ 28
Section 6.06. Limitations on Acquisition of Nonrelated Business....................................... 28
Section 6.07. Limitation on Sale of Properties........................................................ 28
Section 6.08. Fiscal Year and Accounting Method....................................................... 28
Section 6.09. Liquidation............................................................................. 29
Section 6.10. Material Amendments to Articles of Incorporation or Bylaws.............................. 29
Section 6.11. Executive Compensation.................................................................. 29
Section 6.12. Restricted Payments..................................................................... 29
Section 6.13. Consolidation or Merger................................................................. 29
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS.................................................. 30
Section 7.01. Financial Ratios........................................................................ 30
ARTICLE VIII - EVENTS OF DEFAULT............................................................................... 30
Section 8.01. Events of Default....................................................................... 30
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<PAGE>
Section 8.02. Remedies Upon Event of Default.......................................................... 31
Section 8.03. Performance by the Lenders.............................................................. 32
Section 8.04. Payment of Expenses Incurred by the Lenders............................................. 32
ARTICLE IX - REGISTRATION RIGHTS............................................................................... 32
Section 9.01. "Piggy-Back" Registration.............................................................. 32
Section 9.02. Shelf Registration..................................................................... 34
Section 9.03. Obligations of Borrower................................................................ 34
Section 9.04. Furnish Information.................................................................... 35
Section 9.05. Expenses of Registration............................................................... 36
Section 9.06. Indemnification Regarding Registration Rights.......................................... 36
Section 9.07. Reports Under the 1934 Act............................................................. 38
Section 9.08. Assignment of Registration Rights...................................................... 39
Section 9.09. Other Matters.......................................................................... 39
ARTICLE X - BOARD OF DIRECTORS................................................................................. 40
Section 10.01. Board of Directors Representation or Attendance by Observer............................ 40
Section 10.02. Limitation of Authority of Persons Designated as a Director Nominee.................... 40
Section 10.03. Nonliability of the Lenders............................................................ 40
ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS................................................................ 41
Section 11.01. The Lenders' Representations and Warranties to Other Lenders........................... 41
Section 11.02. Waiver of Loan Provisions or Interest or Principal Payments............................ 41
Section 11.03. Agency................................................................................. 41
ARTICLE XII - MISCELLANEOUS.................................................................................... 43
Section 12.01. Strict Compliance...................................................................... 43
Section 12.02. Waivers and Modifications.............................................................. 43
Section 12.03. Limitation on Liability................................................................ 43
Section 12.04. Choice of Forum; Consent to Service of Process and Jurisdiction........................ 43
Section 12.05. Arbitration............................................................................ 44
Section 12.06. Invalid Provisions..................................................................... 46
Section 12.07. Maximum Interest Rate.................................................................. 46
Section 12.08. Participations and Assignments of the Debentures....................................... 47
Section 12.09. Confidentiality........................................................................ 47
Section 12.10. Binding Effect......................................................................... 48
Section 12.11. No Third Party Beneficiary............................................................. 48
Section 12.12. Entirety............................................................................... 48
Section 12.13. Headings............................................................................... 48
Section 12.14. Survival............................................................................... 48
Section 12.15. Multiple Counterparts.................................................................. 48
Section 12.16. Knowledge of Borrower.................................................................. 49
Section 12.17. Notices................................................................................ 49
Section 12.18. Governing Law.......................................................................... 51
</TABLE>
iii
<PAGE>
AGREEMENT
THIS AGREEMENT, dated as of June 12, 1998, by and among Simtek
Corporation, a Colorado corporation, as borrower ("Borrower"), Renaissance
Capital Growth & Income Fund III, Inc., a Texas corporation, and Renaissance US
Growth & Income Trust, PLC, a public limited company registered in England and
Wales, (individually referred to as Renaissance III and Renaissance PLC,
respectively, and together with any permitted assignees or successors in
interest individually referred to as each or any "Lender" and collectively
referred to as the "Lenders"), and Renaissance Capital Group, Inc., a Texas
corporation, as agent for the Lenders (the "Agent"). All references herein to
Borrower shall include the Subsidiaries, unless the context otherwise requires.
WITNESSETH:
WHEREAS, Borrower seeks to obtain One Million Five Hundred Thousand
Dollars ($1,500,000) from the Lenders through the issuance of Debentures to be
used by the Borrower for acquisitions, working capital and general corporate
purposes in accordance with Section 2.02 hereof; and
WHEREAS, Borrower has requested that the Lenders provide such loan as
herein provided, and that the Lenders are willing to furnish such to Borrower
upon the terms and subject to the conditions and for the considerations
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
contained and for other valuable consideration, receipt and sufficiency of which
is acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
-------------------------------
Section 1.01. Definitions.
- -------------------------
For the purposes of this Agreement, the following terms shall have the
respective meanings assigned to them in this Article I or in the section or
recital referred to below:
"Acquisition Indebtedness" shall mean Indebtedness or
mandatorily redeemable preferred stock of Borrower or a Subsidiary incurred in
connection with, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Subsidiary became a Subsidiary or was acquired by
Borrower.
"Affiliate" with respect to any Person shall mean a person
that directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
"Capital Expenditure" shall mean an expenditure for assets
that is properly classifiable as a capital expenditure in accordance with GAAP.
1
<PAGE>
"Capital Lease" shall mean any lease of property, real or
personal, which would be properly classifiable as a capital lease in accordance
with GAAP.
"Common Stock" shall mean Borrower's common stock, $.01 par
value.
"Conversion " or "Conversion Rights" shall mean exchange of,
or the rights to exchange, the Principal Amount of the Loan, or any part
thereof, for fully paid and nonassessable Common Stock on the terms and
conditions provided in the Debenture.
"Current Liabilities" shall mean all liabilities classified in
accordance with GAAP as current liabilities.
"Current Ratio" shall mean, for any Person as of any date, the
ratio of such Person's Consolidated Current Assets to Consolidated Current
Liabilities as of such date.
"Debentures" shall mean the Debentures executed by Borrower
and delivered pursuant to the terms of this Agreement, together with any
renewals, extensions or modifications thereof.
"Debtor Laws" shall mean all applicable liquidation,
conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization or similar laws from time to time in effect affecting the rights
of creditors or debtors generally.
"Default" or "Event of Default" shall mean any of the events
specified in Article VIII.
"Dividends," in respect of any corporation, shall mean (i)
cash distributions or any other distributions on, or in respect of, any class of
capital stock of such corporation, except for distributions made solely in
shares of stock of the same class, and (ii) any and all funds, cash and other
payments made in respect of the redemption, repurchase or acquisition of such
stock, unless such stock shall be redeemed or acquired through the exchange of
such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended, together with all rules and regulations issued pursuant
thereto.
"Fixed Charge Coverage Ratio" shall mean for Borrower for the
immediately preceding twelve (12)-month period ended on such date, the ratio of
(a) consolidated trailing twelve months free cash flow, to (b) Borrower's total
scheduled payments of principal on Indebtedness for the same 12 (twelve)-month
period, excluding Indebtedness under Borrower's revolving credit loans and
mandatory redemption payments as set forth herein.
"GAAP" shall mean United States generally accepted accounting
principles applied on a consistent basis, set forth in the Opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants or the Financial Accounting Standards Board or their successors,
which are applicable in the circumstances as of the date in question. The
requirement that such principles be applied on a consistent basis shall mean
2
<PAGE>
that the accounting principles observed in a current period are comparable in
all material respects to those applied in a preceding period.
"Governmental Authority" shall mean any government (or any
political subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or any
of its or their businesses, operations or properties.
"Guaranty" of any Person shall mean any contract, agreement or
understanding of such Person pursuant to which such Person in effect guarantees
the payment of any Indebtedness of any other Person (the "Primary Obligor") in
any manner, whether directly or indirectly, including, without limitation,
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose of
assuring the holder of such Indebtedness of the ability of the Primary Obligor
to make payment; or (iii) otherwise to assure the holder of the Indebtedness of
the Primary Obligor against loss in respect thereof, except that "Guaranty"
shall not include the endorsement by Borrower or a Subsidiary in the ordinary
course of business of negotiable instruments or documents for deposit or
collection.
"Holder" shall mean the owner of Registrable Securities.
"Indebtedness" shall mean, with respect to any Person, without
duplication, the following indebtedness, obligations and liabilities of such
Person: (i) indebtedness for borrowed money; (ii) all obligations of such Person
in respect of any Guaranty; (iii) all obligations of such Person in respect of
any Capital Lease, (iv) all obligations, indebtedness and liabilities secured by
any lien or any security interest on any property or assets of such Person, but
only to the extent so secured; and (v) all preferred stock of such Person which
is subject, at the time of calculation of Indebtedness, to a mandatory
redemption requirement, valued at the greater of its involuntary redemption
price or liquidation preference plus accrued and unpaid dividends, and all
extensions, renewals, modifications and amendments thereto.
"Investment" in any Person shall mean any investment, whether
by means of share purchase, loan, advance, capital contribution or otherwise, in
or to such Person, the Guaranty of any Indebtedness of such Person, or the
subordination of any claim against such Person to other Indebtedness of such
Person; provided however, that "Investment" shall not include (i) any demand
deposits in a duly chartered state or national bank or other cash equivalent
investments (ii) any loans permitted by Section 6.12, or (iii) any acquisitions
of equity in any other Person.
"IRS Code" shall mean the Internal Revenue Code of 1986, as
amended, together with all rules and regulations issued thereunder.
"Lien" shall mean any lien, mortgage, security interest, tax
lien, pledge, encumbrance, conditional sale or title retention arrangement, or
any other interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"Loan" shall mean the money lent to Borrower pursuant to this
Agreement, along with any accrued, unpaid interest thereon.
3
<PAGE>
"Loan Closing" or "Loan Closing Date" shall mean the
disbursement of Loan funds.
"Loan Documents" shall mean this Agreement, the Debentures and
any other agreements or documents required to be executed or delivered by
Borrower pursuant to the terms of this Agreement (and any amendments or
supplements hereto or modifications hereof).
"Lock-Up Agreement" shall mean the "lock-up" agreements to be
executed by the executive officers, directors and principal shareholders of
Borrower pursuant to Section 5.19 of this Agreement.
"Material Adverse Effect" or "Material Adverse Change" shall
mean (i) any change, factor or event that shall (a) have a material adverse
effect upon the validity or enforceability of any Loan Documents, (b) have a
material adverse effect upon the financial condition, results of operations,
business, properties, operations or assets of Borrower or its Subsidiaries taken
as a whole or (c) have a material adverse effect upon the ability of Borrower to
fulfill its obligations under the Loan Documents, or (ii) any event that causes
an Event of Default or which, with notice or lapse of time or both, could become
an Event of Default.
"Obligation" shall mean: (i) all present and future
Indebtedness, obligations and liabilities of Borrower to the Lenders arising
pursuant to this Agreement, regardless of whether such Indebtedness, obligations
and liabilities are direct, indirect, fixed, contingent, joint, several, or
joint and several; (ii) all present and future Indebtedness, obligations and
liabilities of Borrower to the Lenders arising pursuant to or represented by the
Debentures and all interest accruing thereon, and reasonable attorneys' fees
incurred in the enforcement or collection thereof; (iii) all present and future
indebtedness, obligations and liabilities of Borrower and any Subsidiary
evidenced by or arising pursuant to any of the Loan Documents; (iv) all costs
incurred by the Lenders or Agent, including, but not limited to, reasonable
attorneys' fees and legal expenses related to this transaction and (v) all
renewals, extensions and modifications of the indebtedness referred to in the
foregoing clauses, or any part thereof.
"Permits" shall have the meaning set forth in Section 4.16.
"Permitted Indebtedness" shall mean Indebtedness outstanding
as of the date hereof or incurred in compliance with Section 6.01 and the other
terms of this Agreement that constitutes (i) Senior Obligations, (ii)
obligations under Capital Leases, (iii) letters of credit, (iv) Current
Liabilities, (v) debt associated with Permitted Liens, (vi) any other
Subordinated Debt, (vii) Acquisition Indebtedness, (viii) purchase money
Indebtedness, (ix) Indebtedness of foreign Subsidiaries, (x) intercompany
Indebtedness, (xi) Indebtedness under this Agreement or the Debentures, and
(xii) any refunding, refinancing or extension of any of the above.
"Permitted Liens" shall mean: (i) Liens (if any) granted for
the benefit of the Lenders; (ii) Liens to secure the Permitted Indebtedness;
(iii) pledges or deposits made to secure payment of worker's compensation
insurance (or to participate in any fund in connection with worker's
compensation insurance), unemployment insurance, pensions or social security
programs; (iv) Liens imposed by mandatory provisions of law such as for
carriers', landlord's, materialmen's, mechanics', warehousemen's, vendors' and
other like Liens arising in the ordinary course of business, securing
Indebtedness whose payment is made within thirty (30) days of the date such Lien
arises, or that are being contested in good faith by appropriate proceedings as
to which adequate
4
<PAGE>
reserves have been established to the extent required by GAAP; (v) Liens for
taxes, assessments and governmental charges or levies imposed upon a Person or
upon such Person's income or profits or property, if the same are not yet due
and payable or if the same are being contested in good faith and as to which
adequate cash reserves have been provided or if an extension is obtained with
respect thereto; (vi) Liens arising from good faith deposits in connection with
tenders, leases, bids or contracts (other than contracts involving the borrowing
of money), pledges or deposits to secure public or statutory obligations and
deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and
deposits to secure the payment of taxes, assessments, customs duties or other
similar charges; (vii) encumbrances consisting of zoning restrictions,
easements, reservations, licenses, covenants and other minor irregularities of
title or other restrictions on the use of real property (whether owned or
leased), provided that such items do not materially impair the intended use of
such property, and none of which is violated by Borrower's existing structures
or land use; (viii) mortgages, financing statements, equipment leases or other
encumbrances incurred in connection with the acquisition of property or
equipment or the replacement of existing property or equipment, provided that
such liens shall be limited to the property or equipment then being acquired;
(ix) Liens which secure Senior Obligations; and (x) Liens listed in Schedule
4.05.
"Person" shall include an individual, a corporation, a joint
venture, a general or limited partnership, a trust, an unincorporated
organization or a government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan or other plan
maintained by Borrower for employees of Borrower and/or any Subsidiaries and
covered by Title IV of ERISA, or subject to the minimum funding standards under
Section 412 of the IRS Code.
"Principal Amount" shall mean, as of any time, the then
aggregate outstanding face amount of the Debentures after any conversions or
redemptions and after giving effect to any installment payments received by the
Lenders.
"Registrable Securities" shall mean (i) the Common Stock
issuable upon Conversion of the Debentures, and (ii) any Common Stock issued
upon exercise of any warrant, right or other security that is issued with
respect to the Common Stock by way of (a) stock dividend; (b) any other
distribution with respect to, or in exchange for, or in replacement of Common
Stock; (c) stock split; and (d) in connection with a combination of shares,
recapitalization, merger, or consolidation excluding in all cases, however, any
Common Stock that is not a Restricted Security and any Registrable Securities
sold or transferred by a Person in a transaction in which the rights under this
Agreement are not assigned.
"Registrable Securities Then Outstanding" shall mean an amount
equal to the number of Registrable Securities outstanding which have been issued
pursuant to the Conversion of the Debentures.
"Renaissance III" shall mean Renaissance Capital Growth &
Income Fund III, Inc., a Texas corporation.
5
<PAGE>
"Renaissance PLC" shall mean Renaissance US Growth & Income
Trust PLC, a public limited company registered in England and Wales.
"Renaissance Group" shall mean Renaissance Capital Group,
Inc., a Texas corporation.
"Restricted Security" shall mean a security that has not been
(i) registered under the 1933 Act or (ii) distributed to the public pursuant to
Rule 144 (or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the 1933 Act and the 1934
Act.
"1933 Act" shall refer to the Securities Act of 1933, as
amended, or any similar federal statute and rules and regulations promulgated
thereunder, all as the same may be in effect from time to time.
"1934 Act" shall refer to the Securities Exchange Act of 1934,
as amended, or any similar federal statute and rules and regulations promulgated
thereunder, all as the same may be in effect from time to time.
"1940 Act" shall refer to the Investment Company Act of 1940,
as amended, or any similar federal statute and rules and regulations promulgated
thereunder, all as the same may be in effect from time to time.
"Senior Documents" means all loan documents evidencing the
Senior Obligations, as each may now or hereafter be amended, modified,
supplemented, renewed or extended from time to time.
"Senior Obligations" means one or more senior debt facilities
(including loans and other extensions of credit under the Senior Documents) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, capital expenditure loans, receivables
financings (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, as now existing or hereafter incurred, and in
each case, as amended, restated, modified, renewed or extended from time to
time.
"Solvent" shall mean, with respect to any Person on a
particular date, that on such date: (i) the fair value of the assets of such
Person is greater than the total amount of liabilities of such Person; (ii) the
estimated present fair salable value, in the ordinary course of business, of the
assets of such Person is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become absolute and
matured; (iii) such Person is able to realize upon its assets and pay its debts
and other liabilities, contingent obligations and other commitments as they
mature in the normal course of business; (iv) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature; and (v) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
6
<PAGE>
"Subordinated Debt" shall mean any indebtedness of Borrower or
any Subsidiaries, now existing or hereafter incurred, which indebtedness is, by
its terms, junior in right of repayment to the payment of the Debentures.
"Subsidiary" or "Subsidiaries" shall mean any or all
corporations or entities whether now existing or hereafter acquired of which
over fifty percent (50%) the Voting Shares or equity interests are owned,
directly or indirectly, by Borrower.
"Total Capitalization" shall mean for any Person, total
Indebtedness plus shareholders' equity as defined in accordance with GAAP.
"Voting Shares" of any corporation shall mean shares of any
class or classes (however designated) having ordinary voting power for the
election of at least a majority of the members of the board of directors (or
other governing bodies) of such corporation, other than shares having such power
only by reason of the happening of a contingency.
Section 1.02. Other Definition Provisions.
-----------------------------------------
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents, certificate,
report or other document made or delivered pursuant to this Agreement, unless
the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the plural
and vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
(d) References to financial statements and reports shall be deemed to
be a reference to such statements and reports prepared in accordance with GAAP.
(e) Accounting terms not specifically defined above in this Agreement
shall be construed in accordance with GAAP.
ARTICLE II - LOAN PROVISIONS
----------------------------
Section 2.01. The Loan.
- ----------------------
(a) Subject to the terms and conditions of this Agreement, and the
compliance with such terms and conditions by all parties, at the Loan Closing
each Lender agrees to lend to Borrower, and Borrower agrees to borrow from the
Lenders, the aggregate sum of One Million Five Hundred Thousand Dollars
($1,500,000) as follows:
7
<PAGE>
Renaissance Capital Growth & Income III, Inc. $750,000
Renaissance US Growth & Income Trust, PLC $750,000
(b) The Loan shall be evidenced by the Debentures. The Debentures shall
rank pari passu with all Indebtedness of Borrower, other than the Senior
Obligations and the Subordinated Debt.
(c) The proceeds of the Loan shall be used by the Borrower for
acquisitions, corporate and working capital purposes.
(d) Unless otherwise mutually agreed, the Loan Closing shall be at the
offices of Renaissance Capital Group, Inc., 8080 North Central Expressway, Suite
210, Dallas, Texas.
Section 2.02. Obligations of Lenders.
- ------------------------------------
If, within ten (10) days of the date of this Agreement, (i) Borrower
has failed to comply with the conditions precedent to the First Disbursement as
specified herein (unless compliance with such conditions in whole or in part has
been waived or modified by the Lenders in their sole discretion) or (ii) the
First Disbursement has not occurred (unless the date of such First Disbursement
has been mutually extended), other than as a result of any failure of Lenders to
comply with the terms of this Agreement, then, in either such case, the
obligations of the Lenders under this Agreement shall terminate; provided,
however, that Borrower shall be obligated for payment of the fees and expenses
provided in Section 2.07 due and payable as of such date of termination.
Section 2.03. Interest Rate and Interest Payments.
- -------------------------------------------------
Interest on the Principal Amount outstanding from time to time shall
accrue at the rate of nine percent (9.00%) per annum, with the first installment
of accrued, unpaid interest being due and payable on July 1, 1998 and subsequent
payments of accrued, unpaid interest being due and payable on the first (1st)
day of each month thereafter. Overdue principal and interest on the Debentures
shall bear interest at the maximum rate permitted by applicable law. Interest on
the Principal Amount of each Debenture shall be calculated, from time to time,
on the basis of the actual days elapsed in a year consisting of three hundred
sixty-five (365) days.
Section 2.04. Maturity.
- ----------------------
If not sooner redeemed or converted, the Debentures shall mature on
June 12, 2005, at which time all the remaining unpaid principal, interest and
any other charges then due under this Agreement shall be due and payable in
full. The Debentures shall be prepaid pro rata with any prepayments of
Indebtedness (other than Senior Obligations) which is pari passu with or
subordinated to the Debentures.
Section 2.05. Mandatory Principal Repayment.
- -------------------------------------------
The Debentures shall be subject to mandatory principal repayment as
provided in the Debentures.
8
<PAGE>
Section 2.06. Redemption.
- ------------------------
The Debentures shall be subject to redemption as provided in the
Debentures.
Section 2.07. Fees and Expenses.
- -------------------------------
(a) Upon Loan Closing:
(i) Borrower shall pay to Agent a Loan Closing fee of one
percent (1.0%) of the Loan.
(ii) Borrower shall pay all unpaid fees and expenses required
to be paid by Borrower on or before the Loan Closing under the Preliminary
Outline of Terms dated April 2, 1998 among the parties, including the fees and
expenses of Lender's legal counsel.
(b) Borrower shall also pay to the Agent monthly a monitoring fee of
$1,000 per month for consulting and monitoring services, and Borrower shall
reimburse Agent for its reasonable travel and out-of-pocket expenses in
monitoring Borrower's compliance with this Agreement.
Section 2.08. Finder's Fees.
- ---------------------------
Borrower represents to the Lenders that, except as set forth in
Schedule 2.08, no placement fees, commissions, brokerage or finder's fees were
incurred by Borrower in connection with this Agreement or the Debentures.
Borrower shall be responsible for the payment of all such placement fees,
commissions, brokerage or finder's fees.
Section 2.09. Taxes.
- -------------------
(a) Each Debenture shall be convertible into shares of Common Stock and
on such terms as are stated in the Debentures. Such conversion shall be made
without deduction for any present or future taxes, duties, charges or
withholdings, (excluding, in the case of the Lenders, any foreign taxes, any
federal, state or local income taxes and any franchise taxes or taxes imposed
upon them by the jurisdiction, or any political subdivision thereof, under which
the Lenders are organized or are qualified to do business), and all liabilities
with respect thereto (herein "Taxes") shall be paid by Borrower. If Borrower
shall be required by law to deduct any Taxes for which Borrower is responsible
under the preceding sentence from any sum payable hereunder to the Lenders: (i)
the sum payable shall be increased so that after making all required deductions,
the Lenders shall receive an amount equal to the sum it would have received had
no such deductions been made; (ii) Borrower shall make such deductions; and
(iii) Borrower shall pay the full amount deducted to the relevant taxing
authority or other authority in accordance with applicable law. Borrower shall
be entitled to any refunds or returns from any such taxing authority.
(b) Except as otherwise set forth in this Agreement or the other Loan
Documents, Borrower shall pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
9
<PAGE>
from any payment made hereunder or under the Loan Documents or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the other Loan Documents (hereinafter referred to as "Other
Taxes").
(c) Borrower shall indemnify the Lenders for the full amount of Taxes
and Other Taxes reasonably paid by the Lenders or any liability (including any
penalties or interest assessed because of Borrower's defaults) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted. This indemnification shall be made within thirty (30) days
from the date the Lenders make written demand therefor. The Lenders shall
subrogate any and all rights and claims relating to such Taxes and Other Taxes
to Borrower upon payment of said indemnification.
(d) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower in this Section
2.09 shall survive the payment in full of the Obligation.
(e) Borrower shall have no liability or obligation with respect to
taxes on income recognized by the Lenders with respect to the Debentures.
Section 2.10. Conversion Rights.
- -------------------------------
Each Debenture shall be convertible into shares of Common Stock on such
terms and in such amounts as are stated in the Debenture. The holders of the
shares issued upon exercise of the right of conversion as provided in said
Debenture shall be entitled to all the rights of the Lenders as stated in this
Agreement or the other Loan Documents, to the extent such rights are
specifically stated to survive the surrender of the Debenture for conversion as
therein provided.
Section 2.11. Collateral, Security Agreements.
- ---------------------------------------------
The due and prompt performance of the obligations of Borrower to the
Lenders under the Loan Agreement and the Debentures shall be secured by all
tangible and intangible assets of Borrower shall be evidenced by a Security
Agreement executed by and between the Lenders and the Borrower. Financing
statements shall be executed in favor of the Lenders by Borrower. There shall be
no prior security interests on any such assets, except for the security
interests set forth on Schedule 4.05.
ARTICLE III - CONDITIONS PRECEDENT
----------------------------------
Section 3.01. Document Requirements.
- -----------------------------------
The obligation of the Lenders to advance funds at the Loan Closing is
subject to the condition precedent that, on or before the date of such advance,
the Lenders shall have received the following:
(a) DEBENTURES. Duly executed Debentures from Borrower in the Principal
Amounts of each disbursement as requested by the Lenders, styled "Compass Bank
10
<PAGE>
FBO Renaissance Capital Growth and Income Fund III, Inc.," and "Compass Bank FBO
Renaissance U.S. Growth and Income Trust PLC," which shall be in form and
substance acceptable to the Lenders and their counsel.
(b) BORROWER'S SECURITY AGREEMENT. Duly executed Security Agreement and
UCC-1 financing statements from Borrower, which shall be in form and substance
acceptable to the Lenders and their counsel.
(c) OFFICER'S CERTIFICATE. True and correct certificate signed by a
duly authorized officer of Borrower and dated as of the Loan Closing Date
stating that, to the best knowledge and belief of such officer, after reasonable
and due investigation and review of matters pertinent to the subject matter of
such certificate: (i) all of the representations and warranties contained in
Article IV hereof and the other Loan Documents are true and correct in all
material respects as of the Loan Closing Date; and (ii) no event has occurred
and is continuing, or would result from the Loan, which constitutes, or with
notice or lapse of time or both would constitute, a Default or an Event of
Default.
(d) SECRETARY'S CERTIFICATE. Signed certificate of the Secretary of
Borrower which shall certify (i) a copy of the Articles of Incorporation of
Borrower and all amendments thereto, certified by the Secretary of State of the
state of incorporation and dated within ten (10) days prior to the Loan Closing;
(ii) a copy of the Bylaws of Borrower and all amendments thereto certified by
the Secretary of Borrower as of the date of such certification; (iii) copies of
resolutions, as adopted by Borrower's Board of Directors, approving the
execution, delivery and performance, as applicable, of this Agreement, the
Debentures and the other Loan Documents, including the transactions contemplated
herein, stating that such resolutions have been duly adopted, are true and
correct, have not been altered or repealed and are in full force and effect;
(iv) certificates of good standing (or other similar instrument) for Borrower
issued by the appropriate official of the state of incorporation of Borrower and
certificates of qualification and good standing for Borrower issued by the
appropriate official of each of the states for which Borrower is required to be
qualified to do business as a foreign corporation, dated within ten (10) days
prior to Loan Closing; and (v) the names of the officers of Borrower authorized
to sign the Loan Documents to be executed by such officer, together with the
true signatures of each of such officers. It is herewith stipulated and agreed
that the Lenders may thereafter rely conclusively on the validity of this
certificate as a representation of the officers of Borrower duly authorized to
act with respect to the Loan Documents until such time as the Lenders shall
receive a further certificate of the Secretary or Assistant Secretary of
Borrower canceling or amending the prior certificate and submitting the
signatures of the officers thereupon authorized in such further certificate.
(e) LEGAL OPINION. Legal opinion from counsel to Borrower, in form and
substance satisfactory to the Lenders and their counsel.
(f) "LOCK-UP" AGREEMENT. "Lock-Up" Agreements, pursuant to Section
5.19(b) of this Agreement, in form and substance satisfactory to the Lenders and
their counsel.
(g) OTHER DOCUMENTS. Such other information, documents and agreements
as may reasonably be required by the Lenders and the Lenders' counsel to
substantiate Borrower's compliance with the requirements of this Agreement and
the Lenders' compliance with the 1940 Act.
11
<PAGE>
Section 3.02. Other Conditions.
- ------------------------------
The obligation of the Lenders to advance funds at the Loan Closing Date
hereof is subject to the satisfaction, on or before the date of such advance, of
the following conditions:
(a) The Borrower shall have executed and delivered a three (3)-year
employment agreement with Douglas M. Mitchell as President and Chief Executive
Officer of the Borrower acceptable to the Lenders; and
(b) Borrower shall have granted to Douglas M. Mitchell additional stock
options in such amounts and on such terms and conditions acceptable to the
Lenders.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER
All references in this Article to Borrower shall include the
Subsidiaries, if any, unless the context otherwise requires. To induce the
Lenders to make the Loan hereunder, Borrower represents and warrants to the
Lenders that:
Section 4.01. Organization and Good Standing.
- --------------------------------------------
Borrower is duly organized and existing in good standing under the laws
of the state of its incorporation, is duly qualified as a foreign corporation
and in good standing in all states in which failure to qualify would have a
Material Adverse Effect, and has the corporate power and authority to own its
properties and assets and to transact the business in which it is engaged and is
qualified in those states wherein it currently proposes to transact material
business operations in the future if the failure to so qualify would have a
Material Adverse Effect.
Section 4.02. Authorization and Power.
- -------------------------------------
Borrower has the corporate power and requisite authority to execute,
deliver and perform the Loan Documents to be executed by Borrower. Borrower has
duly authorized and has taken all corporate action necessary to authorize,
execute, deliver and perform the Loan Documents executed by Borrower. Borrower
is and will continue to be duly authorized to perform the Loan Documents
executed by Borrower.
Section 4.03. No Conflicts or Consents.
- --------------------------------------
Except as disclosed on Schedule 4.03, neither the execution and
delivery of the Loan Documents, nor the consummation of any of the transactions
therein contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any judgment, license, order or permit
applicable to Borrower, or any indenture, loan agreement, mortgage, deed of
trust, or other agreement or instrument to which Borrower is a party or by which
Borrower is bound, or to which Borrower is subject, or violate any provision of
the charter or bylaws of Borrower or trigger any preemptive rights or rights of
first refusal of any third party. No consent, approval, authorization or order
of any court or governmental authority or third party is required in connection
12
<PAGE>
with the execution and delivery by Borrower of the Loan Documents or to
consummate the transactions contemplated hereby or thereby except those that
have been obtained.
Section 4.04. Enforceable Obligations.
- -------------------------------------
The Loan Documents have been duly executed and delivered by Borrower
and are the legal, valid and binding obligations of Borrower, enforceable in
accordance with their respective terms.
Section 4.05. No Liens.
- ----------------------
Except for Permitted Liens, all of the properties and assets owned or
leased by Borrower are free and clear of all Liens and other adverse claims of
any nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all known or recorded liens for borrowed
money is disclosed on Schedule 4.05.
Section 4.06. Financial Condition.
- ---------------------------------
Borrower has delivered to the Lenders the balance sheet of Borrower as
of December 31, 1997, and the related statement of income, stockholders' equity
and statement of cash flow for the year then ended, audited by its independent
certified public accountant and unaudited financial statements as of March 31,
1998 and for the quarter then ended. Such financial statements fairly present
the financial condition of Borrower as of such dates and have been prepared in
accordance with GAAP (except that unaudited financial statements omit certain
footnotes); and as of the date hereof, there are no obligations, liabilities or
Indebtedness (including contingent and indirect liabilities and obligations) of
Borrower which are (separately or in the aggregate) material and are not
reflected in such financial statements or otherwise disclosed herein or in the
Schedules. Since the date of the above-referenced year end financial statements
and quarterly financial statements, there have not been, except as disclosed in
Schedule 4.06: (i) any Material Adverse Change; (ii) any Dividend declared or
paid or distribution made on the capital stock of Borrower or any capital stock
thereof redeemed or repurchased; (iii) any incurrence of long-term debt by
Borrower; (iv) any salary, bonus or compensation increases to any officers, key
employees or agents of Borrower, other than in the ordinary course of business
and consistent with past practice; or (v) any other material transaction entered
into by Borrower, except in the ordinary course of business and consistent with
past practice.
Section 4.07. No Default.
- ------------------------
No event has occurred and is continuing which constitutes, or with
notice or lapse of time or both, would constitute, a Default or an Event of
Default under this Agreement.
Section 4.08. Material Agreements.
- ---------------------------------
To the best of Borrower's knowledge, neither Borrower nor any
Subsidiary nor any other party is in default, and no event has occurred and is
continuing which, with notice or lapse of time or both, would constitute a
default, under any contract, lease, loan agreement, indenture, mortgage,
security agreement, license agreement or other agreement or obligation to which
it is a party or by which any of its properties is subject, except as described
13
<PAGE>
on Schedule 4.08. To the best knowledge of Borrower, it is not a party to, or
bound by, any contract or agreement, the faithful performance of which is so
onerous so as to create or to likely create a Material Adverse Effect on the
business, operations or financial condition of Borrower.
Section 4.09. No Litigation.
- ---------------------------
Except as disclosed on Schedule 4.09, there are no actions, suits,
investigations, arbitrations or administrative proceedings pending or, to the
best knowledge of Borrower, threatened, against Borrower, and there has been no
change in the status of any of the actions, suits, investigations, litigation or
proceedings disclosed to the Lenders which could reasonably be expected have a
Material Adverse Effect on Borrower or on any transactions contemplated by any
Loan Document. Borrower has not received any claim that Borrower currently
violates any federal, state or local law, ordinance, rule or regulation, which
could have an adverse effect on its business and, to the best of Borrower's
knowledge, no such claim is or has been threatened; and, except as disclosed on
Schedule 4.09, there have been no developments adverse to Borrower with respect
to any pending or threatened claim, action or proceeding of an administrative or
judicial nature.
Section 4.10. Taxes.
- -------------------
All tax returns required to be filed by Borrower in any jurisdiction
have been filed and all taxes (including mortgage recording taxes), assessments,
fees and other governmental charges upon Borrower or upon any of its properties,
income or franchises now due have been paid, in each case, except where the same
are being contested in good faith by appropriate proceedings, as disclosed on
Schedule 4.10.
Except as disclosed on Schedule 4.10, Borrower has not received any
notice of deficiency or other adjustment from any taxing authority that is
unresolved as of the Loan Closing. No audit or examination, claim or proposed
assessment by any taxing authority is pending or, to the best knowledge of
Borrower, threatened against Borrower or any of its properties. To the best
knowledge of Borrower, all ad valorem and other property taxes imposed on
Borrower, or that may become a lien on Borrower's assets and that are due and
payable, have been paid in full. Borrower has withheld or collected from each
payment made to each of its U.S. employees the amount of all taxes (including
federal income taxes, Federal Insurance Contributions Act ("FICA") taxes, and
state and local income, payroll, and wage taxes, among others) required to be
withheld or collected.
Section 4.11. Capitalization.
- ----------------------------
The authorized capital stock of Borrower consists of 80,000,000 shares
of Common Stock, $.01 par value, of which 28,745,226 shares of Common Stock are
issued and outstanding as of May 31, 1998. All of such outstanding shares have
been duly authorized and validly issued are fully paid and nonassessable, and
were not issued in violation of the preemptive rights or rights of first refusal
of any person. Schedule 4.11 sets forth all stock options, warrants, conversion
rights, subscription rights, preemptive rights, rights of first refusal and
other rights or agreements to acquire securities of Borrower and any shares held
in treasury or reserved for issue upon exercise of such stock options, warrants
or conversion rights, subscription rights and other rights or agreements to
acquire securities, including the date of termination of such rights and the
consideration therefor. As of the Loan Closing Date, Borrower does not have
class of securities with respect to which a member of a national securities
14
<PAGE>
exchange, broker, or dealer may extend or maintain credit to or for a customer
pursuant to rules or regulation adopted by the Board of Governors of the Federal
Reserve System under Section 7 of the 1934 Act. Borrower has, and will continue
to have as long as the Debentures remain outstanding, authorized and reserved an
adequate number of shares of Common Stock to permit Conversion of the
Debentures.
Section 4.12. Use of Proceeds.
- -----------------------------
Borrower intends to use proceeds from the Loan as disclosed in Section
2.01 hereof.
Section 4.13. Employee Matters.
- ------------------------------
(a) Except as set forth on Schedule 4.13, Borrower is not a party to
any collective bargaining agreement and is not aware of any activities of any
labor union that is currently seeking to represent or organize its employees;
(b) To the best knowledge of Borrower, Borrower is in compliance with
all federal, state and municipal laws respecting employment and employment
practices, occupational health and safety, and wages and hours, and is not
engaged in any unfair labor practice, and there are no arrears in the payment of
wages or social security taxes;
(c) there is no unfair labor practice complaint against Borrower
pending before the National Labor Relations Board or any state or local agency;
(d) to the best knowledge of Borrower, there is no pending labor strike
or other material labor trouble affecting Borrower (including, without
limitation, any organizational drive);
(e) to the best knowledge of Borrower, there is no material labor
grievance pending against Borrower;
(f) there is no pending representation question respecting the
employees of Borrower before any local, state or federal agency;
(g) except as set forth on Schedule 4.13, there are no pending
proceedings arising out of or under any collective bargaining agreement to which
Borrower is a party, or to the best knowledge of Borrower, any basis for which a
claim may be made under any collective bargaining agreement to which Borrower is
a party; and
(h) there are no pending proceedings arising out of any employment
discrimination claim or any basis for which any such claim may be made.
15
<PAGE>
Section 4.14. Employee Benefit Plans.
- ------------------------------------
Schedule 4.14 lists (i) all "employee benefit plans" as described in
the Employee Retirement Income Security Act of 1974, as amended, and the rules
and regulations promulgated thereunder ("ERISA") (other than a defined
contribution pension plan not requiring any contribution by Borrower, paid
time-off policy or vacation/holiday/sick leave policy, and employee group life
and health plans that are fully funded through commercial insurance) and (ii)
all defined benefit "employee pension benefit plans" (as defined in ERISA).
Neither Borrower nor, to the best knowledge of Borrower, any other person has
engaged in a transaction with respect to any employee benefit plan listed or
required to be listed on Schedule 4.14 which could subject any such plan,
Borrower or the Lenders to a penalty under ERISA or a tax under the Internal
Revenue Code of 1986, as amended (the "Code"), except for those transactions
which could not reasonably be expected to have a Material Adverse Effect. Each
of the employee benefit plans listed or required to be listed on Schedule 4.14
has been operated and administered in accordance with applicable law, including
without limitation ERISA, except for any such failure which would not subject
Borrower or the Lenders to any penalty or other liability and except for any
such failure which would not have an adverse effect upon the applicable plan or
any participant therein. Borrower has not incurred nor presently expects to
incur any liability under Title IV of ERISA that could result in liability to
the Lenders or Borrower. Each employee benefit plan listed or required to be
listed on Schedule 4.14 that is a group health plan within the meaning of
Section 5000(b)(1) of the Code is in compliance with the provisions of Section
4980B(f) of the Code, except for any such non-compliance which would not subject
Borrower or the Lenders to any penalty or liability and except for any such
failure which would not have an adverse effect upon the applicable plan or any
participant therein. There is not any pending or, to the best knowledge of
Borrower, threatened claim by or on behalf of any employee benefit plan, by any
employee covered under any such plan, or otherwise involving any employee
benefit plan (other than routine non-contested claims for benefits).
Section 4.15. Compliance with Laws.
- ----------------------------------
Each of Borrower and the Subsidiaries has all requisite licenses,
permits and certificates, including environmental, health and safety permits,
from federal, state and local authorities necessary to conduct its business and
own and operate its assets (collectively, the "Permits"). Except as set forth on
Schedule 4.15, neither Borrower nor any Subsidiary is in violation of any law,
regulation or ordinance relating to its business, operations and properties,
which individually or in the aggregate could have a Material Adverse Effect, and
the business and operations of Borrower or any Subsidiary do not violate, in any
material respect, any federal, state, local or foreign laws, regulations or
orders. Except as set forth on Schedule 4.15, Borrower and the Subsidiaries have
not received any notice or communication from any federal, state or local
governmental or regulatory authority or otherwise of any such violation or
noncompliance. To the best of their knowledge, Borrower and the Subsidiaries
have not engaged in any practices in violation of any antitrust law or
regulation of any federal, state or local Governmental Authority.
16
<PAGE>
Section 4.16. Licenses and Permits.
- ----------------------------------
Borrower and the Subsidiaries have all licenses and permits relating to
the operation of their respective businesses as are necessary and required for
such ownership and operation, all of which are in good standing and, except as
expressly set forth on Schedule 4.16, are not subject to renewal within less
than one (1) year.
Section 4.17. Contracts.
- -----------------------
Schedule 4.17 lists all contracts to which Borrower or the Subsidiaries
are a party involving obligations in respect of the business for payment,
performance of services or delivery of goods in excess of $10,000 or which
require Borrower to continue to perform for a period of longer than twelve (12)
months (the "Scheduled Contracts"). Borrower has delivered to the Lenders true
and correct copies of all the Scheduled Contracts. All of such Scheduled
Contracts are valid and binding obligations of Borrower or the Subsidiaries, are
in full force and effect and are enforceable against the parties thereto in
accordance with their respective terms. Borrower or the Subsidiaries have not
received any notice that the other parties to the Scheduled Contracts are (i) in
default under such Scheduled Contracts or (ii) consider Borrower to be in
default thereunder. Except as expressly noted in Schedule 4.17, to the best
knowledge of Borrower or the Subsidiaries, no party to any of the Scheduled
Contracts intends to terminate or adversely modify its agreement(s) with respect
thereto or adversely change the volume of business done thereunder.
Section 4.18. Shares Issuable Upon Conversion.
- ---------------------------------------------
The shares of Common Stock of Borrower when issued to the Lenders upon
conversion of the Debentures will be duly and validly issued, fully paid and
nonassessable and in compliance with all applicable securities laws. Such
issuance will not give rise to preemptive rights, rights of first refusal or
similar rights by any other security holder of Borrower.
Section 4.19. Insider.
- ---------------------
(a) Neither Borrower nor any Person having "control" (as that term is
defined in the 1940 Act or in the regulations promulgated pursuant thereto) of
Borrower is an "executive officer," "director," or "principal shareholder" (as
those terms are defined in the 1940 Act) of any Lender.
(b) All agreements between Borrower and any of its officers, directors,
and principal shareholders, including employment agreements, are listed on
Schedule 4.19.
Section 4.20. Subsidiaries.
- --------------------------
Except as disclosed on Schedule 4.20, Borrower does not own any capital
stock, equity, or other interest in, or long-term debt of, any Person, or any
right or option to acquire any such interest in any such Person.
17
<PAGE>
Section 4.21. Casualties.
- ------------------------
Except as disclosed on Schedule 4.21, neither the business nor the
properties of Borrower is currently affected by any fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God or other casualty (whether or not covered by insurance) or,
to the best knowledge of Borrower, any environmental hazard.
Section 4.22. Investment Company Act.
- ------------------------------------
Borrower is not an "investment company," as defined in Section 3 of the
1940 Act, nor a company that would be an investment company, except for the
exclusions from the definition of an investment company in Section 3(C) of the
1940 Act, and Borrower is not controlled by such a company.
Section 4.23. Sufficiency of Capital.
- ------------------------------------
Borrower is, and after consummation of this Agreement and giving effect
to all Indebtedness incurred and transactions contemplated in connection
herewith will be, solvent.
Section 4.24. Corporate Names.
- -----------------------------
Borrower has not, during the preceding five (5) years, done business
under or used any assumed, fictitious or trade names.
Section 4.25. Insurance.
- -----------------------
All of the insurable properties of Borrower are insured for its benefit
under valid and enforceable policies issued by insurers of recognized
responsibility in amounts and against such risks and losses as is customary in
Borrower's industry. Schedule 4.25 sets forth all of Borrower's property
insurance policies.
Section 4.26. Intellectual Property.
- -----------------------------------
Borrower owns or is licensed to use all material trademarks, service
marks, trade names, patents and copyrights presently used to conduct its
business. Borrower has the right to use such intellectual property rights
without infringing or violating the rights of any third parties. No claim has
been asserted by any person to the ownership of or right to use any such rights
or challenging or questioning the validity or effectiveness of any such license
or agreement. Borrower is not in default of any such license agreements in any
material respect, and no event has occurred and is continuing which, with notice
or lapse of time or both, would constitute a material default. Each license
agreement is enforceable in accordance with its terms and has not been canceled,
abandoned or terminated, nor has Borrower received notice thereof. There are no
claims for trademark or copyright infringement pending or threatened against
Borrower or the Subsidiaries or their respective officers or directors. Neither
Borrower nor any Subsidiary is currently using copyrightable material for which
Borrower or any Subsidiary needs, but does not have, a license to conduct its
existing business. To the best knowledge of Borrower, neither Borrower nor any
Subsidiary is currently using any trademarks for which Borrower or any
18
<PAGE>
Subsidiary needs, but does not have, a valid character or trademark license to
conduct its existing business.
Section 4.27. Real Property.
- ---------------------------
(a) Set forth on Schedule 4.27 is a list of the addresses of each
parcel of real property leased to Borrower, as indicated on the Schedule.
Borrower owns no real property.
(b) Borrower has delivered to the Lenders true and correct copies of
all of its leases or subleases and all related amendments, supplements and
modifications and related documents (the "Scheduled Lease Documents"), which
require payments or contingent payments by Borrower of any of the Subsidiaries
subsequent to the date hereof in excess of $5,000. There are no other
agreements, written or oral, between Borrower and any third parties claiming an
interest in Borrower's interest in the Scheduled Leases or otherwise relating to
Borrower's use and occupancy of any leased real property. All such leases are
valid and binding obligations of the parties thereto, are in full force and
effect and enforceable against the parties thereto in accordance with their
terms; and no event has occurred including, but not limited to, the executed,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby which (whether with or without notice, lapse of
time or both) would constitute a default thereunder. No property leased under
any lease which the Lenders have agreed to assume is subject to any lien,
encumbrance, easement, right-of-way, building or use restriction, exception,
variance, reservation or limitation as might in any respect interfere with or
impair the present and continued use thereof in the usual and normal conduct of
Borrower's business.
Section 4.28. Environmental.
- ---------------------------
(a) Borrower is currently in compliance with all Environmental Laws (as
defined below) which compliance includes, but is not limited to, the possession
by Borrower of all permits and other governmental authorization required under
applicable Environmental Laws, and compliance in all material respects with the
terms and conditions thereof, except in any case where the failure to be in
compliance would not have a Material Adverse Effect.
(b) Except as set forth on Schedule 4.28, Borrower has not stored,
disposed of or arranged for disposal of any Materials of Environmental Concern
(as defined below) on any of the real property, except in compliance with
applicable Environmental Laws.
(c) Borrower has not received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that Borrower is not in full compliance with Environmental Laws,
and there are no circumstances that may prevent or interfere with such full
compliance in the future. There is no Environmental Claim (as defined below)
pending or, to Borrower's best knowledge, threatened against, or which has been
made known to, Borrower.
(d) Except as set forth on Schedule 4.28, during the period the
facilities have been held by Borrower, its affiliates or, to Borrower's best
knowledge, its predecessors in interest, there have been no actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the generation, handling, transportation, treatment, storage, release, emission,
19
<PAGE>
discharge, presence or disposal of any Hazardous Substance (as defined below),
that could form the basis of any Environmental Claim against Borrower under any
Environmental Law in effect at, or at any time prior to, the Loan Closing.
(e) Without in any way limiting the generality of the foregoing, (i)
there are no underground storage tanks located on the property owned or leased
by Borrower or the Subsidiaries, (ii) there is no asbestos contained in or
forming part of any building, building component, structure or office space
owned or leased by Borrower or the Subsidiaries, and (iii) no polychlorinated
biphenyls ("PCBs") are used or stored at any property owned or leased by
Borrower or the Subsidiaries.
The following terms shall have the following meanings:
"Environmental Claim" means any claim, action, cause of
action, investigation or notice (written or oral) by any person or entity
alleging potential liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries or penalties) arising out
of, based on or resulting from (a) the presence, or release into the
environment, of any Hazardous Substances at any location, whether or not owned
or operated by Borrower or (b) circumstances forming the basis of any violation,
or alleged violation, of any Environmental Law.
"Environmental Laws" means the federal, state and local
environmental, health or safety laws, regulations, ordinances, rules and
policies and common law in effect on the date hereof and the Loan Closing Date
relating to the use, refinement, handling, treatment, removal, storage,
production, manufacture, transportation or disposal, emissions, discharges,
releases or threatened releases of materials of environmental concern, or
otherwise relating to protection of the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), as the same may be amended or modified to the date hereof and the Loan
Closing Date, including, without limitation, the statutes listed below:
Federal Resources Conservation and Recovery Act of 1976, 42
U.S.C. ss. 6901, et seq.
Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, 42 U.S.C. ss. 9601, et seq.
Federal Clean Air Act, 42 U.S.C. ss. 7401, et seq.
Federal Water Pollution Control Act, Federal Clean Water Act
of 1977, 33 U.S.C. ss. 1251, et seq.
Federal Insecticide, Fungicide and Rodenticide Act, Federal
Pesticide Act of 1978, 7 U.S.C. ss. 136, et seq.
Federal Hazardous Materials Transportation Act, 48 U.S.C.
ss. 1801, et seq.
Federal Toxic Substances Control Act, 15 U.S.C. ss. 2601, et
seq.
Federal Safe Drinking Water Act, 42 U.S.C. ss. 300f, et seq.
20
<PAGE>
"Hazardous Substances" means any toxic or hazardous waste,
pollutants or substances, including, without limitation, asbestos, PCBs,
petroleum products and byproducts, substances defined or listed as "hazardous
substance," "toxic substance," "toxic pollutant" or similarly identified
substance or mixture, in or pursuant to any Environmental Law.
Section 4.29. Survival of Representations and Warranties.
- --------------------------------------------------------
All representations and warranties of Borrower herein shall survive the
Loan Closing and the delivery of the Debentures, and any investigation at any
time made by or on behalf of the Lenders shall not diminish the Lenders' right
to rely on Borrower's representations and warranties as herein set forth.
Section 4.30. Full Disclosure.
- -----------------------------
Neither the representations, warranties, schedules, financial
statements referenced in Section 4.06, nor any business plan, offering
memorandum, certificate, document or written statement to be delivered or caused
to be delivered by Borrower or any of its agents or representatives to the
Lenders in connection with this Agreement, contains, as of the date thereon, any
untrue statement of a material fact or omits or will omit to state any material
fact necessary to keep the statements contained herein or therein from being
misleading in any material respect.
ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER
---------------------------------------------
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Lenders shall otherwise consent in writing,
Borrower agrees that:
Section 5.01. Financial Statements, Reports and Documents.
- ---------------------------------------------------------
(a) Borrower shall accurately and fairly maintain its books of account
in accordance with GAAP, retain Hein + Associates LLP, or other such firm of
independent certified public accountants, requested by Borrower and approved by
the Lenders, to make annual audits of its accounts in accordance with generally
accepted auditing standards.
(b) Borrower shall provide the following reports and information to
each Lender:
(i) As soon as available, and in any event within thirty (30)
days after the close of each month, Borrower's monthly financial statements.
(ii) As soon as available, and in any event within forty-five
(45) days after the close of each fiscal quarter, Borrower's quarterly reports.
21
<PAGE>
(iii) As soon as available, and in any event within ninety
(90) days after the close of each fiscal year, Borrower's annual reports.
(iv) Each fiscal quarter, concurrent with the periodic report
required above, a certificate executed by the Chief Financial Officer or Chief
Executive Officer of Borrower, (A) stating that a review of the activities of
Borrower during such fiscal period has been made under his supervision and that
Borrower has observed, performed and fulfilled each and every obligation and
covenant contained herein and is not in default under any of the Loan Documents
or, if any such default shall have occurred, specifying the nature and status
thereof, and (B) stating that Borrower and the Subsidiaries are in compliance as
of the end of such fiscal quarter with the agreed minimum financial ratios and
standards set forth in Schedule 7.01 to this Agreement.
(v) Promptly (but in any event within ten (10) business days)
upon becoming aware of the existence of any condition or event which constitutes
a Default or which, with notice or the passage of time or both would become a
Default or an Event of Default, written notice specifying the nature and period
of existence thereof and the action which Borrower is taking or proposes to take
with respect thereto.
(vi) Promptly (but in any event within ten (10) business days)
upon the receipt thereof by Borrower or the Board of Directors of Borrower (the
"Board of Directors"), copies of all reports, all management letters and other
detailed information submitted to Borrower or the Board of Directors by
independent accountants in connection with each annual or interim audit or
review of the accounts or affairs of Borrower made by such accountants.
(vii) Promptly (but in any event within ten (10) business
days), such other information relating to the finances, budgets, properties,
business and affairs of Borrower and each Subsidiary, as the Lenders or the
Agent may reasonably request from time to time.
(viii) Promptly upon its becoming available, one copy of each
financial statement, report, press release, notice or proxy statement sent by
Borrower to stockholders generally, and of each regular or periodic report,
registration statement or prospectus filed by Borrower with any securities
exchange or the SEC or any successor agency, and of any order issued by any
Governmental Authority in any proceeding to which Borrower is a party.
Section 5.02. Preparation of Budgets.
- ------------------------------------
(a) Prior to the beginning of Borrower's fiscal year Borrower agrees to
prepare and submit to the Board of Directors and furnish to each Lender a copy
of, an annual plan for such year which shall include, without limitation, plans
for expansion, if any, plans for incurrences of Indebtedness and projections
regarding other sources of funds, quarterly projected capital and operating
expense budgets, cash flow statements, profit and loss statements and balance
sheet projections, itemized in such detail as the Board of Directors may
request.
(b) Borrower shall furnish to the Lenders monthly financial reports,
including budgets (as currently used by management in the conduct of business)
within thirty (30) days of the end of each month.
22
<PAGE>
(c) Borrower agrees that it will review its operations with Agent. Such
operations reviews will be in such depth and detail as Agent shall reasonably
request and will be held as reasonably necessary, generally once a fiscal
quarter.
Section 5.03. Payment of Taxes and Other Indebtedness.
- -----------------------------------------------------
Borrower shall, and shall cause its Subsidiaries to, pay and discharge
(i) all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits, or upon any property belonging to it, before
delinquent, (ii) all lawful claims (including claims for labor, materials and
supplies), which, if unpaid, will give rise to a Lien upon any of its property,
other than a Permitted Lien, and (iii) all of its other Indebtedness in
accordance with their respective terms, except as prohibited hereunder;
provided, however, that Borrower and its Subsidiaries, if any, shall not be
required to pay any such tax, assessment, charge, levy or other claim if and so
long as the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings and appropriate accruals and
reserves therefor have been established in accordance with GAAP.
Section 5.04. Maintenance of Existence and Rights; Conduct of Business.
- ----------------------------------------------------------------------
Subject to Section 6.13, Borrower shall, and shall cause its operating
Subsidiaries to, preserve and maintain their respective corporate existence and
all of their respective material rights and privileges necessary in the normal
conduct of their respective businesses, and to conduct their respective
businesses in an orderly and efficient manner consistent with good business
practices and in accordance with all valid regulations and orders of any
Governmental Authority. Borrower shall keep its principal place of business
within the United States.
Section 5.05. SEC Filings.
- -------------------------
If Borrower has a class of securities which become registered pursuant
to Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports
and proxy statements required of a company whose securities are registered for
public trading under and pursuant to the 1934 Act and any rules and regulations
issued thereunder, and to preserve and maintain its registration thereunder.
Section 5.06. Notice.
- --------------------
Borrower shall promptly notify the Lenders of (i) any Material Adverse
Change, (ii) any default under any Senior Obligations, other Indebtedness having
an aggregate principal amount in excess of $25,000, material agreement, contract
or other instrument to which it is a party or by which any of its properties are
bound, or any acceleration of the maturity of any Indebtedness having an
aggregate principal amount in excess of $25,000, if any, (iii) any material
adverse claim against or affecting Borrower or its Subsidiaries, if any, or any
of its properties, and (iv) the commencement of, and any determination in, any
material litigation with any third party or any proceeding before any
Governmental Authority.
23
<PAGE>
Section 5.07. Compliance with Loan Documents.
- --------------------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, promptly
comply with any and all covenants and provisions of the Loan Documents.
Section 5.08. Compliance with Material Agreements.
- -------------------------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all material agreements, indentures, mortgages or
documents binding on it or affecting its properties or business.
Section 5.09. Operations and Properties.
- ---------------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, act
prudently and in accordance with customary industry standards in managing or
operating its assets, properties, business and investments. Borrower shall, and
shall cause each of its Subsidiaries to, keep in good working order and
condition, ordinary wear and tear excepted, all of its assets and properties
which are necessary to the conduct of its business.
Section 5.10. Books and Records; Access.
- ---------------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, maintain
complete and accurate books and records of its transactions in accordance with
good accounting practices. Borrower shall give each duly authorized
representative of the Lenders access during all normal business hours, upon
reasonable notice, to, and shall permit such representative to examine, copy or
make excerpts from, any and all books, records and documents in the possession
of Borrower and its Subsidiaries and relating to its affairs, and to inspect any
of the properties of Borrower and its Subsidiaries; provided that the Lender
agrees that any such inspection will be performed so as not to interfere with
Borrower's normal business operations. Borrower shall make a copy of this
Agreement, along with any waivers, consents, modifications or amendments,
available for review at its principal office by the Lenders or the Lenders'
representatives.
Section 5.11. Compliance with Law.
- ---------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all applicable laws, rules, regulations, ordinances
and all orders and decrees of any Governmental Authority applicable to it or any
of its properties, businesses, or operations.
Section 5.12. Insurance.
- -----------------------
Borrower shall, and shall cause each of its Subsidiaries to, maintain
such worker's compensation insurance, liability insurance and insurance on its
properties, assets and business, now owned or hereafter acquired, against such
casualties, risks and contingencies, and in such types and amounts, as are
consistent with customary practices and standards of companies engaged in
similar businesses.
24
<PAGE>
Section 5.13. Authorizations and Approvals.
- ------------------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, promptly
obtain, from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals as may be required to enable it
to comply with its obligations hereunder and under the other Loan Documents.
Section 5.14. ERISA Compliance.
- ------------------------------
Borrower shall (i) at all times, make prompt payment of all
contributions required under all Plans, if any, and shall meet the minimum
funding standards set forth in ERISA with respect to its Plans subject to ERISA,
if any, (ii) notify the Lenders immediately of any fact in connection with any
of its Plans, which might constitute grounds for termination thereof by the
Pension Benefit Guaranty Corporation or for the appointment by the appropriate
United States District Court of a trustee to administer such Plan, together with
a statement, if requested by the Lenders, as to the reason therefor and the
action, if any, proposed to be taken with respect thereto, and (iii) furnish to
the Lenders, upon their request, such additional information concerning any of
its Plans as may be reasonably requested.
Section 5.15. Further Assurances.
- --------------------------------
Borrower shall, and shall cause each of its Subsidiaries to, make,
execute or endorse, and acknowledge and deliver or file or cause the same to be
done, all such notices, certifications and additional agreements, undertakings,
transfers, assignments, or other assurances, and take any and all such other
action, as the Lenders may, from time to time, deem reasonably necessary or
proper in connection with any of the Loan Documents, or the obligations of
Borrower or its Subsidiaries, if any, thereunder, which the Lenders may request
from time to time.
Section 5.16. Indemnity by Borrower.
- -----------------------------------
Borrower shall indemnify, save, and hold harmless the Lenders and their
directors, officers, lenders, attorneys, and employees (singularly or
collectively, the "Indemnitee") from and against (i) any and all claims,
demands, actions or causes of action that are asserted against any Indemnitee if
the claim, demand, action or cause of action directly or indirectly relates to
this Agreement and the other Loan Documents, the Loan or the relationship of
Borrower and the Lenders under this Agreement or any transaction contemplated
pursuant to this Agreement, (ii) any administrative or investigative proceeding
by any Governmental Authority directly or indirectly related to a claim, demand,
action or cause of action described in clause (i) above, and (iii) any and all
liabilities, losses, costs, or expenses (including reasonable attorneys' fees
and disbursements) that any Indemnitee suffers or incurs as a result of any of
the foregoing; provided, however, that Borrower shall have no obligation under
this Section 5.16 to the Lenders with respect to any of the foregoing arising
out of the gross negligence or willful misconduct of the Lenders or their
assignees or the breach by any Lender or their assignees of this Agreement or
any other Loan Document or other document executed in connection with any of the
aforesaid, the breach by the Lenders or their assignees of any intercreditor or
participation agreement or commitment with other parties, the violation or
alleged violation of any law, rule or regulation by the Lenders or their
assignees, or from the transfer or disposition by the Lenders of any Debenture
or the Common Stock issued upon conversion of the Debenture. If any claim,
25
<PAGE>
demand, action or cause of action is asserted against any Indemnitee, such
Indemnitee shall promptly notify Borrower, but the failure to so promptly notify
Borrower shall not affect Borrower's obligations under this Section unless such
failure materially prejudices Borrower's right or ability to participate in the
contest of such claim, demand, action or cause of action, as hereinafter
provided. In the event that such Indemnitee's failure to properly notify
Borrower materially prejudices Borrower's right or ability to participate in the
contest of such claim, demand, action, or cause of action, then said Indemnitee
shall have no right to receive, and Borrower shall have no obligation to pay,
any indemnification amounts hereunder. Borrower may elect to defend any such
claim, demand, action or cause of action (at its own expense) asserted against
said Indemnitee and, if requested by Borrower in writing and so long as no
Default or Event of Default shall have occurred and be continuing, such
Indemnitee (at Borrower's expense) shall in good faith contest the validity,
applicability and amount of such claim, demand, action or cause of action and
shall permit Borrower to participate in such contest. Any Indemnitee that
proposes to settle or compromise any claim or proceeding for which Borrower may
be liable for payment to or on behalf of an Indemnitee hereunder shall give
Borrower written notice of the terms of such proposed settlement or compromise
reasonably in advance of settling or compromising such claim or proceeding and
shall obtain Borrower's written concurrence thereto. In the event that said
Indemnitee fails to obtain Borrower's prior written consent to any such
settlement or compromise, said Indemnitee shall have no right to receive and
Borrower shall have no obligation to pay any indemnification amounts hereunder.
Each Indemnitee may employ counsel, which counsel shall be reasonably acceptable
to Borrower, in enforcing its rights hereunder and in defending against any
claim, demand, action, or cause of action covered by this Section 5.16;
provided, however, that each Indemnitee shall endeavor in connection with any
matter covered by this Section 5.16 which also involves any other Indemnitee,
use reasonable efforts to avoid unnecessary duplication of effort by counsel for
all Indemnitees, including by allowing Borrower to select one lawyer for all
parties, such selection to be subject to the approval of such parties, which
approval shall not be unreasonably withheld. Any obligation or liability of
Borrower to any Indemnitee under this Section 5.16 shall survive the expiration
or termination of this Agreement and the repayment of the Debentures.
Section 5.17. Reservation of Shares.
- -----------------------------------
Borrower shall at all times reserve and keep available sufficient
authorized and unissued shares of Common Stock to effect the conversion of the
Debentures.
Section 5.18. Incentive Compensation Plan and Senior Management.
- ---------------------------------------------------------------
Within twelve (12) months from the date of this Agreement:
(a) Borrower shall have adopted an incentive compensation plan for
senior management indexed to specific profitability objectives and acceptable to
the Lenders; and
(b) Borrower shall have employed a Chief Financial Officer acceptable
to the Lenders.
26
<PAGE>
Section 5.19. Retention of Stock Ownership.
- ------------------------------------------
(a) Borrower shall not offer, sell or otherwise dispose of any shares
of Common Stock or securities exercisable or convertible into shares of Common
Stock for a period of twelve (12) months following the Loan Closing, without the
written approval of the Lenders, other than (i) Common Stock issued upon the
conversion of any of the Debentures; (ii) Common Stock issued upon exercise of
any outstanding warrants, options or convertible debt instruments; (iii) Common
Stock issued by Borrower in a registered public offering; and (iv) up to 500,000
shares of Common Stock issuable upon exercise of options or warrants to be
granted to employees under its employee stock option and stock compensation
plans.
(b) Douglas M. Mitchell and Richard Petritz will execute and deliver
Lock-Up Agreements at the Loan Closing which shall provide that for a period of
one (1) year from the date of issue of the Debentures or, if earlier, the period
the Debentures remain outstanding, they will not offer, sell or otherwise
dispose of the shares of Common Stock beneficially owned or controlled by them
(including subsequently acquired shares or securities exercisable or convertible
into shares), except for intra-family transfers or estate planning purposes,
without the consent of the Lenders. Thereafter, each such person shall only sell
such securities pursuant to Rule 144, except for intra-family transfer or estate
planning purposes, until the Debentures have been paid in full.
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER
-------------------------------------------
So long as any part of the Debentures has not been redeemed or
converted hereunder, and until such redemption or conversion in full, unless the
Lenders shall otherwise consent in writing, Borrower agrees that:
Section 6.01. Limitation on Indebtedness.
- ----------------------------------------
At Loan Closing, Borrower and its Subsidiaries shall not have any
outstanding Indebtedness, except Indebtedness arising under this Agreement, the
Debentures, the Guaranties, Permitted Indebtedness or as set forth in Schedule
6.01. Borrower and its Subsidiaries will not incur or guarantee any Indebtedness
senior to or pari passu with the Debentures, without the consent of the Lenders,
except for bank debt and asset-based loans for Borrower's operations and
acquisitions.
Section 6.02. Limitation on Liens.
- ---------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, create,
cause, incur, permit, suffer to exist any Lien upon any of its properties or
assets, other than Permitted Liens.
Section 6.03. Limitation on Investments.
- ---------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, make or
have outstanding any Investments in any Person, except for Borrower's or any
Subsidiary's acquisition or ownership of stock of or other equity interests in
Subsidiaries (including Persons that will be Subsidiaries after giving effect to
such Investments), loans and other transactions between Borrower and any
Subsidiaries, short term bank deposits, money market investments,
investment-grade commercial paper, government securities and such other "cash
27
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equivalent" investments as the Lenders may from time to time approve, and
customer obligations and receivables arising out of sales or leases made or the
rendering of services in the ordinary course of business.
Section 6.04. Alteration of Material Agreements.
- -----------------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, consent
to or permit any alteration, amendment, modification, release, waiver or
termination of any material agreement to which it is party, other than in the
ordinary course of business.
Section 6.05. Transactions with Affiliates.
- ------------------------------------------
Except as disclosed in Schedule 6.05, Borrower shall not, and shall not
permit its Subsidiaries to, enter into any transaction not in the ordinary
course of business with, or pay any management fees to, any Affiliate, except
for intercompany transactions, without the consent of the Lenders, unless the
terms thereof (i) are no less favorable to Borrower or such Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not an Affiliate, or (ii) if such transaction
involves an amount less than $15,000, are set forth in writing and have been
approved by a majority of the members of the Board of Directors having no
personal stake in the transaction. Notwithstanding the foregoing, Borrower may
grant options to employees or directors if otherwise permitted under this
Agreement.
Section 6.06. Limitations on Acquisition of Nonrelated Business.
- ---------------------------------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, engage in
any line of business or acquire any new product lines or business or acquire any
companies unless such new product line or business of Borrower acquired is
primarily involved in, or substantially similar or related to, Borrower's
current lines of business.
Section 6.07. Limitation on Sale of Properties.
- ----------------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, (i) sell,
assign, convey, exchange, lease or otherwise dispose of any of its properties,
rights, assets or business (including the capital stock of its operating
Subsidiaries), whether now owned or hereafter acquired, without the consent of
the Lenders, except in the ordinary course of business, or (ii) sell, assign or
discount any accounts receivable, except in the ordinary course of business
(which shall include receivable financing or securitization), in each case
without the consent of the Lenders; provided, however, that Borrower may sell
its securities to unaffiliated third parties for fair market value and to
employees under its existing stock option plan.
Section 6.08. Fiscal Year and Accounting Method.
- -----------------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, change
its fiscal year or method of accounting, except as permitted by GAAP.
28
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Section 6.09. Liquidation.
- -------------------------
Borrower shall not, and shall not permit its Subsidiaries to, (i)
dissolve or liquidate (except for dissolution or liquidation of inactive
Subsidiaries in the ordinary course of business) or (ii) enter into any other
transaction that has a similar effect.
Section 6.10. Material Amendments to Articles of Incorporation or Bylaws.
- ------------------------------------------------------------------------
Borrower shall not, and shall not permit its Subsidiaries to, amend its
Certificate or Articles of Incorporation (or other charter document) or bylaws
in any material respect, without the consent of the Lenders.
Section 6.11. Executive Compensation.
- ------------------------------------
(a) Borrower will not increase the salary, bonus, or other compensation
programs (whether in cash, securities, or other property, and whether payment is
deferred or current) of its five most senior executive officers, unless such
compensation increase is approved by a majority of the Board of Directors or a
Compensation Committee of the Board of Directors, a majority of whom shall be
nonemployee directors.
(b) Borrower shall not implement any bonus, profit sharing or other
incentive plans, until such plans are formally adopted by the majority of the
Board of Directors or a Compensation Committee of the Board of Directors, a
majority of whom shall be nonemployee directors. Borrower's executive
compensation shall be consistent with the general compensation policies adopted
by the Compensation Committee of the Board of Directors.
Section 6.12. Restricted Payments.
- ---------------------------------
Borrower shall not (i) without the consent of the Lenders, declare or
pay any Dividend (other than stock dividends) or make any other cash
distribution on (a) any Common Stock, (b) any Preferred Stock, if at the time of
such declaration or payment, Borrower is in Default with respect to the Loan,
(ii) purchase, redeem, or otherwise acquire any shares of Common Stock or any
shares of Preferred Stock, without the consent of the Lenders, (iii) make any
payments of Indebtedness (other than Senior Obligations) which are pari passu or
subordinated to the Debentures, if at the time of such payment, Borrower is in
Default with respect to the Loan, or (iv) make any prepayments of Indebtedness
(other than Senior Obligations) which are pari passu or subordinated to the
Debentures, unless the Debentures are prepaid on a pro rata basis, without the
consent of the Lenders. Borrower shall not permit its Subsidiaries to enter into
any agreements restricting the payment of dividends from the Subsidiaries to
Borrower, without the consent of the Lenders.
Section 6.13. Consolidation or Merger.
- -------------------------------------
Borrower shall not consolidate with or merge into any other
corporation, unless the surviving corporation after such merger or consolidation
will not be in Default and the surviving corporation becomes a party to this
Agreement. Subsidiaries shall only consolidate with or merge into Borrower or
another Subsidiary; provided, however, that a Subsidiary may merge or
29
<PAGE>
consolidate with any other entity as long as such Subsidiary is the surviving
corporation of such merger or consolidation, and Borrower is not in Default.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
-------------------------------------------------------------
Section 7.01. Financial Ratios.
- ------------------------------
So long as any of the Debentures have not been redeemed or converted
hereunder, and until such redemption or conversion has been made in full, or
unless the Lenders shall otherwise consent in writing, Borrower, on a
consolidated basis, shall be in compliance with the agreed minimum financial
ratios and standards provided in Schedule 7.01, as of the end of each fiscal
quarter of Borrower and as set forth in its most recent quarterly compliance
certificates delivered pursuant to Section 5.01.
ARTICLE VIII - EVENTS OF DEFAULT
--------------------------------
Section 8.01. Events of Default.
- -------------------------------
An "Event of Default" shall exist if any one or more of the following
events (herein collectively called "Events of Default") shall occur and be
continuing:
(a) Borrower shall fail to pay when due (or shall state in writing an
intention not to pay or its inability to pay) any installment of interest on or
principal of, any Debenture or any fee, expense or other payment required
hereunder;
(b) Any representation or warranty made under this Agreement, or any of
the other Loan Documents, or in any certificate or statement furnished or made
to Agent pursuant hereto or in connection herewith or with the Loans hereunder
shall prove to be untrue or inaccurate in any material respect as of the date on
which such representation or warranty was made;
(c) Default shall occur in the performance of any of the covenants or
agreements of Borrower or of its Subsidiaries contained herein, or in any of the
other Loan Documents and the Company shall remain in default for a period of
forty-five (45) days;
(d) Default shall occur in the payment of any Senior Obligations or in
the payment of any other Indebtedness having an aggregate principal amount in
excess of $25,000, or nonmonetary default shall occur in respect of any note,
loan agreement or credit agreement relating to any Indebtedness having an
aggregate principal amount in excess of $25,000, and such default continues for
more than the period of grace, if any, specified therein or any Indebtedness
having an aggregate principal amount in excess of $25,000, shall become due
before its stated maturity by acceleration of the maturity, or any indebtedness
having an aggregate principal amount in excess of $25,000, shall become due by
its terms and shall not be promptly paid or extended;
(e) Any of the Loan Documents shall cease to be legal, valid and
binding agreements enforceable against Borrower in accordance with the
respective terms, or shall in any way be terminated or become or be declared by
30
<PAGE>
any court or by Borrower or any Subsidiary in any legal proceeding to be
ineffective or inoperative, or shall in any way whatsoever cease to give or
provide the respective rights, titles, interests, remedies, powers or privileges
stated therein to be created thereby;
(f) Borrower or any of its Subsidiaries holding a substantial portion
of the total consolidated assets of the Company shall (i) apply for or consent
to the appointment of a receiver, trustee, custodian, intervenor or liquidator
of itself, or of all or substantially all of such Person's assets, (ii) file a
voluntary petition in bankruptcy, admit in writing that such Person is unable to
pay such Person's debts as they become due or generally not pay such Person's
debts as they become due, (iii) make a general assignment for the benefit of
creditors, (iv) file a petition or answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy or insolvency
laws, (v) file an answer admitting the material allegations of, or consent to,
or default in answering, a petition filed against such Person in any bankruptcy,
reorganization or insolvency proceeding, or (vi) take corporate action for the
purpose of effecting any of the foregoing;
(g) An involuntary petition or complaint shall be filed against
Borrower or any of its Subsidiaries seeking bankruptcy or reorganization of such
Person or the appointment of a receiver, custodian, trustee, intervenor or
liquidator of such Person, or all or substantially all of such Person's assets,
and such petition or complaint shall not have been dismissed within sixty (60)
days of the filing thereof or an order, order for relief, judgment or decree
shall be entered by any court of competent jurisdiction or other competent
authority approving a petition or complaint seeking reorganization of Borrower
or its subsidiary or appointing a receiver, custodian, trustee, intervenor or
liquidator of such Person, or of all or substantially all of such Person's
assets;
(h) Any final judgment(s) for the payment of money in excess of the sum
of $50,000 in the aggregate shall be rendered against Borrower or any Subsidiary
and such judgment or judgments shall not be satisfied or discharged prior to the
date on which any of its assets could be lawfully sold to satisfy such judgment;
or
(i) Borrower shall fail to issue and deliver shares of Common Stock as
provided herein upon conversion of the Debentures.
Section 8.02. Remedies Upon Event of Default.
- --------------------------------------------
(a) If an Event of Default shall have occurred and be continuing, then
the Lenders may exercise any one or more of the following rights and remedies,
and any other remedies provided in any of the Loan Documents, as the Lenders in
their sole discretion may deem necessary or appropriate:
(i) declare the unpaid Principal Amount (after application of
any payments or installments received by the Lenders) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities hereunder to be
forthwith due and payable, whereupon the same shall forthwith become due and
payable without presentment, demand, protest, notice of default, notice of
acceleration or of intention to accelerate or other notice of any kind, all of
which Borrower hereby expressly waives, anything contained herein or in the
Debentures to the contrary notwithstanding;
31
<PAGE>
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce
any of the Lenders' rights and remedies under the Loan Documents, or otherwise
provided under or pursuant to any applicable law or agreement, all of which
rights may be specifically enforced.
(b) In the event of a violation by Borrower of the negative covenants
set forth in Article VI, the Lenders may, in their sole discretion, (i) waive
compliance with the covenants, provided Borrower is in compliance with Section
7.01 hereof; or (ii) require Borrower to redeem the Debentures at the higher of
market value or the unpaid principal amount of the Debentures, together with an
amount equal to an eighteen percent (18%) annual yield on the principal amount
through the Redemption Date, whichever is greater.
Section 8.03. Performance by the Lenders.
- ----------------------------------------
Should Borrower or any Subsidiary fail to perform any covenant, duty or
agreement contained herein or in any of the other Loan Documents, any Lender or
Agent may perform or attempt to perform such covenant, duty or agreement on
behalf of Borrower. In such event, Borrower shall, at the request of any Lender
or Agent, promptly pay any amount reasonably expended by any Lender or Agent in
such performance or attempted performance to any Lender or Agent at its
principal office, together with interest thereon, at the interest rate specified
in the Debenture, from the date of such expenditure until paid. Notwithstanding
the foregoing, it is expressly understood that any Lender or Agent assumes no
liability or responsibility for the performance of any duties of Borrower or any
Subsidiary hereunder or under any of the other Loan Documents.
Section 8.04. Payment of Expenses Incurred by the Lenders.
- ---------------------------------------------------------
Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided herein,
Borrower agrees to pay and shall pay all costs and expenses (including
attorneys' fees and expenses) incurred by any Lender or Agent in connection with
the preservation and enforcement of the Lenders' rights under this Agreement,
the Debentures or any other Loan Document.
ARTICLE IX - REGISTRATION RIGHTS
Section 9.01. "Piggy-Back" Registration.
- ----------------------------------------
If Borrower proposes to register any of its capital stock under the
1933 Act in connection with the public offering of such securities for its own
account or for the account of its security holders, other than Holders of
Registrable Securities pursuant hereto (a "Piggy-Back Registration Statement"),
except for (i) a registration relating solely to the sale of securities to
participants in Borrower's stock plans or employee benefit plans or (ii) a
registration relating solely to an transaction for which Form S-4 may be used,
then:
(a) Borrower shall give written notice of such determination to each
Holder of Registrable Securities, and each such Holder shall have the right to
request, by written notice given to Borrower within fifteen (15) days of the
date that such written notice was mailed by Borrower to such Holder, that a
32
<PAGE>
specific number of Registrable Securities held by such Holder be included in the
Piggy-Back Registration Statement (and related underwritten offering, if any);
(b) If the Piggy-Back Registration Statement relates to an underwritten
offering, the notice given to each Holder shall specify the name or names of the
managing underwriter or underwriters for such offering. In addition, such notice
shall also specify the number of securities to be registered for the account of
Borrower and for the account of its shareholders (other than the Holders of
Registrable Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an underwritten
offering, each Holder of Registrable Securities to be included therein must
agree (i) to sell such Holder's Registrable Securities on the same basis as
provided in the underwriting arrangement approved by Borrower, and (ii) to
timely complete and execute all questionnaires, powers of attorney, indemnities,
hold-back agreements, underwriting agreements and other documents required under
the terms of such underwriting arrangements or by the SEC or by any state
securities regulatory body;
(d) If the managing underwriter or underwriters for the underwritten
offering under the Piggy-Back Registration Statement determines that inclusion
of all or any portion of the Registrable Securities in such offering would
materially adversely affect the ability of the underwriters for such offering to
sell all of the securities requested to be included for sale in such offering at
the best price obtainable therefor, the aggregate number of Registrable
Securities that may be sold by the Holders shall be limited to such number of
Registrable Securities, if any, that the managing underwriter or underwriters
determine may be included therein without such adverse effect as provided below.
If the number of securities proposed to be sold in such underwritten offering
exceeds the number of securities that may be sold in such offering, there shall
be included in the offering, first, up to the maximum number of securities to be
sold by Borrower for its own account and for the account of other stockholders
(other than Holders of Registrable Securities), as they may agree among
themselves, and second, as to the balance, if any, Registrable Securities
requested to be included therein by the Holders thereof (pro rata as between
such Holders based upon the number of Registrable Securities initially proposed
to be registered by each), or in such other proportions as the managing
underwriter or underwriters for the offering may require; provided, however,
that in the event that the number of securities proposed to be sold in such
underwritten offering exceeds the number of securities that may be sold in such
offering pursuant to the terms and conditions set forth above and the Piggy-Back
Registration Statement is a result of public offering by Borrower of its
securities for its own account, there shall be included in the offering, first,
up to the maximum number of securities to be sold by Borrower for its own
account and second, as to the balance, if any, securities to be sold for the
account of Borrower's stockholders (both the Holders of Registrable Securities
requested and such other stockholders of Borrower requested to be included
therein) on a pro rata basis; provided, that the Holders shall be permitted to
sell an aggregate of not less than fifteen percent (15%) of the securities to be
offered in the Borrower's initial public offering to satisfy the underwriters'
over-allotment option;
(e) Holders of Registrable Securities shall have the right to withdraw
their Registrable Securities from the Piggy-Back Registration Statement, but if
the same relates to an underwritten offering, they may only do so during the
time period and on the terms agreed upon among the underwriters for such
underwritten offering and the Holders of Registrable Securities;
33
<PAGE>
(f) The exercise of the registration rights of the Holders with respect
to any specific underwritten offering shall be subject to a ninety (90)-day
delay at the request of the managing underwriter; and
(g) All demand and piggy-back registration rights of the Holders shall
terminate when all of the Registrable Securities Then Outstanding may be sold
pursuant to Rule 144(k).
Section 9.02. Shelf Registration.
- ---------------------------------
Borrower shall file a "shelf" registration statement under the 1933 Act
(the "Shelf Registration") covering all of the Registrable Securities within 180
days of the date of issue of the Debentures, and Borrower shall use its best
efforts to cause the Shelf Registration to be declared effective and to keep the
Shelf Registration continuously effective until all of the Registrable
Securities registered therein cease to be Registrable Securities. The securities
shall cease to be Registrable Securities (a) when the Shelf Registration shall
have become effective under the 1933 Act and such securities shall have been
disposed of pursuant to the Shelf Registration, or (b) such securities shall
have been sold as permitted by Rule 144 under the 1933 Act or the date on which
the Registrable Securities may be sold pursuant to Rule 144(k), whichever is the
first to occur. The holders of the Debentures shall utilize Rule 144 in their
sole discretion to the extent it meets their distribution requirements. Borrower
agrees, if necessary, to supplement or amend the Shelf Registration, as required
by the registration form utilized by Borrower or by the instructions applicable
to such registration form or by the 1933 Act, and Borrower agrees to furnish to
the holders of the Registrable Securities copies of any such supplement or
amendment prior to its being used.
Section 9.03. Obligations of Borrower.
- --------------------------------------
Whenever required to effect the registration of any Registrable
Securities pursuant to this Agreement, Borrower shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use all reasonable efforts to cause such
registration statement to become effective, and keep such registration statement
effective until the sooner of all such Registrable Securities having been
distributed, or until one hundred twenty (120) days have elapsed since such
registration statement became effective (subject to extension of this period as
provided below);
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement, or one hundred twenty (120) days have elapsed since such
registration statement became effective (subject to the extension of this period
as provided below);
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
34
<PAGE>
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that Borrower shall not be required in connection therewith or as a
condition thereto to qualify as a broker-dealer in any states or jurisdictions
or to do business or to file a general consent to service of process in any such
states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to Borrower and the Holders of a majority of the Registrable
Securities to be included in such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing; and
(g) In the event of the notification provided for in Section 9.03(f)
above, Borrower shall use its best efforts to prepare and file with the SEC (and
to provide copies thereof to the Holders) as soon as reasonably possible an
amended prospectus complying with the 1933 Act, and the period during which the
prospectus referred to in the notice provided for in Section 9.03(f) above
cannot be used and the time period prior to the use of the amended prospectus
referred to in this Section 9.03(g) shall not be counted in the one hundred
twenty (120)-day period of this Section 9.03.
Section 9.04. Furnish Information.
- ----------------------------------
(a) It shall be a condition precedent to the obligations of Borrower to
take any action pursuant to this Article IX that the selling Holders shall
furnish to Borrower any and all information reasonably requested by Borrower,
its officers, directors, employees, counsel, agents or representatives, the
underwriter or underwriters, if any, and the SEC or any other Governmental
Authority, including, but not limited to: (i) such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities, as shall be required to effect the registration
of their Registrable Securities; and (ii) the identity of and compensation to be
paid to any proposed underwriter or broker-dealer to be employed in connection
therewith.
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the 1933 Act, Borrower shall
give the Holders of Registrable Securities on whose behalf such Registrable
Securities are to be registered and their underwriters, if any, and their
respective counsel and accountants, at such Holders' sole cost and expense
(except as otherwise set forth herein), such access to copies of Borrower's
records and documents and such opportunities to discuss the business of Borrower
with its officers and the independent public accountants who have certified its
financial statements as shall be reasonably necessary in the opinion of such
35
<PAGE>
Holders and such underwriters or their respective counsel, to conduct a
reasonable investigation within the meaning of the 1933 Act.
Section 9.05. Expenses of Registration.
- ---------------------------------------
All expenses, other than underwriting discounts and commissions
applicable to the Registrable Securities sold by selling Holders, incurred in
connection with the registration of the Registrable Securities pursuant to this
Article, including, without limitation, all registration, filing and
qualification fees, printer's expenses, and accounting and legal fees and
expenses of Borrower and the selling Holders, shall be borne by Borrower.
Section 9.06. Indemnification Regarding Registration Rights.
- ------------------------------------------------------------
If any Registrable Securities are included in a registration statement
under this Article:
(a) To the extent permitted by law, Borrower will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any underwriter
(as defined in the 1933 Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the 1933 Act or the
1934 Act, against any losses, claims, damages, liabilities (joint or several) or
any legal or other costs and expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action to which they may become subject under the 1933 Act, the 1934 Act or
state law, insofar as such losses, claims, damages, costs, expenses or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (each a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact with respect
to Borrower or its securities contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements therein; (ii) the omission or alleged omission to
state therein a material fact with respect to Borrower or its securities
required to be stated therein or necessary to make the statements therein not
misleading; or (iii) any violation or alleged violation by Borrower of the 1933
Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law.
Notwithstanding the foregoing, the indemnity agreement contained in this Section
9.06(a) shall not apply and Borrower shall not be liable (i) in any such case
for any such loss, claim, damage, costs, expenses, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person, or (ii) for amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
prior written consent of Borrower, which consent shall not be unreasonably
withheld.
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Agreement shall
indemnify and hold harmless Borrower, each of its directors and officers who
have signed the registration statement, each Person, if any, who controls
Borrower within the meaning of the 1933 Act, the 1934 Act, any state securities
law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or
any state securities law, each of Borrower's employees, agents, counsel and
representatives, any underwriter and any other Holder selling securities in such
registration statement, or any of its directors or officers, or any person who
controls such Holder, against any losses, claims, damages, costs, expenses,
36
<PAGE>
liabilities (joint or several) to which Borrower or any such director, officer,
controlling person, employee, agent, representative, underwriter, or other such
Holder, or director, officer or controlling person thereof, may become subject,
under the 1933 Act, the 1934 Act or other federal or state law, only insofar as
such losses, claims, damages, costs, expenses or liabilities or actions in
respect thereto arise out of or are based upon any Violation, in each case to
the extent and only to the extent that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such. Each such Holder will indemnify any legal or
other expenses reasonably incurred by Borrower or any such director, officer,
employee, agent representative, controlling person, underwriter or other Holder,
or officer, director or of any controlling person thereof, in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section
9.06(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, costs, expenses, liability or action if such settlement is effected
without the prior written consent of the Holder, which consent shall not be
unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section
9.06 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9.06, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonable fees and expenses
of such counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve the indemnifying party of its obligations under this Section 9.06,
except to the extent that the failure results in a failure of actual notice to
the indemnifying party and such indemnifying party is materially prejudiced in
its ability to defend such action solely as a result of the failure to give such
notice.
(d) If the indemnification provided for in this Section 9.06 is
unavailable to an indemnified party under this Section in respect of any losses,
claims, damages, costs, expenses, liabilities or actions referred to herein,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, costs, expenses, liabilities or actions
in such proportion as is appropriate to reflect the relative fault of Borrower,
on the one hand and of the Holder, on the other, in connection with the
Violation that resulted in such losses, claims, damages, costs, expenses,
liabilities or actions. The relative fault of Borrower, on the one hand, and of
the Holder, on the other, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of the material fact or
the omission to state a material fact relates to information supplied by
Borrower or by the Holder, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
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(e) Borrower, on the one hand, and the Holders, on the other, agree
that it would not be just and equitable if contribution pursuant to this Section
9.06 were determined by a pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, costs, expenses,
liabilities and actions referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses incurred by such indemnified party in connection with
defending any such action or claim. Notwithstanding the provisions of this
Section 9.06, neither Borrower nor the Holders shall be required to contribute
any amount in excess of the amount by which the total price at which the
securities were offered to the public exceeds the amount of any damages which
Borrower or each such Holder has otherwise been required to pay by reason of
such Violation. No person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation.
Section 9.07. Reports Under the 1934 Act.
- -----------------------------------------
If Borrower has a class of securities registered pursuant to Section 12
of the 1934 Act, with a view to making available to the Holders the benefits of
Rule 144 promulgated under the 1933 Act ("Rule 144") and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
Borrower to the public without registration or pursuant to a registration on
Form S-3, if applicable, Borrower agrees to use its reasonable efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other
documents required of Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by such
registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ;
or list all Common Stock covered by such registration statement on such
securities exchange on which any of the Common Stock is then listed; or, if the
Common Stock is not then quoted on NASDAQ or listed on any national securities
exchange, use its reasonable efforts within eighteen (18) months from the date
of this Agreement to have such Common Stock covered by such registration
statement quoted on NASDAQ or, at the option of Borrower, listed on a national
securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, (i) forthwith upon request a copy of the most recent annual or
quarterly report of Borrower and such other SEC reports and documents so filed
by Borrower, and (ii) such other information (but not any opinion of counsel) as
may be reasonably requested by any Holder seeking to avail himself of any rule
or regulation of the SEC which permits the selling of any such securities
without registration or pursuant to such form.
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Section 9.08. Assignment of Registration Rights.
- ------------------------------------------------
Subject to the terms and conditions of this Agreement, and the
Debentures, the right to cause Borrower to register Registrable Securities
pursuant to this Agreement may be assigned by Holder to any transferee or
assignee of such securities; provided that said transferee or assignee is a
transferee or assignee of at least ten percent (10%) of the Registrable
Securities and provided that Borrower is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act; it being the intention that so long as Holder
holds any Registrable Securities hereunder, either Holder or its transferee or
assignee of at least ten percent may exercise the demand right to registration
and piggy-back registration rights hereunder. Other than as set forth above, the
parties hereto hereby agree that the registration rights hereunder shall not be
transferable or assigned and any contemplated transfer or assignment in
contravention of this Agreement shall be deemed null and void and of no effect
whatsoever.
Section 9.09. Other Matters.
- ----------------------------
(a) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, with respect to each offering of the
Registrable Securities, whether each Holder is offering such Registrable
Securities in an underwritten or nonunderwritten offering, such Holder will
comply with Regulation M or such other or additional anti-manipulation rules
then in effect until such offering has been completed, and in respect of any
nonunderwritten offering, in writing will inform Borrower, any other Holders who
are selling shareholders, and any national securities exchange upon which the
securities of Borrower are listed, that the Registrable Securities have been
sold and will, upon Borrower's request, furnish the distribution list of the
Registrable Securities. In addition, upon the request of Borrower, each Holder
will supply Borrower with such documents and information as Borrower may
reasonably request with respect to the subject matter set forth and described in
this Section 9.09.
(b) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, upon receipt of any notice from Borrower of
the happening of any event which makes any statement made in the registration
statement, the prospectus or any document incorporated therein by reference,
untrue in any material respect or which requires the making of any changes in
the registration statement, the prospectus or any document incorporated therein
by reference, in order to make the statements therein not misleading in any
material respect, such Holder will forthwith discontinue disposition of
Registrable Securities under the prospectus related to the applicable
registration statement until such Holder's receipt of the copies of the
supplemented or amended prospectus, or until it is advised in writing by
Borrower that the use of the prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference in
the prospectus.
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ARTICLE X - BOARD OF DIRECTORS
------------------------------
Section 10.01. Board of Directors Representation or Attendance by Observer.
- --------------------------------------------------------------------------
(a) Borrower herewith agrees that Agent shall have the right from time
to time to designate a nominee to serve as a member of the Board of Directors.
In the event of a monetary Default under Section 8.01 hereof, the Agent shall
have the right to designate one (1) additional nominee to serve as a member of
the Board of Directors. Borrower will nominate and use its best efforts to
secure the election of such designee(s) as director(s) of Borrower. During such
time as Agent has not exercised such rights, the Agent shall have the right to
designate an observer, who shall be entitled to attend and participate (but not
vote) in all meetings of the Board of Directors and to receive all notices,
information, correspondence and communications sent by Borrower to members of
the Board of Directors. All costs and expenses incurred in connection therewith
by any such designated director(s) or observer, or by Agent on behalf of such
director(s) or observer, shall be reimbursed by Borrower.
(b) Any such director or observer shall, if requested to do so, absent
himself or herself from the meeting in the event of, and so long as, the Board
of Directors are considering and acting on matters pertaining to any rights or
obligations of Borrower or the Lender under this Agreement, the Debentures, the
other Loan Documents.
Section 10.02. Limitation of Authority of Persons Designated as a Director
- --------------------------------------------------------------------------------
Nominee.
- --------
It is provided and agreed that the actions and advice of any person
while serving pursuant to Section 10.01 as a director or an observer at meetings
of the Board of Directors shall be construed to be the actions and advice of
that person alone and not be construed as actions of the Lender as to any notice
of requirements or rights of Lender under this Agreement, the Debentures, or the
other Loan Documents nor as actions of the Lender to approve modifications,
consents, amendments or waivers thereof; and all such actions or notices shall
be deemed actions or notices of the Lender only when duly provided in writing
and given in accordance with the provisions of this Agreement.
Section 10.03. Nonliability of the Lenders.
- ------------------------------------------
The relationship between Borrower and the Lenders is, and shall at all
times remain, solely that of borrower and lender. The Lenders neither undertake
nor assume any responsibility or duty to Borrower to review, inspect, supervise,
pass judgment upon, or inform Borrower of any matter in connection with any
phase of Borrower's business, operations, or condition, financial or otherwise.
Borrower shall rely entirely upon its own judgment with respect to such matters,
and any review, inspection, supervision, exercise of judgment, or information
supplied to Borrower by the Lenders, or any representative or agent of the
Lenders, in connection with any such matter is for the protection of the
Lenders, and neither Borrower nor any third party is entitled to rely thereon.
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ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS
-----------------------------------------------
Section 11.01. The Lenders' Representations and Warranties to Other Lenders.
- ----------------------------------------------------------------------------
Each Lender represents and warrants to the other Lenders and the Agent:
(a) It is legal for it to make its portion of the Loan, and the making
of such portion of the Loan complies with laws applicable to it;
(b) It has made, without reliance upon any other Lenders, its own
independent review (including any desired investigations and inspections) of,
and it accepts and approves, the Loan, this Agreement and the associated
documents and all other matters and information which it deems pertinent. It
acknowledges that the Loan Documents are a complete statement of all
understandings and respective rights and obligations between and among the
Lenders, Subsidiaries and Borrowers regarding the Loan;
(c) None of the Lenders have made any express or implied representation
or warranty to any other Lender with respect to this transaction;
(d) It will, independently and without reliance upon any other Lender,
and based upon such documents and information as it shall deem appropriate at
the time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement, and will make such
investigation as it deems necessary to inform itself as to the Loan, the Loan
Documents, Borrower and any collateral; provided, however, nothing contained in
this Section shall limit Agent's obligation to provide the other Lenders with
the information and documents Agent is expressly required to deliver under this
Agreement;
(e) The relationship of each Lender is, and shall at all times remain,
solely that of each Lender of its respective Loan. The Lenders are not partners
or joint venturers in connection with the Loan; and
(f) The Loan Documents executed by the Lenders are valid and binding
obligations of the Lenders.
Section 11.02. Waiver of Loan Provisions or Interest or Principal Payments.
- ---------------------------------------------------------------------------
A waiver of an interest or principal payment, a declaration of a
Default or any amendment, modification or waiver of this Agreement or the
Debentures will require the consent of the Lenders.
Section 11.03. Agency.
- ----------------------
(a) Each of the Lenders hereby designates and appoints Renaissance
Group as its Agent under this Agreement and authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and to exercise such powers as are set forth herein or therein,
together with such other powers as are reasonable incidental thereto. In
performing its functions and duties under this Agreement, the Agent shall act
solely as agent of the Lenders and does not assume and shall not be deemed to
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have assumed any obligation toward or relationship of agency or trust with or
for Borrower. The Agent may perform any of its duties under this Agreement, or
under the other Loan Documents, by or through its agents or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement, in the other Loan Documents. Except as
expressly provided herein, the duties of the Agent shall be mechanical and
administrative in nature. The Agent shall have and may use its sole discretion
with respect to exercising or refraining from taking any actions which the Agent
is expressly entitled to take or assert under this Agreement, the other Loan
Documents. The Agent shall not have by reason of this Agreement a fiduciary
relationship with respect to the Lenders. Nothing in this Agreement or any of
the other Loan Documents, express or implied, is intended to or shall be
construed to impose upon the Agent any obligations in respect of this Agreement,
any of the other Loan Documents except as expressly set forth herein or therein.
If the Agent seeks the consent or approval of the Lenders to the taking or
refraining from taking any action hereunder, the Agent shall send notice thereof
to the Lenders. The Agent may employ agents, co-agents and attorneys-in-fact and
shall not be responsible to the Lenders or Borrower, except as to money or
securities received by it or its authorized agents, for the negligence or
misconduct of any such agents or attorneys-in-fact selected by it with
reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees or
agents shall be liable to the Lenders for any action taken or omitted by it or
any of them under this Agreement, any of the other Loan Documents, or in
connection herewith or therewith, except that no Person shall be relieved of any
liability imposed by law, intentional tort or gross negligence. The Agent shall
not be not be responsible to the Lenders for any recitals, statements,
representations or warranties contained in this Agreement or for the execution,
effectiveness, genuineness, validity, enforceability, collectability, or
sufficiency of this Agreement, any of the other Loan Documents or any of the
transactions contemplated thereby, or for the financial condition of any of
Borrowers. The Agent shall not be required to make any inquiry concerning either
the performance or observance of any of the terms, provisions or conditions of
this Agreement, any of the other Loan Documents or the financial condition of
Borrower, or the existence or possible existence of any Default or Event of
Default. Agent shall give the Lenders notice of any Default or Event of Default
of which Agent has actual notice. The Agent may at any time request instructions
from the Lenders with respect to any actions or approvals which by the terms of
this Agreement or of any of the other Loan Documents the Agent is permitted or
required to take or to grant, and if such instructions are promptly requested,
the Agent shall be absolutely entitled to refrain from taking any action or to
withhold any approval and shall not be under any liability whatsoever to any
Person for refraining from any action or withholding any approval under any of
the Loan until it shall have received such instructions from the Lenders.
Without limiting the foregoing, the Lenders shall not have any right of action
whatsoever against the Agent as a result of the Agent acting or refraining from
acting under this Agreement, any of the other Loan Documents in accordance with
the instructions of the Lenders.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person, and with respect to all matters pertaining to
this Agreement, any of the other Loan Documents and its duties hereunder or
thereunder, upon advice of counsel selected by it.
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(e) To the extent that the Agent is not reimbursed and indemnified by
Borrower, the Lenders will reimburse and indemnify the Agent for and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement, any of the other
Loan Documents or any action taken or omitted by the Agent under this Agreement,
any of the other Loan Documents. The obligations of the Lenders under this
indemnification provision shall survive the payment in full of the Loans and the
termination of this Agreement.
ARTICLE XII - MISCELLANEOUS
---------------------------
Section 12.01. Strict Compliance.
- ---------------------------------
Any waiver by the Lenders of any breach or any term or condition of
this Agreement, the other Loan Documents shall not be deemed a waiver of any
other breach, nor shall any failure to enforce any provision of this Agreement,
the other Loan Documents operate as a waiver of such provision or of any other
provision, nor constitute nor be deemed a waiver or release of Borrower for
anything arising out of, connected with or based upon this Agreement or the
other Loan Documents.
Section 12.02. Waivers and Modifications.
- -----------------------------------------
All modifications, consents, amendments or waivers (herein "Waivers")
of any provision of this Agreement, the Debentures or any other Loan Documents,
and any consent to departure therefrom, shall be effective only if the same
shall be in writing by the Lenders holding a majority of the principal amount of
the Debentures and then shall be effective only in the specific instance and for
the purpose for which given. No notice or demand given in any case shall
constitute a waiver of the right to take other action in the same, similar or
other instances without such notice or demand. No failure to exercise, and no
delay in exercising, on the part of Agent or any Lender, any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise any other
right. The rights of any Lender hereunder under the other Loan Documents shall
be in addition to all other rights provided by law.
Section 12.03. Limitation on Liability.
- ---------------------------------------
The duties, warranties, covenants and promises arising from the Loan
Documents of each Lender to Borrower shall be several and not joint, and
Borrower shall have no legal or equitable cause of action against any Lender (or
its successors or assigns) for any liability of any other Lender (or its
successors or assigns).
Section 12.04. Choice of Forum; Consent to Service of Process and Jurisdiction.
- -------------------------------------------------------------------------------
Any suit, action or proceeding against Borrower with respect to this
Agreement or the Debentures or any judgment entered by any court in respect
thereof, may be brought in the courts of the State of Texas, County of Dallas,
or in the United States federal courts located in the State of Texas, as each
Lender in its sole discretion may elect, and Borrower hereby submits to the
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nonexclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding. Borrower hereby agrees that service of all writs, process
and summonses in any such suit, action or proceeding brought in the State of
Texas may be brought upon, and Borrower hereby irrevocably appoints, the CT
Corporation System, Dallas, Texas, as its true and lawful attorney-in-fact in
the name, place and stead of Borrower to accept such service of any and all such
writs, process and summonses. Borrower hereby irrevocably waives any objections
which it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any Debenture brought
in such courts, and hereby further irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in any
inconvenient forum.
Section 12.05. Arbitration.
- ---------------------------
(a) Upon the demand of the Lenders or Borrower (collectively the
"parties"), made before the institution of any judicial proceeding or not more
than sixty (60) days after service of a complaint, third party complaint,
cross-claim or counterclaim or any answer thereto or any amendment to any of the
above, any Dispute (as defined below) shall be resolved by binding arbitration
in accordance with the terms of this arbitration clause. A "Dispute" shall
include any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now existing
or hereafter occurring between the parties arising out of, pertaining to or in
connection with this Agreement, any document evidencing, creating, governing, or
securing any indebtedness guaranteed pursuant to the terms hereof, or any
related agreements, documents, or instruments (the "Documents"). The parties
understand that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather that being decided through litigation in court
before a judge or jury and that once decided by an arbitrator the claims
involved cannot later be brought, filed, or pursued in court. If Borrower shall
fail to pay (or shall state in writing an intention not to pay or its inability
to pay) not later than three (3) days after the due date, any installment of
interest on or principal of, any Debenture or any fee, expense or other payment
required hereunder, the Lenders may, at their option, enforce their rights
outside the arbitration provision found in this Section 12.05 or any Debenture.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration Rules of
the Administrator. Arbitrations conducted pursuant to the terms hereof shall be
governed by the provisions of the Federal Arbitration Act (Title 9 of the United
States Code), and to the extent the foregoing are inapplicable, unenforceable or
invalid, the laws of the State of Texas. Judgment upon any award rendered
hereunder may be entered in any court having jurisdiction; provided, however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. 91 or similar
governing state law. Any party who fails to submit to binding arbitration
following a lawful demand by the opposing party shall bear all costs and
expenses, including reasonable attorneys' fees, incurred by the opposing party
in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose against
any real or personal property collateral or other security, (ii) exercise
self-help remedies (including repossession and set off rights) or (iii) obtain
provisional or ancillary remedies such as injunctive relief, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver from a court
44
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having jurisdiction. Such rights can be exercised at any time except to the
extent such action is contrary to a final award or decision in any arbitration
proceeding. The institution and maintenance of an action as described above
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the Dispute to arbitration, nor render inapplicable the
compulsory arbitration provisions hereof. Any claim or Dispute related to
exercise of any self-help, auxiliary or other exercise of rights under this
Section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the agreement of
the parties. All statutes of limitation applicable to any Dispute shall apply to
any proceeding in accordance with this arbitration clause. Any arbitrator
selected to act as the only arbitrator in a Dispute shall be required to be a
practicing attorney with not less than five (5) years practice in commercial law
in the State of Texas. With respect to a Dispute in which the claims or amounts
in controversy do not exceed five hundred thousand dollars ($500,000), a single
arbitrator shall be chosen and shall resolve the Dispute. In such case the
arbitrator shall have authority to render an award up to but not to exceed five
hundred thousand dollars ($500,000), including all damages of any kind
whatsoever, costs, fees and expenses. Submission to a single arbitrator shall be
a waiver of all parties' claims to recover more than five hundred thousand
dollars ($500,000). A Dispute involving claims or amounts in controversy
exceeding five hundred thousand dollars ($500,000) shall be decided by a
majority vote of a panel of three arbitrators ("Arbitration Panel"), one of whom
must possess the qualifications to sit as a single arbitrator in a Dispute
decided by one arbitrator. If the arbitration is consolidated with one conducted
pursuant to the terms of a guaranty of the Indebtedness, then the Arbitration
Panel shall be one which meets the criteria set forth between the Lenders and
Borrower. Arbitrator(s) may, in the exercise of their discretion, at the written
request of a party, (i) consolidate in a single proceeding any multiple party
claims that are substantially identical and all claims arising out of a single
loan or series of loans, including claims by or against borrower(s), guarantors,
sureties and/or owners of collateral if different from Borrower, and (ii)
administer multiple arbitration claims as class actions in accordance with Rule
23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall be empowered
to resolve any dispute regarding the terms of this Agreement or any Dispute or
any claim that all or any part (including this provision) is void or voidable
but shall have no power to change or alter the terms of this Agreement. The
award of the arbitrator(s) shall be in writing and shall specify the factual and
legal basis for the award.
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require that an
arbitration proceeding hereunder be concluded within one hundred eighty (180)
days of the filing of the Dispute with the Administrator. The arbitrator(s)
shall be empowered to impose sanctions for any party's failure to proceed within
the times established herein. Arbitration proceedings hereunder shall be
conducted in Texas at a location determined by the Administrator. In any such
proceeding a party shall state as a counterclaim any claim which arises out of
the transaction or occurrence or is in any way related to the Loan Documents
which does not require the presence of a third party which could not be joined
as a party in the proceeding, The provisions of this arbitration clause shall
survive any termination, amendment, or expiration of the Loan Documents and
repayment in full of sums owed to the Lenders by Borrower unless the parties
otherwise expressly agree in writing. Each party agrees to keep all Disputes and
arbitration proceedings strictly confidential, except for disclosures of
information required in the ordinary course of business of the parties or as
required by applicable law or regulation.
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Section 12.06. Invalid Provisions.
- ----------------------------------
If any provision of any Loan Document is held to be illegal, invalid or
unenforceable under present or future laws during the term of this Agreement,
such provision shall be fully severable; such Loan Document shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of such Loan Document; and the remaining provisions of such
Loan Document shall remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its severance from such
Loan Document. Furthermore, in lieu of each such illegal, invalid or
unenforceable provision shall be added as part of such Loan Document a provision
mutually agreeable to Borrower and the Lenders as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable. In the event Borrower and the Lenders are unable to agree
upon a provision to be added to the Loan Document within a period of ten (10)
business days after a provision of the Loan Document is held to be illegal,
invalid or unenforceable, then a provision acceptable to independent
arbitrators, such to be selected in accordance with the provisions of the
American Arbitration Association, as similar in terms to the illegal, invalid or
unenforceable provision as is possible and be legal, valid and enforceable shall
be added automatically to such Loan Document. In either case, the effective date
of the added provision shall be the date upon which the prior provision was held
to be illegal, invalid or unenforceable.
Section 12.07. Maximum Interest Rate.
- -------------------------------------
(a) Regardless of any provision contained in any of the Loan Documents,
the Lenders shall never be entitled to receive, collect or apply as interest on
the Debentures any amount in excess of interest calculated at the Maximum Rate,
and, in the event that any Lender ever receives, collects or applies as interest
any such excess, the amount which would be excessive interest shall be deemed to
be a partial prepayment of principal and treated hereunder as such; and, if the
principal amount of the Obligation is paid in full, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not the interest paid
or payable under any specific contingency exceeds interest calculated at the
Maximum Rate, Borrower and the Lenders shall, to the maximum extent permitted
under applicable law, (i) characterize any nonprincipal payment as an expense,
fee or premium rather than as interest, (ii) exclude voluntary prepayments and
the effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal
parts, the total amount of interest throughout the entire contemplated term of
the Debentures; provided that, if the Debentures are paid and performed in full
prior to the end of the full contemplated term thereof, and if the interest
received for the actual period of existence thereof exceeds interest calculated
at the Maximum Rate, the Lenders shall refund to Borrower the amount of such
excess or credit the amount of such excess against the principal amount of the
Debentures and, in such event, the Lenders shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest permitted by applicable law on such day that at any time, or from
time to time, may be contracted for, taken, reserved, charged or received on the
Indebtedness evidenced by the Debentures under the laws which are presently in
effect of the United States of America and the laws of any other jurisdiction
which are or may be applicable to the holders of the Debentures and such
Indebtedness or, to the extent permitted by law, under such applicable laws of
46
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the United States of America and the laws of any other jurisdiction which are or
may be applicable to the holder of the Debentures and which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
Section 12.08. Participations and Assignments of the Debentures.
- ----------------------------------------------------------------
(a) The Lenders and the Agent shall have the right to enter into a
participation agreement with any other party or its Affiliates with respect to
the Debentures, or to sell all or any part of the Debentures, but any
participation or sale shall not affect the rights and duties of any such Lender
or the Agent hereunder vis-a-vis Borrower. In the event that all or any portion
of the Loan shall be, at any time, assigned, transferred or conveyed to other
parties, any action, consent or waiver (except for compromise or extension of
maturity), to be given or taken by any Lender or the Agent hereunder (herein
"Action"), shall be such action as taken by the holders of a majority in amount
of the Principal Amount of the Debentures then outstanding, as such holders are
recorded on the books of Borrower and represented by the Agent as described in
subsection (b) below.
(b) Assignment or sale of the Debentures shall be effective on the
books of Borrower only upon (i) endorsement of the Debenture, or part thereof,
to the proposed new holder, along with a current notation of the amount of
payments or installments received and net Principal Amount yet unfunded or
unpaid, and presentment of such Debenture to Borrower for issue of a replacement
Debenture, or Debentures, in the name of the new holder; and (ii) delivery of an
opinion of counsel, reasonably satisfactory to Borrower, that transfer shall not
require registration or qualification under applicable state or federal
securities laws.
(c) The Debentures may be sold, transferred or assigned only to
Affiliates of the Lenders or permitted transferees in multiples of $50,000.
Section 12.09. Confidentiality.
- -------------------------------
(a) All financial reports or information that are furnished to the
Lenders or Holders, or their respective director designees or other
representatives, pursuant to this Agreement or pursuant to the Debentures, the
other Loan Documents shall be treated as confidential unless and to the extent
that such information has been otherwise disclosed by Borrower, but nothing
herein contained shall limit or impair the Lenders' or Holders' right to
disclose such reports to any appropriate Governmental Authority, or to use such
information to the extent pertinent to an evaluation of the Obligation, or to
enforce compliance with the terms and conditions of this Agreement, or to take
any lawful action which the Lenders or Holders deem necessary to protect their
respective interests under this Agreement.
(b) The Lenders and the Agent shall use their reasonable efforts to
protect and preserve the confidentiality of such information, except for such
disclosure as shall be required for compliance by the Lenders or their
respective director designees with SEC reporting requirements or any
administrative or judicial proceeding or otherwise as a matter of law. The
provisions of Section 5.01 notwithstanding, Borrower may refuse to provide
information as required pursuant thereto to an assignee or successor in interest
to the Lenders, unless and until such assignee or successor shall have executed
an agreement to maintain the confidentiality of the information as provided
herein.
47
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Section 12.10. Binding Effect.
- ------------------------------
The Loan Documents shall be binding upon and inure to the benefit of
Borrower and the Lenders and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the prior
written consent of the Lenders, assign any rights, powers, duties or obligations
thereunder.
Section 12.11. No Third Party Beneficiary.
- ------------------------------------------
The parties do not intend the benefits of this Agreement to inure to
any third party, nor shall this Agreement be construed to make or render the
Lenders liable to any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, or for debts or claims
accruing to any such persons against Borrower. Notwithstanding anything
contained herein, in the Debentures, or in any other Loan Document, no conduct
by any or all of the parties hereto, before or after signing this Agreement or
any other Loan Document, shall be construed as creating any right, claim or
cause of action against the Lenders, or any of their respective officers,
directors, agents or employees, in favor of any materialman, supplier,
contractor, subcontractor, purchaser or lessee of any property owned by
Borrower, nor to any other person or entity other than Borrower.
Section 12.12. Entirety.
- ------------------------
This Agreement and the Debentures, the other Loan Documents, and any
other documents or instruments issued or entered into pursuant hereto and
thereto contain the entire agreement between the parties and supersede all prior
agreements and understandings, written or oral (if any), relating to the subject
matter hereof and thereof.
Section 12.13. Headings.
- ------------------------
Section headings are for convenience of reference only and, except as a
means of identification of reference, shall in no way affect the interpretation
of this Agreement.
Section 12.14. Survival.
- ------------------------
All representations and warranties made by Borrower herein shall
survive delivery of the Debentures and the making of the Loans.
Section 12.15. Multiple Counterparts.
- -------------------------------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same agreement, and any of the
parties hereto may execute this Agreement by signing any such counterpart.
48
<PAGE>
Section 12.16. Knowledge of Borrower.
- -------------------------------------
As used herein or in any of the other Loan Documents, all references
"to Borrower's best knowledge" or "to the knowledge of Borrower" or words or
phrases of similar import (whether or not modified by any additional phrase)
shall in each case mean the knowledge of Borrower, the Subsidiaries or their
respective executive officers, directors and principal shareholders.
Section 12.17. Notices.
- -----------------------
(a) Any notices or other communications required or permitted to be
given by this Agreement or any other documents and instruments referred to
herein must be (i) given in writing and personally delivered, mailed by prepaid
certified or registered mail or sent by overnight service, such as FedEx, or
(ii) made by telex or facsimile transmission delivered or transmitted to the
party to whom such notice or communication is directed, with confirmation
thereupon given in writing and personally delivered or mailed by prepaid
certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such notice is
addressed, as that address is specified herein below. Any such notice or other
communication shall be deemed to have been given (whether actually received or
not) on the day it is mailed, postage prepaid, or sent by overnight service or
personally delivered or, if transmitted by telex or facsimile transmission, on
the day that such notice is transmitted; provided, however, that any notice by
telex or facsimile transmission, received by any Borrower or the Lenders after
4:00 p.m., Standard Time, at the recipient's address, on any day, shall be
deemed to have been given on the next succeeding business day. Any party may
change its address for purposes of this Agreement by giving notice of such
change to the other parties.
If to Borrower to:
Simtek Corporation
1465 Kelly Johnson Blvd., Suite 301
Colorado Springs, CO 80920
Attn.: Douglas M. Mitchell
President and Chief Executive Officer
719/531-9444
719/531-9481 (fax)
with a copy to:
Garth B. Jensen, Esq.
Holme, Roberts & Owen LLP
1700 Lincoln Street, Suite 4100
Denver, Colorado 80203-4541
303/861-7000
303/866-0200 (fax)
49
<PAGE>
If to the Lenders to:
Renaissance Capital Growth & Income Fund III, Inc.
Renaissance US Growth & Income Trust PLC
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
If to Agent to:
Renaissance Capital Group, Inc.
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
Any notice delivered personally in the manner provided herein will be
deemed given to the party to whom it is directed upon the party's (or its
agent's) actual receipt. Any notice addressed and mailed in the manner provided
here will be deemed given to the party to whom it is addressed at the close of
business, local time of the recipient, on the fourth (4th) business day after
the day it is placed in the mail, or, if earlier, the time of actual receipt.
50
<PAGE>
Section 12.18. Governing Law.
- -----------------------------
THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED,
AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS
OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
LOAN AGREEMENT.
51
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed and delivered, as of the date and year first above written.
BORROWER:
SIMTEK CORPORATION
By:
--------------------------------------
Douglas M. Mitchell, President and
Chief Executive Officer
LENDERS:
RENAISSANCE US GROWTH & INCOME TRUST, PLC
By: Renaissance Capital Group, Inc.,
Investment Manager
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
RENAISSANCE CAPITAL GROWTH & INCOME FUND
III, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
AGENT:
RENAISSANCE CAPITAL GROUP, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
52
<PAGE>
SCHEDULES TO CONVERTIBLE LOAN AGREEMENT
Schedule 2.08 Schedule of Brokers/Finders
Schedule 4.03 Schedule of Conflicts or Consents
Schedule 4.05 Schedule of Permitted Liens
Schedule 4.06 Schedule of Any Material Adverse Change
Schedule 4.08 Schedule of Material Agreements
Schedule 4.09 Schedule of Litigation
Schedule 4.10 Schedule of Unpaid Taxes
Schedule 4.11 Schedule of Capitalization
Schedule 4.13 Schedule of Employee Matters
Schedule 4.14 Schedule of Employee Benefit Plans
Schedule 4.15 Schedule of Compliance with Laws Matters
Schedule 4.16 Schedule of Licenses and Permits
Schedule 4.17 Schedule of Contracts
Schedule 4.19 Schedule of Agreements between Borrower and any of
its officers, directors, and principal shareholders,
including employment agreements
Schedule 4.20 Schedule of Subsidiaries
Schedule 4.21 Schedule of Casualties
Schedule 4.25 Schedule of Insurance
Schedule 4.27 Schedule of Real Property
Schedule 4.28 Schedule of Environmental Matters
Schedule 6.01 Schedule of Limitation on Indebtedness
Schedule 6.05 Schedule of Transactions with Affiliates
Schedule 7.01 Schedule of Financial Ratios
53
<PAGE>
Schedule 7.01
Financial Ratios
1. DEBT TO NET WORTH RATIO. Borrower agrees to maintain a Debt to Net Worth
Ratio of no greater than 3:1.
2. INTEREST EARNED RATIO. Borrower agrees to maintain an Interest Coverage
Ratio of at least 2:1.
3. CURRENT RATIO. Borrower agrees to maintain a Current Ratio of at
least 1:1.
The securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Company shall have received an opinion of legal counsel
for the Company, or such other evidence as may be satisfactory to legal counsel
for the Company, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
SIMTEK CORPORATION
9.00% CONVERTIBLE DEBENTURE
$750,000 No. 1
Date of Issue: June 12, 1998
Simtek Corporation, a Colorado corporation (the "Company" or
"Borrower"), for value received, promises to pay to:
Compass Bank, Custodian FBO
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
or to its order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on or before June 12, 2005 (the "Due Date") (unless this Debenture
shall have been sooner called for redemption or presented for conversion as
herein provided), the sum of Seven Hundred Fifty Thousand Dollars ($750,000)
(the "Principal Amount") and to pay interest on the unpaid Principal Amount at
the rate of 9.00% per annum. All payments of both principal and interest shall
be made at the address of the Holder hereof as it appears in the books and
records of the Borrower, or at such other place as may be designated by the
Holder hereof.
1. INTEREST. Interest on the Principal Amount outstanding from time to
time shall be payable in monthly installments commencing July 1, 1998, and
subsequent payments shall be made on the first day of each month thereafter
until the Principal Amount and all accrued and unpaid interest shall have been
paid in full. Overdue principal and interest on the Debenture shall bear
interest at the maximum rate permitted by applicable law.
2. MATURITY. If not sooner paid, redeemed or converted, this Debenture
shall mature on June 12, 2005 at which time the remaining unpaid Principal
Amount, and all accrued and unpaid interest and any other charges then due under
the Loan Agreement, shall be due and payable in full. This Debenture shall be
prepaid pro rata with any prepayments of Indebtedness (other than Senior
Obligations) which is pari passu with or subordinated to this Debenture.
3. MANDATORY PRINCIPAL INSTALLMENTS. If this Debenture is not sooner
redeemed or converted as provided hereunder, Borrower shall pay to Holder,
commencing on June 12, 2001 and continuing on the first day of each successive
month thereafter prior to maturity, mandatory principal redemption installments,
each of such installments to be in the amount of Ten Dollars ($10) per Thousand
Dollars ($1,000) of the then remaining Principal Amount, and further, at
maturity, Borrower shall pay to Holder a final installment of the remaining
unpaid Principal Amount, and all accrued and unpaid interest and any other
charges then due under the Loan Agreement.
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Issuers Initial __________
<PAGE>
4. OPTIONAL REDEMPTION BY HOLDER. (a) If at any time after the date
hereof (i) there is a change of control of the Company's voting stock, without
the written consent of the Holder, (ii) there is a change of at least two-thirds
(2/3) of the members of the Company's Board of Directors, without the written
consent of the Holder, (iii) all or substantially all of the assets or capital
stock of the Company is sold, without the consent of the Holder, (iv) the
Company raises more than $5,000,000 in debt or equity in a private placement,
without the written consent of the Holder, (v) the Company or any of its
subsidiaries owning a substantial portion of the consolidated assets of the
Company are merged or consolidated with or into an unaffiliated entity, without
the written consent of Holder, or (vi) the Company's Common Stock is no longer
publicly traded, the Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the date
of redemption (the "Redemption Date").
(b) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, prior to the issuance by the Company of Additional Common Stock
at less than the Conversion Price.
(c) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, if (i) Douglas Mitchell is terminated as President and Chief
Executive Officer of the Borrower for any reason, except for cause, (ii) he is
reassigned to another position with the Company, and the Company employs a new
President and Chief Executive Officer who is not acceptable to the Holder, or
(iii) he resigns as President and Chief Executive Officer of the Company and his
replacement as President and Chief Executive Officer is not acceptable to the
Holder.
(d) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, if the Holder is unable to convert at least 25% of the
Principal Amount of this Debenture into shares of the Company's Common Stock on
or before June 12, 2001 and to sell such shares within 30 days of the date of
such conversion in market transactions at a price of at least ninety percent
(90%) of the closing bid price per share on the date of such conversion.
(e) The Holder may exercise its right to require that the Company
redeem this Debenture pursuant to Sections 4(a), (b), (c) or (d) prior to
maturity by giving notice thereof to the Company, which notice shall specify the
terms of redemption (including the place at which the Holder may obtain
payment), the total redemption payment and the Redemption Date, which date shall
not be less than 30 days nor more than 90 days after the date of the notice.
5. OPTIONAL REDEMPTION BY COMPANY. (a) On any interest payment date, and
after prior irrevocable notice as provided for below, this Debenture is
redeemable, in whole but not in part, at 101% of the Principal Amount, together
with accrued and unpaid interest through the Redemption Date, by the Company, if
all of the following conditions are satisfied: (i) the closing bid price for the
Common Stock averages at least $1.10 per share for the 45 consecutive trading
days prior to the irrevocable notice and the Common Stock is listed or quoted on
the National Market, the Small Cap System, AMEX, NYSE or over-the-counter
trading on the electronic bulletin board; (ii) the average daily trading volume
for the 45 consecutive trading days prior to the irrevocable notice shall be no
less than 75,000 shares; and (iii) the Company shall have filed a registration
statement covering the shares of Common Stock issuable upon conversion of this
Debenture, which shall have become effective. The foregoing earnings per share
and bid price tests shall be duly adjusted for stock splits, stock dividends,
subdivisions, combinations, mergers, consolidations, and other
recapitalizations. The Company's right of redemption is subject to the Holder's
prior right of conversion of the Debenture.
(b) The Company may exercise its right to redeem this Debenture pursuant
to Section 5(a) prior to maturity by giving notice thereof to the Holder of this
Debenture as such name appears on the books of the Borrower, which notice shall
specify the terms of redemption (including the place at which the Holder may
obtain payment), the total redemption payment and the Redemption Date, which
date shall not be less than 30 days nor more than 90 days after the date of the
notice.
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Issuers Initial __________
<PAGE>
6. CONVERSION RIGHT. (a) The Holder of this Debenture shall have the
right, at Holder's option, at any time, to convert all, or, in multiples of one
hundred thousand dollars ($100,000), any part of this Debenture initially into
an aggregate of 2,142,857 fully paid and nonassessable shares of Common Stock.
The Holder of this Debenture may exercise the conversion right by giving written
notice (the "Conversion Notice") to Borrower of the exercise of such right and
stating the name or names in which the stock certificate or stock certificates
for the shares of Common Stock are to be issued and the address to which such
certificates shall be delivered. The Conversion Notice shall be accompanied by
the Debenture. The number of shares of Common Stock that shall be issuable upon
conversion of the Debenture shall equal the Principal Amount of the Debenture
divided by the Conversion Price (as defined below) and in effect on the date the
Conversion Notice is given; provided, however, that in the event that this
Debenture shall have been partially redeemed, shares of Common Stock shall be
issued pro rata, rounded to the nearest whole share. Conversion shall be deemed
to have been effected on the date the Conversion Notice is received (the
"Conversion Date"). In the case of any Debenture called for redemption, the
conversion rights will expire at the close of business on the Redemption Date.
Within 20 business days after receipt of the Conversion Notice, Borrower shall
issue and deliver by hand against a signed receipt therefor or by United States
registered mail, return receipt requested, to the address designated in the
Conversion Notice, a stock certificate or stock certificates of Borrower
representing the number of shares of Common Stock to which Holder is entitled
and a check or cash in payment of all interest accrued and unpaid on the
Debenture up to and including the Conversion Date. The conversion rights will be
governed by the following provisions:
(b) CONVERSION PRICE. On the issue date hereof and until such time as an
adjustment shall occur, the Conversion Price shall be $0.35 per share; provided,
however, that the Conversion Price shall be subject to adjustment at the times
and in accordance with the provisions set forth below. However, if, after
eighteen (18) months from the date of issue of this Debenture, the Common Stock
is not then publicly traded in the over-the-counter market, Nasdaq or a national
securities exchange, and the Company has not redeemed this Debenture pursuant to
Section 4(b) hereof, the Conversion Price shall be decreased each month
thereafter by an amount sufficient to increase by two percent (2.00%) the number
of shares of Common Stock into which this Debenture is convertible. This
adjustment shall continue until the Company redeems this Debenture pursuant to
subparagraph 4(b), or (ii) the shares of Common Stock owned by the Holder and
its affiliates exceeds 51% of the outstanding shares of Common Stock.
(i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE
CONVERSION PRICE. If and whenever any Additional Common Stock shall be issued by
Borrower (the "Stock Issue Date") for a consideration per share less than the
Conversion Price, then in each such case the initial Conversion Price shall be
reduced to a new Conversion Price in an amount equal to the price per share for
the Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with generally accepted accounting principles, if issued other
than for cash, and the number of shares issuable to Holder upon conversion shall
be proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Company as existed for the Holder immediately preceding the Stock Issue Date.
(ii) SALE OF SHARES. In case of the issuance of Additional
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the gross amount of the
cash paid to Borrower for such shares, before deducting any underwriting
compensation or discount in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services or for any
expenses incurred in connection therewith. In case of the issuance of any shares
of Additional Common Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor, other than cash,
shall be deemed to be the then fair market value of the property received.
(iii) STOCK DIVIDENDS. Shares of Common Stock issued as a
dividend or other distribution on any class of capital stock of Borrower shall
be deemed to have been issued without consideration.
Page 3
Issuers Initial __________
<PAGE>
(iv) STOCK SPLITS, SUBDIVISIONS OR COMBINATIONS. In the event
of a stock split or subdivision of shares of Common Stock into a greater number
of shares, the Conversion Price shall be proportionately decreased, and in the
event of a combination of shares of Common Stock into a smaller number of
shares, the Conversion Price shall be proportionately increased, such increase
or decrease, as the case may be, becoming effective at the record date.
(v) EXCEPTIONS. The term "Additional Common Stock" herein
shall mean all shares of Common Stock hereafter issued by Borrower (including
Common Stock held in the treasury of Borrower), except (i) Common Stock issued
upon the conversion of any of the Debentures; (ii) Common Stock issued upon
exercise of any outstanding warrants, options or convertible debt instruments;
and (iii) up to 500,000 shares of Common Stock to be issued upon exercise of
options or warrants to be granted to employees under its employee stock option
and stock compensation plans.
(c) ADJUSTMENT FOR MERGERS, SALES AND CONSOLIDATIONS. In the event of
any consolidation or merger of the Company with or into, or the sale of all or
substantially all of the properties and assets of the Company, to any person,
and in connection therewith, consideration is payable to holders of Common Stock
in cash, securities or other property, then as a condition of such
consolidation, merger or sale, lawful provision shall be made, and duly executed
documents evidencing the same shall be delivered to the Holder, so that the
Holder shall have the right at any time prior to the maturity of this Debenture
to purchase, at a total price equal to the Conversion Price immediately prior to
such event, the kind and amount of cash, securities or other property receivable
in connection with such consolidation, merger or sale, by a holder of the same
number of shares of Common Stock as were exercisable by the Holder immediately
prior to such consolidation, merger or sale. In any such case, appropriate
provisions shall be made with respect to the rights and interest of the Holder
so that the provisions hereof shall thereafter be applicable with respect to any
cash, securities or property deliverable upon exercise hereof. Notwithstanding
the foregoing, (i) if the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, any other person, and
consideration is payable to holders of Common Stock in exchange for their Common
Stock in connection with such merger, consolidation or sale which consists
solely of cash, or (ii) in the event of the dissolution, liquidation or winding
up of the Company, then the Holder shall be entitled to receive distributions on
the date of such event on an equal basis with holders of Common Stock as if this
Debenture had been converted immediately prior to such event, less the
Conversion Price. Upon receipt of such payment, if any, the rights of the Holder
shall terminate and cease and this Debenture shall expire. In case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding up of the Company, the
Company shall promptly, after receipt of this surrendered Debenture, make
payment by delivering a check in such amount as is appropriate (or, in the case
of consideration other than cash, such other consideration as is appropriate) to
such person as it may be directed in writing by the Holder surrendering this
Debenture. Any such adjustment shall be subject to the Company's optional right
to redeem this Debenture as set forth in Sections 5(b) and 5(c) hereof, upon
notice given in the manner set forth in Section 5(d) hereof.
(d) DISTRIBUTIONS. In the event of distribution to all Common Stock
holders of any securities, cash or properties or assets or other rights to
purchase securities or assets, then, after such event, this debenture will also
be convertible into the kind and amount of securities, cash and other property
which the Holder would have been entitled to receive if the Holder owned the
Common Stock issuable upon conversion of the Debenture immediately prior to the
occurrence of such event.
(e) CAPITAL REORGANIZATION AND RECLASSIFICATION. In case of any capital
reorganization or reclassification of the Common Stock of Borrower (other than a
change in par value or as a result of a stock dividend, subdivision, split up or
combination of shares), this Debenture shall be convertible into the kind and
number of shares of stock or other securities or property of Borrower to which
the holder of the Debenture would have been entitled to receive if the holder
owned the Common Stock issuable upon conversion of the Debenture immediately
prior to the occurrence of such event. The provisions of the immediately
foregoing sentence shall similarly apply to successive reorganizations,
reclassifications, consolidations, exchanges, leases, transfers or other
dispositions or other share exchanges.
(f) NOTICE. In the event Borrower shall propose to take any action which
shall result in an adjustment in the Conversion Price, Borrower shall give
notice to the Holder of this Debenture, which notice shall specify the record
Page 4
Issuers Initial __________
<PAGE>
date, if any, with respect to such action and the date on which such action is
to take place. Such notice shall be given on or before the earlier of 10 days
before the record date or the date which such action shall be taken. Such notice
shall also set forth all facts (to the extent known) material to the effect of
such action on the Conversion Price and the number, kind or class of shares or
other securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of this Debenture.
(g) CERTIFICATE. Following completion of an event which results in an
adjustment to the Conversion Price, Borrower shall furnish to the holder of this
Debenture a statement, signed by the Chief Executive Officer and the Secretary
of the Borrower, of the facts creating such adjustment and specifying the
resultant adjusted Conversion Price then in effect, which statement shall
constitute an amendment to this Debenture.
7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. Notwithstanding the
provisions of Section 6 hereof, if the volume-weighted average closing bid price
of the Company's Common Stock as determined by Bloomberg Financial Markets and
Commodities News, for the thirty (30) consecutive trading days following
Borrower's public press release of its December 31, 1998 fiscal year-end
financial results (such volume-weighted average closing bid price herein
referred to as the "1998 Conversion Price Adjustment") is a price less than the
initial Conversion Price, and if the Company does not achieve December 31, 1998
fiscal year pre-tax income of $700,000, excluding extraordinary gains and
interest on this Debenture, then the Conversion Price shall be subject to a
one-time downward adjustment to an amount equal to 100% of the 1998 Conversion
Price Adjustment. If an adjustment is required pursuant to this Section 7, then
the Borrower shall furnish to the holder of this Debenture a statement, within
ten days of the occurrence thereof, signed by the Chief Financial Officer and
the Secretary of Borrower, of the facts creating such adjustment and specifying
the resultant adjusted Conversion Price then in effect, which statement shall
constitute an amendment to the Debenture. Such one-time adjustment to the
Conversion Price shall be subject to the Holder's optional right to require the
Company to redeem this Debenture at the sum equal to the Principal Amount,
together with an amount equal to an 18% annual yield on the Principal Amount
through the Redemption Date, upon notice given in the manner set forth in
Section 4(b) hereof.
8. RESERVATION OF SHARES. Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock or treasury shares of Common
Stock necessary to effect conversion of this Debenture.
9. REGISTRATION RIGHTS. The shares of Common Stock issued upon
conversion of this Debenture shall be restricted from transfer by the holder,
unless the shares are duly registered for sale pursuant to the Securities Act of
1933, as amended, or the transfer is exempt from registration. The Holder has
certain rights with respect to the registration of shares of Common Stock issued
upon the conversion of this Debenture pursuant to the terms of the Loan
Agreement. Borrower agrees that a copy of the executed Loan Agreement and all
amendments shall be available to the Holder at the offices of the Company.
10. TAXES. The Company shall pay any documentary or other transactional
taxes attributable to the issuance or delivery of this Debenture or the shares
of Common Stock issued upon conversion by the Holder (excluding any federal,
state or local income taxes and any franchise taxes or taxes imposed upon the
Holder by the jurisdiction, or any political subdivision thereof, under which
such Holder is organized or is qualified to do business.)
11. DEFAULT.
(a) EVENT OF DEFAULT. An "Event of Default" shall exist if an "Event of
Default" (as defined in the Loan Agreement) shall occur and be continuing.
(b) REMEDIES UPON EVENT OF DEFAULT. If an Event of Default shall have
occurred and be continuing, then the Holder or Agent may exercise any one or
more of the rights and remedies provided in the Loan Documents, as the Holder or
Agent, in its sole discretion, may deem necessary or appropriate.
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Issuers Initial __________
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(c) REMEDIES NONEXCLUSIVE. Each right, power or remedy of the holder
hereof upon the occurrence of any Event of Default as provided for in this
Debenture or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other right,
power or remedy provided for in this Debenture or now or hereafter existing at
law or in equity or by statute, and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) EXPENSES. Upon the occurrence of a Default or an Event of Default,
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including attorneys' fees and expenses) incurred by the Holder or Agent in
connection with the preservation and enforcement of Holder's rights under the
Loan Agreement, the Debenture, or any other Loan Document.
12. FAILURE TO ACT AND WAIVER. No failure or delay by the holder hereof
to require the performance of any term or terms of this Debenture or not to
exercise any right or any remedy shall constitute a waiver of any such term or
of any right or of any default, nor shall such delay or failure preclude the
holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Debenture, the holder hereof shall not be deemed to waive the right either
to require payment when due of all other amounts payable, or to later declare a
default for failure to effect such payment of any such other amount. The failure
of the holder of this Debenture to give notice of any failure or breach of the
Borrower under this Debenture shall not constitute a waiver of any right or
remedy in respect of such continuing failure or breach or any subsequent failure
or breach.
13. CONSENT TO JURISDICTION. The Company hereby agrees and consents that
any action, suit or proceeding arising out of this Debenture may be brought in
any appropriate court in the State of Texas, including the United States
District Court for the Northern District of Texas, or in any other court having
jurisdiction over the subject matter, all at the sole election of the Holder
hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Company hereby
irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or proceeding arising out of this Debenture. Except for default in
payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by the
parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation of
the Debenture shall be resolved by arbitration as set forth in the Loan
Agreement.
14. HOLDER'S RIGHT TO REQUEST MULTIPLE DEBENTURES. The Holder shall,
upon written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
instruments, each of such to be in such amounts as shall be requested; provided
however that no Debenture shall be issued in denominations of less than $50,000.
15. TRANSFER. This Debenture may be transferred on the books of the
Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, in multiples of $100,000 only upon (i) delivery to the
Borrower of a duly executed assignment of the Debenture, or part thereof, to the
proposed new Holder, along with a current notation of the amount of payments
received and net Principal Amount yet unfunded, and presentment of such
Debenture to the Borrower for issue of a replacement Debenture, or Debentures,
in the name of the new Holder, (ii) the designation by the new Holder of the
Lender's agent for notice, such agent to be the sole party to whom Borrower
shall be required to provide notice when notice to Lender is required hereunder
and who shall be the sole party authorized to represent Lender in regard to
modification or waivers under the Debenture, the Loan Agreement, or other Loan
Documents; and any action, consent or waiver, (other than a compromise of
principal and interest), when given or taken by Lender's agent for notice, shall
be deemed to be the action of the holders of a majority in amount of the
Principal Amount of the Debenture, as such holders are recorded on the books of
the Borrower, and (iii) in compliance with the legend to read as follows:
"The Securities represented by this Debenture have not been registered
under the Securities Act of 1933, as amended ("Act"), or applicable
state securities laws ("State Acts") and shall not be sold,
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Issuers Initial __________
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hypothecated, donated or otherwise transferred unless the Company shall
have received an opinion of Legal Counsel for the Company, or such other
evidence as may be satisfactory to Legal Counsel for the Company, to the
effect that any such transfer shall not require registration under the
Act and the State Acts."
The Company shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.
16. NOTICES. All notices and communications under this Debenture shall
be in writing and shall be either delivered in person or by overnight service
such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and (ii) if to the Holder of this
Debenture, to the address (a) of such Holder as it appears on the books of the
Borrower or (b) in the case of a partial assignment to one or more Holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if delivered;
or if mailed, then three days after the date of mailing.
17. MAXIMUM INTEREST RATE. (a) Regardless of any provision contained in
this Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Debenture is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any non principal payment as an
expense, fee or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and
spread, in equal parts, the total amount of interest throughout the entire
contemplated term of the Debenture; provided that, if the Debenture is paid and
performed in full prior to the end of the full contemplated term thereof, and if
the interest received for the actual period of existence thereof exceeds
interest calculated at the Maximum Rate, Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess against the principal
amount of the Debenture and, in such event, Lender shall not be subject to any
penalties provided by any laws for contracting for, charging, taking, reserving
or receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which are
presently in effect of the United States of America or by the laws of any other
jurisdiction which are or may be applicable to the holders of the Debenture and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
18. RIGHTS UNDER LOAN AGREEMENT. This Debenture is issued pursuant to
the Convertible Loan Agreement dated of even date herewith among the Company,
Renaissance III and Renaissance PLC, as Lenders, and Agent, and the holders
hereof are entitled to all the rights and benefits. Both Borrower and Lenders
have participated in the negotiation and preparation of the Loan Agreement and
of this Debenture. Borrower agrees that a copy of the Loan Agreement with all
amendments, additions and substitutions therefor shall be available to the
Holders at the offices of Borrower.
19. DEFINED TERMS. Capitalized terms used but not defined herein shall
have the meaning given them in the Loan Agreement.
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Issuers Initial __________
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20. GOVERNING LAW. This Debenture shall be governed by and construed and
enforced in accordance with the substantive laws of the State of Texas, without
regard to the conflicts of laws provisions thereof, and the applicable laws of
the United States.
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
issued, executed and delivered on the date and year above stated.
SIMTEK CORPORATION
By: /S/ Douglas M. Mitchell
--------------------------------------
Douglas M. Mitchell
President and Chief Executive Officer
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Issuers Initial __________
The securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Company shall have received an opinion of legal counsel
for the Company, or such other evidence as may be satisfactory to legal counsel
for the Company, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
SIMTEK CORPORATION
9.00% CONVERTIBLE DEBENTURE
$750,000 No. 2
Date of Issue: June 12, 1998
Simtek Corporation, a Colorado corporation (the "Company" or
"Borrower"), for value received, promises to pay to:
Compass Bank, Custodian FBO
RENAISSANCE US GROWTH & INCOME TRUST, PLC
or to its order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on or before June 12, 2005 (the "Due Date") (unless this Debenture
shall have been sooner called for redemption or presented for conversion as
herein provided), the sum of Seven Hundred Fifty Thousand Dollars ($750,000)
(the "Principal Amount") and to pay interest on the unpaid Principal Amount at
the rate of 9.00% per annum. All payments of both principal and interest shall
be made at the address of the Holder hereof as it appears in the books and
records of the Borrower, or at such other place as may be designated by the
Holder hereof.
1. INTEREST. Interest on the Principal Amount outstanding from time to
time shall be payable in monthly installments commencing July 1, 1998, and
subsequent payments shall be made on the first day of each month thereafter
until the Principal Amount and all accrued and unpaid interest shall have been
paid in full. Overdue principal and interest on the Debenture shall bear
interest at the maximum rate permitted by applicable law.
2. MATURITY. If not sooner paid, redeemed or converted, this Debenture
shall mature on June 12, 2005 at which time the remaining unpaid Principal
Amount, and all accrued and unpaid interest and any other charges then due under
the Loan Agreement, shall be due and payable in full. This Debenture shall be
prepaid pro rata with any prepayments of Indebtedness (other than Senior
Obligations) which is pari passu with or subordinated to this Debenture.
3. MANDATORY PRINCIPAL INSTALLMENTS. If this Debenture is not sooner
redeemed or converted as provided hereunder, Borrower shall pay to Holder,
commencing on June 12, 2001 and continuing on the first day of each successive
month thereafter prior to maturity, mandatory principal redemption installments,
each of such installments to be in the amount of Ten Dollars ($10) per Thousand
Dollars ($1,000) of the then remaining Principal Amount, and further, at
maturity, Borrower shall pay to Holder a final installment of the remaining
unpaid Principal Amount, and all accrued and unpaid interest and any other
charges then due under the Loan Agreement.
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Issuers Initial __________
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4. OPTIONAL REDEMPTION BY HOLDER. (a) If at any time after the date
hereof (i) there is a change of control of the Company's voting stock, without
the written consent of the Holder, (ii) there is a change of at least two-thirds
(2/3) of the members of the Company's Board of Directors, without the written
consent of the Holder, (iii) all or substantially all of the assets or capital
stock of the Company is sold, without the consent of the Holder, (iv) the
Company raises more than $5,000,000 in debt or equity in a private placement,
without the written consent of the Holder, (v) the Company or any of its
subsidiaries owning a substantial portion of the consolidated assets of the
Company are merged or consolidated with or into an unaffiliated entity, without
the written consent of Holder, or (vi) the Company's Common Stock is no longer
publicly traded, the Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the date
of redemption (the "Redemption Date").
(b) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, prior to the issuance by the Company of Additional Common Stock
at less than the Conversion Price.
(c) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, if (i) Douglas Mitchell is terminated as President and Chief
Executive Officer of the Borrower for any reason, except for cause, (ii) he is
reassigned to another position with the Company, and the Company employs a new
President and Chief Executive Officer who is not acceptable to the Holder, or
(iii) he resigns as President and Chief Executive Officer of the Company and his
replacement as President and Chief Executive Officer is not acceptable to the
Holder.
(d) The Holder shall have the right to require this Debenture to be
redeemed by the Company at the sum equal to the Principal Amount, together with
an amount equal to an 18% annual yield on the Principal Amount through the
Redemption Date, if the Holder is unable to convert at least 25% of the
Principal Amount of this Debenture into shares of the Company's Common Stock on
or before June 12, 2001 and to sell such shares within 30 days of the date of
such conversion in market transactions at a price of at least ninety percent
(90%) of the closing bid price per share on the date of such conversion.
(e) The Holder may exercise its right to require that the Company
redeem this Debenture pursuant to Sections 4(a), (b), (c) or (d) prior to
maturity by giving notice thereof to the Company, which notice shall specify the
terms of redemption (including the place at which the Holder may obtain
payment), the total redemption payment and the Redemption Date, which date shall
not be less than 30 days nor more than 90 days after the date of the notice.
5. OPTIONAL REDEMPTION BY COMPANY. (a) On any interest payment date, and
after prior irrevocable notice as provided for below, this Debenture is
redeemable, in whole but not in part, at 101% of the Principal Amount, together
with accrued and unpaid interest through the Redemption Date, by the Company, if
all of the following conditions are satisfied: (i) the closing bid price for the
Common Stock averages at least $1.10 per share for the 45 consecutive trading
days prior to the irrevocable notice and the Common Stock is listed or quoted on
the National Market, the Small Cap System, AMEX, NYSE or over-the-counter
trading on the electronic bulletin board; (ii) the average daily trading volume
for the 45 consecutive trading days prior to the irrevocable notice shall be no
less than 75,000 shares; and (iii) the Company shall have filed a registration
statement covering the shares of Common Stock issuable upon conversion of this
Debenture, which shall have become effective. The foregoing earnings per share
and bid price tests shall be duly adjusted for stock splits, stock dividends,
subdivisions, combinations, mergers, consolidations, and other
recapitalizations. The Company's right of redemption is subject to the Holder's
prior right of conversion of the Debenture.
(b) The Company may exercise its right to redeem this Debenture pursuant
to Section 5(a) prior to maturity by giving notice thereof to the Holder of this
Debenture as such name appears on the books of the Borrower, which notice shall
specify the terms of redemption (including the place at which the Holder may
obtain payment), the total redemption payment and the Redemption Date, which
date shall not be less than 30 days nor more than 90 days after the date of the
notice.
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Issuers Initial __________
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6. CONVERSION RIGHT. (a) The Holder of this Debenture shall have the
right, at Holder's option, at any time, to convert all, or, in multiples of one
hundred thousand dollars ($100,000), any part of this Debenture initially into
an aggregate of 2,142,857 fully paid and nonassessable shares of Common Stock.
The Holder of this Debenture may exercise the conversion right by giving written
notice (the "Conversion Notice") to Borrower of the exercise of such right and
stating the name or names in which the stock certificate or stock certificates
for the shares of Common Stock are to be issued and the address to which such
certificates shall be delivered. The Conversion Notice shall be accompanied by
the Debenture. The number of shares of Common Stock that shall be issuable upon
conversion of the Debenture shall equal the Principal Amount of the Debenture
divided by the Conversion Price (as defined below) and in effect on the date the
Conversion Notice is given; provided, however, that in the event that this
Debenture shall have been partially redeemed, shares of Common Stock shall be
issued pro rata, rounded to the nearest whole share. Conversion shall be deemed
to have been effected on the date the Conversion Notice is received (the
"Conversion Date"). In the case of any Debenture called for redemption, the
conversion rights will expire at the close of business on the Redemption Date.
Within 20 business days after receipt of the Conversion Notice, Borrower shall
issue and deliver by hand against a signed receipt therefor or by United States
registered mail, return receipt requested, to the address designated in the
Conversion Notice, a stock certificate or stock certificates of Borrower
representing the number of shares of Common Stock to which Holder is entitled
and a check or cash in payment of all interest accrued and unpaid on the
Debenture up to and including the Conversion Date. The conversion rights will be
governed by the following provisions:
(b) CONVERSION PRICE. On the issue date hereof and until such time as an
adjustment shall occur, the Conversion Price shall be $0.35 per share; provided,
however, that the Conversion Price shall be subject to adjustment at the times
and in accordance with the provisions set forth below. However, if, after
eighteen (18) months from the date of issue of this Debenture, the Common Stock
is not then publicly traded in the over-the-counter market, Nasdaq or a national
securities exchange, and the Company has not redeemed this Debenture pursuant to
Section 4(b) hereof, the Conversion Price shall be decreased each month
thereafter by an amount sufficient to increase by two percent (2.00%) the number
of shares of Common Stock into which this Debenture is convertible. This
adjustment shall continue until the Company redeems this Debenture pursuant to
subparagraph 4(b), or (ii) the shares of Common Stock owned by the Holder and
its affiliates exceeds 51% of the outstanding shares of Common Stock.
(i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE
CONVERSION PRICE. If and whenever any Additional Common Stock shall be issued by
Borrower (the "Stock Issue Date") for a consideration per share less than the
Conversion Price, then in each such case the initial Conversion Price shall be
reduced to a new Conversion Price in an amount equal to the price per share for
the Additional Common Stock then issued, if issued in connection with a sale of
shares, or the value of the Additional Common Stock then issued, as determined
in accordance with generally accepted accounting principles, if issued other
than for cash, and the number of shares issuable to Holder upon conversion shall
be proportionately increased; and, in the case of Additional Common Stock issued
without consideration, the initial Conversion Price shall be reduced in amount
and the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Company as existed for the Holder immediately preceding the Stock Issue Date.
(ii) SALE OF SHARES. In case of the issuance of Additional
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the gross amount of the
cash paid to Borrower for such shares, before deducting any underwriting
compensation or discount in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services or for any
expenses incurred in connection therewith. In case of the issuance of any shares
of Additional Common Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor, other than cash,
shall be deemed to be the then fair market value of the property received.
(iii) STOCK DIVIDENDS. Shares of Common Stock issued as a
dividend or other distribution on any class of capital stock of Borrower shall
be deemed to have been issued without consideration.
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Issuers Initial __________
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(iv) STOCK SPLITS, SUBDIVISIONS OR COMBINATIONS. In the event
of a stock split or subdivision of shares of Common Stock into a greater number
of shares, the Conversion Price shall be proportionately decreased, and in the
event of a combination of shares of Common Stock into a smaller number of
shares, the Conversion Price shall be proportionately increased, such increase
or decrease, as the case may be, becoming effective at the record date.
(v) EXCEPTIONS. The term "Additional Common Stock" herein
shall mean all shares of Common Stock hereafter issued by Borrower (including
Common Stock held in the treasury of Borrower), except (i) Common Stock issued
upon the conversion of any of the Debentures; (ii) Common Stock issued upon
exercise of any outstanding warrants, options or convertible debt instruments;
and (iii) up to 500,000 shares of Common Stock to be issued upon exercise of
options or warrants to be granted to employees under its employee stock option
and stock compensation plans.
(c) ADJUSTMENT FOR MERGERS, SALES AND CONSOLIDATIONS. In the event of
any consolidation or merger of the Company with or into, or the sale of all or
substantially all of the properties and assets of the Company, to any person,
and in connection therewith, consideration is payable to holders of Common Stock
in cash, securities or other property, then as a condition of such
consolidation, merger or sale, lawful provision shall be made, and duly executed
documents evidencing the same shall be delivered to the Holder, so that the
Holder shall have the right at any time prior to the maturity of this Debenture
to purchase, at a total price equal to the Conversion Price immediately prior to
such event, the kind and amount of cash, securities or other property receivable
in connection with such consolidation, merger or sale, by a holder of the same
number of shares of Common Stock as were exercisable by the Holder immediately
prior to such consolidation, merger or sale. In any such case, appropriate
provisions shall be made with respect to the rights and interest of the Holder
so that the provisions hereof shall thereafter be applicable with respect to any
cash, securities or property deliverable upon exercise hereof. Notwithstanding
the foregoing, (i) if the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, any other person, and
consideration is payable to holders of Common Stock in exchange for their Common
Stock in connection with such merger, consolidation or sale which consists
solely of cash, or (ii) in the event of the dissolution, liquidation or winding
up of the Company, then the Holder shall be entitled to receive distributions on
the date of such event on an equal basis with holders of Common Stock as if this
Debenture had been converted immediately prior to such event, less the
Conversion Price. Upon receipt of such payment, if any, the rights of the Holder
shall terminate and cease and this Debenture shall expire. In case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding up of the Company, the
Company shall promptly, after receipt of this surrendered Debenture, make
payment by delivering a check in such amount as is appropriate (or, in the case
of consideration other than cash, such other consideration as is appropriate) to
such person as it may be directed in writing by the Holder surrendering this
Debenture. Any such adjustment shall be subject to the Company's optional right
to redeem this Debenture as set forth in Sections 5(b) and 5(c) hereof, upon
notice given in the manner set forth in Section 5(d) hereof.
(d) DISTRIBUTIONS. In the event of distribution to all Common Stock
holders of any securities, cash or properties or assets or other rights to
purchase securities or assets, then, after such event, this debenture will also
be convertible into the kind and amount of securities, cash and other property
which the Holder would have been entitled to receive if the Holder owned the
Common Stock issuable upon conversion of the Debenture immediately prior to the
occurrence of such event.
(e) CAPITAL REORGANIZATION AND RECLASSIFICATION. In case of any capital
reorganization or reclassification of the Common Stock of Borrower (other than a
change in par value or as a result of a stock dividend, subdivision, split up or
combination of shares), this Debenture shall be convertible into the kind and
number of shares of stock or other securities or property of Borrower to which
the holder of the Debenture would have been entitled to receive if the holder
owned the Common Stock issuable upon conversion of the Debenture immediately
prior to the occurrence of such event. The provisions of the immediately
foregoing sentence shall similarly apply to successive reorganizations,
reclassifications, consolidations, exchanges, leases, transfers or other
dispositions or other share exchanges.
(f) NOTICE. In the event Borrower shall propose to take any action which
shall result in an adjustment in the Conversion Price, Borrower shall give
notice to the Holder of this Debenture, which notice shall specify the record
date, if any, with respect to such action and the date on which such action is
to take place. Such notice shall be given on or before the earlier of 10 days
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Issuers Initial __________
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before the record date or the date which such action shall be taken. Such notice
shall also set forth all facts (to the extent known) material to the effect of
such action on the Conversion Price and the number, kind or class of shares or
other securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of this Debenture.
(g) CERTIFICATE. Following completion of an event which results in an
adjustment to the Conversion Price, Borrower shall furnish to the holder of this
Debenture a statement, signed by the Chief Executive Officer and the Secretary
of the Borrower, of the facts creating such adjustment and specifying the
resultant adjusted Conversion Price then in effect, which statement shall
constitute an amendment to this Debenture.
7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. Notwithstanding the
provisions of Section 6 hereof, if the volume-weighted average closing bid price
of the Company's Common Stock as determined by Bloomberg Financial Markets and
Commodities News, for the thirty (30) consecutive trading days following
Borrower's public press release of its December 31, 1998 fiscal year-end
financial results (such volume-weighted average closing bid price herein
referred to as the "1998 Conversion Price Adjustment") is a price less than the
initial Conversion Price, and if the Company does not achieve December 31, 1998
fiscal year pre-tax income of $700,000, excluding extraordinary gains and
interest on this Debenture, then the Conversion Price shall be subject to a
one-time downward adjustment to an amount equal to 100% of the 1998 Conversion
Price Adjustment. If an adjustment is required pursuant to this Section 7, then
the Borrower shall furnish to the holder of this Debenture a statement, within
ten days of the occurrence thereof, signed by the Chief Financial Officer and
the Secretary of Borrower, of the facts creating such adjustment and specifying
the resultant adjusted Conversion Price then in effect, which statement shall
constitute an amendment to the Debenture. Such one-time adjustment to the
Conversion Price shall be subject to the Holder's optional right to require the
Company to redeem this Debenture at the sum equal to the Principal Amount,
together with an amount equal to an 18% annual yield on the Principal Amount
through the Redemption Date, upon notice given in the manner set forth in
Section 4(b) hereof.
8. RESERVATION OF SHARES. Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock or treasury shares of Common
Stock necessary to effect conversion of this Debenture.
9. REGISTRATION RIGHTS. The shares of Common Stock issued upon
conversion of this Debenture shall be restricted from transfer by the holder,
unless the shares are duly registered for sale pursuant to the Securities Act of
1933, as amended, or the transfer is exempt from registration. The Holder has
certain rights with respect to the registration of shares of Common Stock issued
upon the conversion of this Debenture pursuant to the terms of the Loan
Agreement. Borrower agrees that a copy of the executed Loan Agreement and all
amendments shall be available to the Holder at the offices of the Company.
10. Taxes. The Company shall pay any documentary or other transactional
taxes attributable to the issuance or delivery of this Debenture or the shares
of Common Stock issued upon conversion by the Holder (excluding any federal,
state or local income taxes and any franchise taxes or taxes imposed upon the
Holder by the jurisdiction, or any political subdivision thereof, under which
such Holder is organized or is qualified to do business.)
11. DEFAULT.
(a) EVENT OF DEFAULT. An "Event of Default" shall exist if an "Event of
Default" (as defined in the Loan Agreement) shall occur and be continuing.
(b) REMEDIES UPON EVENT OF DEFAULT. If an Event of Default shall have
occurred and be continuing, then the Holder or Agent may exercise any one or
more of the rights and remedies provided in the Loan Documents, as the Holder or
Agent, in its sole discretion, may deem necessary or appropriate.
Page 5
Issuers Initial __________
<PAGE>
(c) REMEDIES NONEXCLUSIVE. Each right, power or remedy of the holder
hereof upon the occurrence of any Event of Default as provided for in this
Debenture or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other right,
power or remedy provided for in this Debenture or now or hereafter existing at
law or in equity or by statute, and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) EXPENSES. Upon the occurrence of a Default or an Event of Default,
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including attorneys' fees and expenses) incurred by the Holder or Agent in
connection with the preservation and enforcement of Holder's rights under the
Loan Agreement, the Debenture, or any other Loan Document.
12. FAILURE TO ACT AND WAIVER. No failure or delay by the holder hereof
to require the performance of any term or terms of this Debenture or not to
exercise any right or any remedy shall constitute a waiver of any such term or
of any right or of any default, nor shall such delay or failure preclude the
holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Debenture, the holder hereof shall not be deemed to waive the right either
to require payment when due of all other amounts payable, or to later declare a
default for failure to effect such payment of any such other amount. The failure
of the holder of this Debenture to give notice of any failure or breach of the
Borrower under this Debenture shall not constitute a waiver of any right or
remedy in respect of such continuing failure or breach or any subsequent failure
or breach.
13. CONSENT TO JURISDICTION. The Company hereby agrees and consents that
any action, suit or proceeding arising out of this Debenture may be brought in
any appropriate court in the State of Texas, including the United States
District Court for the Northern District of Texas, or in any other court having
jurisdiction over the subject matter, all at the sole election of the Holder
hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Company hereby
irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or proceeding arising out of this Debenture. Except for default in
payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by the
parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation of
the Debenture shall be resolved by arbitration as set forth in the Loan
Agreement.
14. HOLDER'S RIGHT TO REQUEST MULTIPLE DEBENTURES. The Holder shall,
upon written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
instruments, each of such to be in such amounts as shall be requested; provided
however that no Debenture shall be issued in denominations of less than $50,000.
15. TRANSFER. This Debenture may be transferred on the books of the
Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, in multiples of $100,000 only upon (i) delivery to the
Borrower of a duly executed assignment of the Debenture, or part thereof, to the
proposed new Holder, along with a current notation of the amount of payments
received and net Principal Amount yet unfunded, and presentment of such
Debenture to the Borrower for issue of a replacement Debenture, or Debentures,
in the name of the new Holder, (ii) the designation by the new Holder of the
Lender's agent for notice, such agent to be the sole party to whom Borrower
shall be required to provide notice when notice to Lender is required hereunder
and who shall be the sole party authorized to represent Lender in regard to
modification or waivers under the Debenture, the Loan Agreement, or other Loan
Documents; and any action, consent or waiver, (other than a compromise of
principal and interest), when given or taken by Lender's agent for notice, shall
be deemed to be the action of the holders of a majority in amount of the
Principal Amount of the Debenture, as such holders are recorded on the books of
the Borrower, and (iii) in compliance with the legend to read as follows:
"The Securities represented by this Debenture have not been registered
under the Securities Act of 1933, as amended ("Act"), or applicable
state securities laws ("State Acts") and shall not be sold,
hypothecated, donated or otherwise transferred unless the Company shall
Page 6
Issuers Initial __________
<PAGE>
have received an opinion of Legal Counsel for the Company, or such other
evidence as may be satisfactory to Legal Counsel for the Company, to the
effect that any such transfer shall not require registration under the
Act and the State Acts."
The Company shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this Debenture
in the name of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by applicable law.
16. NOTICES. All notices and communications under this Debenture shall
be in writing and shall be either delivered in person or by overnight service
such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and (ii) if to the Holder of this
Debenture, to the address (a) of such Holder as it appears on the books of the
Borrower or (b) in the case of a partial assignment to one or more Holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if delivered;
or if mailed, then three days after the date of mailing.
17. MAXIMUM INTEREST RATE. (a) Regardless of any provision contained in
this Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Debenture is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any non principal payment as an
expense, fee or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and
spread, in equal parts, the total amount of interest throughout the entire
contemplated term of the Debenture; provided that, if the Debenture is paid and
performed in full prior to the end of the full contemplated term thereof, and if
the interest received for the actual period of existence thereof exceeds
interest calculated at the Maximum Rate, Lender shall refund to Borrower the
amount of such excess or credit the amount of such excess against the principal
amount of the Debenture and, in such event, Lender shall not be subject to any
penalties provided by any laws for contracting for, charging, taking, reserving
or receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which are
presently in effect of the United States of America or by the laws of any other
jurisdiction which are or may be applicable to the holders of the Debenture and
such Indebtedness or, to the extent permitted by law, under such applicable laws
of the United States of America or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
18. RIGHTS UNDER LOAN AGREEMENT. This Debenture is issued pursuant to
the Convertible Loan Agreement dated of even date herewith among the Company,
Renaissance III and Renaissance PLC, as Lenders, and Agent, and the holders
hereof are entitled to all the rights and benefits. Both Borrower and Lenders
have participated in the negotiation and preparation of the Loan Agreement and
of this Debenture. Borrower agrees that a copy of the Loan Agreement with all
amendments, additions and substitutions therefor shall be available to the
Holders at the offices of Borrower.
19. DEFINED TERMS. Capitalized terms used but not defined herein shall
have the meaning given them in the Loan Agreement.
Page 7
Issuers Initial __________
<PAGE>
20. Governing Law. This Debenture shall be governed by and construed and
enforced in accordance with the substantive laws of the State of Texas, without
regard to the conflicts of laws provisions thereof, and the applicable laws of
the United States.
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
issued, executed and delivered on the date and year above stated.
SIMTEK CORPORATION
By: /S/ Douglas M. Mitchell
--------------------------------------
Douglas M. Mitchell
President and Chief Executive Officer
Page 8
Issuers Initial __________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,149,820
<SECURITIES> 0
<RECEIVABLES> 744,754
<ALLOWANCES> 42,838
<INVENTORY> 915,905
<CURRENT-ASSETS> 3,958,182
<PP&E> 1,912,229
<DEPRECIATION> 1,691,110
<TOTAL-ASSETS> 4,239,917
<CURRENT-LIABILITIES> 907,696
<BONDS> 0
0
0
<COMMON> 287,452
<OTHER-SE> 1,544,769
<TOTAL-LIABILITY-AND-EQUITY> 4,239,917
<SALES> 6,180,550
<TOTAL-REVENUES> 6,180,550
<CGS> 3,477,861
<TOTAL-COSTS> 3,477,861
<OTHER-EXPENSES> 2,184,517
<LOSS-PROVISION> (6,157)
<INTEREST-EXPENSE> 76,166
<INCOME-PRETAX> 162,781
<INCOME-TAX> 0
<INCOME-CONTINUING> 162,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,781
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
