<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
---------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 NORTHWEST BOULEVARD, PLYMOUTH, MINNESOTA 55441
----------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 557-9005
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
OUTSTANDING AT
CLASS JUNE 30, 1996
----- --------------
Common Stock,
$.01 par value 13,391,202
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(in thousands, except per share data) 1996 1995 1996 1995
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 12,012 11,203 30,462 27,371
Cost of goods sold 9,252 23,884 21,860 35,745
---------- ----------- ----------- ------------
Gross margin 2,760 (12,681) 8,602 (8,374)
---------- ----------- ----------- ------------
Operating expenses:
Research and development 1,790 2,545 3,764 4,370
Sales and marketing 4,952 7,512 9,842 12,738
General and administrative 1,403 2,641 2,402 3,675
---------- ----------- ----------- ------------
8,145 12,698 16,008 20,783
---------- ----------- ----------- ------------
Operating loss (5,385) (25,379) (7,406) (29,157)
---------- ----------- ----------- ------------
Other income (expense):
Interest income 106 167 234 314
Interest expense - (1) - (3)
Other, net (79) (416) (109) (37)
---------- ----------- ----------- ------------
27 (250) 125 274
---------- ----------- ----------- ------------
Net loss $ (5,358) (25,629) (7,281) (28,883)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
Net loss per share $ (0.40) (1.95) (.55) (2.21)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
Average common shares outstanding 13,359 13,164 13,317 13,090
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
(in thousands, except per share data) 1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,110 11,456
Short-term investments 1,000 1,000
Accounts receivable 7,955 9,679
Inventories 7,914 8,531
Other current assets 872 767
------------ ------------
Total current assets 23,851 31,433
Equipment and improvements, net 7,544 8,054
Other assets 348 680
------------ ------------
Total Assets $ 31,743 40,167
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,095 6,126
Accrued payroll, benefits and related taxes 1,510 1,486
Deferred revenue 1,184 1,203
Other accrued expenses 2,507 2,598
------------ ------------
Total current liabilities 9,296 11,413
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 27,000 shares authorized,
13,391 and 13,273 shares issued and outstanding 134 133
Additional paid-in capital 77,478 76,830
Cumulative translation adjustments 137 (188)
Accumulated deficit (55,302) (48,021)
------------ ------------
Total stockholders' equity 22,447 28,754
------------ ------------
Total Liabilities and Stockholders' Equity $ 31,743 40,167
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
(In thousands) 1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,281) (28,883)
Adjustments to reconcile net loss to net
cash used in operating activities:
Restructure and related charges - 18,066
Depreciation and amortization 2,398 2,789
Loss on disposal of equipment 29 230
Provision for losses on accounts receivable 120 424
Provision for losses on inventories 351 1,200
Other 250 45
Changes in operating assets and liabilities:
Accounts receivable 1,604 13,369
Inventories 266 (8,807)
Other current assets (105) (435)
Accounts payable (2,031) (1,201)
Accrued payroll, benefits and related taxes 133 (218)
Deferred revenues and other accrued expenses 97 720
-------- --------
Net cash used in operating activities (4,169) (2,701)
-------- --------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 1,000 -
Purchase of short-term investments (1,000) -
Capital expenditures (1,917) (118)
Change in other assets 125 (113)
-------- --------
Net cash used in investing activities (1,792) (231)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations - (33)
Stock option transactions 290 484
-------- --------
Net cash provided by financing activities 290 451
-------- --------
Effect of exchange rate changes on cash 325 334
Net decrease in cash and cash equivalents (5,346) (2,147)
Cash and cash equivalents at beginning of period 11,456 13,241
-------- --------
Cash and cash equivalents at end of period $ 6,110 11,094
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TRICORD SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated statements of operations, balance sheet
and statements of cash flows reflect all adjustments of a normal recurring
nature which are, in the opinion of management, necessary for a fair statement
of the consolidated financial position at June 30, 1996, and of consolidated
results of operations and cash flows for the interim periods ended June 30, 1996
and 1995. The unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1995, which were incorporated by reference in its Form
10-K Annual Report. The year-end balance sheet data is derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the interim
periods ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
2. BALANCE SHEET INFORMATION
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
Inventories:
Raw materials $ 1,972 2,263
Work-in-process 3,069 3,604
Finished goods 2,425 2,435
Evaluation and on-loan items 267 90
Spare parts 181 139
------------- ---------
$ 7,914 8,531
------------- ---------
------------- ---------
3. LEGAL PROCEEDINGS
In July 1996, one of the carriers for the Company's officer and director
insurance coverage assumed the complete defense of the Company and the
individual defendants in an outstanding securities class action lawsuit and
agreed to hold the Company harmless against any further liability with respect
to the matter in exchange for the Company's deposit of $400,000 into an escrow
account and making available warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share. The Company had
previously taken a charge of $250,000 in the fourth quarter of 1995 for the
anticipated costs associated with the eventual resolution of the outstanding
class action lawsuit. Included in the second quarter 1996 loss is an additional
$400,000 or $.03 per share charge, including a $250,000 charge relating to the
estimated fair value of the warrants at the date of the agreement.
4
<PAGE>
4. MAJOR CUSTOMERS
Revenues from Toshiba Corporation ("Toshiba") were 18.2% of the Company's
revenues for the second quarter of 1996 compared to 4.3% for the second quarter
of 1995. For the six months ended June 30, 1996, revenues from Toshiba were
20.3% compared to 6.4% for the same period last year. Memorex Telex Corporation
accounted for 6.8% of the Company's revenues for the second quarter of 1996
compared to 4.1% in the second quarter of 1995, and 19.5% of the Company's
revenues in the first six months of 1996 compared to 12.7% in the first six
months of 1995.
5. CERTAIN SECOND QUARTER 1995 CHARGES
During the second quarter of 1995, the Company engaged in an extensive analysis
and evaluation of the Company's business, including its marketing, operations,
assets and product lines, with performance, strategies and focus undergoing
examination. As a result of this analysis, the Company decided to discontinue
its low-end DS Series product lines and to focus on the enterprise server
market, addressed by the Company's ES Series product lines. In addition, the
Company changed its production methodology from build to inventory to build to
order. As a result, the Company took a charge of $18,066,000 in the second
quarter of 1995. Of this charge, $14,488,000 was associated with the disposal
and write-down of obsolete and excess inventory due primarily to the changes in
the Company's business outlook for 1995, the discontinuance of the low-end DS
product lines, and a reduction in the number of product options the Company
would support within the ES Series product lines. The remaining components of
the second quarter 1995 charge include the following: $1,925,000 consisting
primarily of the write-off of assets relating to the development of the DS
product lines and loaners and demonstration equipment used to support operating
systems other than Novell NetWare and Windows NT; $750,000 consisting of
severance costs resulting from a reduction in work force; and $903,000
consisting of an increase in the allowance for doubtful accounts primarily due
to problems with a receivable from a reseller in Mexico. The breakdown of the
$18,066,000 charge by line item in the statement of operations is as follows:
cost of sales - $14,761,000, research and development - $857,000, sales and
marketing - $1,420,000, and general and administrative - $1,028,000. In
addition to the $18,066,000 charge, a $630,000 charge for salary and benefits
was also taken in the second quarter of 1995 related to the former President and
Chief Executive Officer's separation from the Company.
Of the $14,488,000 charge in the second quarter of 1995 associated with the
disposal and write-down of obsolete and excess inventory, approximately
$11,900,000 related to inventory to be disposed of, while the remaining amount
was principally for estimated future expenses under non-cancelable purchase
orders. As of June 30, 1996, of the approximately $11,900,000 reserved for
future disposition, approximately $7,700,000 of inventory had been disposed of
with the remaining approximately $4,200,000 awaiting final disposition.
5
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company designs, manufactures, markets and supports high-performance
enterprise servers for use in mission-critical on-line transaction processing,
on-line analytical processing, media and file/print applications running on
industry standard network operating systems, principally Microsoft Windows NT,
Novell NetWare and UNIX. The Company's products are characterized by an open
systems design emphasizing systems management, high availability, high
performance and scalability.
In the second quarter of 1995, the Company changed its production methodology
from build to inventory to build to order. This change in production methodology
has significantly changed the Company's historical trends related to backlog at
the beginning of a quarter; the impact on revenues during a quarter is not
clear. The Company's backlog of orders received and accepted but not yet
shipped was $3,560,000 at June 30, 1996 compared to $4,361,000 at June 30, 1995.
Quarterly revenues and operating results still primarily depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast and which limit the Company's ability to plan production and inventory
levels. In addition, because a substantial portion of the Company's net
revenues in each quarter result from shipments made during the last few weeks of
that quarter, if orders anticipated for any quarter do not occur or are delayed
so that shipments cannot be made in the quarter, expenditure levels could be
disproportionately high, and the Company's operating results for that quarter
are adversely affected.
Operating results may also fluctuate based upon other factors, such as delays in
the introduction of new products or enhancements, seasonal fluctuations in
business activity, delays in delivery of components by the Company's suppliers,
acceptance of enterprise servers in various markets around the world, product
announcements by the Company or its competitors, changes in pricing policies by
the Company, its competitors or its suppliers, and the gross margin impact to
the Company of changes in the distribution mix between sales to value added
resellers ("VARs") and system integrators, original equipment manufacturers
("OEMs") and international distributors.
The Company disposed of additional excess and obsolete inventory of $253,000 and
$786,000, respectively, in the second quarter and first six months of 1996
related to the second quarter 1995 charge of $14,488,000. The Company also paid
an additional $50,000 and $100,000, respectively, in the second quarter and the
first six months of 1996 for noncancellable purchase orders for the DS Series
inventory and has been able to negotiate extensions of a significant portion of
the noncancellable purchase orders. As of June 30, 1996, the Company has
approximately $8,700,000 of total inventory reserves, which it believes
adequately provides for excess and obsolete inventory.
6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage increase (decrease) and the
percentage of revenues represented by certain line items in the Consolidated
Statements of Operations for the periods indicated:
<TABLE>
<CAPTION>
Percentage
Increase (Decrease) Percentage of Revenues
1995 to 1996 ---------------------------------------
- --------------------- Three Months Six Months
Three Six Ended June 30 Ended June 30
--------------- ---------------
Months Months 1996 1995 1996 1995
- ------ ------ ----- ------ ------ ------
<C> <C> <S> <C> <C> <C> <C>
7 % 11 % Revenues...................... 100 % 100 % 100 % 100 %
(61) (39) Cost of goods sold............ 77 213 72 131
- ------ ------ ----- ------ ------ ------
122 203 Gross margin.................. 23 (113) 28 (31)
- ------ ------ ----- ------ ------ ------
Operating expenses:
(30) (14) Research and development..... 15 23 12 16
(34) (23) Sales and marketing.......... 41 67 32 47
(47) (35) General and administrative... 12 24 8 13
- ------ ------ ----- ------ ------ ------
(36) (23) Total operating expenses... 68 114 52 76
- ------ ------ ----- ------ ------ ------
(79) (75) Operating loss............... (45) (227) (24) (107)
111 (54) Other income (expense), net... - (2) - 1
- ------ ------ ----- ------ ------ ------
(79)% (75)% Net loss..................... (45)% (225)% (24)% (108)%
- ------ ------ ----- ------ ------ ------
- ------ ------ ----- ------ ------ ------
</TABLE>
REVENUES
The Company derives revenues primarily from the sale of enterprise servers and
associated software products, disk drives, memory, expansion products, and
warranty service contracts. Revenues for the second quarter and six months
ended June 30, 1996 were $12,012,000 and $30,462,000 compared to $11,203,000 and
$27,371,000 for the second quarter and six months ended June 30, 1995. The
increase in revenues for the second quarter and first six months of 1996
compared to the second quarter and first six months of 1995 is primarily due to
the decrease in backlog from March 31, 1996 to June 30, 1996 for the second
quarter of 1996 and the decrease in backlog from December 31, 1995 to June 30,
1996 for the first six months of 1996. Backlog at the beginning of the second
quarter of 1996 was $5,460,000 and at December 31, 1995 was $9,341,000 compared
to backlog at June 30, 1996 of $3,560,000. Backlog at December 31, 1995 was
higher than anticipated due to a parts shortage which delayed the Company's
ability to ship product. The increase in product revenues for the second
quarter is primarily due to higher revenues from associated add-on products such
as disk drives, memory and expansion products, partially offset by lower
revenues from the DS Series product line. The increase in product revenues for
the six months is due primarily to higher revenues from the Company's high-end
ES Series product line partially offset by lower revenues from the Model series
product line. The increase in revenues for the second quarter and six months
with respect to channels of distribution occurred primarily in the OEM channel
with sales to Toshiba Corporation ("Toshiba") and Memorex Telex Corporation
7
<PAGE>
("Memorex Telex"), partially offset by a decrease in the reseller channel.
Sales to Toshiba were 18.2% of revenues in the second quarter of 1996 compared
to 4.3% in the second quarter of 1995 and 20.3% of revenues in the first six
months of 1996 compared to 6.4% in the first six months of 1995. Sales to
Memorex Telex were 8.2% of revenues in the second quarter 1996 and 19.5% of
revenues in the first six months of 1996 compared to 4.1% in the second quarter
of 1995 and 12.7% in the first six months of 1995. During the second quarter of
1996, the Company shipped the last low-end DS Series units ordered by Toshiba.
The Company believes that future DS product line sales to Toshiba will consist
of spare parts and add-on products and future unit sales to Toshiba will depend
on the Company's ability to transition Toshiba to the ES Series product line.
For the last six months of 1996, the Company believes that sales to Toshiba will
be significantly less than during the first six months of 1996. Future sales to
Memorex Telex will depend on the ability of Memorex Telex to maintain their
accounts receivable with the Company on a current basis. As of June 30, 1996,
Memorex Telex had an outstanding accounts receivable balance with the Company of
approximately $2,500,000, a significant portion of which was past due. In July
1996, the Company received a payment from Memorex Telex of approximately
$1,100,000 for outstanding accounts receivable.
GROSS MARGIN
Gross margin, as a percent of revenues, increased to 23% in the second quarter
of 1996 and 28% for the first six months of 1996 compared to (113%) in the
second quarter of 1995 and (31%) for the first six months of 1995. The increase
in gross margin was due primarily to the second quarter 1995 charge of
$14,761,000 to cost of sales as described in footnote 5. Excluding the second
quarter 1995 charge, gross margin, as a percent of revenues, was 19% in the
second quarter of 1995 and 23% for the first six months of 1995. The increase
in gross margin, as a percent of revenues, for the second quarter of 1996
compared to the second quarter of 1995, excluding the second quarter 1995
charge, was primarily due to higher margins on sales of the ES Series product
line. The increase in gross margin, as a percent of revenues, for the first six
months of 1996 compared to the first six months of 1995, excluding the second
quarter 1995 charge, was primarily due to an increase in the first quarter of
1995 of the Company's obsolescence reserve by $1,200,000, or 4% of revenues in
the first six months of 1995, with respect to the Company's older product lines.
Research and Development
Expenses for research and development consist primarily of compensation and
related benefit costs, project expenses and depreciation on capital equipment
used in the research and development process. Research and development expenses
decreased 30% to $1,790,000 for the second quarter of 1996 from $2,545,000 for
the second quarter of 1995 and decreased 14% to $3,764,000 for the first six
months of 1996 from $4,370,000 for the first six months of 1995, primarily due
to the second quarter 1995 charge of $857,000 to research and development.
Excluding the second quarter 1995 charge,
8
<PAGE>
research and development expenses as a percentage of revenues remained the same
at 15% for the second quarter of 1996 compared to the second quarter of 1995.
For the six month period, research and development expenses, as a percentage of
revenues, decreased to 12% in 1996 compared to 13% in 1995, excluding the second
quarter 1995 charge.
Sales and Marketing
Sales and marketing expenses include compensation and benefits, sales
commissions, travel, trade shows, marketing materials and programs and facility
costs associated with worldwide sales offices. Sales and marketing expenses
decreased 34% to $4,952,000 for the second quarter of 1996 from $7,512,000 for
the second quarter of 1995, primarily due to the second quarter 1995 charge of
$1,420,000 to sales and marketing and the reduction of expenses in 1996 due to a
second quarter 1995 reduction in the workforce of the Company's Japanese
subsidiary. Sales and marketing expenses decreased 23% for the first six months
of 1996 to $9,842,000 from $12,738,000 in the first six months of 1995. Sales
and marketing expenses decreased as a percentage of revenues from 67% in the
second quarter of 1995 to 41% in the second quarter of 1996 and decreased to 32%
in the first six months of 1996 from 47% in the same period a year ago,
primarily due to the second quarter 1995 charge of $1,420,000 and the reduced
costs in 1996 due to the second quarter 1995 reduction in the workforce of the
Company's Japanese subsidiary.
General and Administrative
General and administrative expenses decreased 47% to $1,403,000 for the second
quarter of 1996 from $2,641,000 for the second quarter of 1995 and decreased 35%
to $2,402,000 for the first six months of 1996 from $3,675,000 for the first six
months of 1995, primarily due to the second quarter 1995 charges of $1,028,000
and $630,000 to general and administrative, partially offset by $400,000 for the
charge in the second quarter of 1996 related to the securities class action
lawsuit, as discussed in note 3.
Other Income (Expense), Net
Other income was $27,000 for the second quarter of 1996 compared to other
expense of $250,000 for the second quarter of 1995 and for the six months of
1996 other income was $125,000 compared to $274,000 for the first six months of
1995. The increase in other income for the second quarter and the decrease in
other income for the first six months are both primarily related to the increase
or decrease in foreign currency gains related to transactions with the
Company's Japanese subsidiary. There can be no assurance that the Company will
continue to experience foreign currency gains, or at the same rate, as it has in
recent fiscal quarters. From time to time the Company has experienced foreign
currency losses. A weakening of the yen against the dollar could result in a
foreign currency loss and could adversely affect the financial results of the
Company.
9
<PAGE>
Liquidity and Capital Resources
The aggregate net decrease in cash during the first six months of 1996 was
$5,346,000, including $4,169,000 of cash used in operating activities, due
primarily to the net loss for the first six months of 1996. As of June 30, 1996
and December 31, 1995, accounts receivable were $7,955,000 and $9,679,000,
respectively. The average days sales outstanding ("DSO") at June 30, 1996 and
December 31, 1995 were 57 and 47 days, respectively. The increase in DSO at
June 30, 1996 is primarily due to slower collections from Memorex Telex. As of
June 30, 1996 and December 31, 1995, inventories were $7,914,000 and $8,531,000,
respectively. The Company turned inventory on an annualized basis approximately
5.3 times in the first six months of 1996 compared to approximately 4.7 times in
the fourth quarter of 1995.
Net cash used in investing activities was $1,792,000 in the first six months of
1996, primarily due to capital expenditures. These expenditures were primarily
related to capitalization of internally-developed equipment for production,
testing and demonstration purposes and purchase of production equipment. The
Company currently plans purchases of capital equipment of approximately $600,000
during the last six months of 1996, which will either be purchased or
internally-developed equipment, and will be used for research and development,
demonstration purposes and test equipment. Actual capital expenditures could
materially differ from those expressed in the preceding forward-looking
statement, as actual capital expenditures are dependent on many factors,
including: the ability of the Company to achieve its planned revenues and
collections to generate the cash necessary to fund capital expenditures and the
continued use of current capital assets without the need of replacement due to
obsolescence, destruction or technology changes. The Company has no material
commitments for the purchase of capital equipment.
As of June 30, 1996, the Company had approximately $7,110,000 in cash and
investments. In August 1996 the Company obtained a revolving credit facility
with Silicon Valley Bank, Santa Clara, CA, to finance 80% of eligible accounts
receivable up to a maximum amount of $10,000,000. Terms of the revolving credit
facility include interest at 1.5% to 2.75% over the prime rate depending on the
debt to tangible net worth ratio, term of one year renewable annually and a
financial covenant of not less than $10,000,000 of tangible net worth. The
Company currently anticipates that its existing cash and investments together
with available borrowings under the revolving credit facility described above
will be sufficient to satisfy the Company's cash requirements for the next
twelve months. The ability of the Company to satisfy its actual cash
requirements could differ materially from those expressed in the preceding
forward-looking statement, as the Company's ability to satisfy its actual cash
requirements is dependent on many factors, including the ability of the Company
to achieve its planned operating results.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1996, one of the carriers for the Company's officer and director
insurance coverage assumed the complete defense of the Company and the
individual defendants in an outstanding securities class action lawsuit and
agreed to hold the Company harmless against any further liability with respect
to the matter in exchange for the Company's deposit of $400,000 into an escrow
account and making available warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share. The Company had
previously taken a charge of $250,000 in the fourth quarter of 1995 for the
anticipated costs associated with the eventual resolution of the outstanding
class action lawsuit. Included in the second quarter 1996 loss is an additional
$400,000 or $.03 per share charge, including a $250,000 charge relating to the
estimated fair value of the warrants at the date of the agreement.
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
The Company's annual shareholders' meeting was held on May 22, 1996 during which
the following items were voted upon and approved under applicable law:
1. Election of Directors
Mr. John Mitcham was elected director, 11,721,400 votes were cast for Mr.
Mitcham and 453,591 were withheld.
2. On the proposal to amend the 1992 Non-Employee Director Stock Option Plan
to provide for payment of the directors' annual cash retainer in the form
of the Company's common stock, votes representing 11,338,163 shares were
cast for, 598,482 shares were cast against and 93,346 shares abstained from
voting on such proposal and there were 145,000 broker non-votes.
3. On the proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
independent auditors for the Corporation and its subsidiaries for the
fiscal year ending December 31, 1996, votes representing 12,060,528 shares
were cast for and 48,667 shares were cast against and 65,796 shares
abstained from voting on such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Silicon Valley Bank Loan and Security Agreement
27.1 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
11
<PAGE>
SIGNATURE
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.
TRICORD SYSTEMS, INC.
(REGISTRANT)
By: /s/ Gregory T. Barnum
---------------------
Gregory T. Barnum, Vice President
of Finance & Administration
(Principal Financial Officer)
By: /s/ Marvin E. Dee
-----------------
Marvin E. Dee, V.P. of Finance & Treasurer
(Principal Accounting Officer)
Date: August 14, 1996
12
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
Number Number
- ------- ------
10.1 Silicon Valley Bank Loan and Security Agreement 14
27.1 Financial data schedule 31
13
<PAGE>
- --------------------------------------------------------------------------------
[LETTERHEAD]
LOAN AND SECURITY AGREEMENT
BORROWER: TRICORD SYSTEMS, INC.
ADDRESS: 2800 NORTHWEST BLVD.
PLYMOUTH, MN 55441
DATE: AUGUST 9, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement
(the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount
of Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Silicon and are
not refundable.
1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its sole
discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon
harmless from any loss, cost, expense, or liability, including payments made by
Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising
out of or in connection with any Letters of Credit. Borrower agrees to be bound
by the regulations and interpretations of the issuer of any Letters of Credit
guarantied by Silicon and opened for Borrower's account or by Silicon's
interpretations of any Letter of Credit issued by Silicon for Borrower's
account, and Borrower understands and agrees that Silicon shall not be liable
for
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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any error, negligence, or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the letters of Credit or
any modifications, amendments, or supplements thereto. borrower understands
that letters of Credit may require Silicon to indemnify the issuing bank for
certain costs or liabilities arising out of claims by Borrower against such
issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless
with respect to any loss, cost, expense, or liability incurred by Silicon under
any Letter of Credit as a result of Silicon's indemnification of any such
issuing bank. The provisions of this Loan Agreement, as it pertains to Letters
of Credit, and any other present or future documents or agreements between
Borrower and silicon relating to Letters of Credit are cumulative.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Silicon a security interest
in all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporations, is
and will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's articles or certificate of incorporation, or
Borrower's by-laws, or any law or any material agreement or instrument which is
binding upon Borrower or its property, and (iv) do not constitute grounds for
acceleration of any material indebtedness or obligation under any material
agreement or instrument which is binding upon Borrower or its property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give Silicon at least 30
days prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on the
Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interest,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever requested by Silicon, use its best
efforts to cause such third party to execute and deliver to Silicon, in form
acceptable to Silicon, such waivers and subordinations as Silicon shall specify,
so as to ensure that silicon's rights in the Collateral are, and will continue
to be, superior to the rights of any such third party. Borrower will keep in
full force and effect, and will comply with all the terms of, any lease of real
property where any of the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
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purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or business
of Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
Knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and indorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Silicon transaction reports and loan requests, schedules and
assignments of all Receivables, and schedules of collections, all on Silicon's
standard forms; provided, however, that Borrower's failure to execute and
deliver the same shall not affect or limit Silicon's security interest and other
rights in all of Borrower's Receivables, nor shall Silicon's failure to advance
or lend against a specific Receivable affect or limit
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Silicon's security interest and other rights therein. Loan requests received
after 2:30 PM will not be considered by Silicon until the next Business Day.
Together with each such schedule and assignment, or later if requested by
Silicon, Borrower shall furnish Silicon with copies (or, at Silicon's request,
originals) of all contracts, orders, invoices, and other similar documents, and
all original shipping instructions, delivery receipts, bills of lading, and
other evidence of delivery, for any goods the sale or disposition of which gave
rise to such Receivables, and Borrower warrants the genuineness of all of the
foregoing. Borrower shall also furnish to Silicon an aged accounts receivable
trial balance in such form and at such intervals as Silicon shall request. In
addition, Borrower shall deliver to Silicon the originals of all instruments,
chattel paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, immediately upon receipt thereof and in
the same form as received, with all necessary endorsements, all of which shall
be with recourse. Borrower shall also provide Silicon with copies of all credit
memos within two days after the date issued.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to
collect all Receivables, unless and until a Default or an Event of Default
has occurred. Borrower shall hold all payments on, and proceeds of,
Receivables in trust for Silicon, and Borrower shall immediately deliver all
such payments and proceeds to Silicon in their original form, duly endorsed
in blank, to be applied to the Obligations in such order as Silicon shall
determine. Silicon may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Silicon may specify, pursuant to a blocked account
agreement in such form as Silicon may specify. Silicon or its designee may,
at any time, notify Account Debtors that the Receivables have been assigned
to Silicon.
4.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds or the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that; (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregated all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof; nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
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5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is,at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any
such insurance, Silicon shall apply such proceeds in reduction of the
Obligations as Silicon shall determine in its sole discretion, except that,
provided no Default or Event of Default has occurred and is continuing, Silicon
shall release to Borrower insurance proceeds with respect to Equipment totaling
less than $100,000, which shall be utilized by Borrower for the replacement of
the Equipment with respect to which the insurance proceeds were paid. Silicon
may require reasonable assurance that the insurance proceeds so released will be
so used. If Borrower fails to provide or pay for any insurance, Silicon may,
but is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on
one Business Day's notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy Borrower's books and
records. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have the
right to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for same), plus reasonable out of pocket
expenses. Borrower will not enter into any agreement with any accounting firm,
service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower's business, and except for the sale of obsolete or
unneeded Equipment in the ordinary course of business; (v) store any Inventory
or other Collateral with any warehouseman or other third party; (vi) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent
basis; (vii) make any loans of any money or other assets; (viii) incur any
debts, outside the ordinary course of business, which would have a material,
adverse effect on Borrower or on the prospect of repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations of
another party or entity; (x) pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower); (xi) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of Borrower's stock;
(xii) make any change in Borrower's capital structure which would have a
material adverse effect of Borrower or on the prospect of repayment of the
Obligations; or (xiii) pay total compensation, including salaries, fees,
bonuses, commissions, and all other payments, whether directly or indirectly, in
money or otherwise, to Borrower's executives, officers and directors (or any
relative thereof) in an amount in excess of the amount set forth on the
Schedule; or (xiv) dissolve or elect to dissolve. Transactions permitted by the
foregoing provisions of this Section are only permitted if no Default or Event
of Default would occur as a result of such transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to
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the next Maturity Date, that such party elects to terminate this Agreement
effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to.* The termination fee shall be due and payable on the effective date
of termination and thereafter shall bear interest at a rate equal to the highest
rate applicable to any of the Obligations.
* $75,000 (0.75% OF $10,000,000), IF TERMINATION OCCURS PRIOR TO THE FIRST
ANNIVERSARY OF THE DATE HEREOF, PROVIDED THAT NO TERMINATION FEE SHALL BE
CHARGED IF THE CREDIT FACILITY HEREUNDER IS REPLACED WITH A NEW FACILITY FROM
ANOTHER DIVISION OF SILICON VALLEY BANK HAVING A TERM OF AT LEAST 12 MONTHS FROM
THE DATE OF THE NEW FACILITY.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right
or remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other
nonmonetary Obligation which by its nature cannot be cured; or (e) Borrower
shall fail to perform any other nonmonetary Obligation, which failure is not
cured within 5 Business Days after the date due; or (f) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (h)
Borrower breaches any material contract or obligation, which has or may
reasonably be expect to have a material adverse effect on Borrower's business or
financial condition; or (i) Dissolution, termination of existence, insolvency or
business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statue of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party
to secure any or all of the Obligations,
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or any attempt to do any of the foregoing, or commencement of proceedings by or
against any such third party under any bankruptcy or insolvency law; or (m)
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (n) there shall be a change in the record or beneficial ownership
of an aggregate of more than 20% of the outstanding shares of stock of Borrower,
in one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of Silicon; or (o) Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a
material adverse change in Borrower's business or financial condition; or (q)
Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date. Silicon
may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one or
more of the following:. (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Silicon's sole discretion,
to grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclu-
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sively be deemed to be commercially reasonable: (i) Notice of the sale is given
to Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general, non-
specific terms; (iii) The sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable .
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default,
without limiting Silicon's other rights and remedies, Borrower grants to Silicon
an irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall Silicon's rights under the foregoing power of attorney or any of Silicon's
other rights under this Agreement be deemed to indicate that Silicon is in
control of the business, management or properties of Borrower.
7.5 APPLICABLE OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Silicon shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its
sole discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price of deferring
the reduction of the Obligations under the actual receipt by Silicon of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies accorded
a secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure of delay or Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable.
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"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"BUSINESS DAY" means a day on which Silicon is open for business.
"CODE" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 2.1 above.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code.
"ELIGIBLE INVENTORY" (NOT APPLICABLE).
"ELIGIBLE RECEIVABLES" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on
such considerations as Silicon may from time to time deem appropriate.
Without limiting the fact that the determination of which Receivables are
eligible for borrowing is a matter of Silicon's discretion, the following
(the "MINIMUM ELIGIBILITY REQUIREMENTS") are the minimum requirements for a
Receivable to be an Eligible Receivable: (i) the Receivable must not be
outstanding for more than 90 days from its invoice date, (ii) the Receivable
must not represent progress billings, or be due under a fulfillment or
requirements contract with the Account Debtor, (iii) the Receivable must not
be subject to any contingencies (including Receivables arising from sales on
consignment, guaranteed sale or other terms pursuant to which payment by the
Account Debtor may be conditional), (iv) the Receivable must not be owing
from an Account Debtor with whom the Borrower has any dispute (whether or not
relating to the particular Receivable), (v) the Receivable must not be owing
from an Affiliate of Borrower, (vi) the Receivable must not be owing from an
Account Debtor which is subject to any insolvency or bankruptcy proceeding,
or whose financial condition is not acceptable to Silicon, or which, fails or
goes out or a material portion of its business, (vii) the Receivable must not
be owing from the United States or any department, agency or instrumentality
thereof (unless there has been compliance, to Silicon's satisfaction, with
the United States Assignment of Claims Act), (viii) the Receivable must not
be owing from an Account Debtor located outside the United States or Canada
(unless pre-approved by Silicon in its discretion in writing, or backed by a
letter of credit satisfactory to Silicon, or FCIA insured satisfactory to
Silicon), (ix) the Receivable must not be owing from an Account Debtor to
whom Borrower is or may be liable for goods purchased from such Account
Debtor or otherwise. Receivables owing from one Account Debtor will not be
deemed Eligible Receivables to the extent they exceed 25% of the total
eligible Receivables outstanding. In addition, if more than 50% of the
Receivables owing from an Account Debtor are outstanding more than 90 days
from their invoice date (without regard to unapplied credits) or are
otherwise not eligible Receivables, then all Receivables owing from that
Account Debtor will be deemed ineligible for borrowing. Silicon may, from
time to time, in its discretion, revise the Minimum Eligibility Requirements,
upon written notice to the Borrower.
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"EVENT OF DEFAULT" means any of the events set forth in Section 7.1 of this
Agreement.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter arising therefrom, all claims of Borrower
against Silicon, rights to purchase or sell real or personal property, rights as
a licensor or licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation life insurance, key man insurance, credit insurance,
liability insurance, property insurance and other insurance), tax refunds and
claims, computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower, all rights
to indemnification and all other intangible property of every kind and nature
(other than Receivables).
"INVENTORY" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing,
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shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"PERMITTED LIENS" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Silicon, which consent shall not
be unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the rights to require, a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest is subordinate to the
security interest in favor of Silicon, and agree not to take any action to
enforce its subordinate security interest so long as any Obligations remain
outstanding, and that Borrower agree that any uncured default in any obligation
secured by the subordinate security interest shall also constitute an Event of
Default under this Agreement.
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, of any other entity.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies or any unpaid vendor,
lienor or secured party.
OTHER TERMS. All accounting terms used in this agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined herein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 2:30 PM on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
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9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Silicon and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. THERE ARE
NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH
ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE
PARTIES IN CONNECTION HEREWITH.
9.8 WAIVERS. The failure of Silicon at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Silicon shall not waive
or diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Silicon,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Silicon incurs in order to do the following:
prepare and negotiate this Agreement and the documents relating to this
Agreement; obtain legal advice in connection with this Agreement or Borrower;
enforce, or seek to enforce, any of its rights; prosecute actions against, or
defend actions by, Account Debtors; commence, intervene in, or defend any
action or proceeding; initiate any complaint to be relieved of the automatic
stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim,
third-party claim, or other claim; examine, audit, copy, and inspect any of
the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce Silicon's security
interest in, the Collateral; and otherwise represent Silicon in any
litigation relating to Borrower. IN SATISFYING BORROWER'S OBLIGATION
HEREUNDER TO REIMBURSE SILICON FOR ATTORNEYS FEES, BORROWER MAY, FOR
CONVENIENCE, ISSUE CHECKS DIRECTLY TO SILICON'S ATTORNEYS. LEVY, SMALL &
LALLAS, BUT BORROWER ACKNOWLEDGES AND AGREES THAT LEVY, SMALL & LALLAS IS
REPRESENTING ONLY SILICON AND NOT BORROWER IN CONNECTION WITH THIS AGREEMENT.
If either Silicon or Borrower files any lawsuit against the other predicated
on a breach of this Agreement, the prevailing party in such action shall be
entitled to recover its reasonable costs and attorneys' fees, including (but
not limited to) reasonable attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. All attorneys' fees and costs to which Silicon may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Silicon; provided,
however, that Borrower may not assign or transfer any of
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its rights under this Agreement without the prior written consent of Silicon,
and any prohibited assignment shall be void. No consent by Silicon to any
assignment shall release Borrower from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against Silicon, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Silicon, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
TRICORD SYSTEMS, INC.
BY /s/ Gregory T. Barnum
--------------------------------
PRESIDENT OR VICE PRESIDENT
BY /s/ Marvin E. Dee
--------------------------------
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /s/ Richard J. Gregorski
--------------------------------
TITLE /s/ Senior Vice President
-----------------------------
44,541
-12-
<PAGE>
[LOGO] SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: TRICORD SYSTEMS, INC.
ADDRESS: 2800 NORTHWEST BLVD.
PLYMOUTH, MN 55441
DATE: AUGUST 9, 1996
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
- -------------------------------------------------------------------------------
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i) $10,000,000
at any one time outstanding; or (ii) 80% of the amount
of Borrower's Eligible Receivables (as defined in
Section 8 above).
LETTER OF CREDIT SUBLIMIT
(Section 1.5): $1,000,000
- -------------------------------------------------------------------------------
2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in effect from time to
time, plus 1.50% per annum, provided that the interest
rate shall be adjusted, hereafter, based on the
Borrower's Debt to Tangible Net Worth Ratio as
follows:
- --------------------------------------------------------------------------------
- - If the Borrower's Debt to Tangible - The interest rate shall be adjusted -
- - Net Worth Ratio is - to a rate equal to the "Prime Rate" -
- - - in effect from time to time, plus -
- --------------------------------------------------------------------------------
- - 2.0 to 1 or less - 1.50% -
- --------------------------------------------------------------------------------
- - more than 2.0 to 1 but not more than - 2.25% -
- - 2.75 to 1 - -
- --------------------------------------------------------------------------------
- - more than 2.75 to 1 - 2.75% -
- --------------------------------------------------------------------------------
-1-
<PAGE>
Any change in the interest rate shall be based on the
monthly financial statements of the Borrower and shall
go into effect on the first day of the first month
following the earlier of the date such financial
statements were delivered or were due under this
Agreement.
Interest shall be calculated on the basis of a 360-day
year for the actual number of days elapsed. "Prime
Rate" means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate upon
which other rates charged by Silicon are based, and it
is not necessarily the best rate available at Silicon.
The interest rate applicable to the Obligations shall
change on each date there is a change in the Prime
Rate.
For purposes of the foregoing, Debt to Tangible Net
Worth Ratio shall mean the ratio of Borrower's total
liabilities to Tangible Net Worth (as defined below).
- -------------------------------------------------------------------------------
3. FEES (Section 1.4):
Loan Fee: $90,000, payable concurrently herewith.
- -------------------------------------------------------------------------------
4. MATURITY DATE
(Section 6.1): One year from the date of this Agreement, subject to
automatic renewal as provided in Section 6.1 above, and
early termination as provided in Section 6.2 above.
- -------------------------------------------------------------------------------
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the
end of each month, except as otherwise specifically
provided below:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of not
less than $10,000,000.
DEFINITIONS. For purposes of the foregoing financial covenants, the
following terms shall have the following meanings:
"Tangible Net Worth" shall mean the excess of total
assets over total liabilities, determined in accordance
with generally accepted accounting principles, with the
following adjustments:
(A) there shall be excluded from assets: (i)
notes, accounts receivable and other obligations
owing to the Borrower from its officers or other
Affiliates, and (ii) all assets which would be
classified as intangible assets under generally
accepted accounting principles, including without
limitation goodwill, licenses, patents,
trademarks, trade names, copyrights, capitalized
software and organizational costs, licenses and
franchises.
-2-
<PAGE>
(B) there shall be excluded from liabilities: all
indebtedness which is subordinated to the
Obligations under a subordination agreement in
form specified by Silicon or by language in the
instrument evidencing the indebtedness which is
acceptable to Silicon in its discretion.
- -------------------------------------------------------------------------------
6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice date,
within 15 days after the end of each month.
2. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers
within 15 days after the end of each month.
3. Monthly reconciliations of Receivable agings (aged
by invoice date), transaction reports, and general
ledger, within 15 days after the end of each month.
4. Monthly perpetual inventory reports for the Inventory
valued on a first-in, first-out basis at the lower of
cost or market (in accordance with generally accepted
accounting principles) or such other inventory reports
as are reasonably requested by Silicon, all within 15
days after the end of each month.
5. Monthly unaudited financial statements, as soon as
available, and in any event within thirty days after
the end of each month.
6. Monthly Compliance Certificates, within thirty days
after the end of each month, in such form as Silicon
shall reasonably specify, signed by the Chief Financial
Officer of Borrower, certifying that as of the end of
such month Borrower was in full compliance with all of
the terms and conditions of this Agreement, and setting
forth calculations showing compliance with the
financial covenants set forth in this Agreement and
such other information as Silicon shall reasonably
request.
7. Quarterly unaudited financial statements, as soon as
available, and in any event within forty-five days
after the end of each fiscal quarter of Borrower.
8. Annual operating budgets (including income statements,
balance sheets and cash flow statements, by month) of
the upcoming fiscal year of Borrower within thirty days
prior to the end of each fiscal year of Borrower.
9. Annual financial statements, as soon as available, and
in any event within 120 days following the end of
Borrower's fiscal year, certified by independent
certified public accountants acceptable to Silicon.
-3-
<PAGE>
- -------------------------------------------------------------------------------
7. COMPENSATION
(Section 5.5): Without Silicon's prior written consent, Borrower shall
not pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing
accounts and other payments, whether directly or
indirectly, in money or otherwise, during any fiscal
year to all of Borrower's executives, officers and
directors (or any relative thereof) as a group in
excess of 125% of the total amount thereof in the prior
fiscal year.
- -------------------------------------------------------------------------------
8. CONDITIONS PRECEDENT
The obligation of Silicon to make the initial Loan
hereunder and to issue or arrange for the issuance of
the initial Letter of Credit hereunder is subject to
the fulfillment, to the satisfaction of Silicon and its
counsel, of each of the following conditions:
(a) LOAN DOCUMENTS. Silicon shall have received
each of the following Loan Documents: intellectual
property assignments and security agreements with
respect to Borrower's intellectual property, and
UCC-1 Financing Statements, all on Silicon's
standard forms, duly acknowledged for recording or
filing in the appropriate governmental offices;
and such other documents, instruments and
agreements in connection herewith as Silicon shall
require, executed, certified and/or acknowledged
by such parties as Silicon shall designate;
(b) SEARCHES. Silicon shall have received UCC
Searches in all appropriate jurisdictions showing
the UCC-1 Financing Statement in favor of Silicon
to be of record, and showing no other financing
statements, liens or encumbrances other than
Permitted Liens.
(c) TERMINATIONS BY EXISTING LENDER. Borrower's
existing lender(s) shall have executed and
delivered UCC termination statements and other
documentation evidencing the termination of its
liens and security interests in the assets of
Borrower or a subordination agreement in form and
substance satisfactory to Silicon in its sole
discretion;
(d) CHARTER DOCUMENTS. Silicon shall have
received copies of Borrower's By-laws and Articles
or Certificate of Incorporation, as amended,
modified, or supplemented to the Closing Date,
certified by the Secretary of Borrower;
(e) GOOD STANDING. Silicon shall have received a
certificate of corporate status with respect to
Borrower, dated within ten (10) days of the date
of the funding of the first Loan, by the Secretary
of State of Delaware, which certificate shall
indicate that Borrower is in good standing in such
state;
(f) FOREIGN QUALIFICATION. Silicon shall have
received certificates or corporate status with
respect to Borrower and each other Loan Party,
each dated within ten (10) days of the date of the
funding of the first Loan, issued by the Secretary
of State of each state in which such party's
failure to be duly qualified or licensed would
have a material adverse effect on its financial
condition or assets, indicating that such party is
in good standing;
-4-
<PAGE>
(g) OPINION OF COUNSEL. Silicon shall have
received an opinion of Borrower's counsel covering
such matters as Silicon shall determine in its
discretion;
(h) OTHER MATTERS. All other documents and legal
matters in connection with the transactions
contemplated by this Agreement shall have been
delivered, executed and recorded and shall be in
form and substance satisfactory to Silicon and its
counsel.
- -------------------------------------------------------------------------------
9. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): None
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): None
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): See Representations and Warranties of Borrower
dated July 26, 1996.
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None
- -------------------------------------------------------------------------------
10. OTHER COVENANTS
(Section 5.1): Borrower shall at all times maintain its primary
banking relationship with Silicon.
Borrower: Silicon:
TRICORD SYSTEMS, INC. SILICON VALLEY BANK
By /s/ Gregory T. Barnum By /s/ Richard J. Gregorski
------------------------------ ----------------------------
Vice President Title Senior Vice President
-------------------------
By /s/ Marvin E. Dee
------------------------------
Secretary or Ass't Secretary
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages 1 and 2 of the Company's Form 10-Q for the six months ended June 30, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,110
<SECURITIES> 1,000
<RECEIVABLES> 7,955
<ALLOWANCES> (1,691)
<INVENTORY> 7,914
<CURRENT-ASSETS> 23,851
<PP&E> 17,042
<DEPRECIATION> (9,498)
<TOTAL-ASSETS> 31,743
<CURRENT-LIABILITIES> 9,296
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 22,313
<TOTAL-LIABILITY-AND-EQUITY> 31,743
<SALES> 30,462
<TOTAL-REVENUES> 30,462
<CGS> 21,860
<TOTAL-COSTS> 21,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,281)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,281)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
