<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21126
S3 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0204341
--------------------------- -----------------------------------
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
2801 Mission College Boulevard
P.O. Box 58058
Santa Clara, California 95052-8058
- --------------------------------------- ----------
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (408) 588-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, $.0001 par value,
outstanding at October 31, 1997 was 50,288,975
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S3 INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three months and nine months
ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
Page 2 of 24
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
S3 INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
September 30, 1996
1997 (As Restated)
------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 67,399 $ 94,616
Short-term investments 44,692 62,768
Accounts receivable (net of allowances of $3,340 in 1997
and $2,648 in 1996) 117,458 76,120
Inventories, net 50,727 53,466
Prepaid expenses and other 35,715 34,369
-------- --------
Total current assets 315,991 321,339
Property and equipment, net 48,593 34,047
Production capacity rights 14,400 14,400
Investment in joint venture 112,108 93,430
Other assets 44,542 17,246
-------- --------
Total $535,634 $480,462
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,039 $ 51,160
Notes payable 28,461 17,802
Accrued liabilities 14,896 12,063
Deferred revenue 21,760 12,113
Income taxes payable -- 2,651
-------- --------
Total current liabilities 131,156 95,789
Notes payable 4,800 14,400
Other liabilities 9,188 6,452
-------- --------
Total liabilities 145,144 116,641
-------- --------
Convertible Subordinated Notes 103,500 103,500
-------- --------
Commitments and contingencies (Notes 5 and 6)
Stockholders' equity:
Common Stock, $.0001 par value; 70,000,000 shares
authorized; 50,194,051 and 48,331,794 shares outstanding
in 1997 and 1996 178,987 169,411
Unrealized gain (loss) on short-term investments 39 (54)
Retained earnings 107,964 90,964
-------- --------
Total stockholders' equity 286,990 260,321
-------- --------
Total $535,634 $480,462
======== ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
Page 3 of 24
<PAGE> 4
S3 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net sales $ 119,604 $110,085 $ 334,448 $311,327
Cost of sales 78,791 68,079 207,039 191,391
--------- -------- --------- --------
Gross margin 40,813 42,006 127,409 119,936
Operating expenses:
Research and development 20,057 15,897 60,028 45,675
Selling, marketing and administrative 13,763 12,858 39,895 35,359
--------- -------- --------- --------
Total operating expenses 33,820 28,755 99,923 81,034
--------- -------- --------- --------
Income from operations 6,993 13,251 27,486 38,902
Other income (expense), net (737) 277 (1,008) 1,986
--------- -------- --------- --------
Income before income taxes 6,256 13,528 26,478 40,888
Provision for income taxes 1,872 4,600 9,478 13,869
--------- -------- --------- --------
Net income $ 4,384 $ 8,928 $ 17,000 $ 27,019
========= ======== ========= ========
Net income per common and equivalent share:
Primary $ 0.08 $ 0.17 $ 0.33 $ 0.54
========= ======== ========= ========
Assuming full dilution $ 0.08 $ 0.17 $ 0.33 $ 0.53
========= ======== ========= ========
Shares used in computing net income per
common and equivalent share:
Primary 52,380 51,101 51,232 50,421
========= ======== ========= ========
Assuming full dilution 52,380 52,932 53,020 51,031
========= ======== ========= ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
Page 4 of 24
<PAGE> 5
S3 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, September 30,
1997 1996
------------- --------------
(As Restated)
<S> <C> <C>
Operating activities:
Net income $ 17,000 $ 27,019
Adjustments to reconcile net income to net cash used for
operating activities:
Deferred income taxes 3,229 (994)
Depreciation and amortization 13,203 7,717
Equity in income from joint venture (18,678) --
Changes in assets and liabilities:
Accounts receivable (41,338) (20,621)
Inventories 2,739 (9,572)
Prepaid expenses and other (3,221) (6,794)
Production capacity rights -- (7,200)
Accounts payable 14,879 (26,073)
Accrued liabilities 4,937 6,319
Deferred revenue 9,647 10,201
Income taxes payable (2,651) (1,477)
-------- ---------
Net cash used for operating activities (254) (21,475)
-------- ---------
Investing activities:
Property and equipment purchases, net (25,435) (12,515)
Investment in real estate partnership -- (2,100)
Sales/maturities of short-term investments, net 18,169 11,389
Technology investments (16,200) --
Investment in joint venture -- (26,921)
Other assets (12,875) --
-------- ---------
Net cash used for investing activities (36,341) (30,147)
-------- ---------
Financing activities:
Sale of common stock, net 9,576 3,391
Sale of convertible subordinated notes -- 103,500
Debt issuance costs -- (3,250)
Net borrowings (repayments) of notes payable (9,600) --
Borrowings on equipment financing 9,402 6,500
Net borrowings of notes payable -- 3,000
-------- ---------
Net cash provided by financing activities 9,378 113,141
-------- ---------
Net increase (decrease) in cash and equivalents (27,217) 61,519
Cash and cash equivalents at beginning of period 94,616 69,289
-------- ---------
Cash and cash equivalents at end of period $ 67,399 $ 130,808
======== =========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
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<PAGE> 6
S3 INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The condensed consolidated financial statements have been prepared by S3
Incorporated, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include the accounts of S3 Incorporated
and its wholly-owned subsidiaries ("S3" or collectively the "Company"). Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
the Company, the financial statements reflect all adjustments consisting only of
normal recurring adjustments except as discussed in note 2 below, necessary for
a fair presentation of the financial position at September 30, 1997, the
operating results for the three and nine months ended September 30, 1997 and
1996, and cash flows for the nine months ended September 30, 1997 and 1996.
The results of operations for the three months and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the future quarters or the year ending December 31, 1997. Certain
reclassifications of 1996 amounts were made in order to conform to the 1997
presentation.
2. Restatement of Financial Statements for Previous Periods
Subsequent to the filing of the Company's Form 10-Q for the quarter
ended June 30, 1997, the Company discovered that its accounting policies with
respect to revenue recognition for international sales had not been fully
followed. The Company's policy is to defer recognition of revenue on all sales
to distributors until the product is sold by each distributor to its customers.
Following a preliminary review, the Company believes that in certain instances,
revenue was recognized at the time of shipment of product to the Company's
distributors instead of at the time the distributor sold the product to its
customer. The Company's review of this matter is ongoing and is being conducted
by the Audit Committee of the Board of Directors. Although the review has not
been completed, the Company believes that it has quantified the revenue
misstatements related to its distributors and has reported the effects as
restatements in this quarterly report. The effects of such restatements are
summarized as follows in thousands except per share amount:
<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended,
September 30, 1996 September 30, 1996
------------------- ------------------
<S> <C> <C>
Net sales before restatement $119,440 $333,337
Net sales after restatement $110,085 $311,327
Cost of sales before restatement $ 72,824 $203,691
Cost of sales after restatement $ 68,079 $191,391
Net income before restatement $ 11,788 $ 32,888
Net income after restatement $ 8,928 $ 27,019
Net income per common and equivalent share before restatement $ 0.23 $ 0.65
Net income per common and equivalent share after restatement $ 0.17 $ 0.54
</TABLE>
<TABLE>
At December 31, 1996
--------------------
<S> <C>
Deferred revenue before restatement $ 624
Deferred revenue after restatement $ 12,113
Total liabilities before restatement $109,862
Total liabilities after restatement $116,641
Total stockholder's equity before restatement $267,100
Total stockholder's equity after restatement $260,321
</TABLE>
After further review, the Company will reissue its annual financial statements
for the year ended December 31, 1996. Until that time, no reliance should be
placed on the 1996 financial statements or independent auditors' report thereon
included in the 1996 Annual Report on Form 10-K or on the financial statements
included in the quarterly reports on Form 10-Q previously filed in 1996 and
1997.
Page 6 of 24
<PAGE> 7
3. Inventories:
Inventories consist of work in process and finished goods and are stated
at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
September 30, December 31,
Inventories consist of: 1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Work in process $27,584 $22,556
Finished goods 23,143 30,910
------- -------
Total $50,727 $53,466
======= =======
</TABLE>
4. Net income per share:
Primary per share data is computed based on the weighted average number
of common and dilutive common equivalent shares outstanding. Common equivalent
shares include stock options and shares subscribed under the employee stock
purchase plan (computed using the treasury stock method). Fully diluted per
share data is computed using the most dilutive assumptions and by adjusting the
primary per share data and net income for the effect of the conversion of the 5
3/4% Convertible Subordinated Notes outstanding during the period and the
elimination of the related interest and amortization of issue costs, net of
income taxes.
5. Wafer supply agreements and commitments
During 1995, the Company entered into two long-term manufacturing
capacity arrangements. The Company entered into an agreement with United
Microelectronics Corporation (UMC) and Alliance Semiconductor Corporation to
form United Semiconductor Corporation (USC), a separate Taiwanese company, for
the purpose of building and managing a semiconductor manufacturing facility in
Taiwan, Republic of China. The Company has invested a total of $89.4 million for
its equity interest of 23.75%. The Company has the right to purchase up to
31.25% of the output from the foundry.
In addition, in 1995 the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Company (TSMC) to provide
additional capacity over the 1996 to 2000 timeframe. The agreement with TSMC
requires the Company to make certain annual advance payments to be applied
against the following years capacity. The Company has signed promissory notes to
secure these payments over the term of the agreement. At September 30, 1997, the
remaining advance payments (and corresponding promissory notes) totaled $31.2
million ($16.8 million in prepaid expenses and $14.4 million in production
capacity rights).
In the ordinary course of business, the Company places purchase orders
with its wafer suppliers based on its existing and anticipated customer orders
for its products. Should the Company experience a substantial unanticipated
decline in the selling price of its products and/or demand thereof, it could
result in a material loss on such purchase commitments.
6. Contingencies
The semiconductor and software industries are characterized by frequent
litigation regarding patent and other intellectual property rights and other
contract disputes. The Company has been and can be in the future party to
various claims of this nature. Although the ultimate outcome of these matters is
not presently determinable, management believes that
Page 7 of 24
<PAGE> 8
the resolution of all such matters will not have a material adverse
effect on the Company's financial position or results of operations.
See Note 8 concerning litigation.
7. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal
1997 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 will replace current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $0.09 and $0.19 for the three months ended
September 30, 1997 and 1996 respectively. Basic EPS would have been $0.35 and
$0.57 for the nine months ended September 30, 1997 and 1996 respectively.
Diluted EPS under SFAS 128 would have been $0.08 and $0.17 for the three months
ended September 30, 1997 and 1996 respectively. Diluted EPS for the nine months
ended September 30, 1997 and 1996 would have been $0.33 and $0.54 respectively.
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards No. 130 (Reporting Comprehensive
Income), which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
8. Subsequent Events
In November 1997, several complaints were filed in federal and state
courts seeking an unspecified amount of damages on behalf of an alleged class of
persons who purchased shares of the Company's Common Stock at various times
between January 1, 1995 and November 3, 1997. The complaints name as defendants
the Company, certain of its officers and former officers and certain directors
of the Company and its outside auditors, asserting that they violated federal
and state securities laws by misrepresenting and failing to disclose certain
information about the Company's business. The Company has not formally responded
to the complaints. While management intends to defend the actions vigorously,
there can be no assurance that an adverse result or settlement with regards to
these lawsuits would not have a material adverse effect on the Company's
financial condition or results of operations.
Page 8 of 24
<PAGE> 9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the timing of
availability and functionality of products under development, product mix,
trends in average selling prices, trends in the PC market, the percentage of
export sales and sales to strategic customers and the availability and cost of
products from the Company's suppliers, are subject to risks and uncertainties,
including those set forth below under "Factors That May Affect Results," that
could cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any statement is based.
OVERVIEW
The Company is a leading supplier of multimedia acceleration hardware
and its associated software for the PC market. The Company's accelerators are
designed to work cooperatively with a PC's central processing unit ("CPU"),
implementing functions best suited for a dedicated accelerator while allowing
the CPU to perform the more general purpose computing functions of today's
advanced graphical user interface ("GUI") environment and applications.
Subsequent to the filing of the Company's Form 10-Q for the quarter
ended June 30, 1997, the Company discovered that its accounting policies with
respect to revenue recognition for international sales had not been fully
followed. The Company's policy is to defer recognition of revenue on all sales
to distributors until the product is sold by each distributor to its customers.
Following a preliminary review, the Company believes that in certain instances,
revenue was recognized at the time of shipment of product to the Company's
distributors instead of at the time the distributor sold the product to its
customer. The Company's review of this matter is ongoing and is being conducted
by the Audit Committee of the Board of Directors. As a result, the Company's
quarterly financial statements have been restated from the amounts previously
reported to reflect the recognition of revenue at the time of sale by the
distributor to the customer. See note 2 of notes to unaudited condensed
consolidated financial statements.
Page 9 of 24
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------- ------------ -------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.9 61.8 61.9 61.5
----- ----- ----- -----
Gross margin 34.1 38.2 38.1 38.5
----- ----- ----- -----
Operating expenses:
Research and development 16.8 14.4 18.0 14.7
Selling, marketing and
administrative 11.5 11.7 11.9 11.3
----- ----- ----- -----
Total operating expenses 28.3 26.1 29.9 26.0
----- ----- ----- -----
Income from operations 5.8 12.1 8.2 12.5
Other income (expense), net (0.6) 0.2 (0.3) 0.6
----- ----- ----- -----
Income before income taxes 5.2 12.3 7.9 13.1
Provision for income taxes 1.6 4.2 2.8 4.5
----- ----- ----- -----
Net income 3.6% 8.1% 5.1% 8.6%
===== ===== ===== =====
</TABLE>
The Company's operating results have historically been, and will
continue to be, subject to quarterly and other fluctuations due to a variety of
factors, including changes in pricing policies by the Company, its competitors
or its suppliers, anticipated and unanticipated decreases in unit average
selling prices of the Company's products, availability and cost of products from
the Company's suppliers, changes in the mix of products sold and in the mix of
sales by distribution channels, the gain or loss of significant customers, new
product introductions by the Company or its competitors, marketing acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
and the timing of significant orders.
The Company's operating results may fluctuate from those in prior
quarters or may be adversely affected in quarters in which it is undergoing a
product line transition in which production and sales of new products are
ramping up and in which existing products are under extreme price pressures due
to competitive factors. If new products are not brought to market in a timely
manner or do not address market needs or performance requirements, then the
Company's operating results will be adversely affected. As a result of the
foregoing, the Company's operating results and stock price may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in net
sales or net income from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock.
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<PAGE> 11
NET SALES
The Company's net sales to date have been generated from the sale of its
graphics and multimedia accelerators. The Company's products are used in, and
its business is dependent on, the personal computer industry with sales
primarily in Asia, the U.S., and Europe. Net sales were $119.6 million for the
three months ended September 30, 1997, a 9% increase above the $110.1 million of
net sales for the three months ended September 30, 1996. Net sales were $334.4
million for the nine months ended September 30, 1997 or 7% above the $311.3
million of net sales for the nine months ended September 30, 1996. Year to date
net sales increased primarily as a result of demand for the Company's ViRGE and
Trio families of integrated accelerators that resulted in increased unit
shipments. The increase in unit shipments was partially offset by lower overall
average selling prices.
Due to competitive price pressures, the Company's products experience
declining unit average selling prices over time, which at times can be
substantial. The pricing environment for 2D graphics accelerators, which
accounted for a majority of the Company's net sales in 1996, has recently
experienced and is expected to continue to experience increasing pricing
pressures due to aggressive pricing from certain of the Company's competitors.
In particular, the Company's Trio family of integrated 2D accelerators
experienced significant decreases in average selling prices in 1996 which has
continued during the first nine months of 1997. The graphics accelerator market
is transitioning from 2D acceleration to 3D acceleration, and the Company
introduced its ViRGE family of 2D/3D accelerators in response to this
transition. As a result of the entry of competitors into the 3D acceleration
market, the Company has experienced and anticipates that it may continue to
experience increased pricing pressures on average selling prices for the ViRGE
family of 2D/3D accelerators. The Company experienced significant price
competition for its products in the three and nine months ended September 30,
1997. The Company currently anticipates sequential price declines in the fourth
quarter of 1997 and the first half of 1998. The Company expects that the
percentage of its net sales represented by any one product or type of product
may change significantly from period to period as new products are introduced
and existing products reach the end of their product life cycles. If the
transition occurs slower than expected, if the Company's graphic products do not
achieve market acceptance, or if the pricing pressures increase or continue in
the manner experienced in the first nine months of 1997, then the Company's
operating results could be adversely affected.
Export sales accounted for 76% and 57% of net sales for the three months
ended September 30, 1997 and 1996, respectively. Export sales accounted for 68%
and 76% of net sales for the nine months ended September 30, 1997 and 1996
respectively. Approximately 20% and 19% of export sales for the three and nine
months ended September 30, 1997 were to affiliates of United States customers.
The Company expects that export sales will continue to represent a significant
portion of net sales, although there can be no assurance that export sales as a
percentage of net sales will remain at current levels. All sales transactions
were denominated in U.S. dollars.
Four customers accounted for 24%, 17%, 15% and 11% of net sales for the
three months ended September 30, 1997, and three customer accounted for 24%,
15%, and 11% of net sales for the nine months ended September 30, 1997.
Comparatively, three customers accounted for 22%, 14% and 10% of net sales for
the three months ended September 30, 1996, and two customer accounted for 16%
and 14% of net sales for the nine months ended September 30, 1996. The Company
expects a significant portion of its future sales to remain concentrated within
a limited number of strategic customers. There can be no assurance that the
Company will be able to retain its strategic customers or that such customers
will not cancel or reschedule orders or, in the event orders are canceled, that
such orders will be replaced by other sales. In addition, sales to any
particular customer may fluctuate significantly from quarter to quarter. The
occurrence of any such events or the loss of a strategic customer could have a
material adverse effect on the Company's operating results.
The occurrence of any supply problems for the Company's products may
adversely affect the rate of growth in net sales. Net sales may also be
adversely affected by delays in the production ramp of customers' new programs
and systems which incorporate the Company's products. In addition, the Company
ships more product
Page 11 of 24
<PAGE> 12
in the third month of each quarter than in either of the first two months of the
quarter, with shipments in the third month higher at the end of the month. This
pattern, which is common in the semiconductor industry, is likely to continue.
The concentration of sales in the last month of the quarter may cause the
Company's quarterly results of operations to be more difficult to predict.
Moreover, a disruption in the Company's production or shipping near the end of a
quarter could materially reduce the Company's net sales for that quarter. The
Company's reliance on outside foundries and independent assembly and testing
houses reduces the Company's ability to control, among other things, delivery
schedules.
GROSS MARGIN
Gross margin percentage decreased to 34% for the three months ended
September 30, 1997 from 38% for the three months ended September 30, 1996. The
decrease was due to decreases in overall average selling prices coupled with the
Company's mix of product sold. Gross margin percentage decreased to 38% for the
nine months ended September 30, 1997 from 39% for the nine months ended
September 30, 1996. The Company currently expects its gross margin percentage
for the three months ending December 31, 1997 to approximate current levels or
decrease as a percentage of revenue.
In the future, the Company's gross margin percentages may be affected by
increased competition and related decreases in unit average selling prices
(particularly with respect to older generation products), timing of volume
shipments of new products, the availability and cost of products from the
Company's suppliers, changes in the mix of products sold, the profitability of
the USC joint venture (the Company recognizes its proportionate share of USC
profits and losses), the extent to which the Company forfeits or utilizes its
production capacity rights with TSMC, the extent to which the Company will incur
additional licensing fees and shifts in sales mix between add-in card and
motherboard manufacturers to systems OEMs.
RESEARCH AND DEVELOPMENT EXPENSES
The Company has made and intends to continue to make significant
investments in research and development to remain competitive by developing new
and enhanced products. Research and development expenses were $20.1 million for
the three months ended September 30, 1997, an increase of $4.2 million from
$15.9 million for the three months ended September 30, 1996. Research and
development expenses were $60.0 million for the nine months ended September 30,
1997, an increase of $14.3 million from $45.7 million for the nine months ended
September 30, 1996. Research and development spending increases reflect
additions to the Company's engineering staff and nonrecurring engineering and
initial product verification expenses related to the expected introduction of
new products. Research and development spending is expected to increase in
absolute dollars in 1997 as a result of the product development activities
currently underway for the desktop, mobile and home PC markets with a focus on
full motion video, 3D, and audio.
Products in the Company's market typically have a life cycle of 12 to 24
months. The successful development and commercialization of new products
required to replace or supplement existing products involve many risks,
including the identification of new product opportunities, the successful and
timely completion of the development process, and the selection of the Company's
products by leading systems suppliers and board manufacturers for design into
their products. The Company currently lacks product offerings addressing the
high end of the desktop graphics market. These products are currently expected
to be announced in the first half of 1998. There can be no assurance that these
products will achieve market acceptance or that the Company will successfully
identify new product opportunities and develop and bring to the market in a
timely manner successful new products, that products or technologies developed
by others will not render the Company's products noncompetitive, or that the
Company's products will be selected for design into its customers' products. In
addition, it is possible that the Company's products may be found defective
after the Company has already shipped significant volume production. There can
be no assurance that the Company would be able to successfully correct such
problems or that such corrections would be acceptable to customers. The
occurrence of any such events would have a material adverse effect on the
Company's operating results.
Page 12 of 24
<PAGE> 13
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses were $13.8 million for
the three months ended September 30, 1997, an increase of $0.9 million from
$12.9 million for the three months ended September 30, 1996. Selling, marketing
and administrative expenses were $39.9 million for the nine months ended
September 30, 1997 an increase of $4.5 million from $35.4 million in the nine
months ended September 30, 1996. Selling and marketing costs increased as a
result of additional personnel, increased commissions and increased marketing
costs associated with the expected introduction of new products. Administrative
costs have increased due to the hiring of additional personnel necessary to
support the increased level of operations. The Company anticipates that selling,
marketing and administrative expenses will increase in absolute dollars for the
three months ended December 31, 1997.
OTHER INCOME (EXPENSE), NET
Other expense, decreased to $(0.7) million for the three months ended
September 30, 1997, from $0.3 million of interest income for the three months
ended September 30, 1996. Other expense decreased to $(1.0) million for the nine
months ended September 30, 1997, from $2.0 million of interest income for the
nine months ended September 30, 1996. The decrease is attributable to the
interest expense incurred on $103.5 million aggregate principal amount of
convertible subordinated notes, which were issued by the Company in September
1996. The interest expense is partially offset by the interest income due to the
higher average amounts of cash and short-term investments as a result of the net
proceeds from the sale of the convertible subordinated notes in September of
1996.
INCOME TAXES
The Company's effective tax rate for the three months and nine months
ended September 30, 1997 is 30% and 36% respectively, compared to an effective
tax rate for the three months and nine months ended September 30, 1996 of 34%.
The change in tax rate is primarily attributable to the Company's expansion into
higher national and subnational tax rate jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash used for operating activities for the nine months ended September
30, 1997 was $0.3 million, as compared to $21.5 million for the nine months
ended September 30, 1996. The Company experienced an increase from December 31,
1996 in accounts receivable, other assets, accrued liabilities, deferred revenue
and other liabilities. These increases were partially offset by decreases in
inventories and income taxes payable. The Company experienced an increase in
accounts receivable from the level at December 31, 1996 due to the substantial
concentration of sales in September 1997 resulting from increased shipments in
the third month of the third quarter over either of the first two months of the
quarter relative to what the Company experienced in previous quarters as well as
an increase in days sales outstanding.
Investing activities for the nine months ended September 30, 1997 and
1996 reflected property and equipment purchases, net, of $25.4 million and $12.5
million, respectively and sales of short term investments of $18.2 and $11.4
million respectively. Technology investments of $16.2 million include an equity
investment in Faroudja, Inc. and various patent technology acquisitions.
Continued expansion of the Company's business may require higher levels of
capital equipment purchases, technology investments, foundry investments and
other payments to secure manufacturing capacity.
Financing activities provided cash of $9.4 and $113.1 million in the
nine months ended September 30, 1997 and 1996. Borrowings on the line of credit
and proceeds from the issuance of common stock were the principal financing
activities that generated cash in the nine months ended September 30, 1997. The
Company completed a private placement of $103.5 million aggregate principal
amount of convertible subordinated notes which was the principal financing
activity that generated cash during the nine month period ended September 30,
1996.
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<PAGE> 14
Working capital at September 30, 1997 and December 31, 1996 was $184.8
million and $225.5 million, respectively. At September 30, 1997, the Company's
principal sources of liquidity included cash and equivalents of $67.4 million
and $44.7 million in short-term investments. In addition, the Company has a
$75.0 million unsecured revolving line of credit that expires September 26,
1999. The Company had $10.0 million outstanding under the line of credit as of
September 30, 1997. In addition, the Company has a separate secured equipment
line of credit totaling $7.6 million. The Company had $5.9 million outstanding
under this secured equipment line of credit at September 30, 1997. The Company
believes that its available funds and its anticipated funds from operations will
satisfy the Company's projected working capital, existing foundry supply
agreement and capital expenditure requirements for at least the next 12 months.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has entered into
and will continue to consider various possible transactions, including the use
of "take or pay" contracts that commit the Company to purchase specified
quantities of wafers over extended periods, equity investments in, advances or
issuances of equity securities to wafer manufacturing companies in exchange for
guaranteed production or the formation of joint ventures to own and operate or
construct wafer fabrication facilities. Manufacturing arrangements such as these
may require substantial capital investments, which may require the Company to
seek additional equity or debt financing. There can be no assurance that such
additional financing, if required, will be available when needed or, if
available, will be on satisfactory terms. In addition, the Company may, from
time to time, as business conditions warrant, invest in or acquire businesses,
technology or products that complement the business of the Company.
The cyclical nature of the semiconductor industry periodically results
in shortages of advanced process wafer fabrication capacity such as the Company
experiences from time to time. The Company's ability to maintain adequate levels
of inventory is primarily dependent upon the Company obtaining sufficient supply
of products to meet future demand, and any inability of the Company to maintain
adequate inventory levels may adversely affect its relations with its customers.
In addition, because the Company must order products and build inventory
substantially in advance of product shipments, there is a risk that the Company
will forecast incorrectly and produce excess or insufficient inventories of
particular products because the Company's products are volatile and subject to
rapid technology and price change. This inventory risk is heightened because
certain of the Company's key customers place orders with short lead times. The
Company's customers' ability to reschedule or cancel orders without significant
penalty could adversely affect the Company's liquidity, as the Company may be
unable to adjust its purchases from its independent foundries to match such
customer changes and cancellations. To the extent the Company produces excess or
insufficient inventories of particular products, the Company's operating results
could be adversely affected.
FACTORS THAT MAY AFFECT RESULTS
Fluctuations in Quarterly Operating Results
The Company's operating results have historically been, and will
continue to be, subject to quarterly and other fluctuations due to a variety of
factors, including changes in pricing policies by the Company, its competitors
or its suppliers, anticipated and unanticipated decreases in unit average
selling prices of the Company's products, availability and cost of products from
the Company's suppliers, changes in the mix of products sold and in the mix of
sales by distribution channels, the gain or loss of significant customers, new
product introductions by the Company or its competitors, market acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
and the timing of significant orders. Operating results could also be adversely
affected by general economic and other conditions affecting the timing of
customer orders and capital spending, a downturn in the market for PCs, order
cancellations or rescheduling and the other factors discussed below. These
factors could adversely affect demand for the Company's products. In addition,
the
Page 14 of 24
<PAGE> 15
pricing environment for graphics accelerators has recently experienced
increasing pricing pressures and is expected to continue to experience pricing
pressures, due in part to aggressive pricing from certain of the Company's
competitors. In particular, the Company's Trio family of integrated 2D
accelerators, which accounted for a majority of the Company's revenues in 1996,
experienced significant decreases in average selling prices in 1997. The
graphics accelerator market is transitioning from 2D acceleration to 3D
acceleration, and the Company has introduced its ViRGE family of 2D/3D
accelerators in response to this transition. As a result of the entry of
competitors into the 3D acceleration market, the Company has experienced and
anticipates that it may continue to experience increased pricing pressures on
average selling prices for the ViRGE family of 2D/3D accelerators. If the
transition occurs slower than expected, if the Company's 2D/3D products do not
achieve market acceptance, or if pricing pressures increase above normal
anticipated levels, the Company's operating results could be adversely affected.
Further, because the Company is continuing to increase its operating expenses
for personnel and new product development, the Company's operating results would
be adversely affected if such budgeted sales levels were not achieved. PC
graphics and multimedia subsystems include, in addition to the Company's
products, a number of other components which are supplied by third-party
manufacturers. Any shortage of such components in the future could adversely
affect the Company's business and operating results. Furthermore, it is possible
that the Company's products may be found to be defective after the Company has
already shipped significant volume production. There can be no assurance that
the Company would be able to successfully correct such defects or that such
corrections would be acceptable to customers, and the occurrence of such events
could have a material adverse effect on the Company's business and operating
results.
Because the Company must order products and build inventory
substantially in advance of product shipments, and because the markets for the
Company's products are volatile and subject to rapid technological and price
changes, there is a risk that the Company will forecast incorrectly and produce
excess or insufficient inventories of particular products. In addition, the
Company's customers may change delivery schedules or cancel orders without
significant penalty. To the extent the Company produces excess or insufficient
inventories of particular products, the Company's operating results could be
adversely affected.
The Company ships more product in the third month of each quarter than
in either of the first two months of the quarter, with shipments in the third
month higher at the end of the month. This pattern, which is common in the
semiconductor industry, is likely to continue. The concentration of sales in the
last month of the quarter may cause the Company's quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Company's production or shipping near the end of a quarter could materially
reduce the Company's net sales for that quarter. The Company's reliance on
outside foundries and independent assembly and testing houses reduces the
Company's ability to control, among other things, delivery schedules.
Due to the foregoing factors, it is likely that in some future quarter
or quarters the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially and adversely affected.
Importance of New Products; Rapid Technological Change
The PC industry in general, and the market for the Company's products in
particular, is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price competition,
resulting in short product life cycles and regular reductions of unit average
selling prices over the life of a specific product. Products in the Company's
market typically have a life cycle of 12 to 24 months, with regular reductions
of unit average selling prices over the life of a specific product. The
successful development and commercialization of new products required to replace
or supplement existing products involve many risks, including the identification
of new product opportunities, the successful and timely completion of the
development process, and the selection of the Company's products by leading
systems suppliers and add-in card and motherboard manufacturers for design into
their products. There can be no assurance that the Company will successfully
identify new product opportunities and develop and bring to market in a timely
manner successful new products, that products or technologies developed by
others will not render the Company's products or
Page 15 of 24
<PAGE> 16
technologies noncompetitive, or that the Company's products will be selected for
design into its customers' products.
The Company is continually developing new products to address changing
market needs, and its operating results may fluctuate from those in prior
quarters or may be adversely affected in quarters in which it is undergoing a
product transition or in which existing products are under price pressures due
to competitive factors. Market acceptance of the Company's products will also
depend upon acceptance of other components, such as memory, that the Company's
products are designed to work with. For example, the Company has recently
introduced accelerators designed to work with synchronous graphics RAM ("SGRAM")
and/or synchronous DRAM ("SDRAM") which the Company believes offer better
performance for its price than the more expensive video RAM ("VRAM"). However,
there can be no assurance that other memory technologies, such as Rambus DRAM,
will not achieve a greater degree of market acceptance than SGRAMs or SDRAMs.
If new products are not brought to market in a timely manner or do not
address market needs or achieve market acceptance, then the Company's operating
results could be adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Dependence on Foundries and Other Third Parties
The Company currently relies on several independent foundries to
manufacture its products either in finished form or wafer form. The Company
currently has long-term supply arrangements with two of its foundries, a "take
or pay" contract with Taiwan Semiconductor Manufacturing Company ("TSMC") and a
joint venture foundry, United Semiconductor Corporation ("USC"). In 1995, the
Company expanded and formalized its relationship with TSMC to provide additional
capacity over the 1996 to 2000 timeframe. The foundry agreement with TSMC
requires the Company to make certain annual advance payments to purchase certain
committed capacity amounts to be applied against the following year's capacity
or forfeit advance payments against such amounts. In addition, the Company
entered into an agreement with United Microelectronics Corporation ("UMC") and
Alliance Semiconductor Corporation to form a separate Taiwanese company, USC,
for the purpose of building and managing a semiconductor manufacturing facility.
The Company invested $53.0 million in 1996 and $36.4 million in 1995 for its
23.75% equity interest. The facility commenced production utilizing advanced
submicron semiconductor manufacturing processes in late 1996. The Company has
the right to purchase up to 31.25% of the output from the foundry. To the extent
the Company purchases excess inventories of particular products or chooses to
forfeit advance payments, the Company's operating results could be adversely
affected. To the extent USC experiences operating losses, the Company will
recognize its proportionate share of such losses and may be required to
contribute additional capital. The Company believes that a number of
manufacturers are expanding or planning to expand their fabrication capacity
over the next several years, which could lead to overcapacity in the market and
resulting decreases in costs of finished wafers. If the wafers produced by USC
cannot be produced at competitive prices, USC could sustain operating losses.
There can be no assurance that such operating losses will not have a material
adverse effect on the Company's results of operations.
Page 16 of 24
<PAGE> 17
The Company conducts business with its other current foundries by
delivering written purchase orders specifying the particular product ordered,
quantity, price, delivery date and shipping terms and, therefore, such foundries
are generally not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order. To the extent a foundry terminates its
relationship with the Company or should the Company's supply from a foundry be
interrupted or terminated for any other reason, such as a natural disaster or an
injunction arising from alleged violations of third party intellectual property
rights, the Company may not have a sufficient amount of time to replace the
supply of products manufactured by that foundry. There can be no assurance that
the Company will obtain sufficient advanced process technology foundry capacity
to meet customer demand in the future. The Company is continuously evaluating
potential new sources of supply. However, the qualification process and the
production ramp-up for additional foundries has in the past taken, and could in
the future take, longer than anticipated, and there can be no assurance that
such sources will be able or willing to satisfy the Company's requirements on a
timely basis or at acceptable quality or per unit prices.
Two of the Company's principal foundries, TSMC and UMC, and the
Company's foundry joint venture, USC, are located in the Science-Based
Industrial Park in Hsin Chu City, Taiwan. The Company currently expects these
three foundries to supply the substantial portion of the Company's products in
1997 and 1998. Disruption of operations at these foundries for any reason,
including work stoppages, fire, earthquakes or other natural disasters, would
cause delays in shipments of the Company's products, and could have a material
adverse effect on the Company's results of operations. In addition, as a result
of the rapid growth of the semiconductor industry based in the Science-Based
Industrial Park, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity could
adversely affect the Company's foundries' ability to supply the Company's
products, which could have a material adverse effect on the Company's results of
operations.
The Company is using multiple sources for certain of its products, which
may require the Company's customers to perform separate product qualifications.
The Company has not, however, developed alternate sources of supply for certain
other products, and its newly introduced products are typically produced
initially by a single foundry until alternate sources can be qualified. The
requirement that a customer perform separate product qualifications or a
customer's inability to obtain a sufficient supply of products from the Company
may cause that customer to satisfy its product requirements from the Company's
competitors, which would adversely affect the Company's results of operations.
The Company's products are assembled and tested by a variety of
independent subcontractors. The Company's reliance on independent assembly and
testing houses to provide these services involves a number of risks, including
the absence of adequate availability of certain packaging technologies, the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs. The Company also is subject to the risks of
shortages and increases in the cost of raw materials used in the manufacture or
assembly of the Company's products.
Page 17 of 24
<PAGE> 18
Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the foundries or
assembly or testing houses, delays in obtaining additional production at
existing foundries or in obtaining production from new foundries, shortages of
raw materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
Transactions to Obtain Manufacturing Capacity; Future Capital Needs
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has entered into
and may consider in the future various transactions, including the use of "take
or pay" contracts that commit the Company to purchase specified quantities of
wafers over extended periods, equity investments in or advances or issuances of
equity securities to wafer manufacturing companies in exchange for guaranteed
production capacity, or the formation of joint ventures to own and operate or
construct foundries or to develop certain products. Any of such transactions
would involve financial risk to the Company and could require the Company to
commit substantial capital or provide technology licenses in return for
guaranteed production capacity. In particular, the Company has entered into a
"take or pay" contract with TSMC and has entered into the USC joint venture. The
need to commit substantial capital may require the Company to seek additional
equity or debt financing. The sale or issuance of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. There can be no assurance that such additional financing, if
required, will be available when needed or, if available, will be on terms
acceptable to the Company.
Dependence on Accelerator Product Line
S3's products are designed to improve the graphics and multimedia
performance of Pentium-based PCs and Microsoft Windows, Windows NT and IBM OS/2
operating systems, the predominant standards in today's PC market. Any shift
away from such standards would require the Company to develop new products. The
Company expects that additional specialized graphics processing and general
purpose computing capabilities will be integrated into future versions of Intel
and other Pentium-based microprocessors and that standard multimedia
accelerators in the future will likely integrate memory, system logic, audio,
communications or other additional functions. The Company has not previously
offered either single function or integrated accelerator products that provide
these functions, which have traditionally been provided by separate single
function chips or chipsets. The Company has been and will continue to be
required to expand the scope of its research and development efforts to provide
these functions, which will require the hiring of engineers skilled in the
respective areas and additional management and coordination among the Company's
design and engineering groups. Alternatively, the Company may find it necessary
or desirable to license or acquire technology to enable the Company to provide
these functions, and there can be no assurance that any such technology will be
available for license or purchase on terms acceptable to the Company.
Furthermore, there is a limited amount of space on PC motherboards, and
companies that offer solutions that provide the greatest amount of functionality
within this limited space may have a competitive advantage. While the Company's
strategy is to develop new and enhanced graphics and multimedia accelerator
products that will be complementary to present and future versions of Intel and
other Pentium-based microprocessors and integrate additional functionality,
there can be no assurance that the Company will be able to develop such new or
enhanced products in a timely manner or correctly anticipate the additional
functionality that will be required to compete effectively in this market. There
can be no assurance that, if developed, the Company's new or enhanced products
that incorporate these functions will achieve market acceptance. There also can
be no assurance that the market for graphics and multimedia accelerators will
continue to grow in the future or that new technological developments or changes
in standards will not result in decreased demand for graphics and multimedia
accelerators or for the Company's products that are not
Page 18 of 24
<PAGE> 19
compatible with such changed standards. For example, in 1996, there was an
absence of an industry standard 3D graphics API. As a result, the Company
developed and promoted its proprietary API. Microsoft has since introduced its
Direct3D API, which has emerged as the standard API for 3D acceleration. While
the Company's 3D accelerators currently support the Company's proprietary API
and Microsoft's Direct 3D API, there can be no assurance that another API will
emerge as an industry standard that the Company's accelerators will not support.
While the PC industry in recent periods has been characterized by substantial
demand, such demand has historically been cyclical, and there can be no
assurance that this demand will continue in future periods or that demand for
the Company's products will continue. The occurrence of any such events would
have a material adverse effect on the Company's operating results.
Substantial Competition
The market for the Company's products is extremely competitive and is
characterized by declining selling prices over the life of a particular product
and rapid technological changes. The Company's principal competitors for
graphics accelerators include ATI Technologies, Inc., Cirrus Logic, Inc., Matrox
Graphics Inc., and Trident Microsystems, Inc. The Company's principal
competitors in the multimedia market include the companies named in the
preceding sentence and a number of smaller companies which may have greater
flexibility to address specific market needs. Potential competitors in these
markets include both large and emerging domestic and foreign semiconductor
companies. In particular, there is a significant number of established and
emerging companies that have developed, are developing or have announced plans
to develop 3D graphics chips, including Intel Corporation and Lockheed Martin
Corporation, which have announced that they are jointly developing such chips,
which are currently expected to become available in the second half of 1997, and
Texas Instruments Incorporated, which has announced a development and marketing
agreement with 3Dlabs Inc., Ltd. In addition, Intel Corporation has entered into
a definitive agreement to acquire Chips and Technologies, Inc., a leading
provider of accelerators for the mobile PC market. There can be no assurance
that the Company's product offerings to address the demand for the next
generation of 2D/3D accelerators will be competitive, and if such product
offerings are not competitive, the Company's results of operations in 1997 and
future periods could be materially and adversely affected. The entry of
additional competitors into the 2D/3D accelerator market has resulted in and is
expected to continue to result in pricing pressures on average selling prices of
the Company's products. To the extent the Company expands its product line to
add products with additional functionality, it will encounter substantial
competition from established semiconductor companies and may experience
competition from companies designing chips based on different technologies, such
as software-centric multimedia processors. Further, the need of PC manufacturers
to rapidly introduce a variety of products aimed at different segments of the PC
market may lead to the shift by such system OEMs to the purchase of graphics and
multimedia add-in cards provided by others. Certain of the Company's competitors
supply both add-in cards and accelerator chips, which may provide those
competitors with an advantage over suppliers such as the companies that supply
only accelerator chips. In addition, certain of the Company's potential
competitors that supply add-in cards and/or motherboards, such as Intel
Corporation, may seek to use their card/board business to leverage the startup
of their graphics accelerator business. Certain of the Company's current and
potential competitors have greater technical, manufacturing, financial and
marketing
Page 19 of 24
<PAGE> 20
resources than the Company. The Company believes that its ability to compete
successfully depends upon a number of factors both within and outside of its
control, including product performance, product features, product availability,
price, quality, timing of new product introductions by the Company and its
competitors, the emergence of new graphics and PC standards, customer support,
and industry and general economic trends. There can be no assurance that the
Company will have the financial resources, technical expertise, or marketing,
distribution and support capabilities to compete successfully. The Company's
future success will be highly dependent upon the successful development and
introduction of new products that are responsive to market needs. There can be
no assurance that the Company will be able to successfully develop or market any
such products.
Customer Concentration
The Company expects a significant portion of its future sales to remain
concentrated within a limited number of strategic customers. This concentration
is also reflected in the Company's accounts receivable where greater than 50% of
the balance is held by three customers at September 30, 1997. There can be no
assurance that the Company will be able to retain its strategic customers or
that such customers will not otherwise cancel or reschedule orders, or in the
event of canceled orders, that such orders will be replaced by other sales. In
addition, sales to any particular customer may fluctuate significantly from
quarter to quarter. The occurrence of any such events could have a material
adverse effect on the Company's operating results.
Management of Growth; Dependence on Key Personnel
Since its inception, the Company has experienced significant growth in
the number of its employees and in the scope of its operating and financial
systems, resulting in increased responsibilities for the Company's management.
To manage future growth effectively, the Company will need to continue to
improve its operational, financial and management information systems,
procedures and controls, and expand, train, motivate, retain and manage its
employee base. There can be no assurance that the Company will be able to manage
its growth effectively, and failure to do so could have a material adverse
effect on the Company's operating results.
The Company's future success depends in part on the continued service of
its key engineering, sales, marketing and executive personnel, including highly
skilled semiconductor design personnel and software developers, and its ability
to identify and hire additional personnel. Competition for such personnel is
intense and there can be no assurance that the Company can retain and recruit
necessary personnel to operate its business and support its future growth. The
loss of key personnel could have a material adverse effect on the Company's
business and operating results. The Company does not maintain key man insurance
on any of its employees.
Importance of Intellectual Property; Litigation Involving Intellectual P
roperty
The Company's ability to compete will be affected by its ability to
protect its proprietary information. The Company has filed several United States
and foreign patent applications and to date has a number of issued United States
patents. The Company relies primarily on its trade secrets and technological
know-how in the conduct of its business. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. The semiconductor and software industries
are characterized by frequent claims and related litigation regarding patent and
other intellectual property rights. The Company has been and can be in the
future party to various claims of this nature. Although the ultimate outcome of
these matters is not presently determinable, management presently believes that
the resolution of all such pending matters will not have a material adverse
Page 20 of 24
<PAGE> 21
effect on the Company's operating results. There can be no assurance that third
parties will not assert additional claims or initiate litigation against the
Company, its foundries, or its customers with respect to existing or future
products. In addition, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
determine the scope and validity of the proprietary rights of the Company or
others. Litigation by or against the Company has in the past, in the case of the
Brooktree Corporation ("Brooktree") litigation, resulted and could in the future
result in substantial expense to the Company and diversion of the efforts of the
Company's technical and management personnel, whether or not litigation is
determined in favor of the Company. In the event of litigation to determine the
validity of any third-party claims, such litigation could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel, whether or not litigation is determined in favor of the
Company. In the event of an adverse result in any such litigation, the Company
could be required to pay substantial damages, cease the manufacture, use, sale,
offer for sale and importation of infringing products, expend significant
resources to develop or obtain non-infringing technology, discontinue the use of
certain processes or obtain licenses to the technology which is the subject of
the litigation. There can be no assurance that the Company would be successful
in such development or acquisition or that any such licenses, if available,
would be available on commercially reasonable terms, and any such development or
acquisition could require expenditures by the Company of substantial time and
other resources. Any such litigation or adverse result therefrom could have a
material adverse effect on the Company's operating results.
In October 1995, Brooktree filed a complaint against the Company in the
United States District Court for the Southern District of California, alleging
that the Company's current products infringe a Brooktree patent. Such a lawsuit
resulted in substantial expense to the Company to defend the action and diverted
the efforts of the Company's technical and management personnel. In August 1996,
the Company and Brooktree entered into a settlement and license agreement
pursuant to which all claims and counterclaims between the parties were
dismissed and the Company agreed to pay to Brooktree a license fee and royalties
related to certain product revenues over a five-year period.
International Operations
The Company expects that export sales will continue to represent a
significant portion of net sales, although there can be no assurance that export
sales, as a percentage of net sales, will remain at current levels. In addition,
a substantial proportion of the Company's products are manufactured, assembled
and tested by independent third parties in Asia. Due to its export sales and
independent third party manufacturing, assembly and testing operations, and its
joint venture foundry, the Company is subject to the risks of conducting
business internationally, including unexpected changes in, or impositions of,
legislative or regulatory requirements, fluctuations in the U.S. dollar, which
could increase the sales price in local currencies of the Company's products in
foreign markets or increase the cost of wafers purchased by the Company, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs and other barriers and restrictions, potentially longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse taxes,
and the burdens of complying with a variety of foreign laws. In addition, the
Company is subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations. Two of the Company's independent foundries,
UMC and TSMC, and the Company's joint venture foundry, USC, are located in
Taiwan. The Company currently expects these three foundries to supply the
substantial portion of the Company's products in 1998. The People's Republic of
China and Taiwan at times experienced strained relations in 1995 and 1996, and
the worsening of relations or the development of hostilities between the two
parties could have a material adverse effect on the Company. Although the
Company has not to date experienced any material adverse effect on its
operations as a result of such regulatory, geopolitical, economic and other
factors, there can be no assurance that such factors will not adversely impact
the Company's operations in the future or require the Company to modify its
current business practices. In addition,
Page 21 of 24
<PAGE> 22
the laws of certain foreign countries may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
Volatility of Stock Price
The market price of the shares of Common Stock, like that of the common
stock of many other semiconductor companies, has been and is likely to be highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. The market price of the Common Stock could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's anticipated or actual operating results, announcements of new
products, technological innovations or setbacks by the Company or its
competitors, conditions in the semiconductor and PC industries, the commencement
of, developments in or outcome of litigation, changes in or the failure by the
Company to meet earnings estimates by securities analysts, market conditions for
high technology stocks in general, and other events or factors.
Litigation
In November 1997, several complaints were filed in federal and state
courts seeking an unspecified amount of damages on behalf of an alleged class of
persons who purchased shares of the Company's Common Stock at various times
between January 1, 1995 and November 3, 1997. The complaints name as defendants
the Company, certain of its officers and former officers and certain directors
of the Company and its outside auditors, asserting that they violated federal
and state securities laws by misrepresenting and failing to disclose certain
information about the Company's business. The Company has not formally responded
to the complaints. While management intends to defend the actions vigorously,
there can be no assurance that an adverse result or settlement with regards to
these lawsuits would not have a material adverse effect on the Company's
financial condition or results of operations.
Page 22 of 24
<PAGE> 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1997, several complaints were filed in federal and state
courts seeking an unspecified amount of damages on behalf of an alleged class of
persons who purchased shares of the Company's Common Stock at various times
between January 1, 1995 and November 3, 1997. The complaints name as defendants
the Company, certain of its officers and former officers and certain directors
of the Company and its outside auditors, asserting that they violated federal
securities laws by misrepresenting and failing to disclose certain information
about the Company's business. The Company has not formally responded to these
complaints. While Management intends to defend the actions vigorously, there can
be no assurance that an adverse result or settlement with regards to these
lawsuits would not have a material adverse effect on the Company's financial
condition or results of operations.
The Company has received from the United States Securities and Exchange
Commission requests for information relating to the Company's recent restatement
announcement. The Company has responded and intends to continue to respond to
such requests.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Revolving Credit Agreement dated as of September 26, 1997 by and among S3
Incorporated, the Lenders named therein, Comerica Bank - California as
Administrative Agent, and Fleet Bank as Documentation Agent.
27 Financial Data Schedule (filed only with the electronic submission of Form
10-Q in accordance with the Edgar requirements)
(b) No Reports on Form 8-K were filed by the Company during the three months
ended September 30, 1997.
Page 23 of 24
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S3 INCORPORATED
(Registrant)
/S/WALTER D. AMARAL
------------------------------
WALTER D. AMARAL
Chief Financial Officer
(Principal Financial and Accounting Officer)
November 19, 1997
Page 24 of 24
<PAGE> 25
EXHIBIT INDEX
10.1 Revolving Credit Agreement dated as of September 26, 1997 by
and among S3 Incorporated, the Lenders named therein, Comerica
Bank - California as Administrative Agent, and Fleet Bank as
Documentation Agent.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
REVOLVING CREDIT AGREEMENT
DATED AS OF SEPTEMBER 26, 1997
BY AND AMONG
S3 INCORPORATED,
THE LENDERS NAMED HEREIN,
COMERICA BANK - CALIFORNIA, AS ADMINISTRATIVE AGENT
AND
FLEET NATIONAL BANK, AS DOCUMENTATION AGENT
<PAGE> 2
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT is entered into as of September 26,
1997, by and among S3 INCORPORATED, a Delaware corporation (the "Borrower"), the
Lenders (as defined below), COMERICA BANK - CALIFORNIA, not in its individual
capacity, but solely in its capacity as the Agent, and FLEET NATIONAL BANK, not
in its individual capacity, but solely in its capacity as the Documentation
Agent.
RECITALS
A. The Borrower desires to obtain from the Lenders a revolving credit
facility in the aggregate principal amount of up to Seventy-Five Million Dollars
($75,000,000) outstanding at any time for the limited purposes as more
particularly described below; and
B. The Lenders have agreed to make such credit available to the
Borrower, but only upon the terms and subject to the conditions hereinafter set
forth and in reliance on the representations and warranties set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants hereinafter set forth, and intending to be legally bound, the
parties hereto agree as follows:
SECTION 1. DEFINITIONS.
1.1 DEFINED TERMS. As used herein, the following terms have the
following meanings:
"Accounts" means any "account," as such term is defined in Section 9106
of the UCC, now owned or hereafter acquired by the Borrower or any of its
Approved Subsidiaries and, in any event, shall include, without limitation, all
accounts receivable, book debts and other forms of obligations (other than forms
of obligations evidenced by chattel paper, documents or instruments) now owned
or hereafter received or acquired by or belonging or owing to the Borrower or
any of its Approved Subsidiaries (including, without limitation, under any trade
name, style or division thereof) arising out of goods sold or services rendered
by the Borrower or any of its Approved Subsidiaries, and all monies due or to
become due to the Borrower or any of its Approved Subsidiaries under all
purchase orders and contracts for the sale of goods or the performance of
services or both by the Borrower or any of its Approved Subsidiaries (whether or
not yet earned by performance on the part of the Borrower or any of its Approved
Subsidiaries or in connection with any other transaction), now in existence or
hereafter occurring, including, without limitation, the right to receive the
proceeds of purchase orders and contracts, and without duplication all
collateral security and guaranties of any kind given by any Person with respect
to any of the foregoing.
1.
<PAGE> 3
"Acquisition" means any transaction, or any series of related
transactions, by which the Borrower or any of its Subsidiaries directly or
indirectly (a) acquires all or substantially all of any ongoing business or all
or substantially all of the assets of any firm, partnership, joint venture,
limited liability company, corporation or division thereof, whether through
purchase of assets, merger or otherwise, or (b) acquires (in one transaction or
as the most recent transaction in a series of transactions) control of at least
a majority of the stock of a corporation having ordinary voting power for the
election of directors of such corporation, or (c) acquires control of fifty
percent (50.0%) or more of the ownership interest in any partnership, limited
liability company or joint venture.
"Adjusted LIBOR" means, for each Interest Period in respect of LIBOR
Loans comprising part of the same Borrowing, an interest rate per annum (rounded
upward to the nearest 1/16th of one percent (0.0625%)) determined pursuant to
the following formula:
LIBOR
Adjusted LIBOR= ----------------------------------
1.00-Eurodollar Reserve Percentage
The Adjusted LIBOR shall be adjusted automatically as of the effective date of
any change in the Eurodollar Reserve Percentage.
"Affiliate" means, with respect to any Person, each other Person which,
directly or indirectly, controls, is controlled by or is under common control
with such Person (excluding any trustee under, or any committee with
responsibility for administering, any Pension Plan or Employee Benefit Plan). A
Person shall be deemed to be "controlled by" another Person if such other Person
possesses, directly or indirectly, power (i) to vote fifteen percent (15%) or
more of the securities (on a fully diluted basis) having ordinary voting power
for the election of directors, managing general partners or managing members or
(ii) to direct or cause the direction of the management and policies of such
Person whether by contract or otherwise.
"Agent" means Comerica Bank - California, not when acting in its
individual capacity, but solely when acting in its capacity as the
administrative agent under this Agreement or any of the other Loan Documents,
and any successor administrative agent.
"Agent's Payment Office" means the address for payments set forth on the
signature page hereto in relation to the Agent or such other address as the
Agent may from time to time specify in accordance with SECTION 12.4.
"Agent-Related Persons" means the Agent and any successor agent,
appointed to the terms hereof, together with their respective Affiliates, and
the officers, directors, employees and attorneys-in-fact of such Persons.
"Aggregate Commitments" means the combined Commitments of the Lenders in
the aggregate principal amount of Seventy-Five Million Dollars ($75,000,000), as
such may be reduced from time to time pursuant to this Agreement.
2.
<PAGE> 4
"Agreement" means this Revolving Credit Agreement, including all
amendments, modifications and supplements hereto and all appendices, exhibits
and schedules to any of the foregoing, and shall refer to the Agreement as the
same may be in effect from time to time.
"Applicable Margin" means 1.00% in the case of LIBOR Loans.
"Approved Subsidiary" means, at any time, any Material Subsidiary which
(a) Requisite Lenders have approved in their sole and absolute discretion and
(b) the Bermuda Subsidiary after Requisite Lenders shall have approved
Borrower's Investment therein as specified in SECTION 7.2(G).
"Asset Sale" means the sale by the Borrower or any of its Subsidiaries,
or by any successor in interest (including a debtor in possession or trustee
under the Bankruptcy Code), to any Person other than the Borrower or any of its
wholly-owned Subsidiaries of (i) any of the Stock or other equity interests of
any of the Borrower's Subsidiaries, (ii) all or substantially all of the assets
of any division or line of business of the Borrower or any of its Subsidiaries,
or (iii) any other assets (including, without limitation, any assets that do not
constitute substantially all of the assets of any division or line of business
of the Borrower or any of its Subsidiaries); provided that "Asset Sale" shall
not include (y) any sale of capital assets to the extent such sale constitutes
the sale of obsolete or worn out equipment of the Borrower or its Subsidiaries
under clause (iii) above if, after the delivery of written notice by the
Borrower to the Agent (which delivery shall occur promptly after the Borrower or
such Subsidiary's agreeing to make such sale) of the Borrower's or such
Subsidiary's intent to reinvest or cause the reinvestment of such proceeds in
accordance with this clause (y), such Net Cash Proceeds of such sale are
reinvested by the Borrower or such Subsidiary within the ninety (90) day period
immediately following such sale in capital assets of a type similar to those
sold and (z) the sale in the ordinary course of business of personal property
held for resale in the ordinary course of business of the Borrower or any of its
Subsidiaries or liquidation sales of any discontinued, discounted or obsolete
Inventory conducted in the ordinary course of business by the Borrower or any of
its Subsidiaries.
"Attorney Costs" means all reasonable fees and disbursements of any law
firm or other external counsel to the Agent or the Documentation Agent.
"Bankruptcy Code" means the Bankruptcy Code of 1978, as amended, as
codified under Title 11 of the United States Code, and the Bankruptcy Rules
promulgated thereunder, as the same may be in effect from time to time.
"Base Rate" means for any day, the higher of (a) the per annum floating
rate established by Comerica as its "prime rate" for domestic (United States of
America) commercial loans in effect on such day, and (b) one-half percent
(0.50%) in excess of the Federal Funds Rate in effect on such day. Comerica's
prime rate is a rate set by Comerica based upon various factors, including
Comerica's costs and desired return, general economic conditions and other
factors, and is neither directly tied to an external rate of interest or index
nor necessarily the lowest or
3.
<PAGE> 5
best rate of interest actually charged by Comerica at any given time to any
customer or particular class of customers for any particular credit extension.
Comerica may make commercial or other loans at rates of interest at, above or
below its prime rate. Each change in the Base Rate shall result in a
corresponding change in the interest rate charged on any Base Rate Loan.
"Base Rate Loans" means any and all of the Loans bearing interest at the
Base Rate.
"Bermuda Subsidiary" has the meaning set forth in SECTION 7.2(G).
"Board of Directors" means the board of directors of the Borrower or any
committee of the board of directors of the Borrower authorized with respect to
any particular matter to exercise the power of the board of directors of the
Borrower.
"Borrowing" means a borrowing under this Agreement consisting of Loans
made to the Borrower on the same day by the Lenders pursuant to SECTION 2.
"Borrowing Base" means an amount equal to the lesser of (i) eighty
percent (80.0%) of Eligible Accounts, or (ii) the Aggregate Commitments.
"Borrowing Base Certificate" means a certificate with appropriate
insertions setting forth the components of the Borrowing Base in detail
satisfactory to the Agent, which certificate shall be substantially in the form
set forth in EXHIBIT B and certified by the chief financial officer or
controller of the Borrower.
"Borrowing Notice" means a notice given by the Borrower to the Agent in
accordance with SECTION 2.5, substantially in the form of EXHIBIT C.
"Business Day" means any day which is not a Saturday, Sunday or a legal
holiday under the laws of the State of California or Massachusetts or is not a
day on which banking institutions located in the State of California are
authorized or required by law or other governmental action to close; except that
if any determination of a "Business Day" shall relate to a LIBOR Loan, the term
"Business Day" shall in addition exclude any day which is not a Eurodollar
Banking Day.
"Capital Expenditures" means all payments made for Acquisitions or for
any fixed assets or improvements or for replacements, substitutions or additions
thereto, that have a useful life of more than one (1) year and which are
required to be capitalized under GAAP, including Capital Lease Obligations.
"Capital Lease" means, as to any Person, any lease of any Property by
such Person as lessee that is, or should be in accordance with Financing
Accounting Standards Board Statement No. 13, classified and accounted for as a
"capital lease" on the balance sheet of such Person prepared in accordance with
GAAP.
"Capital Lease Obligation" means, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with GAAP,
would appear on a balance
4.
<PAGE> 6
sheet of such lessee in respect of such Capital Lease or otherwise be disclosed
in a note to such balance sheet.
"Cash Equivalents" has the meaning set forth in SECTION 7.2(B).
"Change of Control" means the occurrence after the date of this
Agreement of: (i) any Person, or two or more Persons acting in concert,
acquiring beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities of the Borrower (or other
securities convertible into such securities) representing greater than 50% of
the combined voting power of all securities of the Borrower entitled to vote in
the election of directors; (ii) any Person, or two or more Persons acting in
concert, acquiring by contract or otherwise, or entering into a contract or
arrangement which, upon consummation, will result in its or their acquisition
of, or control over, securities of the Borrower (or other securities convertible
into such securities) representing greater than 50% of the combined voting power
of all securities of the Borrower entitled to vote in the election of directors;
or (iii) during any twelve consecutive calendar months, individuals who were
directors of the Borrower on the first day of such period shall cease to
constitute a majority of the board of directors of the Borrower.
"Charges" means all federal, state, county, city, municipal, local,
foreign or other governmental taxes, levies, assessments, charges or claims, in
each case then due and payable by the Borrower or any of the Borrower's
Subsidiaries, upon or relating to (a) the Loans hereunder, (b) any of their
employees, payroll, income or gross receipts, (c) any of their ownership or use
of any of their respective assets or (d) any other aspect of their respective
businesses.
"Closing" means the time at which each of the conditions precedent set
forth in SECTION 4 to the making of the first Loan hereunder shall have been
duly and completely satisfied by the Borrower or waived by all Lenders in their
sole and absolute discretion; provided, however, that in the event that the
Closing does not occur on or before September 30, 1997, 10:00 a.m., San Jose,
California time, this Agreement shall be immediately void and the Lenders shall
have no obligations hereunder.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended, the Treasury
Regulations adopted thereunder and the Treasury Regulations proposed thereunder,
as the same may be in effect from time to time.
"Comerica" means Comerica Bank - California.
"Commitment" means, as to each Lender, the amount set forth on SCHEDULE
1.0 next to such Lender's name, as such may be amended from time to time in
accordance with this Agreement.
"Compliance Certificate" means a certificate signed by the Borrower's
chief financial
5.
<PAGE> 7
officer, substantially in the form set forth in EXHIBIT D, with such changes
therein as the Agent from time to time reasonably may request for the purpose of
having such certificate disclose the matters certified therein and the method of
computation thereof.
"Consolidated Effective Tangible Net Worth" means, as at any date of
determination, an amount equal to (a) the Consolidated Net Worth of the Borrower
and its Subsidiaries plus (b) Subordinated Debt minus (c) an amount equal to the
book value of the Borrower's interest in the joint ventures between the Borrower
and United Microelectronics Corporation reflected on the consolidated balance
sheet of the Borrower and its Subsidiaries as at June 30, 1997.
"Consolidated Leverage Ratio" means the ratio of (a) Consolidated Total
Liabilities minus Subordinated Debt to (b) Consolidated Effective Tangible Net
Worth.
"Consolidated Net Worth" means, with respect to a Person, on a
consolidated basis, as at any date of determination, the difference between
Consolidated Total Assets and Consolidated Total Liabilities.
"Consolidated Total Assets" means, with respect to a Person, on a
consolidated basis, as at any date of determination, all assets of such Person,
as determined and computed in accordance with GAAP.
"Consolidated Total Liabilities" means, with respect to a Person, on a
consolidated basis, as at any date of determination, all liabilities of such
Person, as determined and computed in accordance with GAAP.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (other than for collection or deposit in the ordinary
course of business), co-made or discounted or sold with recourse by that Person,
or in respect of which that Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation for which that Person is in
effect liable through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor, or to
provide funds for the payment or discharge of such obligation (whether in the
form of loans, advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such obligation, or to
make payment for any products, materials or supplies or for any transportation,
services or lease regardless of the non-delivery or non-furnishing thereof, in
any such case if the purpose or intent of such agreement is to provide assurance
that such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof. The amount of
any Contingent Obligation of any Person shall be deemed to be an amount equal to
the maximum amount of such Person's liability with respect to the stated or
determinable amount of the primary obligation for which such Contingent
Obligation is incurred or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder).
6.
<PAGE> 8
"Conversion/Continuation Notice" means a notice given by the Borrower to
the Agent in accordance with SECTION 2.6, substantially in the form of EXHIBIT
E, with appropriate insertions.
"Designated Deposit Account" means a demand deposit account maintained
by the Borrower in the State of California with Comerica or such other financial
institution as the Borrower from time to time shall designate by written notice
to the Agent.
"Documentation Agent" means FLEET NATIONAL BANK, not in its individual
capacity, but solely when acting in its capacity as the documentation agent
under this Agreement or any of the other Loan Documents, and any successor
documentation agent.
"Dollars" and "$" means the lawful money of the United States of
America.
"Due Inquiry" means a review of relevant records in Borrower's or its
Subsidiaries' possession and inquiry of appropriate employees, officers and
directors.
"Eligible Accounts" means, at any time, the aggregate of the Borrower's
and each Approved Subsidiary's Accounts, net of any credit balances, excluding,
however, without double counting (a) all Accounts of the Borrower or the
Approved Subsidiaries in respect of which full payment has not been received
within ninety (90) days of the invoice date; (b) all Accounts as to which the
goods, merchandise or other personal property or the rendition of services has
not been fully and completely delivered or performed; (c) all Accounts against
which the account debtor or any other Person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or reduce the
liability represented by such Accounts; (d) all Accounts as to which the account
debtor or other Person obligated to make payment thereon is insolvent, subject
to bankruptcy or receivership proceedings or has made an assignment for the
benefit of creditors; (e) all Accounts in which the Borrower or the Approved
Subsidiaries or an Affiliate of the Borrower or the Approved Subsidiaries is the
account debtor; (f) all Accounts for any account debtor to the extent the
Accounts of such account debtor comprise twenty-five percent (25.0%) or more of
the Borrower's and the Approved Subsidiaries' total Accounts but only to the
extent such Accounts exceed twenty-five percent (25.0%) of such total Accounts;
(g) all Accounts with respect to which the account debtor is a Governmental
Authority, except to the extent the account debtor is the United States of
America or any department, agency or instrumentality of the United States of
America and the Borrower complies with the Assignment of Claims Act of 1940, as
amended (31 U.S.C. Section 203 et. seq.); (h) all Accounts with respect to which
the account debtor is not domiciled in the United States of America; (i) in the
event twenty-five percent (25.0%) or more of the Accounts of any account debtor
shall be deemed ineligible under clause (a), above, all accounts of such account
debtor; (j) all Accounts as to which no invoice has been sent to the account
debtor or remain otherwise unbilled; (k) all Accounts the actual amount of which
is subject to negotiation before the Account is reduced to a sum certain; and
(l) any Account as to which the credit standing of the account debtor or other
Person obligated to make payment thereon is unacceptable to the Agent or
Requisite Lenders or as to which the Agent or Requisite Lenders, in their
reasonable discretion, determine that the ability of the account debtor or other
Person obligated to make payment is otherwise impaired.
7.
<PAGE> 9
"Eligible Assignee" means (a) a commercial bank organized under the laws
of the United States, or any State thereof, and having combined capital and
surplus of $100,000,000; (b) a commercial bank organized under the laws of any
other country which is a member of the Organization for Economic Cooperation and
Development ("OECD"), or a political subdivision of any such country, and having
a combined capital and surplus of $100,000,000; provided, however, that such
bank is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD or the Cayman
Islands; (c) the central bank of any country which is a member of the OECD; (d)
a finance company or other financial institution or fund (whether a corporation,
partnership, trust or other entity) that is engaged in making, purchasing or
otherwise investing in commercial loans in the ordinary course of its business
and having a combined capital and surplus of $100,000,000; (e) an insurance
company organized under the laws of the United States, or any state thereof, and
having a combined capital and surplus of $100,000,000; (f) any Lender party to
this Agreement; (g) any Affiliate of a Lender and (h) any other Person approved
by the Agent and the Borrower, such approval not to be unreasonably withheld;
provided, however, that an Affiliate of the Borrower shall not qualify as an
Eligible Assignee.
"Employee Benefit Plan" means any Pension Plan and any employee welfare
benefit plan, as defined in Section 3(1) of ERISA, that is maintained for the
employees of the Borrower or any ERISA Affiliate of the Borrower.
"Environmental Laws" has the meaning set forth in SECTION 5.19 below.
"Environmental Complaint" has the meaning set forth in SECTION 5.19
below.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, as the same may be in effect from time to time, and any successor
statute.
"ERISA Affiliate" means, as applied to any Person, any trade or business
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of the
regulations promulgated under Section 414 of the Code.
"Eurodollar Banking Day" means any day on which dealings in dollar
deposits are conducted by and among banks in the London Interbank Market.
"Eurodollar Reserve Percentage" means the reserve percentage, if any,
(expressed as a decimal, rounded upward to the nearest 1/100th of one percent
(0.01%)) in effect on the date LIBOR for such Interest Period is determined
(whether or not applicable to any Lender) under regulations issued from time to
time by the Federal Reserve Board for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities") having a term comparable to such Interest Period.
8.
<PAGE> 10
"Event of Default" means the occurrence of any of the events set forth
in SECTION 9.1.
"Federal Funds Rate" means, for any period, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)") for such day opposite the caption "Federal Funds
(Effective)". If on any relevant day such rate is not yet published in
H.15(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, the "Composite 3:30 p.m.
Quotation") for such day under the caption "Federal Funds Effective Rate". If on
any relevant day the appropriate rate for such previous day is not yet published
in either H.15(519) or the Composite 3:30 p.m. Quotation, the rate for such day
will be the arithmetic mean of the rates for the last transaction in overnight
federal funds arranged prior to 9:00 a.m., New York City time, on that day by
each of three leading brokers of federal funds transactions in New York City
selected by the Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System and any successor thereto.
"Fiscal Quarter" means each fiscal quarter of the Borrower ending on
each March 31, June 30, September 30 and December 31.
"Fiscal Year" means each fiscal year of the Borrower ending on December
31.
"Funding Date" means with respect to any proposed Borrowing hereunder,
the date funds are advanced to Borrower for any Loan.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Persons as may be approved by the significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Governmental Authority" means (a) any federal, state, county, municipal
or foreign government, or political subdivision thereof, (b) any governmental or
quasi-governmental agency, authority, board, bureau, commission, department,
instrumentality or public body, (c) any court or administrative tribunal or (d)
with respect to any Person, any arbitration tribunal or other non-governmental
authority to whose jurisdiction that Person has consented.
"Hazardous Materials" means, without limitation, any flammable
explosives, radioactive materials, hazardous materials, hazardous wastes,
hazardous or toxic substances or related materials defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), the Hazardous Materials Transportation Act, as
amended (49 U.S.C. Section 1801, et seq.), the Resource Conservation
9.
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and Recovery Act, as amended (42 U.S.C. Section 6901, et seq.) and in the
regulations adopted and publications promulgated pursuant thereto, or any other
federal, state or local governmental law, ordinance, rule, or regulation.
"Indebtedness" means, as to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money, including, without limitation,
all of such indebtedness outstanding under this Agreement and any of the other
Loan Documents, (b) all Capital Lease Obligations of such Person, (c) to the
extent of the outstanding indebtedness thereunder, any obligation of such Person
that is evidenced by a promissory note or other instrument representing an
extension of credit to such Person, whether or not for borrowed money, (d) any
obligation of such Person for the deferred purchase price of Property or
services (other than trade or other accounts payable in the ordinary course of
business in accordance with customary industry terms), (e) any obligation of
such Person of the nature described in clauses (a), (b), (c) or (d), above, that
is secured by a Lien on assets of such Person and which is non-recourse to the
credit of such Person, but only to the extent of the fair market value of the
assets so subject to the Lien, (f) obligations of such Person arising under
acceptance facilities or under facilities for the discount of accounts
receivable of such Person, (g) any obligation of such Person to reimburse the
issuer of any letter of credit issued for the account of such Person upon which
a draw has been made, (h) all obligations of such Person to a counterparty under
any Rate Contract, (i) all Contingent Obligations of such Person, and (j) all
Off Balance Sheet Liabilities.
"Insolvency Proceeding" means (a) any case, action or proceeding before
any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution, winding-up
or relief of debtors, or (b) any general assignment for the benefit of
creditors, composition, marshalling of assets for creditors or other, similar
arrangement in respect of its creditors generally or any substantial portion of
its creditors, in each of case (a) and (b) undertaken under federal, state or
foreign law, including the Bankruptcy Code.
"Interest Differential" means, with respect to any prepayment of a LIBOR
Loan on a day other than an Interest Payment Date on which such LIBOR Loan
matures, the difference between (a) the per annum interest rate payable with
respect to such LIBOR Loan as of the date of the prepayment and (b) the Adjusted
LIBOR on, or as near as practicable to, the date of the prepayment for a LIBOR
Loan commencing on such date and ending on the last day of the applicable
Interest Period. The determination of the Interest Differential by Agent shall
constitute a rebuttable presumption of the accuracy thereof.
"Interest Payment Date" means, with respect to any LIBOR Loan, the last
day of each Interest Period applicable to such Loan and, with respect to Base
Rate Loans, the last Business Day of each Fiscal Quarter and each date a Base
Rate Loan is converted into a LIBOR Loan; provided, however, that if any
Interest Period for a LIBOR Loan exceeds three (3) months, interest shall also
be paid on the date which falls three (3) months after the beginning of such
Interest Period.
"Interest Period" means, as to any LIBOR Loan, the period commencing on
the date of
10.
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such LIBOR Loan and ending on the numerically corresponding day (or, if there is
no numerically corresponding day, on the last day) in the calendar month that is
one (1), two (2), three (3) or six (6) months thereafter, in each case as the
Borrower may elect; provided, however, that (a) no Interest Period shall end
later than the Revolving Credit Maturity Date, (c) if an Interest Period would
end on a day that is not a Business Day, such Interest Period shall be extended
to the next succeeding Business Day and (d) interest shall accrue from and
including the first Business Day of an Interest Period to but excluding the last
Business Day of such Interest Period.
"Interest Rate Determination Date" means the second Business Day prior
to the first day of the related Interest Period for a LIBOR Loan.
"Investment" means, when used in connection with any Person, any
investment by or of that Person, whether by means of purchase or other
acquisition of Stock or other securities of any other Person or by means of
lease, loan or advance (other than advances to employees for moving or travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business), capital contribution, guaranty or other debt or equity participation
or interest, or otherwise, in any other Person, including any partnership and
joint venture interests of such Person in any other Person. The amount of any
Investment shall be determined and computed in accordance with GAAP.
"Investment Company Act" means the Investment Company Act of 1940, as
amended (15 U.S.C. Section 80a-1 et seq.), as the same may be in effect from
time to time, or any successor statute thereto.
"IRS" means the Internal Revenue Service and any successor thereto.
"Issuing Bank" means Comerica or such other Lender as shall replace
Comerica, with the consent of Requisite Lenders, as the Lender designated to
issue Letters of Credit for the account of the Borrower pursuant to the terms
and conditions of this Agreement.
"Lenders" means the financial institutions which have executed signature
pages to this Agreement and such other Assignee financial institutions as shall
hereafter execute and deliver an Assignment and Acceptance with respect to all
or any portion of the Commitments and the Loans advanced and maintained pursuant
to the Commitments, in each case pursuant to and in accordance with SECTION
11.2.
"Letter of Credit" has the meaning set forth in SECTION 2.1.1(G).
"Letter of Credit Application" means an application given by the
Borrower to the Issuing Bank in the Issuing Bank's standard form, with
appropriate insertions.
"Letter of Credit Commitment" means an amount equal to Twenty-Five
Million Dollars ($25,000,000), which amount is a sublimit of, and not in
addition to, the Aggregate Commitments of the Lenders, as such may be reduced
from time to time pursuant to this
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<PAGE> 13
Agreement.
"Letter of Credit Undrawn Amount" means the stated but undrawn amount of
any issued and outstanding Letters of Credit.
"Leverage Ratio" means, on a consolidated basis for the Borrower and its
Subsidiaries, as measured quarterly as at the last day of each Fiscal Quarter,
the ratio of (a) Consolidated Total Liabilities to (b) Consolidated Net Worth.
"LIBOR" means, with respect to any LIBOR Loan, the London Inter-Bank
Offered Rate (determined solely by the Agent) at which United States Dollar
deposits are offered to Comerica by prime banks in London, England at or about
11:00 a.m., London time, on the Interest Rate Determination Date with respect to
such LIBOR Loan in an aggregate amount approximately equal to the amount of such
LIBOR Loan and for a period of time comparable to the number of days in the
applicable Interest Period. The determination of LIBOR by the Agent shall be
conclusive in the absence of manifest error.
"LIBOR Loan" means any and all of the Loans bearing interest at a rate
determined on the basis of LIBOR.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
assignment for security, security interest, encumbrance, levy, lien or charge of
any kind, whether voluntarily incurred or arising by operation of law or
otherwise, affecting any Property, including any agreement to grant or right to
acquire any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature of a security interest, and the filing of or
agreement to file or deliver any financing statement (other than a precautionary
financing statement with respect to a lease that is not in the nature of a
security interest) under the UCC or comparable law of any jurisdiction.
"Loan" in the singular and "Loans" when used in the plural means any and
all of the loans advanced to the Borrower under the Revolving Credit Facility
pursuant to SECTION 2.1 by the Lenders based on their respective Commitments
according to their respective Pro Rata Shares, which Loan may be in the form of
a Base Rate Loan or a LIBOR Loan.
"Loan Documents" means this Agreement, the Notes, all Letters of Credit,
any agreements with respect to issuance of any Letters of Credit issued for the
account of the Borrower or any of its Subsidiaries, any Rate Contract between
the Borrower and any Lender, and any and all other agreements, guaranties,
documents and instruments heretofore, now or hereafter executed by, on behalf of
or for the benefit of the Borrower or any of its Subsidiaries and delivered to
the Agent or the Lenders pursuant to or in connection with this Agreement, the
Loans or the transactions contemplated hereby, together with all amendments,
modifications, supplements and renewals thereto or thereof.
"Material Adverse Effect" means any set of circumstances or events which
(a) has or could reasonably be expected to have any material adverse effect upon
the validity or
12.
<PAGE> 14
enforceability of the Borrower's obligation to repay the Loans or make any other
payment required under any Loan Document, (b) is or could reasonably be expected
to be material and adverse to the condition (financial or otherwise) or business
operations of the Borrower and its Subsidiaries, taken as a whole, or to the
ability of the Borrower and its Subsidiaries, taken a whole, to repay the Loans
or make any other payment required under the Loan Documents, (c) materially
impairs or could reasonably be expected to materially impair the ability of the
Borrower and its Subsidiaries, taken as a whole, to perform their material
Obligations or (d) materially impairs or could reasonably be expected to
materially impair the ability of the Agent or any Lender to enforce any of its
legal remedies pursuant to the Loan Documents.
"Material Subsidiary" means, at any time, any Subsidiary of the Borrower
having at such time either (a) total (gross) revenues for the preceding four
fiscal quarter period in excess of $ 15,000,000.00 or (b) total assets, as of
the last day of the preceding fiscal quarter, having a net book value in excess
of $20,000,000.00, in each case, based upon the Borrower's most recent annual or
quarterly financial statements delivered to the Agent pursuant to SECTION
6.1(A).
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which the Borrower or any ERISA Affiliate of
the Borrower is making, or is obligated to make, contributions or has made, or
been obligated to make, contributions within the preceding five (5) years.
"Net Cash Proceeds" means, in the case of any Asset Sale, the gross
consideration, including, without limitation, any cash received by way of
deferred payment pursuant to a note receivable or liquidation of any reserve or
escrow account or otherwise, but only as and when so received by the Borrower or
any of its Subsidiaries from any Asset Sale (other than liabilities assumed
directly or indirectly by the buyer) less (i) the amount of actual liabilities
for taxes reasonably anticipated by the Borrower to be attributable to such sale
or other disposition, (ii) the amount of any reserves against any liabilities
associated with such sale required to be retained by the Borrower or any of its
Subsidiaries, as the case may be, after such sale or other disposition in
conformity with GAAP (but only for the period required to be retained as a
reserve), and (iii) the amount of fees and commissions payable to Persons other
than the Borrower or any of its Subsidiaries, and other costs and expenses
related to such sale or other disposition that are to be paid in cash.
"Note" when used in the singular and "Notes" when used in the plural
means any and all of the revolving notes dated the date of issuance, executed by
the Borrower, and payable to the order of each Lender in the stated principal
amount of such Lender's Commitment, substantially in the form of EXHIBIT A, and
any and all replacements, extensions, substitutions and renewals thereof or
therefor.
"Obligations" means all loans, advances, debts, liabilities and
obligations, for monetary amounts owing by the Borrower to the Lenders or the
Agent, whether due or to become due, matured or unmatured, liquidated or
unliquidated, contingent or non-contingent, and all covenants and duties
regarding such amounts, of any kind or nature, present or future, whether or not
evidenced by any note, agreement or other instrument, arising under any of the
Loan Documents. This term includes, without limitation, all principal, interest
(including interest that
13.
<PAGE> 15
accrues after the commencement against the Borrower or any of its Subsidiaries
under the Bankruptcy Code), fees, including, without limitation, any and all
arrangement fees, closing fees, prepayment fees, commitment fees, advisory fees,
agent fees and attorneys' fees and any and all other fees, expenses, costs or
other sums (including Attorney Costs) chargeable to Borrower under any of the
Loan Documents.
"Off Balance Sheet Liabilities" means, with respect to the Borrower and
its Subsidiaries, (i) any repurchase obligation or liability of the Borrower or
any of its Subsidiaries with respect to accounts or notes receivable permitted
to be sold by the Borrower or such Subsidiary pursuant to this Agreement, (ii)
any repurchase obligation or other liability of the Borrower or any of its
Subsidiaries with respect to Property leased by such Person pursuant to an
operating lease, (iii) obligations arising with respect to any other transaction
which is the functional equivalent of, or takes the place of borrowing but which
does not constitute, a liability on the financial statements of the Borrower,
excluding therefrom operating leases which do not require payment by or due from
such Person at the scheduled termination of such operating lease or pursuant to
a required purchase by such Person of the leased property.
"Other Assets" means, as at any date of determination, the following
assets of the Borrower or its Subsidiaries: (a) deferred financing costs
associated with Subordinated Debt; (b) deferred royalties; (c) long term
investments; (d) the Borrower's joint venture with Mission Real Estate
Partnership; (e) the Borrower's investment in Floreat Inc.; (f) non-current
assets in connection with technology licenses; (g) production capacity rights;
and (h) all other non-current assets, including, without limitation, intangible
assets.
"Overadvance" has the meaning set forth in SECTION 2.1.1(D).
"PBGC" means the Pension Benefit Guaranty Corporation and any successor
thereto.
"Pension Plan" means any employee pension benefit plan, as defined in
Section 3(2) of ERISA, that is maintained for the employees of the Borrower or
any ERISA Affiliate of the Borrower, other than a Multiemployer Plan.
"Permitted Indebtedness" has the meaning set forth in SECTION 7.3.
"Permitted Liens" has the meaning set forth in SECTION 7.1.
"Permitted Right of Others" means a right of others consisting of (a) an
interest (other than a legal or equitable co-ownership interest in any material
Property, an option or right to acquire a legal or equitable co-ownership
interest in any material Property and any interest of a ground lessor under a
ground lease) that does not materially impair the value or use of any material
Property for the purposes for which it is or may reasonably be expected to be
held, (b) an option or right to acquire a Lien that would be a Permitted Lien,
and (c) the reversionary interest of a lessor under a lease of Property.
"Person" means any individual, sole proprietorship, partnership, joint
venture, limited
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<PAGE> 16
liability company, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, firm, joint stock company, estate,
entity or Governmental Authority.
"Potential Event of Default" means a condition or event which, after
notice or lapse of time or both, would constitute an Event of Default.
"Principal Contracts and Joint Ventures" means the contracts and other
documents setting forth Borrower's agreements in respect of either or both of
its long term manufacturing capacity arrangements with United Microelectronics
Corporation and Alliance Semiconductor Corporation and Taiwan Semi-Conductor
Manufacturing Corporation as set forth on Schedule 1.1 hereto.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, whether tangible or intangible.
"Pro Rata Share" means, for any Lender, the proportion that such
Lender's Commitment has to the Aggregate Commitments.
"Public Utility Holding Company Act" means the Public Utility Holding
Company Act of 1935, as amended (15 U.S.C. Section 79 et seq.) as the same shall
be in effect from time to time, and any successor statute thereto.
"Quick Ratio" means, for the Borrower and its Subsidiaries, the ratio of
(a) the sum of cash, Cash Equivalents and Accounts (net of the provision for
doubtful Accounts) divided by (b) current liabilities.
"Rate Contract" means any interest rate or currency cap or other
agreement or arrangement designed to provide protection against fluctuations in
interest or currency exchange rates; provided that such agreement or arrangement
does not create or give rise to any additional contingent liability for the
buyer of such cap or the party to such agreement or arrangement other than the
up-front premium.
"Regulation D" means Regulation D adopted by the Federal Reserve Board
(12 C.F.R. Part 204) and any other regulation in substance substituted therefor.
"Regulations G, T, U and X" means, collectively, Regulations G, T, U and
X adopted by the Federal Reserve Board (12 C.F.R. Parts 207, 220, 221 and 224,
respectively) and any other regulation in substance substituted therefor.
"Requisite Lenders" means any combination of Lenders whose combined Pro
Rata Share (and voting interest with respect thereto) of all amounts outstanding
under this Agreement, or, in the event there are no amounts outstanding, the
Aggregate Commitments, is greater than seventy-five percent (75%) of all such
amounts outstanding or the Aggregate Commitments, as the case may be.
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<PAGE> 17
"Responsible Person" means any of the chief executive officer, president
and chief financial officer, corporate controller or any other officer of the
Borrower appointed by resolution of the Board of Directors and acceptable to
Requisite Lenders, in each case having authority to request Loans hereunder.
"Revolving Credit Availability" has the meaning set forth in SECTION
2.1.1.
"Revolving Credit Facility" means the Seventy-Five Million Dollar
($75,000,000) revolving credit facility described in SECTION 2.1.1 to be
provided by the Lenders to the Borrower according to each Lender's Pro Rata
Share.
"Revolving Credit Maturity Date" means the second anniversary of the
date of this Agreement or, if such date is not a Business Day, the next
preceding Business Day.
"Rights of Others" means, as to any Property in which a Person has an
interest, (a) any legal or equitable right, title or other interest (other than
a Lien) held by any other Person in or with respect to that Property, and (b)
any option or right held by any other Person to acquire any such right, title or
other interest in or with respect to that Property.
"SEC" means the Securities and Exchange Commission and any successor
thereto.
"Sobrato Lease" means the Mission Real Estate Limited Partnership
Agreement dated as of 11/28/95 by and among Sobrato Interest III, a California
limited partnership, as general partner and, the Borrower.
"Solvent" has the meaning set forth in SECTION 5.8.
"Stock" means all shares, options, warrants, interests, participation or
other equivalents (regardless of how designated) of or in a corporation or
equivalent entity, whether voting or nonvoting, including, without limitation,
common stock, preferred stock, or any other "equity security" (as such term is
defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended).
"Subordinated Debt" means at any time all Indebtedness of the Borrower
subordinate in right of payment to the Obligations of the Borrower to the
Lenders hereunder, the terms of which shall have been approved in writing by
Requisite Lenders.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership, limited liability company, joint venture or other
business entity of which more than fifty percent (50.0%) of the voting stock or
other equity interests (in the case of Persons other than corporations) is owned
or controlled directly or indirectly by such Person, or a combination thereof.
"Termination Event" means (a) a "reportable event" described in Section
4043 of ERISA
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<PAGE> 18
and the regulations issued thereunder (other than a reportable event not subject
to the provision for 30-day notice to the PBGC under such regulations), or (b)
the withdrawal of the Borrower or any of its ERISA Affiliates from a Pension
Plan during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA, or (c) the filing of a notice of intent to
terminate a Pension Plan or the treatment of a Pension Plan amendment as a
termination under Section 4041 of ERISA, or (d) the institution of proceedings
to terminate a Pension Plan by the PBGC, or (e) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California.
1.2 ACCOUNTING TERMS. Any accounting term used in this Agreement shall
have, unless otherwise specifically provided herein, the meaning customarily
given such term in accordance with GAAP, and all financial data required to be
submitted by this Agreement shall be prepared and computed, unless otherwise
specifically provided herein, in accordance with GAAP. That certain terms or
computations are explicitly modified by the phrase "in accordance with GAAP"
shall in no way be construed to limit the foregoing. In the event that GAAP
changes during the term of this Agreement such that the covenants contained in
SECTION 8 would then be calculated in a different manner or with different
components, (a) the parties hereto agree to amend this Agreement in such
respects as are necessary to conform those covenants as criteria for evaluating
the Borrower's financial condition to substantially the same criteria as were
effective prior to such change in GAAP and (b) the Borrower shall be deemed to
be in compliance with the covenants contained in the aforesaid subsections
during the sixty (60) day period following any such change in GAAP if and to the
extent that the Borrower would have been in compliance therewith under GAAP as
in effect immediately prior to such change.
1.3 OTHER TERMS. All other undefined terms contained in this Agreement
shall, unless the context indicates otherwise, have the meanings provided for by
the UCC to the extent the same are used or defined therein. The words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole, including the exhibits and schedules hereto, all of which
are by this reference incorporated into this Agreement, as the same may from
time to time be amended, modified or supplemented, and not to any particular
section, subsection or clause contained in this Agreement. The term "including"
shall not be limiting or exclusive, unless specifically indicated to the
contrary. The term "or" is disjunctive; the term "and" is conjunctive. The term
"shall" is mandatory; the term "may" is permissive. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and plural, and pronouns stated in the masculine, feminine
or neuter gender shall include the masculine, feminine and the neuter.
1.4 PERFORMANCE; TIME. Whenever any performance obligation hereunder
(other than a payment obligation) shall be stated to be due or required to be
satisfied on a day other than a Business Day, such performance shall be made or
satisfied on the next succeeding Business Day unless otherwise indicated. In the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including"; the words "to" and
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<PAGE> 19
"until" each mean "to but excluding", and the word "through" means "to and
including." If any provision of this Agreement refers to any action taken or to
be taken by any Person, or which such Person is prohibited from taking, such
provision shall be interpreted to encompass any and all means, direct or
indirect, of taking, or not taking, such action.
1.5 LAWS. References to any statute or regulation are to be construed as
including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.
1.6 ROUNDING. Any financial ratios required to be maintained by the
Borrower pursuant to this Agreement shall be calculated by dividing the
appropriate component by the other component, carrying the result to one place
more than the number of places by which such ratio is expressed in this
Agreement and rounding the result up or down to the nearest number (with a
round-up if there is no nearest number) to the number of places by which such
ratio is expressed in this Agreement.
1.7 SCHEDULES AND EXHIBITS. Any reference to a "Section," "Subsection,"
"Exhibit" or "Schedule" shall refer to the relevant Section or Subsection of or
Exhibit or Schedule to this Agreement, unless specifically indicated to the
contrary.
SECTION 2. THE CREDIT - AMOUNT AND TERMS.
2.1 AMOUNTS AND TERMS OF COMMITMENTS.
2.1.1 REVOLVING CREDIT FACILITY. Upon the terms, subject to the
conditions and in reliance upon the representations and warranties of the
Borrower set forth in this Agreement, and subject further to Section 2.1.2(d)
each of the Lenders hereby severally agrees to make Loans of immediately
available funds to the Borrower, on a revolving basis, from the Closing until
the Business Day immediately preceding the Revolving Credit Maturity Date, in an
aggregate principal amount outstanding not to exceed at any time the lesser of
(a) an amount equal to such Lender's Commitment and (b) an amount equal to such
Lender's Pro Rata Share of (i) at such times as, after giving effect to the
proposed Borrowing, the aggregate outstanding Loans plus the Letter of Credit
Undrawn Amount would exceed $50,000,000, the Borrowing Base, and at such times
as, after giving effect to the proposed Borrowing, the aggregate outstanding
Loans plus the Letter of Credit Undrawn Amount would not exceed $50,000,000, the
Aggregate Commitments of all the Lenders less (ii) the Letter of Credit Undrawn
Amount (the "Revolving Credit Availability").
(a) LIMITATION ON EACH LENDER'S OBLIGATION. With respect to
any Borrowing of Loans requested by the Borrower pursuant to a complying
Borrowing Notice delivered to the Agent pursuant to SECTION 2.5 of this
Agreement, each Lender's obligation to advance funds in the form of Loans to the
Borrower shall be limited to an amount equal to such Lender's Pro Rata Share of
such Borrowing (obtained by multiplying the Borrowing amount by such Lender's
Pro Rata Share).
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(b) FUNDING OF LOANS TO AGENT. Following the Agent's receipt
of a complying Borrowing Notice and the Agent's determination that the
conditions precedent to a requested Borrowing set forth in SECTION 4 of this
Agreement have been duly satisfied, the Agent shall promptly notify each Lender
having a Commitment of (i) the amount of the requested Borrowing and such
Lender's Pro Rata Share thereof and (ii) the requested Funding Date, which (1)
if a LIBOR Loan is requested, shall be no earlier than the third Business Day
following the date on which the Agent so notifies such Lender and, (2) if a Base
Rate Loan is requested, shall be the same Business Day. Not later than 12:00
noon, San Jose, California time, on the requested Funding Date, each Lender
having a Commitment shall have advanced its Loan to the Agent at the Agent's
Payment Office in immediately available funds. No Lender shall have any
liability to the Borrower for the failure of such Lender to advance funds for
any Loan unless and until each condition precedent to the applicable Borrowing
has been duly satisfied or has been waived in writing by the Requisite Lenders.
The Borrower shall have no right to enforce any obligation of a Lender to fund
any Loan unless and until each condition precedent to the applicable Borrowing
has been duly satisfied or has been waived in writing by the Requisite Lenders.
The Agent's determination that the conditions precedent to any Borrowing have
been duly satisfied shall be conclusive and binding on all Lenders for purposes
of determining when Lenders shall be obligated to advance funds to the Agent.
(c) DISBURSEMENT OF LOANS TO BORROWER. On the requested
Funding Date, the Agent shall disburse in immediately available funds to the
Designated Deposit Account specified in the Borrowing Notice an amount equal to
the Loans advanced by the Lenders to the Agent's Payment Office with respect to
such Borrowing.
(d) OVERADVANCES. If at any time and for any reason (i) the
aggregate principal amount of the Loans then outstanding plus the Letter of
Credit Undrawn Amount shall exceed the Revolving Credit Availability or (ii) the
Letter of Credit Undrawn Amount shall exceed the Letter of Credit Commitment
(the amount of such excess, if any, in each case being an "Overadvance"), the
Borrower shall immediately repay the full amount of such Overadvance, together
with all interest accrued thereon.
(e) GENERAL PROVISIONS RELATING TO LOANS. Each Loan made by a
Lender hereunder shall, at the Borrower's option in accordance with the terms of
this Agreement, be either in the form of a Base Rate Loan or a LIBOR Loan;
provided, however, that in no event shall the Borrower maintain at any time
LIBOR Loans having more than four (4) different Interest Periods. The Borrower
shall repay the principal amount of the Loans in the amounts and in the manner
set forth in SECTION 2.3 of this Agreement and pay interest accrued on the Loans
at the rates and in the manner set forth in SECTION 2.4 of this Agreement.
Amounts borrowed by the Borrower under the Aggregate Commitments may be repaid
and, prior to the Revolving Credit Maturity Date and subject to the applicable
terms and conditions precedent to Borrowings hereunder, re-borrowed.
(f) PERMITTED USES OF LOAN PROCEEDS. The Borrower shall use
the Loan proceeds only for the purposes of funding working capital, general
short-term corporate needs and Investments expressly permitted under this
Agreement.
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(g) LETTER OF CREDIT SUBLIMIT UNDER REVOLVING CREDIT FACILITY.
Without limiting the generality of the foregoing, each Lender severally agrees
that a Responsible Person of the Borrower may, by delivery of notice to the
Agent in accordance with SECTION 2.5, also request the Issuing Bank to issue one
or more standby or documentary letters of credit under the Letter of Credit
Commitment for the account of the Borrower, which letters of credit shall be in
the standard form of the Issuing Bank (each a "Letter of Credit"); in which
event, after satisfaction of all conditions precedent set forth in SECTION 4.2,
the Issuing Bank shall issue such Letters of Credit subject to and in accordance
with SECTION 2.1.2; provided, however, nothing contained in this Agreement shall
under any circumstance be deemed to require the Issuing Bank to issue any Letter
of Credit which, taking into account the issuance of such Letter of Credit,
would either cause the Letter of Credit Undrawn Amount to exceed the Letter of
Credit Commitment or cause the aggregate principal amount of the Loans then
outstanding plus the Letter of Credit Undrawn Amount to exceed the Revolving
Credit Availability."
2.1.2 LETTER OF CREDIT SUBFACILITY.
(a) Subject to the terms and conditions of this Agreement and
in reliance upon the representations and warranties of the Borrower set forth
herein, at any time and from time to time from the Closing through the Business
Day immediately prior to the Revolving Credit Maturity Date, after satisfaction
of all conditions precedent set forth in SECTION 4.2, the Issuing Bank shall
issue for the account of the Borrower Letters of Credit in minimum amounts not
less than $100,000, provided that a request shall have been made for such
Letters of Credit by a Responsible Person of the Borrower delivering to the
Agent a Borrowing Notice, duly executed with appropriate insertions and as
otherwise required by SECTION 2.5, together with a duly executed Letter of
Credit Application, with appropriate insertions (which Borrowing Notice and
Letter of Credit Application shall have been received by the Issuing Bank prior
to 10:00 a.m., San Jose, California time, five (5) Business Days prior to the
requested issuing date), after consultation with Lenders and receiving the
consent of Requisite Lenders. No Letter of Credit shall have an expiration date
that is later than one hundred twenty (120) days after the Revolving Credit
Maturity Date or one (1) year after the issuance of such Letter of Credit (or
any renewal thereof), whichever is earlier.
(b) Upon issuance of each Letter of Credit, each Lender shall
be deemed to have purchased a participation from the Issuing Bank equal to such
Lender's Pro Rata Share of the original stated amount of such Letter of Credit.
Nothing contained in this Agreement shall under any circumstance be deemed to
require any Lender to participate in the issuance of any Letter of Credit which,
taking into account such Lender's participation in such Letter of Credit, when
added to the aggregate of such Lender's participation in all other issued and
undrawn Letters of Credit, exceeds such Lender's Pro Rata Share of the Letter of
Credit Commitment.
(c) Unless otherwise expressly provided therein, each
beneficiary named by the Borrower with respect to a Letter of Credit issued
hereunder shall be permitted to make full or partial draws under such Letter of
Credit. Upon the making of any draw under a
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Letter of Credit by such beneficiary, the full amount of such draw shall be
immediately due and payable by the Borrower to the Issuing Bank. The Issuing
Bank shall immediately give written notification of the amount of such draw to
the Agent, each Lender and the Borrower and to the extent that the Issuing Bank
has not been immediately reimbursed by the Borrower for any payment required to
be made by the Issuing Bank under such Letter of Credit (and all commissions
incurred but unpaid in connection therewith), each Lender shall, according to
its Pro Rata Share of such Letter of Credit, reimburse the Issuing Bank
immediately upon written demand for the amount of such payment (and such unpaid
commissions). The obligation of each Lender to so reimburse the Issuing Bank
shall be absolute and unconditional and shall not be affected by the occurrence
of a Potential Event of Default or Event of Default or any other occurrence or
event. Any such reimbursement shall not relieve or otherwise limit or impair the
obligation of the Borrower to reimburse the Lenders for the amount of any
payment made by the Issuing Bank under any Letter of Credit.
(d) Without limiting the generality of the preceding
subsections of this SECTION 2.1.2, in the event the Borrower shall fail to
reimburse immediately the Issuing Bank for any honor of a draw on any Letter of
Credit as confirmed by the Issuing Bank's written notice and demand for payment
from each Lender of its ratable participation amount pursuant to SECTION
2.1.2(C), each Lender shall be deemed to have made, without further notice to
the Borrower, a Base Rate Loan in the principal amount equal to such Lender's
Pro Rata Share of the amount drawn under such Letter of Credit (plus any unpaid
commission); and, for this purpose, the conditions precedent set forth in
SECTION 4.2 shall not apply. Any Base Rate Loan deemed to be advanced after the
Revolving Credit Maturity Date, shall be immediately due and payable. The
proceeds of such Base Rate Loans shall be applied to reimburse the Issuing Bank
for such payment required to be made by the Issuing Bank under the Letter of
Credit. In the event that any Base Rate Loan shall be deemed to be made to the
Borrower pursuant to this SECTION 2.1.2(D), such Base Rate Loan shall be deemed
to have been made as of the date of the honor of the draw under the respective
Letter of Credit and interest shall accrue thereon at the same rate as provided
for other Base Rate Loans under this Agreement. In the event that the Issuing
Bank does not receive the proceeds of any Base Rate Loans made pursuant to this
subsection by 12:00 noon, San Jose, California time, on the date that the draw
on the Letter of Credit is honored, the Lender whose funds are delayed shall pay
interest to the Issuing Bank on the amount not received at the Federal Funds
Rate from the date of such honor until the date on which the Issuing Bank
receives such proceeds by 12:00 noon.
(e)(1) The Issuing Bank may resign as Issuing Bank by giving
notice to the Agent, the Lenders and the Borrower on or before April 30 of any
calendar year, and such resignation shall be effective as to any Letter of
Credit outstanding on May 31 of such calendar year upon the then current expiry
date on such Letter of Credit. If the Issuing Bank shall resign as the Issuing
Bank under this Agreement, Requisite Lenders shall appoint a successor Issuing
Bank from among the Lenders, with the consent of such successor.
(2) If an Issuing Bank has resigned and no successor Issuing
Bank is appointed prior to such May 31, then until an appointment of a successor
Issuing Bank is made, in the event of a request by the Borrower for the issuance
of a Letter of Credit under
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SECTION 2.1.1, each Lender shall issue its own Letter of Credit in an amount
equal to such Lender's Pro Rata Share of the amount of such requested Letter of
Credit upon the terms and conditions set forth in SECTIONS 2.1.1 and 2.1.2, with
such changes as are appropriate to apply to an individual Lender issuing a
Letter of Credit without participation. In the event of an unreimbursed draw on
a Letter of Credit issued pursuant to the provisions of this SECTION
2.1.2(E)(2), each Lender which has honored such a draw shall be deemed to have
made a Base Rate Loan to reimburse itself for the draw under such Letter of
Credit.
(3) During any period while there is no Issuing Bank, the
reference to Issuing Bank in SECTION 11.2 shall be deemed to be deleted except
to the extent that any Letter of Credit remains outstanding which has been
issued by the resigning Issuing Bank. With respect to any Letter of Credit
issued under SECTION 2.1.2(E)(2), the reference to "Issuing Bank" in SECTION
2.8(D) shall be to each Lender issuing a Letter of Credit and all fees due
(including the fee payable to the Issuing Bank) under SECTION 2.8(B) shall be
payable to the Lenders according to their respective Pro Rata Shares of the
Aggregate Commitments.
(4) Upon the acceptance of its appointment as a successor
Issuing Bank hereunder, such successor Issuing Bank shall succeed to all the
rights, powers and duties of the retiring Issuing Bank with respect to any
Letters of Credit issued subsequent to such acceptance, and the term "Issuing
Bank" shall mean such successor issuing bank with regard to such subsequently
issued Letters of Credit. Whether or not a successor Issuing Bank is appointed,
the retiring Issuing Bank shall retain all the rights, powers and duties of an
Issuing Bank with respect to any Letters of Credit previously issued by such
retiring Issuing Bank, and the term "Issuing Bank" shall mean such retiring
Issuing Bank with respect to such previously issued Letters of Credit.
(f) The obligation of the Borrower to reimburse the Lenders
for drawings made under the Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever,
including the following circumstances:
(1) Any lack of validity or enforceability of any Letter of
Credit, the obligation supported by such Letter of Credit or any other agreement
or instrument relating thereto (collectively, the "Related LC Documents");
(2) Any amendment or waiver of or any consent to or
departure from all or any of the Related LC Documents;
(3) The existence of any claim, set-off, defense or other
rights which the Borrower may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any Persons or entities for whom any such
beneficiary or any such transferee may be acting), the Lenders, the Agent or any
other Person, whether in connection with the Loan Documents, the Related LC
Documents or any unrelated transaction;
(4) Any breach of contract or other dispute between the
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Borrower and any beneficiary or any transferee of any Letter of Credit (or any
Persons or entities for whom such beneficiary or any such transferee may be
acting), the Lenders, the Agent or any other Person;
(5) Any draft, statement or any other document presented
under any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect whatsoever; or
(6) Any delay, extension of time, renewal, compromise or
other indulgence or modification granted or agreed to by the Issuing Bank, with
or without notice to or approval by the Borrower in respect of any of the
Borrower's Indebtedness under this Agreement.
(g) The Borrower assumes all risks of the acts or omissions of
any beneficiary and any transferee of each Letter of Credit; provided, however,
this assumption with respect to the Agent and the Lenders, including the Issuing
Bank, is not intended to, and shall not, preclude the Borrower's pursuing such
rights and remedies as it may have against any such beneficiary or transferee of
a Letter of Credit at law or under any other agreement. Neither the Agent nor
any Lender, including the Issuing Bank, nor any of their officers or directors
shall be liable or responsible for, without limitation: (1) the use which may be
made of any Letter of Credit or for any acts or omissions of any beneficiary and
any transferee of any Letter of Credit in connection therewith; or (2) the
validity, sufficiency or genuineness of documents, or of any endorsement(s)
thereon, even if such documents should in fact prove to be in any or all
respects invalid, insufficient, fraudulent or forged. In furtherance and not in
limitation of the foregoing, the Issuing Bank may accept documents that appear
on their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary.
(h) Subject to the laws, customs and practices of the trade in
the area where the beneficiary is located and to the extent not otherwise
inconsistent with the provisions of this SECTION 2.1.2, each Letter of Credit
will be subject to, and performance under each Letter of Credit by the Issuing
Bank, its correspondents, and the beneficiary will be governed by, UCC Article 5
and the "Uniform Customs and Practice for Documentary Credit (1993 Revision),
International Chamber of Commerce, Publication No. 500," or by any later Uniform
Customs and Practice fixed by later Congresses of the International Chamber of
Commerce as in effect on the date the Letter of Credit is issued; provided,
however, that to the extent any conflict exists between UCC Article 5 and such
Uniform Customs and Practices then in effect, UCC Article 5 shall control.
2.2 NOTES.
(a) NOTES. The Loans made by each Lender shall be evidenced by
separate Notes executed by the Borrower and made payable to the order of such
Lender in the stated principal amount equal to its Commitment.
(b) NOTATIONS IN LENDERS' BOOKS AND RECORDS. Each Lender shall
make
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notations in its books and records regarding the date, amount and maturity of
each Loan made by it and the amount of each repayment or prepayment of principal
and payment of interest made by the Borrower with respect to such Loan. Each
Lender is irrevocably authorized by the Borrower to endorse its Note and each
Lender's record shall constitute a rebuttable presumption as to the matters set
forth therein; provided, however, that the failure of a Lender to make, or an
error in making, such a notation with respect to any Loan shall not limit or
otherwise affect the Obligations of the Borrower hereunder or under any such
Note to such Lender.
2.3 REPAYMENT OF THE LOANS. Subject to the terms of this Agreement
relating to mandatory permanent reductions of the Aggregate Commitments,
mandatory prepayments of the Loans and the acceleration of maturities by the
Lenders, the Borrower shall repay the Lenders the entire outstanding principal
amount of the Loans and all other unpaid amounts outstanding under the Revolving
Credit Facility on the Revolving Credit Maturity Date.
2.4 PAYMENT OF INTEREST ON THE LOANS.
(a) INTEREST RATES. Subject to SECTION 2.4(D) of this Agreement,
each Loan shall bear interest on the outstanding principal amount thereof from
the date when made, continued or converted until paid in full at a rate per
annum equal to the Base Rate or the Adjusted LIBOR plus the Applicable Margin,
as the case may be.
(b) INTEREST PAYMENT DATES. Interest on each Loan shall be paid in
arrears on each Interest Payment Date. Interest shall also be paid on the date
of any prepayment of any Loans pursuant to this Agreement for the portion of the
Loans so prepaid and upon payment (including prepayment) in full thereof.
(c) INTEREST UPON EVENTS OF DEFAULT. Upon the occurrence of an Event
of Default and so long as such Event of Default shall continue, including after
acceleration (whether before or after entry of judgment), the Borrower shall, at
the option of Requisite Lenders, pay interest on the principal amount of each
Loan then outstanding at a rate per annum which is determined by adding three
percent (3.00%) to the interest rate otherwise applicable to such Loan.
(d) LIMITATIONS ON INTEREST RATES. Notwithstanding any provision in
this Agreement, the Notes or any of the other Loan Documents, the total
liability for payments in the nature of interest shall not exceed the applicable
limits imposed by any applicable federal or state interest rate laws. If any
payments in the nature of interest, additional interest and other charges made
hereunder or under any of the Loan Documents are held to be in excess of the
applicable limits imposed by any applicable federal or state law, the amount
held to be in excess shall be considered payment of principal under the Notes
and the indebtedness evidenced thereby shall be reduced by such amount in the
inverse order of maturity so that the total liability for payments in the nature
of interest, additional interest and other charges shall not exceed the
applicable limits imposed by any applicable federal or state interest rate laws.
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2.5 PROCEDURE FOR THE BORROWING OF LOANS.
(a) Each Borrowing of Loans shall be made upon the Borrower's
irrevocable written notice delivered to the Agent in the form of a Borrowing
Notice, executed by a Responsible Person of the Borrower, with appropriate
insertions (which Borrowing Notice must be received by the Agent prior to 10:00
a.m., San Jose, California time, (i) three (3) Business Days prior to the
requested Funding Date, in the case of LIBOR Loans, and (ii) on the requested
Funding Date, in the case of Base Rate Loans), specifying:
(A) the amount of the Borrowing, which shall be in integral
multiples of One Hundred Thousand Dollars ($100,000) and, if LIBOR
Loans are requested, in an aggregate minimum principal amount of Two
Million Dollars ($2,000,000);
(B) the requested Funding Date, which shall be a Business Day;
(C) whether the Borrowing is to be comprised of LIBOR Loans or
Base Rate Loans;
(D) the duration of the Interest Period applicable to any such
LIBOR Loans included in such notice. If the Borrowing Notice shall
fail to specify the duration of the Interest Period for any
Borrowing comprised of LIBOR Loans, such Interest Period shall be
deemed to be one (1) month; and
(E) the Designated Deposit Account into which proceeds of the
Loans are to be transferred, together with wiring instructions.
(b) Upon receipt of the Borrowing Notice, the Agent will promptly
notify each Lender having a Commitment of the amount of such Lender's Pro Rata
Share of the requested Borrowing.
(c) Each Lender will make the amount of its Pro Rata Share of the
Borrowing available to the Agent for the account of the Borrower at the Agent's
Payment Office by 12:00 noon, San Jose, California time, on the Funding Date
requested by the Borrower in funds immediately available to the Agent. The
proceeds of all such Loans will then be made available to the Borrower on the
Funding Date by the Agent by wire transfer to the Designated Deposit Account
specified in the Borrowing Notice. No Borrowing of Loans shall be deemed made to
the Borrower, and no interest shall accrue on any such Borrowing, until the
related funds have been deposited in the Designated Deposit Account.
(d) Unless all Lenders having a Commitment shall otherwise consent,
during the existence of a Potential Event of Default or Event of Default, the
Borrower may not elect to have a Loan made as a LIBOR Loan.
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2.6 CONVERSION AND CONTINUATION ELECTIONS.
(a) The Borrower may upon irrevocable written notice from the
Borrower to the Agent:
(i) elect to convert on any Business Day, Base Rate Loans in
an amount equal to Two Million Dollars ($2,000,000) or any integral multiple of
$100,000 in excess thereof, into LIBOR Loans; or
(ii) elect to convert on any Interest Payment Date any LIBOR
Loans maturing on such Interest Payment Date into Base Rate Loans; or
(iii) elect to continue on any Interest Payment Date any LIBOR
Loans maturing on such Interest Payment Date (or any part thereof in an amount
equal to Two Million Dollars ($2,000,000) or any integral multiple of $100,000
in excess thereof).
(b) The Borrower shall deliver a Conversion/Continuation Notice in
accordance with SECTION 12.4 of this Agreement to be received by the Agent prior
to 10:00 a.m., San Jose, California time, at least (i) three (3) Business Days
in advance of the conversion date or continuation date, if any Loans are to be
converted into or continued as LIBOR Loans; and (ii) on the conversion date, if
any Loans are to be converted into Base Rate Loans; specifying:
(A) the proposed Conversion Date or Continuation Date;
(B) the aggregate amount of Loans to be converted or continued;
(C) the nature of the proposed conversion or continuation; and
(D) the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to any
LIBOR Loans, the Borrower shall have failed to have given due notice to the
Agent of the Borrower's selection of a new Interest Period to be applicable to
such LIBOR Loans, the Borrower shall be deemed to have elected to convert such
LIBOR Loans into Base Rate Loans.
(d) Upon receipt of a Conversion/Continuation Notice, the Agent will
promptly notify each Lender thereof, or, if no timely notice is provided by the
Borrower, the Agent will promptly notify each Lender of the details of any
automatic conversion. All conversions and continuations shall be made according
to each Lender's applicable Pro Rata Share of the outstanding principal amounts
of the Loans with respect to which the notice was given.
(e) Unless all Lenders shall otherwise consent, during the existence
of a Potential Event of Default or an Event of Default, the Borrower may not
elect to have a Loan converted into or continued as a LIBOR Loan.
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2.7 VOLUNTARY REDUCTION IN AGGREGATE COMMITMENTS. Subject to this
SECTION 2.7 and SECTION 3.5, the Borrower may, at any time and from time to
time, elect to permanently reduce the Aggregate Commitments by delivering to the
Agent written notice thereof (a "Prepayment Notice"); provided, however, that
any such reduction shall commensurately reduce the Letter of Credit Commitment.
The Prepayment Notice shall (a) specify the date and amount of such reduction
and (b) in the event such proposed reduction in the Aggregate Commitments would,
pursuant to this Agreement, give rise to the requirement that the Borrower
prepay any of the Loans in order to comply with the Revolving Credit
Availability, then such notice shall (i) state whether such prepayment is to be
applied to Base Rate Loans or LIBOR Loans, or any combination thereof, and (ii)
if such prepayment consists solely of Base Rate Loans, the Prepayment Notice
shall be delivered to the Agent at least one (1) Business Day prior to the
effective date for such proposed reduction in the Aggregate Commitments, or, if
such prepayment (or any portion thereof) consists of LIBOR Rate Loans, the
Prepayment Notice shall be delivered to the Agent at least three (3) Business
Days prior to the effective date for such proposed reduction in the Aggregate
Commitments. Such notice shall be irrevocable and the Agent shall promptly
notify each Lender thereof and of such Lender's Pro Rata Share of such reduction
in the Aggregate Commitments and, as applicable, prepayment of Loans. Any
prepayment of Loans required to be made by the Borrower pursuant to a reduction
in the Aggregate Commitments shall be due and payable on the effective date for
such reduction, together with accrued interest to such date on the principal
amount prepaid and any amounts required pursuant to SECTION 3.5 of this
Agreement, but otherwise without premium or penalty. Notwithstanding anything to
the contrary, any prepayments pursuant to this SECTION 2.7 shall be applied
first to any Base Rate Loans then outstanding and then to LIBOR Loans with the
shortest Interest Periods remaining.
2.8 FEES.
(a) CLOSING FEE. In consideration hereof, the Borrower agrees to pay
fees upon the Closing as set forth in the Fee Letter to the Lenders that are
original signatories to this Agreement.
(b) COMMITMENT FEE FOR PROVIDING COMMITMENTS. In consideration of
the Lenders' agreement to commit to make the Loans available to the Borrower as
contemplated by this Agreement, the Borrower agrees to pay to the Agent from
time to time, on behalf of and for the ratable benefit of the Lenders according
to their respective Pro Rata Shares of the Aggregate Commitments, a commitment
fee in an amount equal to 0.25% multiplied by the average daily difference
between the Aggregate Commitments and (i) the sum of the aggregate outstanding
principal amount of Loans plus (ii) the Letter of Credit Undrawn Amount, due and
payable quarterly in arrears on the last Business Day of each March, June,
September and December, with the final such payment due and payable on the
Revolving Credit Maturity Date.
(c) AGENT'S FEE. In consideration of Comerica's agreement to act as
Agent under this Agreement, the Borrower agrees to pay to the Agent an annual
agent's fee as set forth in Agent's Fee Letter.
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(d) LETTERS OF CREDIT FEES AND COMMISSIONS.
(i) As a condition to issuance of each Letter of Credit, the
Borrower shall pay to the Issuing Bank for the account of each Lender according
to its Pro Rata Share a letter of credit participation fee equal to (A) for
standby Letters of Credit, the number of days between the date of such issuance
through the expiry date of such Letter of Credit, multiplied by the face amount
of such Letter of Credit, multiplied by the Applicable Margin and divided by
360, and (B) for sight documentary Letters of Credit the face amount of such
Letter of Credit multiplied by 0.40% (0.30% allocated for the account of each
Lender according to its Pro Rata Share, and 0.10% to the Issuing Bank).
(ii) Standby Letter of Credit fees will be payable by the
Borrower to the Issuing Bank in arrears on the last day of each Fiscal Quarter
and on the expiry date for each standby Letter of Credit and such amounts
received by the Issuing Bank shall promptly be paid to the Agent for
distribution to the Lenders. Issuance fees for sight documentary Letters of
Credit will be paid by the Borrower upon issuance and the aggregate of such fees
received by the Issuing Bank during any Fiscal Quarter will be distributed by
the Issuing Bank to the Agent for distribution to the Lenders promptly upon the
Issuing Bank's receipt thereof.
(iii) The Borrower shall pay to the Issuing Bank, upon demand,
all standard charges of the Issuing Bank in connection with the issuance,
extension, renewal, modification, cancellation or negotiation of any Letter of
Credit, which amounts shall include, without limitation, an issuance fee equal
to 1/8% of the face amount of each standby Letter of Credit. No fees or
commissions paid in respect of any Letter of Credit shall be refundable.
2.9 CALCULATION OF INTEREST AND FEES. Interest on the Loans shall be
computed on the basis of a 360-day year and the actual number of days elapsed.
All fees payable hereunder shall be computed on the basis of a 360-day year and
actual days elapsed. In computing interest on any Loan, the date of the making
of such Loan shall be included and the date of payment shall be excluded;
provided, however, that if any Loan is repaid on the same day on which it is
made, such day shall be included in computing interest on such Loan. Each change
in the interest rate of the Base Rate Loans based on changes in the Base Rate
and each change in the interest rate of LIBOR Loans based on changes in the
Eurodollar Reserve Percentage shall be effective on the effective date of such
change and to the extent of such change. The Agent shall give the Borrower
prompt notice of any such change in the Base Rate or Eurodollar Reserve
Percentage; provided, however, that any failure by the Agent to provide the
Borrower with notice hereunder shall not affect the Lenders' right to make
changes in the interest rate of the Base Rate Loans based on changes in the Base
Rate or changes in the interest rate of LIBOR Loans based on changes in the
Eurodollar Reserve Percentage.
2.10 PAYMENTS. All repayments or prepayments of principal and all
payments of interest, fees, costs, expenses and other sums chargeable to the
Borrower under this Agreement, the Notes or any of the other Loan Documents
shall be in lawful money of the United States of America in immediately
available funds and delivered to the Agent, on behalf and for the benefit
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of the Lenders, not later than 10:00 a.m., San Jose, California time, on the
date due at the Agent's Payment Office.
2.11 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made under
this Agreement, the Notes or any of the other Loan Documents shall be stated to
be due on a day which is not a Business Day, such payment shall be made on the
next succeeding Business Day and such extension of time shall in such case be
included in the computation of the payment of interest thereon.
2.12 APPLICATION OF PAYMENTS. Except as otherwise expressly provided in
this Agreement or in any other Loan Document, all payments, when received by the
Lenders or the Agent, on behalf of Lenders, shall be applied in the following
order: (a) then due and payable fees, costs and expenses; (b) then due and
payable interest payments; and (c) then due and payable principal payments and
optional prepayments. In addition, each Lender is authorized to, and at its sole
option may, for the benefit of the Lenders and the Agent, make advances on
behalf of the Borrower for payment of any and all fees, expenses, charges,
costs, principal and interest incurred hereunder or under the other Loan
Documents. To the extent permitted by law, all amounts advanced by any Lender
hereunder or under other provisions of the Loan Documents shall accrue interest
thereon at the Base Rate.
2.13 DISTRIBUTION OF PAYMENTS. The Agent shall immediately distribute to
each Lender, at such address as each Lender shall designate, such Lender's
interest in all repayments and prepayments of principal and all payments of
interest, loan fees, commitment fees and other fees, expenses and costs received
by the Agent on the same day and in the same type of funds as payment was
received. In the event the Agent does not distribute such payments on the same
day received, such payment shall accrue interest at the Federal Funds Rate,
which shall be payable by the Agent. The Agent shall indemnify and hold the
Borrower harmless from any claim for interest by any Lender under this SECTION
2.13.
2.14 AGENT'S RIGHT TO ASSUME FUNDS AVAILABLE FOR LOANS. Unless the Agent
shall have been notified by any Lender no later than the Business Day prior to
the respective Funding Date of any Loan that such Lender does not intend to make
available to the Agent immediately available funds equal to such Lender's Pro
Rata Share of the total principal amount of such Loan, the Agent may assume that
such Lender has advanced funds in the amount of such Loan to the Agent on the
applicable Funding Date and the Agent may, in reliance upon such assumption,
make available to the Borrower corresponding funds. The Agent agrees to give
prompt notice to the Borrower in the event it advances funds on behalf of a
Lender under this SECTION 2.14; provided, that failure to give such notice shall
in no way limit, restrict or otherwise affect the Borrower's obligations or the
Agent's or any Lender's rights or remedies under this Agreement and the other
Loan Documents. If the Agent has made funds available to the Borrower based on
such assumption and such Loan is not in fact made available to the Agent by such
Lender, the Agent shall be entitled to recover the corresponding amount of such
Loan on demand from such Lender. If such Lender does not promptly pay such
corresponding amount upon the Agent's demand, the Agent shall notify the
Borrower and the Borrower shall repay such Loan to the Agent. The Agent also
shall be entitled to recover from such Lender interest on such Loan in
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respect of each day from the date such Loan was made by the Agent to the
Borrower to the date such corresponding amount is recovered by the Agent at the
Federal Funds Rate, and the Agent shall indemnify and hold harmless the Borrower
from any claim for such interest.
2.15 AGENT'S RIGHT TO ASSUME PAYMENTS WILL BE MADE BY THE BORROWER.
Unless the Agent shall have been notified by the Borrower prior to the date on
which any payment to be made by the Borrower hereunder is due that the Borrower
does not intend to remit such payment, the Agent may, in its discretion, assume
that the Borrower has remitted such payment when so due and the Agent may, in
its discretion and in reliance upon such assumption, make available to each
Lender on such payment date an amount equal to such Lender's Pro Rata Share of
such assumed payment. If the Borrower has not in fact remitted such payment to
the Agent, each Lender shall forthwith on demand repay to the Agent the amount
of such assumed payment made available to such Lender, together with interest
thereon in respect of each date from and including the date such amount was made
available by the Agent to such Lender to the date such amount is repaid to the
Agent at the Federal Funds Rate.
SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY.
3.1 TAXES.
(a) Subject to SECTION 3.1(H) of this Agreement, any and all
payments by the Borrower to the Lenders or the Agent under this Agreement shall
be made free and clear of, and without deduction or withholding for, any and all
present or future taxes, fees, duties, levies, imposts, non-income tax
deductions, non-income tax charges or non-income tax withholdings, whatsoever
imposed by any Governmental Authority, excluding, in the case of each Lender and
the Agent, such taxes as are imposed on or measured by the net income of any
Lender or the Agent by any jurisdiction under the laws of which such Lender or
the Agent, as the case may be, is organized or maintains a Lending Office or any
political subdivision thereof (all such non- excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes").
(b) In addition, the Borrower shall pay any present or future stamp
or documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Documents (hereinafter referred to as "Other Taxes").
(c) Subject to SECTION 3.1(A) and 3.1(H) of this Agreement, if any
Taxes or Other Taxes are directly asserted or imposed against any Lender or the
Agent, the Borrower shall indemnify and hold harmless such Lender and the Agent
for the full amount of the Taxes or Other Taxes (including any Taxes or Other
Taxes asserted or imposed by any jurisdiction on amounts payable under this
SECTION 3.1) paid by such Lender or the Agent and any liability (including
penalties, interest, additions to tax and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted or imposed. Payment under this indemnification shall be made
within thirty (30) days from the date Lender
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or Agent makes written demand therefor (provided that the Borrower shall have
the right to contest in good faith any such Taxes or Other Taxes through
appropriate proceedings). Any Lender in its discretion also may, but shall not
be obligated to, pay such Taxes or Other Taxes and the Borrower will promptly
pay, within fifteen (15) days after written demand therefor by any Lender or
Agent, such additional amounts (including any penalties, interest or expenses)
as is necessary in order that the net amount received by such Lender after the
payment of such Taxes or Other Taxes (including any Taxes on such additional
amount) shall equal the amount such Lender would have received had not such
Taxes or Other Taxes been asserted or imposed.
(d) If the Borrower shall be required by law to deduct or withhold
any Taxes or Other Taxes from or in respect of any sum payable hereunder to any
Lender or the Agent, then, subject to SECTION 3.1(H) of this Agreement:
(i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions
applicable to additional sums payable under this SECTION 3.1) such
Lender or the Agent, as the case may be, receives an amount equal to
the sum it would have received had no such deduction or withholding
been made;
(ii) The Borrower shall make such deduction or withholding; and
(iii) The Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with
applicable law.
(e) Within thirty (30) days after the date of any payment by the
Borrower of Taxes or Other Taxes, the Borrower, upon the Agent's request, shall
furnish to the Agent the original or a certified copy of a receipt evidencing
payment thereof, or other evidence of payment satisfactory to the Agent.
(f) If the Borrower fails to pay any Taxes or Other Taxes when due
to the appropriate taxing authority or fails to furnish to the Agent the
required receipts or other required documentary evidence, the Borrower shall
indemnify the Agent and the Lenders for any incremental Taxes or Other Taxes,
interest or penalties that may become payable by the Agent and any such Lenders
as a result of any such failure.
(g) Each of the Agent and any Lender which is a foreign Person
(i.e., a Person other than a United States Person for United States Federal
income tax purposes) agrees that:
(i) in the case of any Lender which is a "bank" within the
meaning of Section 881(c)(3)(A) of the Code,
(A) it shall, no later than the Closing Date (or, in the
case of a Lender which becomes a party hereto pursuant to SECTION
11.2 of this Agreement after the Closing Date, the date upon which
such Lender becomes a party hereto) deliver to the
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Borrower through the Agent two (2) accurate and complete signed
originals of IRS Form 4224 or any successor thereto ("Form 4224"),
or two (2) accurate and complete signed originals of IRS Form 1001
or any successor thereto ("Form 1001"), as appropriate, in each case
indicating that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees under
this Agreement free from withholding of United States Federal income
tax;
(B) if at any time the Agent or such Lender makes any
changes necessitating a new Form 4224 or Form 1001, it shall within
thirty (30) days after such change becomes effective deliver to the
Borrower through the Agent in replacement for, or in addition to,
the forms previously delivered by it hereunder, two (2) accurate and
complete signed originals of Form 4224; or two (2) accurate and
complete signed originals of Form 1001, as appropriate, in each case
indicating that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees under
this Agreement free from withholding of United States Federal income
tax;
(ii) in the case of any Lender other than a Lender described in
clause (i) above,
(A) it shall, no later than the Closing Date (or, in the
case of a Lender which becomes a party hereto pursuant to SECTION
11.2 of this Agreement after the Closing Date, the date upon which
Lender becomes a party hereto) deliver to the Borrower through the
Agent two (2) accurate and complete signed originals of a
certificate substantially in the form of EXHIBIT F hereto (any such
certificate, a "Non- Bank Lender Tax Certificate") and two (2)
accurate and complete signed originals of IRS Form W-8 or any
successor thereto ("Form W-8") certifying to such Lender's legal
entitlement (assuming compliance by the Borrower with the terms of
this Agreement) to an exemption whereby such Lender is on the date
of delivery thereof entitled to receive payments of principal,
interest and fees under this Agreement free from withholding of
United States Federal income tax;
(B) if at any time the Agent or such Lender makes any
changes necessitating a new Form W-8, it shall within thirty (30)
days after such change becomes effective deliver to the Borrower
through the Agent in replacement for, or in addition to, the forms
previously delivered by it hereunder, two (2) accurate and complete
signed originals of Form W-8 certifying to such Lender's legal
entitlement (assuming compliance by the Borrower with the terms of
this Agreement) to an exemption whereby such Lender is on the date
of delivery thereof entitled to receive payments of principal,
interest and fees under this Agreement free from withholding of
United States Federal income tax;
(iii) it shall, before or within thirty (30) days after the
occurrence of any event (including the passing of time but excluding
any event mentioned in (i) or (ii), above) requiring a change in or
renewal of the most recent Form 4224, Form 1001 or Form W-8
previously delivered by such Lender, deliver to the Borrower through
the
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Agent two (2) accurate and complete original signed copies of Form
4224, Form 1001 or Form W-8 in replacement for the forms previously
delivered by such Lender; and
(iv) it shall, promptly upon any Lender's or the Agent's
reasonable request to that effect, deliver to such Lender or the
Agent (as the case may be) such other forms or similar documentation
as may be required from time to time by any applicable law, treaty,
rule or regulation in order to establish such Lender's tax status
for withholding purposes.
(h) The Borrower will not be required to pay any additional amounts
in respect of United States Federal income tax pursuant to SECTION 3.1(D) of
this Agreement to the Agent or any Lender for the account of any Lending Office
of such Lender:
(i) if the obligation to pay such additional amounts would not
have arisen but for a failure by such Lender to comply with its
obligations under SECTION 3.1(G) of this Agreement in respect of
such Lending Office;
(ii) if such Lender shall have delivered to the Borrower a Form
4224, Form 1001 or Form W-8 in respect of such Lending Office
pursuant to SECTION 3.1(G) of this Agreement, and such Lender shall
not at any time be entitled to exemption from deduction or
withholding of United States Federal income tax in respect of
payments by the Borrower hereunder for the account of such Lending
Office for any reason other than a change in United States law or
regulations or in the official interpretation of such law or
regulations by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the
force of law) after the date of delivery of such form.
(i) If, at any time, the Borrower requests any Lender to deliver any
forms or other documentation in addition to those required pursuant to SECTION
3.1(G)(IV) of this Agreement, then the Borrower shall, on demand of such Lender
through the Agent, reimburse such Lender for any costs and expenses (including
Attorney Costs) reasonably incurred by such Lender in the preparation or
delivery of such forms or other documentation.
(j) If the Borrower is required to pay additional amounts to any
Lender or the Agent pursuant to SECTION 3.1(D) of this Agreement, then such
Lender shall use its reasonable best efforts (consistent with legal and
regulatory restrictions) to change the jurisdiction of its Lending Office so as
to eliminate any such additional payment by such Lender which may thereafter
accrue if such change in the judgment of such Lender is not otherwise
disadvantageous to such Lender.
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3.2 ILLEGALITY.
(a) If any Lender shall determine that the introduction of any
Requirement of Law, or any change in any Requirement of Law or in the
interpretation or administration thereof, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for any Lender or its Lending Office to make LIBOR Loans, then, on notice
thereof by such Lender to the Borrower through the Agent, the obligation of such
Lender to make LIBOR Loans shall be suspended until such Lender shall have
notified the Agent and the Borrower that the circumstances giving rise to such
determination no longer exists.
(b) If a Lender shall determine that it is unlawful to maintain any
LIBOR Loan, the Borrower shall prepay in full all LIBOR Loans of that Lender
then outstanding, together with interest accrued thereon, either on the last day
of the Interest Period thereof if such Lender may lawfully continue to maintain
such LIBOR Loans to such day, or immediately, if such Lender may not lawfully
continue to maintain such LIBOR Loans, together with any amounts required to be
paid in connection therewith pursuant to SECTION 3.5 of this Agreement.
(c) If the Borrower is required to prepay any LIBOR Loan immediately
as provided in SECTION 3.2(B) of this Agreement, then, on the date such
prepayment is required, unless such prepayment is actually made with funds from
another source, the Borrower shall be deemed to have borrowed from the affected
Lender the amount of such prepayment as a Base Rate Loan.
(d) Before giving any notice to the Agent pursuant to this SECTION
3.2, the affected Lender shall designate a different Lending Office with respect
to its LIBOR Loans if such designation will avoid the need for giving such
notice or making such demand and will not, in the judgment of such Lender, be
illegal or otherwise disadvantageous to such Lender.
3.3 INCREASED COSTS. If any Lender shall determine that, due to either
(a) the introduction of or any change (other than any change by way of
imposition of or increase in the Eurodollar Reserve Percentage included in the
calculation of the LIBOR) in or in the interpretation of any Requirement of Law
or (b) the compliance with any guideline or request from any central bank or
other Governmental Authority (whether or not having the force of law), there
shall be any increase in the cost to such Lender of agreeing to make or making,
funding or maintaining any LIBOR Loans, then the Borrower shall be liable for,
and shall from time to time, upon demand therefor by such Lender, pay to such
Lender such additional amounts as are sufficient to compensate such Lender for
such increased costs. Each Lender will promptly notify the Borrower and the
Agent of any event of which it has knowledge occurring after the date hereof,
which will entitle such Lender to compensation pursuant to this SECTION 3.3.
3.4 INABILITY TO DETERMINE RATES. If the Agent shall have determined
that for any reason adequate and reasonable means do not exist for ascertaining
the LIBOR for any requested Interest Period with respect to a proposed LIBOR
Loan or that the LIBOR applicable for any requested Interest Period with respect
to a proposed LIBOR Loan does not adequately and fairly reflect the cost to the
Lenders of funding such Loan, the Agent will forthwith give notice of such
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determination to the Borrower and each Lender. Thereafter, the obligation of the
Lenders to make or maintain LIBOR Loans, as the case may be, hereunder shall be
suspended until the Agent, upon the instruction of the Requisite Lenders,
revokes such notice in writing. Upon receipt of such notice, the Borrower may
revoke any Borrowing Notice or Conversion/Continuation Notice then submitted by
it. If the Borrower does not revoke such notice, the Lenders shall make, convert
or continue the Loans, as proposed by the Borrower, in the amount specified in
the applicable notice submitted by the Borrower, but such Loans shall be made or
continued as or converted to Base Rate Loans instead of LIBOR Loans, as the case
may be.
3.5 PREPAYMENT OF LIBOR LOANS. In the event that the Borrower prepays or
is required to prepay any LIBOR Loan by acceleration or otherwise or fails to
draw down or convert to a LIBOR Loan after giving notice thereof, the Borrower
agrees to reimburse each Lender for its expenses and funding losses due to such
prepayment or failure to draw. The Borrower and the Lenders hereby agree that
such expenses and funding losses shall consist of the sum of the discounted
monthly differences for each month during the applicable or requested Interest
Period, calculated as follows for each such month:
(a) principal amount of such LIBOR Loan times (number of days
between the date of prepayment and the last day in the applicable Interest
Period divided by 360), times the applicable Interest Differential; plus
(b) all actual out-of-pocket expenses (other than those taken into
account in the calculation of the Interest Differential) incurred by the Lenders
and the Agent (excluding allocations of any expense internal to the Lenders and
the Agent) and reasonably attributable to such payment or prepayment; provided
that no prepayment fee shall be payable (and no credit or rebate shall be
required) if the product of the foregoing formula is not a positive number.
3.6 CAPITAL REQUIREMENTS. If any Lender shall determine that any change
after the date of this Agreement in any law, rule, regulation or guideline
adopted pursuant to or arising out of the July 1988 report of the Basle
Committee on Banking Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital Standards", or the
adoption after the date hereof of any other Requirement of Law regarding capital
adequacy, or any change after the date of this Agreement in any of the foregoing
or in the enforcement or interpretation or administration of any of the
foregoing by any Governmental Authority charged with the enforcement or
interpretation or administration thereof, or compliance by any Lender (or any
Lending Office of Lender) or compliance by such Lender's holding company with
any request or directive regarding capital adequacy (whether or not having the
force of law) of any such Governmental Authority, has the effect of reducing the
rate of return on such Lender's capital or on the capital of such Lender's
holding company, if any, as a consequence of the maintaining of any of its
Commitments or the making or maintaining of any Loan under this Agreement to a
level below that which such Lender or such Lender's holding company could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's policies and the policies of such Lender's holding company with
respect to capital adequacy) by an amount deemed to be material, then, upon
written demand by such Lender, the Borrower shall pay to such Lender, from time
to time such additional amount or amounts as will
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compensate such Lender or such Lender's holding company for any such reduction
suffered. Without affecting its rights under this SECTION 3.6 or any other
provision of this Agreement, such Lender agrees that if there is any increase in
any cost to or reduction in any amount receivable by such Lender with respect to
which the Borrower would be obligated to compensate such Lender pursuant to this
SECTION 3.6, such Lender shall give the Borrower thirty (30) days notice thereof
and shall use reasonable efforts to select an alternative Lending Office which
would not result in any such increase in any cost to or reduction in any amount
receivable by such Lender; provided, however, that such Lender shall not be
obligated to select an alternative Lending Office if such Lender determines that
(a) as a result of such selection such Lender would be in violation of any
Requirement of Law, or would incur additional costs or expenses, or (b) such
selection would be inadvisable for regulatory reasons.
3.7 CERTIFICATES OF LENDERS. Any Lender claiming reimbursement or
compensation pursuant to this SECTION 3 shall deliver to the Borrower (with a
copy to the Agent) a certificate setting forth in reasonable detail the amount
payable and the basis therefor to such Lender hereunder, accompanied by any
statements, invoices, or demands in the case of jurisdictions or Governmental
Authorities asserting or imposing a Tax, Other Tax or other amounts owed, with
any confidential information, including amounts, redacted. Such certificate
shall constitute a rebuttable presumption as to the matters set forth therein.
SECTION 4. CONDITIONS PRECEDENT TO LOANS.
4.1 FIRST LOAN. The obligation of each Lender to make the first Loan
hereunder is subject to the satisfaction of the following conditions precedent:
(a) CORPORATE DOCUMENTS. The Lenders shall have received, in form
and substance satisfactory to the Lenders and their respective counsel, a
certificate of the secretary of the Borrower dated as of the Closing Date and
certifying that the following items are attached thereto, are true, complete and
accurate and that the Lenders may conclusively rely on such certificate unless
and until such entity shall have delivered to the Agent a further certificate
amending such prior certificate:
(i) A certified copy of the records of all actions taken by
the Borrower, including all resolutions of such entity authorizing or relating
to the execution, delivery of the Loan Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby;
(ii) A certified copy of the certificate or articles of
incorporation, bylaws and shareholder agreements of the Borrower any other
charter or formation documents of the Borrower certified by a Responsible Person
of the Borrower as being in full force and effect;
(iii) Certificate of the Secretary of State of each of the
States set forth on SCHEDULE 5.1 dated as of a date close to the Closing Date
stating that the Borrower is a corporation in good legal standing under the laws
of States indicated on such Schedule as applicable thereto;
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(iv) Certificates of the Franchise Tax Board of the States set
forth on SCHEDULE 5.1, dated as of a date close to the Closing Date, stating
that the Borrower is in good standing under the laws of the State listed on such
schedule;
(v) Certificates of incumbency together with specimen
signatures with respect to the authorized representatives of the Borrower; and
(vi) Such other documents relating to the Borrower and its
Subsidiaries as the Lenders reasonably may request.
(b) CREDIT AND COLLATERAL DOCUMENTS. The Agent shall have received,
for the benefit of the Lenders, in form and substance satisfactory to the
Lenders, the following dated as of the Closing Date:
(i) NOTES. Separate Notes, duly executed by the Borrower to
each of the Lenders in the stated principal amount of such Lender's Commitment.
(ii) BORROWING NOTICE. If a Borrowing will occur on the
Closing Date, a Borrowing Notice duly executed and delivered by a Responsible
Person of the Borrower requesting Loans to be funded at Closing.
(iii) BRINGDOWN CERTIFICATE. If the date of execution of this
Agreement precedes the Closing Date, a certificate, dated as of the Closing
Date, of the chief financial officer of the Borrower to the effect that (i) the
representations and warranties of the Borrower contained in SECTION 5 are true,
accurate and complete in all material respects as of the Closing as though made
on such date (except to the extent such representations and warranties
specifically relate to an earlier date, in which case they shall be true,
accurate and complete in all material respects as of such earlier date) and (ii)
no Event of Default or Potential Event of Default under this Agreement has
occurred and is continuing.
(iv) COMPLIANCE CERTIFICATE. A Compliance Certificate dated
the Closing Date and measured as of June 30, 1997, on a pro forma basis duly
executed and delivered by the chief financial officer or controller of the
Borrower, with appropriate insertions.
(c) OPINIONS OF COUNSEL. The Agent shall have received originally
executed legal opinions of counsel to the Borrower in form and substance
satisfactory to the Lenders and their respective counsel, dated the Closing Date
and addressed to Lenders.
(d) UCC SEARCHES. Lenders shall have received certified copies,
dated close to the Closing Date, of requests for copies or information (Form
UCC-3 or equivalent), or certificates, dated close to the Closing Date,
satisfactory to Lenders, of a UCC Reporter Service, listing all effective
financing statements which name the Borrower or any of the Borrower's
Subsidiaries as debtor and which are filed in the appropriate offices in the
States in which are located the chief executive offices or any offices or
facilities of any of them, together with copies
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of such financing statements, and accompanied by written evidence (including UCC
termination statements) satisfactory to the Lenders that the Liens indicated in
any such financing statements are either permitted under SECTION 7.1 of this
Agreement or have been terminated or released.
(e) INSURANCE. The Agent shall have received from the Borrower, in
form and substance satisfactory to the Lenders, certificates, binders and other
instruments or documents evidencing the insurance coverage and limits maintained
by the Borrower, in each case in compliance with the requirements of SECTION 6.3
of this Agreement, showing that the Agent has been named loss payee under all
policies of property insurance and as an additional insured under all policies
of liability insurance.
(f) FINANCIAL STATEMENTS; PROJECTIONS. The Agent shall have received
(i) audited consolidated financial statements of the Borrower and its
consolidated Subsidiaries dated as of December 31, 1996 showing financial
results substantially in conformance with those presented to the Lenders
previously, (ii) company-prepared consolidated financial statements of the
Borrower and its consolidated Subsidiaries for the Fiscal Quarter ended June 30,
1997 showing financial results substantially in conformance with those presented
to the Lenders previously and (iii) company-prepared financial projections for
the Borrower and its consolidated Subsidiaries for the Fiscal Years ending
December 31, 1997, through June 30, 1999 to include projected income statements,
balance sheets, statement of cash flows and schedule of planned capital
expenditures, in each case on a monthly basis for the upcoming Fiscal Year and
including a substantive description of each of the material underlying
assumptions used in preparing such consolidated financial forecasts, in form and
detail reasonably satisfactory to the Lenders;
(g) NO MATERIAL ADVERSE CHANGE. There shall have occurred no
material adverse change, as determined by Lenders, since December 31, 1996 in
the Property, operations, business prospects, profits or financial condition of
the Borrower.
(h) NO LITIGATION. Except as disclosed and described in the
Schedules hereto, there shall not have been instituted or threatened any
material litigation or proceeding in any court or administrative forum or before
any arbitrator to which the Borrower or any of its Subsidiaries are, or are
threatened with becoming, a party, which in the Lenders' sole discretion is
determined, after consultation with counsel, to pose a significant risk of
resulting in a Material Adverse Effect.
(i) CONSENTS. The Agent shall have received written evidence
reasonably satisfactory to the Lenders that all government and third party
approvals and consents necessary to the making or maintenance of the Loans
hereunder and the carrying on of the business of the Borrower have been
obtained.
(j) ACCURATE INFORMATION. The information provided to the Agent or
the Lenders by or on behalf of the Borrower and its Subsidiaries, as well as the
representations and warranties of the various parties as contained in the Loan
Documents shall be true, accurate and complete in all material respects and the
projections shall be reasonable.
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(k) FEE LETTER. The Agent shall have received, on behalf of the
Lenders, the fees and any other items required pursuant to the Fee Letter.
(l) AGENT'S FEE LETTER. The Agent shall have received the fees from
the Borrower required under the Agent's Fee Letter.
(m) FEES AND COSTS. The Agent shall have received an amount equal to
the aggregate of the Agent's good faith estimate of all fees (including Attorney
Costs), costs, expenses and other disbursements incurred by the Agent and the
Documentation Agent in connection with the Closing of the transactions
contemplated under this Agreement and each of the other Loan Documents, which
payment shall be subject to post-Closing adjustment following receipt by Agent
of all final invoices.
(n) OTHER DOCUMENTS. The Lenders shall have received such other
instruments, documents, information and items from the Borrower as reasonably
requested by the Lenders.
4.2 ALL LOANS. Unless waived in writing by Requisite Lenders, the
obligation of the Lenders to make any Loan is subject to the satisfaction of the
following further conditions precedent:
(a) PERFORMANCE OF AGREEMENTS. The Borrower shall have performed all
of their agreements under the Loan Documents and each of the other Loan
Documents to be performed on or before such Funding Date.
(b) NO EVENT OF DEFAULT OR POTENTIAL EVENT OF DEFAULT. No event
shall have occurred and be continuing or would result from the making of any
Loans on such Funding Date which constitutes an Event of Default or Potential
Event of Default.
(c) REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in the Loan Documents shall be true, accurate and complete
in all material respects with the same effect as though such representations and
warranties had been made on and as of such Funding Date (except to the extent
such representations and warranties specifically relate to an earlier date, in
which case they shall be true, accurate and complete in all material respects as
of such earlier date).
(d) OTHER DOCUMENTS. The Agent shall have received such other
instruments and documents as it may have reasonably requested from the Borrower
in connection with the Loans to be made on such date.
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SECTION 5. BORROWER'S REPRESENTATIONS AND WARRANTIES.
The Borrower hereby warrants and represents to the Agent and each Lender
for itself and each of its Material Subsidiaries as follows and agrees that each
of said representations and warranties shall be deemed to survive until full,
complete and indefeasible payment and performance of the Obligations and shall
apply anew to each Borrowing hereunder:
5.1 EXISTENCE AND POWER. The Borrower and each of its Material
Subsidiaries are corporations duly organized and validly existing in good
standing under the laws of the respective jurisdictions of incorporation and are
duly qualified and licensed as a foreign corporation and authorized to do
business in each jurisdiction where their respective ownership of Property or
conduct of business requires such qualification and where the failure to so
qualify could with reasonable likelihood result in a Material Adverse Effect,
and in each jurisdiction where the Borrower or any of its Material Subsidiaries
maintain an office (a list of all such States is set forth on SCHEDULE 5.1); the
Borrower and each of its Material Subsidiaries have the corporate power and
authority, rights and franchises to own their respective Property and assets and
to carry on their respective businesses as now conducted; the Borrower and each
of its Material Subsidiaries have the corporate power and authority to execute,
deliver and perform the terms of the Loan Documents to which they are a party
and all other instruments and documents contemplated hereby or thereby.
5.2 LOAN DOCUMENTS AND NOTES AUTHORIZED; BINDING OBLIGATIONS. The
execution, delivery and performance of this Agreement and each of the other Loan
Documents to which it is a party and the execution, delivery and payment of the
Notes have been duly authorized by all necessary and proper action on the part
of the Borrower. The Loan Documents to which the Borrower is a party constitute
legally valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, except as enforcement
thereof may be limited by bankruptcy, insolvency or other laws affecting the
enforcement of creditors' rights generally.
5.3 NO CONFLICT. The execution, delivery and performance of this
Agreement and each of the other Loan Documents and the execution, delivery and
payment of the Notes will not contravene any provision of the Borrower's
certificate or articles of incorporation or bylaws or any of its Material
Subsidiaries' charter documents; will not contravene, conflict with or violate
any applicable law or regulation, or any order, writ, judgment, injunction,
decree, determination or award of any Governmental Authority; will not violate
or result in the breach of, or constitute a default under any Contracts (as
defined in SECTION 5.7) other than as set forth on SCHEDULE 5.7. The Borrower
and each of its Material Subsidiaries are not in violation or breach of or
default under any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award or any contract, agreement, lease, license,
indenture or other instrument to which they are a party, the non-compliance
with, the violation or breach of or the default under which could with
reasonable likelihood result in a Material Adverse Effect.
5.4 SUBSIDIARIES; CAPITAL STRUCTURE. SCHEDULE 5.4 sets forth and
identifies all Subsidiaries of the
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Borrower as of the Closing Date and all Material Subsidiaries of the Borrower
from time to time existing, together with the jurisdiction of organization, the
authorized and issued Stock of each such Subsidiary, by class and number and
including the percentage of each class legally owned or to be owned by the
Borrower as of the Closing Date. SCHEDULE 5.4 further sets forth the authorized
and issued Stock of Borrower by class and number and including the holders of
such Stock and the percentage of each class legally owned or to be owned by such
holders as of the Closing Date and on a fully diluted basis. Except as set forth
in SCHEDULE 5.4, there are no options, warrants, rights to purchase or similar
rights, or plans to issue any of the foregoing, covering the Stock of the
Borrower or any of the Borrower's Material Subsidiaries.
5.5 FINANCIAL CONDITION. The Borrower's financial statements as of June
30, 1997, a copy of which heretofore has been delivered to the Agent by the
Borrower, and all other financial statements and other data submitted in writing
by the Borrower to the Agent or any Lender in connection with the request for
credit granted by this Agreement, are true, accurate and complete in all
material respects, and said financial statements and other data fairly present
the consolidated financial condition of the Borrower as of the date thereof, and
have been prepared in accordance with GAAP, subject to year-end audit
adjustments and the absence of footnotes. There has been no material adverse
change in the business, assets, operations, prospects or financial or other
condition of the Borrower since June 30, 1997. The financial projections
delivered or to be delivered by the Borrower to the Agent or any Lender in
connection with the Loan Documents have been prepared on a basis consistent with
the historical financial statements described above, except as described
therein, and are based on the good faith estimates and assumptions of management
of the Borrower, and the Borrower has no reason to believe that such estimates
and assumptions are not reasonable.
5.6 LITIGATION. Except as set forth on SCHEDULE 5.6, there are no
claims, actions, suits, proceedings or other litigation pending or, to the best
of the Borrower's knowledge, after Due Inquiry, threatened against the Borrower
or any of its Material Subsidiaries at law or in equity before any Governmental
Authority or, to the best of the Borrower's knowledge, after Due Inquiry, any
investigation by any Governmental Authority of the Borrower's or any of its
Material Subsidiaries' affairs, Properties or assets. Except as set forth on
SCHEDULE 5.6, neither the Borrower nor any of its Material Subsidiaries has any
Contingent Liabilities which would, if adversely determined, have a Material
Adverse Effect and which are not provided for or disclosed in the financial
statements delivered to the Agent pursuant to SECTION 5.5.
5.7 CONSENTS AND APPROVALS. Except as set forth on SCHEDULE 5.7, no
approval, authorization or consent of any trustee or holder of any indebtedness
or obligation of the Borrower or of any other Person under any material
agreement, contract, lease or license or similar document or instrument to which
the Borrower or any of its Material Subsidiaries is a party or by which the
Borrower or any such Material Subsidiary is bound (collectively, "Contracts"),
is required to be obtained by the Borrower or any such Material Subsidiary in
order to make or consummate the transactions contemplated under the Loan
Documents. Except as further set forth in SCHEDULE 5.7, all material consents
and approvals of, filings and registrations with, and other actions in respect
of, all Governmental Authorities required to be obtained by the Borrower or any
of its Material Subsidiaries in order to make or consummate the
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transactions contemplated under the Loan Documents have been, or prior to the
time when required will have been, obtained, given, filed or taken and are or
will be in full force and effect.
5.8 SOLVENCY. As of the Closing and after giving effect to the
transactions contemplated by this Agreement and the other Loan Documents,
including all of the Loans made and to be made hereunder, and thereafter, the
Borrower is Solvent and each of its Material Subsidiaries is Solvent. For
purposes of this Agreement, "Solvent" means that (a) the fair market value of
the Borrower's assets will be in excess of the amount that will be required to
be paid on or in respect of the existing debts and other liabilities (including
contingent liabilities) of the Borrower as they mature; (b) the Borrower shall
not have unreasonably small capital to carry on its business as conducted or as
proposed to be conducted; (c) the Borrower does not intend to or believe that it
will incur debts beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be received by it and the amounts
to be payable on or in respect of its obligations); (d) the Borrower does not
intend to hinder, delay or defraud either present or future creditors; and (e)
the Borrower will have received fair consideration and reasonably equivalent
value in exchange for incurring its Obligations under the Loan Documents.
5.9 EMPLOYMENT AND LABOR AGREEMENTS. Except as set forth on SCHEDULE
5.9, there are no employment agreements covering senior management of the
Borrower or any of its Material Subsidiaries and there are no collective
bargaining agreements or other labor agreements covering any employees of the
Borrower or any such Subsidiary. A true and complete copy of each any such
agreements has been furnished to the Agent.
5.10 AGREEMENTS WITH AFFILIATES AND OTHER AGREEMENTS. Except as
disclosed on SCHEDULE 5.10, neither the Borrower nor any of its Material
Subsidiaries has entered into and, as of the Closing does not contemplate
entering into, any material agreement or contract with any Affiliate of the
Borrower other than the employment agreements disclosed on SCHEDULE 5.9. Neither
the Borrower nor any of its Material Subsidiaries is a party to or is bound by
any Contract or is subject to any restriction under its respective charter or
formation documents, which has, or is likely in the future to have, a Material
Adverse Effect.
5.11 ERISA. All Employee Benefit Plans of the Borrower are listed on
SCHEDULE 5.11. All Pension Plans of the Borrower, including terminated Pension
Plans, that are intended to be qualified under Section 401(a) of the Code have
been determined by the IRS to be qualified. All Pension Plans of the Borrower
existing as of the date hereof continue to be so qualified. No "reportable
event" (as defined in Section 4043 of ERISA) has occurred and is continuing with
respect to any Pension Plan of the Borrower for which the thirty-day notice
requirement may not be waived other than those of which the appropriate
Governmental Authority has been notified. All Employee Benefit Plans of the
Borrower have been operated in all material respects in accordance with their
terms and applicable law, including ERISA, and no "prohibited transaction" (as
defined in ERISA and the Code) that would result in any material liability to
the Borrower or any of its Subsidiaries has occurred with respect to any such
Employee Benefit Plan.
5.12 LABOR MATTERS. There are no strikes or other labor disputes against
the Borrower
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or any of its Material Subsidiaries or, to the best of the Borrower's knowledge
threatened against the Borrower or any of its Material Subsidiaries, which would
have a Material Adverse Effect. Hours worked by and payment made to employees of
the Borrower or, to the best of the Borrower's knowledge, after Due Inquiry, or
any of Borrower's Material Subsidiaries have not been in violation of the Fair
Labor Standards Act or any other applicable law dealing with such matters which
could with reasonable likelihood result in a Material Adverse Effect. All
payments due from the Borrower on account of employee health and welfare
insurance which could with reasonable likelihood result in a Material Adverse
Effect if not paid have been paid or, if not due, accrued as a liability on the
books of the Borrower.
5.13 MARGIN REGULATIONS. The Borrower does not own any "margin
security," as that term is defined in Regulations G and U of the Federal Reserve
Board, and the proceeds of the Loans under this Agreement will be used only for
the purposes contemplated hereunder. None of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin security, for
the purpose of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose which
might cause any of the Loans under this Agreement to be considered a "purpose
credit" within the meaning of Regulations G, T, U and X. The Borrower will not
take or permit any agent acting on its behalf to take any action which might
cause this Agreement or any document or instrument delivered pursuant hereto to
violate any regulation of the Federal Reserve Board.
5.14 TAXES. All material federal, state, local and foreign tax returns,
reports and statements required to be filed by the Borrower and, to the best of
the Borrower's knowledge, after Due Inquiry, by any of the Borrower's Material
Subsidiaries have been filed with the appropriate Governmental Authorities and
all Charges and other impositions shown thereon to be due and payable by the
Borrower or such Material Subsidiary have been paid prior to the date on which
any fine, penalty, interest or late charge may be added thereto for nonpayment
thereof, or any such fine, penalty, interest, late charge or loss has been paid,
or the Borrower or such Material Subsidiary is contesting its liability
therefore in good faith and has fully reserved all such amounts in the financial
statements provided to the Agent pursuant to SECTION 6.1. The Borrower and each
of its Material Subsidiaries has paid when due and payable all material Charges
upon the books of the Borrower or such Material Subsidiary except as permitted
pursuant to SECTION 6.4. Proper and accurate amounts have been withheld by the
Borrower and each of its Material Subsidiaries from its employees for all
periods in full and complete compliance with the tax, social security and
unemployment withholding provisions of applicable federal, state, local and
foreign law and such withholdings have been timely paid to the respective
Governmental Authorities. The Borrower and each of its Material Subsidiaries has
not executed or filed with the IRS or any other Governmental Authority any
agreement or other document extending, or having the effect of extending, the
period for assessment or collection of any Charges.
5.15 TRADEMARKS, PATENTS, COPYRIGHTS AND LICENSES. The Borrower and each
of its Material Subsidiaries possess and either own or have the right to use to
the extent required all necessary trademarks, trade names, copyrights, patents,
patent rights, and licenses which are material to the conduct of their
respective businesses as now operated, and each such trademark,
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tradename, copyright, patent and patent right is listed, together with
applicable federal, state or foreign application and registration numbers, on
SCHEDULE 5.15. The Borrower and each of its Material Subsidiaries conduct their
respective business without infringement or, to the best of the Borrower's
knowledge, after Due Inquiry, claim of infringement of any trademark, trade
name, trade secret, service mark, patent, copyright, license or other
intellectual property Right of Others, except where such infringement or claim
of infringement could not with reasonable likelihood result in a Material
Adverse Effect. There is no infringement or, to the best of the Borrower's
knowledge, after Due Inquiry, claim of infringement by others of any material
trademark, trade name, trade secret, service mark, patent, copyright, license or
other intellectual property right of the Borrower or any of its Material
Subsidiaries.
5.16 NO BROKERS. No broker or finder acting on behalf of the Borrower
brought about the obtaining, making or closing of this Agreement or the credit
made available by the Lenders to the Borrower pursuant to this Agreement, and
neither the Borrower nor any Affiliate of the Borrower has any obligation to pay
any Person in respect of any finder's or brokerage fees in connection with the
credit facilities contemplated by this Agreement.
5.17 FULL DISCLOSURE. As of the Closing Date, no information contained
in this Agreement, the other Loan Documents or, to the best of the Borrower's
knowledge, any other documents or written materials furnished by or on behalf of
the Borrower to the Agent or any Lender pursuant to the terms of this Agreement
or any of the other Loan Documents contains any untrue or inaccurate statement
of a material fact or omits to state a material fact necessary to make the
statement contained herein or therein not misleading in light of the
circumstances under which made.
5.18 OTHER REGULATIONS. The Borrower is not: (a) a "public utility
company" or a "holding company," or an "affiliate" or a "subsidiary company" of
a "holding company," or an "affiliate" of such a "subsidiary company," as such
terms are defined in the Public Utility Holding Company Act or (b) an
"investment company," or an "affiliated person" of, or a "promoter" or
"principal underwriter" for, an "investment company," as such terms are defined
in the Investment Company Act. The making of the Loans hereunder and the
application of the proceeds and repayment thereof by the Borrower and the
performance of the transactions contemplated by this Agreement and the other
Loan Documents will not violate any provision of the Investment Company Act, or
any rule, regulation or order issued by the SEC thereunder.
5.19 HAZARDOUS MATERIALS. Neither the Borrower nor any of its Material
Subsidiaries has used Hazardous Materials (as defined hereinafter) on or
affecting any premises at which the Borrower or any of its Material Subsidiaries
has a place of business (collectively and singly the "premises") in any manner
which violates federal, state or local laws, ordinances, statutes, rules,
regulations or judgments governing the use, storage, treatment, handling,
manufacture, transportation, or disposal of Hazardous Materials ("Environmental
Laws"). The Borrower has never received any notice ("Environmental Complaint")
of any violations of Environmental Laws (and, within five (5) days of receipt of
any Environmental Complaint the Borrower shall give the Agent a copy thereof),
and to the best of the Borrower's knowledge, there have been no actions
commenced or threatened by any party for noncompliance with any Environmental
Laws.
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SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees that, so long as any of the
Commitments shall be available and until the full, complete and indefeasible
payment and performance of the Obligations, unless Requisite Lenders shall
otherwise consent in writing, the Borrower shall, and shall cause each of its
Subsidiaries, to do all of the following:
6.1 RECORDS AND REPORTS. Maintain a system of accounting administered in
accordance with sound business practices to permit preparation of financial
statements in conformity with GAAP, and deliver each of the following to Agent:
(a) QUARTERLY FINANCIAL STATEMENTS. As soon as practicable and in
any event within forty-five (45) days after the end of each Fiscal Quarter,
consolidated and consolidating balance sheets of the Borrower and its
consolidated Subsidiaries as at the end of such period and the related
consolidated and consolidating statements of income, stockholders' equity and
cash flows of the Borrower and its Subsidiaries for such quarter, setting forth
in each case in comparative form the consolidated and consolidating figures for
the corresponding periods of the previous Fiscal Year for the same periods, all
in reasonable detail and certified by the chief financial officer of the
Borrower that they (i) are complete and fairly present the financial condition
of the Borrower as at the dates indicated and the results of its operations and
changes in its cash flow for the periods indicated, (ii) disclose all
liabilities that are required to be reflected or reserved against under GAAP,
whether liquidated or unliquidated, fixed or contingent and (iii) have been
prepared in accordance with GAAP, subject to changes resulting from audit and
normal year-end adjustment;
(b) ANNUAL AUDITED FINANCIAL STATEMENTS. As soon as practicable and
in any event within ninety (90) days after the end of each Fiscal Year,
consolidated and consolidating balance sheets of the Borrower and its
consolidated Subsidiaries as at the end of such Fiscal Year and the related
consolidated and consolidating statements of income, stockholders' equity and
cash flows of the Borrower and its consolidated Subsidiaries for such Fiscal
Year, setting forth in each case in comparative form the consolidated and
consolidating figures for the previous year, all in reasonable detail and (i) in
the case of such consolidated financial statements, accompanied by a report
thereon of Deloitte and Touche Firm, or other independent public accountants of
recognized national standing selected by the Borrower and reasonably
satisfactory to Requisite Lenders, which report shall be unqualified and shall
not contain an adverse opinion, or a disclaimer of opinion, shall not express
doubts about the ability of the Borrower or its Subsidiaries to continue as a
going concern, or be qualified or limited because of a restricted or limited
examination by such accountant of any material portion of the Borrower's and its
consolidated Subsidiaries' records and shall state that such consolidated
financial statements present fairly the financial position of such Person as at
the dates indicated and the results of operations and changes in financial
position for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years (except as otherwise stated therein) and that the
examination by such auditors in connection with such consolidated and
consolidating financial statements has been made in accordance with generally
accepted auditing
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standards;
(c) CERTAIN FILINGS AND OTHER INFORMATION. Promptly after the
sending or filing thereof, copies of all reports or filings which the Borrower
or any of its Subsidiaries sends to any of their securities holders, the
Securities and Exchange Commission or any securities exchange on which the
Borrower's or any of its Subsidiaries' securities are listed or traded and any
and all press releases which the Borrower or any of its Subsidiaries issues or,
as reasonably requested by the Agent or the Lenders, other information (whether
or not publicly filed);
(d) BORROWING BASE CERTIFICATES AND ACCOUNTS AGINGS. As soon as
practicable and in any event within fifteen (15) days after the end of any
Fiscal Quarter at any time during which the aggregate Loans outstanding plus the
Letter of Credit Undrawn Amount exceed $50,000,000, a Borrowing Base
Certificate, aging schedule of the Borrower's and its Subsidiaries' Accounts as
of the last day of such preceding Fiscal Quarter and such other information as
shall be requested by the Agent or Requisite Lenders, each duly executed by the
chief financial officer or controller of the Borrower, with appropriate
insertions satisfactory to the Agent, in its sole discretion;
(e) COMPLIANCE CERTIFICATES. As soon as practicable and in any event
within forty-five (45) days after the end of each Fiscal Quarter, a Compliance
Certificate dated as of the last day of such period, duly executed by the chief
financial officer or controller of the Borrower;
(f) FINANCIAL FORECASTS. No later than forty-five (45) days
following the close of each Fiscal Year, consolidated and consolidating
financial forecasts, including projected income statements, balance sheets,
statement of cash flows and schedule of planned capital expenditures, in each
case on a quarterly basis for the upcoming Fiscal Year and including a
substantive description of each of the material underlying assumptions used in
preparing such consolidated and consolidating financial forecasts, in form and
detail reasonably satisfactory to the Lenders;
(g) AUDITORS' LETTERS. Promptly upon receipt thereof, copies of all
material reports submitted to the Borrower by its independent public accountants
in connection with each annual, interim or special audit of the financial
statements of the Borrower or its Subsidiaries made by such accountants,
including, without limitation, the comment letter submitted by such accountants
to management in connection with their annual audit;
(h) NOTICES. Promptly upon any Responsible Person of the Borrower
obtaining actual knowledge (i) of any condition or event which constitutes an
Event of Default or Potential Event of Default under this Agreement, (ii) that
any Person has given any notice or taken any other action with respect to a
claimed default or event or condition of the type referred to in SECTION 9.1(C)
of this Agreement, (iii) of the institution of any litigation or investigation
by any Governmental Authority involving an alleged liability (regardless of
whether insured) of the Borrower or any of its
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Subsidiaries equal to or greater than $250,000 or any adverse determination in
any litigation involving a potential liability of the Borrower or any of its
Subsidiaries equal to or greater than $250,000, (iv) of a material adverse
change in the business, operations, properties, assets or condition (financial
or otherwise) of the Borrower and its Subsidiaries, taken as a whole or (v) of
any action or event which might have a Material Adverse Effect, (vi) of the
change of the executive office or the principal place of business of Borrower or
any Subsidiary or of the location of a Borrower's or any Subsidiary's books and
records, (vii) of any change in the name of the Borrower or any Subsidiary, or
(viii) of any change in the Borrower's or any Subsidiary's certified accountant
or any resignation, or decision not to stand for re-election, by any member of
its Board of Directors, a certificate of a Responsible Person specifying the
notice given or action taken by such Person and the nature of such claimed
default, Event of Default, Potential Event of Default, event or condition and
what action has been taken, is being taken and is proposed to be taken with
respect thereto;
(i) TERMINATION EVENTS; PROHIBITED TRANSACTIONS. Promptly upon
becoming aware of the occurrence of any (i) Termination Event in connection with
any Pension Plan or (ii) "prohibited transaction" (as such term is defined in
ERISA and the Code) in connection with any Employee Benefit Plan or any trust
created thereunder, a written notice specifying the nature thereof, what action
has been taken, is being taken or is proposed to be taken with respect thereto,
and, when known, any action taken or threatened by the IRS or the PBGC with
respect thereto;
(j) ERISA. With reasonable promptness, copies of (i) all notices
received by the Borrower or any of its ERISA Affiliates of the PBGC's intent to
terminate any Pension Plan or to have a trustee appointed to administer any
Pension Plan, (ii) each Schedule B (Actuarial Information) to the annual report
(Form 5500 Series) filed by the Borrower or any of its ERISA Affiliates with the
IRS with respect to each Pension Plan covering employees of the Borrower or any
of its Subsidiaries and (iii) all notices received by the Borrower or any of its
ERISA Affiliates from a Multiemployer Plan sponsor concerning the imposition or
amount of withdrawal liability pursuant to Section 4202 of ERISA;
(k) PENSION PLANS. Promptly upon receipt, any challenge by the IRS
to the qualification under Section 401 or 501 of the Code of any Pension Plan;
(l) TAX RETURNS. Upon the request of the Agent or Requisite Lenders,
copies of all federal, state, local and foreign tax returns and reports in
respect of income, franchise or other taxes on or measured by income (excluding
sales, use or like taxes) filed by or on behalf of the Borrower;
(m) REAL ESTATE NOTICES. Promptly upon receipt, copies of any
material notices, including, without limitation, notices of default, received by
the Borrower from any lessor of real estate; and
(n) OTHER INFORMATION. With reasonable promptness, such other
information and data, including, without limitation, lists of Property and
accounts, budgets, agreements with insurers, forecasts and reports, as from time
to time may be reasonably requested by the Agent or Requisite Lenders.
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All financial statements to be delivered by the Borrower to the Agent
pursuant to this SECTION 6.1 will present fairly the financial condition of the
applicable Person as of the date thereof; will disclose all liabilities of the
Borrower and its consolidated Subsidiaries that are required to be reflected or
reserved against under GAAP, whether liquidated or unliquidated, fixed or
contingent; and will have been prepared in accordance with GAAP. All tax returns
submitted to the Agent will, to the best of the Borrower's knowledge, be true
and correct. The Borrower hereby agrees that each time it submits a financial
statement or tax return to the Agent, the Borrower shall be deemed to represent
and warrant to the Lenders that such financial statement or tax return complies
with all of the preceding requirements set forth in this paragraph, as
appropriate.
6.2 CORPORATE RIGHTS; FACILITIES; CONDUCT OF BUSINESS.
(a) MAINTENANCE OF EXISTENCE AND RIGHTS. Maintain and preserve in
full force and effect its corporate existence and all rights, licenses, leases,
qualifications, privileges, franchises and other authority adequate for the
conduct of its business except where the lapsing of any of the foregoing could
not with reasonable likelihood have a Material Adverse Effect;
(b) MAINTENANCE OF PROPERTIES. Maintain, preserve and protect its
material properties, assets, equipment and facilities in good order and working
repair and condition (taking into consideration ordinary wear and tear) and from
time to time make, or cause to be made, all needful and proper repairs, renewals
and replacements thereto;
(c) MAINTENANCE OF INTELLECTUAL PROPERTY. Maintain, preserve and
protect all of its rights to enjoy and use material trademarks, trade names,
service marks, patents, copyrights, licenses, leases, franchise agreements and
franchise registrations; and
(d) MAINTENANCE OF BUSINESS. Conduct its business in an orderly
manner without voluntary interruption.
6.3 INSURANCE. Maintain with financially sound and reputable companies,
reasonably satisfactory to the Agent, such insurance in such amounts and subject
to such deductibles and other terms as is usual in the businesses conducted and
previously conducted by the Borrower or its Subsidiaries, covering, without
limitation, product liability, fire, theft, public liability, personal injury,
property damage, worker's compensation and extended coverage insurance covering
the Borrower's and such Subsidiaries' respective Property and assets, as well as
business interruption and hazard insurance. The property insurance required
hereunder of Borrower shall contain a loss payable endorsement (form BFU 438 or
equivalent) in favor of the Agent on behalf of the Lenders and satisfactory to
the Agent and obtained at the Borrower's expense and shall name each Lender as
an additional insured. The Borrower shall, if so requested by the Agent or
Requisite Lenders, deliver to the Agent, as often as the Agent may reasonably
request, schedules identifying all insurance then in effect and certificates
evidencing such insurance.
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6.4 TAXES AND OTHER LIABILITIES. Promptly pay and discharge all Charges
when due and payable, except (a) such as may be paid thereafter without penalty
or (b) such as may be contested in good faith by appropriate proceedings and for
which an adequate reserve has been established and is maintained in accordance
with GAAP. The Borrower shall promptly notify the Agent of any material
challenge, contest or proceeding pending by or against the Borrower or any of
the Borrower's Subsidiaries before any taxing authority.
6.5 INSPECTION RIGHTS; ASSISTANCE. Upon one (1) day's notice if an Event
of Default exists, and upon seven (7) days' notice if no Event of Default
exists, from time to time during normal business hours and without unreasonably
interfering with the Borrower's normal business activities, permit the Agent or
any Lender or any agent, representative or employee thereof, to examine and make
copies of and abstracts from the financial records and books of account of, and
visit the Properties of, the Borrower and to discuss the affairs, finances and
accounts of the Borrower with any of its executive officers to the extent any of
the foregoing may be relevant to the Borrower's obligations under the Loan
Documents. All out of pocket expenses connected with one inspection and
examinations shall be at the Borrower's expense. Provided that if no Event of
Default or potential Event of Default has occurred, Borrower shall only be
obligated to reimburse the Agent(s) or any Lender's out of pocket expenses for
one examination per year. Within 45 days after the end of each Fiscal Year, the
Borrower shall conduct a meeting of Lenders to discuss such Fiscal Year's
results and the financial condition of the Borrower at which shall be present
the chief executive officer and the chief financial officer of the Borrower.
Such meetings shall be held at a time and place convenient to the Lenders and
the Borrower.
6.6 COMPLIANCE WITH LAWS. Exercise all due diligence in order to comply
in all material respects with the requirements of all applicable laws, rules,
regulations, orders, writs, judgments, decrees, determinations and awards of any
Governmental Authority, non-compliance with which would have a Material Adverse
Effect; provided, however, that the Borrower may contest any act, regulation,
order, decree or direction in any reasonable manner which shall not, in the
reasonable opinion of Requisite Lenders, adversely affect the Lenders' rights
hereunder.
6.7 MATERIAL AGREEMENTS. Comply in all respects with the terms of each
agreement to which it is a party, except where all instances of any failure to
so comply could not, in the aggregate, be reasonably likely to result in a
Material Adverse Effect.
6.8 SUPPLEMENTAL DISCLOSURE. From time to time as may be necessary (in
the event that such information is not otherwise delivered by the Borrower to
the Agent or the Lenders pursuant to this Agreement), so long as there are
Obligations outstanding hereunder, disclose to the Agent in writing any material
matter hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described by the Borrower
in this Agreement or any of the other Loan Documents (including all Schedules
and Exhibits hereto or thereto) or which is necessary to correct any information
set forth or described by the Borrower hereunder or thereunder or in connection
herewith which has been rendered inaccurate thereby.
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6.9 ENVIRONMENTAL CONDITION, INVESTIGATIONS AND INDEMNIFICATION.
(a) Use its properties and assets in such a manner as to comply with
all Environmental Laws and shall not use its properties and assets for the
disposal of, or to produce, store, handle, treat, release, or transport, any
Hazardous Materials other than in accordance with Environmental Laws; take
reasonable efforts to ensure that (i) none of its properties or assets will be
designated or identified in any manner pursuant to any Environmental Laws as a
Hazardous Materials disposal site, or a candidate for closure pursuant to any
Environmental Laws and (ii) no Lien arising under any Environmental Laws will
attach to any revenues or to any real or personal property owned by the Borrower
or its Subsidiaries.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions necessary to clean up and
remove all Hazardous Materials on or affecting the premises, whether caused by
the Borrower or a third party, in accordance with all Environmental Laws to the
satisfaction of the Agent and Requisite Lenders, and in accordance with the
orders and directives of all federal, state, and local governmental authorities.
6.10 ENFORCEMENT OF COVENANTS NOT TO COMPETE. Preserve, protect and
defend, to the extent permitted by applicable law and consistent with good
business judgement, all of its rights with respect to any covenant not to
compete contained in any of its material contracts.
6.11 FURTHER ASSURANCES. Execute, deliver and perform (in addition to
the obligations and documents which this Agreement expressly requires the
Borrower or its Subsidiaries to execute, deliver and perform) any and all
further acts or documents which the Agent or Requisite Lenders may reasonably
require to give full effect to the purposes of this Agreement or any of the
other Loan Documents. Without limiting the generality of the foregoing, upon the
request of the Agent or Requisite Lenders, the Borrower agrees to update from
the Closing Date the Schedules hereto, and affirm the accuracy of such Schedules
as of the date of such update, whereupon, with the concurrence of Requisite
Lenders, such updated Schedules shall be substituted for the preexisting
Schedules and all references in this Agreement to the Closing Date shall refer
to the date of such updated Schedules.
SECTION 7. BORROWER'S NEGATIVE COVENANTS.
So long as any of the Commitments shall be available and until full,
complete and indefeasible payment and performance of the Obligations, unless
Requisite Lenders shall otherwise consent in writing, the Borrower covenants and
agrees as follows:
7.1 LIENS; NEGATIVE PLEDGES. The Borrower shall not, and shall not
permit any of its Subsidiaries to, create, incur, assume or suffer to exist any
Lien or Right of Others of any nature upon or with respect to any of their
respective Property, whether now or hereafter owned, leased or acquired, except
(collectively, the "Permitted Liens"):
(a) Existing Liens disclosed on SCHEDULE 7.1, provided that the
obligations
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secured thereby are not increased;
(b) Purchase money Liens on any Property acquired or held by the
Borrower or any of its Subsidiaries in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all or any part of
the cost of acquiring such Property; provided that (i) any such Lien attaches to
such Property concurrently with, or within twenty (20) days after, the
acquisition thereof, (ii) such Lien attaches solely to the Property so acquired
in such transaction, and (iii) such Indebtedness is incurred to finance Capital
Expenditures permitted under SECTION 7.6 of this Agreement and is permitted
under SECTION 7.3 of this Agreement;
(c) Liens for taxes, assessments or levies if payment shall not at
the time be required to be made in accordance with SECTION 6.4 of this
Agreement;
(d) Liens not exceeding an aggregate amount of $250,000 in respect
of pledges or deposits (i) under workers' compensation laws, unemployment
insurance and other types of social security or similar legislation, (ii) in
connection with surety, appeal and similar bonds incidental to the conduct of
litigation, (iii) incidental to the conduct of the business of the Borrower or
any of its Subsidiaries and which were not incurred in connection with the
borrowing of money or the obtaining of advances or credit, or (iv) securing
obligations contested in good faith; provided that the Liens permitted by this
SECTION 7.1(D) do not in the aggregate materially detract from the value of the
assets or Property of or materially impair the use thereof in the operation of
the business of the Borrower or any of its Subsidiaries taken as a whole;
(e) Permitted Rights of Others;
(f) Easements, rights of way restrictions, minor defects or other
irregularities in title or other similar charges or encumbrances not interfering
in any material way with the ordinary course of the Borrower's or any of its
Subsidiaries' businesses;
(g) Liens relating to Capital Leases;
(h) Bankers' liens in the nature of rights of set-off arising in the
ordinary course of business of the Borrower or its Subsidiaries; and
(i) Extensions or renewals of any Lien described in this SECTION
7.1.
7.2 INVESTMENTS. The Borrower shall not, and shall not permit any of its
Subsidiaries to, make or suffer to exist any Investment or enter into any
agreement to make any Investment, except:
(a) Investments in the Borrower's Subsidiaries and other Investments
existing on the Closing Date, in each case as disclosed on SCHEDULE 7.2(A);
(b) Investments expressly permitted pursuant to the Borrower's
investment
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policy attached hereto as SCHEDULE 7.2(B) (collectively, "Cash Equivalents");
(c) Loans to employees of the Borrower or its Subsidiaries permitted
under SECTION 7.4 of this Agreement and in an aggregate principal amount
outstanding at any time not to exceed $1,000,000;
(d) Investments received in the settlement of any debt owing to the
Borrower or any of its Subsidiaries, where such debt was incurred in the
ordinary course of business;
(e) Investments which are Capital Expenditures permitted by SECTION
7.6 of this Agreement;
(f) Investments which are Acquisitions provided that the sole
consideration for such Acquisition consists of the capital stock of the Borrower
or, to the extent that the consideration paid in an Acquisition consists of cash
or Cash Equivalents, the cash or Cash Equivalent consideration paid in such
Acquisition does not, in the aggregate with all such Acquisitions during the
previous rolling four-quarter period at the time of the closing of such
Acquisition, exceed an amount equal to $50,000,000; and
(g) Investments up to an aggregate amount not exceeding $20,000,000
in a wholly-owned Subsidiary of Borrower to be organized by Borrower under the
laws of Bermuda (the "Bermuda Subsidiary") for the purpose of making sales of
Borrower's products and services into foreign countries provided the same is
approved in writing by Requisite Lenders, such approval not to be unreasonably
withheld in the event Borrower provides the following, each in form and
substance satisfactory to Requisite Lenders: (i) Agent and Lenders shall have
received, at least twenty (20) days prior to the date of any such proposed
Investment, written notification of such proposed Investment detailing the
business plan, projections, anticipated assets and liabilities, and such other
financial and operational information as Agent or any Lender may request,
together with such information as shall enable Requisite Lenders to determine in
their reasonable judgment whether the Bermuda Subsidiary will be required by
Requisite Lenders to become a co-borrower with Borrower or a guarantor of the
Obligations of Borrower hereunder, and (ii) such documentation as may be
required by Requisite Lenders executed by the Bermuda Subsidiary evidencing such
co-borrower or guarantee obligations, (iii) a legal opinion of Bermuda counsel
to the Bermuda Subsidiary addressing such matters as Agent or Requisite Lenders
may request.
7.3 LIMITATIONS ON INDEBTEDNESS; CONTINGENT OBLIGATIONS. The Borrower
shall not, and shall not permit any of its Subsidiaries to, create, incur,
assume, guarantee, agree to purchase or repurchase, permit the conversion of its
Stock into, or provide funds in respect of, or otherwise become or be or remain
liable with respect to, any Indebtedness (other than Indebtedness of the
Borrower or Indebtedness of the Borrower's Subsidiaries in favor of the Lenders
and the Agent arising under this Agreement, the Notes and the other Loan
Documents) to the extent that such other Indebtedness would exceed at any one
time in the aggregate an amount equal to the sum of (a) ten percent (10.0%) of
Consolidated Effective Tangible Net Worth and (b) all principal amounts
outstanding under the Taiwan Semi-Conductor
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Manufacturing Corporation promissory notes, which outstanding principal amount
is, as of the date of this Agreement, equal to $24,000,000 (collectively,
"Permitted Indebtedness"). SCHEDULE 7.3 sets forth existing Indebtedness of the
Borrower for each item of Indebtedness the amount of which exceeds $500,000.
7.4 EMPLOYEE LOANS AND EXECUTIVE COMPENSATION. Except as set forth on
SCHEDULE 7.4, the Borrower shall not make or accrue, or permit any of its
Subsidiaries to make or accrue, any loans or other advances of money to any
officer or employee of any of them, other than reimbursable advances incurred in
the ordinary course of the Borrower's business and except as otherwise permitted
by SECTION 7.2 hereof.
7.5 OPERATING LEASES. The Borrower shall not, and shall not permit any
of its Subsidiaries to, create, incur, assume or suffer to exist any obligations
to make payments (including taxes, insurance, maintenance and similar payments
which are required to be paid under the terms of the subject lease or agreement)
for the rental of property under operating leases or agreements to lease (other
than agreements for Capital Leases) having a term of one year or more which,
exclusive of operating leases existing on the date hereof and, when valued on a
basis of eight (8) times the annual lease rental thereunder (as so valued,
"Operating Lease Obligations") and taken together with all outstanding Capital
Lease Obligations entered into after the date hereof, exceed $5,000,000.00 in
the aggregate outstanding at any time.
7.6 CAPITAL EXPENDITURES. The Borrower shall not, and shall not permit
any of its Subsidiaries to, make or incur, Capital Expenditures during any
Fiscal Year in excess of an amount greater than Forty-Five Million Dollars
($45,000,000).
7.7 RESTRICTION ON FUNDAMENTAL CHANGES. The Borrower shall not, and
shall not permit any of its Subsidiaries to enter into, any transaction of
merger or consolidation, directly or indirectly, whether by operation of law or
otherwise, or liquidate, wind up or dissolve themselves (or suffer any
liquidation or dissolution), engage in any Asset Sales, suffer to occur a Change
of Control or sell or dispose of any of the Borrower's Stock, except:
(a) any of the Borrower's Subsidiaries may be merged into the
Borrower or any wholly-owned Subsidiaries of the Borrower, provided that no
Event of Default or Potential Event of Default has occurred and is continuing or
would result from such merger and the Borrower, if a party to such merger, is
the surviving entity;
(b) the Borrower or its Subsidiaries may enter into sale-leaseback
transactions provided that the aggregate value of all Property sold by the
Borrower or its Subsidiaries in such transactions (determined by the higher of
the book value of such Property or the gross proceeds paid or payable to the
Borrower or its Subsidiaries' in connection with such transactions) for all such
transactions does not exceed $8,000,000; and
(c) other Asset Sales to the extent that the aggregate Net Cash
Proceeds arising after the date of this Agreement do not exceed $25,000,000.
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7.8 TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not
permit any of its Subsidiaries to, enter into or be a party to any agreement or
transaction with any Affiliate of the Borrower, except:
(a) As set forth on SCHEDULE 7.8;
(b) In the ordinary course of and pursuant to the reasonable
requirements of the Borrower's or its Subsidiaries' businesses and upon fair and
reasonable terms that are approved by the Board of Directors, fully disclosed to
the Agent and no less favorable to the Borrower or its Subsidiaries, as the case
may be, than would obtain in a comparable arm's-length transaction with a Person
not an Affiliate of the Borrower.
7.9 MAINTENANCE OF BUSINESS. The Borrower shall not, and shall not
permit any of its Subsidiaries to, engage in any business materially different
than the businesses currently engaged in by the Borrower or such Subsidiary.
7.10 EVENTS OF DEFAULT. The Borrower shall not take or omit to take any
action, which act or omission would, with the lapse of time, or otherwise
constitute (a) a Default or Event of Default under any of the Loan Documents or
(b) a default or an event of default under any Principal Contracts and Joint
Ventures or the Sobrato Lease.
7.11 ERISA.
(a) Neither the Borrower nor any ERISA Affiliate of the Borrower
shall incur any obligation to contribute to a Pension Plan required by a
collective bargaining agreement or as a consequence of the acquisition of an
ERISA Affiliate, unless (i) the Borrower or such ERISA Affiliate shall notify
the Agent in writing that it intends to incur such obligation and (ii) after the
Agent's receipt of such notice, Requisite Lenders consent to the establishment
or maintenance of, or the Borrower's incurring an obligation to contribute to,
the Pension Plan, which consent may not unreasonably be withheld but may be
subject to such reasonable conditions as Requisite Lenders may require.
(b) If the Borrower or any ERISA Affiliate of the Borrower incurs
any obligation to contribute to any Pension Plan, then the Borrower shall not
(i) terminate, or permit such ERISA Affiliate to terminate, any Pension Plan so
as to result in any liability that would have a Material Adverse Effect or (ii)
make or permit such ERISA Affiliate to make a complete or partial withdrawal
(within the meaning of Section 4201 of ERISA) from any Multiemployer Plan so as
to result in any liability that would have a Material Adverse Effect.
7.12 NO USE OF ANY LENDER'S NAME. Except as required by law, the
Borrower shall not, and shall not permit any of its Subsidiaries to, use or
authorize others to use, any Lender's name or marks in any publication or public
medium, including, without limitation, any prospectus, without such Lender's
advance written authorization and neither the Borrower nor any Lender shall use
or authorize others to use the other party's name in any press release or
advertisement without the other party's advance written consent.
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7.13 NEGATIVE PLEDGE CLAUSES. The Borrower shall not enter into or
cause, suffer or permit to exist any agreement with any Person (other than, with
respect to clause (i), below, the Agent and the Lenders pursuant to this
Agreement) which prohibits or limits the ability of the Borrower or its
Subsidiaries: (i) to create, incur, assume or suffer to exist any Lien upon any
of its Property, assets or revenues, whether now owned or hereafter acquired;
provided, however, that the Borrower or its Subsidiaries may enter into such an
agreement in connection with Property acquired with the proceeds of purchase
money Indebtedness or any Capital Lease permitted by this Agreement when such
prohibition or limitation by its terms is effective only against the assets
subject to such Lien; and (ii) to make payments to the Borrower by way of
dividends, advances, reimbursement or otherwise.
SECTION 8. FINANCIAL COVENANTS OF BORROWER.
The Borrower covenants and agrees that so long as any Obligations shall
be outstanding or any Commitment shall be available, unless Requisite Lenders
otherwise shall consent in writing, the Borrower and its consolidated
Subsidiaries shall maintain all of the following financial covenants. The
Borrower agrees and understands that (except as expressly provided herein) all
covenants under this SECTION 8 shall be subject to compliance as measured as of
the last day of each Fiscal Quarter. For purposes of this SECTION 8 the
aggregate principal amount of Loans outstanding under the Revolving Credit
Facility will be deemed to constitute current liabilities.
8.1 MINIMUM EFFECTIVE TANGIBLE NET WORTH. Maintain as at the end of each
Fiscal Quarter Consolidated Effective Tangible Net Worth of an amount equal to
no less than the sum of (a) $270,000,000 plus (b) an amount equal to 75.0% of
the cumulative quarterly net income, exclusive of losses of the Borrower and its
Subsidiaries (exclusive of profits from joint ventures of which the Borrower or
any of its Subsidiaries is a partner or member) commencing with the Fiscal
Quarter beginning July 1, 1997 plus (c) an amount equal to 100.0% of the net
proceeds received by the Borrower or its Subsidiaries on or after July 1, 1997
from any issuances of Stock, other equity interests of the Borrower or its
Subsidiaries or Subordinated Debt; provided, however, that in the event that, in
connection with one or more Acquisitions on or after July 1, 1997 by the
Borrower or its Subsidiaries, the Borrower's public accountants determine that
previously incurred costs associated with in-process research and development
must be written off, the minimum required Consolidated Effective Tangible Net
Worth shall be reduced by the amount of such write-offs to the extent that the
aggregate amount of all such write-offs in connection with such Acquisitions
does not exceed $50,000,000.
8.2 MINIMUM QUICK RATIO. Maintain as at the end of each Fiscal Quarter a
Quick Ratio of at least 1.50:1.00.
8.3 PROFITABLE OPERATIONS. Maintain net income and operating income (in
each case exclusive of earnings from joint ventures of which the Borrower or any
of its Subsidiaries is a partner or member) for each Fiscal Quarter together
with the next preceding three Fiscal Quarters taken in the aggregate of at least
One Dollar.
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8.4 MAXIMUM CONSOLIDATED LEVERAGE RATIO. Maintain as at the end of each
Fiscal Quarter a Consolidated Leverage Ratio not to exceed .90:1.00.
8.5 MAXIMUM OTHER ASSETS. Maintain as at the end of each Fiscal Quarter
Other Assets not to exceed an amount equal to $70,000,000.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES.
9.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall constitute an Event of Default:
(a) INSTALLMENTS OF PRINCIPAL. The Borrower shall fail to pay any
installment of principal under this Agreement or any of the Notes on the date
such installment shall become due and payable; or
(b) OTHER PAYMENTS. The Borrower shall fail to pay any installment
of interest on any Loan or any of the other Obligations of the Borrower to the
Lenders or the Agent arising under this Agreement, the Notes or any of the other
Loan Documents when and as the same shall become due and payable, whether by
acceleration or otherwise and such failure shall not have been cured to
Requisite Lenders' satisfaction within five (5) calendar days; or
(c) CROSS DEFAULTS. The Borrower or any of its Subsidiaries shall
after any required notice thereunder and after the expiration of applicable
grace periods (i) default in the repayment of any principal of or the payment of
any interest in respect of the Sobrato Lease or on any Indebtedness exceeding in
the aggregate a principal amount of $500,000, (ii) breach or violate any term or
provision of the Principal Contracts and Joint Ventures or (iii) breach or
violate any term or provision of any promissory note, loan agreement, mortgage,
indenture or other evidence of such Indebtedness pursuant to which amounts
outstanding in the aggregate exceed $500,000, and such failure continues after
the applicable grace or notice period, if any, if the effect of such breach is
to permit the acceleration of such indebtedness (or any Contingent Obligation to
become payable or any collateral in respect thereof to be demanded (whether or
not waived by the note holder or obligee); or
(d) REPRESENTATIONS AND WARRANTIES. Any representation or warranty
made by or on behalf of the Borrower in this Agreement or any statement or
certificate at any time given in writing pursuant hereto or in connection
herewith shall be false, misleading or incomplete in any material respect when
made; or
(e) SPECIFIC DEFAULTS. The Borrower shall fail or neglect to
perform, keep or observe any of the covenants contained in SECTIONS 7 OR 8 of
this Agreement; or
(f) OTHER DEFAULTS. Subject to SECTIONS 9.1(A), (B) and (E) of this
Agreement, the Borrower or any of its Subsidiaries shall fail or neglect to
perform, keep or observe any covenant or provision of this Agreement or of any
of the other Loan Documents or
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any other document or agreement executed by the Borrower or its Subsidiaries in
connection therewith and the same has not been cured to Requisite Lenders'
satisfaction within thirty (30) calendar days after the Borrower shall become
aware thereof, whether by written notice from the Agent or any Lender or
otherwise or should reasonably have become aware thereof; provided, however,
that if the same is susceptible of cure but, due to the nature thereof, cannot
be cured within said thirty (30) day period, such cure period shall be extended
for a reasonable period of time not exceeding an additional sixty (60) days so
long as the Borrower has commenced said cure within such thirty (30) day period
and is at all times thereafter diligently completing the cure thereof; or
(g) INSOLVENCY; VOLUNTARY PROCEEDINGS. The Borrower or any of its
Subsidiaries (i) shall cease or fail to be Solvent, or generally shall fail to
pay, or admit in writing their inability to pay, their debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) shall voluntarily liquidate, dissolve or cease to conduct their
businesses in the ordinary course (except for entities without material assets
or revenues); (iii) shall commence any Insolvency Proceeding with respect to
itself; or (iv) shall take any action to effectuate or authorize any of the
foregoing; or
(h) INVOLUNTARY PROCEEDINGS. (i) Any involuntary Insolvency
Proceeding shall be commenced or filed against the Borrower or any of its
Subsidiaries, or any writ, judgment, warrant of attachment, execution or similar
process shall be issued or levied against a substantial part of the Borrower's
or any of its Subsidiaries' Properties, and any such proceeding or petition
shall not be dismissed, or such writ, judgment, warrant of attachment, execution
or similar process shall not be released, vacated or fully bonded within sixty
(60) days after commencement, filing or levy; (ii) if the Borrower or any of its
Subsidiaries shall admit the material allegations of a petition against it in
any Insolvency Proceeding, or an order for relief (or similar order under
non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Borrower or
any of its Subsidiaries shall acquiesce in the appointment of a receiver,
trustee, custodian, conservator, liquidator, mortgagee in possession (or agent
therefor), or other similar Person for itself or a substantial portion of its
Property or business; or
(i) MONETARY JUDGMENTS. There shall be a money judgment, writ or
warrant of attachment or similar process entered or filed against the Borrower
or any of its Subsidiaries which is not fully covered by insurance (subject to
reasonable deductibles) and remains unvacated, unbonded, unstayed or unpaid or
undischarged for more than thirty (30) days (whether or not consecutive) or in
any event later than five (5) Business Days prior to the date of any proposed
sale thereunder, which, together with all such other unvacated, unbonded,
unstayed, unpaid and undischarged judgments or attachments against Borrower
exceeds in the aggregate $250,000; or
(j) NON-MONETARY JUDGMENTS. Any non-monetary judgment, order or
decree shall be rendered against the Borrower which does or would reasonably be
expected to result in a Material Adverse Effect, and there shall be any period
of thirty (30) consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
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(k) INVALIDITY OF LOAN DOCUMENTS. Any material provision of the Loan
Documents, for any reason other than the satisfaction in full of the Obligations
thereunder, shall cease to be, or shall be asserted by the Borrower not to be, a
legal, valid and binding obligation of the Borrower or its applicable
Subsidiaries, enforceable in accordance with its terms, and such occurrence has
not been cured to Requisite Lenders' satisfaction within five (5) Business Days
after the Borrower shall have received notice of such failure from the Agent or
any Lender or within thirty (30) days of when the Borrower shall have become
aware thereof (whichever period is less); or
(l) CHANGE OF CONTROL. There shall occur any Change of Control; or
(m) SUSPENSION OF BUSINESS OPERATIONS. If the Borrower or any of its
Subsidiaries shall, other than in the ordinary course of business (as determined
by past practices), suspend all or any part of its operations material to the
conduct of the business of the Borrower or such Subsidiary for a period of more
than 60 consecutive days, which suspension in the good faith judgment of the
Agent could reasonably be expected to have a Material Adverse Effect; or
(n) MATERIAL ADVERSE CHANGE. There shall have been a change in the
assets, liabilities, financial condition, operations or affairs of the Borrower
or any of its Subsidiaries, other than changes in the ordinary course of
business, which in the reasonable determination of Requisite Lenders has, either
individually or in the aggregate, a Material Adverse Effect.
9.2 WAIVER OF DEFAULT. Any Event of Default may be waived only with the
written consent of Requisite Lenders; except that any Event of Default under any
of SECTIONS 9.1(A), 9.1(B), 9.1(G) and 9.1(H) of this Agreement may only be
waived with the written consent of all Lenders. Any Event of Default so waived
shall be deemed to have been cured and not to be continuing; but no such waiver
shall be deemed a continuing waiver or shall extend to or affect any subsequent
like default or impair any rights arising therefrom.
9.3 REMEDIES. Upon the occurrence and continuance of any Event of
Default or Potential Event of Default, the Lenders shall have no further
obligation to advance money or extend credit to or for the benefit of the
Borrower. In addition, upon the occurrence and during the continuance of an
Event of Default, the Lenders or the Agent, on behalf of the Lenders, may, at
the option of Requisite Lenders, do any one or more of the following, all of
which are hereby authorized by the Borrower:
(a) Declare all or any of the Obligations of the Borrower under this
Agreement, the Notes, the other Loan Documents and any other instrument executed
by the Borrower pursuant to the Loan Documents to be immediately due and
payable, and upon such declaration such Obligations so declared due and payable
shall immediately become due and payable; provided that if such Event of Default
is under part (g) or (h) of SECTION 9.1 of this Agreement, then all of the
Obligations shall become immediately due and payable forthwith without the
requirement of any notice or other action by the Lenders or the Agent;
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(b) Terminate this Agreement as to any future liability or
obligation of the Lenders; provided that if such Event of Default is under part
(g) or (h) of SECTION 9.1 of this Agreement, then all future liability and
obligations of the Lenders shall immediately terminate without the request or
notice or other action by the Lenders or the Agent.
(c) To the extent permitted by laws applicable to the making of
dividends or distributions to equity holders, but without regard to any negative
effect on the Borrower's tax status, require the Borrower to cause each of its
Subsidiaries to dividend to the Borrower all cash flow;
(d) Exercise in addition to all other rights and remedies granted
hereunder, any and all rights and remedies granted under the Loan Documents or
otherwise available at law or in equity; and
(e) Demand that the Borrower (i) deposit cash with the Agent in an
amount equal to the amount of any Letter of Credit Undrawn Amount remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and the Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letter of Credit fees and commissions
scheduled or payable over the remaining term of each Letter of Credit.
9.4 SET-OFF.
(a) RIGHTS OF SET-OFF. Subject to SECTION 9.4(B) below, during the
continuance of an Event of Default, any deposits or other sums credited by or
due from any Lender to the Borrower may be set off against the Obligations and
any and all other liabilities, direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, of the Borrower to the
Lenders.
(b) REQUISITE LENDERS' CONSENT TO SET-OFF REQUIRED. Each Lender
agrees that it shall not, and that it shall not attempt to, exercise any right
of set-off, banker's lien or similar remedy against any of the Property of the
Borrower without the prior written consent of Agent or Requisite Lenders.
9.5 SHARING OF PAYMENTS. If, other than as expressly provided elsewhere
herein, any Lender shall receive from the Borrower or any other source
whatsoever on account of the Loans made by it any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, bankers' lien,
counterclaim, cross-action, enforcement of any claim evidenced by this Agreement
or any of the other Loan Documents or by proof thereof in any case under the
Bankruptcy Code or similar proceeding or otherwise) which is in excess of its
respective Pro Rata Share of payments on account of the Loans obtained by all
Lenders with respect to such Loans, such Lender shall forthwith (a) notify the
Agent of such fact and (b) make such dispositions and arrangements with each
other Lender with respect to such excess, either by way of distribution until
the amount of such excess has been exhausted, assignment of claims, subrogation
or otherwise, as shall result in each such Lender receiving in respect of the
amounts
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due such Lender, under this Agreement its ratable share of such payments;
provided, however, that if all or any part of such excess payment is thereafter
recovered from such Lender, such disposition and arrangements shall be rescinded
and the amount restored to the extent of such recovery, but without interest.
9.6 RIGHTS AND REMEDIES CUMULATIVE. The Lenders' and the Agent's rights
and remedies under this Agreement shall be cumulative. The Lenders and the Agent
shall have all other rights and remedies not inconsistent herewith as provided
at law or in equity. No exercise by any Lender or the Agent of one right or
remedy shall be deemed an election. No delay by any Lender or the Agent shall
constitute a waiver, election or acquiescence by such party.
SECTION 10. AGENT.
10.1 APPOINTMENT AND AUTHORIZATION. Each Lender hereby irrevocably
appoints, designates and authorizes Comerica as the Agent under this Agreement
and under each of the other Loan Documents and irrevocably authorizes the Agent
to take such action on its behalf under and subject to the provisions of this
Agreement and each other Loan Document and to exercise such powers and perform
such duties as are expressly delegated to it by the terms of this Agreement or
any other Loan Document, together with such powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary contained elsewhere in
this Agreement or in any other Loan Document, the Agent shall not have any
duties or responsibilities, except those expressly set forth herein, nor shall
the Agent have or be deemed to have any fiduciary relationship with any Lender,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.
10.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
10.3 LIABILITY OF AGENT. None of the Agent-Related Persons shall (a) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document (except for its own
gross negligence or willful misconduct), or (b) be responsible in any manner to
any Lender for any recital, statement, representation or warranty made by the
Borrower or any Affiliate of the Borrower, or any officer thereof, contained in
this Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Agent under or in connection with, this Agreement or any other Loan Document, or
for the value of any Collateral or the validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document, or
for any failure of the Borrower or any other party to any Loan Document to
perform their obligations hereunder or thereunder. No Agent-Related Person shall
be under any obligation to any Lender to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or
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to inspect the Properties, books or records of the Borrower or any of its
Affiliates.
10.4 RELIANCE BY AGENT.
(a) The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine and
correct and to have been signed, sent or made by the proper Person or Persons,
and upon advice and statements of legal counsel directed to the Agent (including
counsel to the Borrower), independent accountants and other experts selected by
the Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of Requisite Lenders or all the Lenders where
so required as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement or any other Loan Document in
accordance with a request or consent of the Requisite Lenders or all the Lenders
where so required and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.
(b) For purposes of determining compliance with the conditions
precedent specified in SECTION 4, each Lender that has executed this Agreement
or shall hereafter execute and deliver an Assignment and Acceptance in
accordance with SECTION 11.2(A) of this Agreement shall be deemed to have
consented to, approved or accepted or to be satisfied with each document or
other matter either sent by the Agent to such Lender for consent, approval,
acceptance or satisfaction, or required thereunder to be consented to or
approved by or acceptable or satisfactory to Lender, unless an officer of the
Agent responsible for the transactions contemplated by the Loan Documents shall
have received notice from such Lender prior to the initial Borrowing specifying
its objection thereto and either such objection shall not have been withdrawn by
notice to the Agent to that effect or such Lender shall not have made available
to Agent such Lender's ratable portion of such Borrowing.
10.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Potential Event of Default or Event of
Default, except with respect to defaults in the payment of principal, interest
and fees required to be paid to the Agent on behalf and for the benefit of the
Lenders, unless the Agent shall have received written notice from a Lender or
the Borrower referring to this Agreement, describing such Potential Event of
Default or Event of Default and stating that such notice is a "notice of
default." In the event that the Agent receives such a notice, the Agent shall
give notice thereof to the Lenders. The Agent shall take such action with
respect to such Potential Event of Default or Event of Default as shall be
requested by Requisite Lenders in accordance with this SECTION 10; provided,
however, that unless and until the Agent shall have received any such request,
the Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Potential Event of Default or Event of
Default as it shall deem in the best interest of the Lenders.
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10.6 NON-RELIANCE. Each Lender expressly acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it and that no
act by the Agent hereafter taken, including any review of the affairs of the
Borrower, shall be deemed to constitute any representation or warranty by the
Agent to any Lender. Each Lender confirms to the Agent that it has not relied,
and will not hereafter rely, on the Agent to check or inquire on such Lender's
behalf into the adequacy, accuracy or completeness of any information provided
by the Borrower or any other Person under or in connection with the Loan
Documents or the transactions herein contemplated (whether or not the
information has been or is hereafter distributed to such Lender by the Agent).
Each Lender represents to the Agent that it has, independently and without
reliance upon the Agent and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of the Borrower, and all applicable bank regulatory laws
relating to the transactions contemplated thereby, and made its own decision to
enter into this Agreement and extend credit to the Borrower under and pursuant
to this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Agent and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of the Borrower. Except for notices,
reports and other documents expressly herein required to be furnished to the
Lenders by the Agent, the Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or
creditworthiness of the Borrower which may come into the possession of any
Agent-Related Persons. The Agent shall not be responsible to any Lender for the
execution, effectiveness, genuineness, validity, enforceability, collectibility
or sufficiency of this Agreement or any other Loan Document or for any
representations or warranties, recitals or statements made herein or therein or
made in any written or oral statements, or in any financial or other statements,
instruments, reports or certificates or any other documents furnished or made by
the Agent to the Lenders or by or on behalf of the Borrower to the Agent or any
Lender in connection with the Loan Documents and the transactions contemplated
thereby or for the financial condition or business affairs of the Borrower or
any other Person liable for the payment of any Obligations, nor shall the Agent
be required to ascertain or inquire as to the performance or observance of any
of the terms, conditions, provisions, covenants or agreements contained in any
of the Loan Documents or as to the use of the proceeds of the Loans or as to the
existence or possible existence of any Event of Default or Potential Event of
Default.
10.7 INDEMNIFICATION. Whether or not the transactions contemplated
hereby shall be consummated, the Lenders shall indemnify upon demand all
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Borrower and without limiting the obligation of the Borrower to do so), ratably
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind whatsoever which may at any time (including at any time following the
repayment of the Loans and the termination or resignation of the related Agent)
be imposed on, incurred by or asserted against
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any such Person in any way relating to or arising out of this Agreement or any
document contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by any such Person
under or in connection with any of the foregoing; provided, however, that no
Lender shall be liable for the payment to Agent-Related Persons of any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from such Person's
gross negligence or willful misconduct. Without limitation of the foregoing,
each Lender shall reimburse the Agent upon demand for its ratable share of any
costs or other out-of-pocket expenses (including Attorney Costs) incurred by the
Agent in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Borrower. Without limiting
the generality of the foregoing, if the IRS or any other Governmental Authority
of the United States of America or other jurisdiction asserts a claim that the
Agent did not properly withhold tax from amounts paid to or for the account of
any Lender (because the appropriate form was not delivered, was not properly
executed, or because such Lender failed to notify the Agent of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason), such Lender shall indemnify the Agent
fully for all amounts paid, directly or indirectly, by the Agent as tax or
otherwise, including penalties and interest, and including any taxes imposed by
any jurisdiction on the amounts payable to the Agent under this SECTION 10.7,
together with all costs and expenses (including Attorney Costs). The obligation
of the Lenders in this SECTION 10.7 shall survive the payment of all
Obligations.
10.8 AGENT IN INDIVIDUAL CAPACITY. Comerica and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory or other business with the Borrower and its Affiliates as
though Comerica were not the Agent hereunder and without notice to or consent of
the Lenders. With respect to its Loans, Comerica shall have the same rights and
powers under this Agreement as any other Lender and may exercise the same as
though it were not the Agent, and the terms "Lender" and "Lenders" shall include
Comerica in its individual capacity.
10.9 SUCCESSOR AGENT. The Agent may, and at the request of Requisite
Lenders shall, resign as the Agent upon thirty (30) days' notice to the Borrower
and the Lenders. If the Agent shall resign as Agent under this Agreement,
Requisite Lenders shall appoint from among the Lenders a successor agent for the
Lenders. If no successor agent is appointed prior to the effective date of the
resignation of the Agent, the Agent may appoint, after consulting with the
Lenders and the Borrower, a successor agent from among the Lenders. Upon the
acceptance of its appointment as successor agent hereunder, such successor agent
shall succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this SECTION 10 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was the Agent under this
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Agreement. If no successor agent has accepted appointment as Agent by the date
which is thirty (30) days following a retiring Agent's notice of resignation,
the retiring Agent's resignation shall nevertheless thereupon become effective
and the Lenders shall perform all of the duties of the Agent hereunder until
such time, if any, as Requisite Lenders appoint a successor agent as provided
for above.
10.10 DOCUMENTATION AGENT. The Documentation Agent shall not have any
right, power, obligation, liability, responsibility or duty under this Agreement
other than those applicable to all Lenders as such. Without limiting the
foregoing, the Documentation Agent shall not be deemed to have any fiduciary
relationship with any Lender. Each Lender acknowledges that it has not relied,
and will not rely, on any of the Lenders so identified in deciding to enter into
this Agreement or in taking or not taking any action hereunder.
SECTION 11. AMENDMENTS AND WAIVERS; ASSIGNMENTS, PARTICIPATION, ETC.
11.1 AMENDMENTS AND WAIVERS. No amendment, modification or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by the Borrower therefrom, shall be effective unless
the same shall be in writing and signed by Requisite Lenders and acknowledged by
the Agent, and then such waiver shall be effective only in the specific instance
and for the specific purpose for which given; provided, however, that no such
waiver, amendment, or consent shall, unless in writing and signed by all Lenders
and acknowledged by the Agent, do any of the following:
(a) increase or extend the Commitment of any Lender (or reinstate
any Commitment terminated pursuant to SECTION 9.3 of this Agreement) or subject
any Lender to any additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to the Lenders (or any of them) hereunder or
under any Loan Document (including in respect of any Mandatory Prepayment);
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or of any fees or other amounts payable hereunder or under
any Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which shall be required for the Lenders or
any of them to take any action hereunder;
(e) amend this SECTION 11.1;
and, provided further, that no amendment, modification, waiver or consent shall,
unless in writing and signed by the Agent in addition to Requisite Lenders or
all Lenders, as the case may be, affect the rights or duties of the Agent under
this Agreement or any other Loan Document.
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11.2 ASSIGNMENTS, PARTICIPATION, ETC.
(a) Any Lender may, with the written consent executed by the
Borrower (at all times other than during the existence of an Event of Default in
which event the Borrower's consent shall not be required) and the Agent (and
written notice to each other Lender), which consents shall not be unreasonably
withheld or delayed, at any time assign and delegate to one or more Eligible
Assignees (provided that no written consent of the Borrower, the Issuing Bank or
the Agent shall be required in connection with any assignment and delegation by
such Lender to an Affiliate of such Lender which Affiliate is controlled by or
under common control with such Lender) (each an "Assignee") all, or any ratable
part of all, of the Loans, the Commitments and the other rights and obligations
of such Lender hereunder, in a minimum amount of the aggregate Commitments of
$10,000,000; provided, however, that the Borrower and the Agent may continue to
deal solely and directly with such Lender in connection with the interest so
assigned to an Assignee until (A) written notice of such assignment, together
with payment instructions, addresses and related information with respect to the
Assignee, shall have been given to the Borrower and the Agent by such Lender and
the Assignee; (B) such Lender and its Assignee shall have delivered to the
Borrower and the Agent an Assignment and Acceptance in the form of EXHIBIT G
("Assignment and Acceptance") together with any Note or Notes subject to such
assignment; and (C) the assignor Lender or Assignee has paid to the Agent a
processing fee of $3,000; provided that no processing fee shall be charged for
any assignment to a Lender or an Affiliate of a Lender, and further provided
that the Borrower shall not pay any fees or costs in connection with such
assignment.
(b) From and after the date that the Agent notifies the assigning
Lender that it has received an executed Assignment and Acceptance and payment of
the above-referenced processing fee, (i) the Assignee thereunder shall be a
party hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and obligations of a Lender under the Loan Documents, and (ii) the assigning
Lender shall, to the extent that rights and obligations hereunder and under the
other Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Loan Documents; provided, however, that the assigning Lender shall not
relinquish its rights to indemnification pursuant to SECTION 12.3 of this
Agreement, such rights to indemnification shall survive the assignment and the
assigning Lender shall retain such rights co-extensively with the other
Indemnitees.
(c) Within five (5) Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, the Borrower shall execute and deliver to the Agent new
Notes on the same terms and conditions as the original Notes evidencing such
Assignee's assigned Loans and Commitments and, if the assignor Lender has
retained a portion of its Loans and its Commitments, replacement Notes in the
principal amount of the Loans retained by the assignor Lender (such Notes to be
in exchange for, but not in payment of, the Notes held by such Lender).
Immediately upon each Assignor, Lender or its Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments
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arising therefrom. The Commitments allocated to each Assignee shall reduce such
Commitments of the assigning Lender pro tanto.
(d) Any Lender may at any time sell to one or more commercial banks
or other Persons not Affiliates of the Borrower and not reasonably known after
Due Inquiry by such Lender to be an active competitor of the Borrower (a
"Participant") participating interests in any Loans, the Commitment of that
Lender and the other interests of that Lender (the "Originating Lender")
hereunder and under the other Loan Documents in a minimum amount of $10,000,000;
provided, however, that (i) the Originating Lender's obligations under this
Agreement shall remain unchanged, (ii) the Originating Lender shall remain
solely responsible for the performance of such obligations, (iii) the Borrower
and the Agent shall continue to deal solely and directly with the Originating
Lender in connection with the Originating Lender's rights and obligations under
this Agreement and the other Loan Documents, and (iv) no Lender shall transfer
or grant any participating interest under which the Participant shall have
rights to approve any amendment to, or any consent or waiver with respect to,
this Agreement or any other Loan Documents, except to the extent such amendment,
consent or waiver would require unanimous consent of Lenders as described in
clauses (A), (C) and (D) of the first proviso to SECTION 11.1 of this Agreement.
In the case of any such participation, the Participant shall be entitled to the
benefit of SECTIONS 3.1, 3.3, 3.6, 11.1 of this Agreement (but solely with
respect to those matters set forth in clauses (A), (C) and (D) thereof requiring
the consent of all Lenders), and 12.3 as though it were also a Lender hereunder,
and if amounts outstanding under this Agreement are due and unpaid, or shall
have been declared or shall have become due and payable upon the occurrence of
an Event of Default, each Participant shall be deemed to have the right of
set-off in respect of its participating interest in amounts owing under this
Agreement to the same extent as if the amount of its participating interests
were owing directly to it as a Lender under this Agreement.
(e) Each Lender agrees to take normal and reasonable precautions and
exercise due care to maintain the confidentiality of all information identified
as "confidential" by the Borrower and provided to it by the Borrower, or by the
Agent on the Borrower's behalf, in connection with this Agreement or any other
Loan Document, and neither it nor any of its Affiliates shall use, or disclose
any such information for any purpose or in any manner other than pursuant to the
terms contemplated by this Agreement; except to the extent such information (i)
was or becomes generally available to the public other than as a result of a
disclosure by such Lender, or (ii) was or becomes available on a
non-confidential basis from a source other than the Borrower, provided that such
source is not bound by a confidentiality agreement with the Borrower known to
Lender; provided, however, that any Lender may disclose such information (A) at
the request or pursuant to any requirement of any Governmental Authority to
which such Lender is subject or in connection with an examination of such Lender
by any such authority; (B) pursuant to subpoena or other court process; (C) when
otherwise required to do so in accordance with the provisions of any applicable
Requirement of Law; and (D) to such Lender's independent auditors and other
professional advisors, provided that such auditors and professional advisors
shall be required to similarly protect the confidentiality of such information.
Notwithstanding the foregoing, the Borrower authorizes each Lender to disclose
to any Participant or Assignee (each, a "Transferee") and to any prospective
Transferee, such financial and other information in
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such Lender's possession concerning the Borrower which has been delivered to the
Agent or the Lenders pursuant to this Agreement or which has been delivered to
the Agent or the Lenders by the Borrower in connection with the Lenders' credit
evaluation of the Borrower prior to entering into this Agreement; provided that,
unless otherwise agreed in writing in advance by the Borrower, such Transferee
agrees in writing to such Lender and Borrower to keep such information
confidential to the same extent required of Lenders hereunder.
(f) Notwithstanding any other provision contained in this Agreement
or any other Loan Document to the contrary, any Lender may assign all or any
portion of the Loans or Notes held by it to any Federal Reserve Bank or the
United States Treasury as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank, provided that any payment in respect of
such assigned Loans or Notes made by the Borrower to or for the account of the
assigning or pledging Lender in accordance with the terms of this Agreement
shall satisfy the Borrower's obligations hereunder in respect to such assigned
Loans or Notes to the extent of such payment. No such assignment shall release
the assigning Lender from its obligations hereunder.
SECTION 12. MISCELLANEOUS.
12.1 NO WAIVER BY AGENT OR LENDERS. No failure or delay on the part of
the Agent or any Lender in the exercise of any power, right or privilege under
this Agreement, the Notes or any of the other Loan Documents shall impair such
power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any
other right, power or privilege.
12.2 ENTIRE AGREEMENT; CONSTRUCTION.
(a) This Agreement, the Notes and each of the other Loan Documents
dated as of the date hereof, taken together, constitute and contain the entire
agreement among the Borrower, the Lenders and the Agent and supersede any and
all prior agreements, negotiations, correspondence, understandings and
communications among the parties, whether written or oral, respecting the
subject matter hereof.
(b) This Agreement is the result of negotiations between and has
been reviewed by the Borrower, the Lenders executing this Agreement as of the
Closing Date and the Agent and their respective counsel; accordingly, this
Agreement shall be deemed to be the product of the parties hereto, and no
ambiguity shall be construed in favor of or against the Borrower, the Lenders or
the Agent. The Borrower, the Lenders and the Agent each severally agree that
they intend the literal words of this Agreement and the other Loan Documents and
that no parol evidence shall be necessary or appropriate to establish the
Borrower's, any Lender's or the Agent's actual intentions.
12.3 INDEMNIFICATION. To the fullest extent permitted by law, the
Borrower agrees to protect, indemnify, defend and hold harmless the Agent, each
Lender and each of their
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respective directors, officers, employees and agents and any Person who controls
any of them within the meaning of the federal, state and foreign securities laws
(each an "Indemnitee" and collectively, the "Indemnitees") from and against any
liabilities, losses, obligations, damages, penalties, expenses or costs of any
kind or nature and from any suits, judgments, claims or demands (including,
without limitation, in respect of or for reasonable fees and other disbursements
of counsel for and consultants of such Indemnitees in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitees shall be designated a party thereto) based on any federal, state,
local or foreign law or other statutory regulation, including, without
limitation, securities, environmental and commercial law or other statutory
regulation, which arises under common law or at equitable cause or on contract
or otherwise on account of or in connection with any matter or thing or any
action or failure to act by the Indemnitees, or any of them, arising out of or
relating to the Loan Documents or any agreement or instrument contemplated by
the Loan Documents, except to the extent such liability arises from the willful
misconduct or gross negligence of any of the Indemnitees (collectively, the
"Indemnified Matters"). Upon receiving knowledge of any suit, claim, demand or
any other matter asserted by any Person that the Agent or any Lender believes is
covered by this indemnity, the Agent or such Lender shall give the Borrower
notice of the matter and an opportunity to defend it, at the Borrower's sole
cost and expense, with legal counsel reasonably satisfactory to the Agent and
the Lenders. The Agent or the Lenders may also require the Borrower to defend
the matter. The obligations of the Borrower under this SECTION 12.3 shall
survive the payment and performance of the Obligations and the termination of
this Agreement. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this SECTION 12.3 may be unenforceable because it is
violative of any law or public policy, the Borrower shall contribute the maximum
portion which it is permitted to pay and satisfy under applicable law to the
payment and satisfaction of all Indemnified Matters incurred by the Indemnitees.
12.4 NOTICES.
(a) All notices, requests and other communications provided for
hereunder shall be in writing (including, unless the context expressly otherwise
provides, by facsimile transmission, provided that any matter transmitted by the
Borrower by facsimile (i) shall be immediately confirmed by a telephone call to
the recipient at the number specified on the applicable signature page hereof,
and (ii) shall be followed promptly by a hard copy original thereof) and mailed,
faxed or delivered, to the address or facsimile number specified for notices on
the applicable signature page hereof; or, as directed to the Borrower or the
Agent, to such other address as shall be designated by such party in a written
notice to the other parties, and as directed to each other party, at such other
address as shall be designated by such party in a written notice to the Borrower
and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next day) delivery, or transmitted by facsimile machine,
respectively, or if delivered, upon delivery, except that notices pursuant to
SECTIONS 2 or 10 of this Agreement shall not be effective until actually
received by the Agent.
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(c) The Borrower and the Lenders acknowledge and agree that any
agreement of the parties to receive certain notices by telephone and facsimile
is for their mutual benefit and convenience. Any party shall be entitled to rely
on the authority of any Person purporting to be a Person authorized by any other
party to give such notice and the party relying on such authorization shall not
have any liability to any other Person on account of any action taken or not
taken by such party in reliance upon such telephonic or facsimile notice. The
obligation of the Borrower to repay the Loans shall not be affected in any way
or to any extent by any failure by the Agent to receive written confirmation of
any telephonic or facsimile notice or the receipt by the Agent of a confirmation
which is at variance with the terms understood by the Agent to be contained in
the telephonic or facsimile notice.
12.5 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each Lender shall
notify the Agent in writing of any changes in the address to which notices to
such Lender should be directed, of addresses of its Lending Office, of payment
instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.
12.6 COUNTERPARTS. This Agreement and any amendments, waivers, consents
or supplements hereto may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. Each such agreement
shall become effective upon the execution of a counterpart hereof or thereof by
each of the parties hereto or thereto, delivery of each such counterpart to the
Agent, and notification thereof by the Agent has been received by the Borrower
and the Lenders.
12.7 COSTS AND EXPENSES. The Borrower shall, whether or not the
transactions contemplated hereby shall be consummated, and in addition to costs
and expenses required to be paid at Closing under SECTION 4.1 of this Agreement:
(a) pay or reimburse Comerica (including in its capacity as the
Agent) within thirty (30) days after demand for all costs and expenses incurred
by Comerica (including in its capacity as the Agent) in connection with the
preparation, delivery, administration and execution of, and any amendment,
supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any other Loan Document and any other documents
prepared in connection herewith (including any commitment letter and related
documents preceding this Agreement) or therewith, and the consummation of the
transactions contemplated hereby and thereby, including the reasonable Attorney
Costs incurred by Comerica or Documentation Agent as to any amendments,
supplements, waivers, or modifications, (including in its capacity as the Agent)
with respect hereto and thereto;
(b) pay or reimburse the Agent and each Lender within thirty (30)
days after demand for all costs and expenses incurred by them in connection with
the enforcement, attempted enforcement, or preservation of any rights or
remedies (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding
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or appellate proceeding) under this Agreement, any other Loan Document, and any
such other documents, including Attorney Costs incurred by the Agent and any
Lender; and
(c) pay or reimburse Comerica (including in its capacity as the
Agent) within thirty (30) days after demand for all reasonable audit,
environmental inspection and review, search and filing, registration and
recording, costs, fees and expenses, incurred or sustained by Comerica
(including in its capacity Agent) in connection with the matters referred to
under clauses (A) and (B) of this SECTION 12.7 of this Agreement.
12.8 RELIANCE BY LENDERS. All covenants, agreements, representations and
warranties made herein by the Borrower shall, notwithstanding any investigation
by the Lenders or the Agent be deemed to be material to and to have been relied
upon by the Lenders.
12.9 NO SET-OFFS BY BORROWER. All sums payable by the Borrower pursuant
to this Agreement, the Notes or any of the other Loan Documents shall be payable
without notice or demand and shall be payable in United States Dollars without
set-off or reduction of any manner whatsoever; provided, however, that
notwithstanding the requirement that all payments be made without set-off or
reduction, if any invoice by the Agent for interest, loan fees or letter of
credit commissions incorrectly states that the Borrower owes an amount greater
than the amount actually due, the Borrower pays the amount due on such invoice
and then such error is corrected by Agent or determined as having been made by a
court having jurisdiction pursuant to the terms of this Agreement, then the
Borrower may apply the amount of such overpayment toward future payments due
hereunder or, in the event no further payments will fall due hereunder, recover
such overpayment from the Lenders.
12.10 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Lender.
12.11 HEADINGS. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
12.12 SEVERABILITY. Whenever possible, each provision of this Agreement,
the Notes and each of the other Loan Documents shall be interpreted in such a
manner as to be valid, legal and enforceable under the applicable law of any
jurisdiction. Without limiting the generality of the foregoing sentence, in case
any provision of this Agreement, the Notes or any of the other Loan Documents
shall be invalid, illegal or unenforceable under the applicable law of any
jurisdiction, the validity, legality and enforceability of the remaining
provisions, or of such provision in any other jurisdiction, shall not in any way
be affected or impaired thereby.
12.13 NO THIRD PARTIES BENEFITTED. This Agreement is made and entered
into for the sole protection and legal benefit of the Borrower, the Lenders and
the Agent, and their permitted successors and assigns, and except as otherwise
expressly provided in this Agreement, no other
70
<PAGE> 72
Person shall be a direct or indirect legal beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement or any of
the other Loan Documents. Neither the Agent nor any Lender shall have any
obligation to any Person not a party to this Agreement or other Loan Documents.
12.14 RELATIONSHIP OF PARTIES. The relationship between the Borrower, on
the one hand, and the Lenders and the Agent, on the other, is, and at all times
shall remain, solely that of a borrower and lenders. Neither the Lenders nor the
Agent shall under any circumstances be construed to be partners or joint
venturers of the Borrower or any of its Affiliates; nor shall the Lenders nor
the Agent under any circumstances be deemed to be in a relationship of
confidence or trust or a fiduciary relationship with the Borrower or any of its
Affiliates, or to owe any fiduciary duty to the Borrower or any of its
Affiliates. The Lenders and the Agent do not undertake or assume any
responsibility or duty to the Borrower or any of its Affiliates to select,
review, inspect, supervise, pass judgment upon or otherwise inform the Borrower
or any of its Affiliates of any matter in connection with its or their Property,
any Collateral held by the Agent or any Lender or the operations of the Borrower
or any of its Affiliates. The Borrower and each of its Affiliates shall rely
entirely on their own judgment with respect to such matters, and any review,
inspection, supervision, exercise of judgment or supply of information
undertaken or assumed by any Lender or the Agent in connection with such matters
is solely for the protection of the Lenders and the Agent and neither the
Borrower nor any of their Affiliates is entitled to rely thereon.
12.15 TIME. Time is of the essence as to each term or provision of this
Agreement and each of the other Loan Documents.
12.16 WAIVER OF PUNITIVE DAMAGES. NOTWITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED IN THIS AGREEMENT, THE BORROWER HEREBY AGREES THAT IT SHALL
NOT SEEK FROM THE LENDERS OR THE AGENT PUNITIVE DAMAGES UNDER ANY THEORY OF
LIABILITY.
12.17 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF
THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH
STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, AND
ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
12.18 PERSONAL JURISDICTION. THE BORROWER THE AGENT, LENDER AND ALL
ASSIGNEES AND PARTICIPANTS HEREBY IRREVOCABLY AGREE THAT ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OF THE
AGREEMENTS, DOCUMENTS OR INSTRUMENTS DELIVERED IN CONNECTION HEREWITH MAY BE
BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES OF
AMERICA IN THE NORTHERN DISTRICT OF CALIFORNIA AS THE AGENT MAY ELECT, AND, BY
EXECUTION AND DELIVERY HEREOF, ACCEPTS AND CONSENTS TO, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS AND AGREES
71
<PAGE> 73
THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY THE AGENT IN
WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT HEREUNDER BY THE
BORROWER AGAINST THE AGENT OR ANY LENDER. THE PARTIES HEREBY WAIVE, TO THE FULL
EXTENT PERMITTED BY LAW, ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR
PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS.
12.19 WAIVER OF JURY TRIAL. THE BORROWER, EACH LENDER AND THE AGENT,
HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO
ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OF THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND
OBLIGATIONS.
72
<PAGE> 74
WITNESS the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
BORROWER
S3 INCORPORATED,
a Delaware corporation
By: /s/ Walter D. Amaral
-------------------------------
Name: Walter D. Amaral
Title: CFO and Treasure
Notices to be sent to:
S3 INCORPORATED
2801 Mission College Boulevard
P.O. Box 58058
Santa Clara, California 95052-8058
Attn: Dale Lindly, Controller
Telephone: (408) 588-8659
Facsimile: (408) 367-7323
With a copy to:
Andrea A. Wirum, Esq.
Pillsbury, Madison & Sutro LLP
235 Montgomery Street, Room 1485
San Francisco, CA 94104
<PAGE> 75
AGENT COMERICA BANK - CALIFORNIA
By: /s/ Alan Jepsen
-------------------------------
Alan Jepsen,
Vice President and Assistant
Manager
Agent's Payment Office:
COMERICA BANK - CALIFORNIA
55 Almaden Boulevard
San Jose, California 95113
Attn: Alan Jepsen, Vice President
and Assistant Manager
ABA No. 121137522
Account No.: 2158590010
Notices to be sent to:
COMERICA BANK - CALIFORNIA
55 Almaden Boulevard
San Jose, California 95113
Attn: Alan Jepsen, Vice President
and Assistant Manager
Telephone: (408) 291-6628
Facsimile: (408) 271-4021
With a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111
Attn: Joseph A. Scherer, Esq.
Telephone: (415) 693-2000
Telecopy: (415) 951-3699
<PAGE> 76
DOCUMENTATION AGENT FLEET NATIONAL BANK
By: /s/ Mathew M. Glauninger
-------------------------------
Mathew M. Glauninger,
Vice President
Notices to be sent to:
FLEET NATIONAL BANK
Mail Stop MABOF04M
75 State Street
Boston, Massachusetts 02109
Attn: Mathew M. Glauninger, Vice
President
Telephone: (617) 346-1563
Facsimile: (617) 346-1633
With a copy to:
Hinckley, Allen & Snyder
28 State Street
Boston, Massachusetts 02109
Attn: Mac Farmer III
Telephone: (617) 345-9000
Telecopy: (617) 345-9020
<PAGE> 77
LENDERS COMERICA BANK - CALIFORNIA
By: /s/ Alan Jepsen
-------------------------------
Alan Jepsen,
Vice President and Assistant
Manager
By:
-------------------------------
Name:
Title:
Domestic Lending Office:
COMERICA BANK - CALIFORNIA
55 Almaden Boulevard
San Jose, California 95113
Attn: Alan Jepsen, Vice President
and Assistant Manager
Telephone: (408) 291-6628
Facsimile: (408) 271-4021
Notices to be sent to:
COMERICA BANK - CALIFORNIA
55 Almaden Boulevard
San Jose, California 95113
Attn: Alan Jepsen, Vice President
and Assistant Manager
Telephone: (408) 291-6628
Facsimile: (408) 271-4021
<PAGE> 78
FLEET NATIONAL BANK
By: /s/ Mathew M. Glauninger
-------------------------------
Mathew M. Glauninger,
Vice President
Domestic Lending Office:
FLEET NATIONAL BANK
Mail Stop MABOF04M
75 State Street
Boston, Massachusetts 02109
Attn: Mathew M. Glauninger
Telephone: (617) 346-1563
Facsimile: (617) 346-1633
Notices to be sent to:
FLEET NATIONAL BANK
Mail Stop MABOF04M
75 State Street
Boston, Massachusetts 02109
Attn: Mathew M. Glauninger
Telephone: (617) 346-1563
Facsimile: (617) 346-1633
<PAGE> 79
THE SUMITOMO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY
By: /s/ Ninoos Y. Benjamin
-------------------------------
Ninoos Y. Benjamin
Vice President and Manager
Domestic Lending Office:
THE SUMITOMO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY
333 So. Grand Ave., Ste. 5300
Los Angeles, CA 90071
Attn: Ninoos Y. Benjamin, Vice
President and Manager
Telephone: (213) 229-2104
Facsimile: (213) 613-1083
Notices to be sent to:
THE SUMITOMO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY
333 So. Grand Ave., Ste. 5300
Los Angeles, CA 90071
Manager, Credit Administration Department
Telephone: (213) 629-3191
Facsimile: (213) 628-2719
cc: Ninoos Y. Benjamin, Vice
President and Manager
Telephone: (213) 229-2104
Facsimile: (213) 613-1083
<PAGE> 80
SCHEDULE 1.0
<TABLE>
<CAPTION>
REVOLVING LOAN FACILITY
---------------------------------
COMMITMENT Pro Rata Share
-------------- --------------
<S> <C> <C>
COMERICA BANK - CALIFORNIA $30,000,000.00 40.0000000%
FLEET NATIONAL BANK $25,000,000.00 33.3333334%
THE SUMITOMO TRUST & BANKING $20,000,000.00 26.6666666%
CO., LTD., LOS ANGELES AGENCY
-------------- --------------
Total $75,000,000.00 100.0000000%
============== ==============
</TABLE>
<PAGE> 81
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS................................................................. 1
1.1 Defined Terms............................................................... 1
1.2 Accounting Terms............................................................ 16
1.3 Other Terms................................................................. 17
1.4 Performance; Time........................................................... 17
1.5 Laws........................................................................ 17
1.6 Rounding.................................................................... 17
1.7 Schedules and Exhibits...................................................... 18
SECTION 2. THE CREDIT - AMOUNT AND TERMS............................................... 18
2.1 Amounts and Terms of Commitments............................................ 18
2.1.1 Revolving Credit Facility............................................ 18
2.1.2 Letter of Credit Subfacility......................................... 20
2.2 Notes....................................................................... 23
2.3 Repayment of the Loans...................................................... 23
2.4 Payment of Interest on the Loans............................................ 23
2.5 Procedure for the Borrowing of Loans........................................ 24
2.6 Conversion and Continuation Elections....................................... 25
2.7 Voluntary Reduction in Aggregate Commitments................................ 26
2.8 Fees........................................................................ 27
2.9 Calculation of Interest and Fees............................................ 28
2.10 Payments.................................................................... 28
2.11 Payment on Non-Business Days................................................ 28
2.12 Application of Payments..................................................... 28
2.13 Distribution of Payments.................................................... 28
2.14 Agent's Right to Assume Funds Available for Loans........................... 29
2.15 Agent's Right to Assume Payments Will be Made by the Borrower............... 29
SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY...................................... 29
3.1 Taxes....................................................................... 29
3.2 Illegality.................................................................. 33
3.3 Increased Costs............................................................. 33
3.4 Inability to Determine Rates................................................ 34
3.5 Prepayment of LIBOR Loans................................................... 34
3.6 Capital Requirements........................................................ 34
3.7 Certificates of Lenders..................................................... 35
SECTION 4. CONDITIONS PRECEDENT TO LOANS............................................... 35
4.1 First Loan.................................................................. 35
4.2 All Loans................................................................... 38
</TABLE>
i.
<PAGE> 82
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 5. BORROWER'S REPRESENTATIONS AND WARRANTIES................................... 39
5.1 Existence and Power......................................................... 39
5.2 Loan Documents and Notes Authorized; Binding Obligations.................... 39
5.3 No Conflict................................................................. 39
5.4 Subsidiaries; Capital Structure............................................. 40
5.5 Financial Condition......................................................... 40
5.6 Litigation.................................................................. 40
5.7 Consents and Approvals...................................................... 40
5.8 Solvency.................................................................... 41
5.9 Employment and Labor Agreements............................................. 41
5.10 Agreements with Affiliates and Other Agreements............................. 41
5.11 ERISA....................................................................... 41
5.12 Labor Matters............................................................... 42
5.13 Margin Regulations.......................................................... 42
5.14 Taxes....................................................................... 42
5.15 Trademarks, Patents, Copyrights and Licenses................................ 42
5.16 No Brokers.................................................................. 43
5.17 Full Disclosure............................................................. 43
5.18 Other Regulations........................................................... 43
5.19 Hazardous Materials......................................................... 43
SECTION 6. BORROWER'S AFFIRMATIVE COVENANTS............................................ 44
6.1 Records and Reports......................................................... 44
6.2 Corporate Rights; Facilities; Conduct of Business........................... 47
6.3 Insurance................................................................... 47
6.4 Taxes and Other Liabilities................................................. 47
6.5 Inspection Rights; Assistance............................................... 48
6.6 Compliance With Laws........................................................ 48
6.7 Material Agreements......................................................... 48
6.8 Supplemental Disclosure..................................................... 48
6.9 Environmental Condition, Investigations and Indemnification................. 48
6.10 Enforcement of Covenants Not to Compete..................................... 49
6.11 Further Assurances.......................................................... 49
SECTION 7. BORROWER'S NEGATIVE COVENANTS............................................... 49
7.1 Liens; Negative Pledges..................................................... 49
7.2 Investments................................................................. 50
7.3 Limitations on Indebtedness; Contingent Obligations......................... 51
</TABLE>
ii.
<PAGE> 83
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.4 Employee Loans and Executive Compensation................................... 51
7.5 Operating Leases............................................................ 52
7.6 Capital Expenditures........................................................ 52
7.7 Restriction on Fundamental Changes.......................................... 52
7.8 Transactions with Affiliates................................................ 52
7.9 Maintenance of Business..................................................... 53
7.10 Events of Default........................................................... 53
7.11 ERISA....................................................................... 53
7.12 No Use of any Lender's Name................................................. 53
7.13 Negative Pledge Clauses..................................................... 53
SECTION 8. FINANCIAL COVENANTS OF BORROWER............................................. 54
8.1 Minimum Effective Tangible Net Worth........................................ 54
8.2 Minimum Quick Ratio......................................................... 54
8.3 Profitable Operations....................................................... 54
8.4 Maximum Consolidated Leverage Ratio......................................... 54
8.5 Maximum Other Assets........................................................ 54
SECTION 9. EVENTS OF DEFAULT AND REMEDIES.............................................. 54
9.1 Events of Default........................................................... 54
9.2 Waiver of Default........................................................... 57
9.3 Remedies.................................................................... 57
9.4 Set-Off..................................................................... 58
9.5 Sharing of Payments......................................................... 58
9.6 Rights and Remedies Cumulative.............................................. 58
SECTION 10. AGENT....................................................................... 58
10.1 Appointment and Authorization............................................... 58
10.2 Delegation of Duties........................................................ 59
10.3 Liability of Agent.......................................................... 59
10.4 Reliance by Agent........................................................... 59
10.5 Notice of Default........................................................... 60
10.6 Non-Reliance................................................................ 60
10.7 Indemnification............................................................. 61
10.8 Agent in Individual Capacity................................................ 62
10.9 Successor Agent............................................................. 62
10.10 Documentation Agent......................................................... 62
SECTION 11. AMENDMENTS AND WAIVERS; ASSIGNMENTS, PARTICIPATION, ETC..................... 62
11.1 Amendments and Waivers...................................................... 62
</TABLE>
iii.
<PAGE> 84
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
11.2 Assignments, Participation, Etc............................................. 63
SECTION 12. MISCELLANEOUS............................................................... 66
12.1 No Waiver by Agent or Lenders............................................... 66
12.2 Entire Agreement; Construction.............................................. 66
12.3 Indemnification............................................................. 66
12.4 Notices..................................................................... 67
12.5 Notification of Addresses, Lending Offices, Etc............................. 67
12.6 Counterparts................................................................ 68
12.7 Costs and Expenses................................................... 68
12.8 Reliance by Lenders......................................................... 68
12.9 No Set-Offs by Borrower..................................................... 68
12.10 Successors and Assigns...................................................... 69
12.11 Headings.................................................................... 69
12.12 Severability................................................................ 69
12.13 No Third Parties Benefitted................................................. 69
12.14 Relationship of Parties..................................................... 69
12.15 Time........................................................................ 70
12.16 Waiver of Punitive Damages.................................................. 70
12.17 Governing Law............................................................... 70
12.18 Personal Jurisdiction....................................................... 70
12.19 Waiver of Jury Trial........................................................ 70
</TABLE>
iv.
<PAGE> 85
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit A - Form of Note
Exhibit B - Form of Borrowing Base Certificate
Exhibit C - Form of Borrowing Notice
Exhibit D - Form of Compliance Certificate
Exhibit E - Form of Conversion/Continuation Notice
Exhibit F - Form of Non-Bank Lender Tax Certificate
Exhibit G - Form of Assignment and Acceptance
INDEX OF SCHEDULES
Schedule 1.0 - Commitments
Schedule 1.1 - Principal Contracts and Joint Ventures
Schedule 5.1 - List of States
Schedule 5.4 - Affiliates; Capital Structure
Schedule 5.6 - Litigation
Schedule 5.7 - Required Consents
Schedule 5.9 - Employment and Labor Agreements
Schedule 5.10 - Contracts with Affiliates
Schedule 5.11 - Employee Benefit Plans
Schedule 5.15 - Trademarks, Patents and Copyrights
Schedule 7.1 - Existing Liens
Schedule 7.2(a) - Existing Investments
Schedule 7.2(b) - Investment Policy
Schedule 7.3 - Existing Indebtedness
Schedule 7.4 - Loans to Officers and Employees
Schedule 7.8 - Transactions with Affiliates
</TABLE>
v.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 67,399
<SECURITIES> 44,692
<RECEIVABLES> 120,798
<ALLOWANCES> 3,340
<INVENTORY> 50,727
<CURRENT-ASSETS> 315,991
<PP&E> 78,523
<DEPRECIATION> 29,930
<TOTAL-ASSETS> 535,634
<CURRENT-LIABILITIES> 131,156
<BONDS> 0
0
0
<COMMON> 178,987
<OTHER-SE> 108,003
<TOTAL-LIABILITY-AND-EQUITY> 535,634
<SALES> 334,448
<TOTAL-REVENUES> 334,448
<CGS> 207,039
<TOTAL-COSTS> 207,039
<OTHER-EXPENSES> 99,923
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 5,245
<INCOME-PRETAX> 26,478
<INCOME-TAX> 9,478
<INCOME-CONTINUING> 17,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,000
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
