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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 quarterly period ended March 31, 1999.
OR
[ ] Transition report pursuant to Section 13(d) or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
Commission file number: 0-23296
CIDCO INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3500734
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
220 Cochrane Circle
Morgan Hill, CA 95037
(Address of principal executive offices and zip code)
(408) 779-1162
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of the Registrant's Common Stock on May 7, 1999
was 13,406,343.
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CIDCO INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements:
Balance sheet at March 31, 1999
and December 31, 1998 ......................................3
Statement of operations for the three months
ended March 31, 1999 and 1998 ..............................4
Statement of cash flows for the three months
ended March 31, 1999 and 1998 ..............................5
Notes to financial statements .................................6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..............7
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk.....18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................19
ITEM 2. Changes in Securities ........................................19
ITEM 3. Defaults Upon Senior Securities ..............................19
ITEM 4. Submission of Matters to a Vote of Security Holders ..........19
ITEM 5. Other Information ............................................19
ITEM 6. Exhibits and Reports on Form 8-K .............................19
SIGNATURES .................................................................20
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIDCO INCORPORATED
BALANCE SHEET
(in thousands, except per share data; unaudited)
March 31, December 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 29,117 $ 12,349
Short-term investments ....................... 11,065 13,975
Accounts receivable, net of allowance
for doubtful accounts of $2,710 and $1,885 . 38,766 27,689
Inventories .................................. 19,692 22,086
Deferred tax asset ........................... 1,490 1,490
Income tax refunds receivable ................ 93 18,367
Other current assets ......................... 815 1,547
---------- ----------
Total current assets ....................... 101,038 97,503
Property and equipment, net ..................... 8,728 9,691
Other assets .................................... 577 473
---------- ----------
$ 110,343 $ 107,667
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 17,847 $ 12,446
Accrued liabilities .......................... 13,264 14,585
Accrued taxes payable ........................ 345 234
---------- ----------
Total current liabilities .................. 31,456 27,265
Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
authorized, 14,418 and 14,418 shares issued 144 144
Treasury stock, at cost (1,012 and 339 shares) (7,368) (4,600)
Additional paid-in capital ................... 88,916 88,916
Retained earnings ............................ (2,805) (4,058)
---------- ----------
Total stockholders' equity ................. 78,887 80,402
---------- ----------
$ 110,343 $ 107,667
========== ==========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
STATEMENT OF OPERATIONS
(in thousands, except per share data; unaudited)
Three months ended
March 31,
----------------------------
1999 1998
--------- ---------
Sales ....................................... $ 47,202 $ 69,354
Cost of sales ............................... 35,038 52,055
Gross margin ................................ 12,164 17,299
Operating expenses:
Research and development ................ 1,936 3,589
Selling and marketing ................... 7,332 17,649
General and administrative .............. 1,519 3,483
Restructuring ........................... -- 2,672
--------- ---------
10,787 27,393
Income (loss) from operations ............... 1,377 (10,094)
Other income, net ........................... 165 1,447
--------- ---------
Income (loss) before income taxes ........... 1,542 (8,647)
Provision (benefit) for income taxes ........ -- (3,286)
--------- ---------
Net income (loss) ........................... $ 1,542 $ (5,361)
========= =========
Basic earnings (loss) per share ............. $ 0.11 $ (0.38)
========= =========
Diluted earnings (loss) per share ........... $ 0.11 $ (0.38)
========= =========
Common shares outstanding ................... 13,759 14,003
========= =========
Common shares assuming dilution ............. 14,400 14,003
========= =========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
STATEMENT OF CASH FLOWS
(in thousands; unaudited)
Three months ended
March 31,
----------------------
1999 1998
--------- ---------
Cash flows provided by operating activities:
Net income (loss) .................................... $ 1,542 $ (5,361)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 1,427 1,291
Equity in losses of affiliate ...................... -- 205
Changes in assets and liabilities:
Accounts receivable ............................... (11,077) 12,741
Inventories ....................................... 2,394 (1,448)
Income tax refunds receivable ..................... 18,274 --
Other current assets .............................. 732 (2,916)
Other assets ...................................... (104) 81
Accounts payable .................................. 5,401 (545)
Accrued liabilities ............................... (1,321) 5,326
Accrued taxes payable ............................. 111 (1,875)
--------- ---------
Net cash provided by operating activities ........... 17,379 7,499
Cash flows provided by (used in) investing activities:
Acquisition of property and equipment ................ (464) (5,546)
Sale (purchase) of short-term investments, net ....... 2,875 2,731
--------- ---------
Net cash provided by (used in) investing activities . 2,411 (2,815)
Cash flows provided by (used in) financing activities:
Issuance of common stock ............................. 57 766
Purchase of treasury stock ........................... (3,079) --
--------- ---------
Net cash provided by (used in) financing activities . (3,022) 766
Net increase in cash and cash equivalents .............. 16,768 5,450
Cash and cash equivalents at beginning of period ....... 12,349 48,253
--------- ---------
Cash and cash equivalents at end of period ............. $ 29,117 $ 53,703
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes ........................... $ -- $ 2,075
========= =========
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Note 1. Basis of Presentation
The accompanying financial information is unaudited, but, in the
opinion of management, reflects all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's financial
position, operating results and cash flows for those periods presented. 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 the rules and regulations of the Securities and
Exchange Commission. The financial information should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's most recent Annual Report on Form
10-K filed with the Securities and Exchange Commission. Results for the interim
period are not necessarily indicative of results for the entire year.
Note 2. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the standard cost method (which approximates first in, first
out). The Company's inventories consist of finished goods and raw materials
purchased for the manufacture of finished goods.
The components of inventory are as follows (in thousands):
Mar. 31,1999 Dec. 31,1998
------------ ------------
Inventories, net of reserves:
Finished Goods ................... $ 14,259 $ 14,005
Raw Materials (1) ............... 5,433 8,081
---------- ----------
$ 19,692 $ 22,086
========== ==========
(1) A reserve of $4,040 and 3,935 (in thousands) related to i-Phone raw
materials has been included in restructuring for the periods ended March 31,
1999 and December 31,1998, respectively. See Note 3.
Note 3. Restructuring
The Company incurred a pretax restructuring charge of $19.9 million in 1998
due to implementation of several streamlining programs, including combining
certain marketing and operations functions, restructuring research and
development activities and discontinuing certain products, resulting in asset
write-downs, lease termination costs and accrued employee costs. No additional
restructuring costs have been incurred in 1999.
The following table lists the components of the restructuring accrual for
the quarter ended March 31, 1999:
Employee Asset
Costs Write-downs Leases Total
(in thousands): -------- ----------- ------ -------
Balance at December 31, 1998 ........... $ 60 $ 3,935 $ (112) $ 3,883
Reserve utilized in first quarter, 1999. (285) 105 129 (51)
------ ------- ------ -------
Balance at March 31, 1999 .............. $ (225) $ 4,040 $ 17 $ 3,832
====== ======= ====== =======
Note 4. Earnings per Share
Basic Earnings Per Share ("EPS") is computed by dividing net income
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Basic EPS excludes
the dilutive effect of stock options. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options.
The following table is a reconciliation of the numerators and
denominators of the basic and diluted EPS:
Quarter ended March 31,
---------------------------
1999 1998
---------- ----------
Net income (loss) used to compute
earnings per common share .................. $ 1,542 $ (5,361)
========== ==========
Denominator used to compute basic
earnings (loss) per common share ........... 13,759 14,003
Shares issuable on exercise of options (1) ... 641 --
---------- ----------
Denominator used to compute diluted
earnings (loss) per common share ........... 14,400 14,003
========== ==========
Basic earnings (loss) per share .............. $ 0.11 $ (0.38)
========== ==========
Diluted earnings (loss) per share ............ $ 0.11 $ (0.38)
========== ==========
(1) Potential common stock equivalents issuable upon exercise of options to
purchase 641,206 shares of common stock priced at $1.00 to $3.50 per share at
March 31, 1999. Potential common stock equivalents issuable upon exercise of
options to purchase 232,256 shares of common stock priced at $1.00 to $2.75 per
share was excluded because their inclusion would be anti-dilutive for the year
ended December 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information should be read in conjunction with the interim
financial statements and the notes thereto in Part I, Item 1 of this Quarterly
Report.
Historical Background
CIDCO was incorporated in July 1988 to design, develop and market
subscriber telephone equipment that would support Caller ID, Caller ID on Call
Waiting and other intelligent network feature ("Network" or "Network Feature")
Services (individually or collectively "Services") then being introduced by
Regional Bell Operating Companies ("RBOCs") and independent telephone operating
companies, both domestic and international (collectively with RBOCs, "Telcos").
The Company began operations in 1989, initially funding its business with a
capital investment made by its founders. Prior to its initial public offering,
the Company financed its growth principally through internally generated funds
and short-term borrowings. In March 1994, the Company completed its initial
public offering of Common Stock and had two subsequent public offerings in 1994
resulting in capital infusions to the Company totaling approximately $59.4
million.
Historically, the Company's primary sales and distribution channels
have been direct marketing relationships with certain Telcos ("Direct Marketing
Services"), fulfillment of Telco generated orders ("Fulfillment"), wholesale
shipments directly to Telcos ("Direct to Telco"), and, to a lesser extent,
international accounts, retail stores ("Retail"), and original equipment
manufacturing ("OEM") customers. Direct Marketing Services programs are sales
campaigns run by the Company involving the use of consumer mailings and
telemarketing to sell Services for the Telcos which utilize the Company's
products. As part of these programs the Company, acting as the Telco's "agent,"
generates an order for Network Services, such as Caller ID, and then ships on
the Telco's behalf an adjunct product or a phone product to each customer
"acquired" through the campaign. Fulfillment sales occur when the Company
receives an order and ships the requested product directly to the customer. In
the case of Fulfillment sales, the Telcos generate orders by performing the
marketing activities themselves rather than retaining the Company to perform
such services, as in Direct Marketing Services programs. Direct Marketing
Services sales totaled 32%, 49%, and 25% of sales in 1998, 1997 and 1996,
respectively. Fulfillment sales accounted for 34%, 35%, and 43% of sales in
1998, 1997 and 1996, respectively. Sales through Direct Marketing Services and
Fulfillment channels for the quarter ended March 31, 1999 were 21% and 43% of
total sales, respectively.
This Report contains forward-looking statements that reflect the
Company's current views with respect to future events that may impact the
Company's results of operations and financial condition. In this report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
those set forth below under the caption "Factors Which May Affect Future
Results," which could cause actual future results to differ materially from
historical results or those described in the forward-looking statements. The
forward-looking statements contained in this Report should be considered in
light of these factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.
Results of Operations
The following table sets forth for the periods indicated the percentage
of sales represented by certain line items in the Company's income statement:
As a Percentage of Sales
Three months ended
March 31,
------------------------
1999 1998
----- -----
Sales ......................................... 100.0% 100.0%
Cost of sales ................................. 74.2 75.1
----- -----
Gross margin .................................. 25.8 24.9
Operating expenses:
Research and development ................... 4.1 5.2
Selling and marketing ...................... 15.6 25.3
General and administrative ................. 3.2 5.0
Restructuring .............................. -- 3.9
----- -----
22.9 39.4
----- -----
Income (loss) from operations ................. 2.9 (14.5)
Other income, net ............................. 0.4 2.1
----- -----
Income (loss) before income taxes ............. 3.3 (12.4)
Provision (benefit) for income taxes .......... -- (4.7)
----- -----
Net income (loss) ............................. 3.3% (7.7)%
===== =====
Sales
Sales are recognized upon shipment of the product to the customer less
reserves for anticipated returns or, in the case of Direct Marketing Services,
non-retention of certain Services provided by the Telcos, and customer credit
worthiness. Sales decreased 32% to $47.2 million in the first quarter of 1999
from $69.4 million in the first quarter of 1998. Sales from Direct Marketing
Services Programs decreased to $9.9 million in the first quarter of 1999 from
$22.6 million in the first quarter of 1998. Fulfillment sales decreased to $20.1
million in the first quarter of 1999 from $28.5 million in the first quarter of
1998. Adjunct product sales decreased to 59% of dollar sales volume in the first
quarter of 1999 from 73% of dollar sales volume in the first quarter of 1998.
Unit sales of adjunct products decreased in the first quarter of 1999 to 1.5
million from 2.3 million in the first quarter of 1998. These decreases were due
to decreased unit sales of the Company's adjunct products through both the
Company's Fulfillment sales channel and Direct Marketing Services programs for
Network Feature Services on behalf of certain Telcos as the Company chose not to
participate in risky, low profit agency programs. In addition, the average
selling price of adjunct products dropped 16% from the first quarter of 1998 to
the first quarter of 1999 due to continued competitive pricing pressures.
Gross margin
Cost of sales includes the cost of finished goods purchased from the
Company's offshore contract manufacturers, costs associated with procuring and
warehousing the Company's inventory and royalties payable on licensed technology
used in the Company's products. Gross margin as a percentage of sales increased
to 26% in the first quarter of 1999 from 25% in the first quarter of 1998. This
increase was primarily due to the absence of one-time charges in the first
quarter of 1999 that were present in the first quarter of 1998. Excluding
one-time charges, gross margin for the first quarter of 1998 was 37%. The
decrease in gross margin between the first quarters of 1999 and 1998 (adjusted
for one-time charges) was primarily due to the decrease in Direct Marketing
Services sales that, in the first quarter of 1998, had significantly higher
gross margins in conjunction with significantly higher marketing costs. In
addition, continued pricing pressures for all products contributed to the lower
gross margins in the first quarter of 1999. The Company expects gross margins to
vary in the future due to changes in sales mix by distribution channel and
product mix. For the remainder of 1999, the Company believes gross margins will
range between 20% to 30%.
Research and development expenses
Research and development expenses consist of salaries for personnel,
associated benefits and tooling and supplies for research and development
activities. The Company's policy is to expense all research and development
expenditures as incurred except for certain investments for tooling. Research
and development expenses decreased to $1.9 million in the quarter ended March
31, 1999 from $3.6 million in the first quarter of 1998. This decrease primarily
resulted from decreased spending on iPhone(R)(1)related development projects due
to the discontinuance of its Internet Solutions Division as well as overall
expense reductions due to the restructuring initiated in the third quarter of
1998. Research and development expenses as a percentage of sales decreased to
4.1% in the quarter ended March 31, 1999 from 5.2% in the same period of 1998.
The Company expects that research and development spending will remain at
approximately the same absolute dollar level experienced in the first quarter of
1999 for the remainder of 1999.
Selling and marketing expenses
Selling and marketing expenses consist of personnel costs, telephone
and electronic data exchange expenses, promotional costs and travel expenses.
Selling and marketing expenses decreased to $7.3 million in the quarter ended
March 31, 1999, from $17.6 million in the comparable period of 1998. As a
percentage of sales, selling and marketing expenses decreased to 15.6% in the
quarter ended March 31, 1999, from 25.4% in the same period of 1998. This
decrease was primarily due to decreased marketing costs for the Company's Direct
Marketing Services programs for Network Services. These marketing costs totaled
$2.9 million in the first quarter of 1999 as compared to $11.2 million in the
first quarter of 1998. The balance of the decrease was due to overall expense
reductions resulting from the restructuring initiated in the third quarter of
1998. The Company expects that selling and marketing expenses as a percentage of
sales will remain at approximately the level experienced in the first quarter of
1999 for the remainder of 1999.
General and administrative expenses
General and administrative expenses consist of primarily salaries,
benefits and other expenses associated with the finance and administrative
functions of the Company. General and administrative expenses decreased to $1.5
million in the quarter ended March 31, 1999 from $3.5 million in the comparable
period of 1998. As a percentage of sales, general and administrative expenses
decreased to 3.2% in the quarter ended March 31, 1999 from 5.0% in the
comparable period of 1998. These decreases are mainly due to the absence in the
first quarter of 1999 of a one-time charge of $1.2 million incurred in the first
quarter of 1998, as well as overall expense reductions due to the restructuring
begun in the third quarter of 1998. The Company believes that general and
administrative expenditures will remain at approximately first quarter spending
levels during the remainder of 1999.
Restructuring
The Company incurred no additional restructuring charges in the first
quarter of 1999 as compared to $2.7 million in the first quarter of 1998. The
Company currently expects no further restructuring charges in 1999.
Provision (benefit) for income taxes
The Company recorded no tax provision in the first quarter of 1999 due
to a loss carry-forward from 1998. In the first quarter of 1998, the benefit for
income taxes reflects an effective tax rate of (38)%.
(1) iPhone is a registered trademark of InfoGear Technology Corporation.
Liquidity and capital resources
The Company's cash, cash equivalents increased $16.8 million during the
quarter ended March 31, 1999 primarily from cash generated from operations of
$17.4 million and the sale of short-term investments of $2.9 million, partially
offset by acquisition of treasury stock of $3.1 million and acquisition of
property and equipment of $0.4 million. Cash generated by operations of $17.4
million resulted primarily from the receipt of income tax refunds of $18.3
million, increased accounts payable of $5.4 million, decreased inventories of
$2.4 million, net income of $1.5 million, depreciation and amortization of $1.4
million and decreased other current assets of $0.7 million, partially offset by
increased accounts receivable of $11.1 million and decreased accrued liabilities
and taxes payable of $1.2 million.
The Company generated working capital of $69.6 million as of March 31,
1999, as compared to $70.2 million at December 31, 1998. The Company's current
ratio decreased to 3.2 to 1, as of March 31, 1999, from 3.6 to 1, as of December
31, 1998. Accounts receivable increased $11.1 million to $38.8 million at March
31, 1999 from $27.7 million at December 31, 1998, while the average daily sales
outstanding rate decreased to 74 days from 83 days due to the higher sales
volume in the first quarter of 1999 over the last quarter of 1998.
The Company has a line of credit for up to $15 million. Borrowings
under the line bear interest at the bank's base rate and the interest is payable
monthly. The bank's base rate was 7.75% per annum at March 31, 1999. Borrowings
under the line are secured by substantially all of the Company's assets. As of
March 31, 1999, the Company had not borrowed any funds under the line. The line
is primarily used as security for letters of credit used to purchase inventory
from international suppliers. Letters of credit secured by this line totaled
$1.0 million as of March 31, 1999.
On January 27, 1999, the Company announced plans to purchase up to two
million shares of its outstanding Common Stock. As of March 31, 1999, the
Company had repurchased 698,000 shares at an aggregate purchase price of $3.1
million.
The Company plans to continue to invest in its infrastructure,
including information systems, to gain efficiencies and meet the demands of its
markets and customers. The Company believes its remaining 1999 capital
expenditures will be approximately $4.6 million. The remaining 1999 capital
expenditures are expected to be funded from available working capital. The
planned expenditure level is subject to adjustment as changing economic
conditions necessitate. The Company believes its current cash, cash equivalents,
short-term investments, and borrowing capacity will satisfy the Company's
working capital and capital expenditure requirements for the next twelve months.
Factors That May Affect Future Results
Dependence on Telco Services and Maturation of Market
Approximately 59%, 65% and 84% of the Company's revenues during the
first quarter of 1999 and the years 1998 and 1997, respectively, came from the
Company's sales of Network Feature adjuncts and the balance from Network Feature
phones. The size of the overall market for Network Feature products and Services
is a function of the total number of potential subscribers with Network
Feature-enabled telephone lines and the rate of adoption of Network Feature
Services, or the "penetration rate," among those subscribers. Customer adoption
of Network Feature Services has been in the past, and likely will be in the
future, dependent on a variety of factors, including the rate at which Telcos
from time-to-time elect to promote Network Feature Services, the perceived value
of the Services to end users, including the extent to which other end users have
also adopted Network Feature Services, and the end user cost for the Services.
There can be no assurances that Telcos will continue to promote Network Feature
Services, that one or more Network Feature Services will gain market acceptance
or that, in areas where the Services are accepted, those markets will not become
saturated. In addition, even if peak market penetration for Network Feature
Service has not been achieved for the entire United States market, one or more
regional markets may become saturated. Further, the market for Network Feature
adjunct products may be eroded as Network Feature functionality is designed into
competitively priced phone products as a standard Feature. Declines in demand
for or revenues from Network Feature Services, whether due to reduced promotion
of such Services by Telcos, competition, market saturation, price reduction,
technological change or otherwise, could have a material adverse affect on the
Company's business, operating results or financial condition. In addition, as
penetration rates for adoption of Network Feature Services increase towards
projected saturation levels, the expenses, or "cost per order," the Company must
incur in its Direct Marketing Services arrangements to obtain incremental end
user adoption of Network Feature Services increases, which may result in
unfavorable pressures on the Company's profitability.
Dependence on Telcos; Concentrated Customer Base
A significant portion of the Company's revenues is derived from a small
number of Telcos. During the first quarter of 1999 and the years 1998 and 1997,
respectively, the percentage of revenue derived by the Company from its
significant (greater than 10% of total sales) customers was 72% (two customers),
62% (four customers) and 77% (four customers). There can be no assurance that
the Company will retain its current Telco customers or that it will be able to
attract additional customers. The Company generally does not enter into long
term contracts with its Telco or other customers where on-going minimum
purchases are required. Moreover, the arrangements are typically both
nonexclusive and terminable at will following a specified notice period,
generally 20 to 60 days. In addition, these Telco customers may have significant
leverage over the Company and may try to obtain terms relatively favorable to
the customer and/or subsequently change the terms, including pricing, on which
the Company and such customers do business. If the Company is forced to accept
such terms and/or change the terms, including pricing, on which it does
business, the Company's operating margins may decline and such decline may have
a material adverse affect on the Company's business, results of operations or
financial condition.
The Company's sales and operating results are substantially dependent
on the extent of, and the timing of, this relatively small number of Telcos'
respective decisions to implement and from time-to-time promote Caller ID,
Caller ID on Call Waiting and other Network Services on a system-wide or
regional basis. The extent to which the Telcos determine to implement and/or
from time-to-time promote Network Services may be affected by a wide variety of
factors, including regulatory approvals, technical requirements, budgetary
constraints at the Telcos, consolidation among Telcos, market saturation for the
Services, the profitability of the Services to the Telcos, market acceptance for
the Services and other factors. The Company typically has little control over
any of these factors. There can be no assurances that the Telcos will continue
to implement and/or promote Network Feature Services, or that the Company's
product and program offerings will be selected by the Telcos. Moreover, the
Company believes that certain Telcos have begun to perform for themselves the
customer acquisition services currently undertaken by the Company through its
Direct Marketing programs, rather than through third parties such as the
Company. The continuation of this trend among the Telcos could have a material
adverse affect on the Company's business, results of operations and financial
condition. The Company operates with little or no backlog and its quarterly
results are substantially dependent on the Telcos' implementation and/or
promotion of Services on a system wide or regional basis during each quarter.
The Company's operating expenses are based on anticipated sales levels, and a
high percentage of such expenses are relatively fixed. As result, to the extent
that the Telcos delay the implementation and/or promotion of these Services
which were anticipated for a particular quarter, the Company's sales and
operating results in that quarter may be materially and adversely affected.
New Product Introduction; Technological Change
The telecommunications industry is subject to rapid technological
change, changing customer requirements, frequent new product introductions and
changing industry standards which may render existing products and Services
obsolete. The Company's future success will depend in large part on its ability
to timely develop and introduce new products and services which keep pace with,
and correctly anticipate, these changes and which meet new, evolving market
standards and changing customer requirements, as well as its ability to enhance
and improve existing products and services. Product introductions and short
product life cycles necessitate high levels of expenditure for research and
development. There can be no assurance that the Company's existing markets will
not be eroded or that the Company will be able to correctly anticipate and/or
timely develop and introduce products and services which meet the requirements
of the changing marketplace or which achieve market acceptance. If the Company
is unable to develop and introduce products and services which timely meet the
changing requirements of the marketplace and achieve market acceptance, the
Company's business, results of operations or financial condition may be
materially and adversely affected.
In particular, the Company is seeking to expand its product offerings
into a new business area, Internet/E-Mail appliances, and expects to devote a
significant portion of its research and development resources on developing an
"e-mail appliance" which would allow electronic messaging via an easy-to-use
device. These are significantly new areas for the Company and its existing
research and development, sales and marketing personnel. There can be no
assurances that the Company will be successful in timely developing such
products or that, if developed, there will be a market for such products.
Moreover, there can be no assurances that the Company's existing personnel will
have the skills necessary to timely develop, market and sell products for this
market or that, if it becomes necessary to do so, the Company will be able to
hire the necessary skilled personnel to develop, market and/or sell products in
these new areas.
Significant undetected errors or delays in new products or releases may
affect market acceptance of the Company's products and could have a material
adverse effect on the Company's business, results of operations or financial
condition. There can be no assurances that, despite testing by the Company or
its customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of market share or
failure to achieve market acceptance. Any such occurrences could have a material
adverse effect on the Company's business, results of operations or financial
condition. Further, if the Company were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with products or if customers were
dissatisfied with product functionality or performance, this could have a
material adverse effect on the Company's business, results of operations or
financial condition.
Fluctuations in Quarterly Revenues and Operating Results
The Company has experienced in the past, and may experience in the
future, significant fluctuations in sales and operating results from quarter to
quarter as a result of a variety of factors, including the timing of orders for
the Company's products from Telcos and other customers; the success of the
Company's own direct marketing programs, in particular, deriving adequate sales
volumes while controlling related costs; the addition or loss of distribution
channels or outlets; the impact on adoption rates of changes in monthly end-user
charges for Services; the timing and market acceptance of new product
introductions by the Company or its competitors; increases in the cost of
acquiring end-user customers for Services and the resulting effects on operating
expenses; technical difficulties with Telco Networks; changes in the Company's
product mix or sales mix by distribution channel that may affect sales prices,
margins or both; technological difficulties and resource constraints encountered
in developing, testing and introducing new products; uncertainties involved in
the Company's entry into markets for new Services; disruption in sources of
supply, manufacturing and product delivery; changes in material costs;
regulatory changes; general economic conditions, competitive pressures,
including reductions in average selling prices and resulting erosions of
margins; and other factors. Accordingly, the Company's quarterly results are
difficult to predict until the end of each particular quarter, and delays in
product delivery or closing of expected sales near the end of a quarter can
cause quarterly revenues and net income to fall significantly short of
anticipated levels. Because of these factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and that such comparisons should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarter the Company's operating results will 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 adversely affected.
Need to Develop Alternative Distribution Channels
Historically, the Company's Telco customers have been the primary
distribution channel for the Company's products. However, the Company is seeking
to diversify its distribution channels toward direct-to-end-user, retail and
other alternate distribution channels to the extent such channels do not
conflict with current Telco partnerships, with the goals of broadening the
Company's market opportunities and adding predictability to the Company's
quarter-by-quarter revenues. Moving into these new channels may involve a number
of risks, including, among other things, the establishment of new channel
relationships and presence, the cost of creating brand awareness and end-user
demand in the new channels, the viability of the Company's product offerings in
the new channels and managing conflicts among different channels offering the
Company's products. There can be no assurance that the Company will be
successful in identifying and exploiting alternate distribution channels or in
addressing any one or more of these risks. If the Company is not successful, it
may lose significant sales opportunities and will continue to be substantially
dependent upon the Telco channel for sales of its products.
Risks Related to Contract Manufacturing; Limited Sources of Supply
The Company's products are manufactured for the Company by third
parties that are primarily located in Malaysia, China and Thailand. The use of
third parties to manufacture products involves a number of risks, including
limited control over production facilities and schedules and the management of
supply chains for the manufactured products. Moreover, reliance on contract
manufacturers in foreign countries subjects the Company to risks of political
instability, financial instability, expropriation, currency controls and
exchange fluctuations, and changes in tax laws, tariffs and rules. See "Risks
Relating to International Sales." Many of the key components used in the
Company's products are available either only from single sources or, even if
potentially available from multiple sources, involve relatively long lead times
to manufacture, such that the Company cannot quickly obtain additional supply
without incurring significant incremental costs. In general, the Company does
not have supply contracts with its suppliers and orders parts on a purchase
order basis. The Company's inability to obtain sufficient quantities of
components required, or to develop alternative manufacturing capability if and
as required in the future, could result in delays or reductions in product
shipments that could materially and adversely affect the Company's business,
results of operations and financial condition.
Dependence on Key Personnel; Hiring and Retention of Employees
The Company's continued growth and success depend to a significant
extent on the continued services of its senior management and other key
employees and its ability to attract and retain highly skilled technical,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
continuously recruiting new personnel or in retaining existing personnel. None
of the Company's employees is subject to a long-term employment agreement. The
loss of one or more key employees or the Company's inability to attract
additional qualified employees or retain other employees could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company may experience increased compensation costs
in order to attract and retain skilled employees.
Risks Relating to International Sales
The Company has had relatively limited international sales to date.
However, the Company believes that international sales, particularly in Latin
America, Asia-Pacific and Europe, may represent an increasing percentage of the
Company's sales in the future. The Company's future success will depend in part
on its ability to compete in Latin America, Japan and elsewhere in the
Asia-Pacific region, and in Europe, and this will depend on the continuation of
favorable trading relationships between the region and the United States. The
Company's entry into international markets will likely require significant
management attention and may require significant engineering efforts to adapt
the Company's products to such countries' telephone systems. Moreover, the rate
of customer acceptance of Network Feature Services in areas outside of the
United States is highly uncertain. There can be no assurance that the Company's
Network Feature products will gain meaningful market penetration in target
foreign jurisdictions, whether due to local consumer preferences, local
regulatory requirements, technological constraints in the local Networks, the
extent to which the local Telcos determine to promote Network Feature Services,
or other factors. Dependence on revenues from international sales involves a
number of inherent risks, including new or different regulations, economic
slowdown and/or downturn in the general economy in one or more local markets,
international currency fluctuations, general strikes or other disruptions in
working conditions, political instability, trade restrictions, changes in
tariffs, the difficulties associated with staffing and managing international
operations, generally longer receivables collection periods, unexpected changes
in or impositions of legislative or regulatory requirements, reduced protection
for intellectual property rights in some countries, potentially adverse taxes,
delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers. International sales will also be impacted
by the specific economic conditions in each country.
Management of Infrastructure
The Company's future success will require, among other things, that the
Company continue to improve its operating and information systems. In
particular, the Company must constantly seek to improve its order entry and
tracking and product fulfillment service capabilities and systems in order to
retain and/or obtain Telco customers. The failure of the Company to successfully
manage and improve its operating and information systems may adversely affect
both the Company's ability to obtain and/or retain its Telco customers and
accordingly, could have a material adverse effect on the Company's business,
results of operations or financial condition.
Competition
The telecommunications industry is an intensely competitive industry
with several large vendors that develop and market Network Feature products.
Certain of these vendors have significantly more financial and technical
resources than the Company. The Company's competitors include in-house divisions
of the Company's current and potential customers, as well as companies offering
specific services and large firms. In addition to U.S. companies, competitors
for the Company's phone products include both large Asian and European consumer
electronics companies and smaller Asian and European manufacturers. If the
Company's existing customers perform directly the customer acquisition services
currently undertaken by the Company through its Direct Marketing Services
programs, or if potential customers retain or increase internal capabilities to
provide such services, the Company's business, results of operation and
financial condition could be adversely affected. The introduction of new
competitive products into one or more of the Company's various markets could
have a material adverse effect on the Company's business, results of operations
or financial condition.
Limited Protection of Intellectual Property; Risk of Third-Party Claims of
Infringement
The Company has patent protection on certain aspects of its existing
technology and also relies on trade secret protection, copyrights, trademarks
and contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights, that others have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Moreover, there can be no assurance
that the rights granted under any such patents will provide competitive
advantages to the Company or be adequate to safeguard and maintain the Company's
proprietary rights. In addition, the laws of certain countries in which the
Company's products may from time-to-time be sold may not protect intellectual
property rights to the same extent as the laws of the United States.
The telecommunications industry, like many technology-based industries,
is characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time to time may be notified by
third parties that the Company may be infringing patents owned by or proprietary
rights of third parties. The Company has in the past and may in the future have
to seek a license under such patent or proprietary rights, or redesign or modify
their products and processes in order to avoid infringement of such rights.
There can be no assurance that such a license would be available on acceptable
terms, if at all, or that the Company could so avoid infringement of such patent
or proprietary rights, in which case the Company's business, financial condition
and results of operations could be materially and adversely affected.
Additionally, litigation may be necessary to protect the Company's proprietary
rights. Any claims or litigation involving the Company's owned or licensed
patents or other intellectual property rights may be time consuming and costly,
or cause product shipment delays, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Possible Volatility of Stock Price
The market price of the Company's Common Stock has experienced
significant fluctuations and may continue to fluctuate significantly. The market
price of the Common Stock may be significantly affected by factors such as the
announcement of new products or product enhancements by the Company or its
competitors, technological innovation by the Company or its competitors,
quarterly variations in the Company's or its competitors' products and services,
changes in revenue and revenue growth rates for the Company as a whole or for
specific geographic areas, products or product categories, changes in earnings
estimates by market analysts, speculation in the press or analyst community and
general market conditions or market conditions specific to the technology
industry or the telecommunications industry in particular. The stock prices for
many companies in the technology sector have experienced wide fluctuations that
often have been unrelated to their operating performance. Such fluctuations may
adversely affect the market price of the Company's Common Stock.
Year 2000 Compliance
The information provided below constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
The Year 2000 problem arises from the use of a two-digit field to
identify years in computer programs (for example, 98=1998), and the assumption
of a single century, namely the 1900s. A program created with this assumption
may read or attempt to read "00" as the year 1900. If computer or information
systems do not correctly recognize date information when the year changes to
2000, there could be an adverse impact to the operations of a company who is not
sufficiently prepared. To minimize the possibility and extent of such an impact
to the Company's operation, the Company has put into place a formal Year 2000
Compliance Project that focuses on four key readiness areas: (1) product
readiness, addressing the Company's product functionality; (2) internal
infrastructure readiness, addressing internal information systems and
non-information technology systems; (3) supplier readiness, addressing the
preparedness of our supplier base; and (4) customer readiness; addressing the
preparedness of our customer base. The Company has appointed a Year 2000
Compliance Officer, and for each readiness area, a task force is systematically
performing company-wide risk assessment and contingency planning, conducting
testing and remediation, and communicating with employees, suppliers, customers
and third-party business partners to uncover problem areas and develop action
plans related to the Year 2000 problem. Below are overviews of each readiness
area and the Company's progress thereon for becoming ready for the Year 2000.
Product Readiness
The Company has completed its review of Year 2000 issues with respect
to its product line. The Company's telephones, telephone adjuncts and
accessories, and other products, with the exception of one PBX product, do not
calculate dates or rely upon software that calculates dates. Any date
information that is displayed on these products is provided by the Telco Service
provider over the Telco's Network, and only month and day information is sent
over the Network and displayed by the products. Additionally, the user can set
the date information in two (2) of the Company's current products. In other
words, The Company's products simply display the date information that the Telco
provides, or in some cases, the date information that a user inputs.
Accordingly, Year 2000 issues are not relevant to the functionality of these
products. For the one product that calculates dates, the Voysconnect PBX System,
the related software will, under normal use, record and process calendar dates
falling on or after January 1, 2000 with the same functionality, data integrity
and performance as the software records and processes calendar dates on or
before December 31, 1999. In any future products developed by or for the Company
that may calculate or utilize date information, the Company will take steps to
require Year 2000 compliance.
Internal Infrastructure Readiness
An assessment of internal information systems, hardware and software is
in process. The Company has migrated to a new software platform for its
enterprise-wide accounting and management system, which is warranted to be Year
2000 compliant. For other systems, the Company is in the process of identifying
and modifying non-compliant systems, has established a schedule for prioritized
system compliance, and is in the process of executing the Compliance Project. In
addition to applications and information technology systems, the Company is
testing and developing remediation plans for embedded systems, facilities and
other operations. One particular area of activity is in examining, testing and
reviewing the interfaces between the Company's various internal systems, some of
which may require revision to be Year 2000 compliant. The Company expects all
systems to be compliant by no later than July 1999.
Supplier Readiness
This program is focused on minimizing the risk associated with
suppliers in two areas: (1) a supplier's ability to continue providing products
and services, and (2) the Year 2000 compliance of suppliers in their internal
operations. The Company has contacted all its material suppliers. The Company
has received responses from the majority of its preferred suppliers. Supplier
issues that potentially affect the Company's operations and products are
targeted to be resolved by July 1999. The Company has informed its suppliers
that it will reevaluate its business relationship with any supplier who either
fails to respond or cooperate with this project, or who fails to certify as to
Year 2000 compliance by July 1999.
Customer Readiness
This program is focused on minimizing the risk associated with our
customers in two areas: (1) a customer's ability to continue ordering and
utilizing the Company's products and services, and (2) the Year 2000 compliance
of customers in their internal operations, especially with respect to Electronic
Data Interchange ("EDI") with the Company. The Company has contacted all its
significant customers. The Company has received responses from some of its
customers and anticipates that the majority of customers will respond and
provide the Company with the requested information, and will participate with
the Company in joint testing of EDI processes and interfaces. Customer issues
that potentially affect the Company's sales of products and services are
targeted to be resolved by September 1999.
Risk Factors, Costs and Contingency Planning:
The Company's overall Year 2000 project is currently migrating from the
assessment phase to the remediation and contingency planning phases with
remediation and contingency planning in progress on a number of fronts. The
Company believes that its greatest potential risks are associated with the
systems of the Company's suppliers, and secondarily, problems associated with
the Company's information systems and infrastructure needs. For example, it is
possible that infrastructure service providers (e.g., electricity and/or water
providers) may, despite assurances, be unable to deliver services without
interruption to the Company's headquarter facilities and/or to the Company's
overseas manufacturers. For example, recent reports indicate that China may
suffer electricity outages for failure to adequately prepare for the year 2000.
The Company utilizes contract manufacturers in Malaysia, China and Thailand and
is considering building surplus product inventory this year, and is evaluating
enabling back-up manufacturing at alternate facilities. Additionally, it is
possible that one or more of the Company's Telco customers may choose to defer
the commencement of programs that they would ordinarily start in the last
quarter of 1999 or the first quarter of 2000 to avoid Year 2000 issues that may
arise with respect to Network Services. Such a decision could have a detrimental
impact upon the Company's revenue for those quarters.
With respect to suppliers and information systems, the Company is well
along with assessment and is performing remediation and contingency planning,
but cannot predict whether significant problems will yet be identified. However,
based on the status of the assessments made and remediation plans developed and
implemented to date, the Company currently does not believe that problems
identified will pose significant issues, or that direct costs associated with
such issues will exceed $1,000,000. Once the Company has completed its
assessments, developed remediation plans for all problems, developed remaining
contingency plans, and completely implemented and tested its remediation plans,
it will be better able to estimate remediation costs, and it will provide
updated estimates at that time.
As the Year 2000 Compliance Project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in time, or may find that the costs of these
activities exceed current expectations. In many cases, the Company will be in a
position of relying on assurances from suppliers and infrastructure service
providers that new and upgraded information systems and other products will be
Year 2000 compliant. The Company plans to test such third-party products, but
cannot be sure that its tests will be adequate or that, if problems are
identified, they will be addressed by the supplier in a timely and satisfactory
way. Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, it cannot be
sure that all of its systems will work together in a Year 2000-compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company.
Item 3 Quantitative and Qualitative Disclosure About Market Risk
Management believes that the market risk associated with the Company's
market risk sensitive instruments as of March 31, 1999 is not material, and
therefore, disclosure is not required.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
PhoneTel Communications, Inc. filed a complaint in August 1998 in
Federal District Court in Texas, alleging that CIDCO Worldwide, Inc. (an
affiliate of the Company) and 14 other defendants violated one or more of
PhoneTel's telephony patents. The complaint has not been served on the Company
pending the completion of current discussions between PhoneTel and the Company,
and thus litigation has not commenced. Although this matter is at an early
stage, management believes that the Company has not infringed any of PhoneTel's
patents, and that it would prevail in any litigation which may proceed from this
complaint. Management of the Company currently believes that the outcome of this
matter and the ultimate effect, if any, will not materially impact the Company's
consolidated financial position, results of operations, or cash flows.
In the ordinary course of business, the Company may be involved in
other legal proceedings. As of the date hereof, the Company is not a party to
any other pending legal proceedings that it believes will materially affect its
financial condition or results of operations.
ITEM 2. Changes In Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits at page 21 below.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three
months ended March 31, 1999.
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.
CIDCO INCORPORATED
May 13, 1998 By:/s/Paul G. Locklin
- ------------ ------------------
Date Paul G. Locklin
President and Chief Executive Officer
Chairman of the Board of Directors
May 13, 1998 /s/Richard D. Kent
- ------------ ------------------
Date Richard D. Kent
Chief Financial Officer, Chief Operations
Officer, Chief Accounting Officer and
Corporate Secretary
CIDCO INCORPORATED
Index to Exhibits
Exhibits Page
3.1 Amended and Restated Certificate of Incorporation. (1) --
3.2 Second Amended and Restated By-laws of CIDCO Incorporated
dated January 26, 1999. (7) --
4.1 Amended and Restated Loan and Security Agreement dated March 29,
1999 between Registrant and Comerica Bank-California. 22
4.2 Rights Agreement dated as of January 27, 1997, between the
Registrant and United States Trust Company
of New York, as Rights Agent. (3) --
10.4 Patent License Agreement dated as of May 1, 1989 between the
Registrant and American Telephone and Telegraph Company. (1) --
10.5 Form of Indemnification Agreement. (1) --
10.17 Sublease dated Nov. 18, 1994, between Thoits Bros. and the
Registrant for 180 Cochrane Circle. (2) --
10.18 Lease dated Nov. 1, 1994, between Thoits Bros., Inc. and the
Registrant for 105 Cochrane Circle, Units A, B, C, D and E. (2) --
10.20 Registrant's 1994 Directors' Stock Option Plan. (2) --
10.21 Registrant's 1994 Employee Stock Purchase Plan. (2) --
10.24 Employment Agreement dated June 28, 1996 between Registrant
and Ian Laing. (4) --
10.30 Registrant's Second Amended and Restated 1993 Stock Option Plan.(5) --
10.31 Registrant's Amended and Restated 1998 Stock Option Plan. (5) --
10.32 Employment Agreement dated June 1, 1998 between Registrant
and Richard D. Kent. (5) --
10.33 Employment Termination Agreement dated Nov. 12, 1998 between
Registrant and Daniel L. Eilers. (5) --
10.34 Employment Agreement dated Nov. 12, 1998 between Registrant
and Paul G. Locklin. (6) --
10.35 Employment Agreement dated Sept. 30, 1994 between Registrant
and Timothy J. Dooley. (6) --
10.39 Employment Agreement dated June 5, 1998 between Registrant
and William A. Sole. 54
- -------------------------------
(1) Incorporated herein by reference to the Company's registration statement on
Form S-1, File No. 33-74114.
(2) Incorporated herein by reference to the Company's Form 10-K for the year
ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended March 31, 1997.
(4) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(5) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended September 30, 1998.
(6) Incorporated herein by reference to the Company's Form 10-K for the year
ended December 31, 1998.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
EXHIBIT 4.1
AMENDED AND RESTATED LOAN & SECURITY AGREEMENT
(ACCOUNTS AND INVENTORY)
OBLIGOR #1531733758 NOTE #
AGREEMENT DATE March 29, 1999
CREDIT LIMIT $15,000,000
INTEREST RATE B + 0
OFFICER NO./INITIALS BRADFORD L. SMITH
THIS AGREEMENT is entered into as of March 29, 1999 between Comerica
Bank-California ("Bank") as secured party, whose Headquarter Office is 333 West
Santa Clara Street, San Jose, California 95113 and CIDCO, INCORPORATED
("Borrower"), a California corporation whose chief executive office is located
at 220 Cochrane Circle, Morgan Hill, California 95037. The parties agree as
follows:
1.0 DEFINITIONS.
1.1 "Agreement" as used in this Agreement means and includes this
Amended and Restated Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider hereto and any extensions, supplements,
amendments or modifications hereto and to any such rider. This Agreement
replaces (i) that certain Revolving Credit Loan Agreement dated August 26, 1994,
as amended and restated by that certain Amended and Restated Revolving Credit
Loan Agreement dated March 2, 1995, as amended from time to time thereafter; and
(ii) that certain LIBOR Addendum to Revolving Credit Loan Agreement dated
October 20, 1997.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement other
than principal and interest which are paid or advanced by Bank; taxes and
insurance premiums of every nature and kind of Borrower paid by Bank; filing,
recording, publication and search fees, appraiser fees, auditor fees and costs,
and title insurance premiums paid or incurred by Bank in connection with Bank's
transactions with Borrower; costs and expenses incurred by Bank in collecting
the Receivables (with or without suit) to correct any default or enforce any
provision of this Agreement, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, disposing of, preparing for sale and/or
advertising to sell the Collateral, whether or not a sale is consummated; costs
and expenses of suit incurred by Bank in enforcing this Agreement or any portion
hereof, including, but not limited to, expenses incurred by Bank in attempting
to obtain relief from any stay, restraining order, injunction or similar process
which prohibits Bank from exercising any of its rights or remedies; and
reasonable attorneys' fees and expenses incurred by Bank in advising,
structuring, drafting, reviewing, amending, terminating, enforcing, defending or
concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought. Bank Expenses shall include Bank's
in-house legal charges at reasonable rates. Notwithstanding the foregoing or
anything to the contrary herein, Borrower shall not be obligated for Bank
Expense in excess of Seven Thousand Five Hundred and/100 Dollars ($7,500) in
connection with the drafting, reviewing or negotiation of this Agreement.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest publicly announced by Bank at its headquarters office in San Jose,
California as its "Prime Rate" or "Base Rate" from time to time and which serves
as the basis upon which effective rates of interest are calculated for those
loans making reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all
of Borrower's books and records including, but not limited to: minute books;
ledgers; records indicating, summarizing or evidencing Borrower's assets,
liabilities, Receivables, business operations or financial condition, and all
information relating thereto, computer programs; computer disk or tape files;
computer printouts; computer runs; and other computer prepared information and
equipment of any kind.
<PAGE>
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
eighty percent (80%) of the net amount of Eligible Accounts after deducting
therefrom all payments by the account debtor, adjustments and credits in favor
of the account debtor applicable thereto ("Accounts Receivable Borrowing Base");
and (2) the amount, if any, of the advances against inventory agreed to be made
pursuant to any Inventory Rider ("Inventory Borrowing Base"), or other rider,
amendment or modification to this Agreement, that may now or hereafter be
entered into by Bank and Borrower, less any issued and outstanding or if not
outstanding, unreimbursed, Letters of Credit.
1.6 "Cash Flow" as used in this Agreement means for any applicable
period of determination, the Net Income (after deduction for income taxes and
other taxes of such person determined by reference to income or profits of such
person) for such period, plus, to the extent deducted in computation of such Net
Income, the amount of depreciation and amortization or other such non-cash
expense and the amount of deferred tax liability during such period, all as
determined in accordance with GAAP. The applicable period of determination will
be quarterly, beginning with the period from N/A to N/A .
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets of
Borrower in which Bank receives a security interest or which hereafter come into
the possession, custody or control of Bank; and the proceeds of any of the
foregoing, including, but not limited to, proceeds of insurance covering the
collateral and any and all Receivables, Intangibles, negotiable collateral,
Inventory, equipment, money, deposit accounts or other tangible and intangible
property of Borrower resulting from the sale or other disposition of the
collateral, and the proceeds thereof. Notwithstanding anything to the contrary
contained herein, collateral shall not include any waste or other materials
which have been or may be designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all obligations, except
those obligations arising pursuant to any other separate contract, instrument,
note, or other separate agreement which, by its terms, provides for a specific
interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer receivables,
United States government securities, claims against the United States
government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that should be
classified as current in accordance with GAAP, including without limitation any
portion of the principal of the Indebtedness classified as current, plus (ii) to
the extent not otherwise included, all liabilities of Borrower to any of its
affiliates whether or not classified as current in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a given
day, adding any new Credit advanced or incurred on such date, and subtracting
any payments or collections which are deemed to be paid and are applied to Bank
in reduction of the Credit on that date under the provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within thirty (30) days, or
less, from the date of invoice, have been validly assigned to Bank and strictly
comply with all of Borrower's warranties and representations to Bank; but
Eligible Accounts shall not include the following: (a) accounts with respect to
which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, bailment, guaranteed sale or other terms by reason of which the
payment by the account debtor may be conditional. Notwithstanding any provision
to the contrary in this Agreement or in any agreement executed in connection
herewith, nothing in this Agreement or in any agreement executed in connection
herewith shall be deemed to preclude Bank from having a security interest in any
Receivables for the services provided by Borrower to Third Party Consignors or
Bailors in connection with third party goods, products and accessories held by
Borrower in connection with consignment or bailment; (c) accounts with respect
to which the account debtor is not a resident of the United States with the
exception of foreign accounts that have been approved by Bank; (d) accounts with
respect to which the account debtor is the United States or any department,
agency or instrumentality of the United States; (e) accounts with respect to
which the account debtor is any State of the United States or any city, county,
town, municipality or division thereof; (f) accounts with respect to which the
account debtor is a subsidiary of, related to, affiliated or has common
shareholders, officers or directors with Borrower; (g) accounts with respect to
which Borrower is or may become liable to the account debtor for goods sold or
services rendered by the account debtor to Borrower; (h) accounts not paid by an
account debtor within ninety (90) days from the date of invoice; (i) accounts
with respect to which account debtors dispute liability or make any claim, or
have any defense, crossclaim, counterclaim, or offset; (j) accounts with respect
to which any Insolvency Proceeding is filed by or against the account debtor, or
if an account debtor becomes insolvent, fails or goes out of business; (k)
accounts owed by any single account debtor which exceed twenty percent (20%) of
all of the Eligible Accounts; (l) accounts with a particular account debtor on
which over twenty-five percent (25%) of the aggregate amount owing is greater
than one hundred and twenty (120) days from the date of the invoice; (m)
accounts with a particular account debtor on which over fifty percent (50%) of
the aggregate amount owing is past due; and (n) notwithstanding any provisions
herein to the contrary, an allowance is hereby made for a concentration of
thirty-five percent (35%) for the accounts of Southwestern Bell, Pacific Bell,
GTE and Bell Atlantic/Nynex.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and include for
any applicable period of determination, the sum, without duplication, of (a) all
interest paid or payable during such period by a person on debt of such person,
plus (b) all payments of principal or other sums paid or payable during such
period by such person with respect to debt of such person having a final
maturity more than one year from the date of creation of such debt, plus (c) all
debt discount and expense amortized or required to be amortized during such
period by such person, plus (d) the maximum amount of all rents and other
payments paid or required to be paid by such person during such period under any
lease or other contract or arrangement providing for use of real or personal
property in respect of which such person is obligated as a lessee, user or
obligor, plus (e) all dividends and other distributions paid or payable by such
person or otherwise accumulating during such period on any capital stock of such
person, plus (f) all loans or other advances made by such person during such
period to any Affiliate of such person. The applicable period of determination
will be N/A , beginning with the period from N/A to N/A .
1.15 "GAAP" as used in this Agreement means as of any applicable
period, generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against Borrower, or any
guarantor of Borrower's Obligations, or any of Borrower's account debtors, under
any provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some
or all creditors, any proceeding seeking a reorganization, arrangement or any
other relief under the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general Intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disk, computer tapes, literature,
reports, catalogs and deposit accounts) other than goods and Receivables, as
well as Borrower's Books relating to any of the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including, but
not limited to, goods held by Borrower for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, advertising materials, and packing
and shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items hereafter
acquired by Borrower by way of substitution, replacement, return, repossession
or otherwise, and all additions and accessions thereto, and the resulting
product or mass, and any documents of title respecting of the above, but
excluding third party goods, products and accessories held by Borrower in
connection with consignment or bailment. Notwithstanding any provision to the
contrary in this Agreement or in any agreement executed in connection herewith,
nothing in this Agreement or in any agreement executed in connection herewith
shall be deemed to preclude Bank from having a security interest in any
Receivables for the services provided by Borrower to Third Party Consignors or
Bailors in connection with third party goods, products and accessories held by
Borrower in connection with consignment or bailment.
1.19 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the benefit
of creditors or any other person or entity having powers or duties like or
similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.
1.20 "Letter of Credit Subfeature" as used in this Agreement means
standby letters of credit issued by Bank for the account of Borrower in an
aggregate amount not to exceed at any one time the maximum sums permitted in
Section 2.1 hereof, which Letter of Credit Subfeature shall be used by Borrower
to obtain letters of credit having terms not to exceed twelve (12) months and
which shall mature not more than sixty (60) days prior to the maturity date set
forth in this Agreement. Any issued and outstanding or if not outstanding,
unreimbursed letters of credit issued under the Letter of Credit Subfeature
shall be included in the Borrowing Base and shall reduce the amount available to
Borrower hereunder.
1.21 "Net Income" as used in this Agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a)any gains or losses on the sale or other disposition, not
in the ordinary course of business, of investments or fixed or capital assets,
and any taxes on the excluded gains and any tax deductions or credits on account
on any excluded losses; and
(b)in the case of Borrower, net earnings of any Person in
which Borrower has an ownership interest, unless such net earnings shall have
actually been received by Borrower in the form of cash distributions.
1.22 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any kind
and description whether advanced pursuant to or evidenced by this Agreement; by
any note or other instrument; or by any other written agreement between Bank and
Borrower and whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.
1.23 "Permitted Liens" as used in this Agreement means and includes all
of the following:
(a) Liens in favor of Bank securing the Obligations of
Borrower to Bank;
(b) Liens securing claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like persons imposed
without action of such parties, provided that the payment thereof is not yet
required;
(c) Liens incurred or deposits made in the ordinary course of
business of Borrower in connection with workers' compensation, unemployment
insurance, social security and other like laws;
(d) Additional purchase money security interests in personal
property acquired after the date of this Agreement with the consent of Bank;
(e) Any liens existing as of the date hereof as reflected on
Schedule A hereto;
(f) Leases, subleases, licenses and sublicenses granted to
others in the ordinary course of business not interfering in any material
respect with the conduct of the business of Borrower, and any interest or title
of a lessor, sublessor, licensor or sublicensor or under any lease, sublease,
license or sublicense;
(g) Liens arising from judgments, decrees or attachments to
the extent and only so long as such judgment, decree or attachment has not
caused or resulted in an Event of Default;
(h) Easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar liens affecting real
property not interfering in any material respect with the ordinary conduct of
the business of Borrower;
(i) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection with the
importation of goods;
(j) Liens which constitute rights of set-off of a customary
nature of bankers' liens with respect to amounts on deposit, whether arising by
operation of law or by contract, in connection with arrangements entered into
with banks in the ordinary course of business; and
(k) Liens incurred in connection with the extension, renewal
or refinancing of the Obligations secured by liens of the type described herein
above, provided that any extension, renewal or replacement lien shall be limited
to the property encumbered by the existing lien and the principal amount of the
Obligations being extended, renewed or refinanced does not increase.
1.24 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency or other entity.
1.25 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all contracts
or agreements (whether or not yet earned or due), all merchandise returned to or
reclaimed by Borrower and Borrower's books (except minute books) relating to any
of the foregoing, but excluding the proceeds of third party goods, products,
accessories or inventory having been held by Borrower in consignment or
bailment. Notwithstanding any provision to the contrary in this Agreement or in
any agreement executed in connection herewith, nothing in this Agreement or in
any agreement executed in connection herewith shall be deemed to preclude Bank
from having a security interest in any Receivables for the services provided by
Borrower to Third Party Consignors or Bailors in connection with third party
goods, products and accessories held by Borrower in connection with consignment
or bailment.
1.26 "Subordinated Debt" as used in this Agreement means Indebtedness
of Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to Bank.
1.27 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present and
future Indebtedness of Borrower to N/A subordinate to Indebtedness.
1.28 "Tangible Effective Net Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased by
subordinated debt if any, and decreased by the following: patents, licenses,
goodwill, subscription lists, organization expenses, trade receivables converted
to notes, and money due from affiliates (including officers, directors,
subsidiaries and commonly held companies).
1.29 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination:
(a) the net book value of all assets of a person (other than
patents, patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill and similar intangible assets) after all appropriate
deductions in accordance with GAAP (including, without limitation, reserves for
doubtful receivables, obsolescence, depreciation and amortization), minus
(b) all total liabilities of such person.
1.30 "Third Party Consignor or Bailor" as used in this Agreement means
any Person who places any goods, products, accessories or inventory with
Borrower to be held by Borrower in consignment or bailment.
1.31 "Total Liabilities" as used in this Agreement means the total of
all items of Indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the Total
Liabilities of Borrower as of the date Total Liabilities is to be determined,
including without limitation (a) all obligations secured by any mortgage,
pledge, security interest or other lien on property owned or acquired, whether
or not the obligations secured thereby shall have been assumed; (b) all
obligations which are capitalized lease obligations; and (c) all guaranties,
endorsements or other contingent or surety obligations with respect to
Indebtedness of others, whether or not reflected on the balance sheets of
Borrower, including without limitation any obligation to furnish funds, directly
or indirectly through the purchase of goods, supplies, services, or by way of
stock purchase, capital contribution, advance or loan or any obligation to enter
into a contract for any of the foregoing.
1.32 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
1.33 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to as
the "Code") as amended.
2.0 LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with Interest, as provided for below.
2.1 Upon the request of Borrower, made at any time and from time to
time during the term hereof, and so long as no Event of Default has occurred and
is continuing, Bank shall lend to Borrower an amount equal to the Borrowing
Base; provided, however, that in no event shall Bank be obligated to make
advances to Borrower under this Section 2.1 whenever the Daily Balance exceeds,
at any time, either the lower of (i) the Borrowing Base plus any amounts
outstanding under the Letter of Credit Subfeature; or (ii) the sum of Ten
Million and 00/100 Dollars ($10,000,000), except that such amount may be
increased to a maximum sum of Fifteen Million and 00/100 Dollars ($15,000,000),
provided that any amount in excess of Ten Million and 00/100 Dollars
($10,000,000) shall be secured by cash pledged by Borrower to Bank. Any amounts
in excess of the permitted amounts herein shall be referred to herein as an
"Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear interest, on
the Daily Balance owing, at a rate of zero (0) percentage points per annum above
the Base Rate (the "Rate"). The Credit shall bear interest, from and after the
occurrence and during the continuance of an Event of Default and without
constituting a waiver of any such Event of Default, on the Daily Balance owing,
at a rate three (3) percentage points per annum above the Rate. All interest
chargeable under this Agreement that is based upon a per annum calculation shall
be computed on the basis of a three hundred sixty (360) day year for actual days
elapsed.
The Base Rate as of the date of this Agreement is seven and three
quarters percent (7.75%) per annum. In the event that the Base Rate announced
is, from time to time hereafter, changed, adjustment in the Rate shall be made
and based on the Base Rate in effect on the date of such change. The Rate, as
adjusted, shall apply to the Credit until the Base Rate is adjusted again. The
minimum interest payable by Borrower under this Agreement shall in no event be
less than N/A per month. All interest payable by Borrower under the Credit shall
be due and payable on the first business day of each calendar month during the
term of this Agreement and Bank may, at its option, elect to treat such interest
and any and all Bank Expenses as advances under the Credit, which amounts shall
thereupon constitute Obligations and shall thereafter accrue interest at the
rate applicable to the Credit under the terms of the Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall bear
additional interest on the amount thereof at a rate equal to three (3)
percentage points per annum in excess of the first interest rate set forth in
Section 2.2, from the date incurred and for each month thereafter, until repaid
in full.
3.0 TERM.
3.1 This Agreement shall remain in full force and effect until May 1,
2000, or until terminated by notice, by Borrower. Notice of such termination
shall be effectuated by mailing of a registered or certified letter not less
than sixty (60) days prior to the effective date of such termination, addressed
to Bank at the address set forth herein and the termination shall be effective
as of the date so fixed in such notice. Notwithstanding the foregoing, should
Borrower be in default of one or more of the provisions of this Agreement, Bank
may terminate this Agreement at any time without notice. Notwithstanding the
foregoing, should either Bank or Borrower become insolvent or unable to meet its
debts as they mature, or fail, suspend, or go out of business, the other party
shall have the right to terminate this Agreement at any time without notice. On
the date of termination all Obligations shall become immediately due and payable
without notice or demand; no notice of termination by Borrower shall be
effective until Borrower shall paid all Obligations to Bank in full.
Notwithstanding termination, until all Obligations have been fully satisfied,
Bank shall retain its security interest in all existing Collateral and
Collateral arising thereafter, and Borrower shall continue to perform all of its
Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank.
4.0 CREATION OF SECURITY INTEREST.
4.1 Borrower hereby grants to Bank a continuing security interest in
all presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Obligations owed by Borrower to Bank and in
order to secure prompt performance by Borrower of each and all of its covenants
and Obligations under this Agreement and otherwise created. Bank's security
interest in the Collateral shall attach to all Collateral without further act on
the part of Bank or Borrower. In the event that any Collateral, including
proceeds, is evidenced by or consists of a letter of credit, advice of credit,
instrument, money, negotiable documents, chattel paper or similar property
(collectively, "Negotiable Collateral"), Borrower shall, promptly upon request
of Bank following the occurrence of an Event of Default hereunder, endorse and
assign such Negotiable Collateral over to Bank and deliver actual physical
possession of the Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all Receivables
without further act on the part of Bank or Borrower. Upon request from Bank,
Borrower shall provide Bank with schedules describing all Receivables created or
acquired by Borrower (including without limitation agings listing the names and
addresses of, and amounts owing by date by account debtors), and shall execute
and deliver written assignments of all Receivables to Bank all in a form
acceptable to Bank, provided, however, Borrower's failure to execute and deliver
such schedules and/or assignments shall not affect or limit Bank's security
interest and other rights in and to the Receivables. Together with each
schedule, Borrower shall furnish Bank with copies of Borrower's customers'
invoices or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Upon the
occurrence and during the continuance of an Event of Default, Bank or Bank's
designee may notify customers or account debtors to pay Bank directly, but,
unless and until Bank does so or gives Borrower other written instructions,
Borrower shall collect all Receivables for Bank and receive in trust all
payments thereon as Bank's trustee, and, if so requested to do so from Bank,
during the continuance of an Event of Default, Borrower shall immediately
deliver said payments to Bank in their original form as received from the
account debtor and all letters of credit, advices of credit, instruments,
documents, chattel paper or any similar property evidencing or constituting
Collateral. Notwithstanding anything to the contrary contained herein, if sales
of inventory are made for cash, Borrower shall, during the continuance of an
Event of Default, upon the request of Bank immediately deliver to Bank, in
identical form, all such cash, checks, or other forms of payment which Borrower
receives. The receipt of any check or other item of payment by Bank shall not be
considered a payment on account until such check or other item of payment is
honored when presented for payment, in which event, said check or other item of
payment shall be deemed to have been paid to Bank two (2) calendar days after
the date Bank actually receives such check or other item of payment.
4.3 Bank's security interest in Inventory shall attach to all Inventory
without further act on the part of Bank or Borrower. Upon Bank's request,
Borrower will from time to time at Borrower's expense pledge, and after the
occurrence and during the continuance of an Event of Default, assemble and
deliver such Inventory to Bank or to a third party as Bank's bailee; or hold the
same in trust for Bank's account or store the same in a warehouse in Bank's
name; or deliver to Bank documents of title representing said Inventory; or
evidence of Bank's security interest in some other manner acceptable to Bank.
Until the occurrence and during the continuance of a default by Borrower under
this Agreement or any other Agreement between Borrower and Bank, and prior to a
demand by Bank hereunder to the contrary, Borrower may, subject to the
provisions hereof and consistent herewith, sell the Inventory, but only in the
ordinary course of Borrower's business. A sale of Inventory in Borrower's
ordinary course of business does not include an exchange or a transfer in
partial or total satisfaction of a debt owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with Borrower's
execution of this Agreement, and at any time or times hereafter at the request
of Bank, all financing statements, continuation financing statements, security
agreements, mortgages, assignments, certificates of title, affidavits, reports,
notices, schedules of accounts, letters of authority and all other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
maintain perfected Bank's security interest in the Collateral and in order to
fully consummate all of the transactions contemplated under this Agreement.
Borrower hereby irrevocably makes, constitutes and appoints Bank (and any of
Bank's officers, employees or agents designated by Bank) as Borrower's true and
lawful attorney-in-fact with power to sign the name of Borrower on any financing
statements, continuation financing statements, security agreement, mortgage,
assignment, certificate of title, affidavit, letter of authority, notice of
other similar documents which must be executed and/or filed in order to perfect
or continue perfected Bank's security interest in the Collateral. Bank agrees
that it will only exercise its foregoing rights as attorney-in-fact upon the
occurrence and during the continuance of an Event of Default or as necessary to
service Borrower's account in the ordinary course of business.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of its officers,
employees or agents) shall have the right at any time or times hereafter during
Borrower's usual business hours, or during the usual business hours of any third
party having control over the records of Borrower, to inspect and verify
Borrower's Books in order to verify the amount or condition of, or any other
matter, relating to, said Collateral and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may designate as
Borrower's attorney-in-fact, with power: to endorse Borrower's name on any
checks, notes, acceptances, money orders, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrower's name on any
invoice or bill of lading relating to any Receivables, on drafts against account
debtors, on schedules and assignments of Receivables, on verifications of
Receivables and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the address
for delivery of Borrower's mail addressed to Borrower to an address designated
by Bank, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward all other mail to Borrower; to send,
whether in writing or by telephone, requests for verification of Receivables;
and to do all things necessary to carry out this Agreement. Bank agrees that it
will only exercise the foregoing rights upon the occurrence and during the
continuance of an Event of Default. Borrower ratifies and approves all acts of
such attorney-in-fact. Neither Bank nor its attorney-in-fact will be liable for
any acts or omissions or for any error of judgment or mistake of fact or law
except to the extent caused by the gross negligence or willful misconduct of
such attorney-in-fact or Bank. This power being coupled with an interest, is
irrevocable so long as any Receivables in which Bank has a security interest
remain unpaid and until the Obligations have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards, warehousemen,
or any personnel to protect the Collateral, pay any service bureau, or, obtain
any records, and all costs for the same shall be added to the Obligations and
shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries and
service providers.
5.0 CONDITIONS PRECEDENT.
5.1 As conditions precedent to the making of the loans and the
extension of the financial accommodations hereunder, all of the conditions
precedent set forth below shall have occurred to the satisfaction of Bank and
its counsel:
a.receipt by Bank of this Agreement and other documents requested by Bank;
b.receipt by Bank of financing statements (Form UCC-1) in form satisfactory to
Bank for filing and recording with the appropriate governmental authorities;
c.receipt by Bank of certified extracts from the minutes of the meeting or
written consent of its board of directors, authorizing the borrowings and the
granting of the security interest provided for herein and authorizing specific
officers to execute and deliver the agreements provided for herein;
d. receiptby Bank of (i) a certificate of good standing showing that Borrower is
in good standing under the laws of the state of its incorporation and
California; and (ii) certificates indicating that Borrower is qualified to
transact business and is in good standing in any other state in which it
conducts business except where failure to so qualify or be in good standing
would not have a material adverse effect on Borrower (a "Material Adverse
Effect");
e. receipt by Bank of UCC searches, tax lien and litigation searches, business
statement filings, insurance certificates, notices or other similar documents
which Bank may require and in such form as Bank may require, in order to
reflect, perfect or protect Bank's first priority security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
by this Agreement;
f.receipt by Bank of evidence that Borrower has obtained insurance and
acceptable endorsements;
g.receipt by Bank of waivers executed by landlords and mortgagees of any real
property on which any Collateral is located;
h.receipt by Bank of the Borrower's Authorization;
i.receipt by Bank of the Corporate Resolution and Incumbency Certification -
Authority to Procure Loans;
j.receipt by Bank of the Equipment Rider;
k.receipt by Bank of the Environmental Rider;
l.receipt by Bank of the Agreement to Furnish Insurance;
m.payment by Borrower of all attorneys' fees and expenses incurred by Bank (not
to exceed Seven Thousand Five Hundred and 00/100 Dollars ($7,500) in the
aggregate) in preparing and negotiating this Agreement, or any portion hereof,
and preparing and/or reviewing any documents to be executed in connection
herewith;
n.payment by Borrower of its commitment fee in the amount of Fifty Thousand and
00/100 Dollars ($50,000) for the line of credit associated with this Agreement;
and
o.such other and further items and Bank may reasonably require to carry out the
terms hereof.
6.0 WARRANTIES, REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, within twenty (20) days of
the last day of each month, during the term hereof execute and deliver a Report
of Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less than
the advances made hereunder. Bank shall have the right to recompute Borrower's
Borrowing Base in conformity with this Agreement.
6.2 Except as permitted in Section 1.12 hereof, if any warranty is
breached as to any account, or any account is not paid in full by an account
debtor within ninety (90) days from the date of invoice, or an account debtor
disputes liability or makes any claim with respect thereto, or a petition in
bankruptcy or other application for relief under the Bankruptcy Code or any
other insolvency law is filed by or against an account debtor, or an account
debtor makes an assignment for the benefit of creditors, becomes insolvent,
fails or goes out of business, then Bank may deem ineligible any and all
accounts owing by that account debtor, and reduce Borrower's Borrowing Base by
the amount thereof. Bank shall retain its security interest in all Receivables
and accounts, whether eligible or ineligible, until all Obligations have been
fully paid and satisfied. Returns and allowances, if any, as between Borrower
and its customers, will be on the same basis and in accordance with the usual
customary practices of Borrower, as they exist at this time. Borrower shall
promptly notify Bank of all disputes and claims and settle or adjust them on
terms approved by Bank. After the occurrence and during the continuance of a
default by Borrower hereunder, no material discount, credit or allowance shall
be granted to any account debtor by Borrower and no return of merchandise
outside of the ordinary course of business shall be accepted by Borrower without
Bank's consent, which shall not be unreasonably withheld. Bank may, after the
occurrence and during the continuance of a default by Borrower, settle or adjust
disputes and claims directly with account debtors for amounts and upon terms
which Bank considers advisable, and in such cases Bank will credit Borrower's
account with only the net amounts received by Bank in payment of the accounts,
after deducting all Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
(a) Borrower has good and marketable title to the Collateral.
Bank has and shall continue to have a first priority perfected security interest
in and to the Collateral except with respect to Permitted Liens. The Collateral
shall at all times remain free and clear of all liens, encumbrances and security
interests except Permitted Liens.
(b) All accounts are and will, at all times pertinent hereto,
be bona fide existing Obligations created by the sale and delivery of
merchandise or the rendition of services to account debtors in the ordinary
course of business, free of liens, claims, encumbrances and security interests
(except as held by Bank and except as may be consented to, in writing, by Bank)
and are unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, rights of return or cancellation in excess of an aggregate value
of Fifty Thousand and 00/100 Dollars ($50,000) except in the ordinary course of
business as Borrower's business is currently operated, and Borrower shall have
received no notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time an account due from such account debtor is assigned to Bank.
(c) At the time each account is assigned to Bank, all property
giving rise to such account shall have been delivered to the account debtor or
to the agent for the account debtor for immediate shipment to, and unconditional
acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank may
from time to time require, delivery receipts, customer's purchaser orders,
shipping instructions, bills of lading and any other evidence of shipping
arrangements. Absent such a request by Bank, copies of all such documentation
shall be held by Borrower as custodian for Bank.
6.4 At the time each Eligible Account is included in the Borrowing
Base, each such Eligible Account will be due and payable on terms set forth in
Section 1.12 hereof or on such other terms approved in writing by Bank in
advance of the creation of such accounts and which are expressly set forth on
the face of all invoices, copies of which shall be held by Borrower as custodian
for Bank, and no such eligible account will then be past due.
6.5 Borrower shall keep the Inventory only at the following locations:
See Schedule B and the owner or mortgagees of the respective locations are:
See Schedule B
(a) Borrower, immediately upon demand by Bank, shall now and
from time to time hereafter, at such intervals as are requested by Bank, deliver
to Bank therefor, designations of Inventory specifying Borrower's cost of
Inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;
(b) Borrower's Inventory, valued at the lower of Borrower's
cost or the wholesale market value thereof, at all times pertinent hereto shall
not be less than N/A Dollars ($ N/A ) of which no less than N/A Dollars ($ N/A )
shall be in raw materials and finished goods;
(c) All of the Inventory is and shall remain free from all
purchase money or other security interests, liens or encumbrances except
Permitted Liens;
(d) Borrower does now keep and hereafter at all times shall
keep correct and accurate records itemizing and describing the kind, type,
quality and quantity of the Inventory, its cost therefor and selling price
thereof, and the daily withdrawals therefrom and additions thereto, all of which
records shall be available upon demand to any of Bank's officers, agents and
employees for inspection and copying;
(e) All Inventory, now and hereafter at all times, shall be
new (except for reconditioned units used to fulfill warranty claims) Inventory
of good and merchantable quality free from defects;
(f) Except for component parts, work in progress and finished
goods stored by foreign third party manufacturers, Inventory is not now and
shall not at all times hereafter be located or stored with a bailee,
warehouseman or other third party without Bank's prior written consent, and, in
such event, Borrower will concurrently therewith cause any such bailee,
warehouseman or other third party to issue and deliver to Bank, in a form
acceptable to Bank, warehouse receipts in Bank's name evidencing the storage of
Inventory or other evidence of Bank's prior rights in the Inventory. In any
event, Borrower shall instruct any third party to hold all such Inventory for
Bank's account subject to Bank's security interests and its instructions; and
(g) Bank shall have the right upon demand now and/or at all
times hereafter, during Borrower's usual business hours, upon reasonable prior
notice, to inspect and examine the Inventory and to check and test the same as
to quality, quantity, value and condition and Borrower agrees to reimburse Bank
for Bank's reasonable costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
(a) Grant a security interest in or permit a lien, claim or
encumbrance except Permitted Liens upon any of the Collateral to any person,
association, firm, corporation, entity or governmental agency or
instrumentality;
(b) Permit any levy, attachment or restraint to be made
affecting any of Borrower's assets;
(c) Permit any judicial officer or assignee to be appointed or
to take possession of any or all of Borrower's assets;
(d) Change its name, business structure, corporate identity or
structure; add any new fictitious names, liquidate, merge or consolidate with or
into any other business organization other than with Borrower's stock;
(e) Move or relocate any Collateral except in accordance with
Subsection (n) hereof or otherwise in the normal course of business ;
(f) Acquire any other business organization or organizations
where the acquisition amount exceeds an aggregate of Two Million and 00/100
Dollars ($2,000,000) other than with Borrower's stock without Bank's prior
written consent, which shall not be unreasonably withheld;
(g) Enter into any transaction or transactions not in the
usual course of Borrower's business in excess of an aggregate of Five Million
and 00/100 Dollars ($5,000,000), without Bank's prior written consent, which
shall not be unreasonably withheld;
(h) Make any change in Borrower's financial structure or in
any of its business objectives, purposes or operations which would adversely
affect the ability of Borrower to repay Borrower's Obligations;
(i) Incur any debts outside the ordinary course of Borrower's
business except renewals or extensions of existing debts and interest thereon;
(j) Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
(k) Make loans, advances or extensions of credit to any
Person, except for sales on open account and otherwise in the ordinary course of
business;
(l) Guarantee or otherwise, directly or indirectly, in any way
be or become responsible for obligations of any other person, whether by
agreement to purchase the Indebtedness of any other Person, agreement for
furnishing of funds to any other Person through the furnishing of goods,
supplies or services, by way of stock purchase, capital contribution, advance or
loan, for the purpose of paying or discharging (or causing the payment or
discharge of) the Indebtedness of any other person, or otherwise, except for the
endorsement of negotiable instruments by Borrower in the ordinary course of
business for deposit or collection;
(m)(a) Other than sales of Inventory in the ordinary course of
Borrower's business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's properties or assets having an
aggregate book value of more than Five Million and 00/100 Dollars ($5,000,000)
(whether in one transaction or in a series of transactions) without Bank's prior
written consent, which shall not be unreasonably withheld; (b) change its name,
consolidate with or merge into any other corporation, permit another corporation
to merge into it, acquire all or substantially all the properties or assets of
any other Person, enter into any reorganization or recapitalization or
reclassify its capital stock, or (c) enter into any sale-leaseback transaction;
(n) Purchase or hold beneficially any stock or other
securities of, or make any investment, except for commercial paper rated A-1 or
P-1 by Moody's Ratings, or acquire any interest whatsoever in, any other Person,
except for the common stock of the Subsidiaries owned by Borrower on the date of
this Agreement, the shares of stock in Infogear and CIDCO Europe currently owned
by Borrower, investments or transactions consistent with Borrower's investment
policy or as otherwise authorized by Borrower's Board of Directors, and as
further consented to by Bank, which consent shall not be unreasonably withheld,
and except for certificates of deposit with maturities of one year or less of
United States commercial banks with capital, surplus and undivided profits in
excess of One Hundred Million Dollars ($100,000,000) and direct obligations of
the United States Government maturing within one year from the date of
acquisition thereof;
(o) Allow any fact, condition or event to occur or exist with
respect to any employee pension or profit sharing plans established or
maintained by it which might constitute grounds for termination of any such plan
or for the court appointment of a trustee to administer any such plan; or
(p) Make capital expenditures or lease equipment in an
aggregate amount that exceeds Five Million and 00/100 Dollars ($5,000,000) in
any fiscal year.
6.7 Borrower is not a merchant who resells goods for personal, family
or household purposes.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants and
agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence.
6.9 Borrower further represents, warrants and covenants as set forth
below.
(a) Borrower will not make any distribution or declare or pay
any cash dividend to any shareholder or on any of its capital stock, of any
class, whether now or hereafter outstanding, or purchase, acquire, repurchase,
or redeem or retire any such capital stock other than the repurchase of stock in
an aggregate amount not to exceed Five Million and 00/100 Dollars ($5,000,000)
during Borrower's fiscal year ending 1999, to be increased to an aggregate
amount not to exceed Ten Million and 00/100 Dollars ($10,000,000) if Borrower
has net profits of not less than One Million and 00/100 Dollars ($1,000,000) as
of Borrower's fiscal quarter ending March 31, 1999;
(b) Borrower is and shall at all times hereafter be a
corporation duly organized and existing in good standing under the laws of the
state of its incorporation and qualified and licensed to do business in
California. Borrower is also and shall at all times hereafter be qualified and
licensed to do business in any other state in which it conducts its business,
except where failure to so qualify would not have a Material Adverse Effect;
(c) Borrower has the right and power and is duly authorized to
enter into this Agreement; and
(d) The execution by Borrower of this Agreement shall not
constitute a breach of any provision contained in Borrower's articles of
incorporation or by-laws.
6.10 The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any Agreement to which Borrower is now or
hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in the
ordinary course of business.
6.12 Except to the extent (a) being contested in good faith; and (b)
adequate reserves are being held by Borrower in connection with any disputed
assessments or taxes, all assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against, Borrower
or any of its property have been paid, and shall hereafter be paid in full,
before delinquency. Except to the extent (a) being contested in good faith; and
(b) adequate reserves are being held by Borrower in connection with any disputed
assessments or taxes, Borrower shall make due and timely payment or deposit of
all federal, state and local taxes, assessments or contribution required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will make
timely payment or deposit of all F.I.C.A. payments and withholding taxes
required of it by applicable laws, and will upon request furnish Bank with proof
satisfactory to it that Borrower has made such payments or deposit. If Borrower
fails to pay any such assessment, tax, contribution, or make such deposit, or
furnish the required proof, Bank may, in its sole and absolute discretion and
without notice to Borrower, (i) make payment of the same or any part hereof, or
(ii) set up such reserves in Borrower's account as Bank deems necessary to
satisfy the liability therefor, or both. Bank may conclusively rely on the usual
statements of the amount owing or other official statements issued by the
appropriate governmental agency. Each amount so paid or deposited by Bank shall
constitute a Bank Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency which
Borrower believes will have a material impact upon its operations and Borrower
has no knowledge of any such pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall immediately notify Bank in writing.
6.14 (a) Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and use
of the Collateral and its other assets. All such policies of insurance relating
to Borrower's ownership and use of the Collateral and its other assets shall be
in such form, with such companies, and in such amounts as may be reasonably
satisfactory to Bank. Borrower shall deliver to Bank certified copies of such
policies of insurance and evidence of the payments of all premiums therefor. All
such policies of insurance (except those of public liability and property
damage) shall contain an endorsement in a form satisfactory to Bank showing Bank
as a loss payee thereof, with a waiver of warranties (Form 438-BFU), and all
proceeds payable thereunder shall be payable to Bank and, upon receipt by Bank,
shall be applied on account of the Obligations owing to Bank; however, Bank
agrees that it will only exercise its foregoing rights as loss payee under
Borrower's insurance policies upon the occurrence and during the continuance of
an Event of Default. To secure the payment of the Obligations, Borrower grants
Bank a security interest in and to all such policies of insurance (except those
of public liability and property damage) and the proceeds thereof, and Borrower
shall direct all insurers under such policies of insurance to pay all proceeds
thereof directly to Bank unless Bank consents otherwise, which consent shall not
be unreasonably withheld; however, Bank agrees that it will only exercise its
foregoing rights as secured creditor with respect to the proceeds of Borrower's
insurance policies upon the occurrence and during the continuance of an Event of
Default.
(b) During the continuance of any Event of Default, Borrower
hereby irrevocably appoints Bank (and any of Bank's officers, employees or
agents designated by Bank) as Borrower's attorney for the purpose of making,
selling and adjusting claims under such policies of insurance, endorsing the
name of Borrower on any check, draft, instrument or other item of payment for
the proceeds of such policies of insurance and for making all determinations and
decisions with respect to such policies of insurance. Borrower may replace but
will not cancel any of such policies without Bank's prior written consent, which
consent shall not be unreasonably withheld. Each such insurer shall agree by
endorsement upon the policy or policies of insurance required above or to pay
any premium in whole or in part relating thereto. Bank, without waiving or
releasing any Obligations or any Event of Default, may, but shall have no
obligation to do so, obtain and maintain such policies of insurance and pay such
premiums and take any other action with respect to such policies which Bank
deems advisable. All sums so disbursed by Bank, as well as reasonable attorneys'
fees, court costs, expenses and other charges relating thereto, shall constitute
Bank Expenses and are payable on demand.
6.15 All financial statements and information relating to Borrower
which have been or may hereafter be delivered by Borrower to Bank are true and
correct to the best of Borrower's knowledge and have been prepared in accordance
with GAAP constituently applied and there has been no material adverse change in
the financial condition of Borrower since the submission of such financial
information to Bank.
6.16 (a) Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be reasonably requested by Bank, not modify
or change its method of accounting or enter into, modify or terminate any
agreement presently existing, or at any time hereafter entered into with any
third party accounting firm and/or service bureau for the preparation and/or
storage of Borrower's accounting records without the written consent of Bank
first obtained and without said accounting firm and/or service bureau agreeing
to provide information regarding the Receivables and Inventory and Borrower's
financial condition to Bank; permit Bank and any of its employees, officers or
agents, upon reasonable prior notice, during Borrower's usual business hours, or
the usual business hour of third persons having control thereof, to have access
to and examine all of Borrower's Books relating to the Collateral, Borrower's
Obligations to Bank, Borrower's financial condition and the results of
Borrower's operations and in connection therewith, permit Bank or any of its
agents, employees or officers to copy and make extracts therefrom.
(b) Borrower shall deliver to Bank within fifteen days (15)
days after becoming available a CPA-audited statement of the financial condition
of Borrower for each such fiscal year, with the CPA's audit to be unqualified.
Such annual financial statements shall include, without limitation, a balance
sheet and profit and loss statement and any other report requested by Bank
relating to the Collateral and the financial condition of Borrower, and a
certificate signed by an authorized employee of Borrower to the effect that all
reports, statements, computer disk or tape files, computer printouts, computer
runs, or other computer prepared information of any kind or nature relating to
the foregoing or documents delivered or caused to be delivered to Bank under
this subparagraph are complete, correct and thoroughly present the financial
condition of Borrower and that there exists on the date of delivery to Bank no
condition or event which constitutes a breach or Event of Default under this
Agreement.
(c) Borrower shall deliver to Bank within fifteen (15) days of
becoming available: (i) the annual report and 10K filed by Borrower with the
Securities and Exchange Commission; and (ii) the quarterly 10-Q report filed by
Borrower with the Securities and Exchange Commission each quarter of each fiscal
year of Borrower.
(d) Borrower shall deliver to Bank copies of all reports filed
with the Securities and Exchange Commission promptly upon the filing thereof,
but in any event within fifteen (15) days thereof.
(e) In addition to the financial statements requested above,
Borrower agrees to provide Bank with the following schedules:
X Accounts Receivable Agings on a monthly basis within 20 days of the
end of each month;
X Accounts Payable Agings on a monthly basis within 20 days of the
end of each month;
N/A Job Progress Reports on a N/A basis; and
X Borrowing Base Certificate on a monthly basis within 20 days of the
end of each month.
6.17 Borrower agrees that Bank may perform annual accounts receivable
audits, at the expense of Borrower.
6.18 Borrower shall maintain the following financial ratios and
covenants to be tested quarterly, except as set forth specifically below:
(a) Working Capital in an amount not less than N/A .
(b) Tangible Effective Net Worth in an amount not less than
Seventy-five Million and 00/100 Dollars ($75,000,000) (to be decreased to
Seventy Million and 00/100 Dollars ($70,000,000) if Borrower has net profits of
not less than One Million and 00/100 Dollars ($1,000,000) as of Borrower's
fiscal quarter ending March 31, 1999); to increase by fifty percent (50%) of any
quarterly profit and fifty percent (50%) of any new equity or subordinated debt;
(c) A ratio of Current Assets to Current Liabilities of not
less than N/A.
(d) A quick ratio of Current Assets (less inventories) to
Current Liabilities greater than 1.50:1.00, increasing to 1.75:1.00 by June 30,
1999;
(e) A ratio of Total Liabilities (less debt subordinated to
Bank) to Tangible Effective Net Worth of less than 0.75:1.00;
(f) A ratio of Cash Flow to Fixed Charges of not less than N/A.
(g) Net profit after taxes both quarterly and annually, except
that a loss in an aggregate amount not to exceed Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000) shall be permitted in any one quarter
during Borrower's fiscal year ending 1999; and
(h) Borrower shall not without Bank's prior written consent
make capital expenditures or lease equipment in an aggregate amount that exceeds
Five Million and 00/100 Dollars ($5,000,000) in any fiscal year.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.19 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor), including, but not limited to,
budgets, sales projections and/or other financial exhibits as Bank may
reasonably request from time to time hereafter, and shall promptly notify Bank
of any material adverse change in Borrower's financial condition and of any
condition or event known to Borrower which constitutes a breach of or an event
which constitutes an Event of Default under this Agreement.
6.20 Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.
6.21 Borrower shall immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including all
Bank Expenses; Borrower authorizes and approves all advances and payments by
Bank for items described in this Agreement as Bank Expenses.
6.22 Each warranty, representation and agreement made not as of a date
certain contained in this Agreement shall be automatically deemed repeated with
each advance and shall be conclusively presumed to have been relied on by Bank
regardless of any investigation made or information possessed by Bank. The
warranties, representations and agreements set forth herein shall be cumulative
and in addition to any and all other warranties, representations and agreements
which Borrower shall give, or cause to give, to Bank, either now or hereafter.
6.23 Borrower shall keep all of its principal operating accounts with
Bank and shall notify the Bank immediately in writing of the existence of any
other bank account, deposit account, or any other account into which money can
be deposited.
6.24 Borrower shall furnish to Bank: (a) as soon as possible, but in no
event later than thirty (30) days after Borrower knows or has reason to know
that any reportable event with respect to any deferred compensation plan has
occurred, a statement of the chief financial officer of Borrower setting forth
the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of
such reportable event given to the Pension Benefit Guaranty Corporation, if a
copy of such notice is available to Borrower; (b) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice
Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.
6.25 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic substances,
wastes and hazardous material and shall maintain all necessary authorizations
and permits except where failure to do so would not have a Material Adverse
Effect.
6.26 Borrower shall maintain insurance on the life of N/A in an amount
not to be less than N/A Dollars ($ N/A ) under one or more policies issued by
insurance companies satisfactory to Bank, which policies shall be assigned to
Bank as security for the Indebtedness and on which Bank shall be named as sole
beneficiary.
6.27 Borrower shall limit direct and indirect compensation paid to the
following employees:
, N/A , to an aggregate of N/A
Dollars ($ N/A ) per N/A .
6.28 Borrower shall pay an annual commitment fee in the amount of Fifty
Thousand and 00/100 Dollars ($50,000) payable upon closing and on each
anniversary of the closing during which this Agreement is in effect.
6.29 Borrower shall pay commitment fees ("Commitment Fee" or
"Commitment Fees") of (i) 1.00% of the face amount of the letters of credit
being issued under the Letter of Credit Subfeature if the aggregate face amounts
of the issued and outstanding letters of credit total Ten Million and 00/100
Dollars ($10,000,000) or less as of the date of the issuance of such letter of
credit; and (ii) .85% of the face amount of the letters of credit being issued
under the Letter of Credit Subfeature if the aggregate face amounts of the
issued and outstanding letters of credit total in excess of Ten Million and
00/100 Dollars ($10,000,000) as of the date of the issuance of such letter of
credit.
6.30 Borrower shall perform all acts reasonable necessary to ensure
that: Borrower and any business in which Borrower holds a substantial interest;
and (ii) all customers, suppliers and vendors that are material to Borrower's
business, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used in this
paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date-sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms of this
section as Bank may from time to time require.
7.0 EVENTS OF DEFAULT
Any one or more of the following events shall constitute a default and an Event
of Default by Borrower under this Agreement:
p. If Borrower fails or neglects to perform, keep or observe any
material term, provision, condition, covenant, agreement, warranty or
representation, other than a payment default under Subsection (c) hereof,
contained in this Agreement, or any other present or future agreement between
Borrower and Bank;
q. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank is
not true and correct in all material respects;
r. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of Borrower's Obligations (whether of principal,
interest, taxes (except to the extent (a) being contested in good faith; and (b)
adequate reserves are being held by Borrower in connection with such disputed
taxes), reimbursement of Bank Expenses, or otherwise);
s. If there is a material impairment of the prospect of repayment of
all or any portion of Borrower's Obligations or a material impairment of the
value or priority of Bank's security interest in the Collateral;
t. If all or any of Borrower's assets are attached, seized, subject to
a writ or distress warrant, or are levied upon, or come into the possession of
any Judicial Officer or Assignee and the same are not released, discharged or
bonded against within fifteen (15) days thereafter;
u. If any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within fifteen (15) days thereafter;
v. If any proceeding is filed or commenced by or against Borrower for
its dissolution or liquidation;
w. If Borrower is enjoined, restrained or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs;
x. If a notice of lien (except for a Permitted Lien), levy or
assessment in an amount equal to or in excess of Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000) is filed of record with respect to any
or all of Borrower's assets by any (1) state, county, municipal or other
governmental agency and Borrower (a) is not contesting such lien, levy or
assessment in good faith; or (b) Borrower fails to record on its books adequate
reserves by the end of Borrower's then-current quarter, or if any taxes or debts
owing at any time hereafter in excess of such amount to any one or more of such
entities becomes a lien, whether choate or otherwise, upon any or all of
Borrower's assets and the same is not paid on the payment date thereof unless it
is adequately reserved by Borrower by the end of Borrower's then-current
quarter; or (2) the United States government, or any department, agency or
instrumentality thereof, and Borrower (a) is not contesting such lien, levy or
assessment in good faith; or (b) Borrower fails to advise Bank within five (5)
Business Days thereof that Borrower has either (i) paid the amount of such lien,
levy or assessment; or (ii) recorded adequate reserves therefor;
y. If a judgment or other claim becomes a lien or encumbrance upon any
or all of Borrower's assets and the same is not satisfied, dismissed or bonded
against within fifteen (15) days thereafter;
z. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during the term of
this Agreement such an agreement with an outside service bureau is entered into,
and at any time thereafter, without first obtaining the written consent of Bank,
Borrower terminates, modifies, amends or changes its contractual relationship
with said computer service bureau or said computer service bureau fails to
provide Bank with any requested information or financial data pertaining to
Bank's Collateral, Borrower's financial condition or the results of Borrower's
operations;
aa. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration of the
maturity of Borrower's Indebtedness to others, whether under any indenture,
agreement or otherwise;
bb. If Borrower makes any payment on account of Indebtedness which has
been subordinated to Borrower's Obligations to Bank;
cc. If any misrepresentation exists now or thereafter in any warranty
or representation made to Bank by any officer or director of
Borrower, or if any such warranty or representation is withdrawn
by any officer or director;
dd. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its subordination or
guaranty, becomes insolvent or an Insolvency Proceeding is commenced by or
against any such subordinating party or guarantor;
ee. If Borrower is an individual and Borrower dies;
ff. If any reportable event, which Bank determines constitutes grounds
for the termination of any deferred compensation plan by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any such plan, shall have occurred and
be continuing thirty (30) days after written notice of such determination shall
have been given to Borrower by Bank, or any such Plan shall be terminated within
the meaning of Title IV of the Employment Retirement Income Security Act
("ERISA"), or a trustee shall be appointed by the appropriate United States
District Court to administer any such plan, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any plan and in case of any
event described in this Section 7.0, the aggregate amount of Borrower's
liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063
or 4064 of ERISA shall exceed five percent (5%) of Borrower's Tangible Effective
Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank
shall refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any of
the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if, within
fifteen (15) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period.
8.0 BANK'S RIGHTS AND REMEDIES
7.1 Upon the occurrence and during the continuance of an Event of
Default by Borrower under this agreement, Bank may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes or otherwise, immediately due and
payable to Bank;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this agreement, or any other agreement between
Borrower and Bank;
(c) Terminate this Agreement as to any future liability or
obligation of Bank, but without affecting Bank's rights and security interests
in the Collateral, and the Obligations of Borrower to Bank;
(d) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral available to Bank as Bank may
designate. Borrower authorizes Bank to enter the premises where the Collateral
is located, take and maintain possession of the Collateral and the premises (at
no charge to Bank), or any part thereof, and to pay, purchase, contest or
compromise any encumbrance, charge or lien which in the opinion of Bank appears
to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith;
(e) Without limiting Bank's rights under any security interest,
Bank is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks and advertising matter, or any property of a
similar nature as it pertains to the Collateral, in completing production of,
advertising for sale and selling any Collateral and Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit, and Bank
shall have the right and power to enter into sublicense agreements with respect
to all such rights with third parties on terms acceptable to Bank;
(fShip, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sales and sell (in the manner provided for
herein) the Inventory;
(gSell or dispose of the Collateral in a commercially
reasonable manner at either a public or private sale, or both, by way of one or
more contracts or transactions, for cash or on terms, in such manner and at such
places (including Borrower's premises) as is commercially reasonable in the
opinion of Bank. It is not necessary that the Collateral be present at any such
sale;
(h)Bank shall give notice of the disposition of the Collateral
as follows:
1. Bank shall give Borrower and each holder of a
security interest in the Collateral who has filed with Bank a written request
for notice,
a notice in writing of the time and place of public sale, or, if the sale is a
private sale or some disposition other than a public sale is to be made of the
Collateral, the time on or after which the private sale or other disposition is
to be made;
2. The notice shall be personally delivered or
mailed, postage prepaid, to Borrower's address appearing in this Agreement, at
least five (5)
calendar days before the date fixed for the sale, or at least five (5) calendar
days before the date on or after which the private sale or other disposition is
to be made, unless the Collateral is perishable or threatens to decline speedily
in value. Notice to persons other than Borrower claiming an interest in the
Collateral shall be sent to such addresses as have been furnished to Bank;
3. If the sale is to be a public sale, Bank shall
also give notice of the time and place by publishing a notice one time at least
five (5) calendar days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held; and
4. Bank may credit bid and purchase at any public
sale.
(i)Borrower shall pay all Bank Expenses incurred in connection
with Bank's enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;
(j)Any deficiency which exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third parties,
to Borrower by Bank, or, in Bank's discretion, to any party who Bank believes,
in good faith, is entitled to the excess; and
(k)Without constituting a retention of Collateral in
satisfaction of an obligation within the meaning of 9505 of the Uniform
Commercial Code or an action under California Code of Civil Procedure 726, apply
any and all amounts maintained by Borrower as deposit accounts (as that term is
defined under 9105 of the Uniform Commercial Code) or other accounts that
Borrower maintains with Bank against the Obligations.
7.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and remedies
not inconsistent herewith as provided by law or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election or acquiescence by Bank.
8.0 TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
If Borrower fails to pay promptly when due to another person or entity,
monies which Borrower is required to pay by reason of any provision in this
Agreement, Bank may, but need not, pay the same and charge Borrower's account
therefor, and Borrower shall promptly reimburse Bank. All such sums shall become
additional Indebtedness owing to Bank, shall bear interest at the rate
hereinabove provided, and shall be secured by all Collateral. Any payments made
by Bank shall not constitute (i) an agreement by it to make similar payments in
the future, or (ii) a waiver by Bank of any default under this Agreement, Bank
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance of lien and the receipt of the usual official
notice of the payment thereof shall be conclusive evidence that the same was
validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
9.0 WAIVERS
9.1 Borrower agrees that checks and other instruments received by Bank
in payment or on account of Borrower's Obligations constitute only conditional
payment until such items are actually paid to Bank and Borrower waives the right
to direct the application of any and all payments at any time or times hereafter
received by Bank on account of Borrower's Obligations and Borrower agrees that
Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by
Bank upon its books.
9.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, documents, instruments, chattel paper,
and guarantees at any time held by Bank on which Borrower may in any way be
liable.
9.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto occurring
or arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of Inventory shall be borne by Borrower.
9.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm and/or
service bureau or consultant in connection with any information requested by
Bank pursuant to or in accordance with this Agreement, and agrees that Bank may
contact directly any such accountants, accounting firm and/or service bureau or
consultant in order to obtain such information.
9.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER, OR
CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT OR BREACH OF DUTY
CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND BORROWER.
9.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails to
pursue or enforce any term, such waiver, delay or failure to pursue or enforce
shall only be effective with respect to that single act and shall not be
construed to affect any subsequent transactions or Bank's right to later pursue
such rights and remedies.
10.0 ONE CONTINUING LOAN TRANSACTION. All loans and advances heretofore, now or
at any time or times hereafter made by Bank to Borrower under this agreement or
any other agreement between Bank and Borrower, shall constitute one loan secured
by Bank's security interests in the Collateral and by all other security
interests, liens, encumbrances heretofore, now or from time to time hereafter
granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are consumer loans, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in Borrower's principal dwelling which is
not a purchase money security interest as to that portion, unless expressly
provided to the contrary in another place, or (ii) if Borrower (or any of them)
has (have) given or give(s) Bank a deed of trust or mortgage covering real
property, or mortgage shall not secure the loan and any other Obligation of
Borrower (or any of them), unless expressly provided to the contrary in another
place.
11.0 NOTICES. Unless otherwise provided in this Agreement, all notices, requests
or demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing.
12.0 AUTHORIZATION TO DISBURSE. Bank is hereby authorized to make loans and
advances hereunder upon telephonic or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or at the
discretion of Bank if said loans and advances are necessary to meet any
Obligations of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party, and Borrower shall hold Bank harmless
from any damage, claims or liability by reason of Bank's honor of, or failure to
honor, any such instructions except to the extent caused by the gross negligence
or willful misconduct of Bank.
13.0 DESTRUCTION OF BORROWER'S DOCUMENTS. Any documents, schedules, invoices or
other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
invoices or other papers and makes arrangements, at Borrower's expense, for
their return.
14.0 CHOICE OF LAW. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.
15.0 GENERAL PROVISIONS.
15.1 This Agreement shall be binding and deemed effective when executed
by Borrower and accepted and executed by Bank at its headquarter office.
15.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties; provided, however,
that Borrower may not assign this Agreement or any rights hereunder without
Bank's prior written consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Bank shall release Borrower or any
guarantor from their Obligations to Bank. Bank may assign this Agreement and its
rights and duties hereunder. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in
Bank's rights and benefits hereunder. In connection therewith, Bank may disclose
all documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
15.3 Paragraph headings and paragraph numbers have been set forth
herein for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire Agreement.
15.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any rule
of construction or otherwise; on the contrary, this Agreement has been reviewed
by all parties and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of all parties hereto. When permitted by the context, the singular includes the
plural and vice versa.
15.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
15.6 This Agreement cannot be changed or terminated orally. Except as
to currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations, if
any, with respect to the subject matter hereof, are merged into this Agreement.
15.7 The parties intend to and agree that their respective rights,
duties, powers, liabilities, obligations and discretions shall be performed,
carried out, discharged and exercised reasonably and in good faith.
15.8 In addition, if this Agreement is secured by a deed of trust or
mortgage covering real property, then the trustor or mortgagor shall not
mortgage or pledge the mortgaged premises as security for any other Indebtedness
or obligations. This Agreement, together with all other Indebtedness secured by
said deed of trust or mortgage, shall become due and payable immediately,
without notice, at the option of Bank, (a) if said trustor or mortgagor shall
mortgage or pledge the mortgaged premises for any other Indebtedness or
obligations or shall convey, assign or transfer the mortgaged premises by deed,
installment sale contract or other instrument; (b) if the title to the mortgaged
premises shall become vested in any other person or party in any manner
whatsoever; or (c) if there is any disposition (through one or more
transactions) of legal or beneficial title to a controlling interest of said
trustor or mortgagor.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Loan & Security Agreement (Accounts and Inventory) to be executed as of
the date first hereinabove written.
CIDCO, INCORPORATED
By:/s/ Richard D. Kent
Title: Chief Financial & Operating Officer
Accepted and effective as of March 29, 1999 at Bank's Headquarters Office
COMERICA BANK-CALIFORNIA
By:/s/Bradford L. Smith
Title: Vice President
SCHEDULE A
Permitted Liens
(This space left blank in document.)
SCHEDULE B
CIDCO Incorporated locations and Landlords/Mortgagors
1. CIDCO Incorporated
180 and 220 Cochrane Circle
Morgan Hill, California 95037
2. GSS Array Technology
94 MOO 1. Hi-Tech Industrial Estate
Banlane, Bang PA-In
Ayudhaya 13160
Thailand
3. In-Tec Global / Professional Conglomerate SDN. BHD
NO 10, Jalan Hasil
Kawasan Perindustrian Jalan Hasil
81200 Tampoi, Johor Bahru, Johor, Malaysia
4. CGE Ltd.
NO. 8 Industrial Zone
Dan Shui Zhen
Hui Yang Hsien
Canton, China
5. Shenzhen Taifeng Electronics - (formally known as Sanford Investment)
Taifeng Building 5th Industrial Zone
Nantou Shenzhen China
Third Party Warehouses
6. Salinas Valley Public Warehouse
Fireston Business Park
340 El Camino Real South
Salinas, CA 93901
[GRAPHIC OMITTED]
EQUIPMENT RIDER
Borrower(s): CIDCO, INCORPORATED
Borrower and Comerica Bank-California ("Bank") are entering into that
certain Amended and Restated Loan & Security Agreement (Accounts and Inventory)
of even date herewith (the "Agreement"). This EQUIPMENT RIDER (this "Rider")
dated March 29, 1999 is hereby made a part of and incorporated into the
Agreement.
1. Borrower grants to Bank a security interest in the following
(hereinafter referred to as "Equipment"):
(a) All of Borrower's present machinery, equipment, fixtures,
vehicles, office equipment, furniture, furnishings, tools,
dies, jigs and attachments, wherever located, (including but
not limited to, the items listed and described on the Schedule
of Equipment attached hereto and marked Exhibit "A" and by
this reference made a part hereof as though fully set forth
hereat);
(b) all of Borrower's additional equipment, wherever located, of
like or unlike nature, to be acquired hereafter, and all
replacements, substitutes, accessions, additions and
improvements to any of the foregoing; and
(c) all of Borrower's general intangibles, including without
limitation, computer programs and computer disks. 2. Bank's security
interest in the Equipment as set forth above shall secure each, any and all
of Borrower's Obligations to
Bank, as the term "Obligations" is defined in the Agreement; and, the payment of
Borrower's indebtedness in the principal amount not to exceed Fifteen Million
and 00/100 Dollars ($15,000,000) and interest evidenced by the Agreement.
3. Bank may, in its sole discretion, from time to time hereafter, make
loans to Borrower. Loans made by Bank to Borrower pursuant to this Rider shall
be included as part of the Obligations of Borrower to Bank and at Bank's option,
may be evidenced by promissory note(s), in form satisfactory to Bank. Such loans
shall bear interest at the rate and be payable in the manner specified in said
promissory note(s) in the event Bank exercises the aforementioned option, and in
the event Bank does not, such loans shall bear interest at the rate and be
payable in the manner specified in the Agreement.
4. Borrower represents and warrants to Bank that:
(a) it has good and indefeasible title to the Equipment;
(b) the Equipment is and will be free and clear of all liens,
security interests, encumbrances and claims, except Permitted
Liens as defined in the Agreement;
(c) the Equipment shall be kept only at the following locations:
180 and 220 Cochrane Circle, Morgan Hill, California
95037 and See Schedule B of the Agreement
(d) the owners or mortgagees of the respective locations are:
See Schedule B of the Agreement; and
(e) Bank shall have the right to demand now and/or at all times
hereafter, during Borrower's usual business hours to inspect
and examine the Equipment and Borrower agreed to reimburse
Bank for its reasonable costs and expenses in so doing.
5. Borrower shall keep and maintain the Equipment in good operating
condition and repair, make all necessary replacements thereto so that the value
and operating efficiency thereof shall at all times be maintained and preserved.
Borrower shall not permit any items of Equipment to become a fixture to real
estate or accession to other property, and the Equipment is now and shall at all
times remain and be personal property.
6. Borrower, at its expense, shall keep and maintain the Equipment insured
against loss or damage by fire, theft, explosion, sprinklers and all other
hazards and risks ordinarily insured against by other owners who use such
properties and interest in properties in similar businesses for the full
insurable value thereof; and business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and use
of its assets. All such policies of insurance shall be in such form, with such
companies and in such amounts as may be reasonably satisfactory to Bank.
Borrower shall deliver to Bank certified copies of such policies of insurance
and evidence of the payment of all premiums thereof. All such policies of
insurance (except those of public liability and property damage) shall contain
an endorsement in a form satisfactory to Bank showing loss payable to Bank and
all proceeds payable thereunder shall be payable to Bank and upon receipt by
Bank shall be applied on the account of Borrower's Obligations. To secure the
payment of Borrower's Obligations, Borrower grants Bank's security interest in
and to all such policies of insurance (except those of public liability and
property damage) and the proceeds thereof and directs all insurers under such
policies of insurance to pay all proceeds thereof directly to Bank). Upon the
occurrence and during the continuance of an Event of Default, Borrower hereby
irrevocably appoints Bank (and any of Bank's officers, employees or agents
designated by Bank) as Borrower's attorney-in-fact for the purpose of making,
settling and adjusting claims under such policies of insurance. Each such
insurer shall agree by endorsement upon the policy or policies of insurance
issued by it to Borrower, or any other person, shall affect the right of Bank to
recover under such policy or policies of insurance required above or to pay any
premium in whole or in part relating thereto. Bank, without waiving or releasing
any obligations or defaults by Borrower hereunder, may at any time or times
hereafter, but shall have no obligations to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, including reasonable attorneys' fees, court costs, expenses and other
charges relating thereto, shall be a part of Borrower's Obligations and payable
on demand.
7. Until the occurrence and during the continuance of a default by Borrower
under the Agreement or this Rider, Borrower may, subject to the provisions of
the Agreement and this Rider and consistent therewith, remain in possession
thereof and use the Equipment referred to herein in the ordinary course of
business at the location or locations hereinabove designated.
8. All of the terms, conditions, warranties, covenants, agreements and
representations of the Agreement are incorporated herein and reaffirmed.
9. Upon a default by Borrower under the Agreement or this Rider, Borrower
upon request of Bank to do so, agrees to assemble and make the Equipment or any
part thereof available to Bank at a place designated by Bank.
10. Borrower shall upon demand by Bank immediately deliver to Bank and
properly endorse, any and all evidences of ownership, certificates of title or
applications for titles to any of the aforesaid items of Equipment.
11. Bank shall not in any way or manner be liable or responsible for (a)
the safekeeping of the Equipment; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof or (d) any act or default by any person whomsoever. All risk of Loss,
damage or destruction of the Equipment shall be borne by Borrower.
Borrower: CIDCO, INCORPORATED
By:/s/Richard D. Kent
Its:CFO & COO
Accepted this 29th day of March, 1999 at Bank's place of business in San Jose,
California.
Comerica Bank-California
By: /s/Bradford L. Smith
Its: Vice President
[GRAPHIC OMITTED]
ENVIRONMENTAL RIDER
This ENVIRONMENTAL RIDER (this "Rider") dated this 29th day of March,
1999 is hereby made a part of and incorporated into that certain Amended and
Restated Loan & Security Agreement (Accounts and Inventory) (the "Agreement")
dated March 29, 1999 between Comerica Bank-California, a California corporation
("Lender") and CIDCO, INCORPORATED, a California corporation ("Borrower").
1. Borrower hereby represents, warrants and covenants that none of the
collateral or real property occupied and/or owned by Borrower has ever been used
by Borrower or to the knowledge of Borrower any other previous owner and/or
operator in connection with the disposal of or to refine, generate, manufacture,
produce, store, handle, treat, transfer, release, process or transport any
hazardous waste, as defined in 42 U.S.C. 9601 (14) ("Hazardous Substance"), and
Borrower will not at any time use the collateral or such real property for the
disposal of, refining of, generating, manufacturing, producing, storing,
handling, treating, transferring, releasing, processing, or transporting any
such Hazardous Waste and/or Hazardous Substances.
2. None of the collateral or real property used and/or occupied by
Borrower has been designated, listed or identified in any manner by the United
States Environmental Protection Agency (the "EPA") or under and pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, set forth at 42 U.S.C. 9601 et seq. ("CERCLA") or the Resource
Conservation and Recovery Act of 1986, as amended, set forth at 42 U.S.C. 9601
et seq. ("RCRA") or any other environmental protection statute as a Hazardous
Waste or Hazardous Substance disposal or removal site, superfund or cleanup site
or candidate for removal of closure pursuant to RCRA, CERCLA or any other
environmental protection statute.
3. Borrower has not received a material summons, citation, notice,
directive, letter or other communication, written or oral, from the EPA or any
other federal or state governmental agency or instrumentality, authorized
pursuant to an environmental protection statute, concerning any intentional or
unintentional action or omission by Borrower resulting in the releasing,
spilling, leaking, pumping, pouring, emitting, emptying, dumping or otherwise
disposing of Hazardous Waste or Hazardous Substance into the environmental
resulting in damage thereto or to the fish, shellfish, wildlife, biota or other
natural resources.
4. Borrower shall not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part, or on the part of
any third party, on property owned and/or occupied by Borrower, any disposal,
releasing, spilling, leaking, pumping, omitting, pouring, emptying or dumping of
a Hazardous Waste or Hazardous Substance into the environment where damage may
result to the environment, fish, shellfish, wildlife, biota or other natural
resources unless such disposal, release, spill, leak, pumping, emission,
pouring, emptying or dumping is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal or state governmental
authority.
5. Borrower shall furnish to Lender:
(a) Promptly and in any event within thirty (30) days after receipt
thereof, a copy of any material notice, summons, citation, directive, letter or
other communications from the EPA or any other governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with the handling, transporting, transferring,
disposal or in the releasing, spilling, leaking, pumping, pouring, omitting,
emptying or dumping of Hazardous Waste or Hazardous Substances into the
environment resulting in damage to the environment, fish, shellfish, wildlife,
biota and any other natural resource;
(b) Promptly and in any event within thirty (30) days after the
receipt thereof, a copy of any notice of or other communication concerning the
filing of a lien upon, against or in connection with Borrower, the collateral or
Borrower's real property by the EPA or any other governmental agency or
instrumentality authorized to file such a lien pursuant to an environmental
protection statute in connection with a fund to pay for damages and/or cleanup
and/or removal costs arising from the intentional or unintentional action or
omission of Borrower resulting from the disposal or in the releasing, spilling,
leaking, pumping, pouring, emitting, emptying or dumping of Hazardous Waste or
Hazardous Substances into the environment;
(c) Promptly and in any event within thirty (30) days after the
receipt thereof, a copy of any notice, directive, letter or other communication
from the EPA or any other governmental agency or instrumentality acting under
the authority of an environmental protection statute indicating that all or any
portion of the Borrower's property or assets have been listed and/or borrowers
deemed by such agency to be the owner and operator of the facility that has
failed to furnish to the EPA or other authorized governmental agency or
instrumentality, all the information required by the RCRA, CERCLA or other
applicable environmental protection statutes;
(d) Promptly and in no event more than thirty (30) days after the
filing thereof with the EPA or other governmental agency or instrumentality
authorized as such pursuant to an environmental protection statute, copies of
any and all information reports filed with such agency or instrumentality in
connection with Borrower's compliance with RCRA, CERCLA or other applicable
environmental protection statutes.
6. Any one or more of the following events which occur with respect to
Borrower shall constitute an event of default;
(a) The breach by Borrower of any covenant or condition,
representation or warranty contained in this Rider;
(b) The failure by Borrower to comply with each, every and all of
the requirements of RCRA, CERCLA or any other applicable environmental on
Borrower's other property;
(c) The receipt by Borrower of a notice from the EPA or any other
governmental agency or instrumentality acting under the authority of any
environmental protection statute, indicating that a lien has been filed against
any of the collateral, or any of Borrower's other property by the EPA or any
other governmental agency or instrumentality in connection with a fund as a
result of damage arising from an intentional or unintentional action or omission
by Borrower resulting from the disposal, releasing, spilling, leaking, pumping,
pouring, emitting, emptying or dumping of Hazardous Substances or Hazardous
Waste into the environment; and
(d) Any other event or condition exists which might, in the opinion
of Lender, under applicable environmental protection statutes, have a material
adverse effect on the financial or operational condition of Borrower or the
value of all or any material part of the collateral or other property of
Borrower.
IN WITNESS WHEREOF, Borrower has agreed as of the date first set forth
above.
CIDCO, INCORPORATED
(borrower/pledgor)
By: /s/Richard D. Kent
Its: CFO & COO
[GRAPHIC OMITTED]
CORPORATE RESOLUTIONS AND INCUMBENCY
CERTIFICATION - AUTHORITY TO PROCURE LOANS
I certify that I am the duly elected and qualified Secretary of CIDCO,
INCORPORATED, a California corporation (the "Corporation") and the keeper of the
records of the Corporation; that the following is a true and correct copy of
resolutions duly adopted by the Board of Directors of the Corporation in
accordance with its bylaws and applicable statutes on or as of the 29th day of
March, 1999.
Copy of Resolutions:
Be it Resolved, That:
1. Any (insert number required to sign) ( 1 ) one of the officers set forth
below of the Corporation are/is authorized, for, on behalf of, and in the
name of the Corporation to:
(a) Negotiate and procure letters of credit and other credit or
financial accommodations from Comerica Bank-California (the
"Bank") up to an amount not exceeding Twenty-Five Million and
00/100 Dollars ($25,000,000) (if left blank, unlimited);
(b) Discount with Bank commercial or other business paper belonging to
the Corporation made or drawn by or upon third parties, without
limit as to amount;
(c) Purchase, sell, exchange, assign, endorse for transfer and/or
deliver certificates and/or instruments representing stocks,
bonds, evidence of indebtedness or other securities owned by the
Corporation, whether or not registered in the name of the
Corporation;
(d) Give security for any liabilities of the Corporation to Bank by
grant, security interest, assignment, lien, deed of trust or
mortgage upon any real or personal property, tangible or
intangible of the Corporation; and
(e) Execute and deliver in form and content as may be required by Bank
any and all notes, evidences of indebtedness, applications for
letters of credit, guaranties, subordination agreements, loan and
security agreements, financing statements, assignments, liens,
deeds of trust, mortgages, trust receipts and other agreements,
instruments or documents to carry out the purposes of these
Resolutions, any or all of which may relate to all or to
substantially all of the Corporation's property and assets.
2. Said Bank be and it is authorized and directed to pay the proceeds of any
such loans or discounts as directed by the persons so authorized to sign,
whether so payable to the order of any of said persons in their individual
capacities or not, and whether such proceeds are deposited to the
individual credit of any of said persons or not;
3. Any and all agreements, instruments and document previously executed and
acts and things previously done to carry out the purposes of these
Resolutions are ratified, confirmed and approved as the act or acts of the
Corporation.
4. These Resolutions shall continue in force, and Bank may consider the
holders of said offices and their signatures to be and continue to be as
set forth in a certified copy of these Resolutions delivered to Bank, until
notice to the contrary in writing is duly served on Bank (such notice to
have no effect on any action previously taken by Bank in reliance on these
Resolutions).
5. Any person, corporation or other legal entity dealing with Bank may rely
upon a certificate signed by an officer of Bank to effect that these
Resolutions and any agreement, instrument or document executed pursuant to
them are still in full force and effect and binding upon the Corporation.
6. Bank may consider the holders of the offices of the Corporation and their
signatures, respectively, to be and continue to be as set forth in the
Certificate of the Secretary of Corporation until notice to the contrary in
writing is duly served on Bank.
I further certify that the above Resolutions are in full force and effect as of
the date of this Certificate; that these Resolutions and any borrowings or
financial accommodations under these Resolutions have been properly noted in the
corporate books and records, and have not been rescinded, annulled, revoked or
modified; that neither the foregoing Resolutions nor any actions to be taken
pursuant to them are or will be in contravention of any provision of the
articles of incorporation or bylaws of the Corporation or of any agreement,
indenture or other instrument to which the Corporation is a party or by which it
is bound; and that neither the articles of incorporation nor bylaws of the
Corporation nor any agreement, indenture or other instrument to which the
Corporation is a party or by which it is bound require the vote or consent of
shareholders of the Corporation to authorize any act, matter or thing described
in the foregoing Resolutions.
I further certify that the following named persons have been duly elected to the
offices set opposite their respective names, that they continue to hold these
offices at the present time, and that the signatures which appear below are the
genuine, original signatures of each respectively:
NAME (Type or Print) TITLE SIGNATURE
Paul G. Locklin President/CEO /s/ Paul G. Locklin
Richard D. Kent CFO/COO /s/ Richard D. Kent
IN WITNESS WHEREOF, I have affixed my name as Secretary and have caused the
corporate seal of said Corporation to be affixed this 29th day of March, 1999.
/s/ Richard D. Kent
Secretary
The Above Statements are Correct. /s/ Paul G. Locklin
SIGNATURE OF OFFICER OR DIRECTOR OF, IF NONE,
A SHAREHOLDER OTHER THAN SECRETARY WHEN
SECRETARY IS AUTHORIZED TO SIGN ALONE
Failure to complete the above when the Secretary is authorized to sign alone
shall constitute a certification by the Secretary that he/she is the sole
Shareholder, Director and Officer of the Corporation.
[GRAPHIC OMITTED]
BORROWER'S AUTHORIZATION
Date: March 29, 1999
I (we) hereby authorize and direct Comerica Bank-California ("Bank") to
pay
to be forwarded on demand
of the proceeds of my (our) loan from the Bank evidenced by an Amended and
Restated Loan & Security Agreement dated March 29, 1999 in the original
principal amount of Fifteen Million and 00/100 Dollars ($15,000,000).
Borrower(s): CIDCO, INCORPORATED
By:/s/ Paul G. Locklin Its: President/CEO
SIGNATURE OF Paul G. Locklin TITLE (if applicable)
By:/s/ Richard D. Kent Its: CFO & COO
SIGNATURE OF Richard D. Kent TITLE (if applicable)
Attachment A to UCC-1 Financing Statement
between Comerica Bank-California and CIDCO, Incorporated dated March 29, 1999
The attached Financing Statement covers the following types or
items of property:
ACCOUNTS, INVENTORY AND EQUIPMENT
All present and future accounts, contract rights, chattel paper,
security agreements and debts secured thereby, documents, notes, drafts,
instruments, general intangibles (including, without limitation, all present and
future choses and things in action, goodwill, patents, trademarks, trade names,
customer lists, purchase orders, deposit accounts and tax refunds) , and
returned goods. All present and hereafter acquired inventory wherever located,
including but not limited to all present and future goods held for sale or lease
or to be furnished under a contract of service and all raw materials, work in
process and finished goods but excluding inventory, goods or equipment and
accessories associated therewith which is held by Borrower in consignment or
bailment, subject to the last sentence hereof. All present and hereafter
acquired equipment wherever located, including but not limited to machinery,
machine tools, motors, equipment, controls, attachments, parts, tools,
furniture, furnishings, fixtures and motor vehicles and all attachments,
accessories, accessions, replacements, substitutions, additions and improvements
to any of the foregoing but excluding inventory, goods or equipment and
accessories associated therewith which is held by Borrower in consignment or
bailment, subject to the last sentence hereof. All present and future dies,
drawings, blueprints, catalogs and computer programs. All proceeds and products
of the foregoing, including but not limited to accounts, contract rights,
general intangibles, equipment, inventory, money, deposit accounts, foods,
chattel paper, documents, notes, drafts, instruments, insurance proceeds, and
any other tangible or intangible property received upon the sale or other
disposition of any of the foregoing but excluding the proceeds and products from
the sale of consigned or bailed inventory, goods or equipment and accessories
associated therewith which was held and/or disposed of by Borrower, subject to
the last sentence hereof. All present and future books and records pertaining to
any of the foregoing and the equipment containing said books and records.
Notwithstanding any provision to the contrary in this Attachment A, nothing in
this Attachment A shall be deemed to preclude Bank from having a security
interest in any Receivables, as defined in that certain Amended and Restated
Loan & Security Agreement of even date herewith (the "Loan Agreement"), for the
services provided by Borrower to Third Party Consignors or Bailors, as defined
in the Loan Agreement, in connection with any third party inventory, goods,
products, equipment and accessories held by Borrower in connection with
consignment or bailment.
Except as to inventory held for sale, the debtor has no right to sell
or otherwise dispose of any of the collateral.
/s/ RDK
Debtor's Initials
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as
of June 5, 1998 (the "Effective Date"), by and between CIDCO Incorporated, a
Delaware corporation (the "Company"), and William A. Sole ("Executive").
Recitals
The Company and Executive desire to enter into this Agreement in order
to provide compensation and benefits to Executive and to encourage Executive to
devote his full attention and dedication to the Company and to continue his
employment with the Company. The Company believes that the existence of this
Agreement will serve as an incentive to Executive to remain in the employ of the
Company and will enhance its ability to call on and rely upon Executive to
continue to provide services to the Company.
Definitions: As used in this Agreement, unless the context requires a different
meaning, the following terms shall have the meanings set forth herein:
Cause" means:
Executive's theft, material act of dishonesty, fraud, or intentional
falsification of any employment or Company records, or Executive's commission of
any criminal act which impairs Executive's ability to perform his duties under
this Agreement;
the neglect or refusal of Executive to substantially fulfill his
material duties as an employee; improper disclosure of the Company's
confidential, business or proprietary information by Executive; a material
breach of any fiduciary duty by Executive with respect to the Company resulting
in material harm to the Company; or
Executive's conviction (including any plea of guilty or nolo
contendere) for a crime involving moral turpitude or which causes material harm
to the reputation and standing of the Company, as determined by the Company in
good faith.
"Change in Control" means the occurrence of either:
the sale, exchange or transfer of all or substantially all of the
property and assets of the Company; or
a merger or consolidation in which the Company is a party or the direct
or indirect sale or exchange by the stockholders of the Company of a majority of
the voting stock of the Company which, in any such event, constitutes a "Change
in Control," as defined in subsection 12(b) of the CIDCO Incorporated Amended
and Restated 1993 Stock Option Plan as in effect on the Effective Date.
"Constructive Termination" means the occurrence of any of the following
conditions, which condition(s) remain(s) in effect thirty (30) days after
written notice to the Company's Chief Executive Officer from Executive of such
conditions(s), which written notice of condition(s) shall be delivered by
Executive to the Chief Executive Officer within ten (10) days following the
occurrence of the alleged condition(s):
a material decrease in Executive's annual base salary which is made
without Executive's written consent, except that, in the event of a reduction in
base salary that is initiated for all executives, such action can be taken and
will not constitute Constructive Termination for purposes of this Agreement nor
will it require Executive's written consent;
a demotion, a material reduction in Executive's position,
responsibilities or duties or a material, adverse change in Executive's
substantive functional responsibilities or duties, as measured against
Executive's position, responsibilities or duties immediately prior to such
change causing it to be of materially less stature or responsibility;
the relocation of Executive's work place for the Company to a location
more than twenty-five (25) miles from Executive's principal place of employment
prior to such relocation;
any material breach of this Agreement by the Company; or
any failure or refusal of a successor company to assume the Company's
obligations under this Agreement as required by Section 16.
"Permanent Disability" means that:
Executive has been incapacitated by bodily injury or disease so as to
be prevented thereby from engaging in the performance of Executive's duties;
such incapacity shall have continued for a period of four(4)consecutive
months or six (6) months in any twelve (12) month period; and
such incapacity will, in the opinion of a qualified physician, be
permanent and continuous during the remainder of Executive's life.
Position and Duties. Executive shall continue to be an at-will employee of the
Company. Executive shall also be entitled to continue to participate in and to
receive benefits on the same basis as other executive or senior staff members
under any of the Company's employee benefit plans as in effect from time to
time. In addition, Executive shall be entitled to the benefits afforded to other
employees similarly situated under the Company's vacation, holiday and business
expense reimbursement policies. Executive agrees to devote his full business
time, energy and skill to his duties at the Company. These duties shall include,
but not be limited to, any duties consistent with his position which may be
assigned to Executive from time to time.
Benefits Upon Executive's Termination for Cause, Voluntary Termination,
Permanent Disability or Death. In the event that Executive voluntarily
terminates his employment relationship with the Company at any time and his
termination is not for nor deemed for Constructive Termination, or in the event
that Executive's employment terminates as a result of his death or Permanent
Disability or for Cause, Executive shall be entitled to no compensation or
benefits from the Company other than those earned under Section 2 above through
the date of his termination of employment.
Termination for Other Than Cause and/or for Constructive Termination. If
Executive's employment is terminated by the Company for any reason other than
Cause or if Executive terminates his employment with the Company for
Constructive Termination, Executive shall be entitled to the following
separation benefits: twelve (12) months of Executive's annual base salary as in
effect as of the date of such termination, less applicable withholding, paid in
a lump sum payment; and Executive shall be entitled to elect continued medical
insurance coverage in accordance with the applicable provisions of federal law
(COBRA) and the Company shall pay for the cost of such COBRA coverage for twelve
(12) months. This payment shall be made in a lump sum together with the payment
described in subsection 4(a). If such coverage included Executive's dependents
immediately prior to the date of termination, such dependents shall also be
covered at the Company's expense for the same time period as Executive's COBRA
coverage described above.
Additional Benefit Upon Certain Termination After Change in Control. If, within
six (6) months following the date of consummation (i.e., the closing) of a
Change in Control, Executive either (i) is given notice of termination of his
employment by the Company for any reason other than Cause or (ii) gives notice
to the Company of the occurrence of one or more conditions constituting
Constructive Termination and subsequently terminates his employment with the
Company on the basis of such Constructive Termination, then in either such event
Executive shall be entitled to the Stock Option Acceleration Benefit described
below in addition to the payments and benefits provided by Section 4. Except as
otherwise provided below, the Stock Option Acceleration Benefit shall apply to
each option (an "Option") to purchase shares of stock of the Company or its
successor granted to Executive by the Company or its successor and outstanding
as of the date ten (10) business days prior to the effective date of the
termination of Executive's employment (the "Effective Termination Date") for a
reason described in this Section 5, regardless of whether such Option was
granted before, on or after the Effective Date of this Agreement. Pursuant to
the Stock Option Acceleration Benefit:
the vesting and exercisability of each Option shall be computed on the
basis of monthly vesting periods commencing on the date contemplated by the
stock option agreement evidencing such Option (the "Vesting Commencement Date")
notwithstanding that such agreement provides for vesting on the basis of one or
more periods of different length, such as a year;
and in addition to the number of actual full months of Executive's
employment with the Company from the Vesting Commencement Date through the
Effective Termination Date, Executive shall be credited, effective as of the
date ten (10) business days prior to the Effective Termination Date, with an
additional number of full months of employment for Option vesting purposes equal
to the lesser of (i) twelve (12) months or (ii) the number of actual full months
of Executive's employment with the Company beginning on the Vesting Commencement
Date and ending on the Effective Termination Date.
This Section 5 shall not be applied or construed in any manner that would reduce
the degree of vesting or exercisability of any Option determined in the absence
of this Section. Notwithstanding any provision of this Section 5 to the
contrary, if it is determined that the provisions or operation of this Section 5
would preclude treatment of a Change in Control as a "pooling-of-interests" for
accounting purposes and provided further that in the absence of this Section 5
such Change in Control would be treated as a "pooling-of-interests" for
accounting purposes, then this Section 5 shall be void ab initio, and the
vesting and exercisability of each Option shall be determined under any other
applicable provision of the stock option agreement evidencing such Option.
Required Advance Notice of Termination for Other Than Cause. No termination of
Executive's employment by the Company for any reason other than Cause shall be
effective prior to the tenth (10th) business day following the date on which
Executive is given written notice of such termination.
Excess Parachute Payment. In the event that any payment or benefit received or
to be received by Executive pursuant to this Agreement or otherwise would
subject Executive to any excise tax pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), due to the characterization of
such payment or benefit as an excess parachute payment under Section 280G of the
Code, Executive may elect in his sole discretion to reduce the amounts of any
payments or benefits otherwise called for under this Agreement in order to avoid
such characterization.
Conflict of Interest/Non-Solicitation. Executive agrees that for a period of one
(1) year following termination of his employment with the Company, he will not,
directly or indirectly, solicit the services of or in any manner persuade
employees, customers or vendors of the Company to discontinue that person's or
entity's relationship with or to the Company as an employee, customer or vendor,
as the case may be. Payment of Taxes. All payments made to Executive under this
Agreement shall be subject to all applicable federal and state income,
employment and payroll taxes.
Exclusive Remedy. Under any claim for breach of this Agreement or wrongful
termination, the payments and benefits provided for in Section 4 and Section 5
as applicable shall constitute Executive's sole and exclusive remedy for any
alleged injury or other damages arising out of the cessation of the employment
relationship between Executive and the Company in the event of Executive's
termination. Except as expressly set forth herein, Executive shall be entitled
to no other compensation, benefits, or other payments from the Company as a
result of any termination of employment with respect to which the payments
and/or benefits described in Section 4 and Section 5 as applicable have been
provided to Executive.
Proprietary and Confidential Information. Executive agrees to continue to abide
by the terms and conditions of the Company's confidentiality and/or proprietary
rights agreement between Executive and the Company.
Arbitration. Pursuant to the Federal Arbitration Act, any claim,
dispute or controversy arising out of this Agreement, the interpretation,
validity or enforceability of this Agreement or the alleged breach thereof shall
be submitted by the parties to binding arbitration in Santa Clara County,
California or elsewhere by mutual agreement. The selection of the arbitrator and
procedure shall be governed by the Employment Arbitration Rules of the American
Arbitration Association. The arbitrator shall be someone with an employment law
background and from the AAA Commercial Arbitration Panel, or if both parties
agree, the Judicial Arbiters Group. Notwithstanding the above, this arbitration
provision shall not preclude the Company from seeking injunctive relief from any
court having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's trade secrets or
confidential and proprietary information or the breach of any provisions by
Executive of the Company's confidentiality and/or proprietary rights agreement
between Executive and Company. Each party shall bear its own costs and expenses
of arbitration or litigation, including but not limited to attorneys fees and
other costs. Judgment may be entered on the award of the arbitration in any
court having jurisdiction. Interpretation. Executive and the Company agree that
this Agreement shall be interpreted in accordance with and governed by the laws
of the State of California.
Conflict in Benefits. This Agreement shall supersede all prior arrangements,
whether written or oral, and understandings regarding the subject matter of this
Agreement including but not limited to any severance plans or arrangements or
prior employment agreements, and shall be the exclusive agreement for the
determination of any payments due upon Executive's termination of employment;
provided, however, that this Agreement is not intended to and shall not affect,
limit or terminate (i) any plans, programs, or arrangements of the Company that
are regularly made available to a significant number of employees of the
Company, (ii) any agreement or arrangement with Executive that has been reduced
to writing and which does not relate to the subject matter hereof, (iii) any
indemnification rights described below, or (iv) any agreements or arrangements
hereafter entered into by the parties in writing, except as otherwise expressly
provided herein.
Release of Claims. Except for the Stock Option Acceleration Benefit described in
Section 5, no severance benefits shall be paid to Executive under this Agreement
unless and until Executive shall, in consideration of the payment of such
severance benefit, execute a release of claims in the form attached hereto as
Exhibit A and all applicable waiting periods thereunder shall have expired;
provided, however, that such release shall not apply to any right of Executive
to be indemnified by the Company for the period during which Executive was
employed by the Company.
Successors and Assigns. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. In view of the personal
nature of the services to be performed under this Agreement by Executive, he
shall not have the right to assign or transfer any of his rights, obligations or
benefits under this Agreement, except as otherwise noted herein.
Notices. All notices and other communications required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have been duly
given when delivered in person or sent by confirmed facsimile transmission, when
received if given by Federal Express or other internationally recognized
overnight courier service, or five (5) business days after deposit in the United
States Post Office, postage prepaid, by first-class registered or certified
mail, return receipt requested, addressed as follows:
if to the Company: CIDCO Incorporated, 220 Cochrane Circle,
Morgan Hill, CA 95037,
Attn: Corporate Secretary,
cc: Corporate Counsel,
and if to Executive at the address specified at the end of this
Agreement. Notice may also be given at such other address as either party may
have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
No Representations. Executive acknowledges that he is not relying and has not
relied on any promise, representation or statement made by or on behalf of the
Company which is not set forth in this Agreement.
Validity. If any one or more of the provisions (or any part thereof) of this
Agreement shall be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions (or any part
thereof) shall not in any way be affected or impaired thereby.
Modification. This Agreement may only be modified or amended by a supplemental
written agreement signed by Executive and the Company.
Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together will constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year written below.
CIDCO Incorporated
Date: June 6, 1998
By: /s/Daniel Eilers
Title: Chief Executive Officer
EXECUTIVE: /s/William A. Sole
Date: June 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(IN THOUSANDS)
</LEGEND>
<CIK> 0000917639
<NAME> CIDCO INCORPORATED
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,117
<SECURITIES> 11,065
<RECEIVABLES> 41,476
<ALLOWANCES> (2,710)
<INVENTORY> 19,692
<CURRENT-ASSETS> 101,038
<PP&E> 28,876
<DEPRECIATION> (19,930)
<TOTAL-ASSETS> 110,343
<CURRENT-LIABILITIES> 31,456
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 110,343
<SALES> 47,202
<TOTAL-REVENUES> 47,202
<CGS> 35,038
<TOTAL-COSTS> 10,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,542
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,542
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
