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 September 29, 2001
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Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number: ________________________________________________________
SILICON LABORATORIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 74-2793174
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4635 Boston Lane, Austin, Texas 78735
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(Address of principal executive offices) (Zip Code)
(512) 416-8500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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. /X/ Yes / / No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of October 11, 2001,
48,558,641 shares of common stock of Silicon Laboratories Inc. were outstanding.
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Condensed Consolidated Balance Sheets at September 29, 2001
and December 30, 2000 ....................................... 2
Condensed Consolidated Statements of Operations for the
three and nine months ended September 29, 2001 and
September 30, 2000........................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 29, 2001 and September 30, 2000.. 4
Notes to Condensed Consolidated Financial Statements........... 5
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 7
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk..... 26
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings.............................................. 27
ITEM 2 Changes in Securities and Use of Proceeds...................... 27
ITEM 3 Defaults Upon Senior Securities................................ 27
ITEM 4 Submission of Matters to a Vote of Securities Holders.......... 27
ITEM 5 Other Information.............................................. 27
ITEM 6 Exhibits and Reports on Form 8-K............................... 27
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 29, DECEMBER 30,
2001 2000
------------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents..................... $ 70,519 $ 51,902
Short-term investments........................ 24,683 44,536
Accounts receivable, net of allowance for
doubtful accounts of $432 at September 29,
2001 and $758 at December 30, 2000.......... 10,689 13,616
Inventories................................... 5,834 7,219
Deferred income taxes......................... 1,048 1,719
Prepaid expenses and other.................... 3,109 1,119
------------- ------------
Total current assets............................ 115,882 120,111
Property, equipment and software, net........... 20,830 22,625
Goodwill and other intangible assets............ 221 39,686
Other assets.................................... 2,468 2,418
------------- ------------
Total assets.................................... $139,401 $184,840
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 6,482 $ 8,728
Accrued expenses.............................. 3,347 2,406
Deferred revenue.............................. 2,537 2,640
Current portion of long-term obligations...... 2,072 2,078
Income taxes payable.......................... -- 912
------------- ------------
Total current liabilities....................... 14,438 16,764
Long-term debt and leases....................... 1,865 3,390
Other long-term obligations..................... 948 1,735
------------- ------------
Total liabilities............................... 17,251 21,889
Stockholders' equity:
Common stock--$.0001 par value; 250,000
shares authorized; 48,552 and 48,117
shares issued and outstanding at
September 29, 2001 and December 30, 2000,
respectively................................ 5 5
Additional paid-in capital.................... 169,207 165,404
Stockholder notes receivable.................. (985) (1,202)
Deferred stock compensation................... (19,880) (21,061)
Retained earnings (accumulated deficit)....... (26,197) 19,805
------------- ------------
Total stockholders' equity...................... 122,150 162,951
------------- ------------
Total liabilities and stockholders' equity...... $139,401 $184,840
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues......................... $19,925 $29,427 $50,482 $73,400
Cost of revenues................. 8,544 10,130 22,347 25,277
------------- ------------- ------------- -------------
Gross profit..................... 11,381 19,297 28,135 48,123
Operating expenses:
Research and development...... 7,672 5,263 21,251 13,290
Selling, general and
administrative.............. 5,362 5,128 14,197 12,702
Write off of in-process
research & development...... -- 394 -- 394
Goodwill amortization......... -- 1,240 4,187 1,240
Impairment of goodwill and
other intangible assets..... 34,885 -- 34,885 --
Amortization of deferred
stock compensation.......... 1,319 884 3,981 2,451
------------- ------------- ------------- -------------
Operating expenses............... 49,238 12,909 78,501 30,077
------------- ------------- ------------- -------------
Operating income (loss).......... (37,857) 6,388 (50,366) 18,046
Other (income) and expenses:
Interest income............... (857) (1,248) (2,940) (2,753)
Interest expense.............. 179 339 578 957
------------- ------------- ------------- -------------
Income (loss) before income
taxes.......................... (37,179) 7,297 (48,004) 19,842
Provision (benefit) for income
taxes.......................... (651) 3,332 (2,002) 8,691
------------- ------------- ------------- -------------
Net income (loss) ............... $(36,528) $ 3,965 $(46,002) $11,151
============= ============= ============= =============
Net income (loss) per share:
Basic......................... $ (0.79) $ 0.09 $ (1.01) $ 0.31
Diluted....................... $ (0.79) $ 0.08 $ (1.01) $ 0.23
Weighted-average common shares
outstanding:
Basic......................... 46,210 43,917 45,698 36,119
Diluted....................... 46,210 49,987 45,698 48,584
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income (loss)...................................... $(46,002) $11,151
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization of property, equipment
and software....................................... 5,897 4,634
Amortization of goodwill and other intangible assets. 4,580 1,329
Impairment of goodwill and other intangible assets... 34,885 --
Amortization of deferred stock compensation.......... 3,981 2,451
Amortization of note/lease end-of-term interest
payments........................................... 242 242
Compensation expense related to stock options,
direct stock issuance, and warrants to
non-employees...................................... -- 153
Changes in operating assets and liabilities:
Investment interest receivable..................... 630 (275)
Accounts receivable................................ 2,927 (5,947)
Inventories........................................ 1,386 (3,556)
Prepaid expenses and other......................... (310) (252)
Income tax receivable.............................. (1,467) --
Other assets....................................... 40 (61)
Accounts payable................................... (1,496) (1,709)
Accrued expenses................................... 941 3,806
Deferred revenue................................... (103) 1,504
Deferred income taxes.............................. (359) (535)
Income taxes payable............................... (912) (47)
------------- -------------
Net cash provided by operating activities.............. 4,860 12,888
INVESTING ACTIVITIES
Purchases of short-term investments.................... (43,314) (60,278)
Maturities of short-term investments................... 62,538 23,651
Purchases of property, equipment and software.......... (4,122) (13,395)
Purchases of other assets.............................. (821) (750)
Acquisition of business, net of cash acquired.......... -- (13,285)
------------- -------------
Net cash provided by (used in) investing activities.... 14,281 (64,057)
FINANCING ACTIVITIES
Proceeds from long-term debt........................... -- 3,532
Payments on long-term debt............................. (1,130) (5,997)
Payments on capital leases............................. (401) (364)
Proceeds from repayment of stockholder notes........... 193 --
Proceeds from exercise of warrants..................... -- 100
Proceeds from Employee Stock Purchase Plan............. 566 --
Net proceeds from initial public offering.............. -- 90,646
Net proceeds from exercises of stock options........... 248 1,610
------------- -------------
Net cash provided by (used in) financing activities.... (524) 89,527
------------- -------------
Increase in cash and cash equivalents.................. 18,617 38,358
Cash and cash equivalents at beginning of period....... 51,902 8,197
------------- -------------
Cash and cash equivalents at end of period............. $ 70,519 $46,555
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 332 $ 706
============= =============
Income taxes paid...................................... $ 793 $ 9,170
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 29, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited; however, they contain all normal recurring accruals and adjustments
which, in the opinion of management, are necessary to present fairly the
consolidated financial position of Silicon Laboratories Inc. and its
subsidiaries (collectively, the "Company") at September 29, 2001 and September
30, 2000, the consolidated results of its operations for the three and nine
months ended September 29, 2001 and September 30, 2000 and the consolidated
statements of cash flows for the nine months ended September 29, 2001 and
September 30, 2000. All intercompany accounts and transactions have been
eliminated. The results of operations for the three and nine months ended
September 29, 2001 are not necessarily indicative of the results to be expected
for the full year.
The accompanying unaudited condensed consolidated financial statements do not
include footnotes and certain financial presentations normally required under
accounting principles generally accepted in the United States. Therefore, these
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 30, 2000,
included in the Company's Form 10-K filed with the Securities and Exchange
Commission.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consist of the following (in
thousands):
SEPTEMBER 29, December 30,
2001 2000
------------------- -------------------
Work in progress........ $4,112 $4,302
Finished goods.......... 1,722 2,917
------------------- -------------------
$5,834 $7,219
=================== ===================
OTHER COMPREHENSIVE INCOME
There were no material differences between net income (loss) and
comprehensive income (loss) during any of the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142, BUSINESS
COMBINATIONS and GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 replaces
Accounting Principles Board Opinion (APB) No. 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under
SFAS No. 142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired. SFAS No. 141
and SFAS No. 142 are effective for all business combinations completed after
June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill
recorded for business combinations consummated prior to July 1, 2001 will
cease, and intangible assets acquired prior to July 1, 2001 that do not meet
the criteria for recognition under SFAS No. 141 will be reclassified to
goodwill. Companies are required to adopt SFAS No. 142 for fiscal years
beginning after December 15, 2001, but early adoption is permitted. The
Company will adopt SFAS No. 142 on December 30, 2001, the beginning of fiscal
2002. In connection with the adoption of SFAS No. 142, the Company will be
required to perform a transitional goodwill impairment assessment. The
adoption of SFAS No. 141 and SFAS No. 142 will not have a material impact on
the Company's results of operations and financial position since the
Company's existing balances of goodwill and other intangible assets are not
significant due to impairment charges recorded during the quarter ended
September 29, 2001 under SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
5
SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ -----------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------------ ----------------- ---------------- ------------------
Net income (loss)........... $(36,528) $ 3,965 $(46,002) $11,151
Basic:
Weighted-average shares
of common stock
outstanding............ 48,455 47,496 48,375 42,162
Weighted-average shares
of common stock subject
to repurchase.......... (2,245) (3,579) (2,677) (6,043)
------------------ ----------------- ---------------- ------------------
Shares used in computing
basic net income (loss)
per share.............. 46,210 43,917 45,698 36,119
------------------ ----------------- ---------------- ------------------
Effect of dilutive securities:
Weighted-average shares
of common stock subject
to repurchase.......... -- 3,506 -- 5,932
Convertible preferred
stock and warrants..... -- 115 -- 4,281
Stock options............ -- 2,449 -- 2,252
------------------ ----------------- ---------------- ------------------
Shares used in computing
diluted net income
(loss) per share....... 46,210 49,987 45,698 48,584
================== ================= ================ ==================
Basic net income (loss) per
share..................... $ (0.79) $ 0.09 $ (1.01) $ 0.31
Diluted net income (loss)
per share................. $ (0.79) $ 0.08 $ (1.01) $ 0.23
2. SEGMENT REPORTING
The Company has one operating segment, integrated circuits (ICs), with three
product areas (Wireline, Wireless, and Optical Networking). The chief operating
decision maker allocates resources and assesses performance of the business and
other activities at the operating segment level. The Wireline Division accounted
for a majority of the revenues in all periods presented.
3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in the
normal course of business. While the ultimate results of these matters cannot be
predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position or results of operations.
On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit against
the Company for alleged willful infringement by our DAA products of a TDK-held
patent. TDK's complaint seeks unspecified treble damages, costs and attorneys'
fees, and an injunction. On September 27, 2001, we served and filed an answer to
their complaint, in which we denied infringement and asserted that their patent
is invalid. This lawsuit may involve significant expense and may also divert our
6
SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
management's time and attention from other aspects of our business. Due to
the inherent uncertainties of litigation, we are unable to predict the
outcome of this matter.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The components of intangible assets are as follows (in thousands):
Customer Acquired
Workforce Base Technology Patents Goodwill Total
--------- -------- ---------- ------- -------- --------
Balance at December 30, 2000.. $309 $922 $863 $104 $37,488 $39,686
Amortization.................. (156) (101) (106) (30) (4,187) (4,580)
Write-down of assets.......... (6) (821) (757) -- (33,301) (34,885)
--------- -------- ---------- ------- -------- --------
Net balance at September 29,
2001........................ $147 $ -- $ -- $ 74 $ -- $ 221
========= ======== ========== ======= ======== ========
The Company, as part of its review of financial results for the three months
ended September 29, 2001, performed an assessment of the carrying value of the
Company's long-lived assets to be held and used including significant amounts of
goodwill and other intangible assets recorded in connection with our
acquisitions of Krypton Isolation, Inc. "Krypton" and SNR Semiconductor, Inc.
"SNR". The assessment was performed pursuant to Statement Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF because of the recent appearance of several
impairment indicators:
- The revenue stream associated with the Krypton business has decreased
significantly since the acquisition;
- Krypton customers have effectively stopped purchasing Krypton products;
- The Krypton office was closed in August of 2001 and most of the
workforce is no longer employed by the Company;
- The Company determined that further development or alternative uses of
the acquired technologies were remote; and
- The Company does not expect to have any significant future cash flows
related to these acquired assets.
The conclusion of that assessment was that the acquired assets were
permanently impaired. As a result, the Company recorded a charge of $33.3
million and $1.6 million to reduce goodwill and other intangible assets,
respectively, based on the amount by which the carrying amount of the assets
exceeded their fair market value. Fair value was determined based on discounted
future cash flows for assets that had separately identifiable cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE
IN THIS QUARTERLY REPORT ON FORM 10-Q, THE PRIOR QUARTERLY REPORT ON FORM 10-Q/A
FILED JULY 24, 2001, THE PRIOR QUARTERLY REPORT ON FORM 10-Q FILED APRIL 24,
2001 AND OUR ANNUAL REPORT ON FORM 10-K FILED JANUARY 22, 2001. EXCEPT FOR THE
HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS
QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
SILICON LABORATORIES AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED IN
SILICON LABORATORIES' PRIOR QUARTERLY REPORT ON FORM 10-Q/A FILED JULY 24, 2001,
THE PRIOR QUARTERLY REPORT ON FORM 10-Q FILED APRIL 24, 2001 AND OUR ANNUAL
REPORT ON FORM 10-K FILED JANUARY 22, 2001. OUR FISCAL YEAR-END FINANCIAL
REPORTING PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO
DECEMBER 31ST.
7
OUR THIRD QUARTER OF FISCAL YEAR 2001 ENDED SEPTEMBER 29, 2001. OUR THIRD
QUARTER OF FISCAL YEAR 2000 ENDED SEPTEMBER 30, 2000. ALL OF THE QUARTERLY
PERIODS REPORTED IN THIS QUARTERLY REPORT ON FORM 10-Q HAD THIRTEEN WEEKS.
OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal integrated
circuits, or ICs, for the communications industry. Our innovative ICs can
dramatically reduce the cost, size and system power requirements of the products
that our customers sell to their end-user customers. We currently offer ICs that
can be incorporated into communications devices, such as modems and wireless
phones, as well as cable and satellite set-top boxes, residential communication
gateways for cable or DSL, cable modems and optical networking equipment.
Customers during fiscal 2000 included 3Com, Agere Systems (formerly the Lucent
Microelectronics business), Motorola, PC-TEL, and Smart Link.
Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 270
employees at September 29, 2001, from 256 at the end of fiscal 2000, 148 at the
end of fiscal 1999, 42 at the end of fiscal 1998, and 17 at the end of fiscal
1997. As a "fabless" semiconductor company, we rely on third-party semiconductor
fabricators to manufacture the silicon wafers that reflect our IC designs. Each
wafer contains numerous die, which are cut from the wafer to create a chip for
an IC. We also rely on third-party assemblers to assemble and package these die
prior to final product testing and shipping.
Our company is organized into three principal product areas, the Wireline
Products Division, the Wireless Products Division, and the Optical Networking
Division. Our Wireline Products Division commenced research and development for
our first IC product, the direct access arrangement, or DAA, in October 1996. We
introduced our DAA product in the first quarter of fiscal 1998, and first
received acceptance of this product for inclusion in a customer's device, which
we refer to as a "design win", in March 1998. The first commercial shipment of
our DAA product was made in April 1998. A majority of our sales to date have
been derived from sales of our various DAA products and we expect to remain
dependent on continued sales of DAA products for a majority of our sales until
we are able to diversify sales with new products. In recent periods, we have
expanded our product lines. For example, the Wireline Products Division has
introduced our ISOmodem product providing a complete embedded modem solution for
fast connection, low speed applications and our ProSLIC product providing the
telephone features at the source end of the telephone for subscriber line
interfaces in voice-over-digital network applications. Our Wireless Products
Division has introduced RF synthesizer products serving GSM mobile telephone
applications, wideband CDMA applications and wireless local area network
opportunities. In addition, this Division introduced a GSM transceiver product
to address GSM mobile telephone applications. Our Optical Networking Products
Division introduced a family of products suitable for SONET physical layer
applications. We expect to be less dependent on our DAA products for future
sales to the extent that these products, or other products that we may
introduce, are incorporated into devices sold by our customers.
Since our inception, a few customers have accounted for a substantial portion
of our revenues. During fiscal 2000, PC-TEL accounted for 46% of our revenues.
No other customer accounted for more than 10% of our revenues in fiscal 2000. To
date, a majority of our sales have been generated through our direct sales
force. In fiscal 1998, we began to establish a network of independent sales
representatives and distributors worldwide to support our sales and marketing
activities. We anticipate that revenues from these representatives and
distributors will increase as a percentage of our total revenues in future
periods. However, we expect to continue to experience significant customer
concentration in direct sales to key customer accounts until we are able to
diversify sales with new customers.
During the first half of fiscal 2001, many personal computer manufacturers
announced cutbacks in their sales forecasts due to rapid deterioration in
industry-wide demand, resulting in a major inventory correction. This downturn
had a significant negative impact on our results for the three and nine months
ended September 29, 2001. We believe that this decrease in demand will also have
a sizable impact on our results from operations, particularly within our
Wireline Products Division, for the year ending December 29, 2001 and creates
significant uncertainty in our business planning for the remainder of the year.
8
The percentage of our revenues derived from customers located outside of the
United States was 67% in the nine months ended September 29, 2001, 21% in fiscal
2000, 7% in fiscal 1999 and was insignificant in fiscal 1998. All of our
revenues to date have been denominated in U.S. dollars. We believe that the
percentage of our revenues derived from customers outside of the United States
will continue to increase as our products receive greater acceptance in
international markets.
The sales cycle for the test and evaluation of our ICs can range from 1 to 12
months or more. An additional 3 to 6 months or more may be required before a
customer ships a significant volume of devices that incorporate our ICs. We
expect this sales cycle to lengthen as our customers experience a decrease in
demand for their products due to the ongoing economic downturn that is
particularly affecting technology companies. Due to this lengthy sales cycle, we
may experience a significant delay between incurring expenses for research and
development and selling, general and administrative efforts, and the generation
of corresponding revenues, if any. We intend to continue to increase our
investment in research and development, selling, general and administrative
functions and inventory as we expand our operations in the future. Consequently,
if revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high, and our operating results for that
quarter and, potentially, future quarters would be adversely affected.
Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. Because many of our ICs
are designed for use in consumer products such as PCs and wireless telephones,
we expect that the demand for our products will be subject to seasonal demand
resulting in increased sales in the third and fourth quarters of each year when
customers place orders to meet holiday demand.
The following describes the line items set forth in our consolidated
statements of operations:
REVENUES. Revenues are generated principally by sales of our ICs. We
recognize revenue upon the transfer of title, which generally occurs upon
shipment to our customers. Revenues are deferred on shipments to distributors
until they are resold by such distributors. Our products typically carry a
one-year replacement warranty. Our revenues are subject to variation from period
to period due to the volume of shipments made within a period and the prices we
charge for our products. The vast majority of our revenues were negotiated at
prices that reflect a discount from the list prices for our products. These
discounts are made for a variety of reasons, including to establish a
relationship with a new customer, as an incentive for customers to purchase
products in larger volumes or in response to competition. In addition, as a
product matures, we expect that the average selling price for that product will
decline due to the greater availability of competing products. Therefore, our
ability to increase revenues in the future is dependent on increased demand for
our established products and our ability to ship larger volumes of those
products in response to such demand, as well as customer acceptance of newly
introduced products.
COST OF REVENUES. Cost of revenues includes the cost of purchasing finished
silicon wafers processed by independent foundries; costs associated with
assembly, test and shipping of those products; costs of personnel and equipment
associated with manufacturing support, logistics and quality assurance; an
allocated portion of our occupancy costs; and allocable depreciation of testing
equipment and leasehold improvements. Generally, we depreciate equipment over
four years on a straight line basis. We also depreciate our leasehold
improvements over the shorter of the estimated useful life or the applicable
lease term. Recently introduced products tend to have higher cost of revenues
per unit due to initially low production volumes required by our customers and
higher costs associated with new package variations. Generally, as production
volumes for a product increase, unit production costs tend to decrease as our
semiconductor fabricators and assemblers achieve greater economies of scale for
that product. Additionally, the cost of wafer procurement, which is a
significant component of cost of goods sold, varies cyclically with overall
demand for semiconductors.
9
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of compensation and related costs of employees engaged in research
and development activities, as well as an allocated portion of our occupancy
costs for such operations. We depreciate our research and development equipment
over four years and amortize our purchased software from computer-aided design
tool vendors over four years. Development activities include the design of new
products and creation of test methodologies to assure compliance with required
specifications.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of personnel-related expenses, related allocable
portion of our occupancy costs, sales commissions to independent sales
representatives, professional fees, directors and officers liability insurance,
other promotional and marketing expenses and reserves for bad debt. Write offs
of uncollectible accounts have been insignificant to date.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development reflects the write off of in-process research and
development costs acquired in connection with our acquisition of Krypton.
GOODWILL AMORTIZATION. Goodwill amortization includes the amortization of
goodwill purchased in connection with our acquisitions of Krypton and SNR.
Goodwill is amortized over four to five years using the straight line method.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. Impairment of goodwill
and other intangible assets reflects the charge to write-down that portion of
the carrying value of goodwill and other intangible assets that is in excess of
their fair market value.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of
stock options and direct issuances of stock to our employees, we recorded
deferred stock compensation, representing, for accounting purposes, the
difference between the exercise price of option grants, or the issuance price of
direct issuances of stock, and the deemed fair value of our common stock at the
time of such grants or issuances. The deferred stock compensation is amortized
over the vesting period of the applicable options or shares, generally five to
eight years. The amortization of deferred stock compensation is recorded as an
operating expense.
INTEREST INCOME. Interest income reflects interest earned on average cash,
cash equivalents and investment balances.
INTEREST EXPENSE. Interest expense consists of interest on our long-term
debt and capital lease obligations.
PROVISION (BENEFIT) FOR INCOME TAXES. We accrue a provision (benefit) for
federal and state income tax at the applicable statutory rates.
10
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues.................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............ 42.7 34.4 44.2 34.4
------------- ------------- ------------- -------------
Gross profit................ 57.3 65.6 55.8 65.6
Operating expenses:
Research and development.. 38.7 17.9 42.2 18.1
Selling, general and
administrative.......... 27.1 17.4 27.9 17.3
Write off of in-process
research & development.. -- 1.3 -- 0.5
Goodwill amortization..... -- 4.2 8.3 1.7
Impairment of goodwill and
other intangible assets. 175.4 -- 69.1 --
Amortization of deferred
stock compensation...... 6.5 3.0 7.9 3.3
------------- ------------- ------------- -------------
Operating expenses.......... 247.7 43.9 155.4 41.0
Operating income (loss)..... (190.4) 21.7 (99.6) 24.6
Other (income) and expenses:
Interest income........... (4.5) (4.2) (5.7) (3.8)
Interest expense.......... 1.0 1.2 1.2 1.3
------------- ------------- ------------- -------------
Income (loss) before income (186.9) 24.8 (95.1) 27.0
taxes.....................
Provision (benefit) for
income taxes.............. (3.5) 11.3 (4.0) 11.8
------------- ------------- ------------- -------------
Net income (loss) .......... (183.4)% 13.5% (91.1)% 15.2%
============= ============= ============= =============
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2001 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2000.
REVENUES. Revenues for the quarter ended September 29, 2001 were $19.9
million, a decrease of $9.5 million or 32.3% from revenues of $29.4 million in
the quarter ended September 30, 2000. Revenues for the nine months ended
September 29, 2001 were $50.5 million, a decrease of $22.9 million or 31.2% from
revenues of $73.4 million in the nine months ended September 30, 2000. The
decreases were primarily due to a decline in the sales volume of our DAA family
of products reflecting the rapid deterioration in demand within the personal
computer industry. Revenues from non-DAA products, such as the ISOmodem, the
ProSLIC, the RF Synthesizer and our optical networking products, accounted for
approximately 42.8% of revenues for the quarter ended September 29, 2001 as
compared to 15% of revenues for the quarter ended September 30, 2000.
GROSS PROFIT. Gross profit for the quarter ended September 29, 2001 was
$11.4 million or 57.3% of revenues, a decrease of $7.9 million or 40.9% as
compared with gross profit of $19.3 million or 65.6% of revenues in the
quarter ended September 30, 2000. Gross profit for the nine months ended
September 29, 2001 was $28.1 million or 55.8% of revenues, a decrease of
$20.0 million or 41.6% as compared with gross profit of $48.1 million or
65.6% of revenues in the nine months ended September 30, 2000. The decreases
in gross profit were primarily due to the substantial decrease in sales
volume, decreased utilization of our testing capacity and reserves for excess
inventory due to demand fluctuations for our products. With respect to the
nine months ended September 29, 2001, these negative influences on gross
profit were partially offset by a vendor credit received during the quarter
ended March 31, 2001 for yield variations outside processing parameters.
The future direction of gross margins is uncertain due to many factors such as
the severity and duration of the personal computer industry downturn, our
ability to sell existing inventory on hand, our ability to successfully
introduce to market and sell new products, the selling prices for existing
and new products, the extent to which our competitors introduce new products
to market, and future product cost considerations with our vendors.
11
RESEARCH AND DEVELOPMENT. Research and development expense for the quarter
ended September 29, 2001 was $7.7 million or 38.7% of revenues, which reflected
an increase of $2.4 million or 45.3% as compared with research and development
expense of $5.3 million or 17.9% of revenues for the quarter ended September 30,
2000. Research and development expense for the nine months ended September 29,
2001 was $21.3 million or 42.2% of revenues, which reflected an increase of $8.0
million or 60.2% as compared with research and development expense of $13.3
million or 18.1% of revenues for the nine months ended September 30, 2000. The
increases in the dollar amount of research and development expense were
principally due to continued product development activities, significant
increases in new product development initiatives in wireless and optical
networking opportunities, usage of more expensive advanced silicon CMOS
processes, and increased spending to develop test methodologies for new
products. As a percentage of revenues, research and development expense
increased significantly due to the substantial decrease in sales volume for the
three and nine months ended September 29, 2001. We expect that research and
development expense will continue to increase in absolute dollars in future
periods as we develop new ICs, and may fluctuate as a percentage of revenues due
to changes in sales volume and new product development initiatives.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense for the quarter ended September 29, 2001 was $5.4 million or 27.1% of
revenues, which reflected an increase of $0.3 million or 5.9% as compared to
selling, general and administrative expense of $5.1 million or 17.4% of revenues
in the quarter ended September 30, 2000. Selling, general and administrative
expense for the nine months ended September 29, 2001 was $14.2 million or 27.9%
of revenues, which reflected an increase of $1.5 million or 11.8% as compared to
selling, general and administrative expense of $12.7 million or 17.3% of
revenues in the nine months ended September 30, 2000. The increases in the
dollar amount of selling, general and administrative expense were principally
attributable to increased staffing, but were partially offset by a decrease in
spending on patent litigation fees. We expect our legal expenses to increase as
a result of the infringement lawsuit filed against us by TDK Semiconductor
Corporation in August 2001. We expect that selling, general and administrative
expense will increase in absolute dollars in future periods as we expand our
sales channels, marketing efforts and administrative infrastructure. In
addition, we expect selling, general and administrative expense to fluctuate as
a percentage of revenues because of (1) the likelihood that indirect
distribution channels, which entail the payment of commissions, will account for
a larger portion of our revenues in future periods and, therefore, increase our
selling, general and administrative expense relative to a direct sales force
performing at satisfactory levels of productivity; (2) fluctuating usage of
advertising to promote our products and, in particular, our newly introduced
products; and (3) potential significant variability in our future sales volume.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. There was no write off of
in-process research & development during the three and nine months ended
September 29, 2001. Write off of in-process research & development for the three
and nine months ended September 30, 2000 was $0.4 million as a result of the
acquisition of Krypton.
GOODWILL AMORTIZATION. Goodwill amortization for the three and nine months
ended September 29, 2001 was $0.0 million and $4.2 million, respectively,
compared to $1.2 million and $1.2 million for the three and nine months ended
September 30, 2000, respectively. During the quarter ending September 29, 2001
we recorded a charge to reduce the carrying value of goodwill (See IMPAIRMENT OF
GOODWILL AND OTHER INTANGIBLE ASSETS below).
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. We performed an
assessment of the carrying value of the Company's long-lived assets to be held
and used including significant amounts of goodwill and other intangible assets
recorded in connection with our acquisitions of Krypton and SNR during the year
2000. As a result, we determined that substantially all of the acquired goodwill
and other intangible assets were impaired. We recorded a charge of $33.3 million
to write off goodwill and a charge of $1.6 million to reduce the value of other
intangible assets, based on the amount by which the carrying amount of these
assets exceeded their fair market value.
12
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred stock
compensation for the difference between the exercise price of option grants or
the issuance price of direct issuances of stock, and the deemed fair value of
our common stock at the time of such grants or issuances. We are amortizing this
amount over the vesting periods of the applicable options or restricted stock,
which resulted in amortization expense of $1.3 million and $4.0 million for the
three and nine months ended September 29, 2001, respectively, as compared to
$0.9 million and $2.5 million for the three and nine months ended September 30,
2000, respectively. The increases in the dollar amount of amortization of
deferred stock compensation were due to additional deferred stock compensation
for options and restricted stock issued subsequent to the first quarter of
fiscal 2000.
INTEREST INCOME. Interest income for the quarter ended September 29, 2001 was
$0.9 million as compared to $1.2 million for the quarter ended September 30,
2000. This decrease was primarily due to lower interest rates and lower cash and
short-term investments balances during the quarter ended September 29, 2001.
Interest income for the nine months ended September 29, 2001 was $2.9 million as
compared to $2.8 million for the nine months ended September 30, 2000.
INTEREST EXPENSE. Interest expense for the three and nine months ended
September 29, 2001 was $0.2 million and $0.6 million, respectively, as compared
to $0.3 million and $1.0 million for the three and nine months ended September
30, 2000, respectively. The decreases in interest expense were primarily due to
lower levels of debt during the recent quarter and nine month period.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate, excluding the
impact of non-deductible write off of in-process research and development,
amortization of goodwill, impairment of goodwill and other intangible assets and
deferred stock compensation, was a benefit of 40.5% in the nine months ended
September 29, 2001, as compared to our effective tax expense provision rate of
36.3% in the nine months ended September 30, 2000. The current period's tax
benefit rate was higher than the prior comparable period's tax expense provision
rate primarily due to the current period's increased tax benefit from the
estimated research and development tax credit in proportion to the amount of the
current period's pre-tax loss.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of September 29, 2001 consisted of
$95.2 million in cash, cash equivalents and short-term investments in addition
to our bank credit facilities. Our bank credit facilities include a revolving
line of credit available for borrowings and letters of credit of up to the
lesser of $5.0 million or 80% of eligible accounts receivable at the bank's
prime lending rate. At September 29, 2001, a letter of credit for $0.4 million
related to a building lease was outstanding under the revolving line of credit
and $4.6 million was available for new borrowings based on the 80% of eligible
accounts receivable limitation.
We also have entered into agreements with three institutional lenders for
equipment financing to purchase or lease equipment, leasehold improvements and
software. At September 29, 2001, the amount outstanding under these agreements
was $3.9 million. This indebtedness bears effective interest rates (including
end-of-term interest payments of $1.3 million) ranging from 12.5% to 14.6% per
annum, is secured by certain equipment, and is repayable over approximately the
next three years.
During the nine months ended September 29, 2001, cash provided by operating
activities was $4.9 million as compared to cash provided by operating activities
of $12.9 million during the nine months ended September 30, 2000. This reduction
in cash flow was primarily due to the significant reduction in sales revenues
during the period.
Due to the nature of our business, we experience working capital needs in the
areas of accounts receivable and inventory. Typically, we bill our customers on
an open account basis with net 30 day payment terms or other specific terms and
conditions that may vary from account to account as individually negotiated with
customers. As of September 29, 2001, we had an accounts receivable balance of
$10.7 million. If sales levels were to increase, it is likely that the level of
13
receivables would also increase. In the event that customers delay their
payments to us, the levels of accounts receivable would also increase.
In the area of inventory, we believe that in order to maintain an adequate
supply of product for our customers, we must carry a certain level of
inventory. This inventory level may vary based principally upon either orders
received from customers or our forecast of demand for these products. Other
considerations in determining inventory levels may include the product life
cycle stage of our products, customer demands for consignment inventory
arrangements, and competitive situations in the marketplace. Such
considerations are balanced against risk of obsolescence or potentially
excess inventory levels. The fluctuations in demand for our products caused
us to establish reserves for excess inventory levels during each quarter of
2001. As of September 29, 2001, we had net inventory of $5.8 million which we
deemed adequate to address these inventory considerations.
Capital expenditures decreased by $9.2 million to $4.9 million for the nine
months ended September 29, 2001 from $14.1 million for the nine months ended
September 30, 2000. This decrease in the dollar amount of capital expenditures
was primarily due to the completion of our internal test floor for existing
products in fiscal 2000 and spending controls implemented during fiscal 2001.
The expenditures in the recent nine months were incurred to purchase
semiconductor test equipment for new products, design software and engineering
tools, other computer equipment, leasehold improvements and software to support
our business capabilities. We anticipate capital expenditures of approximately
$6.5 million for fiscal 2001 primarily to fund additional test floor operations
capabilities for wireless and optical networking products and expand engineering
new product development activities.
Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and extent
of research and development projects and the expansion of our sales and
marketing activities. We believe our existing cash balances and credit
facilities are sufficient to meet our capital requirements through at least the
next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. We may enter into acquisitions or
strategic arrangements in the future which also could require us to seek
additional equity or debt financing. There can be no assurances that additional
equity or debt financing, if required, will be available to us on acceptable
terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income. The adoption of SFAS No. 133 as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, did not have
a material impact on our financial statements since we do not utilize derivative
instruments.
In July 2001, the FASB issued SFAS Nos. 141 and 142, BUSINESS COMBINATIONS
and GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 replaces APB No. 16 and
eliminates pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of intangible assets
and accounting for negative goodwill. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under SFAS
No. 142, goodwill will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations completed after June 30, 2001. Upon
adoption of SFAS No. 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS No. 141 will be reclassified to goodwill. Companies are required to
adopt SFAS No. 142 for fiscal years beginning after December 15, 2001, but early
adoption is permitted. The Company will adopt SFAS No. 142 on December 30, 2001,
the beginning of fiscal 2002. In connection with the adoption of SFAS No. 142,
the Company will be required to perform a transitional goodwill impairment
assessment. The adoption of SFAS No. 141 and SFAS No. 142 will not have a
material impact on the Company's results of operations and financial position
since the Company's existing balances of goodwill and other intangible assets
are not significant due to impairment charges recorded during the quarter ended
September 29, 2001 under SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
14
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
FACTORS AFFECTING OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION
COULD BE HARMED
Our future success will depend on our ability to reduce our dependence on our
DAA products by developing new integrated circuits, or ICs, and product
enhancements that achieve market acceptance in a timely and cost-effective
manner. The development of mixed-signal ICs is highly complex, and we
occasionally have experienced delays in completing the development and
introduction of new products and product enhancements. Successful product
development and market acceptance of our products depend on a number of factors,
including:
- changing requirements of customers within the wireline,
wireless and optical networking markets;
- accurate prediction of market requirements;
- timely completion and introduction of new designs;
- timely qualification and certification of our ICs for use in
our customers' products;
- commercial acceptance and volume production of the products
into which our ICs will be incorporated;
- availability of foundry and assembly capacity;
- achievement of high manufacturing yields;
- quality, price, performance, power use and size of our
products;
- availability, quality, price and performance of competing
products and technologies;
- our customer service and support capabilities and
responsiveness;
- successful development of our relationships with existing and
potential customers; and
- changes in technology, industry standards or end-user
preferences.
We cannot provide any assurance that new products which we recently have
developed or may develop in the future will achieve market acceptance. We have
introduced to market or are in development of many new ICs including:
- an AeroTM GSM transceiver chipset, providing a highly
integrated radio communication section of a GSM wireless
handset with versatile interfaces to other electronic sections
of the handset;
- a family of RF synthesizers, which are used to generate high
frequency signals that are used in wireless communications
systems to select a particular radio channel;
15
- an ISOmodem, which is a miniaturized modem that can be
embedded in electronic devices with low transmission
requirements, such as credit card verification devices, to
provide quick network access;
- a higher speed ISOmodem product to serve additional embedded
modem markets demanding faster transmission requirements such
as next generation set-top boxes;
- a family of ProSLIC products, which provides dial tone, busy
tone, caller ID and ring signal functions at the source end of
the telephone addressing long-haul and short-haul
applications;
- a family of optical networking products, which feature highly
integrated physical layer and clock circuits designed for
SONET/ATM routers, multiplexers, digital cross connects and
optical transceiver modules; and
- a Digital Subscriber Line, or DSL, Analog Front End providing
a highly integrated interface for DSL modems with legacy
support for traditional analog phone line functionality.
We also are actively developing other ICs. If our recently introduced or
other ICs fail to achieve market acceptance, our operating results and
competitive position could be adversely affected.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY
CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES
In fiscal 2000, PC-TEL accounted for 46% of our revenues. The markets for our
products are dominated by a small number of potential customers. Our operating
results in the foreseeable future will continue to depend on sales to a
relatively small number of dominant customers, as well as the ability of these
customers to sell products that use our IC products. In the future, these
customers may decide not to purchase our ICs at all, purchase fewer ICs than
they did in the past or alter their purchasing patterns, particularly because:
- we do not have any material long-term purchase arrangements
with these or any of our other customers;
- substantially all of our sales to date have been made on a
purchase order basis, which permits our customers to cancel,
change or delay product purchase commitments with little or no
notice to us and without penalty; and
- some of our customers have sought or are seeking relationships
with current or potential competitors which may affect our
customers' purchasing decisions.
Our largest customer, PC-TEL, has reported significantly fluctuating revenues
in recent periods. If PC-TEL's revenues continue to decline or remain at reduced
levels, we believe that our results of operations, particularly in the Wireline
Products Division, will be significantly and adversely affected.
While we have been the sole supplier of the direct access arrangement, or
DAA, IC used in PC-TEL's soft modem DAA products, we anticipate that PC-TEL will
regularly evaluate alternative sources of supply in the future in order to
diversify its supplier base which would increase its negotiating leverage with
us and protect its ability to secure DAA components. We have a volume purchase
agreement with PC-TEL, but the agreement does not require PC-TEL to purchase any
minimum number of units from us during fiscal 2001. We believe that any second
source of DAA ICs for PC-TEL could have an adverse effect on the prices we are
able to charge PC-TEL and the volume of DAA ICs that we sell to PC-TEL, which
would negatively affect our revenues and operating results.
The loss of any of our key customers, or a significant reduction in sales to
any one of them, would significantly reduce our revenues and adversely affect
our business.
16
WE HAVE DEPENDED ON OUR DAA FAMILY OF PRODUCTS FOR A SIGNIFICANT MAJORITY OF OUR
REVENUES TO DATE, AND SUBSTANTIAL REDUCTIONS IN ORDERS FOR DAA PRODUCTS WOULD
SIGNIFICANTLY REDUCE OUR REVENUES
A majority of our sales to date have been derived from sales of our DAA
family of ICs. This product family, in turn, is highly dependent on sales to the
personal computer industry which currently faces deteriorating levels of demand.
Until we are able to diversify our sales through the introduction and commercial
acceptance of new products, we will continue to rely on sales of our DAA
products. A continuing decline in overall demand for personal computers, reduced
market acceptance of our DAA products or the introduction of products with
superior price/performance characteristics by our competitors could
significantly reduce our sales. In addition, substantially all of our DAA
products that we have sold include technology related to one or more of our
issued U.S. patents. If these patents are found to be invalid or unenforceable,
our competitors could introduce competitive products that could reduce both the
volume and price per unit of our products. On August 7, 2001 TDK Semiconductor
Corporation filed suit against us alleging that certain of our DAA products
infringe a TDK-held patent. We have filed a response denying such infringement.
If our DAA products are found to infringe TDK's patent, our business operating
results and financial condition could be substantially adversely affected.
During the first nine months of fiscal 2001, we experienced a significant
reduction in orders for our DAA family of products as a result of deteriorating
demand for personal computers. Our revenues for the first nine months of fiscal
2001 declined sequentially from the nine month period ended December 31, 2000 by
39.5%, which resulted in a significant reduction in gross profits, lower gross
margins and net losses for the most recent nine month period.
WE MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD QUARTERLY AND ANNUAL FLUCTUATIONS
IN OUR REVENUES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR
STOCK PRICE
We may experience significant period-to-period fluctuations in our revenues
and operating results in the future due to a number of factors, and any such
variations may cause our stock price to fluctuate. It is likely that in some
future period our operating results will be below the expectations of public
market analysts or investors. If this occurs, our stock price may drop, perhaps
significantly.
A number of factors, in addition to those cited in other risk factors
applicable to our business, may contribute to fluctuations in our revenues and
operating results, including:
- the timing and volume of orders received from our customers;
- the rate of acceptance of our products by our customers,
including the acceptance of new products we may develop for
integration in the products manufactured by such customers,
which we refer to as "design wins";
- the time lag between "design wins" and production orders;
- the demand for, and life cycles of, the products incorporating
our ICs;
- the rate of adoption of mixed-signal ICs in the markets we
target;
- deferrals of customer orders in anticipation of new products
or product enhancements from us or our competitors or other
providers of ICs;
- changes in product mix; and
- the rate at which new markets emerge for products we are
currently developing or for which our design expertise can be
utilized to develop products for these new markets.
17
Due to the terrorist attacks of September 11, 2001 and subsequent world
events, the end demand for consumer-oriented products such as personal computers
and mobile wireless handsets may encounter a sharp and prolonged reduction in
demand. The supply chain for these consumer-oriented products was facing weak
consumer demand, excess inventory, low factory utilization rates, a pattern of
slower upgrade cycles for personal computers, delay of next generation of mobile
handset technology and overall sluggishness even before the events of September
11, 2001. The combination of the then existing business conditions and the loss
of consumer confidence driven by the events of September 11, 2001 may result in
a sharp deterioration in demand for our semiconductor component products which
could unfavorably impact our revenues, operating results and stock price.
The mobile telephone market is characterized by rapid fluctuations in demand
which results in corresponding fluctuations in the demand for our wireless
products that are incorporated in mobile telephones. Additionally, the rate of
technology acceptance by our customers results in fluctuating demand for our
products as customers are reluctant to incorporate a new IC into their products
until the new IC has achieved market acceptance. However, once a new IC achieves
market acceptance, demand for the new IC can quickly accelerate and demand can
quickly decline for the product that the new IC replaces.
DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY BOTH IN ACCURATELY
PREDICTING OUR FUTURE SALES AND APPROPRIATELY BUDGETING FOR OUR EXPENSES
We were incorporated in 1996 and did not begin generating revenues until the
second quarter of 1998. As a result, we have only a short history from which to
predict future revenues. This limited operating experience combined with the
rapidly evolving nature of the markets in which we sell our products, as well as
other factors which are beyond our control, reduce our ability to accurately
forecast quarterly or annual revenues. Additionally, because most of our
expenses are fixed in the short term or incurred in advance of anticipated
revenues, we may not be able to decrease our expenses in a timely manner to
offset any shortfall of revenues. During fiscal 2000, we expanded our staffing
and increased our expense levels in anticipation of future sales growth. If our
sales do not increase, we expect to incur significant losses due to our higher
expense levels.
WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS
Our products are currently used by our customers to produce modems for
personal computers, mobile telephones and other wireless devices, and optical
networking equipment. We rely on our customers to provide hardware, software,
intellectual property indemnification and other technical support for the
devices that use our products. If our customers do not provide the required
functionality or if our customers do not provide satisfactory support for their
products, the demand for these devices that incorporate our products may
diminish. Any reduction in the demand for these devices would significantly
reduce our revenues.
WE RELY ON THIRD PARTIES TO MANUFACTURE AND ASSEMBLE OUR PRODUCTS AND THE
FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
ASSEMBLERS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS
We do not have our own manufacturing facilities. Therefore, we must rely on
third-party vendors to manufacture the ICs we design. We also currently rely
principally on two third-party assembly contractors, Advanced Semiconductor
Engineering and Amkor, to assemble and package the silicon chips provided by the
wafers for use in final products. Additionally, we rely on third-party vendors
for a minor portion of the testing requirements of our products prior to
shipping.
There are significant risks associated with relying on these third-party
contractors, including:
- failure by us, our customers or their end customers to qualify
a selected supplier;
- capacity shortages during periods of high demand;
- reduced control over delivery schedules and quality;
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- limited warranties on wafers or products supplied to us;
- potential increases in prices; and
- their inability to supply or support new or changing packaging
technologies.
We currently do not have long-term supply contracts with any of our
third-party vendors, and therefore, they are not obligated to perform services
or supply products to us for any specific period, or in any specific quantities,
except as may be provided in a particular purchase order. Although we believe
that other semiconductor foundries or assembly contractors can adequately
address our needs, we expect that it would take approximately two to nine months
to transition performance of these services from our current providers to new
providers. Such a transition may also require a qualification process by our
customers or their end customers. We generally place orders for products with
some of our suppliers approximately four months prior to the anticipated
delivery date, with order volumes based on our forecasts of demand from our
customers. Accordingly, if we do not accurately forecast demand for our
products, we may be unable to obtain adequate foundry or assembly capacity from
our third-party contractors to meet our customers' delivery requirements, or we
may accumulate excess inventories. On occasion, we have been unable to
adequately respond to unexpected increases in customer purchase orders, and
therefore, were unable to benefit from this incremental demand. None of our
third-party foundry or assembly contractors have provided assurances to us that
adequate capacity will be available to us within the time required to meet
additional demand for our products.
From our inception through the first nine months of fiscal 2001,
substantially all of the silicon wafers for the products that we shipped were
manufactured either by Taiwan Semiconductor Manufacturing Co. or Vanguard
International Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing
Co. Our customers typically complete their own qualification process. If we fail
to balance customer demand across semiconductor fabrications properly, we might
not be able to fulfill demand for our products, which would adversely affect our
operating results. Additionally, a resulting write off of unusable or excess
inventories would contribute to a decline in earnings.
THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO
TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS WHICH COULD RESULT IN
OUR INABILITY TO TIMELY SATISFY DEMAND FOR OUR PRODUCTS.
The manufacture of silicon wafers for our products is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries from
time to time have experienced lower than anticipated manufacturing yields.
Changes in manufacturing processes or the inadvertent use of defective or
contaminated materials by our foundries could result in lower than anticipated
manufacturing yields or unacceptable performance deficiencies. If our foundries
fail to deliver fabricated silicon wafers of satisfactory quality in a timely
manner, we will be unable to meet our customers' demand for our products in a
timely manner, which would adversely affect our operating results and damage our
customer relationships.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
As part of our growth strategy, we will continue to evaluate opportunities to
acquire other businesses or technologies that would complement our current
offerings, expand the breadth of our markets or enhance our technical
capabilities. Acquisitions that we may potentially make in the future entail a
number of risks that could materially and adversely affect our business and
operating results, including:
- problems integrating the acquired operations, technologies or
products with our existing business and products;
- diversion of management's time and attention from our core
business;
- difficulties in retaining business relationships with
suppliers and customers of the acquired company;
19
o risks associated with entering markets in which we lack prior
experience; and
o potential loss of key employees of the acquired company.
OUR CURRENT MANUFACTURERS, ASSEMBLERS AND CUSTOMERS ARE CONCENTRATED IN THE SAME
GEOGRAPHIC REGION WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR
STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR OPERATIONS OR SALES
Our current semiconductor manufacturers are located in the same region within
Taiwan and our assembly contractors are located in the Pacific Rim region. In
addition, many of our customers, particularly mobile telephone manufacturers,
are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the
Pacific Rim region is significant due to the proximity of major earthquake fault
lines in the area. We are not currently covered by insurance against business
disruption caused by earthquakes as such insurance is not currently available on
terms that we believe are commercially reasonable. Earthquakes, fire, flooding
or other natural disasters in Taiwan or the Pacific Rim region, or political
unrest, war, labor strikes or work stoppages in countries where our
semiconductor manufacturers' and assemblers' facilities are located, likely
would result in the disruption of our foundry or assembly capacity. Any
disruption resulting from these events could cause significant delays in
shipments of our products until we are able to shift our manufacturing or
assembling from the affected contractor to another third-party vendor. There can
be no assurance that such alternate capacity could be obtained on favorable
terms, if at all. In addition, a natural disaster, labor strike, war or
political unrest where our customers' facilities are located would likely reduce
our sales to such customers.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR
PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE
ORDERS FOR THE PRODUCTS
In order to assure availability of our products for some of our largest
customers, we start the manufacturing of our products in advance of receiving
purchase orders based on forecasts provided by these customers. However, these
forecasts do not represent binding purchase commitments and we do not recognize
sales for these products until they are shipped to the customer. As a result, we
incur inventory and manufacturing costs in advance of anticipated sales. Because
demand for our products may not materialize, manufacturing based on forecasts
subjects us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.
WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH RATE
Although we have experienced revenue and earnings growth in prior annual
periods, we may not be able to sustain these growth rates. For the nine month
period ended September 29, 2001, we reported a sequential decline of our overall
revenues from the nine month period ended December 30, 2000 by 39.5% which
resulted in a significant reduction in gross profits, lower gross margin
percentage and a net loss for the recent nine month period. In particular, we
may gain significant market share in a relatively short period of time following
the introduction of a new product, resulting in revenue growth. However,
incremental gains in market share for these newly introduced products may not
occur. Additionally, the time lag by a customer from purchase of initial orders
of our product to follow on production volume orders may extend several
quarterly periods. Accordingly, you should not rely on the results of any prior
quarterly or annual periods as an indication of our future operating
performance.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
AND INCREASE MARKET SHARE
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may
be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
20
to ours. In addition, some of our current and potential competitors have
already established supplier or joint development relationships with the
decision makers at our current or potential customers. These competitors may
be able to leverage their existing relationships to discourage their
customers from purchasing products from us or persuade them to replace our
products with their products. Our competitors may also offer bundled chipset
kit arrangements offering a more complete product despite the technical
merits or advantages of our products. These competitors may elect not to
support our products which could complicate our sales efforts.
In addition, our largest competitors may restructure their operations to
create separate companies that are more focused on providing the types of
products we produce. For example, Rockwell's restructuring in 1998 led to the
creation of Conexant which is a significant competitor. Additionally, Siemens
spun off its semiconductor business in 1999 to create a more focused company
named Infineon Technologies. In July 2000, Lucent Technologies spun off its
microelectronics business, which included its optoelectronics components and
integrated circuits division, into a separate company named Agere Systems in
order to accelerate the growth of the business and alleviate strategic conflicts
with Lucent's competitors. Increased competition could decrease our prices,
reduce our sales, lower our margins or decrease our market share. These and
other competitive pressures may prevent us from competing successfully against
current or future competitors, and may materially harm our business.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR
PRODUCTS COULD BE HARMED
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering, sales and marketing
personnel. Specifically, we believe that our future success is highly dependent
on Navdeep Sooch, our co-founder, Chief Executive Officer and Chairman of the
Board, Daniel Artusi, our Chief Operating Officer, Jeffrey Scott, our co-founder
and Vice President of Engineering, and David Welland, our co-founder and Vice
President of Technology. There is currently a shortage of qualified personnel
with significant experience in the design, development, manufacturing, marketing
and sales of analog and mixed-signal communications ICs. In particular, there is
a shortage of engineers who are familiar with the intricacies of the design and
manufacturability of analog elements, and competition for such personnel is
intense. Our key technical personnel represent a significant asset and serve as
the source of our technological and product innovations. We may not be
successful in attracting and retaining sufficient numbers of technical personnel
to support our anticipated growth. The loss of any of our key employees or the
inability to attract or retain qualified personnel, including engineers and
sales and marketing personnel, could delay the development and introduction of,
and negatively impact our ability to sell, our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW
TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO
ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION
Our ICs are used as components in communications devices in the wireline,
wireless and optical networking markets. As a result, we have devoted and expect
to continue to devote a large amount of resources to develop products based on
new and emerging technologies and standards that will be commercially introduced
in the future. In the first nine months of fiscal 2001, our research and
development expense was $21.3 million, which represented 42.2% of our revenues
compared to $13.3 million, or 18.1% of our revenues for the first nine months of
fiscal 2000. A number of large companies in the wireline, wireless and optical
networking industries are actively involved in the development of these new
technologies and standards. Should any of these companies delay or abandon their
efforts to develop commercially available products based on new technologies and
standards, our research and development efforts with respect to these
technologies and standards likely would have no appreciable value. In addition,
if we do not correctly anticipate new technologies and standards, or if the
products that we develop based on these new technologies and standards fail to
achieve market acceptance, our competitors may be better able to address market
21
demand than would we. Furthermore, if markets for these new technologies and
standards develop later than we anticipate, or do not develop at all, demand
for our products that are currently in development would suffer, resulting in
lower sales of these products than we currently anticipate. We have
introduced to market a RF synthesizer product for use in wireless phones
operating on the Global System for Mobile Communications, or GSM, standard.
The RF synthesizer is also compatible with General Packet Radio Service
standard, which is the emerging data communications protocol for GSM based
wireless phones. We cannot be certain whether these standards will not
change, thereby making our products unsuitable or impractical. In the area of
optical networking, our recently introduced clock and data recovery
integrated circuit operates within stringent specifications for high speed
communications systems known as SONET. Changes to this standard could make
our products uncompetitive or unsuitable to changing system requirements and
result in our inability to sell these products.
OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED
ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR
REVENUES
Our products are complex and may contain errors when first introduced or as
new versions are released. We rely primarily on our in-house testing personnel
to design test operations and procedures to detect any errors prior to delivery
of our products to our customers. Because our products are manufactured by third
parties, should problems occur in the operation or performance of our ICs, we
may experience delays in meeting key introduction dates or scheduled delivery
dates to our customers. These errors also could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.
THE PERFORMANCE OF OUR DIRECT ACCESS ARRANGEMENT PRODUCTS MAY BE ADVERSELY
AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUES
Although our DAA products are compliant with published specifications, these
established specifications might not adequately address all conditions that must
be satisfied in order to operate in harsh environments. This includes
environments where there are wide variations in electrical quality, telephone
line quality, static electricity and operating temperatures or that may be
affected by lightning or improper handling by customers and end users. Our
products have had a limited period of time in the field under operation, and
these environmental factors may result in unanticipated returns of our products.
Any necessary modifications could cause us to incur significant re-engineering
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations and business
reputation problems.
We have a large installed base of direct access arrangement products in the
field. As part of our ongoing support of this product line, we verify the
performance of our products through regulatory agency qualifications, customer
acceptance procedures, evaluation of end customer technical support information,
and analysis of field returns. Certain customer modem implementations of our
direct access arrangement products have been identified to be susceptible to a
particular class of electrical surges originating from lightning strikes that
are not adequately described in regulatory agency qualifications. We have
provided application guidelines to our customers to enhance their implementation
of the modem function to protect our devices from these lightning strike
electrical surges.
Damage from these electrical surges could result in product liability claims
against our customers that produce these modems or against us. Our customers may
seek indemnification or other compensation from us with respect to any liability
that they incur. Even if our DAA product is not the source of the problem and we
are not contractually liable for such indemnification, we may incur costs in an
effort to maintain good relations with our customers. If we are held liable for
these claims or incur other costs in order to maintain good relations, this
problem could adversely affect our operating results.
22
A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED
INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS
In fiscal 2001 to date, substantially all of our test operations were
performed in-house. A minor portion of test operations is provided by our
contract manufacturers or other third parties. While we expect that performing
testing in-house provides us with advantages in terms of lower per unit cost,
quality control and shorter time required to bring a product to market, we may
encounter difficulties and delays in maintaining or expanding our internal test
capabilities. In addition, final testing of complex semiconductors requires
substantial resources to acquire state-of-the-art testing equipment and hiring
additional qualified personnel, which has increased our fixed costs. If demand
for our products does not support the effective utilization of these employees
and additional equipment, we may not realize any benefit from foregoing the use
of outside vendors and utilizing internal final testing. Any decrease in the
demand for our products could result in the underutilization of our testing
equipment and personnel. If our internal test operations are underused or
mismanaged, we may incur significant costs that could adversely affect our
operating results.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL
COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS
We intend to open additional sales offices in international markets to expand
our international sales activities in Europe and the Pacific Rim region. Our
planned international sales growth will be limited if we are unable to hire
additional personnel and develop relationships with international distributors.
We may not be able to maintain or increase international market demand for our
products. Our international operations are subject to a number of risks,
including:
o increased complexity and costs of managing international
operations;
o protectionist laws and business practices that favor local
competition in some countries;
o multiple, conflicting and changing laws, regulations and tax
schemes;
o longer sales cycles;
o greater difficulty in accounts receivable collection and
longer collection periods;
o high levels of distributor inventory subject to rights of
return to us; and
o political and economic instability.
To date, all of our sales to international customers and purchases of
components from international suppliers have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive for our international
customers to purchase, thus rendering them less competitive.
OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS
In recent periods, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
270 employees at September 29, 2001. This growth has placed, and any future
growth of our operations will continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of our accounting and other
internal management systems. We also expect that we will need to continue to
expand, train, manage and motivate our workforce. All of these endeavors will
require substantial management effort. If we are unable to effectively manage
our expanding operations, our business could be materially and adversely
affected.
23
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
Our products rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to sustain market acceptance
of our products. Therefore, we believe that the protection of our intellectual
property rights is and will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and business partners, and control access to and
distribution of our documentation and other proprietary information. Despite
these efforts, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. Monitoring unauthorized use of our technology is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
cannot be certain that patents will be issued as a result of our pending
applications nor can we be certain that any issued patents would protect or
benefit us or give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or
unenforceable. We also cannot be certain that others will not develop effective
competing technologies on their own.
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time, we
receive letters from various industry participants alleging infringement of
patents or misappropriation of trade secrets. The exploratory nature of these
inquiries has become relatively common in the semiconductor industry. We
typically respond when appropriate and as advised by legal counsel. We have been
involved in litigation to protect our intellectual property rights in the past
and may become involved in such litigation again in the future. We are currently
involved in litigation to defend allegations of infringement asserted by TDK
Semiconductor Corporation. See Part II, Item 1. Legal Proceedings. In the
future, we may become involved in litigation to defend allegations of
infringement asserted by others. Legal proceedings could subject us to
significant liability for damages or invalidate our proprietary rights. Legal
proceedings initiated by us to protect our intellectual property rights could
also result in counterclaims or countersuits against us. Any litigation,
regardless of its outcome, would likely be time consuming and expensive to
resolve and would divert our management's time and attention. Any intellectual
property litigation also could force us to take specific actions, including:
o cease selling products that use the challenged intellectual
property;
o obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
or
o redesign those products that use infringing intellectual
property.
On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit against
the Company for alleged willful infringement by our DAA products of a TDK-held
patent. TDK's complaint seeks unspecified treble damages, costs and attorneys'
fees, and an injunction. On September 27, 2001, we served and filed an answer to
their complaint, in which we denied infringement and asserted that their patent
is invalid. This lawsuit may involve significant expense and may also divert our
management's time and attention from other aspects of our business. Due to the
inherent uncertainties of litigation, we are unable to predict the outcome of
this matter.
24
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH
The future growth of our business will depend in part on our ability to
expand our existing relationships with distributors and sales representatives,
develop additional channels for the distribution and sale of our products and
manage these relationships. As part of our channel sales strategy, we intend to
expand our relationships with distributors and sales representatives. As we
develop our indirect sales capabilities, we will need to manage the potential
conflicts that may arise with our direct sales efforts. The inability to
successfully execute or manage a multi-channel sales strategy could impede our
future growth.
RISKS RELATED TO OUR INDUSTRY
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often connected with, or in anticipation of, maturing product cycles of both
semiconductor companies' and their customers' products and declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. The industry is currently experiencing a
significant downturn driven by the wide and rapid deterioration in PC demand, a
reduction in the expected unit sales of wireless phones from previous robust
forecasts, and forecasts of excess capacity in the fiber optic networks. This
downturn has resulted in a material adverse effect on our business and operating
results. The severity and duration of these industry-wide trends are currently
unclear and the material adverse effect on our business may continue in the
future.
Due to the cyclical nature of the semiconductor industry, any upturn in
business could result in increased competition for access to third-party foundry
and assembly capacity. We are dependent on the availability of such capacity to
manufacture and assemble our ICs. Except for non-contractual assurances of
support for specifically identified customer accounts, none of our third-party
foundry or assembly contractors have provided assurances that adequate capacity
will be available to us.
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, including wireline, wireless and optical networking communications
markets, we face competition from a relatively large number of competitors.
Across all of our product areas, we compete with Agere Systems (formerly the
Lucent Microelectronics business), AMCC, Analog Devices, Broadcom, Conexant, CP
Clare, Delta Integration, ESS, Fujitsu, Infineon Technologies, Legerity
(formerly the Advanced Micro Devices telecom division), Maxim Integrated
Products, National Semiconductor, Philips, Texas Instruments, Vitesse
Semiconductor Corp, and others. We expect to face competition in the future from
our current competitors, other manufacturers and designers of semiconductors,
and innovative start-up semiconductor design companies. Some of our customers,
such as Agere Systems, Intel, Motorola, and Texas Instruments, are also large,
established semiconductor suppliers. Our sales to and support of these customers
may enable them to become a source of competition to us, despite our efforts to
protect our intellectual property rights. As the markets for communications
products grow, we also may face competition from traditional communications
device companies. These companies may enter the mixed-signal semiconductor
market by introducing their own ICs or by entering into strategic relationships
with or acquiring other existing providers of semiconductor products.
25
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND REVENUES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. We have
reduced the average unit price of our products in anticipation of future
competitive pricing pressures, new product introductions by us or our
competitors and other factors. Our customers may use their current excess
inventory situation to negotiate lower prices in the future. If we are unable to
offset any such reductions in our average selling prices by increasing our sales
volumes, our gross profits and revenues will suffer. To maintain gross margins,
we will need to develop and introduce new products and product enhancements on a
timely basis and continually reduce our costs. Our failure to do so would cause
our revenues and gross margins to decline.
OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES
Prior to purchasing our products, our customers require that our products
undergo an extensive qualification process, which involves testing of the
products in the customer's system as well as rigorous reliability testing. This
qualification process may continue for six months or longer. However,
qualification of a product by a customer does not assure any sales of the
product to that customer. Even after successful qualification and sales of a
product to a customer, a subsequent revision to the IC, changes in its
manufacturing process or the selection of a new supplier by us may require a new
qualification process, which may result in delays and in us holding excess or
obsolete inventory. After our products are qualified, it can take an additional
six months or more before the customer commences volume production of components
or devices that incorporate our products. Despite these uncertainties, we devote
substantial resources, including design, engineering, sales, marketing and
management efforts, toward qualifying our products with customers in
anticipation of sales. If we are unsuccessful or delayed in qualifying any of
our products with a customer, such failure or delay would preclude or delay
sales of such product to the customer, which may impede our growth and cause our
business to suffer.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY END
USERS IN OUR MARKETS
Generally, our products comprise only a part of a communications device. All
components of such devices must uniformly comply with industry standards in
order to operate efficiently together. We depend on companies that provide other
components of the devices to support prevailing industry standards. Many of
these companies are significantly larger and more influential in effecting
industry standards than we are. Some industry standards may not be widely
adopted or implemented uniformly, and competing standards may emerge that may be
preferred by our customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, market
acceptance of our products could be adversely affected which would harm our
business.
Products for communications applications are based on industry standards that
are continually evolving. Our ability to compete in the future will depend on
our ability to identify and ensure compliance with these evolving industry
standards. The emergence of new industry standards could render our products
incompatible with products developed by other suppliers. As a result, we could
be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards.
If our products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies or
in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information related to quantitative and qualitative disclosures regarding
market risk is set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the risk factors under Item 2 above.
Such information is incorporated by reference herein.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit in the
United States District Court for the Central District of California against the
Company for alleged infringement by the Company of TDK's United States Patent
No. 5,654,984. TDK's complaint asserts that we have infringed their '984 patent
by making, using and selling in the United States certain DAA semiconductor
chipsets, including our Si3035 and Si3044 products, and that the infringement
was and continues to be willful. Their complaint seeks unspecified treble
damages, costs and attorneys' fees, and an injunction.
On September 27, 2001, we served and filed an answer to their complaint, in
which we denied infringement and asserted that TDK's '984 patent is invalid.
For a description of risks associated with this pending lawsuit, please see
"Risk Factors--Significant litigation over intellectual property in our industry
may cause the Company to become involved in costly and lengthy litigation which
could seriously harm our business."
We are not currently involved in any other material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our registration statement (Registration No. 333-94853) under the Securities
Act of 1933, as amended, relating to our initial public offering of our common
stock became effective on March 23, 2000. A total of 3,680,000 shares of common
stock were registered. We sold a total of 3,200,000 shares of our common stock
and selling stockholders sold a total of 480,000 shares to an underwriting
syndicate. The managing underwriters were Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and
was completed on March 24, 2000, at a price to the public of $31.00 per share.
The initial public offering resulted in net proceeds to us of $90.6 million,
after deducting underwriting commissions of $6.9 million and offering expenses
of $1.6 million. We used $15 million of the proceeds as part of the
consideration paid in the acquisition of Krypton on August 9, 2000. Another $4.3
million was used to pay off equipment loans provided by Imperial Bank. We used
another $1.0 million of the proceeds as part of the consideration paid in the
acquisition of SNR on October 2, 2000. As of September 29, 2001, the remaining
proceeds were invested in government securities and other short-term,
investment-grade, interest bearing instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER
-------
3.1* Form of Fourth Amended and Restated Certificate of Incorporation
of Silicon Laboratories Inc. filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (SEC File
No. 333-94853 (the "IPO Registration Statement")).
3.2* Form of Amended and Restated Bylaws of Silicon Laboratories Inc.
(filed as Exhibit 3.2 to the IPO Registration Statement).
27
EXHIBIT
NUMBER
-------
4.1* Specimen certificate for shares of common stock (filed as Exhibit 4.1
to the IPO Registration Statement).
10.1 Master Revolving Note dated September 5, 2001 by and between
Silicon Laboratories Inc. and Comerica Bank-Texas.
10.2 Letter of Credit Agreement dated September 5, 2001 by and between
Silicon Laboratories Inc. and Comerica Bank-Texas.
10.3 Security Agreement dated September 5, 2001 by and between
Silicon Laboratories Inc. and Comerica Bank-Texas.
10.4 Advance Formula Agreement dated September 5, 2001 by and between
Silicon Laboratories Inc. and Comerica Bank-Texas.
----------------
* Incorporated herein by reference to the indicated filing.
(b) During the quarter ended September 29, 2001, we filed the following
Current Reports on Form 8-K:
Not applicable
28
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.
SILICON LABORATORIES INC.
By: /s/ JOHN W. MCGOVERN
----------------------------------
John W. McGovern
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
October 22, 2001 /s/ NAVDEEP S. SOOCH
----------------------------------- --------------------------------------
Date Navdeep S. Sooch
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
October 22, 2001 /s/ JOHN W. MCGOVERN
----------------------------------- -----------------------------------
Date John W. McGovern
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
29
Exhibit 10.1
MASTER REVOLVING NOTE
[COMERICA LOGO] Variable Rate-Maturity Date-Obligatory Advances
(Business and Commercial Loans Only)
Amount Note Date Maturity Date Tax Identification Number
$5,000,000 September 5, 2001 September 5, 2003
On the Maturity Date, as stated above, for value received, the undersigned
promise(s) to pay to the order of Comerica Bank-Texas ("Bank"),at any office of
the Bank in the State of Texas, Five Million Dollars (U.S.) (or that portion of
it advanced by the Bank and not repaid as later provided) with interest until
maturity, whether by acceleration or otherwise, or until Default, as later
defined, at a per annum rate equal to the lesser of (a) the Maximum Rate, as
later defined, or (b) the Stated Rate, as later defined and after that at a rate
equal to the rate of interest otherwise prevailing under this Note plus three
percent (3%) per annum (but in no event in excess of the Maximum Rate.) If on
any day the Stated Rate shall exceed the Maximum Rate for that day, the rate of
interest applicable to this Note shall be fixed at the Maximum Rate on that day
and on each day thereafter until the total amount of interest accrued on the
unpaid principal balance of this Note equals the total amount of interest which
would have accrued if there had been no Maximum Rate. Interest rate changes will
be effective for interest computation purposes as and when the Maximum Rate or
the Stated Rate, as applicable, changes. Subject to the limitations hereinbelow
set forth, interest shall be calculated on the basis of a 360-day year for the
actual number of days the principal is outstanding. The "Stated Rate" shall mean
the Bank's "prime rate" which is the annual rate of interest so designated by
the Bank and which is changed by the Bank from time to time. Accrued interest on
this Note shall be payable on the first day of each calendar month commencing
October 1, 2001, until the Maturity Date (set forth above) when all amounts
outstanding under this Note shall be due and payable in full. If the frequency
of interest payments is not otherwise specified, accrued interest on this Note
shall be payable monthly on the first day of each month. If any payment of
principal or interest under this Note shall be payable on a day other than a day
on which the Bank is open for business, this payment shall be extended to the
next succeeding business day and interest shall be payable at the rate specified
in this Note during this extension. A late payment charge equal to a reasonable
amount not to exceed 5% of each late payment may be charged on any payment not
received by the Bank within 10 calendar days after the payment due date, but
acceptance of payment of this charge shall not waive any Default under this
Note.
The term "Maximum Rate", as used herein, shall mean at the particular time in
question the maximum nonusurious rate of interest which, under applicable law,
may then be charged on this Note. If such maximum rate of interest changes after
the date hereof, the Maximum Rate shall be automatically increased or decreased,
as the case may be, without notice to the undersigned from time to time as of
the effective date of each change in such maximum rate.
The principal amount payable under this Note shall be the sum of all advances
made by the Bank to or at the request of the undersigned, less principal
payments actually received in cash by the Bank. The books and records of the
Bank shall be the best evidence of the principal amount and the unpaid interest
amount owing at any time under this Note and shall be conclusive absent manifest
error. No interest shall accrue under this Note until the date of the first
advance made by the Bank; after that interest on all advances shall accrue and
be computed on the principal balance outstanding from time to time under this
Note until the same is paid in full.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced and whether incurred
voluntarily or involuntarily, known or unknown, or originally payable to the
Bank or to a third party and subsequently acquired by Bank including, without
limitation, any late charges; loan fees or charges; overdraft indebtedness;
costs incurred by Bank in establishing, determining, continuing or defending the
validity or priority of any security interest, pledge or other lien or in
pursuing any of its rights or remedies under any loan document (or otherwise) or
in connection with any proceeding involving the Bank as a result of any
financial accommodation to the undersigned (or any of them); and reasonable
costs and expenses of attorneys and paralegals, whether inside or outside
counsel is used, and whether any suit or other action is instituted, and to
court costs if suit or action is instituted, and whether any such fees, costs or
expenses are incurred at the trial court level or on appeal, in bankruptcy, in
administrative proceedings, in probate proceedings or otherwise (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank and
by all proceeds of these items (cash or otherwise), all account balances of any
of the undersigned from time to time with the Bank, by all property of any of
the undersigned from time to time in the possession of the Bank and by any other
collateral, rights and properties described in each and every deed of trust,
mortgage, security agreement, pledge, assignment and other security or
collateral agreement which has been, or will at any time(s) later be, executed
by any (or all) of the undersigned to or for the benefit of the Bank
(collectively "Collateral"). "Collateral" shall EXCLUDE intellectual property.
Intellectual property includes "Proprietary Information." "Proprietary
Information" shall mean trade secrets, confidential knowledge, data, or any
other proprietary information of the undersigned and each of its subsidiaries or
affiliated companies. By way of illustration but not limitation. "Proprietary
Information" includes (a) inventions, trade secrets, ideas, concepts, processes,
formulas, data, lists, software programs, all other works of authorship, mask
works, proprietary test tooling, know-how, improvements, discoveries,
developments, designs, and techniques relating to the business or proposed
business of the undersigned whether or not any of the foregoing is or are
patentable, copyrightable, or registrable under any intellectual property laws
and (b) information owned by the undersigned or licensed from third parties
regarding plans for research, development, products, services, marketing and
selling, business plans, budgets and unpublished financial statements, licenses,
prices and costs, suppliers, customers, customer lists (except to the extent
necessary for Bank to perfect or exercise its lien on the undersigned's accounts
receivable), information regarding the skills and compensation of other
employees of the undersigned and (c) intellectual property of third parties in
the undersigned's possession.
If an "Event of Default" (as defined in the Credit Agreement of even date
herewith between the undersigned and the Bank, as from time to time amended,
modified or restated) occurs then the Bank may at its option and without prior
notice to the undersigned (or any of them), declare any or all of the
Indebtedness to be immediately due and payable (notwithstanding any provisions
contained in the evidence of it to the contrary), cease advancing money or
extending credit to or for the benefit of the undersigned under this Note or any
other agreement between the undersigned and Bank, terminate this Note as to any
future liability or obligation of Bank, but without affecting Bank's rights and
security interests in any Collateral or the Indebtedness , sell or liquidate all
or any portion of the Collateral, set off against the Indebtedness any amounts
owing by the Bank to the undersigned (or any of them), charge interest at the
default rate provided in the document evidencing the relevant Indebtedness and
exercise any one or more of the rights and remedies granted to the Bank by any
agreement with the undersigned (or any of them) or given to it under applicable
law. All payments under this Note shall be in immediately available United
States funds, without setoff or counterclaim .
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release, substitution or nonenforcement
of any security, or release or substitution of any of the undersigned, any
guarantor or any other party, whether with or without notice, shall affect the
obligations of any of the undersigned. The undersigned waive(s) all defenses or
right to discharge available under Section 3-605 of the Texas Uniform Commercial
Code and waive(s) all other suretyship defenses or right to discharge. The
undersigned agree(s) that the Bank has the right to sell, assign, or grant
participations, or any interest, in any or all of the Indebtedness, and that, in
connection with this right, but without limiting its ability to make other
disclosures to the full extent allowable, the Bank may disclose all documents
and information which the Bank now or later has relating to the undersigned or
the Indebtedness. The undersigned agree(s) that the Bank may provide information
relating to the Note or to the undersigned to the Bank's parent, affiliates,
subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for
any and all costs and expenses (including without limit, court costs, legal
expenses and reasonable attorney fees, whether inside or outside counsel is
used, whether or not suit is instituted and, if suit is instituted, whether
at the trial court level, appellate level, in a bankruptcy, probate or
administrative proceeding or otherwise) incurred in collecting or attempting
to collect this Note or incurred in any other matter or proceeding relating
to this Note.
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and agree(s) that
the terms and conditions of this Note may not be amended, waived or modified
except in a writing signed by an officer of the Bank expressly stating that the
writing constitutes an amendment, waiver or modification of the terms of this
Note. As used in this Note, the word "undersigned" means, individually and
collectively, each maker, accommodation party, indorser and other party signing
this Note in a similar capacity. If any provision of this Note is unenforceable
in whole or part for any reason, the remaining provisions shall continue to be
effective. Chapter 346 of the Texas Finance Code (and as the same may be
incorporated by reference in other Texas statutes) shall not apply to the
Indebtedness evidenced by this Note. THIS NOTE IS MADE IN THE STATE OF TEXAS AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
This Note and all other documents, instruments and agreements evidencing,
governing, securing, guaranteeing or otherwise relating to or executed
pursuant to or in connection with this Note or the Indebtedness evidenced
hereby (whether executed and delivered prior to, concurrently with or
subsequent to this Note), as such documents may have been or may hereafter be
amended from time to time (the "Loan Documents") are intended to be performed
in accordance with, and only to the extent permitted by, all applicable usury
laws. If any provision hereof or of any of the other Loan Documents or the
application thereof to any person or circumstance shall, for any reason and
to any extent, be invalid or unenforceable, neither the application of such
provision to any other person or circumstance nor the remainder of the
instrument in which such provision is contained shall be affected thereby and
shall be enforced to the greatest extent permitted by law. It is expressly
stipulated and agreed to be the intent of the holder hereof to at all times
comply with the usury and other applicable laws now or hereafter governing
the interest payable on the indebtedness evidenced by this Note. If the
applicable law is ever revised, repealed or judicially interpreted so as to
render usurious any amount called for under this Note or under any of the
other Loan Documents, or contracted for, charged, taken, reserved or received
with respect to the indebtedness evidenced by this Note, or if Bank's
exercise of the option to accelerate the maturity of this Note, or if any
prepayment by the undersigned or prepayment agreement results (or would, if
complied with, result) in the undersigned having paid, contracted for or
being charged for any interest in excess of that permitted by law, then it is
the express intent of the undersigned and Bank that this Note and the other
Loan Documents shall be limited to the extent necessary to prevent such
result and all excess amounts theretofore collected by Bank shall be credited
on the principal balance of this Note or, if fully paid, upon such other
Indebtedness as shall then remaining outstanding (or, if this Note and all
other Indebtedness have been paid in full, refunded to the undersigned), and
the provisions of this Note and the other Loan Documents shall immediately be
deemed reformed and the amounts thereafter collectable hereunder and
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the then applicable law, but so as to permit
the recovery of the fullest amount otherwise called for hereunder or
thereunder. All sums paid, or agreed to be paid, by the undersigned for the
use, forbearance, detention, taking, charging, receiving or reserving of the
indebtedness of the undersigned to Bank under this Note or arising under or
pursuant to the other Loan Documents shall, to the maximum extent permitted
by applicable law, be amortized, prorated, allocated and spread throughout
the full term of such indebtedness until payment in full so that the rate or
amount of interest on account of such indebtedness does not exceed the usury
ceiling from time to time in effect and applicable to such indebtedness for
so long as such indebtedness is outstanding. To the extent federal law
permits Bank to contract for, charge or receive a greater amount of interest,
Bank will rely on federal law instead of the Texas Finance Code for the
purpose of determining the maximum Rate.
2
Additionally, to the maximum extent permitted by applicable law now or
hereafter in effect, Bank may, at its option and from time to time, implement
any other method of computing the Maximum Rate under the Texas Finance Code
or under other applicable law, by giving notice, if required, to the
undersigned as provided by applicable law now or hereafter in effect.
Notwithstanding anything to the contrary contained herein or in any of the
other Loan Documents, it is not the intention of Bank to accelerate the
maturity of any interest that has not accrued at the time of such
acceleration or to collect unearned interest at the time of such acceleration.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED, EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY
IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN
ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS
AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Silicon Laboratories Inc. By: /s/ Navdeep Sooch Its: Chief Executive Officer
-------------------------- ---------------------------- -----------------------
OBLIGOR NAME TYPED/PRINTED SIGNATURE OF TITLE (if applicable)
By: /s/ John W. McGovern Its: Chief Financial Officer
---------------------------- -----------------------
SIGNATURE OF TITLE (if applicable)
By: Its:
---------------------------- -----------------------
SIGNATURE OF TITLE (if applicable)
4635 Boston Lane Austin Texas Travis 78735
--------------------------------------------------------------------------------------------
Street Address City State Country Zip Code
--------------------------------------------------------------------------------------------
For Bank Use Only CCAR#
--------------------------------------------------------------------------------------------
Loan Officer Initials Loan Group name Obligor(s) Name
--------------------------------------------------------------------------------------------
Loan Officer I.D. No. Loan Group No. Obligor # Note # Amount
--------------------------------------------------------------------------------------------
3
Exhibit 10.2
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and delivered to be effective as of September
5, 2001, by and between SILICON LABORATORIES INC. (herein referred to with
all successors, assigns and/or personal representatives as the "Borrower"),
and COMERICA BANK-TEXAS (herein referred to with its successors and assigns
as the "Bank"). For and in consideration of the mutual promises herein
contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower and Bank agree as
follows:
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. The following terms, as used in this Agreement, shall
have the meanings set forth below. The singular number shall be deemed
to include the plural, the masculine gender shall include the feminine
and neuter genders, and vice versa.
"ADVANCE FORMULA AGREEMENT" shall mean the Advance Formula Agreement of
even date herewith between Borrower and Bank, as from time to time
amended, modified or restated.
"AFFILIATE" shall mean, when used with respect to any Person, any other
Person which, directly or indirectly, controls or is controlled by or
is under common control with such Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), with respect to any
Person, shall mean possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract
or otherwise.
"AGREEMENT" shall mean this Credit Agreement, including all addenda,
exhibits and schedules now or hereafter made a part hereof, as the same
may be amended from time to time.
"APPLICABLE INTEREST RATE" shall mean, with respect to the Indebtedness
from time to time outstanding under any promissory note or other Loan
Document evidencing the Indebtedness, the rate or rates provided in
such note as the applicable interest rate.
"COLLATERAL" shall mean all property, assets and rights in which a Lien
or other encumbrance in favor of or for the benefit of Bank is or has
been granted or arises or has arisen, or may hereafter be granted or
arise, under or in connection with any Loan Document, or otherwise, to
secure the payment or performance of any portion of the Indebtedness.
"Collateral" shall EXCLUDE intellectual property. Intellectual property
includes "Proprietary Information". "Proprietary Information" shall
mean trade secrets, confidential knowledge, data, or any other
proprietary information of the Borrower and each of its subsidiaries or
affiliated companies. By way of illustration but not limitation,
"Proprietary Information" includes (a) inventions, trade secrets,
ideas, concepts, processes, formulas, data, lists, software programs,
all other works of authorship, mask works, proprietary test tooling,
know-how, improvements, discoveries, developments, designs, and
techniques relating to the business or proposed business of the
Borrower whether or not any of the foregoing is or are patentable,
copyrightable, or registrable under any intellectual property laws and
(b) information owned by the Borrower or licensed from third parties
regarding plans for research, development, products, services,
marketing and selling, business plans, budgets and unpublished
financial statements, licenses, prices and costs, suppliers, customers,
customer lists (except to the extent necessary for Bank to perfect or
exercise its lien on the Borrower's accounts receivable), information
regarding the skills and compensation of other employees of the
Borrower and (c) intellectual property of third parties in Borrower's
possession.
"CREDIT CARD EXPOSURE" shall mean the maximum amount that Borrower may
at any time have outstanding under one or more corporate credit cards
issued by Bank to Borrower, which amount shall initially be $300,000.
"DEBT" shall mean, as of any applicable date of determination thereof,
all liabilities of a Person that should be classified as liabilities in
accordance with GAAP. In the case of Borrower, the term "Debt" shall
include, without limitation, the Indebtedness.
"DEFAULT" shall mean, any condition or event which, with the giving of
notice or the passage of time, or both, would constitute an Event of
Default.
"ENVIRONMENTAL LAW(S)" shall mean all laws, codes, ordinances, rules,
regulations, orders, decrees and directives issued by any federal,
state, local, foreign or other governmental or quasi governmental
authority or body (or any agency, instrumentality or political
subdivision thereof) pertaining to Hazardous Materials or otherwise
intended to regulate or improve health, safety or the environment,
including, without limitation, any hazardous materials or wastes, toxic
substances, flammable, explosive or radioactive materials, asbestos,
and/or other similar materials; any so-called "superfund" or
"superlien" law, pertaining to Hazardous Materials on or about any of
the Collateral, or any other property at any time owned, leased or
otherwise used by any Loan Party, or any portion thereof, including,
without limitation, those relating to soil, surface, subsurface ground
water conditions and the condition of the ambient air; and any other
federal, state, foreign or local statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to, or imposing
liability or standards of conduct concerning, any hazardous, toxic,
radioactive, flammable or dangerous waste, substance or material, as
now or at anytime hereafter in effect.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, or any successor act or code.
"EVENT OF DEFAULT" shall mean any of those conditions or events listed
in SECTION 6.1 of this Agreement.
"FACILITY USAGE" shall mean, at the time in question, the aggregate
amount of outstanding Revolving Loans, existing Letter of Credit
Liabilities and Credit Card Exposure at such time.
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"GOVERNMENTAL AUTHORITY" shall mean the United States, each state, each
county, each city, and each other political subdivision in which all or
any portion of the Collateral is located, and each other political
subdivision, agency, or instrumentality exercising jurisdiction over
Bank, any Loan Party, any of the Indebtedness or any Collateral.
"GOVERNMENTAL REQUIREMENTS" shall mean all laws, ordinances, rules, and
regulations of any Governmental Authority applicable to any Loan Party,
any of the Indebtedness or any Collateral.
"GUARANTOR(S)" shall mean, as the context dictates, any Person(s)
(other than the Borrower) who shall, at any time, guarantee or
otherwise be or become obligated for the repayment of all or any part
of the Indebtedness.
"HAZARDOUS MATERIAL" shall mean and include any hazardous, toxic or
dangerous waste, substance or material defined as such in, or for
purposes of, any Environmental Law(s).
"INDEBTEDNESS" shall mean all obligations and liabilities of any Loan
Party to Bank under any Loan Document, together with all other
indebtedness, obligations and liabilities whatsoever of Borrower to
Bank, whether matured or unmatured, liquidated or unliquidated, direct
or indirect, absolute or contingent, joint or several, due or to become
due, now existing or hereafter arising, voluntary or involuntary, known
or unknown, or originally payable to Bank or to a third party and
subsequently acquired by Bank including, without limitation, any: late
charges; loan fees or charges; overdraft indebtedness; costs incurred
by Bank in establishing, determining, continuing or defending the
validity or priority of any Lien or in pursuing any of its rights or
remedies under any Loan Document or in connection with any proceeding
involving Bank as a result of any financial accommodation to Borrower;
debts, obligations and liabilities for which Borrower would otherwise
be liable to the Bank were it not for the invalidity or enforceability
of them by reason of any bankruptcy, insolvency or other law or for any
other reason; and reasonable costs and expenses of attorneys and
paralegals, whether any suit or other action is instituted, and to
court costs if suit or action is instituted, and whether any such fees,
costs or expenses are incurred at the trial court level or on appeal,
in bankruptcy, in administrative proceedings, in probate proceedings or
otherwise; provided, however, that the term Indebtedness shall not
include any consumer loan to the extent treatment of such loan as part
of the Indebtedness would violate any Governmental Requirement.
"LETTER OF CREDIT" shall mean a letter of credit issued by the Bank for
the account of and/or upon the application of the Borrower in
accordance with this Agreement, as such Letter of Credit may be
amended, supplemented, extended or confirmed from time to time.
2
"LETTER OF CREDIT LIABILITIES" shall mean, at any time and in respect
of all Letters of Credit, the sum of (a) the aggregate amount available
to be drawn under all such Letters of Credit plus (b) the aggregate
unpaid amount of all Reimbursement Obligations then due and payable in
respect of previous drawings under such Letters of Credit.
"LIEN" shall mean any valid and enforceable interest in any property,
whether real, personal or mixed, securing an indebtedness, obligation
or liability owed to or claimed by any Person other than the owner of
such property, whether such indebtedness is based on the common law or
any statute or contract and including, but not limited to, a security
interest, pledge, mortgage, assignment, conditional sale, trust
receipt, lease, consignment or bailment for security purposes.
"LOAN DOCUMENTS" shall mean collectively, this Agreement, any
promissory notes evidencing Indebtedness, any approved subordination
agreement, any reimbursement agreement or other documentation executed
in connection with any Letter of Credit, and any other documents,
instruments or agreements evidencing, governing, securing, guaranteeing
or otherwise relating to or executed pursuant to or in connection with
any of the Indebtedness or any Loan Document (whether executed and
delivered prior to, concurrently with or subsequent to this Agreement),
as such documents may have been or may hereafter be amended from time
to time.
"LOAN PARTY" shall mean Borrower, each of its Subsidiaries (whether or
not a party to any Loan Document) and each other Person who or which
shall be liable for the payment or performance of all or any portion of
the Indebtedness or who or which shall own any property that is subject
to (or purported to be subject to) a Lien which secures all or any
portion of the Indebtedness.
"MATERIAL ADVERSE EFFECT" shall mean any act, event, condition or
circumstance which would likely materially and adversely affect the
business, operations, condition (financial or otherwise), performance
or assets of any Loan Party, the ability of any Loan Party to perform
its obligations under any Loan Document to which it is a party or by
which it is bound or the enforceability of any Loan Document.
"MAXIMUM LEGAL RATE" shall mean the maximum rate of nonusurious
interest per annum permitted to be paid by Borrower or, if applicable,
another Loan Party or received by Bank with respect to the applicable
portion of the Indebtedness from time to time under applicable state or
federal law as now or as may be hereafter in effect, including without
limitation, that rate based upon the "weekly ceiling rate" (as defined
in Chapter 303 of the Texas Finance Code).
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
Person succeeding to the present powers and functions of the Pension
Benefit Guaranty Corporation.
"PENSION PLAN(S)" shall mean any and all employee benefit pension plans
of Borrower and/or any of its Subsidiaries in effect from time to time,
as such term is defined in ERISA.
"PERMITTED ENCUMBRANCES" shall mean: (a) Liens in favor of the Bank;
(b) Liens for taxes, assessments or other governmental charges which
are not yet due and payable, incurred in the ordinary course of
business and for which no interest, late charge or penalty is attaching
or which are being contested in good faith by appropriate proceedings
and, if requested by Bank, bonded in an amount and manner satisfactory
to Bank; (c) Liens, not delinquent, arising in the ordinary course of
business and created by statute in connection with worker's
compensation, unemployment insurance, social security and similar
statutory obligations; (d) Liens of mechanics, materialmen, carriers,
warehousemen or other like statutory or common law Liens securing
obligations incurred in good faith in the ordinary course of business
without violation of any Loan Document that are not yet due and
payable; and (e) Liens existing as of the date hereof identified as
follows: Comdisco, Third Coast Capital, Finova and certain other
equipment rental agreements, to the extent each such Lien is limited to
the equipment subject to such rental agreement and the amount secured
by each such Agreement is less than $100,000 individually and the
aggregate amount of such Debt does not exceed $500,000.
"PERSON" or "PERSON" shall mean any individual, corporation,
partnership, joint venture, limited liability company, association,
trust, unincorporated association, joint stock company, government,
municipality, political subdivision or agency, or other entity.
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"REIMBURSEMENT OBLIGATIONS" shall mean, at any time and in respect of
all Letters of Credit, the aggregate obligations of the Borrower, then
outstanding or which may thereafter arise, to reimburse the Bank for
any amount paid or incurred by the Bank in respect of any and all
drawings under such Letters of Credit, together with any and all other
Indebtedness, obligations and liabilities of any Loan Party to Bank
related to such Letters of Credit arising under this Agreement, any
Letter of Credit application or any other Loan Document.
"REVOLVING CREDIT MATURITY DATE" shall mean September 5, 2003, or such
earlier date on which the entire unpaid principal amount of all
Revolving Loans becomes due and payable whether by the lapse of time,
demand for payment, acceleration or otherwise; provided, however, if
any such date is not a business day, then the Revolving Credit Maturity
Date shall be the next succeeding business day.
"REVOLVING CREDIT MAXIMUM AMOUNT" shall mean the lesser of (a)
$5,000,000, or (b) the maximum amount permitted by the Advance Formula
Agreement.
"REVOLVING CREDIT NOTE" shall mean the Master Revolving Note dated of
even date herewith in the maximum original principal amount of
$5,000,000 made by Borrower payable to the order of the Bank, as the
same may be renewed, extended, modified, increased or restated from
time to time.
"REVOLVING LOAN" shall mean an advance made, or to be made, under the
revolving credit facility to or for the credit of Borrower by the Bank
pursuant to this Agreement.
"SUBORDINATED DEBT" shall mean any Debt of Borrower (other than the
Indebtedness) which has been subordinated to the Indebtedness pursuant
to a subordination agreement in form and content satisfactory to the
Bank.
"SUBSIDIARY" shall mean as to any particular parent entity, any
corporation, partnership, limited liability company or other entity
(whether now existing or hereafter organized or acquired) in which more
than fifty percent (50%) of the outstanding equity ownership interests
having voting rights as of any applicable date of determination, shall
be owned directly, or indirectly through one or more Subsidiaries, by
such parent entity. As of the date of this Agreement, Borrower's only
Subsidiaries are: Silicon Labs Isolation, Inc. and Silicon Laboratories
UK Limited. Borrower has notified Bank that it intends to establish a
Subsidiary in Japan.
"UCC" shall mean the Uniform Commercial Code as adopted and in force in
the State of Texas, as amended.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined in this
Agreement shall be determined and construed in accordance with GAAP.
SECTION 2 . FUNDING LOANS, PAYMENTS, RECOVERIES AND COLLECTIONS
2.1 FUNDING LOANS. Subject to the terms, conditions and procedures of this
Agreement and each other Loan Document and to the satisfaction of all
conditions precedent to the making and funding of any loan as set forth
in any Loan Document, Bank shall make the proceeds of any such loan
available to Borrower on the disbursement date agreed upon by Bank and
Borrower by depositing such proceeds into an account maintained by
Borrower with Bank or as otherwise agreed to in writing by Borrower and
Bank.
2.2 REVOLVING LOANS. Subject to the terms and conditions of the Loan
Documents and to the satisfaction of all conditions precedent to the
making and funding of any loan as set forth in any Loan Document, the
Bank agrees to make Revolving Loans to Borrower at any time and from
time to time from the effective date hereof until (but not including)
the Revolving Credit Maturity Date. The proceeds of Revolving Loans
shall be used solely for working capital needs and other general
corporate purposes of Borrower.
Except as hereinafter provided, Borrower may request a Revolving Loan
by submitting to Bank a request for advance by an authorized officer or
other representative of Borrower, subject to the following: (a) each
such request for advance shall include, without limitation, the
proposed amount of such revolving loan and the proposed disbursement
date, which date must be a business day; (b) each such request for
advance shall be communicated to Bank by 2:00 p.m. (Dallas, Texas time)
on the proposed disbursement date; (c) a request for advance, once
communicated to Bank, shall not be revocable by Borrower; and (d) each
request for advance, once communicated to Bank, shall constitute a
representation, warranty and certification by Borrower as of the date
thereof that:
4
(i) both before and after the making of such Revolving Loan, the
obligations set forth in the Loan Documents are and shall be valid,
binding and enforceable obligations of each Loan Party, as applicable;
(ii) all terms and conditions precedent to the making of such Revolving
Loan have been satisfied, and shall remain satisfied through the date
of such Revolving Loan; (iii) the making of such Revolving Loan will
not cause the Facility Usage to exceed the Revolving Credit Maximum
Amount; (iv) no Default or Event of Default shall have occurred or be
in existence, and none will exist or arise upon the making of such
Revolving Loan; (v) the representations and warranties contained in the
Loan Documents are true and correct in all material respects and shall
be true and correct in all material respects as of the making of such
Revolving Loan; and (vi) the request for advance will not violate the
terms or conditions of any contract, indenture, agreement or other
borrowing of any Loan Party.
Bank may elect (but without any obligation to do so) to make a
Revolving Loan upon the telephonic or facsimile request of Borrower,
provided that Borrower has first executed and delivered to Bank a
telephone notice authorization in form and content satisfactory to
Bank. If any such Revolving Loan based upon a telephonic or facsimile
request is made by Borrower, Bank may require Borrower to confirm said
telephonic or facsimile request in writing by delivering to Bank, on or
before 11:00 a.m. (Dallas, Texas time) on the next business day
following the disbursement date of such Revolving Loan, a duly executed
written request for advance, and all other provisions of this SECTION
2.2 shall be applicable with respect to such Revolving Loan. In
addition, Borrower may authorize the Bank to automatically make
revolving loans pursuant to such other written agreements as may be
entered into by Bank and Borrower.
Notwithstanding anything contained in this Agreement to the contrary,
the Facility Usage shall not at any time exceed the Revolving Credit
Maximum Amount. If said limitations are exceeded at anytime, Borrower
shall immediately, without demand by Bank, pay to Bank an amount not
less than such excess, or, if Bank, in its sole discretion, shall so
agree, Borrower shall provide Bank cash collateral in an amount not
less than such excess, and Borrower hereby pledges and grants to Bank a
security interest in such cash collateral so provided to Bank. Unless
otherwise expressly provided in a Loan Document, all sums payable by
Borrower to Bank under or pursuant to any Loan Document, whether
principal, interest, or otherwise, shall be paid, when due, directly to
Bank at any office of Bank located in the State of Texas in immediately
available United States funds, and without setoff, deduction or
counterclaim. Bank may, in its discretion, charge any and all deposit
or other accounts (including, without limitation, any account evidenced
by a certificate of deposit or time deposit) of Borrower maintained
with Bank for all or any part of any Indebtedness then due and payable;
provided, however, that such authorization shall not affect Borrower's
obligations to pay all Indebtedness, when due, whether or not any such
account balances maintained by Borrower with Bank are insufficient to
pay any amounts then due.
Borrower shall pay to Bank an annual facility fee in an amount equal to
the product of (a) one quarter of one percent (0.25%)per annum
multiplied by (b) the stated principal amount of the Revolving Credit
Note. Such fee shall be computed and shall be payable on the date of
this Agreement and on each annual anniversary date hereafter.
The provisions of Chapter 346 of the Texas Finance Code are
specifically declared by the parties not to be applicable to any of the
Loan Documents or the transactions contemplated thereby.
2.3 LETTERS OF CREDIT. Subject to the terms and conditions of this
Agreement and the other Loan Documents, the Bank shall, upon request
from Borrower from time to time prior to the Revolving Credit Maturity
Date, issue one or more Letters of Credit. The Letter of Credit
Liabilities shall not exceed $2,000,000; and the Facility Usage shall
not exceed the Revolving Credit Maximum Amount. No Letter of Credit
shall have a stated expiration date later than the Revolving Credit
Maturity Date, and no Letter of Credit shall provide that it will
automatically renew upon its stated expiration date.
Borrower shall give the Bank written notice requesting each issuance
of a Letter of Credit hereunder not less than two business days
prior to the requested issuance date and shall furnish such
additional information regarding such transaction as Bank may
request. The issuance by Bank of each Letter of Credit shall, in
addition to the conditions precedent set forth elsewhere in this
Agreement, be subject to the conditions precedent that (i) such Letter
of Credit shall be in form and substance satisfactory to
Bank, (ii) Borrower shall have executed and delivered such
applications and other instruments and agreements relating to such
Letter of Credit as Bank shall have requested and are not
inconsistent with the terms of this Agreement (iii) each of the
statements in SECTION 2.2 (d) above are true as of the date of
issuance of such Letter of Credit with respect to issuance of such
Letter of Credit (as opposed to making a Revolving Loan), and the
submission of an application for issuance of a Letter of Credit
shall constitute a representation, warranty and certification of
Borrower to that effect, and (iv) no Letter of Credit may be issued
if after giving effect thereto, the sum of the aggregate outstanding
principal balance of all Revolving Loans plus the Letter of Credit
Liabilities would exceed the Revolving Credit Maximum Amount.
5
With respect to the issuance or renewal of each Letter of Credit,
Borrower shall pay to Bank such letter of credit fees and other
expenses customarily charged by Bank in connection with the issuance
or renewals of letters of credit.
Borrower shall be irrevocably and unconditionally obligated forthwith
to reimburse Bank for any amount paid by Bank upon any drawing under
any Letter of Credit, without presentment, demand, protest or other
formalities of any kind, all of which are hereby waived. Unless
Borrower shall elect to otherwise satisfy such Reimbursement
Obligation, such reimbursement shall, subject to satisfaction of any
conditions provided herein for the making of Revolving Loans and to the
Revolving Credit Maximum Amount, automatically be made by advancing to
Borrower a Revolving Loan in the amount of such Reimbursement
Obligation.
In consideration of Bank's issuance of any Letter of Credit, Borrower
shall pay to Bank a letter of credit issuance fee equal to one percent
(1%) per annum. Such fee shall be calculated based on the term and face
amount of such Letter of Credit and the above rate and will be payable
quarterly in arrears.
2.4 MAXIMUM INTEREST RATE. At no time shall any Applicable Interest Rate or
default rate in respect of any Indebtedness hereunder, exceed the
Maximum Legal Rate. In the event that any interest is charged or
otherwise received by Bank in excess of the Maximum Legal Rate,
Borrower hereby acknowledges and agrees that any such excess interest
shall be the result of an accidental and bona fide error, and any such
excess shall be deemed to have been payment of principal, and not of
interest, and shall be applied, first, to reduce the principal
Indebtedness then outstanding, second, any remaining excess, if any,
shall be applied to reduce any other Indebtedness, and third, any
remaining excess, if any, shall be returned to Borrower.
Notwithstanding the foregoing or anything to the contrary contained in
this Agreement or any other Loan Document, but subject to all
limitations contained in this Section, if at anytime any Applicable
Interest Rate or default rate or other rate of interest applicable to
any portion of the Indebtedness is computed on the basis of the Maximum
Legal Rate, any subsequent reduction in the Applicable Interest Rate,
default rate or such other rate of interest shall not reduce such
interest rate thereafter payable below the Maximum Legal Rate until the
aggregate amount of interest accrued equals the total amount of
interest that would have accrued if interest had, at all times, been
computed solely on the basis of the Applicable Interest Rate, default
rate or such other interest rate. This Section shall control all
agreements between the Borrower and the Bank.
2.5 RECEIPT OF PAYMENTS BY BANK. Any payment by Borrower of any of the
Indebtedness made by mail will be deemed tendered and received by Bank
only upon actual receipt thereof by Bank at the address designated for
such payment, whether or not Bank has authorized payment by mail or in
any other manner, and such payment shall not be deemed to have been
made in a timely manner unless actually received by Bank on or before
the date due for such payment, time being of the essence. Borrower
expressly assumes all risks of loss or liability resulting from
non-delivery or delay of delivery of any item of payment transmitted by
mail or in any other manner. Acceptance by Bank of any payment in an
amount less than the amount then due shall be deemed an acceptance on
account only, and any failure to pay the entire amount then due shall
constitute and continue to be an Event of Default. Prior to the
occurrence of any Default, Borrower shall have the right to direct the
application of any and all payments made to Bank hereunder to the
Indebtedness evidenced by the respective notes evidencing the
Indebtedness. Borrower waives the right to direct the application of
any and all payments received by Bank hereunder at any time or times
after the occurrence and during the continuance of any Default.
Borrower further agrees that after the occurrence and during the
continuance of any Default, or prior to the occurrence of any Default
if Borrower has failed to direct such application, Bank shall have the
continuing exclusive right to apply and to reapply any and all payments
received by Bank at any time or times, whether as voluntary payments,
proceeds from any Collateral, offsets, or otherwise, against the
Indebtedness in such order and in such manner as Bank may, in its sole
discretion, deem advisable, notwithstanding any entry by Bank upon any
of its books and records. Borrower hereby expressly agrees that, to the
extent that Bank receives any payment or benefit of or otherwise upon
any of the Indebtedness, and such payment or benefit, or any part
thereof, is subsequently invalidated, declared to be fraudulent or
preferential, set aside, or required to be repaid to a trustee,
receiver, or any other Person under any bankruptcy act, state or
federal law, common law, equitable cause or otherwise, then to the
extent of such payment or benefit, the Indebtedness, or part thereof,
intended to be satisfied shall be revived and continued in full force
and effect as if such payment or benefit had not been made or received
by Bank, and, further, any such repayment by Bank shall be added to and
be deemed to be additional Indebtedness.
6
2.6 CONDITIONS PRECEDENT TO LOANS AND LETTERS OF CREDIT. The obligation of
the Bank to issue any Letter of Credit, if applicable, or to make any
loan under or pursuant to this Agreement shall be subject to the
following conditions precedent:
a. Borrower shall have executed and delivered to Bank, or caused
to have been executed and delivered to Bank, all such
instruments, agreements, certificates, opinions, financial
statements, appraisals, evidence of title, evidence of
insurance, environmental audits, and other information and
other documents as the Bank shall require, and all of the
foregoing shall be in form and content acceptable to Bank and
all instruments and agreements shall be in full force and
effect and binding and enforceable obligations of Borrower
and, to the extent that it is a party thereto or otherwise
bound thereby, of each other Person who may be a party thereto
or bound thereby including without limitation: (i) evidence of
existence, good standing, qualification to conduct business
and authority for each Loan Party and signatory on behalf of
each Loan Party; (ii) all notes, guaranties, security
agreements, mortgages, deeds of trust, pledge agreements,
assignments, financing statements and other documents
requested by Bank to evidence the Indebtedness or to create,
protect or perfect Liens upon the Collateral required by Bank
as security for the Indebtedness and to accord Bank a
perfected security position in the Collateral, subject only to
Permitted Encumbrances;; (iii) a guaranty agreement from each
Guarantor required by Bank; (iv) such other documents or
agreements of security, assurances of Loan Document validity,
legality and enforceability, and appropriate assurances of
validity, perfection and priority of Lien as Bank may request,
and Bank shall have received proof that appropriate security
agreements, financing statements, mortgages, deeds of trust,
collateral and other documents covering the Collateral shall
have been executed and delivered by the appropriate Persons
and recorded or filed in such jurisdictions and such other
steps shall have been taken as necessary to perfect and
protect, subject only to Permitted Encumbrances, the Liens
granted thereby.
b. All actions, proceedings, instruments and documents required
to carry out the borrowings and transactions contemplated by
this Agreement or any other Loan Document or incidental
thereto, and all other related legal matters, shall have been
satisfactory to and approved by Bank.
c. Each Loan Party shall have performed and complied with all
agreements and conditions contained in the Loan Documents
applicable to it and which are then in effect.
d. Each of the representations and warranties of each Loan Party
under any Loan Document shall be true and correct in all
material respects as if made on each loan disbursement date.
e. No Default or Event of Default shall have occurred and be
continuing; there shall have been no material adverse change
in the condition (financial or otherwise), properties,
business, or operations of any Loan Party since the date of
the financial statements most recently delivered to Bank prior
to the date of this Agreement; and no provision of law, any
order of any Governmental Authority, or any regulation, rule
or interpretation thereof, shall have had any Material Adverse
Effect on the validity or enforceability of any Loan Document.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants, and such representations and
warranties shall be deemed to be continuing representations and
warranties during the entire life of this Agreement, and so long as
Bank shall have any commitment or obligation to make any loans or issue
any Letters of Credit, if applicable and so long as any Indebtedness
remains unpaid and outstanding under any Loan Document, as follows:
3.1 AUTHORITY. Each Loan Party and, if applicable, each of its partners and
members who is not a natural Person is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
organization and is duly qualified and authorized to do business in
each other jurisdiction in which the character of its assets or the
nature of its business makes such qualification necessary.
3.2 DUE AUTHORIZATION. Each Loan Party has all requisite power and
authority to execute, deliver and perform its obligations under each
Loan Document to which it is a party or is otherwise bound, all of
which have been duly authorized by all necessary action, and are not in
contravention of law or the terms of any Loan Party's organizational or
other governing documents.
7
3.3 TITLE TO PROPERTY. Each Loan Party has good title to all property and
assets purported to be owned by it, including those assets identified
on the financial statements most recently delivered to Bank.
3.4 ENCUMBRANCES. There are no security interests or other Liens or
encumbrances on, and no financing statements on file with respect to,
any of the property or assets of any Loan Party, except for Permitted
Encumbrances.
3.5 SUBSIDIARIES. Borrower has no Subsidiaries except those specifically
disclosed in the Defined Terms.
3.6 TAXES. Each Loan Party has filed, on or before their respective due
dates, all federal, state, local and foreign tax returns which are
required to be filed, or has obtained extensions for filing such tax
returns, and is not delinquent in filing such returns in accordance
with such extensions, and has paid all taxes which have become due
pursuant to those returns or pursuant to any assessments received by
any such party, as the case may be, to the extent such taxes have
become due, except to the extent such tax payments are being actively
and diligently contested in good faith by appropriate proceedings, and
if requested by Bank, have been bonded or reserved in an amount and
manner satisfactory to Bank.
3.7 NO-DEFAULTS. There exists no default (or event which, with the giving
of notice or passage of time, or both, would result in a default) under
the provisions of any instrument or agreement evidencing, governing,
securing or otherwise relating to any Debt of any Loan Party or
pertaining to any of the Permitted Encumbrances.
3.8 ENFORCEABILITY OF AGREEMENT AND LOAN DOCUMENTS. Each Loan Document has
been duly executed and delivered by duly authorized officer(s) or other
representative(s) of each Loan Party and constitutes the valid and
binding obligation of each Loan Party, enforceable in accordance with
its terms, except to the extent that enforcement thereof may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting the enforcement of creditors' rights generally
at the time in effect.
3.9 NON-CONTRAVENTION. The execution, delivery and performance by each Loan
Party of the Loan Documents to which such Loan Party is a party or
otherwise bound, are not in contravention of the terms of any
indenture, agreement or undertaking to which any such Loan Party is a
party or by which it is bound, except to the extent that such terms
have been waived or that failure to comply with any such terms would
not have a Material Adverse Effect.
3.10 ACTIONS, SUITS, LITIGATION OR PROCEEDINGS. There are no actions, suits,
litigation or proceedings, at law or in equity, and no proceedings
before any arbitrator or by or before any Governmental Authority,
pending, or, to the best knowledge of Borrower, threatened against or
affecting any Loan Party, which, if adversely determined, could
materially impair the right of any Loan Party to carry on its business
substantially as now conducted or could have a Material Adverse Effect.
No Loan Party is under investigation by, or is operating under any
restrictions imposed by, any Governmental Authority.
3.11 COMPLIANCE WITH LAWS. Each Loan Party has complied with all
Governmental Requirements, including, without limitation, Environmental
Laws, to the extent that failure to so comply could have a Material
Adverse Effect.
3.12 CONSENTS, APPROVALS AND FILINGS, ETC. Except as have been previously
obtained or as otherwise expressly provided in this Agreement, no
authorization, consent, approval, license, qualification or formal
exemption from, or any filing, declaration or registration with, any
Governmental Authority and no material authorization, consent or
approval from any other Person, is required in connection with the
execution, delivery and performance by any Loan Party of any Loan
Document to which it is a party. All such authorizations, consents,
approvals, licenses, qualifications, exemptions, filings, declarations
and registrations which have previously been obtained or made, as the
case may be, are in full force and effect and are not the subject of
any attack, or to the knowledge of Borrower, any threatened attack, in
any material respect, by appeal, direct proceeding or otherwise.
3.13 ENVIRONMENTAL REPRESENTATIONS. No Loan Party has used Hazardous
Materials on, in, under or otherwise affecting any real or personal
property now or at any time owned, occupied or operated by such Person
or upon which such Person has a place of business which, in any manner,
violates any Environmental Law, to the extent any such violation could
result in a Material Adverse Effect, and to the best of Borrower's
knowledge, no prior or current owner, occupant or operator of any of
such property does or has used any Hazardous Materials on or affecting
such property in any manner which violates any Environmental Law to the
extent that any such violation could result in a Material Adverse
Effect. No Loan Party has received any notice of any violation of any
Environmental Law, and to the best knowledge of the Borrower, there
have been no actions commenced or threatened by any Person against
any such property or against any Loan Party for non-compliance with any
Environmental Law which could result in a Material Adverse Effect.
8
3.14 ACCURACY OF INFORMATION. All financial statements previously furnished
to Bank have been prepared in accordance with GAAP and fairly present
the financial condition of Borrower and, as applicable, the
consolidated financial condition of Borrower and such other Person(s)
as such financial statements purport to present, and the results of
their respective operations as of the dates and for the periods covered
thereby; and since the date(s) of said financial statements, there has
been no material adverse change in the financial condition of Borrower
or any other Person covered by such financial statements. Each Loan
Party is solvent, able to pay its debts as they mature, has capital
sufficient to carry on its business and has assets the fair market
value of which exceed its liabilities, and no Loan Party will be
rendered insolvent, under-capitalized or unable to pay debts generally
as they become due by the execution or performance of any Loan Document
to which it is a party or by which it is otherwise bound.
SECTION 4. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until all instruments and
agreements evidencing each and every loan, Letter of Credit and other
financial accommodation by the Bank to the Borrower or any Loan Party
are fully discharged and terminated, and thereafter, so long as any
Indebtedness remains outstanding, it will, and, as applicable, it will
cause each Loan Party within its control or under common control to:
4.1 PRESERVATION OF EXISTENCE, ETC. Preserve and maintain its existence and
preserve and maintain such of its rights, licenses, and privileges as
are material to the business and operations conducted by it; qualify
and remain qualified to do business in each jurisdiction in which such
qualification is material to its business and operations or ownership
of its properties, continue to conduct and operate its business
substantially as conducted and operated during the present and
preceding calendar year; at all times maintain, preserve and protect
all of its franchises and trade names and preserve all the remainder of
its property and keep the same in good repair, working order and
condition; and from time to time make, or cause to be made, all needed
and proper repairs, renewals, replacements, betterments and
improvements thereto.
4.2 KEEPING OF BOOKS; AUDITS OF COLLATERAL; FEES. Keep proper books of
record and account in which full and correct entries shall be made of
all of its financial transactions and its assets and businesses so as
to permit the presentation of financial statements prepared in
accordance with GAAP; and permit Bank, or its representatives, at
reasonable times and intervals, at Borrower's cost and expense, to
examine its books and records and to discuss its financial matters with
its officers, employees and independent certified public accountants;
and permit Bank from time to time to audit Borrower's accounts,
inventory, or other Collateral, provided that such audits will be
conducted upon reasonable notice. Borrower agrees to reimburse Bank, on
demand, for customary and reasonable fees and costs incurred by Bank
for such audits, and for each appraisal of Collateral and financial
analysis and examination of Borrower performed from time to time by its
agents.
4.3 REPORTING REQUIREMENTS. Borrower maintains a policy regarding insider
trading (Statement of Company Policy--Regarding Insider Trading) and
Lender acknowledges receipt of such policy. Furnish to Bank, or cause
to be furnished to Bank, the following:
a. as soon as possible, and in any event within three (3)
calendar days after becoming aware of the occurrence or
existence of each Default or Event of Default hereunder or any
material adverse change in the financial condition of any Loan
Party, a written statement of the chief financial officer of
Borrower (or in his or her absence, a responsible senior
officer of Borrower), setting forth details of such Default,
Event of Default or change, and the action which Borrower has
taken, or has caused to be taken, or proposes to take, or to
cause to be taken, with respect thereto;
b. as soon as available, and in any event within ninety (90) days
after and as of the end of each fiscal year of Borrower,
audited financial statements of Borrower and such other of the
Loan Parties as may be required by the Bank, consolidated, as
applicable, including a balance sheet, income statement,
surplus reconciliation statement and statement of cash flows,
for and as of such fiscal year then ending and including such
other comments and financial details as are usually included
in similar reports. Such financial statements shall be
prepared in accordance with GAAP by independent certified
public accountants of recognized standing selected by Borrower
and approved by Bank and containing unqualified opinions as to
the fairness of the statements therein contained;
9
c. during any period of time the Facility Usage is less than
$2,000,000, as soon as available, and in any event within
forty-five (45) days after and as of the end of each fiscal
quarter, including the last such reporting period of each of
Borrower's fiscal years, financial statements of Borrower and
such of the other Loan Parties as may be required by the Bank,
consolidated, as applicable, for and as of such reporting
period, including a balance sheet, income statement, surplus
reconciliation statement and statement of cash flows for and
as of such reporting period then ending and for and as of that
portion of the fiscal year then ending, in each case, prepared
by the chief financial officer of Borrower (or in his or her
absence, a responsible senior officer of Borrower) and, as
applicable, each other Loan Party as to consistency with prior
financial reports and accounting periods, accuracy and
fairness of presentation;
d. during any period of time the Facility Usage is equal to or
greater than $2,000,000, as soon as available, and in any
event within thirty (30) days after and as of the end of each
calendar month, including the last such reporting period of
each of Borrower's fiscal years, financial statements of
Borrower and such of the other Loan Parties as may be required
by the Bank, consolidated, as applicable, for and as of such
reporting period, including a balance sheet, income statement,
surplus reconciliation statement and statement of cash flows
for and as of such reporting period then ending and for and as
of that portion of the fiscal year then ending, in each case,
prepared by the chief financial officer of Borrower (or in his
or her absence, a responsible senior officer of Borrower) and,
as applicable, each other Loan Party as to consistency with
prior financial reports and accounting periods, accuracy and
fairness of presentation;
e. together with each set of financial statements furnished under
subsections (c) and (d) above, furnish a certificate
substantially in the form of Exhibit A attached hereto, signed
by the chief financial officer of Borrower stating that such
financial statements are accurate and complete (subject to
normal year-end adjustments), that he has reviewed the Loan
Documents, that no Event of Default exists at the end of such
fiscal quarter or calendar month, as applicable, and
reflecting the compliance by Borrower (together with
reasonable detail of the calculations) with the financial
covenants set forth herein;
f. during any period of time the Facility Usage is less than
$2,000,000, as soon as available, and in any event, within
forty-five (45) days after and as of the end of each fiscal
quarter, including the last such reporting period of each
fiscal year of Borrower, agings of the accounts receivable and
accounts payable of Borrower;
g. during any period of time the Facility Usage is equal to or
greater than $2,000,000, as soon as available, and in any
event, within thirty (30) days after and as of the end of each
calendar month, including the last such reporting period of
each fiscal year of Borrower, agings of the accounts
receivable and accounts payable of Borrower;
h. simultaneously with the financial statements to be delivered
to Bank pursuant to subsections (c) and (d) above, as
applicable, a Borrowing Base Certificate substantially in the
form attached hereto as Exhibit B;
i. as soon as available, and in any event within ninety (90) days
after the end of each fiscal year, a business and financial
plan of Borrower, in form satisfactory to Bank, prepared by
the chief financial officer of Borrower, setting forth
financial projections and budget for Borrower for the fiscal
year in which such plan is delivered to Bank;
j. promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements
sent by any Loan Party to its stockholders and all
registration statements, periodic reports and other statements
and schedules filed by any Loan Party with any securities
exchange, the Securities and Exchange Commission or any
similar governmental authority; and
k. promptly, and in form and detail satisfactory to Bank, such
other information as Bank may request from time to time.
4.4 FINANCIAL COVENANTS. Maintain all financial covenants set forth below
(for purposes of the financial covenants, definitions for capitalized
terms not otherwise defined in this Agreement follow the covenants):
TANGIBLE NET WORTH. Maintain a Tangible Net Worth at all times of not
LESS than $100,000,000.
QUICK RATIO. Maintain a Quick Ratio at all times of not LESS than
1.5 to 1.0.
10
"AFFILIATE RECEIVABLES" shall mean, as of any time of determination,
any amounts in respect of loans or advances owing to Borrower or
another Loan Party from any of its Subsidiaries or Affiliates (other
than Affiliates which are Guarantors of all Indebtedness) at such time.
"CURRENT LIABILITIES" shall mean, in respect of a Person and as of any
applicable date of determination, all liabilities of such Person that
should be classified as current in accordance with GAAP.
"QUICK RATIO" shall mean, with respect to any Person, and as to any
applicable date of determination, the ratio of (i) the sum of all
unrestricted cash of such Person plus all investments of such Person
made in accordance with the investment policy of such Person that has
been reviewed and approved by Bank prior to the date hereof plus all
accounts receivable of such Person (in each case only to the extent
such case, investments, or accounts receivable is not subject to a
lien, pledge, mortgage or security interest, other than those in favor
of Bank) to (ii) the sum of the Current Liabilities of such Person on
such date plus the outstanding principal amount of the Indebtedness on
such date.
"TANGIBLE NET WORTh" shall mean, with respect to any Person and as of
any applicable date of determination, (a) the net book value of all
assets of such Person (excluding Affiliate Receivables, patent rights,
trademarks, trade names, franchises, copyrights, licenses, goodwill,
and all other intangible assets of such Person), after all appropriate
deductions in accordance with GAAP including, without limitation,
reserves for doubtful receivables, obsolescence, depreciation and
amortization, LESS (b) all Debt of such Person at such time.
4.5 FURTHER ASSURANCES; FINANCING STATEMENTS. Furnish Bank, at Borrower's
cost and expense, upon Bank's request and in form satisfactory to Bank
(and execute and deliver or cause to be executed and delivered), such
additional pledges, assignments, mortgages, Lien instruments or other
security instruments, consents, acknowledgments, subordinations and
financing statements covering any or all of the Collateral required by
Bank to secure any Indebtedness together with such other documents or
instruments as Bank may require to effectuate more fully the purposes
of any Loan Document.
4.6 INSURANCE. Maintain insurance coverage by insurers acceptable to Bank
on its physical assets and against other business risks in such amounts
and of such types as are customarily carried by companies similar in
size and nature or as may otherwise be required by Bank, and in the
event of acquisition of additional property, real or personal, or of
the incurrence of additional risks of any nature, increase such
insurance coverage in such manner and to such extent as prudent
business judgment and present practice would dictate; and in the case
of all policies covering property subject to any Loan Document or
property in which the Bank shall have a Lien of any kind whatsoever,
other than those policies protecting against casualty liabilities to
strangers, all such insurance policies shall provide that the loss
payable thereunder shall be payable to Borrower (or other Person
providing Collateral) and Bank, with mortgagee's clauses in favor of
and satisfactory to Bank for all such policies, and such policies shall
also provide that they may not be canceled or changed without thirty
(30) days' prior written notice to Bank. Upon the request of Bank, all
of said policies, or copies thereof, including all endorsements thereon
and those required hereunder, shall be deposited with Bank.
4.7 COMPLIANCE WITH ERISA. In the event that any Loan Party or any of its
Subsidiaries maintain(s) or establish(es) a Pension Plan subject to
ERISA, (a) comply in all material respects with all requirements
imposed by ERISA as presently in effect or hereafter promulgated,
including, but not limited to, the minimum funding requirements
thereof; (b) promptly notify Bank upon the occurrence of a "reportable
event" or "prohibited transaction" within the meaning of ERISA, or that
the PBGC or any Loan Party has instituted or will institute proceedings
to terminate any Pension Plan, together with a copy of any proposed
notice of such event which may be required to be filed with the PBGC;
and (c) furnish to Bank (or cause the plan administrator to furnish
Bank) a copy of the annual return (including all schedules and
attachments) for each Pension Plan covered by ERISA, and filed with the
Internal Revenue Service by any Loan Party not later than ten (10) days
after such report has been so filed.
4.8 ENVIRONMENTAL COVENANTS. Comply with all applicable Environmental Laws,
and maintain all permits, licenses and approvals required under
applicable Environmental Laws, where the failure to do so could have a
Material Adverse Effect. Promptly notify Bank, in writing, as soon as
Borrower becomes aware of any condition or circumstance which makes any
of the environmental representations or warranties set forth in this
Agreement incomplete, incorrect or inaccurate in any material respect
as of any date;
11
and promptly provide to Bank, immediately upon receipt thereof,
copies of any material correspondence, notice, pleading, citation,
indictment, complaint, order, decree, or other document from any
source asserting or alleging a violation of any Environmental Law
by any Loan Party, or of any circumstance or condition which requires
or may require, a financial contribution by any Loan Party, or a
clean-up, removal, remedial action or other response by or on behalf
of any Loan Party, under applicable Environmental Law, or which seeks
damages or civil, criminal or punitive penalties from any Loan Party
or any violation or alleged violation of any Environmental Law.
Borrower hereby agrees to indemnify, defend and hold Bank, and any of
Bank's past, present and future officers, directors, shareholders,
employees, representatives and consultants, harmless from any and all
claims, losses, damages, suits, penalties, costs, liabilities,
obligations and expenses (including, without limitation, reasonable
legal expenses and attorneys' fees, whether inside or outside counsel
is used) incurred or arising out of any claim, loss or damage of any
property, injuries to or death of any persons, contamination of or
adverse effects on the environment, or other violation of any
applicable Environmental Law, in any case, caused by any Loan Party or
in any way related to any property owned or operated by any Loan Party
or due to any acts of any Loan Party or any of its officers,
directors, shareholders, employees, consultants and/or representatives
INCLUDING ANY CLAIMS, LOSSES, DAMAGES, SUITS, PENALTIES, COSTS,
LIABILITIES, OBLIGATIONS OR EXPENSES, RESULTING FROM BANK'S OWN
NEGLIGENCE OR ARISING OUT OF ANY CLAIM OR THEORY OF STRICT LIABILITY;
provided however, that the foregoing indemnification shall not be
applicable, and Borrower shall not be liable for any such claims,
losses, damages, suits, penalties, costs, liabilities, obligations or
expenses, to the extent (but only to the extent) the same arise or
result from any gross negligence or willful misconduct of Bank or
any of its agents or employees.
4.9 BANK ACCOUNTS. Borrower will maintain with Bank all of its primary bank
accounts, money market accounts, and similar accounts as additional
security for the Indebtedness. Borrower may freely withdraw funds from
such accounts with Bank and (subject to the other requirements hereof)
may choose to invest such funds in investments other than bank
accounts, money market or similar accounts, or certificates of deposit,
it being understood that any such accounts maintained with Bank and any
certificates of deposit purchased from Bank are not frozen or
restricted (except as expressly provided therein or in any Loan
Documents to which they are subject) or subject to any minimum balance
requirements.
4.10 ACCOUNTS RECEIVABLE AUDIT. Within thirty (30) days of the first
Revolving Loan made hereunder, permit Bank or its representatives to
conduct an audit of Borrower's accounts receivable. Borrower will
permit Bank or its representatives to conduct one audit of Borrower's
accounts receivable in each calendar year; provided that, during the
continuation of any Event of Default, Borrower will permit Bank to
conduct one or more additional audits of Borrower's accounts receivable
upon Bank's request. All audits conducted pursuant to this Section 4.10
shall be at Borrower's expense.
SECTION 5 . NEGATIVE COVENANTS
Borrower covenants and agrees that, until all instruments and agreements
evidencing each and every loan, Letter of Credit and other financial
accommodation by the Bank to the Borrower or any Loan Party are fully
discharged and terminated, and thereafter, so long as any Indebtedness
remains outstanding, it will not, and it will not allow any Loan Party within
its control or under common control to, without the prior written consent of
the Bank:
5.1 CAPITAL STRUCTURE; BUSINESS OBJECTS OR PURPOSE; MERGERS; ASSET
DISPOSITION; ACQUISITIONS. Other than any repurchase, acquisition or
redemption of any shares of its capital stock payable upon an
employee's termination pursuant to its employee stock option, purchase
acquire or redeem any of its equity ownership interests; or enter into
any reorganization or recapitalization if such Loan Party is not
obtaining new equity in connection with such reorganization or
recapitalization; or reclassify its equity ownership interests; or make
any material change in its capital structure or general business
objects or purpose; or change its name, or enter into any merger or
consolidation, whether or not the surviving entity thereunder; or sell,
lease, transfer, relocate or dispose of all, substantially all, or any
material part of its assets (whether in a single transaction or in a
series of transactions); or purchase or otherwise acquire or become
obligated for the purchase of all or substantially all of the assets or
business interests of any Person or any shares of stock or other
ownership interests of any Person or in any other manner effectuate or
attempt to effectuate an expansion of present business by acquisition
if either (a) the consideration paid by Borrower and the other Loan
Parties in connection with such acquisition, when aggregated with all
the consideration paid by Borrower and the other Loan Parties in
connection with all other acquisitions made by the Loan Parties,
exceeds $30,000,000 or (b) the cash paid by Borrower and the other Loan
Parties in connection with such acquisition, when aggregated with all
cash paid by Borrower and the other Loan Parties in connection with all
other acquisitions made by the Loan Parties, exceeds $15,000,000.
12
5.2 GUARANTIES. Guarantee, endorse, or otherwise become secondarily liable
for or upon the obligations or Debt of others (whether directly or
indirectly), except guaranties in favor of and satisfactory to Bank and
endorsements for deposit or collection in the ordinary course of
business.
5.3 DEBT. Become or remain obligated for any Debt, except: Indebtedness and
other Debt from time to time outstanding and owing to Bank; current
unsecured trade, utility or non-extraordinary accounts payable arising
in the ordinary course of business; Subordinated Debt; purchase money
indebtedness incurred for the purpose of purchasing or acquiring fixed
assets, so long as the amount of such purchase money indebtedness
incurred by Borrower and its Subsidiaries does not exceed five hundred
thousand dollars ($500,000), in the aggregate, for any fiscal year of
Borrower; and Debt (including, without limitation, capitalized lease
obligations) outstanding as of the date hereof if specifically
disclosed in the most recent financial statements delivered to the Bank
prior to the date hereof.
5.4 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien upon
any of its property or assets, whether now owned or hereafter acquired,
except for Permitted Encumbrances.
5.5 INVESTMENTS; EXTENSIONS OF CREDIT. Make or allow to remain outstanding
any investment (whether such investment shall be of the character of
investment in shares of stock, evidences of indebtedness or other
securities or otherwise) in, or any loans, advances or extensions of
credit to, any Person, other than (a) Borrower's current ownership
interests in those Subsidiaries of Borrower, if any, which are
specifically disclosed in the definition of Subsidiaries, and (b) any
investment in direct obligations of the United States of America or any
agency thereof, or in certificates of deposit issued by Bank,
maintained consistent with Borrower's or such Subsidiary's business
practices prior to the date hereof; provided, that no such investment
shall mature more than one (1) year after the date when made or the
issuance thereof, and (c) marketable, traded stock and other securities
issued by entities organized under the laws of the United States or a
state thereof, and (d) acquisitions permitted pursuant to Section 5.1.
5.6 PENSION PLANS. Except in compliance with this Agreement, enter into,
maintain, or make contribution to, directly or indirectly, any Pension
Plan that is subject to ERISA.
5.7 SUBORDINATE INDEBTEDNESS. Subordinate any indebtedness due to it from
any Person to indebtedness of other creditors of such Person.
5.8 CAPITAL EXPENDITURES. Make Capital Expenditures or commit to make
Capital Expenditures, in an aggregate amount that exceeds $15,000,000
in any fiscal year. "CAPITAL EXPENDITURE" shall mean any expenditure by
a Person for (a) an asset which will be used in a year or years
subsequent to the year in which the expenditure is made and which asset
is properly classified in relevant financial statements of such Person
as equipment, real property, a fixed asset or a similar type of
capitalized asset in accordance with GAAP or (b) an asset relating to
or acquired in connection with an acquired business, and any and all
acquisition costs related to (a) or (b) above.
5.9 DIVIDENDS. Declare or pay dividends on, or make any other distribution
(whether by reduction of capital or otherwise) in respect of any shares
of its capital stock or other ownership interests, except (a) dividends
payable by a Subsidiary of Borrower to Borrower or by the Subsidiary of
another Loan Party to such other Loan Party; (b) dividends payable
solely in stock; and (c) the redemption, repurchase or acquisition of
any shares of its capital stock permitted under Section 5.1.
SECTION 6. EVENTS OF DEFAULT
6.1 EVENTS OF DEFAULT. The occurrence or existence of any of the following
conditions or events shall constitute an "Event of Default" hereunder:
(a) non-payment of any principal, interest or other sums due upon the
Indebtedness at such time the same becomes due or, if applicable, upon
expiration of the grace period, if any;
(b) default in the observance or performance of any of the conditions,
covenants or agreements of any Loan Party set forth in Section 4.3(a)
or Section 5 of this Agreement and such default continues unremedied
for a period of ten (10) days;
(c) default in the observance or performance (other than as referred to
in subsections (a) or (b) above) of any of the conditions, covenants or
agreements of any Loan Party set forth in this Agreement or any other
Loan Document and such default continues unremedied for a period of ten
(10) days after notice of such failure is given by Bank to Borrower;
13
(d) any representation or warranty made by any Loan Party in any Loan
Document shall be untrue or incorrect in any material respect;
(e) any default or event of default, as the case may be, shall occur
under any other Loan Document and shall continue beyond the applicable
grace period, if any;
(f) any default by any Loan Party in the payment of any Debt in excess
of $500,000 (other than the Indebtedness), or in the observance or
performance of any conditions, covenants or agreements related or given
with respect thereto and, in each such case, continuation thereof
beyond any applicable grace or cure period;
(g) the rendering of one or more judgments or decrees for the payment
of money in excess of $500,000, against any Loan Party, and such
judgment(s) or decree(s) shall remain unvacated, unbanded or unstayed,
by appeal or otherwise, for a period of sixty (60) consecutive days
after the date of entry;
(h) sale or other disposition by any Loan Party of any substantial
portion of its assets or property or voluntary suspension of the
transaction of business by any Loan Party or the dissolution,
termination of existence, insolvency, business failure or assignment
for the benefit of creditors of or by any Loan Party, or commencement
of any proceedings under any state or federal bankruptcy or insolvency
law or laws for the relief of debtors by or against any Loan Party and
the same is either initiated by or consented to by such Loan Party or
otherwise remains undismissed for sixty (60) days, or the appointment
of a receiver, trustee, court appointee, sequestrator or otherwise, for
all or any substantial party of the property of any Loan Party, and the
same is not discharged within sixty (60) days; and
(i) any change in the management, ownership or control of Borrower,
whether by reason of incapacity, death, resignation, termination or
otherwise which, in Bank's sole judgment, could become a Material
Adverse Effect;
6.2 REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence and at any time
during the existence or continuance of any Event of Default, but
without impairing or otherwise limiting the Bank's right to demand
payment of all or any portion of the Indebtedness which is payable
on demand, at Bank's option, Bank may give notice to Borrower
declaring all or any portion of the Indebtedness remaining unpaid
and outstanding, whether under the notes evidencing the Indebtedness
or otherwise, to be due and payable in full without presentation,
demand, protest, notice of dishonor, notice of intent to accelerate,
notice of acceleration or other notice of any kind, all of which are
hereby expressly waived, whereupon all such Indebtedness shall
immediately become due and payable. Furthermore, upon the occurrence
of a Default or Event of Default and at any time during the
existence or continuance of any Default or Event of Default, but
without impairing or otherwise limiting the right of Bank, if
reserved under any Loan Document, to make or withhold financial
accommodations at its discretion, to the extent not yet disbursed,
any commitment by Bank to make any further loans or, if applicable,
issue any further Letters of Credit shall automatically terminate.
The foregoing rights and remedies are in addition to any other
rights, remedies and privileges Bank may otherwise have or which may
be available to it, whether under this Agreement, any other Loan
Document, by law, or otherwise.
6.3 WAIVER OF DEFAULTS. No Default or Event of Default shall be waived by
Bank except in a written instrument specifying the scope and terms of
such waiver and signed by an authorized officer of Bank, and such
waiver and shall be effective only for the specific time(s) and
purpose(s) given. No single or partial exercise of any right, power or
privilege hereunder, or any delay in the exercise thereof, shall
preclude other or further exercise of Bank's rights. No waiver of any
Default or Event of Default shall extend to any other or further
Default or Event of Default. No forbearance on the part of Bank in
enforcing any of Bank's rights or remedies under any Loan Document
shall constitute a waiver of any of its rights or remedies. Borrower
expressly agrees that this Section may not be waived or modified by
Bank by course of performance, estoppel or otherwise.
SECTION 7. MISCELLANEOUS
7.1 GOVERNING LAW. Each Loan Document shall be deemed to have been
delivered in and shall be governed by and construed and enforced in
accordance with the laws of the State of Texas, except to the extent
that the UCC, other personal property law or real property law of
another jurisdiction where Collateral is located is applicable, and
except to the extent expressed to the contrary in any Loan Document.
14
7.2 COSTS AND EXPENSES. Borrower shall pay Bank, on demand, all costs and
expenses, including, without limitation, reasonable attorneys' fees and
legal expenses (whether inside or outside counsel is used), incurred by
Bank in perfecting, revising, protecting or enforcing any of its rights
or remedies against any Loan Party or any Collateral, or otherwise
incurred by Bank in connection with any Default or Event of Default or
the enforcement of the Loan Documents or the Indebtedness. Following
Bank's demand upon Borrower for the payment of any such costs and
expenses, and until the same are paid in full, the unpaid amount of
such costs and expenses shall constitute Indebtedness and shall bear
interest at the highest default rate of interest provided in any Loan
Document.
7.3 SUCCESSORS AND ASSIGNS; PARTICIPATION. This Agreement shall be binding
upon and shall inure to the benefit of Borrower and Bank and their
respective successors and assigns. The foregoing shall not authorize
any assignment or transfer by Borrower of any of its respective rights,
duties or obligations hereunder, such assignments or transfers being
expressly prohibited. Bank, however, may freely assign, whether by
assignment, participation or otherwise, its rights and obligations
hereunder, and is hereby authorized to disclose to any such assignee or
participant (or proposed assignee or participant) any financial or
other information in its knowledge or possession regarding any Loan
Party or the Indebtedness.
7.4 RELIANCE ON AND SURVIVAL OF VARIOUS PROVISIONS. All terms, covenants,
agreements, representations and warranties of any Loan Party made in
any Loan Document, or in any certificate, report, financial statement
or other document furnished by or on behalf of any Loan Party in
connection with any Loan Document, shall be deemed to have been relied
upon by Bank, notwithstanding any investigation heretofore or hereafter
made by Bank or on Bank's behalf, and those covenants and agreements of
Borrower set forth in SECTION 4.8 hereof (together with any other
indemnities of Borrower contained elsewhere in any Loan Document) shall
survive the termination of this Agreement and the repayment in full of
the Indebtedness.
7.5 COMPLETE AGREEMENT; CONFLICTS. This Agreement, the other Loan
Documents, and any commitment letter previously issued by Bank with
respect thereto (provided that in the event of any inconsistency or
conflict between this Agreement and the other Loan Documents, on one
hand, and such commitment letter, on the other hand, this Agreement and
the Loan Documents shall control), contain the entire agreement of the
parties thereto and supercede all prior agreements and understandings
related to the subject matter hereof, and none of the parties shall be
bound by anything not expressed in writing. In the event that, and to
the extent that, any of the terms, conditions or provisions of any of
the other Loan Documents are inconsistent with or in conflict with any
of the terms, conditions or provisions of this Agreement, the
applicable terms, conditions and provisions of this Agreement shall
govern and control. Any amendments or modifications hereto shall be in
writing signed by all parties.
7.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the
same agreement.
7.7 WAIVER OF JURY TRIAL. BANK AND BORROWER EACH ACKNOWLEDGE THAT THE RIGHT
TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED.
EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO
CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY
JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS OR ANY
COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR
ACTION OF EITHER OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE
BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY BANK OR BORROWER,
EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.
7.8 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER "LOAN
AGREEMENTS" (AS DEFINED IN SECTION 26.02(A)(2) OF THE TEXAS BUSINESS &
COMMERCE CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES, AND THIS AGREEMENT AND THE OTHER WRITTEN LOAN AGREEMENTS MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
WITNESS the due execution hereof as of the day and year first above written.
COMERICA BANK - TEXAS SILICON LABORATORIES INC.
By: /s/ Julie A. Smith By: /s/ John W. McGovern
--------------------------- ----------------------------
Name: Julie A. Smith Name: John W. McGovern
----------------------------
Title: Vice President Title: Chief Financial Officer
----------------------------
By: /s/ Navdeep Sooch
----------------------------
Name: Navdeep Sooch
----------------------------
Title: Chairman and Chief
Executive Officer
----------------------------
Address: 504 Congress Avenue Address: 4635 Boston Lane
Suite 320 Austin, Texas 78735
Austin, Texas 78701 ___________________
Attn: Julie Smith Attn: ___________________
Telefax No.: (512) 427-7120 Telefax No.: ___________________
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EXHIBIT A
COMPLIANCE CERTIFICATE
Reference is made to that certain Credit Agreement between SILICON
LABORATORIES INC. ("Borrower") and COMERICA BANK-TEXAS, dated as of September
5, 2001 (the "Credit Agreement"). The terms used herein shall have the same
meanings as provided therefor in the Credit Agreement, unless the context
hereof otherwise requires or provides.
The undersigned HEREBY CERTIFIES that he is the duly elected and
qualified officer of Borrower holding the office set forth beneath his
signature below, and as such is the chief financial officer of Borrower, AND
DOES FURTHER CERTIFY, on behalf of Borrower that:
1. Attached hereto are complete and detailed consolidated
financial statements of Borrower and the other Loan Parties as of, and for
the last day of _________________, ______ (the "Reporting Date"), which are
accurate and complete (subject to normal year-end adjustments).
2. He has reviewed the Loan Documents, and that to the best of
his knowledge as of the Reporting Date and the date hereof, no Event of
Default existed or exists, except as set forth in Schedule I attached hereto.
(If no Schedule I is attached, then such exception does not apply and no
Event of Defaults exist).
3. Set forth below is the calculation of the financial
covenants of the Credit Agreement determined as of the Reporting Date, which
calculations have been made in accordance with the requirements of the Credit
Agreement and which are true and correct in all respects:
TANGIBLE NET WORTH. MAINTAIN A TANGIBLE NET WORTH AT ALL
TIMES, OF NOT LESS THAN $100,000,000.
$________________
QUICK RATIO. MAINTAIN A QUICK RATIO OF NOT LESS THAN 1.5 TO 1.
_____ to 1.0
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
_____________, ________.
Signature
----------------------------------------
Name:
Title:
Compliance Certificate EXHIBIT A - Page 1 of 1
EXHIBIT B
Accounts Receivable
Borrowing Base Certificate for Period Beginning: ___________ and Ending
_____________ ("Current Period") Credit Agreement dated as of September 5,
2001 (the "Agreement") by and between Silicon Laboratories Inc.. ("Borrower")
and Comerica Bank-Texas. Capitalized terms used and are otherwise defined
herein have the meanings given them in the Agreement.
Accounts Receivable
1. Balance of Accounts as of the end of the Current Period $________
Ineligible Accounts as of the end of the Current Period:
2. Accounts more than 90 days from invoice date
$___________
3. All of the Accounts of Account Debtor(s) if 25% of the
dollar amount of all Accounts of such Account Debtor(s)
are more than 90 days from invoice date
$___________
4. That portion of Accounts of Account Debtor(s) (other than
PC-Tel) in excess of 25% of the dollar amount of the total
Accounts for the Current Period (Line 1), except to the
extent such portions have previously been excluded under other
provisions hereof.
$___________
5. That portion of Accounts of PC-Tel in excess of 50% of the
total amount of the total Accounts for the Current Period
(Line 1), except to the extent such portions have previously
been excluded under other provisions hereof.
$___________
6. Intercompany and Affiliate Accounts ____________
7. Government Accounts
8. Accounts subject to any dispute or set off. ____________
9. Other ineligible Accounts ____________
10. Total Ineligible Accounts for the Current Period
(Add Lines 2 through 9) $___________
11. Total Eligible Accounts for the Current Period
(Line 1 - Line 10) $___________
12. Total Domestic Eligible Accounts
$___________
13. Multiplied by 80%
14. Total Foreign Eligible Accounts
$___________
15. Multiplied by 90%
16. Sum of 13 and 15 equals Borrowing Base of the
end of the Current Period
17. Loan balance per last Borrowing Base Report $___________
18. Less net payments (see attached tape) $___________
19. Plus Master Revolving Note advances $___________
20. Other Ineligible Accounts
$___________
21. Credit Card Exposure $___________
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Accounts Receivable EXHIBIT B - Page 1 of 2
22. Letter of Credit Liabilities
$___________
23. Total Balance
(Line 17 minus line 18 plus lines 19, 20 , 21 and 22) $___________
24. Total Borrowing Base (Line 16) minus Total Balance
(Line 23) which equals the Amount Available for Borrowing,
subject to the terms of the Agreement, if positive; or subject
to the terms of the Agreement, amount to be repaid, if negative:
$___________
The undersigned hereby certifies that the above information and computations
are true and correct as of the date hereof and may be relied upon by you as a
basis for advancing any credit to us, and that no Default or Event of Default
has occurred and is continuing under the Agreement.
SILICON LABORATORIES INC.
By:
-------------------------------------------------------
Name:
-----------------------------------------------------
Title:
----------------------------------------------------
Date:
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Accounts Receivable EXHIBIT B - Page 2 of 2
Exhibit 10.3
[COMERICA LOGO] SECURITY AGREEMENT
(ALL ASSETS)
As of September 5, 2001, for value received, the undersigned ("Debtor")
pledges, assigns and grants to Comerica Bank-Texas, a Texas banking
association ("Bank"), whose address is P. 0. Box 650282, Dallas, Texas
75265-0282, Attention: Julie Smith, Mail Code MC 6571, a continuing security
interest and lien (any pledge, assignment, security interest or other lien
arising hereunder is sometimes referred to herein as a "security interest")
in the Collateral (as defined below) to secure payment when due, whether by
stated maturity, demand, acceleration or otherwise, of all existing and
future indebtedness ("Indebtedness") to the Bank of Debtor. Indebtedness
includes without limit any and all obligations or liabilities of the Debtor to
the Bank, whether absolute or contingent, direct or indirect, voluntary or
involuntary, liquidated or unliquidated, joint or several, known or unknown,
originally payable to the Bank or to a third party and subsequently acquired
by the Bank including, without limitation, any late charges, loan fees or
charges, and overdraft indebtedness, any and all obligations or liabilities
for which the Debtor would otherwise be liable to the Bank were it not for
the invalidity or unenforceability of them by reason of any bankruptcy,
insolvency or other law, or for any other reason; any and all amendments,
modifications, renewals and/or extensions of any of the above; all costs
incurred by Bank in establishing, determining, continuing, or defending the
validity or priority of any security interest, or in pursuing its rights and
remedies under this Agreement or under any other agreement between Bank and
Debtor or in connection with any proceeding involving Bank as a result of any
financial accommodation to Borrower and/or Debtor; and all other costs of
collecting Indebtedness, including without limit attorneys' fees. Debtor
agrees to pay Bank all such costs incurred by the Bank, immediately upon
demand, and until paid all costs shall bear interest at the highest per annum
rate applicable to any of the Indebtedness, but not in excess of the maximum
rate permitted by law. Any reference in this Agreement to attorneys' fees
shall be deemed a reference to reasonable fees, costs, and expenses of both
in-house and outside counsel and paralegals, whether inside or outside
counsel is used, whether or not a suit or action is instituted, and to court
costs if a suit or action is instituted, and whether attorneys' fees or court
costs are incurred at the trial court level, on appeal, in a bankruptcy,
administrative or probate proceeding or otherwise.
Debtor further covenants, agrees, represents and warrants as follows:
1. COLLATERAL shall mean all of the following property Debtor now or later
owns or has an interest in, wherever located:
(a) all Accounts Receivable (for purposes of this Agreement,
"Accounts Receivable" consists of all accounts, general
intangibles, chattel paper (including without limit electronic
chattel paper and tangible chattel paper), contract rights,
deposit accounts, documents, instruments and rights to
payment evidenced by chattel paper, documents or instruments,
health care insurance receivables, commercial tort claims,
letters of credit, letter of credit rights, supporting
obligations, and rights to payment for money or funds advanced
or sold),
(b) all Inventory,
(c) all Equipment and Fixtures,
(d) all goods, instruments, documents, policies and certificates
of insurance, deposit accounts, money, investment property or
other property (except real property which is not a fixture)
which are now or later in possession or control of Bank, or
as to which Bank now or later controls possession by
documents or otherwise, and
(e) all additions, attachments, accessions, parts, replacements,
substitutions, renewals, interest, dividends, distributions,
rights of any kind (including but not limited to stock splits,
stock rights, voting and preferential rights), products, and
proceeds of or pertaining to the above including, without
limit, cash or other property which were proceeds and are
recovered by a bankruptcy trustee or otherwise as a
preferential transfer by Debtor.
In the definition of Collateral, a reference to a type of collateral
shall not be limited by a separate reference to a more specific or
narrower type of that collateral. "Collateral" shall EXCLUDE
intellectual property. Intellectual property includes "Proprietary
Information". "Proprietary Information" shall mean trade secrets,
confidential knowledge, data, or any other proprietary information of
the Debtor and each of its subsidiaries or affiliated companies. By
way of illustration but not limitation, "Proprietary Information"
includes (a) inventions, trade secrets, ideas, concepts, processes,
formulas, data, lists, software programs, all other works of
authorship, mask works, proprietary test tooling, know-how,
improvements, discoveries, developments, designs, and techniques
relating to the business or proposed business of the Debtor whether
or not any of the foregoing is or are patentable, copyrightable, or
registrable under any intellectual property laws and (b) information
owned by the Debtor or licensed from third parties regarding plans
for research, development, products, services, marketing and selling,
business plans, budgets and unpublished financial statements, licenses,
prices and costs, suppliers, customers, customer lists (except to the
extent necessary for Bank to perfect or exercise its lien on Debtor's
Accounts Receivable), information regarding the skills and compensation
of other employees of the Debtor and (c) intellectual property of third
parties in Debtor's possession. Notwithstanding anything in this
Security Agreement, the usage of the terms "rights of any kind" or
"general intangibles" will not serve to diminish to exclusion of
Debtor's Intellectual Property rights from the definition of
"Collateral."
2. WARRANTIES, COVENANTS AND AGREEMENTS. Debtor warrants, covenants and
agrees as follows:
2.1 Debtor shall furnish to Bank, in form and at intervals as
Bank may request, any information Bank may reasonably request
and allow Bank to examine, inspect, and copy any of Debtor's
books and records. Debtor shall, at the request of Bank, mark
its records and the Collateral to clearly indicate the
security interest of Bank under this Agreement.
2.2 At the time any Collateral becomes, or is represented to be,
subject to a security interest in favor of Bank, Debtor shall
be deemed to have warranted that (a) Debtor is the lawful
owner of the Collateral and has the right and authority to
subject it to a security interest granted to Bank; (b) none of
the Collateral is subject to any security interest other than
that in favor of Bank; (c) there are no financing statements
on file, other than in favor of Bank; (d) no person, other
than Bank, has possession or control (as defined in the
Uniform Commercial Code) of any Collateral of such nature that
perfection of a security interest may be accomplished by
control; and (e) Debtor acquired its rights in the Collateral
in the ordinary course of its business.
2.3 Debtor will keep the Collateral free at all times from all
claims, liens, security interests and encumbrances other than
those in favor of Bank. Debtor will not, without the prior
written consent of Bank, sell, transfer, lease or grant
control to any person other than Bank over, or permit to be
sold, transferred, leased or controlled (by a person other
than Bank), any or all of the Collateral, except for Inventory
in the ordinary course of its business and will not return any
Inventory to its supplier. Bank or its representatives may at
all reasonable times inspect the Collateral and may enter upon
all premises where the Collateral is kept or might be located.
2.4 Debtor will do all acts and will execute or cause to be
executed all writings requested by Bank to establish,
maintain and continue an exclusive, perfected and first
security interest of Bank in the Collateral. Debtor agrees
that Bank has no obligation to acquire or perfect any lien on
or security interest in any asset(s), whether realty or
personalty, to secure payment of the Indebtedness, and Debtor
is not relying upon assets in which the Bank may have a lien
or security interest for payment of the Indebtedness.
2.5 Debtor will pay within the time that they can be paid without
interest or penalty all taxes, assessments and similar charges
which at any time are or may become a lien, charge, or
encumbrance upon any Collateral, except to the extent
contested in good faith and bonded in a manner satisfactory
to Bank. If Debtor fails to pay any of these taxes,
assessments, or other charges in the time provided above, Bank
has the option (but not the obligation) to do so, and Debtor
agrees to repay all amounts so expended by Bank immediately
upon demand, together with interest at the highest lawful
default rate which could be charged by Bank on any
Indebtedness.
2.6 Debtor will keep the Collateral in good condition and will
protect it from loss, damage, or deterioration from any cause.
Debtor has and will maintain at all times (a) with respect to
the Collateral, insurance under an "all risk" policy against
fire and other risks customarily insured against, and (b)
public liability insurance and other insurance as may be
required by law or reasonably required by Bank, all of which
insurance shall be in amount, form and content, and written by
companies as may be satisfactory to Bank, containing a
lender's loss payable endorsement acceptable to Bank. Debtor
will deliver to Bank immediately upon demand evidence
satisfactory to Bank that the required insurance has been
procured. If Debtor fails to maintain satisfactory insurance,
Bank has the option (but not the obligation) to do so and
Debtor agrees to repay all amounts so expended by Bank
immediately upon demand, together with interest at the highest
lawful default rate which could be charged by Bank on any
Indebtedness. Notwithstanding the foregoing, Borrower is under
no obligation to obtain foreign accounts receivable credit
insurance.
2.7 Debtor will do all commercially reasonable acts and will
execute all writings requested by Bank to perform, enforce
performance of, and collect all Accounts Receivable. Debtor
shall neither make nor permit any modification, compromise or
substitution for any Account Receivable without the prior
written consent of Bank. Debtor shall, at Bank's request,
arrange for verification of Accounts Receivable directly with
account debtors or by other methods acceptable to Bank.
1
2.8 Debtor at all times shall be in strict compliance with all
applicable laws, including without limit any laws, ordinances,
directives, orders, statutes, or regulations an object of
which is to regulate or improve health, safety, or the
environment ("Environmental Laws").
2.9 If Bank, acting in its sole discretion, redelivers Collateral
to Debtor or Debtor's designee for the purpose of (a) the
ultimate sale or exchange thereof; or (b) presentation,
collection, renewal, or registration of transfer thereof; or
(c) loading, unloading, storing, shipping, transshipping,
manufacturing, processing or otherwise dealing with it
preliminary to sale or exchange; such redelivery shall be in
trust for the benefit of Bank and shall not constitute a
release of Bank's security interest in it or in the proceeds
or products of it unless Bank specifically so agrees in
writing. If Debtor requests any such redelivery, Debtor will
deliver with such request a duly executed financing statement
in form and substance satisfactory to Bank. Any proceeds
of Collateral coming into Debtor's possession as a result of
any such redelivery shall be held in trust for Bank and
immediately delivered to Bank for application on the
Indebtedness. Bank may (in its sole discretion) deliver any or
all of the Collateral to Debtor, and such delivery by Bank
shall discharge Bank from all liability or responsibility for
such Collateral. Bank, at its option, may require delivery of
any Collateral to Bank at any time with such endorsements or
assignments of the Collateral as Bank may request.
2.10 At any time and without notice, Bank may (a) cause any or all
of the Collateral to be transferred to its name or to the name
of its nominees, provided that any such nominee is not a
competitor of Debtor not normally in the business of serving
as a collateral trustee or related activities; (b) receive or
collect by legal proceedings or otherwise all dividends,
interest, principal payments and other sums and all other
distributions at any time payable or receivable on account of
the Collateral, and hold the same as Collateral, or apply the
same to the Indebtedness, the manner and distribution of the
application to be in the sole discretion of Bank; (c) enter
into any extension, subordination, reorganization, deposit,
merger or consolidation agreement or any other agreement
relating to or affecting the Collateral, and deposit or
surrender control of the Collateral, and accept other property
in exchange for the Collateral and hold or apply the property
or money so received pursuant to this Agreement; and (d) take
such actions in its own name or in Debtor's name as Bank, in
its sole discretion, deems necessary or appropriate to
establish exclusive control (as defined in the Uniform
Commercial Code) over any Collateral of such nature that
perfection of the Bank's security interest may be accomplished
by control.
2.11 Bank may assign any of the Indebtedness and deliver any or all
of the Collateral to its assignee, who then shall have with
respect to Collateral so delivered all the rights and powers
of Bank under this Agreement, and after that Bank shall be
fully discharged from all liability and responsibility with
respect to Collateral so delivered.
2.12 Debtor shall defend, indemnify and hold harmless Bank, its
employees, agents, shareholders, affiliates, officers, and
directors from and against any and all claims, damages, fines,
expenses, liabilities or causes of action of whatever kind,
including without limit consultant fees, legal expenses, and
attorneys' fees, suffered by any of them as a direct or
indirect result of any actual or asserted violation of any
law, including, without limit, Environmental Laws, or of any
remediation relating to any property required by any law,
including without limit Environmental Laws, INCLUDING ANY
CLAIMS, DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF
ACTION OF WHATEVER KIND RESULTING FROM BANK'S OWN NEGLIGENCE
OR ARISING OUT OF ANY CLAIM OR THEORY OF STRICT LIABILITY,
except and to the extent (but only to the extent) caused by
Bank's gross negligence or wilful misconduct.
3. COLLECTION OF PROCEEDS.
3.1 Debtor agrees to collect and enforce payment of all Collateral
until Bank shall direct Debtor to the contrary. Immediately
upon notice to Debtor by Bank and at all times after that,
Debtor agrees to fully and promptly cooperate and assist Bank
in the collection and enforcement of all Collateral and to
hold in trust for Bank all payments received in connection
with Collateral and from the sale, lease or other disposition
of any Collateral, all rights by way of suretyship or guaranty
and all rights in the nature of a lien or security interest
which Debtor now or later has regarding Collateral.
Immediately upon and after such notice, Debtor agrees to (a)
endorse to Bank and immediately deliver to Bank all payments
received on Collateral or from the sale, lease or other
disposition of any Collateral or arising from any other rights
or interests of Debtor in the Collateral, in the form received
by Debtor without commingling with any other funds, and (b)
immediately deliver to Bank all property in Debtor's
possession or later coming into Debtor's possession through
enforcement of Debtor's rights or interests in the Collateral.
Debtor irrevocably authorizes Bank or any Bank employee or
agent to endorse the name of Debtor upon any checks or other
items which are received in payment for any Collateral, and to
do any and all things necessary in order to reduce these items
to money. Bank shall have no duty as to the collection or
protection of Collateral or the proceeds of it, or as to the
preservation of any related rights, beyond the use of
reasonable care in the custody and preservation of Collateral
in the possession of Bank. Debtor agrees to take all steps
necessary to preserve rights against prior parties with
respect to the Collateral. Nothing in this Section 3.1 shall
be deemed a consent by Bank to any sale, lease or other
disposition of any Collateral.
3.2 Debtor agrees that immediately upon Bank's request, following
the occurrence of an Event of Default, the Indebtedness shall
be on a "remittance basis" as follows: Debtor shall at its
sole expense establish and maintain (and Bank, at Bank's
option may establish and maintain at Debtor's expense): (a) an
United States Post Office lock box (the "Lock Box"), to which
Bank shall have exclusive access and control. Debtor expressly
authorizes Bank, from time to time, to remove contents from
the Lock Box, for disposition in accordance with this
Agreement. Debtor agrees to notify all account debtors and
other parties obligated to Debtor that all payments made to
Debtor (other than payments by electronic funds transfer)
shall be remitted, for the credit of Debtor, to the Lock Box,
and Debtor shall include a like statement on all invoices; and
(b) a non-interest bearing deposit account with Bank which
shall be titled as designated by Bank (the "Cash Collateral
Account") to which Bank shall have exclusive access and
control. Debtor agrees to notify all account debtors and other
parties obligated to Debtor that all payments made to Debtor
by electronic funds transfer shall be remitted to the Cash
Collateral Account, and Debtor, at Bank's request, shall
include a like statement on all invoices. Debtor shall execute
all documents and authorizations as required by Bank to
establish and maintain the Lock Box and the Cash Collateral
Account.
3.3 All items or amounts which are remitted to the Lock Box, to
the Cash Collateral Account, or otherwise delivered by or for
the benefit of Debtor to Bank on account of partial or full
payment of, or with respect to, any Collateral shall, at
Bank's option, (a) be applied to the payment of the
Indebtedness, whether then due or not, in such order or at
such time of application as Bank may determine in its sole
discretion, or, (b) be deposited to the Cash Collateral
Account. Debtor agrees that Bank shall not be liable for any
loss or damage which Debtor may suffer as a result of Bank's
processing of items or its exercise of any other rights or
remedies under this Agreement, including without limitation
indirect, special or consequential damages, loss of revenues
or profits, or any claim, demand or action by any third party
arising out of or in connection with the processing of items
or the exercise of any other rights or remedies under this
Agreement. Debtor agrees to indemnify and hold Bank harmless
from and against all such third party claims, demands or
actions, and all related expenses or liabilities, including,
without limitation, attorneys' fees and INCLUDING CLAIMS,
DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF ACTION OF
WHATEVER KIND RESULTING FROM BANK'S OWN NEGLIGENCE OR ARISING
OUT OF ANY CLAIM OR THEORY OF STRICT LIABILITY except to the
extent (but only to the extent) caused by Bank's gross
negligence or willful misconduct.
4. DEFAULTS, ENFORCEMENT AND APPLICATION OF PROCEEDS.
4.1 Upon the occurrence of any Event of Default (as defined in the
Credit Agreement of even date herewith between, Debtor and
Bank, as from time to time amended modified or restated),
Debtor shall be in default under this Agreement.
4.2 Upon the occurrence of any Event of Default, Bank may at its discretion
and without prior notice to Debtor declare any or all of the
Indebtedness to be immediately due and payable, and shall have and
may exercise any right or remedy available to it including, without
limitation, any one or more of the following rights and remedies:
(a) Exercise all the rights and remedies upon default, in
foreclosure and otherwise, available to secured parties under
the provisions of the Uniform Commercial Code and other
applicable law;
(b) Institute legal proceedings to foreclose upon the lien and
security interest granted by this Agreement, to recover
judgment for all amounts then due and owing as Indebtedness,
and to collect the same out of any Collateral or the proceeds
of any sale of it;
(c) Institute legal proceedings for the sale, under the judgment
or decree of any court of competent jurisdiction, of any or
all Collateral; and/or
(d) Personally or by agents, attorneys, or appointment of a
receiver, enter upon any premises where Collateral may
then be located, and take possession of all or any of it
and/or render it unusable; and without being responsible for
loss or damage to such Collateral, hold, operate, sell, lease,
or dispose of all or any Collateral at one or more public or
private sales, leasings or other dispositions, at places and
times and on terms and conditions as Bank may deem fit,
without any previous demand or advertisement; and except as
provided in this Agreement, all notice of sale, lease or other
disposition, and advertisement, and other notice or demand,
any right or equity of redemption, and any obligation of a
prospective purchaser or lessee to inquire as to the power and
authority of Bank to sell, lease, or otherwise dispose of the
Collateral or as to the application by Bank of the proceeds of
sale or otherwise, which would otherwise be required by, or
available to Debtor under, applicable law are expressly waived
by Debtor to the fullest extent permitted.
2
At any sale pursuant to this Section 4.2, whether under the
power of sale, by virtue of judicial proceedings or otherwise,
it shall not be necessary for Bank or a public officer under
order of a court to have present physical or constructive
possession of Collateral to be sold. The recitals contained in
any conveyances and receipts made and given by Bank or the
public officer to any purchaser at any sale made pursuant to
this Agreement shall, to the extent permitted by applicable
law, conclusively establish the truth and accuracy of the
matters stated (including, without limit, as to the amounts of
the principal of and interest on the Indebtedness, the accrual
and nonpayment of it and advertisement and conduct of the
sale); and all prerequisites to the sale shall be presumed to
have been satisfied and performed. Upon any sale of any
Collateral, the receipt of the officer making the sale under
judicial proceedings or of Bank shall be sufficient discharge
to the purchaser for the purchase money, and the purchaser
shall not be obligated to see to the application of the money.
Any sale of any Collateral under this Agreement shall be a
perpetual bar against Debtor with respect to that Collateral.
At any sale or other disposition of the Collateral pursuant to
this Section 4.2, Bank disclaims all warranties which would
otherwise be given under the Uniform Commercial Code,
including without limit a disclaimer of any warranty relating
to title, possession, quiet enjoyment or the like, and Bank
may communicate these disclaimers to a purchaser at such
disposition. This disclaimer of warranties will not render the
sale commercially unreasonable.
4.3 Debtor shall at the request of Bank, notify the account
debtors or obligors of Bank's security interest in the
Collateral and direct payment of it to Bank. Bank may, itself,
upon the occurrence of any Event of Default so notify and
direct any account debtor or obligor. At the request of Bank,
whether or not an Event of Default shall have occurred, Debtor
shall immediately take such actions as the Bank shall request
to establish exclusive control (as defined in the Uniform
Commercial Code) by Bank over any Collateral which is of such
a nature that perfection of a security interest may be
accomplished by control.
4.4 The proceeds of any sale or other disposition of Collateral
authorized by this Agreement shall be applied by Bank in such
order as the Bank, in its discretion, deems appropriate
including, without limitation, the following order: first upon
all expenses authorized by the Uniform Commercial Code and all
reasonable attorneys' fees and legal expenses incurred by
Bank; the balance of the proceeds of the sale or other
disposition shall be applied in the payment of the
Indebtedness, first to interest, then to principal, then to
remaining Indebtedness and the surplus, if any, shall be paid
over to Debtor or to such other person(s) as may be entitled
to it under applicable law. Debtor shall remain liable for any
deficiency, which it shall pay to Bank immediately upon
demand. Debtor agrees that Secured Party shall be under no
obligation to accept any noncash proceeds in connection with
any sale or disposition of Collateral unless failure to do so
would be commercially unreasonable. If Secured Party agrees in
its sole discretion to accept noncash proceeds (unless the
failure to do so would be commercially unreasonable), Secured
Party may ascribe any commercially reasonable value to such
proceeds. Without limiting the foregoing, Secured Party may
apply any discount factor in determining the present value of
proceeds to be received in the future or may elect to apply
proceeds to be received in the future only as and when such
proceeds are actually received in cash by Secured Party.
4.5 Nothing in this Agreement is intended, nor shall it be
construed, to preclude Bank from pursuing any other remedy
provided by law or in equity for the collection of the
Indebtedness or for the recovery of any other sum to which
Bank may be entitled for the breach of this Agreement by
Debtor. Nothing in this Agreement shall reduce or release in
any way any rights or security interests of Bank contained in
any existing agreement between Debtor and Bank.
4.6 No waiver of default or consent to any act by Debtor shall be
effective unless in writing and signed by an authorized
officer of Bank. No waiver of any default or forbearance on
the part of Bank in enforcing any of its rights under this
Agreement shall operate as a waiver of any other default or of
the same default on a future occasion or of any rights.
4.7 Debtor (a) irrevocably appoints Bank or any agent of Bank
(which appointment is coupled with an interest) the true and
lawful attorney of Debtor (with full power of substitution) in
the name, place and stead of, and at the expense of, Debtor
and (b) authorizes Bank or any agent of Bank, in its own name,
at Debtor's expense, to do any of the following, as Bank, in
its sole discretion, deems appropriate:
(i) to demand, receive, sue for, and give receipts or
acquittances for any moneys due or to become due on
any Collateral (including, without limit, to draft
against Collateral) and to endorse any item
representing any payment on or proceeds of the
Collateral;
(ii) to execute and file in the name of and on behalf of
Debtor all financing statements or other filings or
Collateral control agreements deemed necessary or
desirable by Bank to evidence, perfect, or continue
the security interests granted in this Agreement; and
(iii) to do and perform any act on behalf of Debtor
permitted or required under this Agreement.
4.8 Upon the occurrence of an Event of Default, Debtor also
agrees, upon request of Bank, to assemble the Collateral and
make it available to Bank at any place designated by Bank
which is reasonably convenient to Bank and Debtor.
4.9 The following shall be the basis for any finder of fact's
determination of the value of any Collateral which is the
subject matter of a disposition giving rise to a calculation
of any surplus or deficiency under Section 9.615 (f) of the
Uniform Commercial Code (a) the Collateral which is the
subject matter of the disposition shall be valued in an "as
is" condition as of the date of the disposition, without any
assumption or expectation that such Collateral will be
repaired or improved in any manner; (b) the valuation shall be
based upon an assumption that the transferee of such
Collateral desires a resale of the Collateral for cash
promptly (but no later than 30 days) following the
disposition; (c) all reasonable closing costs customarily
borne by the seller in commercial sales transactions relating
to property similar to such Collateral shall be deducted
including, without limitation, brokerage commissions, tax
prorations, attorneys' fees, whether inside or outside counsel
is used, and marketing costs; (d) the value of the Collateral
which is the subject matter of the disposition shall be
further discounted to account for any estimated holding costs
associated with maintaining such Collateral pending sale (to
the extent not accounted for in (c) above), and other
maintenance, operational and ownership expenses; and (e) any
expert opinion testimony given or considered in connection
with a determination of the value of such Collateral must be
given by persons having at least 5 years experience in
appraising property similar to the Collateral and who have
conducted and prepared a complete written appraisal of such
Collateral taking into consideration the factors set forth
above. The "value" of any such Collateral shall be a factor in
determining the amount of proceeds which would have been
realized in a disposition to a transferee other than a secured
party, a person related to a secured party or a secondary
obligor under Section 9-615(f) of the Uniform Commercial
Code.
5. MISCELLANEOUS.
5.1 Until Bank is advised in writing by Debtor to the contrary,
all notices, requests and demands required under this
Agreement or by law shall be given to, or made upon, Debtor at
the first address indicated in Section 5.15 below.
5.2 Debtor will give Bank not less than 30 days (or such longer
period of time as is reasonable under the particular
circumstances) prior written notice of all contemplated
changes in Debtor's name, location, chief executive office,
principal place of business , and/or location of any
Collateral, but the giving of this notice shall not cure any
Event of Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility
under any contracts contained within the Collateral.
5.4 Bank has the right to sell, assign, transfer, negotiate or
grant participations or any interest in, any or all of the
Indebtedness and any related obligations, including without
limit this Agreement. In connection with the above, but
without limiting its ability to make other disclosures to the
full extent allowable, Bank may disclose all documents and
information which Bank now or later has relating to Debtor,
the Indebtedness or this Agreement, however obtained. Debtor
further agrees that Bank may provide information relating to
this Agreement or relating to Debtor or the Indebtedness to
the Bank's parent, affiliates, subsidiaries, and service
providers.
5.5 In addition to Bank's other rights, any indebtedness owing
from Bank to Debtor can be set off and applied by Bank on any
Indebtedness at any time(s) either before or after maturity or
demand without notice to anyone. Any such action shall not
constitute acceptance of collateral in discharge of any
portion of the Indebtedness.
5.6 Debtor, to the extent not expressly prohibited by applicable
law, waives any right to require the Bank to: (a) proceed
against any person or property; (b) give notice of the terms,
time and place of any public or private sale of personal
property security held from Borrower or Debtor or any other
person, or otherwise comply with the provisions of Section
9.611 or 9.621 of the Uniform Commercial Code; or (c) pursue
any other remedy in the Bank's power. Debtor waives notice of
acceptance of this Agreement and presentment, demand, protest,
notice of protest, dishonor, notice of dishonor, notice of
default, notice of intent to accelerate or demand payment or
notice of acceleration of any Indebtedness, any and all other
notices to which the undersigned might otherwise be entitled,
and diligence in collecting any Indebtedness, and agree(s)
that the Bank may, once or any number of times, modify the
terms of any Indebtedness, compromise, extend, increase,
accelerate, renew or forbear to enforce payment of any or all
Indebtedness, or permit Borrower to incur additional
Indebtedness, all without notice to Debtor and without
affecting in any manner the unconditional obligation of Debtor
under this Agreement. Debtor unconditionally and irrevocably
waives each and every defense and setoff of any nature which,
under principles of guaranty or otherwise, would operate to
impair or diminish in any way the obligation of Debtor under
this Agreement, and acknowledges that such waiver is by this
reference incorporated into each security agreement,
collateral assignment, pledge and/or other document from
Debtor now or later securing the Indebtedness, and
acknowledges that as of the date of this Agreement no such
defense or setoff exists.
5.7 In the event that applicable law shall obligate Bank to give
prior notice to Debtor of any action to be taken under this
Agreement, Debtor agrees that a written notice given to Debtor
at least ten days before the date of the act shall be
reasonable notice of the act and, specifically, reasonable
notification of the time and place of any public sale or of
the time after which any private sale, lease, or other
disposition is to
3
be made, unless a shorter notice period is reasonable under
the circumstances. A notice shall be deemed to be given under
this Agreement when delivered to Debtor or when placed in an
envelope addressed to Debtor and deposited, with postage
prepaid, in a post office or official depository under the
exclusive care and custody of the United States Postal Service
or delivered to an overnight courier. The mailing shall be by
overnight courier, certified, or first class mail.
5.8 Notwithstanding any prior revocation, termination, surrender,
or discharge of this Agreement in whole or in part, the
effectiveness of this Agreement shall automatically continue
or be reinstated in the event that any payment received or
credit given by Bank in respect of the Indebtedness is
returned, disgorged, or rescinded under any applicable law,
including, without limitation, bankruptcy or insolvency laws,
in which case this Agreement, shall be enforceable against
Debtor as if the returned, disgorged, or rescinded payment or
credit had not been received or given by Bank, and whether or
not Bank relied upon this payment or credit or changed its
position as a consequence of it. In the event of continuation
or reinstatement of this Agreement, Debtor agrees upon demand
by Bank to execute and deliver to Bank those documents which
Bank determines are appropriate to further evidence (in the
public records or otherwise) this continuation or
reinstatement, although the failure of Debtor to do so shall
not affect in any way the reinstatement or continuation.
5.9 This Agreement and all the rights and remedies of Bank under
this Agreement shall inure to the benefit of Bank's successors
and assigns and to any other holder who derives from Bank
title to or an interest in the Indebtedness or any portion of
it, and shall bind Debtor and the heirs, legal
representatives, successors, and assigns of Debtor. Nothing in
this Section 5.9 is deemed a consent by Bank to any assignment
by Debtor.
5.10 If there is more than one Debtor, all undertakings, warranties
and covenants made by Debtor and all rights, powers and
authorities given to or conferred upon Bank are made or given
jointly and severally.
5.11 Except as otherwise expressly provided in this Agreement, all
terms in this Agreement which are defined in the Uniform
Commercial Code shall have the meanings assigned to them in
Article 9 (or, absent definition in Article 9, in any other
Article) of the Uniform Commercial Code, as those meanings may
be amended, revised or replaced from time to time. "Uniform
Commercial Code" means the Texas Business and Commerce Code as
amended, revised or replaced from time to time.
Notwithstanding the foregoing, the parties intend that the
terms used herein which are defined in the Uniform Commercial
Code have, at all times, the broadest and most inclusive
meanings possible. Accordingly, if the Uniform Commercial Code
shall in the future be amended or held by a court to define
any term used herein more broadly or inclusively than the
Uniform Commercial Code in effect on the date of this
Agreement, then such term, as used herein, shall be given such
broadened meaning. If the Uniform Commercial Code shall in the
future be amended or held by a court to define any term used
herein more narrowly, or less inclusively, than the Uniform
Commercial Code in effect on the date of this Agreement, such
amendment or holding shall be disregarded in defining terms
used in this Agreement.
5.12 No single or partial exercise, or delay in the exercise, of
any right or power under this Agreement, shall preclude other
or further exercise of the rights and powers under this
Agreement. The unenforceability of any provision of this
Agreement shall not affect the enforceability of the remainder
of this Agreement. This Agreement constitutes the entire
agreement of Debtor and Bank with respect to the subject
matter of this Agreement. No amendment or modification of this
Agreement shall be effective unless the same shall be in
writing and signed by Debtor and an authorized officer of
Bank. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS,
WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
5.13 To the extent that any of the Indebtedness is payable upon
demand, nothing contained in this Agreement shall modify the
terms and conditions of that Indebtedness nor shall anything
contained in this Agreement prevent Bank from making demand,
without notice and with or without reason, for immediate
payment of any or all of that Indebtedness at any time(s),
whether or not an Event of Default has occurred.
5.14 Debtor represents and warrants that Debtor's exact name is the
name set forth in this Agreement. Debtor further represents
and warrants the following and agrees that Debtor is, and at
all times shall be, located in the following place :
Debtor is a registered organization which is organized under
the laws of one of the states comprising the United States
(e.g. corporation, limited partnership, registered limited
liability partnership or limited liability company), and
Debtor is located (as determined pursuant to the Uniform
Commercial Code) in the state under the laws of which it was
organized, which is (street address, state and county or
parish): Delaware.
If Collateral is located at other than the address specified
above, such Collateral is located and shall be maintained at
Lantana Bldg. 1 and Lantana Bldg. 2,, 7000 W. Wm. Cannon, Suite 210
-------------------------------------------------------------------
STREET ADDRESS
Austin TX 78735
-------------------------------------------------------------------
CITY STATE ZIP CODE COUNTY
Collateral shall be maintained only at the locations identified in
this Section 5.14.
5.15 A carbon, photographic or other reproduction of this Agreement
shall be sufficient as a financing statement under the Uniform
Commercial Code and may be filed by Bank in any filing office.
5.16 This Agreement shall be terminated only by the filing of a
termination statement in accordance with the applicable
provisions of the Uniform Commercial Code, but the obligations
contained in Section 2.12 of this Agreement shall survive
termination.
5.17 Debtor agrees to reimburse the Bank upon demand for any and
all costs and expenses (including, without limit, court costs,
legal expenses and reasonable attorneys' fees, whether inside
or outside counsel is used, whether or not suit is instituted
and, if suit is instituted, whether at the trial court level,
appellate level, in a bankruptcy, probate or administrative
proceeding or otherwise) incurred in enforcing or attempting
to enforce this Agreement or in exercising or attempting to
exercise any right or remedy under this Agreement or incurred
in any other matter or proceeding relating to this Security
Agreement.
6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT
WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS
AGREEMENT OR THE INDEBTEDNESS.
7. THIS IS A TEXAS SPECIFIC PROVISION: THIS WRITTEN LOAN AGREEMENT (AS
DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE)
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
4
8. SPECIAL PROVISIONS APPLICABLE TO THIS AGREEMENT. (*NONE, IF LEFT BLANK)
DEBTOR: BANK:
Silicon Laboratories Inc. COMERICA BANK-TEXAS, a Texas
---------------------------- banking association
Debtor Name Typed/Printed
By: /s/ Navdeep Sooch
------------------------------- By: /s/ Julie A. Smith
Signature of: Navdeep Sooch ----------------------------
---------------------- Signature of: Julie A. Smith
Its: Chief Executive Officer ----------------
----------------------------- Its: Vice President
Title (If applicable) ---------------------------
Title (If applicable)
By: /s/ John W. McGovern
--------------------------------
Signature of: John W. McGovern
----------------------
Its: Chief Financial Officer
-------------------------------
Title (If applicable)
5
Exhibit 10.4
[COMERICA LOGO] ADVANCE FORMULA AGREEMENT
================================================================================
As of September 5, 2001, this Agreement is made between SILICON
LABORATORIES INC. ("Borrower") and COMERICA BANK-TEXAS, a Texas banking
association ("Bank").
For and in consideration of the loans and other credit which Borrower may now or
hereafter obtain or request from Bank pursuant to the Credit Agreement of even
date herewith between Borrower and Bank (as from time to time amended, modified
restated, the "Credit Agreement") and which are secured pursuant to the Security
Agreement of even date herewith executed by Borrower in favor of the Bank, and
for other good and valuable consideration, Bank and Borrower agree as follows:
1. REVOLVING LOANS. The Revolving Loans (as defined in the Credit Agreement)
which Bank may now or hereafter extend to Borrower are subject to the
limitations of this Agreement and to the conditions and limitations of the
Credit Agreement.
2. ADVANCE FORMULA. Borrower warrants and agrees that Borrower's the Facility
Usage (as defined in the Credit Agreement) shall never exceed the lesser of
$5,000,000 or the sum of:
(a) eighty percent (80%) of the Domestic Eligible Accounts, as
hereinafter defined; and
(b) ninety percent (90%) of the Foreign Eligible Accounts, as hereinafter
defined.
3. FORMULA COMPLIANCE. If the limitations in paragraph 2 above are exceeded at
any time, Borrower shall immediately pay Bank sums sufficient to reduce the
Revolving Loans by the amount of such excess.
4. ELIGIBLE ACCOUNT. "Eligible Account" shall mean an Account (as hereinafter
defined) arising in the ordinary course of a Debtor's business which meets
each of the following requirements:
(a) it is not owing more than ninety (90) days after the date of the
original invoice or other writing evidencing such Account;
(b) it is not owing by an Account Debtor (as hereinafter defined) who has
failed to pay twenty five percent (25%) or more of the aggregate
amount of its Accounts owing to a Debtor within ninety (90) days
after the date of the respective invoices or other writings
evidencing such Accounts;
(c) it arises from the sale or lease of goods and such goods have been
shipped or delivered to the Account Debtor under such Account; or it
arises from services rendered and such services have been performed;
(d) it is evidenced by an invoice, dated not later than the date of
shipment or performance, rendered to such Account Debtor or some
other evidence of billing acceptable to Bank;
(e) it is not evidenced by any note, trade acceptance, draft or other
negotiable instrument or by any chattel paper, unless such note or
other document or instrument previously has been endorsed and
delivered by Borrower to Bank;
(f) it is a valid, legally enforceable obligation of the Account Debtor
thereunder, and is not subject to any offset, counterclaim or other
defense on the part of such Account Debtor or to any claim on the
part of such Account Debtor denying liability thereunder in whole or
in part;
(g) it is subject to a first priority, properly perfected security
interest in favor of Bank and is not subject to any sale of accounts,
any rights of offset, assignment, lien or security interest
whatsoever other than to Bank;
(h) it is not owing by a subsidiary or affiliate of Borrower;
(i) it is not owing by an Account Debtor which is the government of any
foreign country or sovereign state, or of any state, province,
municipality or other instrumentality thereof;
(j) it is not an Account owing by the United States of America or any
state or political subdivision thereof, or by any department, agency,
public body corporate or other instrumentality of any of the
foregoing, unless all necessary steps are taken to comply with the
Federal Assignment of Claims Act of 1940, as amended, or with any
comparable state law, if applicable, and all other necessary steps
are taken to perfect Bank's security interest in such Account;
(k) it is not owing by an Account Debtor for which Borrower has received
a notice of (i) the death of the Account Debtor or any partner of the
Account Debtor, (ii) the dissolution, liquidation, termination of
existence, insolvency or business failure of the Account Debtor,
(iii) the appointment of a receiver for any part of the property of
the Account Debtor, or (iv) an assignment for the benefit of
creditors, the filing of a petition in bankruptcy, or the
commencement of any proceeding under any bankruptcy or insolvency
laws by or against the Account Debtor;
(l) it is not an Account billed in advance, payable on delivery, for
consigned goods, for guaranteed sales, for unbilled sales, for
progress billings, payable at a future date in accordance with its
terms, subject to a retainage or holdback by the Account Debtor or
insured by a surety company;
(m) it is not that portion of all Accounts owing by any single Account
Debtor (other than PC-Tel) which exceeds twenty-five percent (25%) of
the aggregate of all Accounts otherwise deemed eligible hereunder
which are owing to Borrower by all Account Debtors;
(n) it is not that portion of all Accounts owing by PC-Tel which exceeds
fifty percent (50%) of the aggregate of all Accounts otherwise deemed
eligible hereunder which are owing to Borrower by all Account
Debtors; and
(o) it is not owing by any Account Debtor whose obligations Bank, acting
in its sole discretion, shall have notified Borrower are not deemed
to constitute Eligible Accounts.
For purposes of this Agreement, an "Account" shall mean any right of a Borrower
to payment for goods sold or leased or for services rendered, but shall not
include interest or service charges, and "Account Debtor" shall mean a person
who is obligated on or under an Account. An Account which is at any time an
Eligible Account, but which subsequently fails to meet any of the foregoing
requirements, shall forthwith cease to be an Eligible Account.
"Domestic Eligible Account" shall mean an Eligible Account that is owing by
an Account Debtor which maintains its chief executive office in the United
States of America and is organized under the laws of the United States of
America, or any state thereto.
"Foreign Eligible Account" shall mean an Eligible Account (a) that is owing
by an Account Debtor which either does not maintain its chief executive
office in the United States of America or is not organized under the laws
of the United States of America, or any state thereto and (b) with respect
to which either the Account Debtor has delivered an irrevocable letter of
credit issued or confirmed by a bank satisfactory to Bank and payable only
in the United States of America and in U.S. dollars, sufficient to cover
such Account, in form and substance satisfactory to Bank, or such Account
is subject to credit insurance payable to Bank issued by an insurer and on
terms and in an amount acceptable to Bank.
5. INSPECTIONS; COMPLIANCE. Borrower shall permit Bank and its designees from
time to time to make such inspections and audits, and to obtain such
confirmations or other information, with respect to any of the Collateral
or any Account Debtor as Bank is entitled to make or obtain under the
Credit Agreement or the Security Agreement, and shall reimburse Bank on
demand for all costs and expenses incurred by Bank in connection with such
inspections and audits. Borrower shall further comply with all of the other
terms and conditions of the Credit Agreement and the Security Agreement.
6. DEFAULT. Any failure by Borrower to comply with this Agreement shall
constitute a default under the Credit Agreement.
7. AMENDMENTS; WAIVERS. This Agreement may be amended, modified or terminated
only in writing duly executed by Borrower and Bank. No delay by Bank in
requiring Borrower's compliance herewith shall constitute a waiver of such
right. The rights granted to Bank hereunder are cumulative, and in addition
to any other rights Bank may have by agreement or under applicable law.
This Agreement shall supersede and replace in their entirety any prior
advance formula agreements in effect between Bank and Borrower.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Texas, without regard to conflict of laws
principles.
8. DILUTION OF ACCOUNTS. In the event the Bank, at any time in its sole
discretion, determines that the dollar amount of Eligible Accounts
collectable by Borrower is reduced or diluted as a result of discounts or
rebates granted by Borrower to the respective Account Debtor(s), returned
or rejected inventory or services, or such other reason or factor as Bank
deems applicable, Bank may, in its sole discretion, upon five (5) business
days' prior written notice to Borrower, reduce or other wise modify the
percentage of Eligible Accounts included within the Advance Formula under
paragraph 2 above and/or reduce the dollar amount of Borrower's Eligible
Accounts by an amount determined by Bank in its sole discretion.
12. JURY WAIVER. BORROWER AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE
INDEBTEDNESS.
13. SPECIAL PROVISIONS*
-------------------------
*None, if left blank.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year
first above written.
Borrower's Chief Executive Office Address: BORROWER:
4635 Boston Lane SILICON LABORATORIES INC.
------------------------------------------
Austin, Texas 78735 By: /s/ Navdeep Sooch
------------------------------------------ ----------------------------
SIGNATURE OF
------------------------------------------ Its: Chief Executive Officer
TITLE (IF APPLICABLE)
By: /s/ John W. McGovern
----------------------------
SIGNATURE OF
Its: Chief Financial Officer
Accepted and Approved:
COMERICA BANK-TEXAS, a Texas banking association
By: /s/ Julie A. Smith
--------------------------------------
SIGNATURE OF JULIE A. SMITH
Its:
--------------------------------------
TITLE: VICE PRESIDENT
