-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C0IoRBb0P7bKIYgjLp16LPS+TVJukLSw2Tb+cKulVdJwUOunRSGbnACf5nWMqIWr 2gGbD268YONzpIk5lgnIEw== 0001015402-02-001080.txt : 20020415 0001015402-02-001080.hdr.sgml : 20020415 ACCESSION NUMBER: 0001015402-02-001080 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENUS INC CENTRAL INDEX KEY: 0000837913 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942790804 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17139 FILM NUMBER: 02597218 BUSINESS ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 BUSINESS PHONE: 4087477120 MAIL ADDRESS: STREET 1: 1139 KARLSTAD DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089-2117 10-K 1 doc1.txt ================================================================================ As filed with the Securities and Exchange Commission on April 1, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2001 ------------------- OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-17139 ------- GENUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2790804 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1139 KARLSTAD DRIVE, SUNNYVALE, CA 94089 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 747-7120 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the common stock on February 28, 2002 in the over-the-counter market as reported by the Nasdaq National Market, was approximately $78.6 million. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2002, Registrant had 26,287,803 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 2002 Annual Meeting of Shareholders - Items 10, 11, 12 and 13. ================================================================================
TABLE OF CONTENTS PART I. PAGE Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceeding 14 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33 Item 8. Consolidated Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III. Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 37 Item 12. Security Ownership of Certain Beneficial Owners and Management 38 Item 13. Certain Relationships and Related Transactions 38 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
SIGNATURES EXHIBITS INDEX 2 PART I ITEM 1. BUSINESS OVERVIEW Since 1982, we have been supplying advanced manufacturing systems to the semiconductor industry worldwide. Major semiconductor manufacturers use our leading-edge thin film deposition equipment and process technology to produce integrated circuits, commonly called chips, that are incorporated into a variety of products, including personal computers, communications equipment and consumer electronics. We pioneered the development of chemical vapor deposition (CVD) tungsten silicide, which is used in certain critical steps in the manufacture of integrated circuits. In addition, today we are leading the commercialization of atomic layer deposition, also known as ALD technology. This technology is designed to enable a wide spectrum of thin film applications such as aluminum oxide, hafnium oxide and other advanced dielectric insulating and conducting materials for advanced integrated circuit manufacturing. We have implemented a strategy of targeting non-semiconductor markets, as we are confident that our developed films can serve multiple applications in both semiconductors and non-semiconductor segments. In addition to expanding our total available market, this strategy of diversifying our customer base is intended to gain us some protection against cyclical downturns in the semiconductor industry. We think our emerging ALD technology will prove effective in expanding and diversifying our customer base. We continue to develop enabling thin film technology that addresses the scaling challenges facing the semiconductor industry relating to gate and capacitor materials. The International Technology Roadmap for Semiconductors (ITRS) has labeled these challenges as "red zones" because there are no known solutions that allow for further reduction in feature sizes and improved performance. Our innovative thin film technology solutions are designed to enable chip manufacturers to simplify and advance their integrated circuit production processes and lower their total cost of manufacturing per chip, known as cost of ownership. As it is in the semiconductor industry, non-semiconductor business segments have scaling initiatives as well. For example, the making of thin film magnetic heads in the data storage industry has scaling requirements analogous to the scaling trends in semiconductors. A key part of our business strategy includes providing enabling thin film solutions for non-semiconductor applications. We provide a production-proven platform that is used for both the development and volume production of new thin films in integrated circuit manufacturing. This platform is based on a common architecture and a high percentage of common parts that are designed to provide manufacturers with high reliability and low cost of ownership across a wide range of thin film deposition applications. The modular design of our system permits manufacturers to add capacity and to service their manufacturing systems easily. In addition to the modular platform architecture, our systems operate on standardized software that is designed to support a wide range of thin film deposition processes. Furthermore, our patented process chamber design incorporated into our flagship LYNX product family can be configured for chemical vapor deposition (CVD), plasma enhanced CVD, and ALD with minimal changes to the chamber design. Our global customer base consists of semiconductor manufacturers in the United States, Europe and Asia. Our current customers include semiconductor manufacturers such as Infineon Technologies, Micron Technology, Inc., NEC and Samsung Electronics Company, Ltd. and non-semiconductor customers such as Read-Rite Corporation, which is an independent manufacturer of magnetic recording heads for hard disk drives and a recognized technology leader in the data storage industry. 3 INDUSTRY BACKGROUND The manufacture of a chip requires a number of complex steps and processes. Most integrated circuits are built on a base of silicon, called a wafer, and consist of two main structures. The lower structure is made up of components, typically transistors or capacitors, and the upper structure consists of the circuitry that connects the components. Building an integrated circuit requires the deposition of a series of film layers, which may be conductors, dielectrics (insulators), or semiconductors. The overall growth of the semiconductor industry and the increasing complexity of integrated circuits have led to increasing demand for advanced semiconductor equipment. Although the semiconductor industry has grown over 30 years with an average compound annual growth rate (CAGR) of 15%, it is prone to cyclic variations. Typically there are periods of high demand followed by periods of low demand. Each cycle is one to three years of high growth and one to three years of low growth. Currently we are witnessing the biggest recession in the history of the semiconductor and semiconductor equipment industries. VLSI Research, an independent research company specializing in the high technology industry, estimates that bookings in the semiconductor equipment industries in 2001 declined by around 71% compared to the prior year and industry shipments in 2001 were down 38% compared to 2000. Additionally, VLSI expects 2002 shipments to be down 5% compared to 2001. INDUSTRY DRIVERS: LOWERING THE COST PER FUNCTION AND INCREASING PERFORMANCE The growth of computer markets and the emergence and growth of new markets such as wireless communications and digital consumer electronics have contributed to growth in the semiconductor industry. This increase also has been fueled by the semiconductor industry's ability to supply increasingly complex, higher performance integrated circuits, while continuing to reduce cost. The increasing complexity of integrated circuits and the accompanying reductions in feature size require more advanced and expensive wafer fabrication equipment, which can increase the average cost of advanced wafer fabrication facilities. Technological advances in semiconductor manufacturing equipment have historically enabled integrated circuit manufacturers to lower cost per function and improve performance dramatically by: - reducing feature size of integrated circuits and the introduction of new materials with scaled dimensions; - increasing the wafer size; - increasing manufacturing yields; and - improving the utilization of wafer fabrication equipment. REDUCING FEATURE SIZES AND ADDING NEW ENABLING THIN FILMS Smaller feature sizes allow more circuits to fit on one wafer. These reductions have contributed significantly to reducing the manufacturing cost per chip. The semiconductor industry is driven by performance (mainly the increased speed for logic and memory signals) and increased chip density (mainly the increased density of memory and logic capacity). In addition to the continued reduction in feature sizes, there is a paradigm shift for the use of new materials to improve performance of integrated circuits. New materials are required for gate, capacitor and interconnect application segments within the semiconductor manufacturing process. The adoption of new types of thin film conducting and insulating materials will accelerate the trend toward higher levels of semiconductor performance and integration while maintaining the historic trend of reduction of cost per function. LARGER WAFER SIZES By increasing the wafer size, integrated circuit manufacturers can produce more circuits per wafer, thus reducing the overall manufacturing costs per chip. Leading-edge wafer fabrication lines are currently using 200-millimeter (mm) wafers, up from the 100mm wafers used ten to fifteen years ago. Currently, many integrated circuit makers have commenced pilot production lines using 300mm wafers. We believe that most major manufacturers will add 300mm production capabilities within the next one to four years. 4 HIGHER MANUFACTURING YIELDS In the last fifteen years, manufacturing yields, or the percentage of good integrated circuits per wafer, have increased substantially, while the time to reach maximum yield levels during a production lifecycle has decreased significantly. As the complexity of chips increases, manufacturers must continually reduce defect density to obtain higher yields. IMPROVED EQUIPMENT UTILIZATION AND INTRODUCING NEW EQUIPMENT ARCHITECTURES The utilization of semiconductor manufacturing lines has improved in the last ten years. Manufacturing lines now operate continuously. In addition, new architectures of production equipment are being explored that allow for higher throughputs, better reliability, high quality, and low overall cost-of-ownership as measured by the total cost to process each wafer through the equipment. While these production techniques are important for reducing the cost per function of chips, we believe that the most beneficial production solution is likely to combine feature size reduction and the use of new thin film materials. RED ZONE CHALLENGES FACING THE SEMICONDUCTOR INDUSTRY The semiconductor industry is driven by the need for higher performance and greater chip density as measured by an increasing number of functions on the chip. The semiconductor industry has historically been able to double the number of transistors on a given space of silicon every 18 to 24 months by reducing feature sizes. However, as the industry approaches feature size dimensions of 0.13 micron and below, the industry will face significant challenges and roadblocks pertaining to improving device performance and feature size reduction. The International Technology Roadmap has labeled these challenges "red zones" for Semiconductors because there are no known solutions to allow for further reduction in feature sizes and improved performance. It is estimated that semiconductor manufacturers need approximately two to four years to research, develop and commercially produce a new type of chip. Accordingly, we expect semiconductor manufacturers to begin their research and development activities as well as capital purchases to support those activities at least two years before producing a new chip. As part of its strategy to solve the challenges posed by the red zones, the semiconductor industry is moving towards the use of ultra-thin dielectrics with high insulating capabilities for gate dielectrics and capacitors as well as ultra-thin metal barriers for copper-based interconnect processes. Emerging thin films with high dielectric capabilities for gate and capacitor applications include metal oxides such as aluminum oxide. In these ultra-thin dielectric film applications, the thickness and quality must be highly controlled while the films need to be deposited in a high-volume, cost-effective manner. Ultra-thin metal nitride barrier films, such as those made of tungsten nitride, must be developed to support copper-based interconnect schemes. Reduction of feature size requires innovations in new types of thin film deposition technologies and equipment to deposit new films. THE GENUS SOLUTION We are an innovative supplier of thin film deposition equipment to semiconductor and non-semiconductor manufacturers and are focused on developing enabling thin film technology to solve the challenges posed by the red zones. Our patented multi-purpose process chamber serves as the foundation for all of our current products. Our products are designed to deliver high throughput, low cost of ownership and quick time to market, enhancing the ability of manufacturers to achieve productivity gains. We support our innovative thin film deposition systems with a focused level of customer service. 5 INNOVATIVE THIN FILM SOLUTIONS Our systems and processes are designed to provide innovative thin film solutions that address technical and manufacturing problems of the semiconductor industry. We provide our customers with advanced systems and processes for depositing thin films such as CVD tungsten silicide, tungsten nitride, and blanket tungsten, and ALD films such as aluminum oxide, tantalum oxide, titanium oxide, zirconium oxide, hafnium oxide, titanium nitride and tungsten nitride. These innovative thin films solve certain key device and interconnect problems faced by semiconductor manufacturers as they scale their device geometries below 0.13 micron. VERSATILE PRODUCTION PLATFORM Our LNYX series of systems is based on a common outsourced, reliable wafer-handling robotic platform. The LNYX systems are designed to be flexible and can be configured for multiple deposition processes, such as CVD, plasma enhanced CVD and ALD. Our LNYX systems offer the following advantages: - a production-proven platform which allows for easier and faster migration from research and development to production; - a platform based upon a large number of standardized parts used across our systems to enhance reliability; and - a modular design that allows for simplified service. In addition, all of our systems are designed with a graphical user interface that automates tasks and allows for comprehensive viewing of the real-time status of the systems. Our software supports our customers' process development needs with the ability to run a different set of processes for each wafer. LOW COST OF OWNERSHIP Our LNYX series equipment offers low cost of ownership by featuring multiple deposition processes capabilities, production-proven process chamber design, advanced software architecture and reliable wafer handling. Based on feedback from our installed customer base, we estimate that our production systems consistently achieve greater than 90% availability, and that the mean time between failures of our system is greater than 300 hours. In addition, our customers have confirmed that we offer among the lowest costs of operation. We are committed to improving these results; achieving these same levels of performance or better with our new thin film products. CUSTOMER SUPPORT We believe we deliver superior customer support and service to enhance our long-term customer relationships. We maintain an international customer support infrastructure with fully staffed customer support facilities in Japan, Korea and the United States. We provide training for two customer engineers with all of our equipment installations as well as 24 hours a day, seven days a week product support. We offer warranties consisting of a two-year parts warranty and a one-year labor warranty. MARKETS AND APPLICATIONS In 2001, we continued to expand our product line with new films and applications that allow us to serve broader markets. In 1999, Genus had tungsten silicide and tungsten nitride for gate and barrier applications and we were just introducing ALD technology. As we turn into 2002, we have tungsten silicide, tungsten nitride and blanket tungsten by conventional CVD, and aluminum oxide, 6 tantalum oxide, titanium oxide, hafnium oxide and zirconium oxide as well as titanium nitride and tungsten nitride by ALD. In addition, Genus has the demonstrated capability to integrate these ALD films as alloys and nanolaminates (layered structures) for the engineering of specialized capabilities on its LNYX series platforms. These 10 films serve the Company for applications in semiconductors for gate, capacitor and interconnect, as well as non-semiconductor applications (e.g., in particular, aluminum oxide for thin film magnetic heads of hard disk drives). In the near term, our key target applications are gate and capacitor for semiconductors; and ALD dielectrics for gap applications in thin film heads. By focusing on a broader set of film markets, we believe we can reduce our dependence on the volatile dynamic-random-access memory (DRAM) market, as well as benefit from participation in the logic segment and non-semiconductor market opportunities. In summary, we are now participating in semiconductor memory with gate and capacitor films, in semiconductor logic with advanced gate films, and in non-semiconductor gap dielectrics for thin film magnetic heads. We moved from solely memory applications to this level of diversification in the last three years. We focus on the following thin film market segments: CVD SILICIDE AND METAL, AND ALD DIELECTRICS AND METAL BARRIERS FOR GATE STACK FILMS CVD tungsten silicide is used to reduce the electrical resistance of the gate material in a transistor device structure. Our tungsten silicide gate thin films are used in DRAM integrated circuit production. In the future, we expect the tungsten gate material to migrate from tungsten silicide to the low resistance tungsten gate films, such as Rapid integrated gate (RinG) that we have developed and beyond that to use various metal barrier films in combination with high-k dielectrics. Capacitor films Genus is commercializing its ALD technology with the application to advanced capacitors. These include: cylinder ("stacked"), trench, embedded, rf and decoupling capacitor applications. Genus is in beta phase with several applications and customers using both ALD dielectric and metal electrode films. The state of the art has been advanced due to high conformality and high quality Genus ALD films. The opportunity to increase the number of beta sites and move to pilot production exists. Barrier metal interconnect thin films We are currently commercializing new thin film CVD barrier metal films such as tungsten nitride. CVD tungsten nitride has better film characteristics and can more uniformly cover device structures than conventional physical vapor deposition barrier thin films such as titanium nitride. We expect our CVD tungsten nitride barrier thin films to have applications in multi-layer copper interconnect processes. Non-semiconductor films Genus has developed a market for its ALD films in the thin film magnetic head (reader) market. This market developed because of a production ready-made solution that the Genus ALD dielectrics provide for the scaling of the gap dielectrics. The market is scaling to thinner films, ideally suited to the ALD approach. Other non-semiconductor markets are targeted, these include: Magnetic Random Access Memory (MRAM). Optical interconnects / filters, Organic Light Emiting Diodes (OLEDs), Microelectromechanical Systems (MEMS), and photo masks, in fact anywhere that film uniformity and conformality are enabling. However, it is too early to predict timing of the penetration in many of these markets. PRODUCTS AND TECHNOLOGY We have developed our product strategy around the LYNX system concept. The LYNX system integrates platform and process modules with our standardized operating software. The LYNX system refers specifically to the vacuum robotic 7 wafer handler and its wafer controlling software. The LYNX process modules are generically appropriate for CVD, plasma enhanced CVD and ALD technologies. All of our current thin film systems are built on a common platform and marketed in the context of the LYNX series. Each LYNX product includes wafer handling robotics, dual load locks, control electronics and system software. The LYNX system can be used for the deposition of advanced dielectrics and copper ultra-thin barrier seed. The LYNX product line addresses both 200 and 300mm wafer sizes and is designed for the deposition of the following thin film applications: CVD -- - tungsten silicide-monosilane - tungsten silicide-dichlorosilane - tungsten nitride - tungsten ALD -- - aluminum oxide - advanced metal oxides (e.g., tantalum oxide, titanium oxide, zirconium oxide, hafnium oxide) - nanolaminates and alloys - metal films (e.g., titanium nitride and tungsten nitride) LYNX Series LYNX2(R). Manufacturers of advanced DRAM devices of 0.35 to 0.18 micron currently use the LYNX2(R) system in production. LYNX2(R) systems support over 150 process modules in high volume production. Production availability for the LYNX2(R)system runs from 90-95%. LYNX2(R) platforms are also used for customer development and pilot manufacturing for more advanced semiconductor applications below 0.18 micron. The LYNX2(R)features a wafer-handling platform that is compatible with the Modular Equipment Standards Committee (MESC). This platform uses a centrally located, dual-end effectors robot for high throughput operation. The system is controlled by a graphical user interface that provides the operator with real-time information such as recipe, set points, and hardware status and service features. The modular design of the LYNX2(R)allows the addition of up to four process modules, which can be run serially or in parallel. The LYNX2(R) process module design also offers a multi-zone resistive heater for more uniform wafer heating, two-zone showerheads for improved film composition uniformity and a state-of-the-art gas delivery system that minimizes chamber-to-chamber variance. In the case of ALD, fast gas switching has been developed for high productivity ALD. LYNX3(TM). We introduced the LYNX3(TM) in January 1999 as our first 300mm low pressure CVD process module in a beta system. The LYNX3(TM) process module is based on a newly developed and patented process chamber concept that results in exceptional uniformity. The LYNX3(TM) is designed to run all films currently supported by the LYNX2(R), as well as all films currently in development. The LYNX3(TM) system supports up to five process modules, which can be run serially or in parallel. Also, we have developed an advanced version of the LYNX3(TM), which is designed to be a "bridge tool", capable of running either 200 or 300mm wafers. The range of thin films that can be deposited using the LYNX product family include: - ALD Dielectrics. In July 1999, we announced the availability of ALD aluminum oxide. ALD has many possible applications in the semiconductor market including as a high dielectric constant oxide for either capacitors or for gate dielectrics, as an etch stop for advanced structures, or for hard mask applications. We made other advanced ALD dielectrics available during 2000 and 2001. We believe 8 that our ALD aluminum oxide-based technology will find near-term opportunities in the DRAM capacitor application. Other ALD dielectrics will find longer-term applications in both capacitor and gate dielectric structures. - ALD Metal Films. Metal films have been developed and offer application for metal gate (work function control as well as barrier), capacitor electrodes, contact and interconnect barriers. The applications are current in the case of capacitor electrodes and contact barrier. For interconnects they will likely come to be needed below the 90mm feature size, where barrier film thickness decrease below 100 angstroms. Somewhat beyond 2005, there will be an interest in these barriers for metal gate electrodes. - Tungsten Silicide. In addition to our mainstream production silane-based tungsten silicide film, we offer dichlorosilane LRS silicide, a low resistivity, low stress CVD tungsten silicide. DRAM manufacturers can use LRS tungsten silicide for increased yields and faster device speeds. - Rapid Integrated Gate. We introduced the industry's first plasma enhanced CVD tungsten nitride barrier film in 1997, Rapid Integrated Gate or RInG. The application is for tungsten gates with a built-in tungsten nitride barrier that can be rapidly integrated for gates using rapid thermal annealing processes. This film is a low-cost candidate for production using tungsten gate technology. - Metal Oxide Alloys and Nanolaminates. With the development of Genus ALD, the Company has been able to demonstrate a film flexibility otherwise not known. For example, Genus LYNX ALD system can provide the flexibility to deposit up to 3 compound films in alloy and / or nanolaminate form. The capability has become enabling for the "engineering" of composite films for optimal performance in next generation semiconductor devices. Composites of both dielectrics and metals can be achieved. Genus 8700 Series and 6000 Series. While we no longer actively sell these thin film products, we continue to sell spare parts and provide service for the installed base worldwide. FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS Currently, the Company operates in one industry segment. The Company is engaged in the design, manufacturing, marketing and servicing of advanced thin film deposition systems used in the semiconductor manufacturing industry. Please refer to Item 6, Selected Financial Data, and Item 8, Consolidated Financial Statements and Supplementary Data of this 10K report for operating segment financial information. CUSTOMER SUPPORT We believe that our customer support organization is critical to establishing and maintaining the long-term customer relationships that often are the basis upon which semiconductor manufacturers select their equipment vendor. Our customer support organization is headquartered in Sunnyvale, California with additional employees located in Japan, South Korea and Europe. Our support personnel are available on a 24-hour a day, seven days a week basis with a maximum one-hour response time. All support personnel have technical backgrounds, with process, mechanical and electronics training, and are supported by our engineering and applications personnel. Support personnel install systems, perform warranty and out-of-warranty service and provide sales support. We offer a 12-month labor warranty and a 24-month parts warranty. We also offer training to our customers at our headquarters. 9 SALES AND MARKETING We maintain direct sales and service offices in the United States, Japan, South Korea and Europe. From these offices and other locations, we provide customer support directly and maintain, "spares depots" for our products. We also have sales representatives in the northwestern U.S., Taiwan, Singapore, Malaysia and China. CUSTOMERS We rely on a limited number of customers for a substantial portion of our net sales. Our major customers in 2001 included Samsung, NEC, Infineon, SCS and Read-Rite. As of December 31, 2001 we had seven customers in four market segments serving four market segments - Memory, Logic, Data Storage and MEMS, compared to two customers serving only the memory market segment in 2000. BACKLOG We schedule production of our systems based on both backlog and regular sales forecasts. We include in backlog only those systems for which we have accepted purchase orders and assigned shipment dates within the next 12 months. All orders are subject to cancellation or delay by the customer with limited or no penalty. Our backlog was approximately $3.2 million as of December 31, 2001. The year-to-year fluctuation is due primarily to the cyclical nature of the semiconductor industry. Our backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and our actual sales for the year may not meet or exceed the backlog represented. Because of possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily representative of actual sales for any succeeding period. In particular, during periods of industry downturns we have experienced significant delays relating to orders that were previously booked and included in backlog. RESEARCH AND DEVELOPMENT We focus our research and development efforts on developing innovative thin film products. During recent periods, we have devoted a significant amount of resources to the LYNX2(R) and LYNX3systems and ALD films. We expect to focus our future efforts on our Lynx ALD system for 200 and 300mm applications for advanced film technologies. We maintain a Class 1 applications laboratory and a separate thin films development area in California. By basing our products on the Lynx system, we believe that we can focus our development activities on the process chamber and develop new products quickly and at relatively low cost. Our research and development expenses were $12.1 million for 2001, $8.7 million for 2000, and $5.4 million for 1999, representing 25%, 21%, and 19% of revenues, respectively. Our research and development expenses were higher in 2001 primarily due to investments made in developing demonstration equipment. The worldwide semiconductor industry is characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, we believe that our future success will depend upon our ability to continue to improve our existing systems and process technologies, and to develop systems and new technologies that compete effectively. We must adapt our systems and processes to technological changes and to support emerging industry standards for target markets. We cannot be sure that we will complete our existing and future development efforts within our anticipated schedule or that our new or enhanced products will have the features to make them successful. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new or improved systems or process 10 technologies. These new and improved systems and process technologies may not meet the requirements of the marketplace and achieve market acceptance. Furthermore, despite testing by us, difficulties could be encountered with our products after shipment, resulting in loss of revenue or delay in market acceptance and sales, diversion of development resources, injury to our reputation or increased service and warranty costs. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs and market acceptance. If we are unable to improve our existing systems and process technologies or to develop new technologies or systems, we may lose sales and customers. COMPETITION The global semiconductor fabrication equipment industry is intensely competitive and is characterized by rapid technological change and demanding customer service requirements. Our ability to compete depends upon our ability to continually improve our products, processes and services and our ability to develop new products that meet constantly evolving customer requirements. A substantial capital investment is required by semiconductor manufacturers to install and integrate new fabrication equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular supplier's products, the manufacturer often relies for a significant period of time upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same supplier. It is difficult for us to sell to a particular customer for a significant period of time after that customer has selected a competitor's product, and it may be difficult for us to unseat an existing relationship that a potential customer has with one of our competitors in order to increase sales of our products to that customer. Each of our product lines competes in markets defined by the particular wafer fabrication process it performs. In each of these markets we have multiple competitors. At present, however, no single competitor competes with us in all of the same market segments in which we compete. Competitors in a given technology tend to have different degrees of market presence in the various regional geographic markets. Competition is based on many factors, primarily technological innovation, productivity, total cost of ownership of the systems, including yield, price, product performance and throughput capability, quality, contamination control, reliability and customer support. We believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to these competitive factors. Our direct competitors in the CVD tungsten silicide market include Applied Materials, Inc. and Tokyo Electron, Ltd. our direct competitors in the ALD market include ASM International and Veeco Instruments. Competition from these competitors increased in 2000 and 2001, and we expect that such competition will continue to intensify. We believe that we compete favorably on each of the competitive elements in this market. We may not be able to maintain our competitive position against current and potential competition. New products, pricing pressures, rapid changes in technology and other competitive actions from both new and existing competitors could materially affect our market position. Some of our competitors have substantially greater installed customer bases and greater financial, marketing, technical and other resources than we do and may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Our competitors may introduce or acquire competitive products that offer enhanced technologies and improvements. In addition, some of our competitors or potential competitors have greater name recognition and more extensive customer bases that could be leveraged to gain market share to our detriment. We believe that the semiconductor equipment industry will continue to be subject to increased consolidation, which will increase the number of larger, more powerful companies and increase competition. 11 MANUFACTURING AND SUPPLIERS Our manufacturing operations are based in our Sunnyvale, California facility and consist of procurement, subassembly, final assembly, test and reliability engineering. Our manufacturing facility maintains and operates a Class-1 clean room to demonstrate integrated applications with its customers. The LYNX family systems are based on an outsourced wafer-handling platform, enabling us to use a large number of common subassemblies and components. Many of the major assemblies are procured completely from outside sources. We focus our internal manufacturing efforts on those precision mechanical and electro-mechanical assemblies that differentiate our systems from those of our competitors. Most of the components for our thin film systems are produced in subassemblies by independent domestic suppliers according to our design and procurement specifications. We anticipate that the use of such subassemblies will continue to increase in order to achieve additional manufacturing efficiencies. Many of these components are obtained from a limited group of suppliers. We generally acquire these components on a purchase order basis and not under long-term supply contracts. Our reliance on outside vendors generally, and a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. Because the manufacture of certain of these components and subassemblies is an extremely complex process and can require long lead times, we could experience delays or shortages caused by suppliers. Historically, we have not experienced any significant delays in manufacturing due to an inability to obtain components, and we are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing of our systems in the future. However, the inability to develop alternate sources or to obtain sufficient source components as required in the future, could result in delays of product shipments that would have a material adverse effect on our business, results of operations and financial condition. We are subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our sales demonstrations and research and development. Failure to comply with present or future regulations could result in substantial liability to us, suspension or cessation of our operations, restrictions on our ability to expand at our present locations or requirements for the acquisition of significant equipment or other significant expense. To date, we have adequately complied with environmental rules and regulations. Such compliance has not materially affected our operations. INTELLECTUAL PROPERTY We believe that because of the rapid technological change in the semiconductor industry, our future prospects will depend primarily upon the expertise and creative skills of our personnel in process technology, new product development, marketing, application engineering and product engineering, rather than on patent protection. Nevertheless, we have a policy to actively pursue domestic and foreign patent protection to cover technology developed by us. We hold 25 United States patents with 12 patent applications pending in the United States as well as several foreign patents and patent applications covering various aspects of our products and processes. Where appropriate, we intend to file additional patent applications to strengthen our intellectual property rights. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we cannot be sure that we will be able to protect our technology adequately, and our competitors could independently develop similar technology, duplicate our products or design around our patents. To the extent we wish to assert our patent rights, we cannot be sure that any claims of our patents will be sufficiently broad to protect our technology or that our pending patent applications will be approved. In 12 addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, that any rights granted under these patents will provide adequate protection to us, or that we will have sufficient resources to protect and enforce our rights. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States. From time to time, we may receive notices from third parties alleging infringement of patents or intellectual property rights. It is our policy to respect all parties' legitimate intellectual property rights, and we will defend against such claims or negotiate licenses on commercially reasonable terms where appropriate. However, no assurance can be given that we will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The complaint seeks monetary and injunctive relief. On August 1, 2001, Genus filed a counterclaim against ASMA and ASM International, N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide" and for antitrust violations. Genus also seeks a declaratory judgment that ASMA's claims regarding the 365 and 590 Patents are invalid and unenforceable. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the court issued an order granting ASM leave to amend its complaint to add Dr. Arthur Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery regarding Genus' antitrust claims until after the patent litigation is resolved. On February 4, 2002, Genus filed for declaratory judgment on the grounds that ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim Construction Hearings regarding these claims are set for June 14, 2002 (for the 590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002 (for the 165 Patent). We intend to defend our position vigorously. The outcome of any litigation is uncertain, however, and we may not prevail. Should we be found to infringe any of the patents asserted, in addition to potential monetary damages and any injunctive relief granted, we would need either to obtain a license from ASM to commercialize our products or redesign our products so they do not infringe any of these patents. If we were unable to obtain a licenses or adopt a non-infringing product design, we may not be able to proceed with development, manufacture and sale of our atomic layer products. In this case our business may not develop as planned, and our results could materially suffer. EMPLOYEES As of December 31, 2001, we employed 138 full-time employees worldwide. The success of our future operations depends in large part on our ability to recruit and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing systems and the development of new systems and processes. The competition for such personnel is intense, particularly in the San Francisco bay area, where our headquarters are located. At times we have experienced difficulty in attracting new personnel, and we may not be successful in retaining or recruiting sufficient key personnel in the future. None of our employees is represented by a labor union, and we have never experienced a work stoppage, slowdown or strike. We consider our relationships with our employees to be good. Information regarding our foreign and domestic operations and export revenues is included in Note 12 of the Notes to the Consolidated Financial Statements. 13 RECENT DEVELOPMENTS On January 25, 2002, the Company sold 3,871,330 shares of common stock, and warrants to purchase 580,696 shares of common stock, for gross proceeds of approximately $8.7 million or net aggregate proceeds of $7.9 million. ITEM 2. PROPERTIES We maintain our headquarters, manufacturing and research development operations in Sunnyvale, California. We have a lease for a facility totaling approximately 100,500 square feet. Our lease expires in October 2012, with a current annual rental expense of approximately $903,000. In 2003, our annual rental expense will be $1,828,000. We currently have about 20,000 square feet of office and clean room space available for subletting. We also have leases for our sales and support offices in Seoul, South Korea and Tokyo, Japan. We believe that our existing facilities are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed. In 2000, we were subleasing approximately 27,000 square feet to a third party. In September 2001, this third party terminated their sublease and we reclaimed the office space. Total amount of sublease income in 2001 was approximately $596,000. ITEM 3. LEGAL PROCEEDINGS In May of 1999, Varian Semiconductor Equipment Associates, Inc. ("Varian") filed a Statement of Claims with the American Arbitration Society of Santa Clara County, California seeking to enforce certain provisions of the April 15, 1998 Asset Purchase Agreement by and between Varian and Genus (the "Asset Sale"). The dispute specifically involved ownership rights of certain high-energy ion implanter assets. Varian and Genus entered into a Settlement and Mutual Release (the "Release") in January of 2000. As partial consideration under the Release, Genus agreed to relinquish its ownership interest in certain funds provided to Varian in conjunction with the Asset Sale. These funds were held in an escrow account maintained by Varian, the amount of which was $543,000. In July 1999, we were named as a co-defendant in a claim filed at the Superior Court of the state of California for the county of Santa Clara, involving an automobile accident by one of our former employees, which resulted in the death of an individual. Significant general, punitive and exemplary damages were being sought by the plaintiffs. In June 2001, the plaintiffs settled with our insurance carrier for an amount within our insurance policy limits. On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The complaint seeks monetary and injunctive relief. On August 1, 2001, Genus filed a counterclaim against ASMA and ASM International, N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide" and for antitrust violations. Genus also seeks a declaratory judgment that ASMA's claims regarding the 365 and 590 Patents are invalid and unenforceable. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the court issued an order granting ASM leave to amend its complaint to add Dr. Arthur Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery regarding Genus' antitrust claims until after the patent litigation is resolved. On February 4, 2002, Genus filed for declaratory judgment on the grounds that ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim 14 Construction Hearings regarding these claims are set for June 14, 2002 (for the 590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002 (for the 165 Patent). On December 13, 2001, Process Tube Systems, Inc. filed suit against Genus in the Superior Court of California, County of Santa Clara, asserting that Genus breached a certain purchase order agreement dated September 29, 2000. The complaint sought damages in the amount of $282,384 plus costs, fees, and interest. We may in the future be party to litigation arising in the course of our business, including claims that we allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Information Our common stock is traded in the over-the-counter market under the NASDAQ symbol GGNS. The only class of Genus securities that is traded is Genus common stock. The high and low closing sales prices for 2000 and 2001 set forth below are as reported by the NASDAQ National Market System. At February 28, 2002, we had 418 registered shareholders as reported by Mellon Investor Services. The closing sales price of Genus common stock on December 31, 2001, the last trading day in 2001, was $ 2.43.
2000 2001 ------------------ -------------- HIGH LOW HIGH LOW -------- -------- ------ ------ First Quarter. . . . $ 16-3/4 $ 4-1/4 $4.094 $1.656 Second Quarter . . . 12-5/16 5-5/8 7.280 2.875 Third Quarter. . . . 10 3-13/16 6.050 1.769 Fourth Quarter . . . $ 4-3/4 $1-19/32 $3.250 $1.909
We have not paid cash dividends on our common stock since inception, and our Board of Directors presently intends to reinvest our earnings, if any, in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ================================================= 2001 2000 1999 1998(1) 1997 ======= ======== ========= ======== ========= (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues. . . . . . . . . . . . . . . . . . . $48,739 $40,638 $28,360 $ 32,431 $ 84,286 Costs and expenses: Costs of goods sold . . . . . . . . . . . . 32,500 24,385 16,628 29,600 54,762 Research and development. . . . . . . . . . 12,118 8,659 5,368 8,921 12,327 Selling, general and administrative . . . . 10,381 10,093 7,930 14,115 20,326 Restructuring and other(2). . . . . . . . . 0 0 543 7,308 0 -------------------------------------------------- Loss from operations. . . . . . . . . . . . . (6,260) (2,499) (2,109) (27,513) (3,129) Other income (expense), net . . . . . . . . . (336) 108 669 (86) (1,363) -------------------------------------------------- Loss before provision for income taxes and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . (6,596) (2,391) (1,440) (27,599) (4,492) Provision for income taxes. . . . . . . . . . 70 490 177 1 14,844 -------------------------------------------------- Loss before cumulative effect of change in accounting principle. . . . . . . . . . . . . (6,666) (2,881) (1,617) (27,600) (19,336) Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . 0 (6,770) 0 0 0 -------------------------------------------------- Net loss. . . . . . . . . . . . . . . . . . . (6,666) (9,651) (1,617) (27,600) (19,336) Deemed dividends on preferred stock . . . . . 0 0 0 (1,903) 0 -------------------------------------------------- Net loss attributable to common shareholders. $(6,666) $(9,651) $(1,617) $(29,503) $(19,336) ================================================= Net loss per share before cumulative effect of change in accounting principle Basic . . . . . . . . . . . . . . . . . . . (0.31) (0.15) (0.09) (1.71) (1.15) Diluted . . . . . . . . . . . . . . . . . . (0.31) (0.15) (0.09) (1.71) (1.15) Net loss per share: Basic . . . . . . . . . . . . . . . . . . . (0.31) (0.51) (0.09) (1.71) (1.15) Diluted . . . . . . . . . . . . . . . . . . (0.31) (0.51) (0.09) (1.71) (1.15) Cumulative effect of change in accounting principle (3) Basic . . . . . . . . . . . . . . . . . . . (0.36) Diluted . . . . . . . . . . . . . . . . . . (0.36) Shares used in computing net loss per share: Basic . . . . . . . . . . . . . . . . . . . 21,163 18,937 18,134 17,248 16,860 Diluted . . . . . . . . . . . . . . . . . . 21,163 18,937 18,134 17,248 16,860
17 The following are pro forma amounts with the change in accounting principle related to revenue recognition applied retroactively to years prior to 2000.
Revenues. . . . . . . . . . . . . . . . . . . $48,739 $40,638 $27,992 $ 33,599 * Net loss. . . . . . . . . . . . . . . . . . . (6,666) (2,881) (3,232) (25,963) * Net loss per share: Basic . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.18) $ (1.51) * Diluted . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.18) $ (1.51) *
DECEMBER 31, ============================================= 2001 2000 1999 1998(1) 1997 -------- ------- ------- -------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents . . . . . . . . . . . $ 3,043 $ 3,136 $ 6,739 $ 8,125 $ 8,700 Working capital . . . . . . . . . . . . . . . . (2,600) 896 14,151 15,799 30,774 Total assets. . . . . . . . . . . . . . . . . . 35,902 44,535 27,744 31,827 76,738 Long-term debt and capital lease obligations 0 0 0 50 971 Redeemable Series B convertible preferred stock 0 0 0 773 0 Total shareholders' equity. . . . . . . . . . . $12,128 $11,292 $19,378 $19,953 $48,357 (1) In 1998, we sold the ion implant equipment product line. (2) In 1998, we recorded a restructuring charge related to the sale of the ion implant equipment product line and the restructuring of the thin film operation. (3) In 2000, the Company changed its accounting method for recognizing revenue to comply with Staff Accounting Bulletin number 101. * Data is not available to provide pro forma information for this year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the discussion in this Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. OVERVIEW Since 1982, we have been supplying advanced manufacturing systems to the semiconductor industry worldwide. Major semiconductor manufacturers use our leading-edge thin film deposition equipment and process technology to produce integrated circuits, commonly called chips that are incorporated into a variety of products including personal computers, communications, equipment and consumer electronics. We pioneered the development of chemical vapor deposition (CVD) tungsten silicide, which is used in certain critical steps in the manufacture of integrated circuits. In addition, today we are leading the commercialization of atomic layer deposition, also known as ALD technology. This technology is designed to enable a wide spectrum of thin film applications such as aluminum oxide, hafnium oxide and other advanced dielectric insulating and conducting metal barrier materials for advanced integrated circuit manufacturing. Genus' consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of 18 revenues and expenses during the reporting period. On a quarterly basis, management reevaluates its estimates and judgments based on historical experience and relevant current conditions and adjusts the financial statements as required. Our global customer base consists of semiconductor manufacturers in the United States, Europe and Asia. Over the past few years we were dependent on one customer, Samsung, for a majority of our thin film product revenue. Samsung accounted for 73% of our revenue in 2001, 92% in 2000 and 84% in 1999. There is no long-term agreement between us and Samsung. In 1999, we shipped our LYNX2(R) system to a new customer, Micron Technology, and in the first quarter of 2000, we shipped an ALD system to Infineon Technologies, also a new customer. In 2001, we shipped systems to four new customers. International revenue accounted for 93% of revenue in 2001, 98% of revenue in 2000 and 86% of revenue in 1999. We anticipate that international sales, and in particular from South Korea, will continue to account for a significant portion of our total revenue. The Company's selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company deferred the recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. Prior to January 1, 2000, revenue related to systems had been generally recognized upon shipment. A provision for the estimated future cost of system installation, warranty and commissions was recorded when revenue was recognized. Under SAB 101, warranty obligations are accrued upon final customer acceptance, which coincides with recognition of revenue. The cost of inventory shipped to customers for which we are awaiting customer acceptance is recorded as "Inventory at customers' locations." The local currency is the functional currency for our foreign operations in South Korea and Japan. All other currency is dollar denominated. Gains or losses from translation of foreign operations where the local currencies are the functional currency are included as a component of shareholders' equity and comprehensive loss. Foreign currency transaction gains and losses are recognized in the statement of operations. Business activity in the semiconductor and semiconductor manufacturing equipment industries has been cyclical; for this and other reasons, Genus' results of operations for the twelve months ended December 31, 2001, may not necessarily be indicative of future operating results. In order to support our business strategy, we will be required to make significant investments in research and development. In addition, we believe selling, general and administrative costs will increase as sales volumes increase. We depend on increases in sales in order to attain profitability. If our sales do not increase, our current operating expenses could prevent us from attaining profitability and harm our financial results. CRITICAL ACCOUNTING POLICIES We have identified the following as critical accounting policies to our Company: revenue recognition, accrual for warranty expenses, valuation of inventories and valuation of research and demonstration equipment (demonstration equipment). Revenue recognition Genus' revenue recognition policy is based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". Genus recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed and determinable, collectibility is reasonably assured, and Genus has 19 completed any systems installation obligations. Revenues from sales of systems and major system upgrades are currently recognized when installation is complete and the customer accepts the product, in writing. Revenues from sale of spare parts and system upgrades are recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts. Revenues can fluctuate significantly as a result of the timing of customers acceptances. At December 31, 2001 and 2000, the Company had deferred revenue of $7.4 million and $18.6 million, respectively. Accrual for warranty expenses The Company provides one-year labor and two-year material warranty on its products. Warranty expenses are accrued upon revenue recognition. At present, based upon historical experience, the Company accrues material warranty equal to 2% and 5% of shipment value for its LYNX2(R) and LYNX3 products, respectively, and labor warranty equal to $20,000 per system for both its LYNX2(R) and LYNX3 products. At the end of every quarter, the Company reviews its actual spending on warranty and reassess if its accrual is adequate to cover warranty expenses on the systems in the field which are still under warranty. Differences between the required accrual and booked accrual are charged to warranty expenses for the period. At December 31, 2001 and 2000, the Company accrued $803,000 and $757,000, respectively, for material and labor warranty obligations. Actual results could differ from estimates. In the unlikely event that a problem is identified that would result in the need to replace components on a large scale, material effects on our operating results and financial position may result. Valuation of Inventories Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. We write down inventories to net realizable value based on forecasted demand and market conditions. Raw material and purchased parts include spare parts inventory for systems at a carrying value of $4.4 million and $6.1 million for 2001 and 2000, respectively. The forecasted demand for spare parts take into account the Company's obligations to support systems for periods that are as long as 5 years. Actual demand and market conditions may be different from those projected by the Company. This could have a material effect on operating results and the financial position. In 2001, as a result of unfavorable economic conditions and diminished demand for semiconductor products, the Company experienced a decline in sales and recorded inventory charges of $317,000 related primarily to excess inventories. These charges have been included in cost of sales in our consolidated statements of operations. At December 31, 2001 and 2000, the Company had inventory valuation allowances of $2.1 million and $2.8 million, respectively. Valuation of research and demonstration equipment Equipment, furniture and fixtures are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Equipment includes research and demonstration equipment, which is located in our Applications Laboratory and are used to demonstrate to our customers the capabilities of our equipment to process wafers and deposit films. The gross value of demonstration equipment is based on the cost of materials and actual factory labor and overhead expenses incurred in manufacturing the equipment. Costs related to refurbishing or maintaining existing demonstration equipment, which do not add to the capabilities or useful life of the equipment, are not capitalized and are expensed as incurred. Demonstration equipment is stated at cost and depreciated over a period of five years. 20 Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets related to those assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the future cash flows is less than the carrying amounts of those assets, the Company recognizes an impairment loss based on the excess of the carrying amounts over the fair values of the assets. RESULTS OF OPERATIONS 2001 COMPARED WITH 2000 Revenues in 2001 were $48.7 million, up 20% from 2000. Revenues in 2001 were based on customer acceptances on twelve systems including seven 200mm systems using CVD technology, one 300mm system using CVD technology and four 200mm systems using ALD technology. Revenues in 2000 were based on customer acceptances of eleven 200mm CVD systems and one 200mm ALD system. Average selling prices in 2001 were slightly higher than in 2000 reflecting a favorable mix of more ALD and 300mm modules, which in general, have higher prices than CVD and 200mm products. Revenues from sale of spare parts and services in 2001 were $7.1 million, approximately the same as in 2000. Going forward we expect revenues in 2002 to be up compared to 2001 with most of the growth coming in the second half of the year. Shipments in 2001 were $38.2 million, 19% below 2000. For the semiconductor equipment industry as a whole, shipments in 2001 were 38% below 2000, based on data published by VLSI Research. Orders in 2001 were $33.1 million, 20% below the level of orders received in 2000. For the semiconductor equipment industry as a whole, orders in 2001 were 71% below 2000, based on data published by VLSI Research. Orders in 2001 included bookings for three CVD 200mm systems, one CVD process module and four ALD systems. Orders in 2000 included bookings for ten 200mm CVD systems and two ALD systems. We ended 2001 with a total of seven customers serving four market segments - Capacitor, Logic, Data Storage and MEMS, compared to two customers serving only the capacitor market segment in 2000. We now offer two product platforms, the LYNX3, which can be used to produce both 200mm and 300mm wafers, and LYNX2(R), our core production platform for all 200mm applications to date. Also, we now have two fully supported core technologies - CVD tungsten products and ALD high K (dielectric constant) oxides, both available on LYNX2(R) and LYNX3. Gross profit margin in 2001 was 33% of revenues compared to a gross profit margin of 40% in 2000. Although average selling prices in 2001 were slightly higher than in 2000, overall gross margin was lower in 2001 due to two factors: - - First, capacity variances were incurred due to our lower production volume, particularly in the fourth quarter, and fixed costs related to manufacturing and international service operations. We partially addressed this capacity issue in October 2001 by laying off 10 employees and implementing an across the board reduced work week. We will continue to monitor our capacity utilization and take actions as required. - - Second, we incurred incremental manufacturing variances of approximately $1.5 million, primarily attributable to the introduction of LYNX3, and excess-inventory write-offs of approximately $317,000 during the third quarter. Going forward, we expect gross margins to continuously improve with the increase in volume. Research and development (R&D) expenses were $12.1 million in 2001 representing 25% of revenues compared to $8.7 million in 2000, representing 21% of revenues. The increase in R&D expenses of $3.4 million, between 2000 and 21 2001, was primarily due to increased usage of outside consultants ($1.8 million), expenses related to the reconfiguration of demonstration equipment ($800,000) and additional depreciation on research equipment ($600,000). In 2001, we added significant capacity in our demonstration lab and are now able to turnaround customer requests for demos in 15 to 30 days compared to turnaround times of 45 to 60 days in 2000. We believe that our demonstration lab now has adequate capacity for the foreseeable future and we expect a significant reduction in R&D expenses related to demonstration equipment in 2002. Selling, general and administrative (SG&A) expenses were $10.4 million in 2001, 21% of revenues, compared to expenses of $10.1 million, 25% of revenues, in 2000. Increases in salaries related to higher headcount ($700,000) and severance expenses ($150,000) were partially offset by reduced selling commissions ($500,000) and by various cost cutting actions, including temporary salary reductions and shutdown periods, implemented in Q4 of 2001. Other expenses were $336,000 in 2001 compared to other income of $108,000 in 2000. Expenses in 2001 were primarily due to interest expense on higher average outstanding debt. Provision for income taxes was $70,000 in 2001 compared to $490,000 in 2000 primarily reflecting the accrual for taxes in our Korean and Japanese subsidiaries. We continue to provide a full valuation allowance against the tax benefit associated with the losses in our U.S. and foreign subsidiaries. At December 31, 2001, we had federal net operating loss carry-forwards of $92.2 million and state net operating loss carry-forwards of $18.8 million. 2000 COMPARED WITH 1999 Revenues in 2000 were $40.6 million compared with revenues of $28.4 million in 1999, representing an increase of 43%. A total of 12 systems were accepted by the customer in 2000, and qualified for revenue recognition. A total of 5 systems that shipped in 2000 were not signed off and accepted by customers, and this revenue was deferred at December 31, 2000. Export sales accounted for 92% of revenue in 2000 compared with 86% in 1999. Revenues for 2000 of $40.6 million, compared to $28.0 million which reflect the 1999 net revenues applying the change in accounting principle related to revenue recognition, represents an increase of 45%. Gross profit margin in 2000 was $16.3 million, representing 40% of revenues, compared with $11.7 million or 41% in 1999. Costs of goods sold for 1999 reflecting the change in accounting principle were $17.9 million and the gross profit was $10.1 million or 36%. The gross margin % was lower on higher sales volumes, and was attributed to lower margins due to competitive pricing pressures on our standard tungsten silicide products, and increased worldwide customer service and manufacturing expenses to support our sales growth in 2000, including a new office in Japan. Our gross profits have historically been affected by variations in average selling prices, configuration differences, changes in the mix of product sales, unit shipment levels, the level of foreign sales and competitive pricing pressures. Research and development expenses in 2000 were $8.7 million compared with $5.4 million in 1999, representing an increase of 61%. As a percentage of revenues, research and development expenses were 21% in 2000 and 19% in 1999. The increase in research and development expenses is attributable to investments in development programs for ALD productization and films, our three 300mm system, new tungsten products, and continuous improvement programs for existing products. These programs are essential in our efforts to broaden our customer base and penetrate new markets in both semiconductor and non-semiconductor applications. Selling, general and administrative expenses were $10.1 million in 2000 compared with $7.9 million in 1999, representing an increase of 27%. As a percentage of revenues, selling, general and administrative expenses were 25% in 2000 and 28% in 1999. The $2.2 million increase in 2000 was due primarily to 22 increased investment in sales and marketing to support the 43% revenue growth and 66% shipment growth we experienced in 2000, and focused efforts toward new customers and market segments. We had other income (net) of $108,000 in 2000 compared with other income of $669,000 in 1999. Other income in 2000 consisted of interest income and foreign currency exchange gains due to the strengthening of the Korean won against the U.S. dollar during the first half of 2000, offset by foreign currency exchange losses incurred in the fourth quarter. In 1999, other income included interest income and foreign currency exchange gains. We provided for income taxes of $490,000 in 2000 compared with $177,000 of income taxes in 1999. In both years, income taxes were related to income generated from our South Korean subsidiary. In 2000, we recorded a non-recurring charge of $6.8 million for the cumulative effect of a change in accounting principle due to the adoption of SAB 101. This amount represents the gross profit on systems that shipped during 1999, but did not receive final customer acceptance during 1999. Included in this number were 5 systems and some upgrades, which had a total sales value of $13.5 million. In December 2000, the Company changed its accounting method for recognizing revenue on sales with an effective date of January 1, 2000. The Company's selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company deferred recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. The Company previously recognized revenue related to systems upon shipment. A provision for the estimated future cost of system installation, warranty and commissions was recorded when revenue was recognized. Service revenue is recognized when service has been completed. The cumulative effect in prior years of the change in accounting method was a charge of $6.8 million or $0.36 per diluted share. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, our cash and cash equivalents were $3.0 million, compared to $3.1 million as of December 31, 2000. Accounts receivable was $4.3 million, a decrease of $4.2 million from $8.5 million as of December 31, 2000, as we were able to collect on most of our overdue receivables. Cash used by operating activities totaled $1.9 million 2001, and consisted primarily of net loss of $6.7 million and decreases in deferred revenues of $11.2 million, partially offset by depreciation of $3.0 million and reductions in receivables of $4.2 million and reductions in inventories of $9.2 million. Inventory reductions were primarily related to improved supply chain management, decreases in inventory held at customer sites from $9.5 million to $5.1 million and to reductions in shipment backlog, which reduced from $8.4 million at the end of December 2000 to $3.2 million on December 31, 2001. Financing activities provided cash of $9.4 million for 2001. In May, we received approximately $6.9 million of net proceeds from the sale of 2.5 million shares of our common stock and warrants for 1.3 million additional shares of our common stock. Additionally, we increased our net short-term borrowings by $1.8 million. We incurred capital expenditures of $7.4 million in 2001. These expenditures were primarily related to the continuing program of upgrading existing equipment in our development and applications laboratories to meet our most advanced system capabilities and specifications, especially for our ALD processes. This has improved our product and film development capabilities, and increased our customer demonstration capabilities, which is critical in the sales process. 23 Our primary source of funds at December 31, 2001 consisted of $3.0 million in cash and cash equivalents, and $4.3 million of accounts receivable, most of which we have collected during the three months ending March 31, 2002. Significant financing transactions completed since December 31, 2000 include the following: - - On May 17, 2001, we sold 2,541,785 shares of our common stock, and warrants to purchase up to 1,270,891 of additional shares of common stock, for net proceeds of approximately $6.9 million. Additional warrants were issued to Burnham Securities and Wells Fargo Van Kasper for their services as placement agents in the transaction, for an additional 190,634 shares of our common stock. - - On December 20, 2001, we replaced the $10.0 million line of credit with Venture bank with a $10.0 million line of credit from Silicon Valley bank. The Silicon Valley bank agreement includes a domestic revolving line of credit of $7.5 million, secured against domestic eligible receivables and a foreign line of credit of $7.5 million, financed by EXIM bank, secured against foreign eligible receivables and inventory. The initial term of the loan is 12 months ending December 20, 2002. Total availability under both lines at any given point in time is limited to $10.0 million. The interest rate for borrowings under both the domestic and foreign lines is prime plus 1.75% per annum calculated on the basis of a 360-day year. The loan agreement is collateralized by a first priority perfected security interest in the Company's assets and has a covenant requiring the Company to maintain a minimum tangible net worth of $12.0 million plus 50% of consideration for subsequent equity issuances and 50% of net income of future quarters. The minimum tangible net worth requirement is reduced by any losses in a subsequent quarter, but will not be reduced to less than $12.0 million. At December 31, 2001, $4.5 million was outstanding under this agreement and there were no additional funds available to borrow. - - On January 4, 2002, we received gross proceeds of $1.2 million under a secured loan with CitiCapital, a division of Citigroup. The loan is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in our demonstration lab. - - On January 25, 2002, the Company sold 3,871,330 shares of our common stock and warrants to purchase up to 580,696 of additional shares of common stock for net proceeds of approximately $7.9 million. - - On March 27, 2002, we amended our line of credit with Silicon Valley Bank to increase the funds available under both lines of credit to $15.0 million, to extend the initial term of the loan to 15 months ending March 19, 2003 and to reset the covenant to $12.0 million plus 50% of consideration for equity issuances subsequent to March 8, 2002. A summary of our contractual obligations as of December 31, 2001 is as follows (amounts in $000):
Less than After 5 Total Revolving 1 year 1-3 years 4-5 years years ------- ---------- ------- ---------- ---------- -------- Silicon Valley Bank $ 4,481 $ 4,481 $ - $ - $ - $ - Operating Leases 19,031 N/A 944 3,257 3,281 11,549 ------- ---------- ------- ---------- ---------- -------- $23,512 $ 4,481 $ 944 $ 3,257 $ 3,281 $ 11,549 ======= ========== ======= ========== ========== ========
As of February 28, 2002, our cash balance was $9.8 million. We believe that our existing working capital and credit lines will be sufficient to satisfy our cash needs for the next 12 months. Accordingly, these financial statements have been prepared on a going concern basis. However, we may need additional cash for financing our growth. We are reviewing the possibility of procuring additional financing through bank credit lines, equipment leases and various equity-based 24 transactions. There can be no assurance that any required additional funding, if needed, will be available on terms attractive to us, which could have a material adverse affect on our business, financial condition and results of operations. Any additional equity financing may be dilutive to shareholders, and any additional debt financing, if available, may involve further restrictive covenants. RECENT ACCOUNTING PRONOUNCEMENTS. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe the adoption of SFAS No. 141, to date has not had significant impact on our consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We believe the adopting of SFAS 142 will not have a significant impact on our consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of long-lived assets, except for certain obligations of leases. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, stature, ordinance or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and provides further guidance regarding the accounting and disclosure of long-lived assets. The Company is required to adopt SFAS 144 effective January 1, 2002. We believe the adoption of SFAS No. 144 will not have a significant impact on our consolidated financial statements. RISK FACTORS The risks described below are not the only risks that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial may also impair our business operations. Our business, operating results or financial condition could be materially adversely affected by, and the trading price of our common stock could decline due to any of those risks. You should also refer to the other information and our financial statements included in this 10K report and the related information incorporated by reference into this 10K report. WE HAVE EXPERIENCED LOSSES OVER THE LAST FEW YEARS AND WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY We have experienced losses of $6.7 million, $9.6 million and $1.6 million for 2001, 2000 and 1999, respectively. 25 We may not be able to attain or sustain consistent future revenue growth on an annual basis, or achieve and maintain consistent profitability on an annual basis. SUBSTANTIALLY ALL OF OUR NET SALES COME FROM A SMALL NUMBER OF LARGE CUSTOMERS Historically, we have relied on a small number of customers for a substantial portion of our net revenues. For example, in 2001 Samsung Electronics Company, Ltd., Read-Rite Corporation, NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In 2000, Samsung Electronics Company, Ltd. and Micron Technology, Inc. accounted for 92% and 5% of revenues, respectively. In 1999, Samsung Electronics Company Ltd. and Micron Technology, Inc. accounted for 84% and 11% of revenues, respectively. The semiconductor manufacturing industry generally consists of a limited number of larger companies. Consequently, we expect that a significant portion of our future product sales will continue to be concentrated within a limited number of customers, even though we are making progress in reducing the concentration of our reliance on customers through our strategy of product and customer diversification. None of our customers has entered into a long-term agreement with us requiring them to purchase our products. In addition, sales to these customers may decrease in the future when they complete their current semiconductor equipment purchasing requirements. If any of our customers were to encounter financial difficulties or become unable to continue to do business with us at or near current levels, our business, results of operations and financial condition would be materially harmed. Customers may delay or cancel orders or may stop doing business with us for a number of reasons including: - customer departures from historical buying patterns; - general market conditions; - economic conditions; or - competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits. WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL OR INFLUENCE AND ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES, PARTICULARLY SALES IN ASIAN COUNTRIES Export sales accounted for approximately 93%, 98% and 86% of our total net sales in 2001, 2000 and 1999, respectively. Net sales to our South Korean-based customers accounted for approximately 73%, 92% and 84% of total net sales, respectively. We anticipate that international sales, including sales to South Korea, will continue to account for a significant portion of our net sales. As a result, a significant portion of our net sales will be subject to risks, including: - unexpected changes in law or regulatory requirements; - exchange rate volatility; - tariffs and other barriers; - political and economic instability; - difficulties in accounts receivable collection; - extended payment terms; - difficulties in managing distributors or representatives; - difficulties in staffing our subsidiaries; - difficulties in managing foreign subsidiary operations; and - potentially adverse tax consequences. 26 Our foreign sales are primarily denominated in U.S. dollars and we do not engage in hedging transactions. As a result, our foreign sales are subject to the risks associated with unexpected changes in exchange rates, which could affect the price of our products. In the past, turmoil in the Asian financial markets resulted in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. For example, prices fell dramatically in 1998 because integrated circuit manufacturers sold dynamic random access memory chips, called DRAM's, at less than cost in order to generate cash. The cash shortfall caused Asian semiconductor companies to defer or cancel investments in new production facilities, thereby reducing our anticipated sales of our semiconductor manufacturing equipment in Asia in 1998. Also during this time, the value of the won, the currency of South Korea, declined significantly against the U.S. dollar. As a result, purchases of U.S. manufactured products became very costly. Since most of our sales were made to South Korean customers, these circumstances adversely impacted our customers' ability to invest in new facilities and equipment that reduced our shipments and profitability in 1998. Wherever currency devaluations occur abroad, our goods become more expensive for our customers in that region. Difficult economic conditions may limit capital spending by our customers. These circumstances may also affect the ability of our customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. OUR SALES REFLECT THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY, WHICH COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY AND COULD CAUSE US TO FAIL TO ACHIEVE ANTICIPATED SALES Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. Although we are marketing our atomic layer deposition technology to non-semiconductor markets such as markets in magnetic thin film heads, flat panel displays, micro-electromechanical systems and inkjet printers, we are still dependent on the semiconductor market. The semiconductor industry is cyclical and experiences periodic downturns both of which reduce the semiconductor industry's demand for semiconductor manufacturing capital equipment. Semiconductor industry downturns have significantly decreased our revenues, operating margins and results of operations in the past. During the industry downturn in 1998, several of our customers delayed or cancelled investments in new manufacturing facilities and equipment due to declining DRAM prices, the Asian economic downturn, and general softening of the semiconductor market. This caused our sales in 1998 to be significantly lower than in the prior three years. After the dramatic industry boom for semiconductor equipment that peaked early in the year 2000, another cyclical downturn is presently occurring. The sharp and severe industry downturn in 2001 was the largest in the industry's history. Almost all previous downturns have been solely due to pricing declines. The 2001 downturn in the industry marked a corresponding decline in unit production. Genus recently reported a loss for our 2001 financial results. There is a risk that our revenues and operating results will continue to be further impacted by the continued downturn in the semiconductor industry and global economy. OUR FUTURE GROWTH IS DEPENDENT ON ACCEPTANCE OF NEW THIN FILMS AND MARKET ACCEPTANCE OF OUR SYSTEMS RELATING TO THOSE THIN FILMS We believe that our future growth will depend in large part upon the acceptance of our new thin films and processes, especially our atomic layer deposition technology. As a result, we expect to continue to invest in research and development in these new thin films and the systems that use these films. There can be no assurance that the market will accept our new products or that we will be able to develop and introduce new products or enhancements to our existing products and processes in a timely manner to satisfy customer needs or 27 achieve market acceptance. The failure to do so could harm our business, financial condition and results of operations. We must manage product transitions successfully, as introductions of new products could harm sales of existing products. We derive our revenue primarily from the sale of equipment used to chemically deposit tungsten silicide in the manufacture of memory chips. We estimate that the life cycle for these tungsten silicide deposition systems is three-to-five years. There is a risk that future technologies, processes or product developments may render our product offerings obsolete and we may not be able to develop and introduce new products or enhancements to our existing products in a timely manner. WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR INDUSTRY AGAINST COMPETITORS WITH GREATER RESOURCES The semiconductor manufacturing capital equipment industry is highly competitive. We face substantial competition throughout the world. We believe that to remain competitive, we will require significant financial resources in order to develop new products, offer a broader range of products, establish and maintain customer service centers and invest in research and development. Many of our existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing, customer service capabilities and greater name recognition. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. If our competitors enter into strategic relationships with leading semiconductor manufacturers covering thin film products similar to those sold by us, it would materially adversely affect our ability to sell our products to such manufacturers. In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their product lines. We may not be able to maintain or expand our sales if our resources do not allow us to respond effectively to such competitive forces. WE MAY NOT ACHIEVE ANTICIPATED REVENUE GROWTH IF WE ARE NOT SELECTED AS VENDOR OF CHOICE FOR NEW OR EXPANDED FABRICATION FACILITIES AND IF OUR SYSTEMS AND PRODUCTS DO NOT ACHIEVE BROADER MARKET ACCEPTANCE Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven financial performance. Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this vendor of choice for the specific production line application. To do otherwise creates risk for the manufacturer because the manufacture of a semiconductor requires many process steps and a fabrication facility will contain many different types of machines that must work cohesively to produce products that meet the customers' specifications. If any piece of equipment fails to perform as expected, the customer could incur significant costs related to defective products, production line downtime, or low production yields. Since most new fabrication facilities are similar to existing ones, semiconductor manufacturers tend to continue using equipment that has a proven track record. Based on our experience with major customers like Samsung, we have observed that once a particular piece of equipment is selected from a vendor, the customer is likely to continue purchasing that same piece of equipment from the vendor for similar applications in the future. Our customer list, though 28 limited, has expanded in recent months. Yet our broadening market share remains at risk to choices made by customers that continue to be influenced by pre-existing installed bases by competing vendors. A semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by potential new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are not able to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be harmed. OUR LENGTHY SALES CYCLE INCREASES OUR COSTS AND REDUCES THE PREDICTABILITY OF OUR REVENUE Sales of our systems depend upon the decision of a prospective customer to increase manufacturing capacity. That decision typically involves a significant capital commitment by our customers. Accordingly, the purchase of our systems typically involves time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. For many potential customers, an evaluation as to whether new semiconductor manufacturing equipment is needed typically occurs infrequently. Following an evaluation by the customer as to whether our systems meet its qualification criteria, we have experienced in the past and expect to experience in the future delays in finalizing system sales while the customer evaluates and receives approval for the purchase of our systems and constructs a new facility or expands an existing facility. Due to these factors, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort. The time between our first contact with a customer and the customer placing its first order typically lasts from nine to twelve months and is often longer. This lengthy sales cycle makes it difficult to accurately forecast future sales and may cause our quarterly and annual revenue and operating results to fluctuate significantly from period to period. If anticipated sales from a particular customer are not realized in a particular period due to this lengthy sales cycle, our operating results may be adversely affected for that period. OUR INTELLECTUAL PROPERTY IS IMPORTANT TO US AND WE RISK LOSS OF A VALUABLE ASSET, REDUCED MARKET SHARE AND LITIGATION EXPENSES IF WE CANNOT ADEQUATELY PROTECT IT. Our success depends in part on our proprietary technology. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We currently have a number of United States and foreign patents and patent applications. On August 1, 2001, we filed a counterclaim against ASM International N.V., charging ASM with infringing Genus' U.S. Patent 5,294,568, entitled "Method of Selective Etching Native Oxide," and with committing antitrust violations designed to harm the atomic layer deposition market. There can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted there under will provide us with competitive advantages. IF WE ARE FOUND TO INFRINGE THE PATENTS OR INTELLECTUAL PROPERTY OF OTHER PARTIES, OUR ABILITY TO GROW OUR BUSINESS MAY BE SEVERELY LIMITED. From time to time, we may receive notices from third parties alleging infringement of patents or intellectual property rights. It is our policy to respect all parties' legitimate intellectual property rights, and we will defend against such claims or negotiate licenses on commercially reasonable terms where 29 appropriate. However, no assurance can be given that we will be able to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitles "Method For Growing Thin Films," which ASM claims to own or exclusively license. The complaint seeks monetary and injunctive relief. On August 1, 2001, Genus filed a counterclaim against ASMA and ASM International, N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide" and for antitrust violations. Genus also seeks a declaratory judgment that ASMA's claims regarding the 365 and 590 Patents are invalid and unenforceable. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, The Court issued an order granting ASM leave to amend its complaint to add Dr. Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery regarding Genus' antitrust claims until after trial of the patent claims. On February 4, 2002, Genus filed for declaratory judgment on the grounds that ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim Construction Hearings regarding these claims are set for June 14, 2002 (for the 590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002 (for the 165 Patent). We intend to defend our position vigorously. The outcome of any litigation is uncertain, however, and we may not prevail. Should we be found to infringe any of the patents asserted, in addition to potential monetary damages and any injunctive relief granted, we would need either to obtain a license from ASM to commercialize our products or redesign our products so they do not infringe any of these patents. If we were unable to obtain a license or adopt a non-infringing product design, we may not be able to proceed with development, manufacture and sale of our atomic layer products. In this case our business may not develop as planned, and our results could materially suffer. WE ARE DEPENDENT UPON KEY PERSONNEL WHO ARE EMPLOYED AT WILL, WHO WOULD BE DIFFICULT TO REPLACE AND WHOSE LOSS WOULD IMPEDE OUR DEVELOPMENT AND SALES We are highly dependent on key personnel to manage our business, and their knowledge of business, management skills and technical expertise would be difficult to replace. Our success depends upon the efforts and abilities of Dr. William W.R. Elder, our chairman and chief executive officer, Dr. Thomas E. Seidel, our chief technology officer, and other key managerial and technical employees who would be difficult to replace. The loss of Dr. Elder or Dr. Seidel or other key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and would also result in lost sales and diversion of management resources. None of our executive officers are bound by a written employment agreement, and the relationships with our officers are at will. Because of competition for additional qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products. Our growth depends on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Competition for such personnel is intense, particularly in the San Francisco Bay Area where we are based. If we are unable to retain our existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to customers, or fail to meet delivery commitments or experience deterioration in service levels or decreased customer satisfaction. 30 OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD RESULT IN SUBSTANTIAL LIABILITY TO US We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, property damage, personal injury and fines or suspension or cessation of our operations. We use the following regulated gases at our manufacturing facility in Sunnyvale: tungsten hexafluoride, dichlorosilane silicide, silane and nitrogen. We also use regulated liquids such as hydrofluoric acid and sulfuric acid. The city of Sunnyvale, California, imposes high environmental standards to businesses operating within the city. Genus has met the city's stringent requirements and has received an operating license from Sunnyvale. Presently, our compliance record indicates that our methods and practices successfully meet standards. Moving forward, if we fail to continuously maintain high standards to prevent the leakage of any toxins from our facilities into the environment, restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. WE DEPEND UPON A LIMITED NUMBER OF SUPPLIERS FOR MANY COMPONENTS AND SUBASSEMBLIES, AND SUPPLY SHORTAGES OR THE LOSS OF THESE SUPPLIERS COULD RESULT IN INCREASED COST OR DELAYS IN THE MANUFACTURE AND SALE OF OUR PRODUCTS Components and sub-assemblies included in our products are obtained from a single supplier or a limited group of suppliers. Disruption or termination of these sources could have an adverse effect on our operations. We believe that alternative sources could be obtained and qualified to supply these products, if necessary. Nevertheless, a prolonged inability to obtain components could have a material adverse effect on our operating results. WE DEPEND UPON SIX INDEPENDENT SALES REPRESENTATIVES FOR THE SALE OF OUR PRODUCTS AND ANY DISRUPTION IN THESE RELATIONSHIPS WOULD ADVERSELY AFFECT US We currently sell and support our thin film products through direct sales and customer support organizations in the U.S., Europe, South Korea and Japan and through six independent sales representatives and distributors in the U.S., Europe, South Korea, Taiwan, China and Malaysia. We do not have any long-term contracts with our sales representatives and distributors. Any disruption or termination of our existing distributor relationships could negatively impact sales and revenue. WE ESTABLISHED A DIRECT SALES ORGANIZATION IN JAPAN AND WE MAY NOT SUCCEED IN EFFECTIVELY PENETRATING THE JAPANESE MARKETPLACE We terminated our relationship with our distributor, Innotech Corp. in Japan in 1998. In 2000, we invested significant resources in Japan by establishing a direct sales organization, Genus-Japan, Inc. Although we continue to invest significant resources in our Japan office and have received orders from two new Japanese customers in 2001, we may not be able to attract new customers in the Japanese semiconductor industry, and as a result, we may fail to yield a profit or return on our investment in Japan. THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH MAY LEAD TO LOSSES BY INVESTORS OR TO SECURITIES LITIGATION Our common stock has experienced substantial price volatility, particularly as a result of quarter-to-quarter variations in our, our competitors or our customers' actual or anticipated financial results, our competitors or our customers' announcements of technological innovations, revenue recognition policies, changes in earnings estimates by securities analysts and other events or factors. Also, the stock market has experienced extreme price and volume 31 fluctuations which have affected the market price of many technology companies, in particular, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions in the United States and the countries in which we do business, may adversely affect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company's stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A disaster could severely damage our ability to deliver our products to our customers. Our products depend on our ability to maintain and protect our operating equipment and computer systems, which is primarily located in or near our principal headquarters in Sunnyvale, California. Sunnyvale exists near a known earthquake fault zone. Although our facilities are designed to be fault tolerant, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. Although we maintain general business insurance against interruptions such as fires and floods, there can be no assurance that the amount of coverage will be adequate in any particular case. WE ARE OBLIGATED TO ISSUE SHARES OF OUR STOCK UNDER OUTSTANDING OPTIONS AND WARRANTS AND SUCH ISSUANCE MAY DILUTE YOUR PERCENTAGE OWNERSHIP IN GENUS OR CAUSE OUR STOCK PRICE TO DROP As of January 31, 2002, we have a total of 5,231,431 shares of common stock underlying warrants and outstanding employee stock options. Of the stock options, 1,835,202 shares are exercisable as of January 31, 2002. All of the shares underlying the warrants are currently exercisable. Some warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. If all of the shares underlying the exercisable options and warrants were exercised and sold in the public market, the value of your current holdings in Genus may decline as a result of dilution to your percentage ownership in Genus or as a result of a reduction in the per share value of our stock resulting from the increase in the number of Genus shares available on the market, if such availability were to exceed the demand for our stock. WE HAVE IMPLEMENTED ANTI-TAKEOVER MEASURES THAT MAY RESULT IN DILUTING YOUR PERCENTAGE OWNERSHIP OF GENUS STOCK Pursuant to a preferred stock rights agreement, our board of directors has declared a dividend of one right for each share of our common stock that was outstanding as of October 13, 2000. The rights trade with the certificates for the common stock until a person or group acquires beneficial ownership of 15% or m ore of our common stock. After such an event, we will mail rights certificates to our shareholders and the rights will become transferable apart from the common stock. At that time, each right, other than rights owned by an acquirer or its affiliates, will entitle the holder to acquire, for the exercise price, a number of shares of common stock having a then-current market value of twice the exercise price. In the event that circumstances trigger the transferability and exercisability of rights granted in our preferred stock rights agreement, your current holdings in Genus may decline as a result of dilution to your percentage ownership in Genus or as a result of a reduction in the per share value of our stock resulting from the increase in the number of outstanding shares available. 32 FORWARD-LOOKING STATEMENTS We make forward-looking statements in this 10K report that may not prove to be accurate. This 10-K report contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding, among other items, our business strategy, growth strategy and anticipated trends in our business. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. When we use the words "believe," "expect," "anticipate," "project" and similar expressions, this should alert you that this is a forward-looking statement. We base these forward-looking statements on our expectations. They are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this 10-K report, and in documents incorporated into this 10-K report, including those set forth above in "Risk Factors," describe factors, among others, that could contribute to or cause these differences. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this 10-K report will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as our business practices evolve and could seriously harm our financial results. Won denominated sales made by the South Korean subsidiary for the year ended December 31, 2001 amounted to won 6.0 billion, or $4.6 million; sales for the year ended December 31, 2000 amounted to won 10.4 billion, or $9.1 million; and sales for the year ended December 31, 1999 amounted to won 6.1 billion, or $5.2 million. Sales made by the Japanese subsidiary for the year ended December 31, 2001 amounted to yen 369.0 million, or $3.1 million. There were no sales from our Japanese subsidiary in 2000 and 1999. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, reduce the demand for our products. Reduced demand for our products could materially adversely affect our business, results of operations and financial condition. At any time, fluctuations in interest rates could affect interest earnings on our cash, cash equivalents or increase any interest expense owed on the line of credit facility. We believe that the effect, if any, of reasonably possible near term changes in interest rates on our financial position, results of operations and cash flows would not be material. Currently, we do not hedge these interest rates exposures. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP, independent accountants, dated February 11, 2002, except as to the fourth paragraph of Note 6, which is as of March 27, 2002, are included in a separate section of this Report. SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA The following table presents our consolidated statements of operations data for each of the eight quarters in the period ended December 31, 2001 In our opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any quarter 33 should not be relied upon as necessarily indicated of results for any future period. We expect our quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in "Business Risks."
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR ==================================================== (IN THOUSANDS, EXCEPT SHARE DATA) 2001 Revenues $ 14,309 $ 13,659 $ 15,094 $ 5,677 Gross profit 5,706 5,039 4,794 700 Net income (loss) 131 (853) (744) (5,200) Basic net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23) Diluted net income (loss) per share $ 0.01 $ (0.04) $ (0.03) $ (0.23) 2000 Revenues As originally reported $ 12,277 $ 12,356 $ 14,165 $ 15,683 Effect of revenue recognition change (8,451) (5,770) 378 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter 3,826 6,586 14,543 15,683 ----------- ------------ ----------- ------------ Gross profit As originally reported 5,465 5,450 6,043 6,361 Effect of revenue recognition change (4,483) (3,039) 456 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter 982 2,411 6,499 6,361 ----------- ------------ ----------- ------------ Cumulative effect of change in accounting principle (6,770) - - - ----------- ------------ ----------- ------------ Net income (loss) As originally reported 971 955 1,190 1,099 Effect of revenue recognition change (11,308) (3,014) 456 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter $ (10,337) $ (2,059) $ 1,646 $ 1,099 =========== ============ =========== ============ Basic income per share: Income before cumulative effect of accounting change As originally reported $ 0.05 $ 0.05 $ 0.06 $ 0.06 Effect of revenue recognition change (0.24) (0.16) 0.03 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter (0.19) (0.11) 0.09 0.06 ----------- ------------ ----------- ------------ Cumulative effect of change in accounting principle (0.36) - - - ----------- ------------ ----------- ------------ Net income As originally reported 0.05 0.05 0.06 0.06 Effect of revenue recognition change (0.60) (0.16) 0.03 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter $ (0.55) $ (0.11) $ 0.09 $ 0.06 =========== ============ =========== ============ Diluted income per share: Income before cumulative effect of accounting change As originally reported $ 0.05 $ 0.05 $ 0.06 $ 0.05 Effect of revenue recognition change (0.24) (0.16) 0.02 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter (0.19) (0.11) 0.08 0.05 ----------- ------------ ----------- ------------ 34 Cumulative effect of change in accounting principle (0.36) - - - ----------- ------------ ----------- ------------ Net income (loss) As originally reported 0.05 0.05 0.06 0.05 Effect of revenue recognition change (0.60) (0.16) 0.02 - ----------- ------------ ----------- ------------ As restated for first three quarters and as reported for fourth quarter $ (0.55) $ (0.11) $ 0.08 $ 0.05 =========== ============ =========== ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of December 31, 2001, the directors and executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, are as follows:
NAME AGE POSITION - ----------------------- --- ---------------------------------------------------------- William W.R. Elder. . . 63 Chairman and Chief Executive Officer Thomas E. Seidel, Ph.D. 66 Executive Vice President, Chief Technical Officer Shum Mukherjee. . . . . 51 Executive Vice President, Finance, Chief Financial Officer * Werner Rust . . . . . 59 Vice President, Worldwide Sales & Marketing Eddie Lee . . . . . . . 50 Executive Vice President, Advanced Engineering Mario M. Rosati . . . . 55 Secretary and Director Todd S. Myhre . . . . . 57 Director G. Frederick Forsyth. . 57 Director George D. Wells . . . . 66 Director Robert J. Richardson. . 55 Director
Except for Mr. Mukherjee and Mr. Lee, all of the officers have been associated with us in their present or other capacities for more than the past five years. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships among our executive officers. * Mr. Rust will be approved as an officer in the May 2002 meeting of the Board of Directors. WILLIAM W.R. ELDER was a founder of Genus and is our Chairman of the Board, President and our Chief Executive Officer. From October 1996 to April 1998, Dr. Elder served only as Chairman of the Board. From April 1990 to September 1996, Dr. Elder was Chairman of the Board, President and Chief Executive Officer of the Company. From November 1981 to April 1990, Dr. Elder was President and a director of the Company. THOMAS E. SEIDEL has served as our Executive Vice President and Chief Technical Officer since January 1996. From July 1988 to January 1996, Dr. Seidel was associated with SEMATECH, a semiconductor-industry consortium, in various senior management positions, most recently as Chief Technologist and Director of Strategic Technology. SHUM MUKHERJEE has served as our Executive Vice President of Finance and Chief Financial Officer since October 2001. Mr. Mukherjee has broad financial management experience. From 1978 to 1984, Mr. Mukherjee was with Ford of Europe, Raychem Corporation (now a division of Tyco International) from 1984 to 1998 and with E*TRADE Group from 1998 to 2001. Mr. Mukherjee earned a Masters Degree in Management from the Sloan School of Management at Massachusetts Institute of Technology. WERNER RUST has served as our Vice President of Sales and Marketing Worldwide since November 2001. Mr. Rust has more than 20 years' experience in semiconductor sales and marketing. From 1994 to 1996, Mr. Rust served as Director of Marking at GaSonics. From 1997 to 1998, Mr. Rust served as General Manager of Low-K Dielectric at Fairchild Technologies. From 1998 to February 2001, Mr. Rust served as Director of Marketing at SVG. From February 2001 to September 2001, Mr. Rust served as CMO/Etch of Strategic Marketing at Applied Materials. EDDIE LEE has served as our Executive Vice President, Advanced Technology, Engineering and Strategic Marketing since February 2001. Mr. Lee joined the Company in August 2000, as Vice President of New Technology Business Development. Prior to joining the Company, Mr. Lee was Vice President of 36 Technology at Silicon Valley Group. Working in the thin film industry since 1974, Mr. Lee has held managerial positions at Honeywell, Advanced Micro Devices and Varian. He is currently on the technical advisory board of two other privately held companies in a non-competing field with Genus. MARIO M. ROSATI has served as our Secretary since May 1996 and as a director since our inception in November 1981. He has been a member, since 1971, of the law firm Wilson Sonsini Goodrich & Rosati, Professional Corporation, general counsel to the Company. Mr. Rosati is also a director of Aehr Test Systems, a manufacturer of computer hardware testing systems, Sanmina Corporation, an electronics contract manufacturer, Symyx Technologies, Inc., a combinatorial materials science company, The Management Network Group, Inc., a management consulting firm focused on the telecommunications industry, and Vivus, a specialty pharmaceutical company, all publicly-held companies. He is also a director of a number of privately held companies. TODD S. MYHRE has served as a director since January 1994. Since September 1999, he served as Interim Chief Executive Officer and a Board member for Ybrain.com, an e-commerce company focused on the college student market. From April 1998 to August 1999 and from September 1995 to January 1996, he served as President, Chief Executive Officer, and a Board member of GameTech International, an electronic gaming manufacturer. From February 1996 to February 1998, Mr. Myhre was an international business consultant. From January 1993 to August 1993, from August 1993 to December 1993 and from January 1994 to August 1995, Mr. Myhre served as Vice President and Chief Financial Officer of the Company, as Executive Vice President and Chief Operating Officer and as President and a Director of the Company. G. FREDERICK FORSYTH has served as a director since February 1996. Since May 2000, Mr. Forsyth has served as President and CEO of NewRoads, Inc. From March 1999 to May 2000, Mr. Forsyth served as President, Systems Engineering and Services of Solectron Corp. From August 1997 to March 1999, Mr. Forsyth served as President, Professional Products Division of Iomega, Inc. From June 1989 to February 1997, Mr. Forsyth was associated with Apple Computer, Inc., a personal computer manufacturer, in various senior management positions, most recently as Senior Vice President and General Manager, Macintosh Product Group. GEORGE D. WELLS has served as a director since March 2000. From July 1992 to October 1996, Mr. Wells served as President and Chief Executive Officer of Exar Corporation. From April 1985 to July 1992, he served as President and Chief Operating Officer of L.S.I. Logic Corporation and became Vice Chairman in March 1992. From May 1983 to April 1985, Mr. Wells was President and Chief Executive Officer of Intersil, Inc., a subsidiary of General Electric Company. ROBERT J. RICHARDSON has served as a director since March 2000. Since January 2000, Mr. Richardson has been a semiconductor industry consultant. From November 1997 to January 2000, Mr. Richardson served as Chairman, Chief Executive Officer and President of Unitrode Corporation. From June 1992 to November 1997, he served in various positions at Silicon Valley Group, Inc. including President Lithography Systems, President Track Systems Division, and Corporate Vice-President New Business Development and Marketing. From October 1988 to June 1992, Mr. Richardson was President and General Manager, Santa Cruz Division at Plantronics, Inc. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to "Board of Directors and Committees," "Summary Compensation Table," "Stock Options and Stock Appreciation Rights" and "Retirement Benefits" in the Company's definitive Proxy Statement for the fiscal year ended December 31, 2001, which we will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report. 37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to "Information Relating to Directors, Nominees and Executive Officers" in the Company's definitive Proxy Statement for the fiscal year ended December 31, 2001, which we will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to "Certain Transactions" in the Company's definitive Proxy Statement for the fiscal year ended December 31, 2001 which we will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Consolidated Financial Statements. Report of Independent Accountants Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Operations - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity and comprehensive income (loss) - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 Notes to the Consolidated Financial Statements 2. Financial Statement Schedule. Schedule II "Valuation and Qualifying Accounts" 3. Exhibits and reports on form 8-K. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Report. On December 13, 2001, the Company filed a Form 8-K with the Securities and Exchange Commission its intention to conduct a private placement transaction in the first quarter of 2002. 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Genus, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Genus, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2000, the Company changed its method of recognizing revenue to comply with Securities and Exchange Commission Staff Accounting Bulletin No. 101. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------- PricewaterhouseCoopers LLP San Jose, California February 11, 2002, except as to the fourth paragraph of Note 6, which is as of March 27, 2002 40
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, -------------------- 2001 2000 --------- --------- ASSETS Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 3,043 $ 3,136 Accounts receivable (net of allowance for doubtful accounts of $69 in 2001 and $363 in 2000) . . . . . . . . . . . . . 4,262 8,479 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 12,648 21,849 Other current assets . . . . . . . . . . . . . . . . . . . . 1,221 675 --------- --------- Total current assets . . . . . . . . . . . . . . . . . . . 21,174 34,139 Equipment, furniture and fixtures, net . . . . . . . . . . . 14,573 10,207 Other assets, net. . . . . . . . . . . . . . . . . . . . . . 155 189 --------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 35,902 $ 44,535 ========= ========= LIABILITIES Current Liabilities: Short-term bank borrowings . . . . . . . . . . . . . . . . . $ 4,481 $ 2,719 Accounts payable . . . . . . . . . . . . . . . . . . . . . . 8,352 8,647 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 3,553 3,315 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 7,388 18,562 --------- --------- Total liabilities. . . . . . . . . . . . . . . . . . . . . 23,774 33,243 --------- --------- Commitments and contingencies (Note 7) SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized 2,032 shares; Issued and outstanding, none . . . . . . . . . . . . . . . . 0 0 Common stock, no par value: Authorized 50,000 shares; Issued and outstanding, 22,365 shares in 2001 and 19,319 shares in 2000. . . . . . . . . . . . . . . . . . . 110,753 102,837 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (96,189) (89,523) Note receivable from shareholder . . . . . . . . . . . . . . (151) 0 Accumulated other comprehensive loss . . . . . . . . . . . . (2,285) (2,022) --------- --------- Total shareholders' equity . . . . . . . . . . . . . . . . 12,128 11,292 --------- --------- Total liabilities and shareholders' equity . . . . . . . . $ 35,902 $ 44,535 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 41
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,739 $40,638 $28,360 Costs and expenses: Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . 32,500 24,385 16,628 Research and development. . . . . . . . . . . . . . . . . . . 12,118 8,659 5,368 Selling, general and administrative . . . . . . . . . . . . . 10,381 10,093 7,930 Restructuring and other . . . . . . . . . . . . . . . . . . . 0 0 543 ------ -------- --------- Loss from operations. . . . . . . . . . . . . . . . . . . . (6,260) (2,499) (2,109) Other income (expense), net . . . . . . . . . . . . . . . . . . (336) 108 669 ------ -------- --------- Loss before provision for income taxes and cumulative effect of change in accounting principle . . . . . . . . . . . . . . (6,596) (2,391) (1,440) Provision for income taxes. . . . . . . . . . . . . . . . . . . 70 490 177 ------ -------- --------- Loss before cumulative effect of change in accounting principle (6,666) (2,881) (1,617) Cumulative effect of change in accounting principle . . . . . . 0 (6,770) 0 ------ -------- --------- Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,666) $(9,651) $(1,617) ======== ======== ======== Per share data: Basic and diluted loss per share before cumulative effect. . . $ (0.31) $ (0.15) $ (0.09) Cumulative effect of change in accounting principle . . . . . . 0 (0.36) 0 ------ -------- --------- Basic and diluted net loss per share. . . . . . . . . . . . . . $ (0.31) $ (0.51) $ (0.09) ======== ======== ======== Shares used to compute basic and diluted net loss per share . . 21,163 18,937 18,134 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 42
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS) NOTES COMMON STOCK RECEIVABLE ACCUMULATED OTHER ---------------- FROM ACCUMULATED COMPREHENSIVE SHARES AMOUNT SHAREHOLDERS DEFICIT LOSS TOTAL ------ -------- -------------- ------------- --------------- -------- Balances, January 1, 1999. . . . . . . . . 17,473 $ 99,849 0 $ (78,255) $ (1,641) $19,953 Conversion of 16 shares of Series B convertible preferred stock to 640 shares of common stock . . . . . . . . 640 773 0 0 0 773 Issuance of shares of common stock under stock option plan. . . . . 50 102 0 0 0 102 Issuance of shares of common stock under employee stock purchase plan . . . . . 306 220 0 0 0 220 Issuance of warrants to Venture Bank to purchase 25 shares of common stock . . 0 53 0 0 0 53 Amortization of deferred stock compensation . . . . . . . . . . . . . 0 45 0 0 0 45 Net loss . . . . . . . . . . . . . . . . 0 0 0 (1,617) 0 Translation adjustments. . . . . . . . . 0 0 0 0 (151) Comprehensive loss . . . . . . . . . . . 0 0 0 0 0 (1,768) ------ -------- -------------- ------------- --------------- -------- Balances, December 31, 1999. . . . . . . . 18,469 101,042 0 (79,872) (1,792) 19,378 Issuance of shares of common stock under stock option plan. . . . . . . . 490 1,023 0 0 0 1,023 Issuance of shares of common stock from warrants and options. . . . 72 0 0 0 0 0 Issuance of shares of common stock under employee stock purchase plan . . . . . 288 282 0 0 0 282 Stock-based compensation . . . . . . . . 0 490 0 0 0 490 Net loss . . . . . . . . . . . . . . . . 0 0 0 (9,651) 0 Translation adjustments. . . . . . . . . 0 0 0 0 (230) Comprehensive loss. . . . . . . . . . . . 0 0 0 0 0 (9,881) ------ -------- -------------- ------------- --------------- -------- Balances, December 31, 2000. . . . . . . . 19,319 102,837 0 (89,523) (2,022) 11,292 Issuance of shares of common stock and warrants to purchase common stock under private placement, net of issuance cost of $725. . . . . . . . . 2,542 6,900 0 0 0 6,900 Issuance of shares of common stock under stock option plan. . . . . . . . 243 521 (151) 0 0 370 Issuance of shares of common stock under employee stock purchase plan . . 261 417 0 0 0 417 Stock-based compensation . . . . . . . . 0 78 0 0 0 78 Net loss . . . . . . . . . . . . . . . . 0 0 0 (6,666) 0 Translation adjustments. . . . . . . . . 0 0 0 0 (263) Comprehensive loss . . . . . . . . . . . . 0 0 0 0 0 (6,929) ------ -------- -------------- ------------- --------------- -------- Balances, December 31, 2001. . . . . . . . 22,365 $110,753 $ (151) $ (96,189) $ (2,285) $12,128 ====== ======== ============== ============= =============== ========
The accompanying notes are an integral part of the consolidated financial statements. 43
GENUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 --------- --------- -------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,666) $ (9,651) $(1,617) Adjustments to reconcile net loss to net cash from operating activities: Cumulative effect of change in accounting principle. . . . . 0 6,770 0 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 3,034 1,740 1,805 Provision for doubtful accounts. . . . . . . . . . . . . . . 0 (188) 51 Restructuring and other. . . . . . . . . . . . . . . . . . . 0 0 543 Stock-based compensation . . . . . . . . . . . . . . . . . . 78 490 98 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . . . . 4,217 (662) 4,785 Inventories. . . . . . . . . . . . . . . . . . . . . . . . 9,201 (10,414) (1,928) Other assets . . . . . . . . . . . . . . . . . . . . . . . (512) 352 (519) Accounts payable . . . . . . . . . . . . . . . . . . . . . (295) 4,501 1,953 Accrued expenses . . . . . . . . . . . . . . . . . . . . . 238 111 (626) Deferred revenue . . . . . . . . . . . . . . . . . . . . . (11,174) 4,659 0 --------- --------- -------- Net cash provided by (used in) operating activities. . . . (1,879) (2,292) 4,545 --------- --------- -------- Cash flows from investing activities: Acquisition of equipment, furniture and fixtures . . . . . . (7,400) (5,053) (2,040) --------- --------- -------- Net cash used in investing activities. . . . . . . . . . . (7,400) (5,053) (2,040) --------- --------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock . . . . . . . . . 7,687 1,305 322 Proceeds from short-term bank borrowings . . . . . . . . . . 14,236 6,719 0 Payments of short-term bank borrowings . . . . . . . . . . . (12,474) (4,000) (4,000) Payments of long-term debt and capital leases. . . . . . . . 0 (52) (62) --------- --------- -------- Net cash provided by (used in) financing activities. . . . 9,449 3,972 (3,740) --------- --------- -------- Effect of exchange rate changes on cash. . . . . . . . . . . . (263) (230) (151) --------- --------- -------- Net decrease in cash and cash equivalents. . . . . . . . . . . (93) (3,603) (1,386) Cash and cash equivalents, beginning of year . . . . . . . . . 3,136 6,739 8,125 --------- --------- -------- Cash and cash equivalents, end of year . . . . . . . . . . . . $ 3,043 $ 3,136 $ 6,739 ========= ========= ======== Supplemental Cash Flow Information Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 470 $ 76 $ 4 Cash paid for income taxes . . . . . . . . . . . . . . . . . . 1 177 0 Non-cash investing and financing activities: Conversion of Series B preferred stock to common stock . . . $ 0 $ 0 $ 773
The accompanying notes are an integral part of the consolidated financial statements. 44 - -------------------------------------------------------------------------------- GENUS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations. Genus, Inc. (the "Company") was incorporated in California in 1982. The Company designs, manufactures and markets capital equipment and deposition processes for advanced semiconductor manufacturing. The Company's products are marketed worldwide either directly to end-users or through exclusive sales representative arrangements. In January 1996, the Company opened a subsidiary in South Korea to provide sales and service support to Korean customers. The Company's customers include semiconductor manufacturers located throughout the United States, Europe and in the Pacific Rim including Japan, South Korea and Taiwan. The following is a summary of the Company's significant accounting policies. Basis of Presentation. The consolidated financial statements include the accounts of Genus, Inc. and its wholly owned subsidiaries after elimination of significant inter-company accounts and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Liquidity. During the year ended December 31, 2001, the Company was in the process of executing its business strategy and has plans to eventually achieve profitable operations. Management believes that existing cash and available financing will be sufficient to meet projected working capital, capital expenditures and other cash requirements for the next twelve months. Accordingly, these financial statements have been prepared on a going concern basis. Cash and Cash Equivalents. The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of money market funds. Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts receivable, short term bank borrowings and accounts payable approximate estimated fair value because of the short maturity of those financial instruments. Concentration of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company places cash not required for current disbursement in money market funds in the United States. The Company does not require collateral from its customers and maintains an allowance for credit losses. One customer accounted for an aggregate of 99% of accounts receivable at December 31, 2001. Two customers accounted for an aggregate of 91% of accounts receivable at December 31, 2000. The Company has written off bad debts of $294,000, none, and none in 2001, 2000, and 1999, respectively. Inventories. Inventories are stated at the lower of cost or market, using standard costs that approximate actual costs, under the first-in, first-out method. Included in the inventory are customer evaluation units. If not purchased by the customer within 6 months after shipment date, the units are amortized over 3 years. Long-Lived Assets. Equipment, furniture and fixtures are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are amortized using 45 the straight-line method over their estimated useful lives or the remaining lease term, whichever is less. Equipment includes demonstration equipment, which is located in our Applications Laboratory and are used to demonstrate to our customers the capabilities of our equipment to process wafers and deposit films. The gross value of demonstration equipment is based on the cost of materials and actual factory labor and overhead expenses incurred in manufacturing the equipment. Costs related to refurbishing or maintaining existing demonstration equipment, which do not add to the capabilities or useful life of the equipment, are not capitalized and are expensed as incurred. Demonstration equipment is stated at cost and depreciated over a period of five years. Revenue Recognition. The Company's selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company defers recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. Under SAB 101, warranty obligations are accrued upon final customer acceptance which coincides with recognition of revenue. Prior to January 1, 2000, revenue related to systems was generally recognized upon shipment. A provision for the estimated future cost of system installation, warranty and commissions was recorded when revenue was recognized. Service revenue is recognized when service has been completed. Product Warranty. The Company provides one-year labor and two-year material warranty on its products. Warranty expenses are accrued upon revenue recognition. At present, based upon historical experience, the Company accrues material warranty equal to 2% and 5% of shipment value for its LYNX2(R) and LYNX3 products, respectively, and labor warranty equal to $20,000 per system for both its LYNX2(R) and LYNX3 products. At the end of every quarter, the Company reviews its actual spending on warranty and reassess if its accrual is adequate to cover warranty expenses on the systems in the field which are still under warranty. Differences between the required accrual and booked accrual are charged to warranty expenses for the period. Income Taxes. The Company accounts for income taxes using a method that requires deferred tax assets to be computed annually on an asset and liability method and adjusted when new tax laws or rates are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Income tax expense (benefit) is the tax payable (refundable) for the period plus or minus the change in deferred tax assets and liabilities during the period. Foreign Currency. The Company has foreign sales and service operations. With respect to all foreign subsidiaries excluding South Korea and Japan, the functional currency is the U.S. dollar, and transaction and translation gains and losses are included in results of operations. The functional currency of the Company's South Korean subsidiary is the won, and the functional currency of the Company's Japanese subsidiary is the yen. The translation from the applicable foreign currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rate during the period. Adjustments resulting from such translation are reflected as cumulative translation adjustments. Net Loss Per Share. Basic net loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing loss available to common shareholders, adjusted for convertible preferred dividends and after-tax interest expense on convertible debt, if any, by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). Stock Compensation. The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." Generally, the Company's policy is 46 to grant options with an exercise price equal to the quoted market price of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company's statements of operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." Comprehensive loss. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for disclosure and financial statement display for reporting total comprehensive income and its individual components. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company's comprehensive loss includes net loss and foreign currency translation adjustments and is displayed in the statement of shareholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe the adoption of SFAS No. 141 to date has not had significant impact on our consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We believe the adopting of SFAS 142 will not have a significant impact on our consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of long-lived assets, except for certain obligations of leases. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statue, ordinance or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and provides further guidance regarding the accounting and disclosure of long-lived assets. The Company is required to adopt SFAS 144 effective January 1, 2002. We believe the adoption of SFAS No. 144 will not have a significant impact on our consolidated financial statements. NOTE 2. ACCOUNTING CHANGE - REVENUE RECOGNITION In December 2000, the Company changed its accounting method for recognizing revenue on sales with an effective date of January 1, 2000. The Company's selling arrangements generally involve contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title. As a result, effective January 1, 2000, to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, the Company defers recognition of revenue from such equipment sales until installation is complete and the product is accepted by the customer. The Company previously recognized revenue related to systems upon shipment. A provision for the estimated future cost of system installation, warranty and commissions was recorded when revenue was recognized. 47 The cumulative effect on prior years of the change in accounting method was a charge of $6.8 million or $0.36 per basic and diluted share. Unaudited Pro forma amounts of the retroactive application of the change in accounting principle under SAB 101 are as follows (amounts are in thousands):
Years Ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Revenues. . . . . . $48,739 $40,638 $27,992 Net loss. . . . . . (6,666) (2,881) (3,232) Net loss per share: Basic . . . . . . $ (0.31) $ (0.15) $ (0.18) Diluted . . . . . $ (0.31) $ (0.15) $ (0.18)
NOTE 3. INVENTORIES Inventories comprise the following (in thousands):
DECEMBER 31, ================ 2001 2000 ======= ======= Raw materials and purchased parts $ 4,446 $ 6,081 Work in process . . . . . . . . . 2,499 5,624 Finished goods. . . . . . . . . . 630 647 Inventory at customers' locations 5,073 9,497 ------- ------- $12,648 $21,849 ======= =======
Finished goods include customer evaluation units with a net book value of $619,000 and $563,000 at December 31, 2001 and 2000, respectively. Inventory at customers' locations represent the cost of systems shipped to customers for which we are awaiting customer acceptance. NOTE 4. EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures are stated at cost and comprise the following (in thousands):
DECEMBER 31, ==================== 2001 2000 ======== ========== Equipment (useful life of 3 years). . . . . . . . . . . . . $ 9,165 $ 8,698 Demonstration equipment (useful life ranges from 3-5 years) 24,161 18,089 Furniture and fixtures (useful life of 3 years) . . . . . . 1,083 1,029 Leasehold improvements (useful life ranges from 4-10 years) 4,385 3,694 --------- --------- 38,794 31,510 Less accumulated depreciation and amortization. . . . . . . (27,611) (24,740) --------- --------- 11,183 6,770 Construction in progress. . . . . . . . . . . . . . . . . . 3,390 3,437 --------- --------- $ 14,573 $ 10,207 ========= =========
NOTE 5. ACCRUED EXPENSES
Accrued expenses comprise the following (in thousands): DECEMBER 31, ================= 2001 2000 ========= ====== System installation and warranty. . . . . . . . . . . $ 803 $ 757 Accrued commissions and incentives. . . . . . . . . . 330 242 Accrued compensation and related items. . . . . . . . 723 615 Federal, state and foreign income taxes . . . . . . . 444 828 Other . . . . . . . . . . . . . . . . . . . . . . . . 1,254 873 --------- ------ $ 3,553 $3,315 ========= ======
48 NOTE 6. SHORT-TERM BANK BORROWING In November 1999, the Company entered into a $10.0 million revolving line of credit with Venture Bank. Amounts available under the line are based on 80% of eligible accounts receivable, and borrowings under the line of credit are secured by all corporate assets and bear interest at prime plus 0.25%. The line of credit expired in November 2001. In July 2001, our 100% owned subsidiary in Japan, Genus Japan Inc., negotiated a financing arrangement, secured by customer receivables, with Aozora Bank, Ltd. in Tokyo. The agreement ends on April 30, 2002. The interest rate for borrowings under this agreement is 6.5%. As of December 31, 2001, there was no balance outstanding and available under this line of credit. In December 2001, the Company replaced the $10.0 million line of credit with Venture bank with a $10.0 million line of credit from Silicon Valley bank. The Silicon Valley bank agreement includes a domestic revolving line of credit of $7.5 million, secured against domestic eligible receivables and a foreign line of credit of $7.5 million, financed by EXIM bank, secured against foreign eligible receivables and inventory. The initial term of the loan is 12 months ending December 20, 2002. Total availability under both lines at any given point in time is limited to $10.0 million. The interest rate for borrowings under both the domestic and foreign lines is prime plus 1.75% per annum calculated on the basis of a 360-day year. The loan agreement is collateralized by a first priority perfected security interest in the Company's assets and has a covenant requiring the Company to maintain a minimum tangible net worth of $12.0 million plus 50% of consideration for subsequent equity issuances and 50% of net income of future quarters. The minimum tangible net worth requirement is reduced by any losses in a subsequent quarter, but will not be reduced to less than $12.0 million. There was $4.5 million outstanding and there were no additional funds available to borrow under this agreement at December 31, 2001. On March 27, 2002, we amended our line of credit with Silicon Valley Bank to increase the funds available under both lines of credit to $15.0 million, to extend the initial term of the loan to 15 months ending March 19, 2003 and to reset the covenant to $12.0 million plus 50% of consideration for equity issuances subsequent to March 8, 2002. On January 4, 2002, the Company received gross proceeds of $1.2 million under a secured loan with CitiCapital, a division of Citigroup. The loan is payable over 36 months, accrues interest of 8.75% per annum and is secured by two systems in our demonstration lab. There was no outstanding balance under this agreement at December 31, 2001. NOTE 7. COMMITMENTS AND CONTINGENCIES We maintain our headquarters, manufacturing and research and development operations in Sunnyvale, California. Our lease for the Sunnyvale facility expires in October 2012 with a current annual rental expense of approximately $903,000. Commencing in 2003, our annual rental expense will be $1,828,000, which includes $200,000 per year to recognize the impact of future rental increases on a straight-line basis. We also have leases for our sales and support offices in Seoul, South Korea and Tokyo, Japan. We believe that our existing facilities are adequate to meet our current requirements and that suitable additional or substitute space will be available as needed. At December 31, 2001, minimum lease payments required under these operating leases are as follows (in thousands):
2002. . . . . $ 944 2003. . . . . 1,628 2004. . . . . 1,628 2005. . . . . 1,628 2006. . . . . 1,653 Thereafter. . 11,549 ------- 19,031 =======
49 Rent expense was $682,000, $806,000, and $713,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Sublease rental income was $596,000, $1,104,000 and $820,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In September 2001, the sublease tenant terminated their sublease and we reclaimed the office space. LEGAL PROCEEDINGS In May 1999, Varian Semiconductor Equipment Associates, Inc. ("Varian") filed a Statement of Claims with the American Arbitration Society of Santa Clara County, California seeking to enforce certain provisions of the April 15, 1998 Asset Purchase Agreement by and between Varian and Genus (the "Asset Sale"). The dispute specifically involved ownership rights of certain high-energy ion implanter assets. Varian and Genus entered into a Settlement and Mutual Release (the "Release") in January of 2000. As partial consideration under the Release, Genus agreed to relinquish its ownership interest in certain funds provided to Varian in conjunction with the Asset Sale. These funds were held in an escrow account maintained by Varian, the amount of which was $543,000. Such amount was recorded as restructuring and other expenses in 1999. In July 1999, we were named as a co-defendant in a claim filed at the Superior Court of the state of California for the county of Santa Clara, involving an automobile accident by one of our former employees, which resulted in the death of an individual. Significant general, punitive and exemplary damages were being sought by the plaintiffs. In June 2001, the plaintiffs settled with our insurance carrier for an amount within our insurance policy limits. On June 6, 2001, ASM America, Inc. ("ASMA") filed a patent infringement action against Genus, Inc. ASMA's complaint alleges that Genus is directly and indirectly infringing U.S. Patent No. 5,916,365 (the "365 Patent"), entitled "Sequential Chemical Vapor Deposition," and U.S. Patent No. 6,015,590 (the "590 Patent") entitled "Method For Growing Thin Films," which ASM claims to own or exclusively license. The complaint seeks monetary and injunctive relief. On August 1, 2001, Genus filed a counterclaim against ASMA and ASM International, N.V. ("ASMI") for infringement of U.S. Patent No. 5,294,568 (the "568 Patent") entitled "Method of Selective Etching Native Oxide" and for antitrust violations. Genus also seeks a declaratory judgment that ASMA's claims regarding the 365 and 590 Patents are invalid and unenforceable. An initial Case Management Conference was held on October 16, 2001. On January 9, 2002, the court issued an order granting ASM leave to amend its complaint to add Dr. Arthur Sherman as a party and to add a claim that Genus is directly and indirectly infringing U.S. Patent No 4,798,165 (the "165 Patent") entitled "Apparatus for Chemical Vapor Deposition Using an Axially Symmetric Gas Flow", which ASM claims to own. The court also severed and stayed discovery regarding Genus' antitrust claims until after the patent litigation is resolved. On February 4, 2002, Genus filed for declaratory judgment on the grounds that ASMA's claims regarding the 165 Patent are invalid and unenforceable. The Claim Construction Hearings regarding these claims are set for June 14, 2002 (for the 590 and 365 Patents), June 24, 2002 (for the 568 Patent), and September 26, 2002 (for the 165 Patent). We may in the future be party to litigation arising in the ordinary course of our business, including claims that we allegedly infringe third party trademarks and other intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. NOTE 8. SHAREHOLDERS' EQUITY Sale of Common Stock 50 On May 17, 2001, the Company sold 2,541,785 shares of our common stock and warrants to purchase up to 1,461,525 of additional shares of common stock for net proceeds of approximately $6.9 million. On January 25, 2002, the Company sold 3,871,330 shares of our common stock and warrants to purchase up to 580,696 of additional shares of common stock for net proceeds of approximately $7.9 million. Warrants and Options In connection with a private placement in April 1995, the Company granted options for 118,000 shares of the Company's common stock to the investors. On April 25, 2000, the grantees elected to exercise their options to purchase all 118,000 shares. As provided in the option agreements, the grantees received a reduced number of shares in exchange for the aggregate exercise price due, resulting in the issuance by the Company of 17,000 shares. In connection with the November 1999 $10.0 million revolving line of credit, the Company issued to Venture Bank warrants to purchase 25,000 shares of the Company's common stock at a price of $2.39 per share. Based on the Black-Scholes option-pricing model, the fair market value of the warrants at the date of the grant was $53,000, which was amortized to interest expense over the two-year life of the line. In connection with the sale of common stock in May 2001, the Company issued warrants to purchase 1,461,525 shares of common stock. Of these warrants, 1,270,891 shares have an exercise price of $3.50; 69,375 shares have an exercise price of $3.00 and 121,259 shares have an exercise price of $5.24. The warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. In connection with the sale of common stock in January 2002, the Company issued warrants to purchase 580,696 shares of common stock at an exercise price of $3.23. The warrants have terms providing for an adjustment of the number of shares underlying the warrants in the event that we issue new shares at a price lower than the exercise price of the warrants, where we make a distribution of common stock to our shareholders or effect a reclassification. Net Loss Per Share A reconciliation of the numerator and denominator of basic and diluted loss per share is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ============================ 2001 2000 1999 ======== ======== ======== Loss attributable to common shareholders before cumulative effect of change in accounting principle: Numerator-Basic and diluted: Net loss attributable to common shareholders . . . . . . . . . $(6,666) $(2,881) $(1,617) ======== ======== ======== Denominator-Basic and diluted: Weighted average common stock outstanding. . . . . . . . . . . 21,163 18,937 18,134 ======== ======== ======== Basic net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.15) $ (0.09) ======== ======== ======== Net loss attributable to common shareholders: Numerator-Basic and diluted: Net loss attributable to common shareholders . . . . . . . . . $(6,666) $(9,651) $(1,617) ======== ======== ======== Denominator-Basic and diluted: Weighted average common stock outstanding . . . . . . . . . . 21,163 18,937 18,134 ======== ======== ======== Basic net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.51) $ (0.09) ======== ======== ========
51 Stock options to purchase 3,378,321 shares of common stock with a weighted average exercise price of $3.72 were outstanding on December 31, 2001, but were not included in the computation of diluted loss per share because the Company has a net loss for 2001. Warrants for the purchase of 1,486,525 shares of common stock with a weighted average exercise price of $3.60 were outstanding at December 31, 2001, but were not included in the computation of diluted loss per share because the Company has a net loss for 2001. Stock options to purchase 2,972,386 shares of common stock with a weighted average exercise price of $4.28 were outstanding on December 31, 2000, but were not included in the computation of diluted loss per share because the Company has a net loss for 2000. Warrants for the purchase of 325,000 shares of common stock with a weighted average exercise price of $3.57 were outstanding at December 31, 2000, but were not included in the computation of diluted loss per share because the Company has a net loss for 2000. Stock options to purchase 2,639,219 shares of common stock with a weighted average exercise price of $2.11 were outstanding on December 31, 1999, but were not included in the computation of diluted loss per share because the Company has a net loss for 1999. Warrants for the purchase of 425,000 shares of common stock with a weighted average exercise price of $3.79 were outstanding at December 31, 1999, but were not included in the computation of diluted loss per share because the Company has a net loss for 1999. Stock Option Plan In March of 2000, the Company adopted the 2000 Incentive Stock Option Plan to replace the 1991 Incentive Stock Option Plan. The 1991 Incentive Stock Option Plan was scheduled to expire ten years after its adoption in 1991. Under the 2000 Incentive Stock Option Plan, the Board of Directors can grant incentive and nonstatutory stock options. The Board of Directors has the authority to determine to whom options will be granted, the number of options, the term and exercise price. The options are exercisable at times and increments as specified by the Board of Directors, and generally vest over a three-year period and expire five years from the date of grant. At December 31, 2001, the Company had reserved 5,503,006 shares of common stock for issuance under the 2000 Incentive Stock Option Plan, which included 700,000 shares added to the plan in 2001 and a total of 469,056 shares remained available for future grants at December 31, 2001. Activity under the 1991 and 2000 Incentive Stock Option Plans is set forth in the table below: (in thousands, except per share data):
AVAILABLE OPTIONS OUTSTANDING WEIGHTED AVAILABLE =================== AVERAGE FOR EXERCISE GRANT OPTIONS PRICE PER SHARE AMOUNT PRICE ========== ========= ===================== ========= ======== Balance, January 1, 1999 . 829 2,301 $ 0.88 to $8.00 $ 4,507 $ 1.96 Granted. . . . . . . . . . (532) 532 1.87 to 4.34 1,384 2.88 Exercised. . . . . . . . . - (50) 0.88 to 3.03 (102) 2.05 Terminated . . . . . . . . 144 (144) 0.88 to 4.00 (226) 1.57 ---------- --------- --------------------- --------- ------ Balance, December 31, 1999 441 2,639 0.88 to 8.00 5,563 2.11 Granted. . . . . . . . . . (1,052) 1,052 2.25 to 15.75 8,795 8.36 Exercised. . . . . . . . . - (490) 0.88 to 3.22 (1,023) 2.09 Terminated . . . . . . . . 229 (229) 0.88 to 15.75 (602) 2.63 Authorized . . . . . . . . 800 - - - -- ---------- --------- --------------------- --------- ------ Balance, December 31, 2000 418 2,972 0.88 to 15.75 12,733 4.28 Granted. . . . . . . . . . (1,005) 1,005 1.59 to 6.83 2,859 2.85 Exercised. . . . . . . . . - (243) 2.02 to 7.32 (521) 2.15 Terminated . . . . . . . . 356 (356) 2.02 to 15.75 (2,489) 6.99 Authorized . . . . . . . . 700 - - - - - ---------- --------- --------------------- --------- ------ Balance, December 31, 2001 469 3,378 $ 0.88 to $15.75 12,582 $ 3.72 ========== ========= ===================== ========= ======
52 Options outstanding and currently exercisable by exercise price under the option plan at December 31, 2001 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ============================================= ============================= WEIGHTED AVG. RANGE OF NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG. PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ============== ============= ================ =============== =========== =============== $0.88 - $0.88 502,573 1.72 $ 0.88 502,573 $ 0.88 1.25 - 1.63 351,170 1.67 1.56 351,170 1.56 1.84 - 2.30 387,244 4.55 2.26 39,556 2.14 2.38 - 2.56 366,833 3.60 2.43 88,654 2.40 2.63 - 3.02 30,250 4.43 2.90 2,695 2.77 3.03 - 3.03 371,000 1.11 3.03 371,000 3.03 3.04 - 3.09 368,223 3.16 3.08 187,426 3.09 3.13 - 5.34 514,778 3.73 5.04 182,771 4.96 5.93 - 8.88 341,250 3.32 7.87 120,460 7.86 10.00 - 15.75 145,000 3.20 15.17 55,004 15.24 - --------------- ------------- ---------------- --------------- ----------- --------------- $0.88 - $15.75 3,378,321 2.89 $ 3.72 1,901,309 $ 2.99 =============== ============= ================ =============== =========== ===============
On January 24, 2001, the Company's Chief Executive Officer issued a full recourse promissory note for $151,000 in connection with the exercise of stock options. The note bears interest of 8% per annum and is repayable on January 24, 2004. Employee Stock Purchase Plan The Company has reserved a total of 2,950,000 shares of common stock for issuance under a qualified stock purchase plan, which provides substantially all Company employees with the right to acquire shares of the Company's common stock through payroll deductions. This total includes 300,000 shares added to the plan in each 2000 and 2001. Under the plan, the Company's employees, subject to certain restrictions, may purchase shares of common stock at the lesser of 85% of fair market value at either the beginning of period or the end of each six-month purchase period. At December 31, 2001, 2,717,942 shares have been issued under the plan. At December 31, 2001, shares available for purchase under this plan were 232,058. Share Purchase Rights Plan On September 7, 2000, the Company's Board of Directors declared a dividend pursuant to a newly adopted Share Purchase Rights Plan, which replaced a similar earlier plan that had expired on July 3, 2000. The intended purpose of the Rights Plan is to protect shareholders' rights and to maximize share value in the event of an unfriendly takeover attempt. As of the record date of October 13, 2000, each share of common stock of Genus, Inc. outstanding was granted one right under the new plan. Each right is exercisable only under certain circumstances and upon the occurrence of certain events and permits the holder to purchase from the Company one one-thousandth (0.001) of a share of Series C Participating Preferred Stock at an initial exercise price of forty dollars ($40.00) per one one-thousandth share. The 50,000 shares of Series C preferred stock authorized in connection with the Rights Plan will be used for the exercise of any preferred share purchase rights in the event that any person or group (the Acquiring Person) acquires beneficial ownership of 15% or more of the outstanding common stock. In such event, the shareholders (other than the Acquiring Person) would receive common stock of the Company having a market value of twice the exercise price. Subject to certain restrictions, the Company may redeem the rights issued under the Rights Plan for $0.001 per right and may amend the Rights Plan without the consent of rights holders. The rights will expire on October 13, 2010, unless redeemed by the Company. 53 Pro Forma Disclosures Pro forma information regarding net loss and net loss per share is presented in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires that the information be disclosed as if the Company had accounted for its employee stock-based compensation plans under the fair value method prescribed by SFAS 123. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2001, 2000 and 1999:
2001 2000 1999 ---------- ---------- ---------- Risk free interest rates 4.19% 5.17% 5.62% Expected life. . . . . . 3.0 years 3.3 years 3.3 years Expected volatility. . . 112% 222% 221% Expected dividend yield. 0% 0% 0%
The weighted average fair value of options granted in 2001, 2000 and 1999 was $1.93, $8.09, and $2.76, respectively. Under the 1989 Employee Stock Purchase Plan, the Company does not recognize compensation cost related to employee purchase rights under the Stock Purchase Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 2001, 2000 and 1999.
2001 2000 1999 ---------- ---------- ---------- Risk free interest rates 3.42% 5.17% 4.95% Expected life. . . . . . 0.5 years 0.5 years 0.5 years Expected volatility. . . 78% 222% 221% Expected dividend yield. 0% 0% 0%
The weighted average fair value of those purchase rights granted in 2001, 2000 and 1999 was $1.30, $4.66 and $1.31, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss and basic and diluted net loss per share would have been the pro forma amounts indicated below (in thousands, except per share data):
2001 2000 1999 -------- --------- -------- Pro forma net loss attributable to common shareholders . . . . . . . . . . . . . . . . $(9,906) $(12,578) $(2,781) Pro forma net loss per share-basic and diluted $ (0.47) $ (0.66) $ (0.15)
The above pro forma effects on net loss may not be representative of the effects on future results as options granted typically vest over several years and additional option grants are expected to be made in future years. 54 Stock Compensation In 1998 and 1999, the Company granted options to outside consultants to purchase 23,000 and 5,000 shares of common stock, respectively. These options have exercise prices between $0.875 and $3.03 per share. The options vest over three years and expire between February 2001 and March 2002. The work is to be conducted over a 3-year period coinciding with the vesting of the options. Unvested options are to be forfeited if the consultants cease performing their work. The Company accounts for consultants options in accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In accordance with this standard, changes in the estimated fair value of these options are recognized as compensation expense in the period of the change. The Company recorded $45,000, $218,000 and $16,000 as compensation expense relating to these options in 1999, 2000 and 2001, respectively. In addition, the Company recorded $28,000 and $209,000 of stock compensation in 2001 and 2000, respectively, resulting from a shortfall in shares approved for the ESPP. The calculation and recording of expense was made in accordance with EITF 97-12, "Accounting for Increased Share Authorizations in an IRS Section 423 Employee Stock Purchase Plan under APB Opinion No. 25." In accordance with this consensus, a compensation charge is calculated for the amount by which the quoted stock price on the date of shareholder approval, less a 15% discount, exceeds the price at which options were granted under the ESPP. The compensation charge so determined is amortized over the term of the options issued under the ESPP that remains after shareholder approval of additional shares. During 2001, the Company recorded $34,000 of stock compensation in connection with the accelerated vesting of options granted to a terminated employee. NOTE 9. EMPLOYEE BENEFIT PLAN During 1988, the Company adopted the Genus, Inc. 401(k) Plan (the "Benefit Plan") to provide retirement and incidental benefits for eligible employees. The Benefit Plan provides for Company contributions as determined by the Board of Directors that may not exceed 6% of the annual aggregate salaries of those employees eligible for participation. In 2001, 2000 and 1999, the Company contributed $101,000, $142,000, and $30,000, respectively, to the Benefit Plan. NOTE 10. OTHER INCOME (EXPENSE), NET Other income (expense), net, comprises the following (in thousands):
YEAR ENDED DECEMBER 31, ======================= 2001 2000 1999 ====== ====== ======= Interest income . . . $ 75 $ 252 $ 336 Interest expense. . . (496) (118) (4) Foreign exchange. . . (27) (58) 330 Other, net. . . . . . 112 32 7 ------ ------ ------ $(336) $ 108 $ 669 ====== ====== ======
NOTE 11. INCOME TAXES Income tax expense for the years ended December 31, 2001, 2000 and 1999 was $70,000, $490,000 and $177,000, respectively. The components of income (loss) before income taxes were as follows (in thousands):
YEAR ENDED DECEMBER 31, ============================ 2001 2000 1999 ======== ======== ======== Domestic loss before taxes . . . . . . . . . . . . . $(6,905) $(3,829) $(2,231) Foreign income (loss) before taxes . . . . . . . . . 309 1,438 791 -------- -------- -------- Loss before taxes and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . $(6,596) $(2,391) $(1,440) ======== ======== ========
55 The income tax expense for 2001, 2000 and 1999, respectively, was due to current foreign taxes. The Company's effective tax rate for the years ended December 21, 2001, 2000 and 1999 differs from the U.S. federal statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, 2001 ============================ 2001 2000 1999 ====== ======= ======= Federal income tax at statutory rate 35.0% 35.0% 35.0% Foreign income taxes. . . . . . . . . (1.1) (20.5) (18.3) Net operating loss not benefited. . . (35.0) (35.0) (29.0) ------ ------- ------- (1.1%) (20.5%) (12.3%) ====== ======= =======
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31, 2001 ==================== 2001 2000 ======== ========== Deferred tax assets Depreciation and amortization . . . . . . . . . . $ 1,118 $ 2,182 Inventory, accounts receivable and other reserves 1,187 1,556 Tax credits . . . . . . . . . . . . . . . . . . . 1,517 1,161 Accrued expenses. . . . . . . . . . . . . . . . . 718 855 Deferred revenue. . . . . . . . . . . . . . . . . 1,063 5,774 Net operating loss carry forwards . . . . . . . . 32,446 19,298 --------- --------- 38,049 30,826 Deferred tax asset valuation allowance. . . . . . (38,049) (30,826) --------- --------- Net deferred tax assets . . . . . . . . . . . . . $ - $ - ========= =========
The deferred tax assets valuation allowance at December 31, 2001 and 2000 is attributable to federal and state deferred tax assets. Management believes that sufficient uncertainty exists with regard to the realizability of these tax assets such that a full valuation allowance is necessary. These factors include the lack of a significant history of consistent profits and the lack of carry-back capacity to realize these assets. Based on these factors, management is unable to assert that it is more likely than not that the Company will generate sufficient taxable income to realize the Company's net deferred tax assets. At December 31, 2001, the Company had the following income tax carry-forwards available (in thousands):
TAX REPORTING EXPIRATION DATES ============== ================ U.S. regular tax operating losses $ 92,208 2005-2021 U.S. business tax credits . . . . 1,577 2002-2021 State net operating losses. . . . $ 18,780 2002-2005
Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating loss carry-forwards and credits before utilization. 56 NOTE 12. SEGMENT INFORMATION Currently, the Company operates in one industry segment. The Company is engaged in the design, manufacture, marketing and servicing of advanced thin film deposition systems used in the semiconductor manufacturing industry. Export Revenues For reporting purposes, export revenues are determined by the location of the parent company of the Company's customer, regardless of where the delivery was made by the Company. Revenues by geographical region for the years ended December 31, 2001, 2000, and 1999 were as follows (in thousands):
YEAR ENDED DECEMBER 31, 2001 ============================ 2001 2000 1999 ------- ------- ------- United States. . . . . . . $ 3,200 $ 3,095 $ 3,830 South Korea. . . . . . . . 35,767 37,123 23,819 Japan. . . . . . . . . . . 3,089 149 216 Taiwan . . . . . . . . . . 2,300 0 0 Germany. . . . . . . . . . 2,706 0 0 Rest of world. . . . . . . 1,677 271 495 ------- ------- ------- $48,739 $40,638 $28,360 ======= ======= =======
The Company did not hold any material long-lived assets in countries other than the United States at December 31, 2001 and December 21, 2000. Major Customers In 2001, Samsung Electronics Company, Ltd, Read-Rite Corporation, NEC, Infineon and SCS accounted for 73%, 7%, 6%, 6% and 5% of revenues, respectively. In 2000, Samsung Electronics Company, Ltd. and Micron Technology, Inc. accounted for 91% and 5% of revenues, respectively. In 1999, Samsung Electronics Company, Ltd. and Micron Technology, Inc accounted for 84% and 11% of revenues, respectively. 57 ITEM 14 (A) 2. FINANCIAL STATEMENT SCHEDULE REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Genus, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 11, 2002, except as to the fourth paragraph of Note 6, which is as of March 27, 2002, appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------- PricewaterhouseCoopers LLP San Jose, California February 11, 2002 58 Genus, Inc. Schedule II "Valuation and Qualifying Accounts"
- -------------------------------------------------------------------------------------- Description Balance at Additions Deductions Balance at Beginning of Charged to Charged to end Period costs/exp Other of period - -------------------------------------------------------------------------------------- 1999 Allowance for doubtful accounts $ 500 $ 308 $ 257 $ 551 Allowance for excess and obsolete inventory 3,769 533 1,857 2,445 2000 Allowance for doubtful accounts 551 0 188 363 Allowance for excess and obsolete inventory 2,445 400 15 2,830 2001 Allowance for doubtful accounts 363 0 294 69 Allowance for excess and obsolete inventory $ 2,830 $ 317 $ (1,032) $ 2,115 - --------------------------------------------------------------------------------------
59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 28th day of March 2002. GENUS, INC. By: /s/SHUM MUKHERJEE --------------------------- Shum Mukherjee Executive Vice President, Finance Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------- --------------------------------- -------------- /s/ WILLIAM W.R. ELDER Chairman of the Board, President March 28, 2002 - ------------------------- William W.R. Elder and Chief Executive Officer /s/ SHUM MUKHERJEE Executive Vice President, Finance March 28, 2002 - ------------------------- Shum Mukherjee Chief Financial Officer /s/ G. FREDERICK FORSYTH Director March 28, 2002 - ------------------------- G. Frederick Forsyth /s/ TODD S. MYHRE Director March 28, 2002 - ------------------------- Todd S. Myhre /s/ MARIO M. ROSATI Director March 28, 2002 - ------------------------- Mario M. Rosati /s/ GEORGE D. WELLS Director March 28, 2002 - ------------------------- George D. Wells /s/ ROBERT J. RICHARDSON Director March 28, 2002 - ------------------------- Robert J. Richardson
60 GENUS, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 2001 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION --- ----------- 2.1 Asset Purchase Agreement, dated April 15, 1998, by and between Varian Associates, Inc. and Registrant and exhibits thereto (15) 3.1 Amended and Restated Articles of Incorporation of Registrant as filed June 6, 1997 (11) 3.2 By-laws of Registrant, as amended (13) 4.1 Common Shares Rights Agreement, dated as of April 27, 1990, between Registrant and Bank of America, N.T. and S.A., as Rights Agent (4) 4.2 Convertible Preferred Stock Purchase Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.3 Registration Rights Agreement, dated February 2, 1998, among the Registrant and the Investors (14) 4.4 Certificate of Determination of Rights, Preferences and Privileges of Series A Convertible Preferred Stock (14) 4.5 Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Preferred Stock (17) 4.6 Redemption and Exchange Agreement, dated July 16, 1998, among the Registrant and the Investors (17) 10.1 Registrant's 1989 Employee Stock Purchase Plan, as amended (5) 10.2 Registrant's 2000 Stock Plan (19) 10.3 Lease, dated April 7, 1992, between Registrant and The John A. and Susan R. Sobrato 1979 Revocable Trust for property at 1139 Karlstad Drive, Sunnyvale, California (6) 10.4 Asset Purchase Agreement, dated May 28, 1992, by and between the Registrant and Advantage Production Technology, Inc. (7) 10.5 Settlement Agreement and Mutual Release, dated April 20, 1998, between Registrant and James T. Healy (16) 10.6 Form of Change of Control Severance Agreement (16) 10.7 Settlement Agreement and Mutual Release, dated January 1998, between the Registrant and John Aldeborgh (18) 10.8 Settlement Agreement and Mutual Release, dated May 1998, between the Registrant and Mary Bobel (18) 10.9 Loan and Security Agreement, dated December 20, 2001, between Registrant and Silicon Valley Bank. 10.10 Loan and Security Agreement (Exim Program) dated December 20, 2001, between Registrant and Silicon Valley Bank 10.11 Intellectual Property Security Agreement, dated December 20, 2001, between Registrant and Silicon Valley Bank. 10.12 Certified Resolution and Incumbency Certificate Between Registrant and Silicon Valley Bank 10.13 Lease Agreement, dated December 21, 2001, between Registrant and Citi Bank. 21.1 Subsidiaries of Registrant 23.1 Consent of Independent Accountants - ---------------- (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-23861) filed August 18, 1988, and amended on September 21, 1988, October 5, 1988, November 3, 1988, November 10, 1988, and December 15, 1988, which Registration Statement became effective November 10, 1988. 61 (2) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-28755) filed on May 17, 1989, and amended May 24, 1989, which Registration Statement became effective May 24, 1989. (3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. (7) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K dated June 12, 1992. (8) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 21, 1992. (9) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (11) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (12) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (13) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (14) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated February 12, 1998. (15) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated April 15, 1998. (16) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1997. (17) Incorporated by reference to the exhibit filed with the Registrant's Current Report on Form 8-K dated July 29, 1998. (18) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998. (19) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K /Afor the year ended December 31, 2000. (20) Incorporated by reference to the exhibit filed on July 20, 2001 with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 2000. 62 EX-10.9 3 doc2.txt EXHIBIT 10.9 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT BORROWER: GENUS, INC. ADDRESS: 1139 KARLSTAD DR. SUNNYVALE, CA 94089 DATE: NOVEMBER , 2001 --- THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts determined by Silicon in its *, up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of any Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time. *GOOD FAITH BUSINESS JUDGMENT 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Silicon's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge interest to Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Silicon minimum monthly interest during the term of this Agreement in the amount set forth on the Schedule (the "Minimum Monthly Interest"). 1.3 OVERADVANCES. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit (an "Overadvance"), Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. Without limiting Borrower's obligation to repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at a rate equal to the interest rate which would otherwise be applicable to the Overadvance, plus an additional 2% per annum. 1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable. 1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its sole discretion, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its sole discretion (collectively, "Letters of Credit"). The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Borrower shall pay all bank charges (including * charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon's letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising out of 63 or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Silicon and opened for Borrower's account or by Silicon's interpretations of any Letter of Credit issued by Silicon for Borrower's account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon's indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Silicon relating to Letters of Credit are cumulative. *CUSTOMARY 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Silicon a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Inventory, Equipment, Receivables, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Silicon's possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Silicon may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER. In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Silicon 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Silicon at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule*. *EXCEPT FOR DEMONSTRATIONS OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. * Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture**. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is 64 located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to execute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify, so as to ensure that Silicon's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. *EXCEPT AS OTHERWISE PERMITTED BY THIS AGREEMENT, **EXCEPT FOR CUSTOMARY LEASEHOLD IMPROVEMENTS 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. Borrower is now and will continue to be solvent. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 COMPLIANCE WITH LAW. * Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. *TO THE BEST OF ITS KNOWLEDGE, 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which * may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate. *COULD BE REASONABLY EXPECTED TO 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to Silicon as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower's business, and 65 (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Silicon as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Silicon transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on Silicon's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Silicon's security interest and other rights in all of Borrower's Receivables, nor shall Silicon's failure to advance or lend against a specific Receivable affect or limit Silicon's security interest and other rights therein. Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day. Together with each such schedule and assignment, or later if requested by Silicon, Borrower shall furnish Silicon with copies (or, at Silicon's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trial balance in such form and at such intervals as Silicon shall request. In addition, Borrower shall deliver to Silicon the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Silicon with copies of all credit memos within two days after the date issued. 4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until a Default or an Event of Default has occurred*. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Silicon, and Borrower shall immediately deliver all such payments and proceeds to Silicon in their original form, duly endorsed in blank, to be applied to the Obligations in such order as Silicon shall determine. Silicon may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify. **Silicon or its designee may, at any time, notify Account Debtors that the Receivables have been assigned to Silicon. *AND IS CONTINUING **AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF A DEFAULT OR AN EVENT OF DEFAULT 4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred*, Borrower shall not be obligated to remit to Silicon the proceeds of the sale of worn out or obsolete equipment disposed of by Borrower in good faith in an arm's length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. *AND IS CONTINUING 4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Silicon may, at any time after the occurrence * of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Silicon considers advisable in its reasonable credit judgment and, in all cases, Silicon shall credit Borrower's Loan account with only the net amounts received by Silicon in payment of any Receivables. *AND DURING THE CONTINUANCE 66 4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to Silicon). In the event any attempted return occurs after the occurrence * of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii) segregate all returned Inventory from all of Borrower's other property, (iii) conspicuously label the returned Inventory as Silicon's property, and (iv) immediately notify Silicon of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Silicon's request deliver such returned Inventory to Silicon. *AND DURING THE CONTINUANCE 4.8 VERIFICATION. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose. 4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF BORROWER. 5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 5.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require, and Borrower shall provide evidence of such insurance to Silicon, so that Silicon is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name Silicon as an additional insured and loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies. 5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify. 5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one Business Day's notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit*, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $700 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining Silicon's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Silicon the same rights with respect to access to books and records and related rights as Silicon has under this Loan Agreement. **Borrower waives the benefit of any accountant-client privilege or other evidentiary privilege precluding or limiting the disclosure, divulgence or delivery of any of its books and records (except that Borrower does not waive any attorney-client privilege). *EQUIVALENT TO THOSE STEPS IT TAKES TO SAFEGUARD ITS OWN CONFIDENTIAL FINANCIAL INFORMATION **WITH RESPECT TO SILICON, 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without Silicon's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity*; (ii) acquire any assets, except in the ordinary course of business**; (iii) 67 enter into any other transaction outside the ordinary course of business***; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business****; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets ; (viii) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity ; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) or (xiv) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction. * PROVIDED, HOWEVER, THAT A SUBSIDIARY OF BORROWER MAY MERGE OR CONSOLIDATE INTO ANOTHER SUBSIDIARY OF BORROWER OR INTO BORROWER **PROVIDED, HOWEVER, THAT BORROWER MAY ACQUIRE INTELLECTUAL PROPERTY ASSETS FROM BORROWER'S SUBSIDIARIES AND ENTER INTO NON-EXCLUSIVE SERVICES AGREEMENTS WITH BORROWER'S SUBSIDIARIES RELATING THERETO *** EXCEPT AS OTHERWISE PERMITTED BY OTHER PROVISIONS OF THIS AGREEMENT; **** AND EXCEPT FOR THE ISSUANCE OF NON-EXCLUSIVE LICENSES AND SIMILAR NON-EXCLUSIVE ARRANGEMENTS FOR THE USE OF PROPERTY OF BORROWER + EXCEPT: (A) LOANS EXISTING AS OF THE DATE HEREOF THAT ARE SHOWN ON THE SCHEDULE; AND (B) LOANS CONSISTING OF (1) TRAVEL ADVANCES AND EMPLOYEE RELOCATION LOANS AND OTHER EMPLOYEE LOANS AND ADVANCES IN THE ORDINARY COURSE OF BUSINESS; AND (2) LOANS TO EMPLOYEES, OFFICERS OR DIRECTORS FOR THE PURCHASE OF EQUITY SECURITIES OF BORROWER PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS OR AGREEMENTS APPROVED BY THE BORROWER'S BOARD OF DIRECTORS; AND (C) DEBT OBLIGATIONS RECEIVED IN CONNECTION WITH THE BANKRUPTCY OR REORGANIZATION OF CUSTOMERS OR SUPPLIERS AND IN SETTLEMENT OF DELINQUENT OBLIGATIONS OF, AND OTHER DISPUTES WITH, CUSTOMERS OR SUPPLIERS IN THE ORDINARY COURSE OF BUSINESS AND (D) DEBT OBLIGATIONS CONSISTING OF NOTES RECEIVABLE OF, OR PREPAID ROYALTIES AND OTHER CREDIT EXTENSIONS TO, CUSTOMERS WHO ARE NOT AFFILIATES, IN THE ORDINARY COURSE OF BUSINESS ++ EXCEPT FOR EXISTING GUARANTIES OF THE OBLIGATIONS OF THE BORROWER'S WHOLLY-OWNED SUBSIDIARIES 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon, may deem reasonably necessary or useful in order to perfect and maintain Silicon's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"), subject to Section 6.3 below. 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three Business Days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence * of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Silicon under this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount equal to **, provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. *AND DURING THE CONTINUANCE **ONE PERCENT (1%) OF THE OVERALL CREDIT LIMIT (AS DEFINED IN THE SCHEDULE), PROVIDED THAT THE TOTAL TERMINATION FEE UNDER THIS LOAN AGREEMENT AND UNDER THE EXIM AGREEMENT (AS DEFINED IN THE SCHEDULE) SHALL NOT EXCEED ONE PERCENT (1%) OF THE OVERALL CREDIT LIMIT, AND 68 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Silicon, Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Silicon shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Silicon's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit *; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within ** 30 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (n) *** or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's business or financial condition; or (q) 69 Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred****. *PROVIDED THAT IF AN OVERADVANCE RESULTS DIRECTLY FROM A CHANGE BY SILICON OF EITHER THE AMOUNT OF RESERVES OR OF THE MINIMUM ELIGIBILITY REQUIREMENTS, THEN BORROWER SHALL HAVE FIVE BUSINESS DAYS TO CURE SUCH OVERADVANCE **45 ***WITHOUT SILICON'S PRIOR WRITTEN CONSENT, (1) A "PERSON" OR "GROUP" (WITHIN THE MEANING OF SECTIONS 13(D) AND 14(D)(2) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) BECOMES, AFTER THE DATE OF THIS AGREEMENT, THE "BENEFICIAL OWNER" (AS DEFINED IN RULE 13D-3 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) DIRECTLY OR INDIRECTLY, OF MORE THAN 30% OF THE TOTAL VOTING POWER OF ALL CLASSES OF CAPITAL STOCK THEN OUTSTANDING OF BORROWER ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS, OR (2) A MAJORITY OF THE MEMBERS OF THE BOARD OF DIRECTORS OF A BORROWER SHALL NOT CONSTITUTE CONTINUING DIRECTORS ****AND IS CONTINUING 7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter*, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower's general, special or other Deposit Accounts with Silicon; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and after the occurrence of any Event of Default **, the interest rate applicable to the Obligations shall be increased by an additional four percent per annum. * DURING THE CONTINUANCE THEREOF ** AND DURING THE CONTINUANCE THEREOF 70 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Silicon agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence * of any Event of Default, without limiting Silicon's other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Silicon agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may, in its sole discretion, deem advisable in order to perfect and maintain Silicon's security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon's possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon's rights under the foregoing power of attorney or any of Silicon's other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower. *AND DURING THE CONTINUANCE 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any 71 other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS: "Account Debtor" means the obligor on a Receivable. -------------- "Affiliate" means, with respect to any Person, a relative, partner, --------- shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which Silicon is open for business. ------------- "Code" means the Uniform Commercial Code as adopted and in effect in the State ---- of California from time to time. "Collateral" has the meaning set forth in Section 2.1 above. * ---------- *"CONTINUING DIRECTOR" MEANS (A) ANY MEMBER OF THE BOARD OF DIRECTORS WHO WAS -------------------- A DIRECTOR (OR COMPARABLE MANAGER) OF BORROWER ON THE DATE OF THIS AGREEMENT, AND (B) ANY INDIVIDUAL WHO BECOMES A MEMBER OF THE BOARD OF DIRECTORS AFTER THE DATE OF THIS AGREEMENT IF SUCH INDIVIDUAL WAS APPOINTED OR NOMINATED FOR ELECTION TO THE BOARD OF DIRECTORS BY A MAJORITY OF THE CONTINUING DIRECTORS. "Default" means any event which with notice or passage of time or both, would ------- constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9102(a) of the Code. ---------------- "Eligible Inventory" [NOT APPLICABLE]. ------------------- "Eligible Receivables" means Receivables arising in the ordinary course of --------------------- Borrower's business from the sale of goods or rendition of services, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate. Without limiting the fact that the determination of which Receivables are eligible for borrowing is a matter of Silicon's discretion, the following (the "Minimum ------- Eligibility Requirements") are the minimum requirements for a Receivable to be - ------------------------- an Eligible Receivable: (i) the Receivable must not be outstanding for more than 90 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii) the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional)*, (iv) the Receivable must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a material portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon's satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. Receivables owing from one Account Debtor will not be deemed Eligible Receivables to the extent they exceed 25% of the total Receivables outstanding**. In addition, if more than 50% of the Receivables owing from an Account Debtor are outstanding more than 90 days from their invoice date (without regard to unapplied credits) or are otherwise not eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its discretion, revise the Minimum Eligibility Requirements, upon written notice to Borrower. * OTHER THAN A SALE CONTINGENT ON THE SUBJECT GOODS CONFORMING WITH BORROWER'S NORMAL PERFORMANCE CRITERIA (BUT A RECEIVABLE SHALL NOT BE AN ELIGIBLE RECEIVABLE IF THE SALE OF GOODS GIVING RISE THERETO DOES NOT CONFORM WITH BORROWER'S NORMAL PERFORMANCE CRITERIA) **PROVIDED THAT SAID PERCENTAGE SHALL BE 60% FROM THE FOLLOWING CUSTOMERS: THOMSON MICRO, SAMSUNG AMERICA, IBM, AMD, MICRON, AND READ RITE; PROVIDED, FURTHER, THAT SUCH PERCENTAGE IS SUBJECT TO ADJUSTMENT BY SILICON AFTER EACH INSPECTION OR AUDIT CONDUCTED BY SILICON OR ITS AGENTS AS PROVIDED FOR HEREIN "Equipment" means all of Borrower's present and hereafter acquired machinery, --------- molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the 72 foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 7.1 of this ------------------ Agreement. "General Intangibles" means all general intangibles of Borrower, whether now -------------------- owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, --------- merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Obligations" means all present and future Loans, advances, debts, ----------- liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Silicon. "Permitted Liens" means the following: (i) purchase money security interests --------------- in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, which consent shall not be unreasonably withheld; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Silicon will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint ------ venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Receivables" means all of Borrower's now owned and hereafter acquired ----------- accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, securities accounts, investment property, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Reserves" means, as of any date of determination, such amounts as Silicon may -------- from time to time establish and revise in good faith reducing the amount of Loans, Letters 73 of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in good faith, do or may affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Receivables), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Other Terms. All accounting terms used in this Agreement, unless otherwise ------------ indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Silicon (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Silicon on account of the Obligations three Business Days after receipt by Silicon of immediately available funds, and, for purposes of the foregoing, any such funds received after 12:00 Noon on any day shall be deemed received on the next Business Day. Silicon shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Silicon in its sole discretion, and Silicon may charge Borrower's loan account for the amount of any item of payment which is returned to Silicon unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Silicon's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's Deposit Accounts maintained with Silicon. 9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within thirty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party*. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid**. * OR BY FACSIMILE (IF TO BORROWER AT (408) 747-7198 OR IF TO SILICON AT 408-654-1068) ** OR ON THE DATE SENT BY CONFIRMED FACSIMILE, IF SENT BEFORE 5:00 PM, OR, IF SO SENT AFTER 5:00 PM, ON THE NEXT BUSINESS DAY 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral -------------------- understandings, representations or agreements between the parties which are not - -------------------------------------------------------------------------------- set forth in this Agreement or in other written agreements signed by the parties - -------------------------------------------------------------------------------- in connection herewith. - ------------------------- 9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default 74 shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. 9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon * from liability for its own gross negligence or willful misconduct. * NOR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH REPRESENTING SILICON 9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon. 9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying Borrower's obligation ----------------------------------- hereunder to reimburse Silicon for attorneys fees, Borrower may, for - ----------------------------------------------------------------------------- convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas, - -------------------------------------------------------------------------------- but Borrower acknowledges and agrees that Levy, Small & Lallas is representing - -------------------------------------------------------------------------------- only Silicon and not Borrower in connection with this Agreement. If either -------------------------------------------------------------------- Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release Borrower from its liability for the Obligations. 9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within * after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that 75 such ** period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The ** period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other present or future agreement. *TWO YEARS **TWO-YEAR 9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". * This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise. * FOR PURPOSES OF THIS AGREEMENT, DEFAULTS AND EVENTS OF DEFAULT ARE DEEMED "CONTINUING" (OR VARIATIONS OF SUCH TERM) AFTER THEY OCCUR, UNLESS AND UNTIL THEY ARE WAIVED IN WRITING BY SILICON OR CURED WITHIN ANY APPLICABLE CURE PERIOD. 9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: GENUS, INC. BY ------------------- PRESIDENT OR VICE PRESIDENT SILICON: SILICON VALLEY BANK BY ------------------- TITLE ---------------------- 76 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: GENUS, INC. ADDRESS: 1139 KARLSTAD DR. SUNNYVALE, CA 94089 DATE: NOVEMBER , 2001 --- This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date. ================================================================================ 1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of: (i) $7,500,000 at any one time outstanding (the "Maximum Credit Limit"); or (ii) 80% of the amount of Borrower's Eligible Receivables (as defined in Section 8 above); provided that the total outstanding Obligations under this Loan Agreement and under the Exim Agreement (as defined below) shall not at any time exceed $10,000,000 (the "Overall Credit Limit"). LETTER OF CREDIT SUBLIMIT (Section 1.5): $500,000, provided that the total Letter of Credit Sublimit and the Foreign Exchange Contract Sublimit shall not, at any time, exceed $500,000. FOREIGN EXCHANGE CONTRACT SUBLIMIT $500,000, provided that the total Letter of Credit Sublimit and the Foreign Exchange Contract Sublimit shall not, at any time, exceed $500,000. Borrower may enter into foreign exchange forward contracts with Silicon, on its standard forms, under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one business day after the contract date (the "FX Forward Contracts"); provided that (1) at the time the FX Forward Contract is entered into Borrower has Loans available to it under this Agreement in an amount at least equal to 10% of the amount of the FX Forward Contract; (2) the total FX Forward Contracts at any one time outstanding may not exceed 10 times the amount of the Foreign Exchange Contract Sublimit set forth above. Silicon shall have the right to withhold, from the Loans otherwise available to Borrower under this Agreement, a reserve (which shall be in addition to all other reserves) in an amount equal to 10% of the total FX Forward Contracts from time to time outstanding, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this AgreementSilicon may, in its discretion, terminate the FX Forward Contracts at any time that an Event of Default occurs and is continuing. Borrower shall execute all standard form applications and agreements of Silicon in connection with the FX Forward Contracts, and without limiting any of the terms of such applications and agreements, Borrower shall pay all standard fees and charges of Silicon in connection with the FX Forward Contracts. EXIM AGREEMENT; CROSS-COLLATERALIZATION; CROSS-DEFAULT: Silicon and the Borrower are parties to that certain Loan and Security Agreement (Exim Program) of even date (the "Exim Agreement"). Both this Agreement and the Exim Agreement shall continue in full force and effect, and all rights and remedies under this Agreement and the Exim Agreement are cumulative. The term "Obligations" as used in this Agreement and in the Exim Agreement shall include without limitation the 77 obligation to pay when due all Loans made pursuant to this Agreement (the "Non-Exim Loans") and all interest thereon and the obligation to pay when due all Loans made pursuant to the Exim Agreement (the "Exim Loans") and all interest thereon. Without limiting the generality of the foregoing, all "Collateral" as defined in this Agreement and as defined in the Exim Agreement shall secure all Exim Loans and all Non-Exim Loans and all interest thereon, and all other Obligations. Any Event of Default under this Agreement shall also constitute an Event of Default under the Exim Agreement, and any Event of Default under the Exim Agreement shall also constitute an Event of Default under this Agreement. In the event Silicon assigns its rights under the Exim Agreement and/or under any Note evidencing Exim Loans and/or its rights under this Agreement and/or under any Note evidencing Non-Exim Loans, to any third party, including without limitation the Export-Import Bank of the United States ("Exim Bank"), whether before or after the occurrence of any Event of Default, Silicon shall have the right (but not any obligation), in its sole discretion, to allocate and apportion Collateral to the Agreement and/or Note assigned and to specify the priorities of the respective security interests in such Collateral between itself and the assignee, all without notice to or consent of the Borrower. ================================================================================ 2. INTEREST. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from time to time, plus 1.75% per annum. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. MINIMUM MONTHLY INTEREST (Section 1.2): None. ================================================================================ 3. FEES (Section 1.4): Loan Fee: $27,500, payable concurrently herewith. Collateral Monitoring Fee: $750 per month, payable in arrears (prorated for any partial month at the beginning and at termination of this Agreement). ================================================================================ 4. MATURITY DATE (Section 6.1): One year from the date of this Agreement. ================================================================================ 5. FINANCIAL COVENANTS (Section 5.1): Borrower shall comply with each of the following covenant(s). Compliance shall be determined as of the end of each fiscal quarter, except as otherwise specifically provided below: MINIMUM TANGIBLE NET WORTH: Borrower shall at all times maintain a Tangible Net Worth of not less than an amount equal to the sum of the following: (i) $12,000,000; Plus ---- (ii) 50% of the sum of: (a) all consideration received by Borrower after the date hereof for the issuance of its equity securities and subordinated debt securities; plus 78 (b) the aggregate amount of net income earned by Borrower in the fiscal quarter in which this Loan Agreement is dated and any subsequent fiscal quarter. Minus ----- (iii) any losses incurred by Borrower after the fiscal quarter in which this Loan Agreement is dated; Provided that, in no event shall Borrower, at any time, -------- permit its Tangible Net Worth to be less than $12,000,000. DEFINITIONS. For purposes of the foregoing financial covenants, the following term shall have the following meaning: "Tangible Net Worth" shall mean the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, with the following adjustments: (A) there shall be excluded from assets: (i) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises (B) there shall be excluded from liabilities: all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon in its discretion. ================================================================================ 6. REPORTING. (Section 5.3): Borrower shall provide Silicon with the following: 1. Monthly Receivable agings, aged by invoice date, within fifteen days after the end of each month. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month. 3. Monthly reconciliations of Receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen days after the end of each month. 4. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with generally accepted accounting principles) or such other inventory reports as are reasonably requested by Silicon, all within fifteen days after the end of each month. 5. Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month. 6. Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks. 7. Quarterly unaudited financial statements, as soon as available, and in any event within forty-five days after the end of each fiscal quarter of Borrower. 79 8. Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower. 9. Annual financial statements, as soon as available, and in any event within 120 days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to Silicon. ================================================================================ 7. COMPENSATION (Section 5.5): Not applicable. ================================================================================ 8. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. PRIOR TRADE NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. EXISTING TRADE NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. OTHER LOCATIONS AND ADDRESSES (Section 3.3): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. MATERIAL ADVERSE LITIGATION (Section 3.10):None. ================================================================================ 9. OTHER COVENANTS (Section 5.1): Borrower shall at all times comply with all of the following additional covenants: (1) BANKING AND INVESTMENT RELATIONSHIP. Borrower shall at all times maintain its primary banking and investment relationship with Silicon. With respect to any deposit accounts or securities accounts maintained by Borrower at any financial institution other than Silicon, Borrower agrees, within 30 days after the date hereof, to cause such other financial institution to execute and deliver to Silicon, a Deposit Account Control Agreement or a Securities Account Control Agreement with respect to all such accounts maintained by Borrower at such other financial institution. (2) SUBORDINATION OF INSIDE DEBT. All present and future indebtedness of Borrower to its officers, directors and shareholders ("Inside Debt") shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon's standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon's standard form. (3) COPYRIGHT FILINGS. Concurrently, Borrower is executing and delivering to Silicon a Collateral Assignment, Patent Mortgage and Security Agreement between Borrower and Silicon (the "Intellectual Property Agreement"). Within 60 days after the date hereof, Borrower shall (i) cause all of its 80 computer software, the licensing of which results in Receivables, to be registered with the United States Copyright Office, (ii) complete the Exhibits to the Intellectual Property Agreement with all of the information called for with respect to such software and all other copyrights, (iii) cause the Intellectual Property Agreement to be recorded in the United States Copyright Office, and (iv) provide evidence of such recordation to Silicon. (4) BARCLAYS FINANCING STATEMENT. Borrower represents and warrants that (i) the UCC-1 Financing Statement filed in the Office of the California Secretary of State on January 18, 1999 with respect to "Genus, Inc." in favor of Barclays Bank, PLC (File No 933360012) does not relate to Borrower, (ii) Borrower understands that said financing statement relates to a Wisconsin corporation, Genus, Inc., (iii) Borrower has no ownership or other interest in, or relationship with, said Wisconsin corporation, (iv) Borrower has no indebtedness to Barclays Bank PLC, and (v) Borrower has not and will not grant any security interest in any of its assets to Barclays Bank, PLC during the term of this Agreement and so long as any of the Obligations remain outstanding. Borrower: Silicon: GENUS, INC. SILICON VALLEY BANK By By --------------------------------- --------------------------- President or Vice President Title ------------------------ 81 EX-10.10 4 doc3.txt EXHIBIT 10.10 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT (EXIM PROGRAM) BORROWER: GENUS, INC. ADDRESS: 1139 KARLSTAD DR. SUNNYVALE, CA 94089 DATE: NOVEMBER , 2001 ---- THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts determined by Silicon in its * , up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of any Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time. *GOOD FAITH BUSINESS JUDGMENT 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Silicon's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge interest to Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Silicon minimum monthly interest during the term of this Agreement in the amount set forth on the Schedule (the "Minimum Monthly Interest"). 1.3 OVERADVANCES. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit (an "Overadvance"), Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. Without limiting Borrower's obligation to repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at a rate equal to the interest rate which would otherwise be applicable to the Overadvance, plus an additional 2% per annum. 1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable. 1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its sole discretion, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its sole discretion (collectively, "Letters of Credit"). The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Borrower shall pay all bank charges (including * charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon's letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity 82 Date. Borrower hereby agrees to indemnify, save, and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Silicon and opened for Borrower's account or by Silicon's interpretations of any Letter of Credit issued by Silicon for Borrower's account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon's indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Silicon relating to Letters of Credit are cumulative. *CUSTOMARY 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Silicon a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Inventory, Equipment, Receivables, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Silicon's possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Silicon may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER. In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Silicon 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Silicon at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule*. *EXCEPT FOR DEMONSTRATIONS OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. * Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture**. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor 83 may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to execute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify, so as to ensure that Silicon's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. *EXCEPT AS OTHERWISE PERMITTED BY THIS AGREEMENT, **EXCEPT FOR CUSTOMARY LEASEHOLD IMPROVEMENTS 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. Borrower is now and will continue to be solvent. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 COMPLIANCE WITH LAW. * Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. *TO THE BEST OF ITS KNOWLEDGE, 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which * result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate. *COULD BE REASONABLY EXPECTED TO 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to Silicon as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing unconditional obligation of the 84 Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Silicon as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Silicon transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on Silicon's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Silicon's security interest and other rights in all of Borrower's Receivables, nor shall Silicon's failure to advance or lend against a specific Receivable affect or limit Silicon's security interest and other rights therein. Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day. Together with each such schedule and assignment, or later if requested by Silicon, Borrower shall furnish Silicon with copies (or, at Silicon's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trial balance in such form and at such intervals as Silicon shall request. In addition, Borrower shall deliver to Silicon the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Silicon with copies of all credit memos within two days after the date issued. 4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until a Default or an Event of Default has occurred*. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Silicon, and Borrower shall immediately deliver all such payments and proceeds to Silicon in their original form, duly endorsed in blank, to be applied to the Obligations in such order as Silicon shall determine. Silicon may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify. **Silicon or its designee may, at any time, notify Account Debtors that the Receivables have been assigned to Silicon. *AND IS CONTINUING **AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF A DEFAULT OR AN EVENT OF DEFAULT 4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred*, Borrower shall not be obligated to remit to Silicon the proceeds of the sale of worn out or obsolete equipment disposed of by Borrower in good faith in an arm's length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. *AND IS CONTINUING 4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Silicon may, at any time after the occurrence * of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Silicon considers advisable in its 85 reasonable credit judgment and, in all cases, Silicon shall credit Borrower's Loan account with only the net amounts received by Silicon in payment of any Receivables. *AND DURING THE CONTINUANCE 4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to Silicon). In the event any attempted return occurs after the occurrence * of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii) segregate all returned Inventory from all of Borrower's other property, (iii) conspicuously label the returned Inventory as Silicon's property, and (iv) immediately notify Silicon of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Silicon's request deliver such returned Inventory to Silicon. *AND DURING THE CONTINUANCE 4.8 VERIFICATION. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose. 4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF BORROWER. 5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 5.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require, and Borrower shall provide evidence of such insurance to Silicon, so that Silicon is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name Silicon as an additional insured and loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies. 5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify. 5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one Business Day's notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit*, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $700 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining Silicon's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Silicon the same rights with respect to access to books and records and related rights as Silicon has under this Loan Agreement. **Borrower waives the benefit of any accountant-client privilege or other evidentiary privilege precluding or limiting the disclosure, divulgence or delivery of any of its books and records (except that Borrower does not waive any attorney-client privilege). *EQUIVALENT TO THOSE STEPS IT TAKES TO SAFEGUARD ITS OWN CONFIDENTIAL FINANCIAL INFORMATION **WITH RESPECT TO SILICON, 86 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without Silicon's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity*; (ii) acquire any assets, except in the ordinary course of business**; (iii) enter into any other transaction outside the ordinary course of business***; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business****; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets ; (viii) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity ; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) or (xiv) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction. * PROVIDED, HOWEVER, THAT A SUBSIDIARY OF BORROWER MAY MERGE OR CONSOLIDATE INTO ANOTHER SUBSIDIARY OF BORROWER OR INTO BORROWER **PROVIDED, HOWEVER, THAT BORROWER MAY ACQUIRE INTELLECTUAL PROPERTY ASSETS FROM BORROWER'S SUBSIDIARIES AND ENTER INTO NON-EXCLUSIVE SERVICES AGREEMENTS WITH BORROWER'S SUBSIDIARIES RELATING THERETO *** EXCEPT AS OTHERWISE PERMITTED BY OTHER PROVISIONS OF THIS AGREEMENT; **** AND EXCEPT FOR THE ISSUANCE OF NON-EXCLUSIVE LICENSES AND SIMILAR NON-EXCLUSIVE ARRANGEMENTS FOR THE USE OF PROPERTY OF BORROWER + EXCEPT: (A) LOANS EXISTING AS OF THE DATE HEREOF THAT ARE SHOWN ON THE SCHEDULE; AND (B) LOANS CONSISTING OF (1) TRAVEL ADVANCES AND EMPLOYEE RELOCATION LOANS AND OTHER EMPLOYEE LOANS AND ADVANCES IN THE ORDINARY COURSE OF BUSINESS; AND (2) LOANS TO EMPLOYEES, OFFICERS OR DIRECTORS FOR THE PURCHASE OF EQUITY SECURITIES OF BORROWER PURSUANT TO EMPLOYEE STOCK PURCHASE PLANS OR AGREEMENTS APPROVED BY THE BORROWER'S BOARD OF DIRECTORS; AND (C) DEBT OBLIGATIONS RECEIVED IN CONNECTION WITH THE BANKRUPTCY OR REORGANIZATION OF CUSTOMERS OR SUPPLIERS AND IN SETTLEMENT OF DELINQUENT OBLIGATIONS OF, AND OTHER DISPUTES WITH, CUSTOMERS OR SUPPLIERS IN THE ORDINARY COURSE OF BUSINESS AND (D) DEBT OBLIGATIONS CONSISTING OF NOTES RECEIVABLE OF, OR PREPAID ROYALTIES AND OTHER CREDIT EXTENSIONS TO, CUSTOMERS WHO ARE NOT AFFILIATES, IN THE ORDINARY COURSE OF BUSINESS ++ EXCEPT FOR EXISTING GUARANTIES OF THE OBLIGATIONS OF THE BORROWER'S WHOLLY-OWNED SUBSIDIARIES 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon, may deem reasonably necessary or useful in order to perfect and maintain Silicon's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"), subject to Section 6.3 below. 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three Business Days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Silicon under this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount equal to * provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from another division of Silicon Valley Bank. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. *ONE PERCENT (1%) OF THE OVERALL CREDIT LIMIT (AS DEFINED IN THE SCHEDULE), PROVIDED THAT THE TOTAL TERMINATION FEE UNDER THIS LOAN AGREEMENT AND UNDER THE NON-EXIM AGREEMENT (AS DEFINED IN THE SCHEDULE) 87 SHALL NOT EXCEED ONE PERCENT (1%) OF THE OVERALL CREDIT LIMIT, AND 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Silicon, Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Silicon shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Silicon's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit *; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within ** 30 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (n) *** or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's business or financial condition; or (q) 88 Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred****. *PROVIDED THAT IF AN OVERADVANCE RESULTS DIRECTLY FROM A CHANGE BY SILICON OF EITHER THE AMOUNT OF RESERVES OR OF THE MINIMUM ELIGIBILITY REQUIREMENTS, THEN BORROWER SHALL HAVE FIVE BUSINESS DAYS TO CURE SUCH OVERADVANCE **45 ***WITHOUT SILICON'S PRIOR WRITTEN CONSENT, (1) A "PERSON" OR "GROUP" (WITHIN THE MEANING OF SECTIONS 13(D) AND 14(D)(2) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) BECOMES, AFTER THE DATE OF THIS AGREEMENT, THE "BENEFICIAL OWNER" (AS DEFINED IN RULE 13D-3 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) DIRECTLY OR INDIRECTLY, OF MORE THAN 30% OF THE TOTAL VOTING POWER OF ALL CLASSES OF CAPITAL STOCK THEN OUTSTANDING OF BORROWER ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS, OR (2) A MAJORITY OF THE MEMBERS OF THE BOARD OF DIRECTORS OF A BORROWER SHALL NOT CONSTITUTE CONTINUING DIRECTORS ****AND IS CONTINUING 7.2 REMEDIES. Upon the occurrence * of any Event of Default, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower's general, special or other Deposit Accounts with Silicon; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and after the occurrence of any Event of Default, ** the interest rate applicable to the Obligations shall be increased by an additional four percent per annum. 89 * DURING THE CONTINUANCE THEREOF ** AND DURING THE CONTINUANCE THEREOF 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Silicon agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence * of any Event of Default, without limiting Silicon's other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Silicon agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may, in its sole discretion, deem advisable in order to perfect and maintain Silicon's security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon's possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon's rights under the foregoing power of attorney or any of Silicon's other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower. *AND DURING THE CONTINUANCE 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or 90 agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS: "Account Debtor" means the obligor on a Receivable. --------------- "Affiliate" means, with respect to any Person, a relative, partner, --------- shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which Silicon is open for business. ------------- "Code" means the Uniform Commercial Code as adopted and in effect in the State ---- of California from time to time. "Collateral" has the meaning set forth in Section 2.1 above. * ---------- *"CONTINUING DIRECTOR" MEANS (A) ANY MEMBER OF THE BOARD OF DIRECTORS WHO WAS -------------------- A DIRECTOR (OR COMPARABLE MANAGER) OF BORROWER ON THE DATE OF THIS AGREEMENT, AND (B) ANY INDIVIDUAL WHO BECOMES A MEMBER OF THE BOARD OF DIRECTORS AFTER THE DATE OF THIS AGREEMENT IF SUCH INDIVIDUAL WAS APPOINTED OR NOMINATED FOR ELECTION TO THE BOARD OF DIRECTORS BY A MAJORITY OF THE CONTINUING DIRECTORS. "Default" means any event which with notice or passage of time or both, would ------- constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9102(a) of the Code. ---------------- "Eligible Inventory" means Inventory which Silicon, in its sole judgment, deems ------------------- eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate*. Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of Silicon's discretion, Inventory which does not meet the following requirements will not be deemed to be Eligible Inventory: Inventory which (i) consists of raw materials or finished goods, in good, new and salable condition which is not perishable, not obsolete or unmerchantable, and is not comprised of work in process, packaging materials or supplies; (ii) meets all applicable governmental standards; (iii) has been manufactured in compliance with the Fair Labor Standards Act; (iv) conforms in all respects to the warranties and representations set forth in this Agreement; (v) is at all times subject to Silicon's duly perfected, first priority security interest; and (vi) is situated at a one of the locations set forth on the Schedule. *AND WHICH CONSTITUTES "ELIGIBLE EXPORT-RELATED INVENTORY" (AS DEFINED IN THE EXIM BORROWER AGREEMENT REFERRED TO IN THE SCHEDULE). "Eligible Receivables" means Receivables arising in the ordinary course of -------------------- Borrower's business from the sale of goods or rendition of services, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate*. Without limiting the fact that the determination of which Receivables are eligible for borrowing is a matter of Silicon's discretion, the following (the "Minimum ------- Eligibility Requirements") are the minimum requirements for a Receivable to be - ------------------------- an Eligible Receivable: (i) the Receivable must not be outstanding for more than 120 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii) the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional)***, (iv) the Receivable must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a material portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon's satisfaction, with the United States Assignment of Claims Act), (viii) , (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. Receivables owing from one Account Debtor will not be deemed Eligible Receivables to the extent they exceed 25% of the total Receivables outstanding**. In addition, if more than 50% of the Receivables owing from an Account Debtor are outstanding more than 120 days from their invoice date (without regard to unapplied credits) or are otherwise not eligible Receivables, then all Receivables owing from that 91 Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its discretion, revise the Minimum Eligibility Requirements, upon written notice to Borrower. *AND WHICH CONSTITUTE "ELIGIBLE EXPORT-RELATED ACCOUNTS RECEIVABLE" (AS DEFINED IN THE EXIM BORROWER AGREEMENT REFERRED TO IN THE SCHEDULE). **PROVIDED THAT SAID PERCENTAGE SHALL BE 60% FROM THE FOLLOWING CUSTOMERS: SCS TAIWAN, SAMSUNG, ST MICRO, INFINEON, FOREIGN LOCATIONS OF IBM, AND FOREIGN LOCATIONS OF INTEL; PROVIDED, FURTHER, THAT SUCH PERCENTAGE IS SUBJECT TO ADJUSTMENT BY SILICON AFTER EACH INSPECTION OR AUDIT CONDUCTED BY SILICON OR ITS AGENTS AS PROVIDED FOR HEREIN *** OTHER THAN A SALE CONTINGENT ON THE SUBJECT GOODS CONFORMING WITH BORROWER'S NORMAL PERFORMANCE CRITERIA (BUT A RECEIVABLE SHALL NOT BE AN ELIGIBLE RECEIVABLE IF THE SALE OF GOODS GIVING RISE THERETO DOES NOT CONFORM WITH BORROWER'S NORMAL PERFORMANCE CRITERIA) "Equipment" means all of Borrower's present and hereafter acquired machinery, --------- molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 7.1 of this ------------------ Agreement. --- "General Intangibles" means all general intangibles of Borrower, whether now -------------------- owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, --------- merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Obligations" means all present and future Loans, advances, debts, ----------- liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Silicon. "Permitted Liens" means the following: (i) purchase money security interests ---------------- in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, which consent shall not be unreasonably withheld; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Silicon will have the right to 92 require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint ------ venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Receivables" means all of Borrower's now owned and hereafter acquired ----------- accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, securities accounts, investment property, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Reserves" means, as of any date of determination, such amounts as Silicon may -------- from time to time establish and revise in good faith reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in good faith, do or may affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Receivables), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Other Terms. All accounting terms used in this Agreement, unless otherwise ------------ indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Silicon (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Silicon on account of the Obligations three Business Days after receipt by Silicon of immediately available funds, and, for purposes of the foregoing, any such funds received after 12:00 Noon on any day shall be deemed received on the next Business Day. Silicon shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Silicon in its sole discretion, and Silicon may charge Borrower's loan account for the amount of any item of payment which is returned to Silicon unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Silicon's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's Deposit Accounts maintained with Silicon. 9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within thirty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party*. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid**. 93 * OR BY FACSIMILE (IF TO BORROWER AT (408) 747-7198 OR IF TO SILICON AT 408-654-1068) ** OR ON THE DATE SENT BY CONFIRMED FACSIMILE, IF SENT BEFORE 5:00 PM, OR, IF SO SENT AFTER 5:00 PM, ON THE NEXT BUSINESS DAY 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral -------------------- understandings, representations or agreements between the parties which are not - -------------------------------------------------------------------------------- set forth in this Agreement or in other written agreements signed by the parties - -------------------------------------------------------------------------------- in connection herewith. - ------------------------- 9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. 9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon * from liability for its own gross negligence or willful misconduct. * NOR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH REPRESENTING SILICON 9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon. 9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying Borrower's obligation ----------------------------------- hereunder to reimburse Silicon for attorneys fees, Borrower may, for - ----------------------------------------------------------------------------- convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas, - ------------------------------------------------------------------------------- but Borrower acknowledges and agrees that Levy, Small & Lallas is representing - -------------------------------------------------------------------------------- only Silicon and not Borrower in connection with this Agreement. If either - --------------------------------------------------------------------- Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and 94 representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release Borrower from its liability for the Obligations. 9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within * after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that such ** period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The ** period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other present or future agreement. *TWO YEARS **TWO-YEAR 9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". * This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise. * FOR PURPOSES OF THIS AGREEMENT, DEFAULTS AND EVENTS OF DEFAULT ARE DEEMED "CONTINUING" (OR VARIATIONS OF SUCH TERM) AFTER THEY OCCUR, UNLESS AND UNTIL THEY ARE WAIVED IN WRITING BY SILICON OR CURED WITHIN ANY APPLICABLE CURE PERIOD. 9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: GENUS, INC. BY -------------------------- PRESIDENT OR VICE PRESIDENT SILICON: SILICON VALLEY BANK BY -------------------------- TITLE ---------------------------- 95 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT (EXIM PROGRAM) BORROWER: GENUS, INC. ADDRESS: 1139 KARLSTAD DR. SUNNYVALE, CA 94089 DATE: NOVEMBER , 2001 ---- This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date. ================================================================================ 1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of a total of $7,500,000 at any one time outstanding (the "Maximum Credit Limit"), or the sum or (a) and (b) below: (a) 85% of the amount of Borrower's Eligible Receivables (as defined in Section 8 above), plus (b) an amount not to exceed the lesser of: (1) 70% of the value of Borrower's Eligible Inventory (as defined in Section 8 above), calculated at the lower of cost or market value and determined on a first-in, first-out basis, or (2) $3,000,000. Provided that (i) the total Loans under Section 1(b) above shall not at any time exceed 60% of the total Loans outstanding under Sections 1(a) and 1(b) above combined, and (ii) the total outstanding Obligations under this Loan Agreement and under the Non-Exim Agreement (as defined below) shall not at any time exceed $10,000,000 (the "Overall Credit Limit"). LETTER OF CREDIT SUBLIMIT (Section 1.5): $3,000,000, provided that the total Letter of Credit Sublimit and the Foreign Exchange Contract Sublimit shall not, at any time, exceed $3,000,000. FOREIGN EXCHANGE CONTRACT SUBLIMIT $3,000,000, provided that the total Letter of Credit Sublimit and the Foreign Exchange Contract Sublimit shall not, at any time, exceed $3,000,000. Borrower may enter into foreign exchange forward contracts with Silicon, on its standard forms, under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one business day after the contract date (the "FX Forward Contracts"); provided that (1) at the time the FX Forward Contract is entered into Borrower has Loans available to it under this Agreement in an amount at least equal to 10% of the amount of the FX Forward Contract; (2) the total FX Forward Contracts at any one time outstanding may not exceed 10 times the amount of the Foreign Exchange Contract Sublimit set forth above. Silicon shall have the right to withhold, from the Loans otherwise available to 96 Borrower under this Agreement, a reserve (which shall be in addition to all other reserves) in an amount equal to 10% of the total FX Forward Contracts from time to time outstanding, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Silicon may, in its discretion, terminate the FX Forward Contracts at any time that an Event of Default occurs and is continuing. Borrower shall execute all standard form applications and agreements of Silicon in connection with the FX Forward Contracts, and without limiting any of the terms of such applications and agreements, Borrower shall pay all standard fees and charges of Silicon in connection with the FX Forward Contracts. ================================================================================ 2. INTEREST. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from time to time, plus 1.75% per annum. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. MINIMUM MONTHLY INTEREST (Section 1.2): None. ================================================================================ 3. FEES (Section 1.4): LOAN FEE: $112,500, payable concurrently herewith. COLLATERAL MONITORING FEE: $750 per month, payable in arrears (prorated for any partial month at the beginning and at termination of this Agreement). ================================================================================ 4. MATURITY DATE (Section 6.1): One year from the date of this Agreement. ================================================================================ 5. FINANCIAL COVENANTS (Section 5.1): Borrower shall comply with each of the financial covenants set forth in the Non-Exim Agreement (as defined below). ================================================================================ 6. REPORTING. (Section 5.3): Borrower shall provide Silicon with the following: 1. Monthly Receivable agings, aged by invoice date, within fifteen days after the end of each month. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month. 3. Monthly reconciliations of Receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen days after the end of each month. 4. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with generally accepted accounting principles) or such other inventory reports as are reasonably requested by Silicon, all within fifteen days after the end of each month. 97 5. Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month. 6. Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks. 7. Quarterly unaudited financial statements, as soon as available, and in any event within forty-five days after the end of each fiscal quarter of Borrower. 8. Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower. 9. Annual financial statements, as soon as available, and in any event within 120 days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to Silicon. ================================================================================ 7. COMPENSATION (Section 5.5): Without Silicon's prior written consent, Borrower shall not pay total compensation, including salaries, withdrawals, fees, bonuses, commissions, drawing accounts and other payments, whether directly or indirectly, in money or otherwise, during any fiscal year to all of Borrower's executives, officers and directors (or any relative thereof) as a group in excess of 115% of the total amount thereof in the prior fiscal year. ================================================================================ 8. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. PRIOR TRADE NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. EXISTING TRADE NAMES OF BORROWER (Section 3.2): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. OTHER LOCATIONS AND ADDRESSES (Section 3.3): As set forth in the Borrower's Representations and Warranties dated November 5, 2001. MATERIAL ADVERSE LITIGATION (Section 3.10): None. 98 ================================================================================ 9. EXIM PROVISIONS: (5) EXIM GUARANTY. Prior to the first disbursement of any Loans hereunder, Borrower shall cause the Export Import Bank of the United States (the "Exim Bank") to guarantee the Loans made under this Agreement, pursuant to a Master Guarantee Agreement, Loan Authorization Agreement and (to the extent applicable) Delegated Authority Letter Agreement (collectively, the "Exim Guaranty"), and Borrower shall cause the Exim Guaranty to be in full force and effect throughout the term of this Agreement and so long as any Loans hereunder are outstanding. If, for any reason, the Exim Guaranty shall cease to be in full force and effect, of if the Exim Bank declares the Exim Guaranty void or revokes any obligations thereunder or denies liability thereunder, any such event shall constitute an Event of Default under this Agreement. Nothing in any confidentiality agreement in this Agreement or in any other agreement shall restrict Silicon's right to make disclosures and provide information to the Exim Bank in connection with the Exim Guaranty. (6) EXIM BORROWER AGREEMENT; COSTS. Borrower shall, concurrently execute and deliver a Borrower Agreement, in the form specified by the Exim Bank, in favor of Silicon and the Exim Bank (the "Exim Borrower Agreement"). This Agreement is subject to all of the terms and conditions of the Exim Borrower Agreement, all of which are hereby incorporated herein by this reference. Borrower expressly agrees to perform all of the obligations and comply with all of the affirmative and negative covenants and all other terms and conditions set forth in the Exim Borrower Agreement as though the same were expressly set forth herein. In the event of any conflict between the terms of the Exim Borrower Agreement and the other terms of this Agreement, whichever terms are more restrictive shall apply. Borrower shall reimburse Silicon for all fees and all out of pocket costs and expenses incurred by Silicon with respect to the Exim Guaranty and the Exim Borrower Agreement, including without limitation all facility fees and usage fees, and Silicon is authorized to debit Borrower's account with Silicon for such fees, costs and expenses when paid by Silicon. (7) NON-EXIM AGREEMENT; CROSS-COLLATERALIZATION; CROSS-DEFAULT. Silicon and the Borrower are parties to that certain Loan and Security Agreement of even date (the "Non-Exim Agreement"). Both this Agreement and the Non-Exim Agreement shall continue in full force and effect, and all rights and remedies under this Agreement and the Non-Exim Agreement are cumulative. The term "Obligations" as used in this Agreement and in the Non-Exim Agreement shall include without limitation the obligation to pay when due all Loans made pursuant to this Agreement (the "Exim Loans") and all interest thereon and the obligation to pay when due all Loans made pursuant to the Non-Exim Agreement (the "Non-Exim Loans") and all interest thereon. Without limiting the generality of the foregoing, all "Collateral" as defined in this Agreement and as defined in the Non-Exim Agreement shall secure all Exim Loans and all Non-Exim Loans and all interest thereon, and all other Obligations. Any Event of Default under this Agreement shall also constitute an Event of Default under the Non-Exim Agreement, and any Event of 99 Default under the Non-Exim Agreement shall also constitute an Event of Default under this Agreement. In the event Silicon assigns its rights under this Agreement and/or under any Note evidencing Exim Loans and/or its rights under the Non-Exim Agreement and/or under any Note evidencing Non-Exim Loans, to any third party, including without limitation the Exim Bank, whether before or after the occurrence of any Event of Default, Silicon shall have the right (but not any obligation), in its sole discretion, to allocate and apportion Collateral to the Agreement and/or Note assigned and to specify the priorities of the respective security interests in such Collateral between itself and the assignee, all without notice to or consent of the Borrower. ================================================================================ 10. OTHER COVENANTS (Section 5.1): Borrower shall at all times comply with all of the following additional covenants: (1) BANKING AND INVESTMENT RELATIONSHIP. Borrower shall at all times maintain its primary banking and investment relationship with Silicon and shall maintain all of its funds (including without limitation all deposit accounts and all investment funds) with Silicon. (a) SUBORDINATION OF INSIDE DEBT. All present and future indebtedness of Borrower to its officers, directors and shareholders ("Inside Debt") shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon's standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon's standard form. (b) COPYRIGHT FILINGS. Concurrently, Borrower is executing and delivering to Silicon a Collateral Assignment, Patent Mortgage and Security Agreement between Borrower and Silicon (the "Intellectual Property Agreement"). Within 60 days after the date hereof, Borrower shall (i) cause all of its computer software, the licensing of which results in Receivables, to be registered with the United States Copyright Office, (ii) complete the Exhibits to the Intellectual Property Agreement with all of the information called for with respect to such software and all other copyrights, (iii) cause the Intellectual Property Agreement to be recorded in the United States Copyright Office, and (iv) provide evidence of such recordation to Silicon. (8) BARCLAYS FINANCING STATEMENT. Borrower represents and warrants that (i) the UCC-1 Financing Statement filed in the Office of the California Secretary of State on January 18, 1999 with respect to "Genus, Inc." in favor of Barclays Bank, PLC (File No 933360012) does not relate to Borrower, (ii) Borrower understands that said financing statement relates to a Wisconsin corporation, Genus, Inc., (iii) Borrower has no ownership or other interest in, or relationship with, said Wisconsin corporation, (iv) Borrower has no indebtedness to Barclays Bank PLC, and (v) Borrower has not and will not grant any security interest in any of its assets to Barclays Bank, PLC during the term of this Agreement and so long as any of the Obligations remain outstanding. 100 Borrower: Silicon: GENUS, INC. SILICON VALLEY BANK By By ---------------------------------- ------------------------------- President or Vice President Title ---------------------------- ANNEX B EXPORT-IMPORT BANK OF THE UNITED STATES WORKING CAPITAL GUARANTEE PROGRAM BORROWER AGREEMENT THIS BORROWER AGREEMENT (this "Agreement") is made and entered into by the entity identified as Borrower on the signature page hereof ("Borrower") in favor of the Export-Import Bank of the United States ("Ex-Im Bank") and the institution identified as Lender on the signature page hereof ("Lender"). RECITALS Borrower has requested that Lender establish a Loan Facility in favor of Borrower for the purposes of providing Borrower with pre-export working capital to finance the manufacture, production or purchase and subsequent export sale of Items. It is a condition to the establishment of such Loan Facility that Ex-Im Bank guarantee the payment of ninety percent (90%) of certain credit accommodations subject to the terms and conditions of a Master Guarantee Agreement, the Loan Authorization Agreement, and to the extent applicable, the Delegated Authority Letter Agreement. Borrower is executing this Agreement for the benefit of Lender and Ex-Im Bank in consideration for and as a condition to Lender's establishing the Loan Facility and Ex-Im Bank's agreement to guarantee such Loan Facility pursuant to the Master Guarantee Agreement. NOW, THEREFORE, Borrower hereby agrees as follows: DEFINITIONS DEFINITION OF TERMS. AS USED IN THIS AGREEMENT, INCLUDING THE RECITALS TO THIS - ------------------- AGREEMENT AND THE LOAN AUTHORIZATION AGREEMENT, THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING MEANINGS: "Accounts Receivable" shall mean all of Borrower's now owned or hereafter acquired (a) "accounts" (as such term is defined in the UCC), other receivables, book debts and other forms of obligations, whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all purchase orders or receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (d) moneys due or to become due to such Borrower under all purchase orders and contracts for the sale of goods or the performance of services or both by Borrower (whether or not yet earned by performance on the part of Borrower), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. 101 "Advance Rate" shall mean the rate specified in Section 5(C) of the Loan Authorization Agreement for each category of Collateral. "Business Day" shall mean any day on which the Federal Reserve Bank of New York is open for business. "Buyer" shall mean a Person that has entered into one or more Export Orders with Borrower. "Collateral" shall mean all property and interest in property in or upon which Lender has been granted a Lien as security for the payment of all the Loan Facility Obligations including the Collateral identified in Section 6 of the Loan Authorization Agreement and all products and proceeds (cash and non-cash) thereof. "Commercial Letters of Credit" shall mean those letters of credit subject to the UCP payable in Dollars and issued or caused to be issued by Lender on behalf of Borrower under a Loan Facility for the benefit of a supplier(s) of Borrower in connection with Borrower's purchase of goods or services from the supplier in support of the export of the Items. "Country Limitation Schedule" shall mean the schedule published from time to time by Ex-Im Bank and provided to Borrower by Lender which sets forth on a country by country basis whether and under what conditions Ex-Im Bank will provide coverage for the financing of export transactions to countries listed therein. "Credit Accommodation Amount" shall mean, the sum of (a) the aggregate outstanding amount of Disbursements and (b) the aggregate outstanding face amount of Letter of Credit Obligations. "Credit Accommodations" shall mean, collectively, Disbursements and Letter of Credit Obligations. "Debarment Regulations" shall mean, collectively, (a) the Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common Rule), 53 Fed. Reg. 19204 (May 26, 1988), (b) Subpart 9.4 (Debarment, Suspension, and Ineligibility) of the Federal Acquisition Regulations, 48 C.F.R. 9.400-9.409 and (c) the revised Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common Rule), 60 Fed. Reg. 33037 (June 26, 1995). "Delegated Authority Letter Agreement" shall mean the Delegated Authority Letter Agreement, if any, between Ex-Im Bank and Lender. "Disbursement" shall mean, collectively, (a) an advance of a working capital loan from Lender to Borrower under the Loan Facility, and (b) an advance to fund a drawing under a Letter of Credit issued or caused to be issued by Lender for the account of Borrower under the Loan Facility. "Dollars" or "$" shall mean the lawful currency of the United States. "Effective Date" shall mean the date on which (a) the Loan Documents are executed by Lender and Borrower or the date, if later, on which agreements are executed by Lender and Borrower adding the Loan Facility to an existing working capital loan arrangement between Lender and Borrower and (b) all of the conditions to the making of the initial Credit Accommodations under the Loan Documents or any amendments thereto have been satisfied. "Eligible Export-Related Accounts Receivable" shall mean an Export-Related Account Receivable which is acceptable to Lender and which is deemed to be eligible pursuant to the Loan Documents, but in no event shall Eligible Export-Related Accounts Receivable include any Account Receivable: (a) that does not arise from the sale of Items in the ordinary course of Borrower's business; (b) that is not subject to a valid, perfected first priority Lien in favor of Lender; (c) as to which any covenant, representation or warranty contained in the Loan Documents with respect to such Account Receivable has been breached; (d) that is not owned by Borrower or is subject to any right, claim or interest of another Person other than the Lien in favor of Lender; (e) with respect to which an invoice has not been sent; (f) that arises from the sale of defense articles or defense services; (g) that is due and payable from a Buyer located in a country with which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (h) that does not comply with the requirements of the Country Limitation Schedule; (i) that is due and payable more than one hundred eighty (180) days from the date of the invoice; (j) that is not paid within sixty (60) calendar days from its original due date, unless it is insured through Ex-Im Bank export credit insurance for comprehensive commercial and political risk, or through Ex-Im Bank approved private insurers for comparable coverage, in which case it is not paid within ninety (90) calendar days from its due date; (k) that arises from a sale of goods to or performance of services for an employee of Borrower, a stockholder of Borrower, a subsidiary of Borrower, a Person with a controlling interest in Borrower or a Person which shares common controlling ownership with Borrower; (l) that is backed by a letter of credit unless the Items covered by the subject letter of credit have been shipped; 102 (m) that Lender or Ex-Im Bank, in its reasonable judgment, deems uncollectible for any reason; (n) that is due and payable in a currency other than Dollars, except as may be approved in writing by Ex-Im Bank; (o) that is due and payable from a military Buyer, except as may be approved in writing by Ex-Im Bank; (p) that does not comply with the terms of sale set forth in Section 7 of the Loan Authorization Agreement; (q) that is due and payable from a Buyer who (i) applies for, suffers, or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or calls a meeting of its creditors, (ii) admits in writing its inability, or is generally unable, to pay its debts as they become due or ceases operations of its present business, (iii) makes a general assignment for the benefit of creditors, (iv) commences a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt or insolvent, (vi) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesces to, or fails to have dismissed, any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) takes any action for the purpose of effecting any of the foregoing; (r) that arises from a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper; (s) for which the Items giving rise to such Account Receivable have not been shipped and delivered to and accepted by the Buyer or the services giving rise to such Account Receivable have not been performed by Borrower and accepted by the Buyer or the Account Receivable otherwise does not represent a final sale; (t) that is subject to any offset, deduction, defense, dispute, or counterclaim or the Buyer is also a creditor or supplier of Borrower or the Account Receivable is contingent in any respect or for any reason; (u) for which Borrower has made any agreement with the Buyer for any deduction therefrom, except for discounts or allowances made in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face value of each respective invoice related thereto; or (v) for which any of the Items giving rise to such Account Receivable have been returned, rejected or repossessed. "Eligible Export-Related Inventory" shall mean Export-Related Inventory which is acceptable to Lender and which is deemed to be eligible pursuant to the Loan Documents, but in no event shall Eligible Export-Related Inventory include any Inventory: (a) that is not subject to a valid, perfected first priority Lien in favor of Lender; (b) that is located at an address that has not been disclosed to Lender in writing; (c) that is placed by Borrower on consignment or held by Borrower on consignment from another Person; (d) that is in the possession of a processor or bailee, or located on premises leased or subleased to Borrower, or on premises subject to a mortgage in favor of a Person other than Lender, unless such processor or bailee or mortgagee or the lessor or sublessor of such premises, as the case may be, has executed and delivered all documentation which Lender shall require to evidence the subordination or other limitation or extinguishment of such Person's rights with respect to such Inventory and Lender's right to gain access thereto; (e) that is produced in violation of the Fair Labor Standards Act or subject to the "hot goods" provisions contained in 29 US.C.Sec.215 or any successor statute or section; (f) as to which any covenant, representation or warranty with respect to such Inventory contained in the Loan Documents has been breached; (g) that is not located in the United States; (h) that is demonstration Inventory; (i) that consists of proprietary software (i.e. software designed solely for Borrower's internal use and not intended for resale); (j) that is damaged, obsolete, returned, defective, recalled or unfit for further processing; (k) that has been previously exported from the United States; (l) that constitutes defense articles or defense services; (m) that is to be incorporated into Items destined for shipment to a country as to which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (n) that is to be incorporated into Items destined for shipment to a Buyer located in a country in which Ex-Im Bank coverage is not available for commercial reasons as designated in the Country Limitation Schedule, unless and only to the extent that such Items are to be sold to such country on terms of a letter of credit confirmed by a bank acceptable to Ex-Im Bank; or (o) that is to be incorporated into Items whose sale would result in an Account Receivable which would not be an Eligible Export-Related Account Receivable. 103 "Eligible Person" shall mean a sole proprietorship, partnership, limited liability partnership, corporation or limited liability company which (a) is domiciled, organized, or formed, as the case may be, in the United States; (b) is in good standing in the state of its formation or otherwise authorized to conduct business in the United States; (c) is not currently suspended or debarred from doing business with the United States government or any instrumentality, division, agency or department thereof; (d) exports or plans to export Items; (e) operates and has operated as a going concern for at least one (1) year; (f) has a positive tangible net worth determined in accordance with GAAP; and (g) has revenue generating operations relating to its core business activities for at least one year. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 and the rules and regulations promulgated thereunder. "Export Order" shall mean a written export order or contract for the purchase by the Buyer from Borrower of any of the Items. "Export-Related Accounts Receivable" shall mean those Accounts Receivable arising from the sale of Items which are due and payable to Borrower in the United States. "Export-Related Accounts Receivable Value" shall mean, at the date of determination thereof, the aggregate face amount of Eligible Export-Related Accounts Receivable less taxes, discounts, credits, allowances and Retainages, except to the extent otherwise permitted by Ex-Im Bank in writing. "Export-Related Borrowing Base" shall mean, at the date of determination thereof, the sum of (a) the Export-Related Inventory Value multiplied by the Advance Rate applicable to Export-Related Inventory set forth in Section 5(C)(1) of the Loan Authorization Agreement, (b) the Export-Related Accounts Receivable Value multiplied by the Advance Rate applicable to Export-Related Accounts Receivable set forth in Section 5(C)(2) of the Loan Authorization Agreement, (c) if permitted by Ex-Im Bank in writing, the Retainage Value multiplied by the Retainage Advance Rate set forth in Section 5(C)(3) of the Loan Authorization Agreement and (d) the Other Assets Value multiplied by the Advance Rate applicable to Other Assets set forth in Section 5(C)(4) of the Loan Authorization Agreement. "Export-Related Borrowing Base Certificate" shall mean a certificate in the form provided or approved by Lender, executed by Borrower and delivered to Lender pursuant to the Loan Documents detailing the Export-Related Borrowing Base supporting the Credit Accommodations which reflects, to the extent included in the Export-Related Borrowing Base, Export-Related Accounts Receivable, Eligible Export-Related Accounts Receivable, Export-Related Inventory and Eligible Export-Related Inventory balances that have been reconciled with Borrower's general ledger, Accounts Receivable aging report and Inventory schedule. "Export-Related General Intangibles" shall mean those General Intangibles necessary or desirable to or for the disposition of Export-Related Inventory. "Export-Related Inventory" shall mean the Inventory of Borrower located in the United States that has been purchased, manufactured or otherwise acquired by Borrower for resale pursuant to Export Orders. "Export-Related Inventory Value" shall mean, at the date of determination thereof, the lower of cost or market value of Eligible Export-Related Inventory of Borrower as determined in accordance with GAAP. "Final Disbursement Date" shall mean, unless subject to an extension of such date agreed to by Ex-Im Bank, the last date on which Lender may make a Disbursement set forth in Section 10 of the Loan Authorization Agreement or, if such date is not a Business Day, the next succeeding Business Day; provided, -------- however, to the extent that Lender has not received cash collateral or an - ------- indemnity with respect to Letter of Credit Obligations outstanding on the Final Disbursement Date, the Final Disbursement Date with respect to an advance to fund a drawing under a Letter of Credit shall be no later than thirty (30) Business Days after the expiry date of the Letter of Credit related thereto. "GAAP" shall mean the generally accepted accounting principles issued by the American Institute of Certified Public Accountants as in effect from time to time. "General Intangibles" shall mean all intellectual property and other "general intangibles" (as such term is defined in the UCC) necessary or desirable to or for the disposition of Inventory. "Guarantor" shall mean each Person, if any, identified in Section 3 of the Loan Authorization Agreement who shall guarantee (jointly and severally if more than one) the payment and performance of all or a portion of the Loan Facility Obligations. "Guaranty Agreement" shall mean a valid and enforceable agreement of guaranty executed by each Guarantor in favor of Lender. "Inventory" shall mean all "inventory" (as such term is defined in the UCC), now or hereafter owned or acquired by Borrower, wherever located, including all inventory, merchandise, goods and other personal property which are held by or on behalf of Borrower for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or 104 consumed in Borrower's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "ISP" shall mean the International Standby Practices-ISP98, International Chamber of Commerce Publication No. 590 and any amendments and revisions thereof. "Issuing Bank" shall mean the bank that issues a Letter of Credit, which bank is Lender itself or a bank that Lender has caused to issue a Letter of Credit by way of guarantee. "Items" shall mean the finished goods or services which are intended for export from the United States, as specified in Section 4(A) of the Loan Authorization Agreement. "Letter of Credit" shall mean a Commercial Letter of Credit or a Standby Letter of Credit. "Letter of Credit Obligations" shall mean all outstanding obligations incurred by Lender, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee by Lender or the Issuing Bank of Letters of Credit. "Lien" shall mean any mortgage, security deed or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the UCC or comparable law of any jurisdiction) by which property is encumbered or otherwise charged. "Loan Agreement" shall mean a valid and enforceable agreement between Lender and Borrower setting forth the terms and conditions of the Loan Facility. "Loan Authorization Agreement" shall mean the Loan Authorization Agreement entered into between Lender and Ex-Im Bank or the Loan Authorization Notice setting forth certain terms and conditions of the Loan Facility, a copy of which is attached hereto as Annex A. "Loan Authorization Notice" shall mean the Loan Authorization Notice executed by Lender and delivered to Ex-Im Bank in accordance with the Delegated Authority Letter Agreement setting forth the terms and conditions of each Loan Facility. "Loan Documents" shall mean the Loan Authorization Agreement, the Loan Agreement, this Agreement, each promissory note (if applicable), each Guaranty Agreement, and all other instruments, agreements and documents now or hereafter executed by Borrower or any Guarantor evidencing, securing, guaranteeing or otherwise relating to the Loan Facility or any Credit Accommodations made thereunder. "Loan Facility" shall mean the Revolving Loan Facility, the Transaction Specific Loan Facility or the Transaction Specific Revolving Loan Facility established by Lender in favor of Borrower under the Loan Documents. "Loan Facility Obligations" shall mean all loans, advances, debts, expenses, fees, liabilities, and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or amounts are liquidated or determinable) owing by Borrower to Lender, of any kind or nature, present or future, arising in connection with the Loan Facility. "Loan Facility Term" shall mean the number of months from the Effective Date to the Final Disbursement Date as originally set forth in the Loan Authorization Agreement. "Master Guarantee Agreement" shall mean the Master Guarantee Agreement between Ex-Im Bank and Lender, as amended, modified, supplemented and restated from time to time. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of Borrower or any Guarantor, (b) Borrower's ability to pay or perform the Loan Facility Obligations in accordance with the terms thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority of such Lien or (d) Lender's rights and remedies under the Loan Documents. "Maximum Amount" shall mean the maximum principal balance of Credit Accommodations that may be outstanding at any time under the Loan Facility specified in Section 5(A) of the Loan Authorization Agreement. "Other Assets" shall mean the Collateral, if any, described in Section 5(C)(4) of the Loan Authorization Agreement. "Other Assets Value" shall mean, at the date of determination thereof, the value of the Other Assets as determined in accordance with GAAP. "Permitted Liens" shall mean (a) Liens for taxes, assessments or other governmental charges or levies not delinquent, or, being contested in good faith and by appropriate proceedings and with respect to which proper reserves have been taken by Borrower; provided, that, the Lien shall have no effect on the -------- ---- priority of the Liens in favor of Lender or the value of the assets in which Lender has such a Lien and a stay of enforcement of any such Lien shall be in effect; (b) deposits or pledges securing obligations under worker's compensation, unemployment insurance, social security or public liability laws or similar legislation; (c) deposits or pledges securing bids, tenders, 105 contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of Borrower's business; (d) judgment Liens that have been stayed or bonded; (e) mechanics', workers', materialmen's or other like Liens arising in the ordinary course of Borrower's business with respect to obligations which are not due; (f) Liens placed upon fixed assets hereafter acquired to secure a portion of the purchase price thereof, provided, that, any such Lien shall not encumber any other property of Borrower; (g) security interests being terminated concurrently with the execution of the Loan Documents; (h) Liens in favor of Lender securing the Loan Facility Obligations; and (i) Liens disclosed in Section 6(D) of the Loan Authorization Agreement. "Person" shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether national, federal, provincial, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person's successors and assigns. "Principals" shall mean any officer, director, owner, partner, key employee, or other Person with primary management or supervisory responsibilities with respect to Borrower or any other Person (whether or not an employee) who has critical influence on or substantive control over the transactions covered by this Agreement. "Retainage" shall mean that portion of the purchase price of an Export Order that a Buyer is not obligated to pay until the end of a specified period of time following the satisfactory performance under such Export Order. "Retainage Accounts Receivable" shall mean those portions of Eligible Export-Related Accounts Receivable arising out of a Retainage. "Retainage Advance Rate" shall mean the percentage rate specified in Section 5(C)(3) of the Loan Authorization Agreement as the Advance Rate for the Retainage Accounts Receivable of Borrower. "Retainage Value" shall mean, at the date of determination thereof, the aggregate face amount of Retainage Accounts Receivable, less taxes, discounts, credits and allowances, except to the extent otherwise permitted by Ex-Im Bank in writing. "Revolving Loan Facility" shall mean the credit facility or portion thereof established by Lender in favor of Borrower for the purpose of providing pre-export working capital in the form of loans and/or Letters of Credit to finance the manufacture, production or purchase and subsequent export sale of Items pursuant to Loan Documents under which Credit Accommodations may be made and repaid on a continuous basis based solely on the Export-Related Borrowing Base during the term of such credit facility. "Special Conditions" shall mean those conditions, if any, set forth in Section 13 of the Loan Authorization Agreement. "Specific Export Orders" shall mean those Export Orders specified in Section 5(D) of the Loan Authorization Agreement. "Standby Letter of Credit" shall mean those letters of credit subject to the ISP or UCP issued or caused to be issued by Lender for Borrower's account that can be drawn upon by a Buyer only if Borrower fails to perform all of its obligations with respect to an Export Order. "Transaction Specific Loan Facility" shall mean a credit facility or a portion thereof established by Lender in favor of Borrower for the purpose of providing pre-export working capital in the form of loans and/or Letters of Credit to finance the manufacture, production or purchase and subsequent export sale of Items pursuant to Loan Documents under which Credit Accommodations are made based solely on the Export-Related Borrowing Base relating to Specific Export Orders and once such Credit Accommodations are repaid they may not be reborrowed. "Transaction Specific Revolving Loan Facility" shall mean a Revolving Credit Facility established to provide financing of Specific Export Orders. "UCC" shall mean the Uniform Commercial Code as the same may be in effect from time to time in the jurisdiction in which Borrower or Collateral is located. "UCP" shall mean the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 and any amendments and revisions thereof. "U.S." or "United States" shall mean the United States of America and its territorial possessions. "U.S. Content" shall mean with respect to any Item all the labor, materials and services which are of U.S. origin or manufacture, and which are incorporated into an Item in the United States. "Warranty" shall mean Borrower's guarantee to Buyer that the Items will function as intended during the warranty period set forth in the applicable Export Order. "Warranty Letter of Credit" shall mean a Standby Letter of Credit which is issued or caused to be issued by Lender to support the obligations of Borrower with respect to a Warranty or a Standby Letter of Credit which by its terms becomes a Warranty Letter of Credit. 106 1.01 RULES OF CONSTRUCTION. FOR PURPOSES OF THIS AGREEMENT, THE ----------------------- FOLLOWING ADDITIONAL RULES OF CONSTRUCTION SHALL APPLY, UNLESS SPECIFICALLY INDICATED TO THE CONTRARY: (a) WHEREVER FROM THE CONTEXT IT APPEARS APPROPRIATE, EACH TERM STATED IN EITHER THE SINGULAR OR PLURAL SHALL INCLUDE THE SINGULAR AND THE PLURAL, AND PRONOUNS STATED IN THE MASCULINE, FEMININE OR NEUTER GENDER SHALL INCLUDE THE MASCULINE, THE FEMININE AND THE NEUTER; (b) THE TERM "OR" IS NOT EXCLUSIVE; (c) THE TERM "INCLUDING" (OR ANY FORM THEREOF) SHALL NOT BE LIMITING OR EXCLUSIVE; (d) ALL REFERENCES TO STATUTES AND RELATED REGULATIONS SHALL INCLUDE ANY AMENDMENTS OF SAME AND ANY SUCCESSOR STATUTES AND REGULATIONS; (e) THE WORDS "THIS AGREEMENT", "HEREIN", "HEREOF", "HEREUNDER" OR OTHER WORDS OF SIMILAR IMPORT REFER TO THIS AGREEMENT AS A WHOLE INCLUDING THE SCHEDULES, EXHIBITS, AND ANNEXES HERETO AS THE SAME MAY BE AMENDED, MODIFIED OR SUPPLEMENTED; (f) ALL REFERENCES IN THIS AGREEMENT TO SECTIONS, SCHEDULES, EXHIBITS, AND ANNEXES SHALL REFER TO THE CORRESPONDING SECTIONS, SCHEDULES, EXHIBITS, AND ANNEXES OF OR TO THIS AGREEMENT; AND (g) ALL REFERENCES TO ANY INSTRUMENTS OR AGREEMENTS, INCLUDING REFERENCES TO ANY OF THE LOAN DOCUMENTS, OR THE DELEGATED AUTHORITY LETTER AGREEMENT SHALL INCLUDE ANY AND ALL MODIFICATIONS, AMENDMENTS AND SUPPLEMENTS THERETO AND ANY AND ALL EXTENSIONS OR RENEWALS THEREOF TO THE EXTENT PERMITTED UNDER THIS AGREEMENT. INCORPORATION OF RECITALS. THE RECITALS TO THIS AGREEMENT ARE INCORPORATED INTO - ------------------------- AND SHALL CONSTITUTE A PART OF THIS AGREEMENT. OBLIGATIONS OF BORROWER Until payment in full of all Loan Facility Obligations and termination of the Loan Documents, Borrower agrees as follows: USE OF CREDIT ACCOMMODATIONS. (a) BORROWER SHALL USE CREDIT ACCOMMODATIONS ONLY - ---------------------------- FOR THE PURPOSE OF ENABLING BORROWER TO FINANCE THE COST OF MANUFACTURING, PRODUCING, PURCHASING OR SELLING THE ITEMS. BORROWER MAY NOT USE ANY OF THE CREDIT ACCOMMODATIONS FOR THE PURPOSE OF: (i) SERVICING OR REPAYING ANY OF BORROWER'S PRE-EXISTING OR FUTURE INDEBTEDNESS UNRELATED TO THE LOAN FACILITY (UNLESS APPROVED BY EX-IM BANK IN WRITING); (ii) ACQUIRING FIXED ASSETS OR CAPITAL GOODS FOR USE IN BORROWER'S BUSINESS; (iii) ACQUIRING, EQUIPPING OR RENTING COMMERCIAL SPACE OUTSIDE OF THE UNITED STATES; (iv) PAYING THE SALARIES OF NON U.S. CITIZENS OR NON-U.S. PERMANENT RESIDENTS WHO ARE LOCATED IN OFFICES OUTSIDE OF THE UNITED STATES; OR (V) IN CONNECTION WITH A RETAINAGE OR WARRANTY (UNLESS APPROVED BY EX-IM BANK IN WRITING). IN ADDITION, NO CREDIT ACCOMMODATION MAY BE USED TO FINANCE THE MANUFACTURE, PURCHASE OR SALE OF ANY OF THE FOLLOWING: (i) Items to be sold or resold to a Buyer located in a country as to which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (ii) that part of the cost of the Items which is not U.S. Content unless such part is not greater than fifty percent (50%) of the cost of the Items and is incorporated into the Items in the United States; (iii) defense articles or defense services; or (iv) without Ex-Im Bank's prior written consent, any Items to be used in the construction, alteration, operation or maintenance of nuclear power, enrichment, reprocessing, research or heavy water production facilities. LOAN DOCUMENTS AND LOAN AUTHORIZATION AGREEMENT. (a) EACH LOAN DOCUMENT AND - ----------------------------------------------- THIS AGREEMENT HAVE BEEN DULY EXECUTED AND DELIVERED ON BEHALF OF BORROWER, AND EACH SUCH LOAN DOCUMENT AND THIS AGREEMENT ARE AND WILL CONTINUE TO BE A LEGAL AND VALID OBLIGATION OF BORROWER, ENFORCEABLE AGAINST IT IN ACCORDANCE WITH ITS TERMS. (c) BORROWER SHALL COMPLY WITH ALL OF THE TERMS AND CONDITIONS OF THE LOAN DOCUMENTS, THIS AGREEMENT AND THE LOAN AUTHORIZATION AGREEMENT. EXPORT-RELATED BORROWING BASE CERTIFICATES AND EXPORT ORDERS. IN ORDER TO - ------------------------------------------------------------ RECEIVE CREDIT ACCOMMODATIONS UNDER THE LOAN FACILITY, BORROWER SHALL HAVE DELIVERED TO LENDER AN EXPORT-RELATED BORROWING BASE CERTIFICATE AS FREQUENTLY AS REQUIRED BY LENDER BUT AT LEAST WITHIN THE PAST THIRTY (30) CALENDAR DAYS AND A COPY OF THE EXPORT ORDER(S) (OR, FOR REVOLVING LOAN FACILITIES, IF PERMITTED BY LENDER, A WRITTEN SUMMARY OF THE EXPORT ORDERS) AGAINST WHICH BORROWER IS REQUESTING CREDIT ACCOMMODATIONS. IF LENDER PERMITS SUMMARIES OF EXPORT ORDERS, BORROWER SHALL ALSO DELIVER PROMPTLY TO LENDER COPIES OF ANY EXPORT ORDERS REQUESTED BY LENDER. IN ADDITION, SO LONG AS THERE ARE ANY CREDIT ACCOMMODATIONS OUTSTANDING UNDER THE LOAN FACILITY, BORROWER SHALL DELIVER TO LENDER AT LEAST ONCE EACH MONTH NO LATER THAN THE TWENTIETH (20TH) DAY OF SUCH MONTH OR MORE FREQUENTLY AS REQUIRED BY THE LOAN DOCUMENTS, AN EXPORT-RELATED BORROWING BASE CERTIFICATE. 1.02 EXCLUSIONS FROM THE EXPORT-RELATED BORROWING BASE. IN DETERMINING ------------------------------------------------------- THE EXPORT-RELATED BORROWING BASE, BORROWER SHALL EXCLUDE THEREFROM INVENTORY WHICH IS NOT ELIGIBLE EXPORT-RELATED INVENTORY AND ACCOUNTS RECEIVABLE WHICH ARE NOT ELIGIBLE EXPORT-RELATED ACCOUNTS RECEIVABLE. BORROWER SHALL PROMPTLY, BUT IN ANY EVENT WITHIN FIVE (5) BUSINESS DAYS, NOTIFY LENDER (a) IF ANY THEN EXISTING EXPORT-RELATED INVENTORY NO LONGER CONSTITUTES ELIGIBLE EXPORT-RELATED INVENTORY OR (b) OF ANY EVENT OR CIRCUMSTANCE WHICH TO 107 BORROWER'S KNOWLEDGE WOULD CAUSE LENDER TO CONSIDER ANY THEN EXISTING EXPORT-RELATED ACCOUNTS RECEIVABLE AS NO LONGER CONSTITUTING AN ELIGIBLE EXPORT-RELATED ACCOUNTS RECEIVABLE. FINANCIAL STATEMENTS. BORROWER SHALL DELIVER TO LENDER THE FINANCIAL STATEMENTS - -------------------- REQUIRED TO BE DELIVERED BY BORROWER IN ACCORDANCE WITH SECTION 11 OF THE LOAN AUTHORIZATION AGREEMENT. SCHEDULES, REPORTS AND OTHER STATEMENTS. BORROWER SHALL SUBMIT TO LENDER IN - --------------------------------------- WRITING EACH MONTH (a) AN INVENTORY SCHEDULE FOR THE PRECEDING MONTH AND (b) AN ACCOUNTS RECEIVABLE AGING REPORT FOR THE PRECEDING MONTH DETAILING THE TERMS OF THE AMOUNTS DUE FROM EACH BUYER. BORROWER SHALL ALSO FURNISH TO LENDER PROMPTLY UPON REQUEST SUCH INFORMATION, REPORTS, CONTRACTS, INVOICES AND OTHER DATA CONCERNING THE COLLATERAL AS LENDER MAY FROM TIME TO TIME SPECIFY. ADDITIONAL SECURITY OR PAYMENT. (a) BORROWER SHALL AT ALL TIMES ENSURE THAT - ------------------------------ THE EXPORT-RELATED BORROWING BASE EQUALS OR EXCEEDS THE CREDIT ACCOMMODATION AMOUNT. IF INFORMED BY LENDER OR IF BORROWER OTHERWISE HAS ACTUAL KNOWLEDGE THAT THE EXPORT-RELATED BORROWING BASE IS AT ANY TIME LESS THAN THE CREDIT ACCOMMODATION AMOUNT, BORROWER SHALL, WITHIN FIVE (5) BUSINESS DAYS, EITHER (i) FURNISH ADDITIONAL COLLATERAL TO LENDER, IN FORM AND AMOUNT SATISFACTORY TO LENDER AND EX-IM BANK OR (ii) PAY TO LENDER AN AMOUNT EQUAL TO THE DIFFERENCE BETWEEN THE CREDIT ACCOMMODATION AMOUNT AND THE EXPORT-RELATED BORROWING BASE. (b) FOR PURPOSES OF THIS AGREEMENT, IN DETERMINING THE EXPORT-RELATED BORROWING BASE THERE SHALL BE DEDUCTED FROM THE EXPORT-RELATED BORROWING BASE (i) AN AMOUNT EQUAL TO TWENTY-FIVE PERCENT (25%) OF THE OUTSTANDING FACE AMOUNT OF COMMERCIAL LETTERS OF CREDIT AND STANDBY LETTERS OF CREDIT AND (ii) ONE HUNDRED PERCENT (100%) OF THE FACE AMOUNT OF WARRANTY LETTERS OF CREDIT LESS THE AMOUNT OF CASH COLLATERAL HELD BY LENDER TO SECURE WARRANTY LETTERS OF CREDIT. (c) UNLESS OTHERWISE APPROVED IN WRITING BY EX-IM BANK, FOR REVOLVING LOAN FACILITIES (OTHER THAN TRANSACTION SPECIFIC REVOLVING LOAN FACILITIES), BORROWER SHALL AT ALL TIMES ENSURE THAT THE OUTSTANDING PRINCIPAL BALANCE OF THE CREDIT ACCOMMODATIONS THAT IS SUPPORTED BY EXPORT-RELATED INVENTORY DOES NOT EXCEED SIXTY PERCENT (60%) OF THE SUM OF THE TOTAL OUTSTANDING PRINCIPAL BALANCE OF THE DISBURSEMENTS AND THE UNDRAWN FACE AMOUNT OF ALL OUTSTANDING COMMERCIAL LETTERS OF CREDIT. IF INFORMED BY LENDER OR IF BORROWER OTHERWISE HAS ACTUAL KNOWLEDGE THAT THE OUTSTANDING PRINCIPAL BALANCE OF THE CREDIT ACCOMMODATIONS THAT IS SUPPORTED BY INVENTORY EXCEEDS SIXTY PERCENT (60%) OF THE SUM OF THE TOTAL OUTSTANDING PRINCIPAL BALANCE OF THE DISBURSEMENTS AND THE UNDRAWN FACE AMOUNT OF ALL OUTSTANDING COMMERCIAL LETTERS OF CREDIT, BORROWER SHALL, WITHIN FIVE (5) BUSINESS DAYS, EITHER (i) FURNISH ADDITIONAL NON-INVENTORY COLLATERAL TO LENDER, IN FORM AND AMOUNT SATISFACTORY TO LENDER AND EX-IM BANK, OR (ii) PAY DOWN THE APPLICABLE PORTION OF THE CREDIT ACCOMMODATIONS SO THAT THE ABOVE DESCRIBED RATIO IS NOT EXCEEDED. CONTINUED SECURITY INTEREST. BORROWER SHALL NOT CHANGE (a) ITS NAME OR IDENTITY - --------------------------- IN ANY MANNER, (b) THE LOCATION OF ITS PRINCIPAL PLACE OF BUSINESS, (c) THE LOCATION OF ANY OF THE COLLATERAL OR (d) THE LOCATION OF ANY OF THE BOOKS OR RECORDS RELATED TO THE COLLATERAL, IN EACH INSTANCE WITHOUT GIVING THIRTY (30) DAYS PRIOR WRITTEN NOTICE THEREOF TO LENDER AND TAKING ALL ACTIONS DEEMED NECESSARY OR APPROPRIATE BY LENDER TO CONTINUOUSLY PROTECT AND PERFECT LENDER'S LIENS UPON THE COLLATERAL. INSPECTION OF COLLATERAL. BORROWER SHALL PERMIT THE REPRESENTATIVES OF LENDER - ------------------------ AND EX-IM BANK TO MAKE AT ANY TIME DURING NORMAL BUSINESS HOURS INSPECTIONS OF THE COLLATERAL AND OF BORROWER'S FACILITIES, ACTIVITIES, AND BOOKS AND RECORDS, AND SHALL CAUSE ITS OFFICERS AND EMPLOYEES TO GIVE FULL COOPERATION AND ASSISTANCE IN CONNECTION THEREWITH. GENERAL INTANGIBLES. BORROWER REPRESENTS AND WARRANTS THAT IT OWNS, OR IS - ------------------- LICENSED TO USE, ALL GENERAL INTANGIBLES NECESSARY TO CONDUCT ITS BUSINESS AS CURRENTLY CONDUCTED EXCEPT WHERE THE FAILURE OF BORROWER TO OWN OR LICENSE SUCH GENERAL INTANGIBLES COULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT. NOTICE OF CERTAIN EVENTS. BORROWER SHALL PROMPTLY, BUT IN ANY EVENT WITHIN FIVE - ------------------------ (5) BUSINESS DAYS, NOTIFY LENDER IN WRITING OF THE OCCURRENCE OF ANY OF THE FOLLOWING: BORROWER OR ANY GUARANTOR (i) APPLIES FOR, CONSENTS TO OR SUFFERS THE APPOINTMENT OF, OR THE TAKING OF POSSESSION BY, A RECEIVER, CUSTODIAN, TRUSTEE, LIQUIDATOR OR SIMILAR FIDUCIARY OF ITSELF OR OF ALL OR A SUBSTANTIAL PART OF ITS PROPERTY OR CALLS A MEETING OF ITS CREDITORS, (ii) ADMITS IN WRITING ITS INABILITY, OR IS GENERALLY UNABLE, TO PAY ITS DEBTS AS THEY BECOME DUE OR CEASES OPERATIONS OF ITS PRESENT BUSINESS, (iii) MAKES A GENERAL ASSIGNMENT FOR THE BENEFIT OF CREDITORS, (iv) COMMENCES A VOLUNTARY CASE UNDER ANY STATE OR FEDERAL BANKRUPTCY LAWS (AS NOW OR HEREAFTER IN EFFECT), (V) IS ADJUDICATED AS BANKRUPT OR INSOLVENT, (VI) FILES A PETITION SEEKING TO TAKE ADVANTAGE OF ANY OTHER LAW PROVIDING FOR THE RELIEF OF DEBTORS, (VII) ACQUIESCES TO, OR FAILS TO HAVE DISMISSED WITHIN THIRTY (30) DAYS, ANY PETITION FILED AGAINST IT IN ANY INVOLUNTARY CASE UNDER SUCH BANKRUPTCY LAWS, OR (VII) TAKES ANY ACTION FOR THE PURPOSE OF EFFECTING ANY OF THE FOREGOING; (a) ANY LIEN IN ANY OF THE COLLATERAL, GRANTED OR INTENDED BY THE LOAN DOCUMENTS TO BE GRANTED TO LENDER, CEASES TO BE A VALID, ENFORCEABLE, PERFECTED, FIRST PRIORITY LIEN (OR A LESSER PRIORITY IF EXPRESSLY PERMITTED PURSUANT TO SECTION 6 OF THE LOAN AUTHORIZATION AGREEMENT) SUBJECT ONLY TO PERMITTED LIENS; (b) THE ISSUANCE OF ANY LEVY, ASSESSMENT, ATTACHMENT, SEIZURE OR LIEN, OTHER THAN A PERMITTED LIEN, AGAINST ANY 108 OF THE COLLATERAL WHICH IS NOT STAYED OR LIFTED WITHIN THIRTY (30) CALENDAR DAYS; (c) ANY PROCEEDING IS COMMENCED BY OR AGAINST BORROWER OR ANY GUARANTOR FOR THE LIQUIDATION OF ITS ASSETS OR DISSOLUTION; (d) ANY LITIGATION IS FILED AGAINST BORROWER OR ANY GUARANTOR WHICH HAS HAD OR COULD REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT AND SUCH LITIGATION IS NOT WITHDRAWN OR DISMISSED WITHIN THIRTY (30) CALENDAR DAYS OF THE FILING THEREOF; (e) ANY DEFAULT OR EVENT OF DEFAULT UNDER THE LOAN DOCUMENTS; (f) ANY FAILURE TO COMPLY WITH ANY TERMS OF THE LOAN AUTHORIZATION AGREEMENT; (g) ANY MATERIAL PROVISION OF ANY LOAN DOCUMENT OR THIS AGREEMENT FOR ANY REASON CEASES TO BE VALID, BINDING AND ENFORCEABLE IN ACCORDANCE WITH ITS TERMS; (h) ANY EVENT WHICH HAS HAD OR COULD REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT; OR (i) THE CREDIT ACCOMMODATION AMOUNT EXCEEDS THE APPLICABLE EXPORT-RELATED BORROWING BASE. INSURANCE. BORROWER WILL AT ALL TIMES CARRY PROPERTY, LIABILITY AND OTHER - --------- INSURANCE, WITH INSURERS ACCEPTABLE TO LENDER, IN SUCH FORM AND AMOUNTS, AND WITH SUCH DEDUCTIBLES AND OTHER PROVISIONS, AS LENDER SHALL REQUIRE, AND BORROWER WILL PROVIDE EVIDENCE OF SUCH INSURANCE TO LENDER, SO THAT LENDER IS SATISFIED THAT SUCH INSURANCE IS, AT ALL TIMES, IN FULL FORCE AND EFFECT. EACH PROPERTY INSURANCE POLICY SHALL NAME LENDER AS LOSS PAYEE AND SHALL CONTAIN A LENDER'S LOSS PAYABLE ENDORSEMENT IN FORM ACCEPTABLE TO LENDER AND EACH LIABILITY INSURANCE POLICY SHALL NAME LENDER AS AN ADDITIONAL INSURED. ALL POLICIES OF INSURANCE SHALL PROVIDE THAT THEY MAY NOT BE CANCELLED OR CHANGED WITHOUT AT LEAST TEN (10) DAYS' PRIOR WRITTEN NOTICE TO LENDER AND SHALL OTHERWISE BE IN FORM AND SUBSTANCE SATISFACTORY TO LENDER. BORROWER WILL PROMPTLY DELIVER TO LENDER COPIES OF ALL REPORTS MADE TO INSURANCE COMPANIES. TAXES. BORROWER HAS TIMELY FILED ALL TAX RETURNS AND REPORTS REQUIRED BY - ----- APPLICABLE LAW, HAS TIMELY PAID ALL APPLICABLE TAXES, ASSESSMENTS, DEPOSITS AND CONTRIBUTIONS OWING BY BORROWER AND WILL TIMELY PAY ALL SUCH ITEMS IN THE FUTURE AS THEY BECAME DUE AND PAYABLE. BORROWER MAY, HOWEVER, DEFER PAYMENT OF ANY CONTESTED TAXES; PROVIDED, THAT BORROWER (a) IN GOOD FAITH CONTESTS BORROWER'S OBLIGATION TO PAY SUCH TAXES BY APPROPRIATE PROCEEDINGS PROMPTLY AND DILIGENTLY INSTITUTED AND CONDUCTED; (b) NOTIFIES LENDER IN WRITING OF THE COMMENCEMENT OF, AND ANY MATERIAL DEVELOPMENT IN, THE PROCEEDINGS; (c) POSTS BONDS OR TAKES ANY OTHER STEPS REQUIRED TO KEEP THE CONTESTED TAXES FROM BECOMING A LIEN UPON ANY OF THE COLLATERAL; AND (d) MAINTAINS ADEQUATE RESERVES THEREFOR IN CONFORMITY WITH GAAP. COMPLIANCE WITH LAWS. BORROWER REPRESENTS AND WARRANTS THAT IT HAS COMPLIED IN - -------------------- ALL MATERIAL RESPECTS WITH ALL PROVISIONS OF ALL APPLICABLE LAWS AND REGULATIONS, INCLUDING THOSE RELATING TO BORROWER'S OWNERSHIP OF REAL OR PERSONAL PROPERTY, THE CONDUCT AND LICENSING OF BORROWER'S BUSINESS, THE PAYMENT AND WITHHOLDING OF TAXES, ERISA AND OTHER EMPLOYEE MATTERS, SAFETY AND ENVIRONMENTAL MATTERS. NEGATIVE COVENANTS. WITHOUT THE PRIOR WRITTEN CONSENT OF EX-IM BANK AND LENDER, - ------------------ BORROWER SHALL NOT (a) MERGE, CONSOLIDATE OR OTHERWISE COMBINE WITH ANY OTHER PERSON; (b) ACQUIRE ALL OR SUBSTANTIALLY ALL OF THE ASSETS OR CAPITAL STOCK OF ANY OTHER PERSON; (c) SELL, LEASE, TRANSFER, CONVEY, ASSIGN OR OTHERWISE DISPOSE OF ANY OF ITS ASSETS, EXCEPT FOR THE SALE OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS AND THE DISPOSITION OF OBSOLETE EQUIPMENT IN THE ORDINARY COURSE OF BUSINESS; (d) CREATE ANY LIEN ON THE COLLATERAL EXCEPT FOR PERMITTED LIENS; (e) MAKE ANY MATERIAL CHANGES IN ITS ORGANIZATIONAL STRUCTURE OR IDENTITY; OR (f) ENTER INTO ANY AGREEMENT TO DO ANY OF THE FOREGOING. REBORROWINGS AND REPAYMENT TERMS. (a) IF THE LOAN FACILITY IS A REVOLVING LOAN - -------------------------------- FACILITY, PROVIDED THAT BORROWER IS NOT IN DEFAULT UNDER ANY OF THE LOAN DOCUMENTS, BORROWER MAY BORROW, REPAY AND REBORROW AMOUNTS UNDER THE LOAN FACILITY UNTIL THE CLOSE OF BUSINESS ON THE FINAL DISBURSEMENT DATE. UNLESS THE REVOLVING LOAN FACILITY IS RENEWED OR EXTENDED BY LENDER WITH THE CONSENT OF EX-IM BANK, BORROWER SHALL PAY IN FULL THE OUTSTANDING LOAN FACILITY OBLIGATIONS AND ALL ACCRUED AND UNPAID INTEREST THEREON NO LATER THAN THE FIRST BUSINESS DAY AFTER THE FINAL DISBURSEMENT DATE. IF THE LOAN FACILITY IS A TRANSACTION SPECIFIC LOAN FACILITY, BORROWER SHALL, WITHIN TWO (2) BUSINESS DAYS OF THE RECEIPT THEREOF, PAY TO LENDER (FOR APPLICATION AGAINST THE OUTSTANDING LOAN FACILITY OBLIGATIONS AND ACCRUED AND UNPAID INTEREST THEREON) ALL CHECKS, DRAFTS, CASH AND OTHER REMITTANCES IT MAY RECEIVE IN PAYMENT OR ON ACCOUNT OF THE EXPORT-RELATED ACCOUNTS RECEIVABLE OR ANY OTHER COLLATERAL, IN PRECISELY THE FORM RECEIVED (EXCEPT FOR THE ENDORSEMENT OF BORROWER WHERE NECESSARY). PENDING SUCH DEPOSIT, BORROWER SHALL HOLD SUCH AMOUNTS IN TRUST FOR LENDER SEPARATE AND APART AND SHALL NOT COMMINGLE ANY SUCH ITEMS OF PAYMENT WITH ANY OF ITS OTHER FUNDS OR PROPERTY. CROSS DEFAULT. BORROWER SHALL BE DEEMED IN DEFAULT UNDER THE LOAN FACILITY IF - ------------- BORROWER FAILS TO PAY WHEN DUE ANY AMOUNT PAYABLE TO LENDER UNDER ANY LOAN OR OTHER CREDIT ACCOMMODATIONS TO BORROWER WHETHER OR NOT GUARANTEED BY EX-IM BANK. MUNITIONS LIST. IF ANY OF THE ITEMS ARE ARTICLES, SERVICES, OR RELATED - -------------- TECHNICAL DATA THAT ARE LISTED ON THE UNITED STATES MUNITIONS LIST (PART 121 OF TITLE 22 OF THE CODE OF FEDERAL REGULATIONS), BORROWER SHALL SEND A WRITTEN 109 NOTICE PROMPTLY, BUT IN ANY EVENT WITHIN FIVE (5) BUSINESS DAYS, OF BORROWER LEARNING THEREOF TO LENDER DESCRIBING THE ITEMS(S) AND THE CORRESPONDING INVOICE AMOUNT. SUSPENSION AND DEBARMENT, ETC. ON THE DATE OF THIS AGREEMENT NEITHER BORROWER - ----------------------------- NOR ITS PRINCIPALS ARE (a) DEBARRED, SUSPENDED, PROPOSED FOR DEBARMENT WITH A FINAL DETERMINATION STILL PENDING, DECLARED INELIGIBLE OR VOLUNTARILY EXCLUDED (AS SUCH TERMS ARE DEFINED UNDER ANY OF THE DEBARMENT REGULATIONS REFERRED TO BELOW) FROM PARTICIPATING IN PROCUREMENT OR NONPROCUREMENT TRANSACTIONS WITH ANY UNITED STATES FEDERAL GOVERNMENT DEPARTMENT OR AGENCY PURSUANT TO ANY OF THE DEBARMENT REGULATIONS OR (b) INDICTED, CONVICTED OR HAD A CIVIL JUDGMENT RENDERED AGAINST BORROWER OR ANY OF ITS PRINCIPALS FOR ANY OF THE OFFENSES LISTED IN ANY OF THE DEBARMENT REGULATIONS. UNLESS AUTHORIZED BY EX-IM BANK, BORROWER WILL NOT KNOWINGLY ENTER INTO ANY TRANSACTIONS IN CONNECTION WITH THE ITEMS WITH ANY PERSON WHO IS DEBARRED, SUSPENDED, DECLARED INELIGIBLE OR VOLUNTARILY EXCLUDED FROM PARTICIPATION IN PROCUREMENT OR NONPROCUREMENT TRANSACTIONS WITH ANY UNITED STATES FEDERAL GOVERNMENT DEPARTMENT OR AGENCY PURSUANT TO ANY OF THE DEBARMENT REGULATIONS. BORROWER WILL PROVIDE IMMEDIATE WRITTEN NOTICE TO LENDER IF AT ANY TIME IT LEARNS THAT THE CERTIFICATION SET FORTH IN THIS SECTION 2.19 WAS ERRONEOUS WHEN MADE OR HAS BECOME ERRONEOUS BY REASON OF CHANGED CIRCUMSTANCES. RIGHTS AND REMEDIES INDEMNIFICATION. UPON EX-IM BANK'S PAYMENT OF A CLAIM TO LENDER IN CONNECTION - --------------- WITH THE LOAN FACILITY PURSUANT TO THE MASTER GUARANTEE AGREEMENT, EX-IM BANK MAY ASSUME ALL RIGHTS AND REMEDIES OF LENDER UNDER THE LOAN DOCUMENTS AND MAY ENFORCE ANY SUCH RIGHTS OR REMEDIES AGAINST BORROWER, THE COLLATERAL AND ANY GUARANTORS. BORROWER SHALL HOLD EX-IM BANK AND LENDER HARMLESS FROM AND INDEMNIFY THEM AGAINST ANY AND ALL LIABILITIES, DAMAGES, CLAIMS, COSTS AND LOSSES INCURRED OR SUFFERED BY EITHER OF THEM RESULTING FROM (a) ANY MATERIALLY INCORRECT CERTIFICATION OR STATEMENT KNOWINGLY MADE BY BORROWER OR ITS AGENT TO EX-IM BANK OR LENDER IN CONNECTION WITH THE LOAN FACILITY, THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT OR ANY OTHER LOAN DOCUMENTS OR (b) ANY MATERIAL BREACH BY BORROWER OF THE TERMS AND CONDITIONS OF THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. BORROWER ALSO ACKNOWLEDGES THAT ANY STATEMENT, CERTIFICATION OR REPRESENTATION MADE BY BORROWER IN CONNECTION WITH THE LOAN FACILITY IS SUBJECT TO THE PENALTIES PROVIDED IN ARTICLE 18 U.S.C. SECTION 1001. LIENS. BORROWER AGREES THAT ANY AND ALL LIENS GRANTED BY IT TO LENDER ARE ALSO - ----- HEREBY GRANTED TO EX-IM BANK TO SECURE BORROWER'S OBLIGATION, HOWEVER ARISING, TO REIMBURSE EX-IM BANK FOR ANY PAYMENTS MADE BY EX-IM BANK PURSUANT TO THE MASTER GUARANTEE AGREEMENT. LENDER IS AUTHORIZED TO APPLY THE PROCEEDS OF, AND RECOVERIES FROM, ANY PROPERTY SUBJECT TO SUCH LIENS TO THE SATISFACTION OF LOAN FACILITY OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF ANY AGREEMENT BETWEEN LENDER AND EX-IM BANK. MISCELLANEOUS GOVERNING LAW. THIS AGREEMENT AND THE LOAN AUTHORIZATION AGREEMENT AND THE - ------------- OBLIGATIONS ARISING UNDER THIS AGREEMENT AND THE LOAN AUTHORIZATION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE GOVERNING THE LOAN DOCUMENTS. NOTIFICATION. ALL NOTICES REQUIRED BY THIS AGREEMENT SHALL BE GIVEN IN THE - ------------ MANNER AND TO THE PARTIES PROVIDED FOR IN THE LOAN AGREEMENT. PARTIAL INVALIDITY. IF AT ANY TIME ANY OF THE PROVISIONS OF THIS AGREEMENT - ------------------ BECOMES ILLEGAL, INVALID OR UNENFORCEABLE IN ANY RESPECT UNDER THE LAW OF ANY JURISDICTION, NEITHER THE LEGALITY, THE VALIDITY NOR THE ENFORCEABILITY OF THE REMAINING PROVISIONS HEREOF SHALL IN ANY WAY BE AFFECTED OR IMPAIRED. WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY - -------------------- WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT, PROCEEDING OR OTHER LITIGATION BROUGHT TO RESOLVE ANY DISPUTE ARISING UNDER, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT, ANY LOAN DOCUMENT, OR ANY OTHER AGREEMENT, DOCUMENT OR INSTRUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OR OMMISSIONS OF LENDER, EX-IM BANK, OR ANY OTHER PERSON, RELATING TO THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT OR ANY OTHER LOAN DOCUMENT. 110 IN WITNESS WHEREOF, Borrower has caused this Agreement to be duly executed as of the th day of , 2001. --- ---------- GENUS, INC. By: -------------------------------- (Signature) Name: ------------------------------ (Print or Type) Title: ----------------------------- (Print or Type) ACKNOWLEDGED: SILICON VALLEY BANK By: -------------------------------- (Signature) Name: ------------------------------ (Print or Type) Title: ----------------------------- (Print or Type) 111 CONSENT OF GUARANTORS Each of the undersigned as a Guarantor of the obligations of Borrower to the Lender executing the foregoing Agreement hereby agrees that the foregoing Agreement, each of their respective Guaranty Agreements and each other Loan Documents may be assigned to the Export-Import Bank of the United States. ----------------------------- [INDIVIDUAL GUARANTOR] [CORPORATE GUARANTOR] By: ------------------------------ Name: ------------------------------ Title: ------------------------------ 112 EX-10.11 5 doc4.txt EXHIBIT 10.11 INTELLECTUAL PROPERTY SECURITY AGREEMENT This Intellectual Property Security Agreement (this "Agreement") is made as of November , 2001 by and between GENUS, INC. ("Borrower"), and SILICON VALLEY --- BANK, a California banking corporation ("Secured Party"). RECITALS -------- A. Secured Party has agreed to lend to Borrower certain funds (the "Loans"), pursuant to a Loan and Security Agreement and a Loan and Security Agreement (Exim Program) dated of substantially even date (collectively, the "Loan Agreement") and Borrower desires to borrow such funds from Secured Party. B. In order to induce Secured Party to make the Loans, Borrower has agreed to grant a security interest in certain intangible property to Secured Party for purposes of securing the obligations of Borrower to Secured Party. NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Grant of Security Interest. As collateral security for the prompt ---------------------------- and complete payment and performance of all of Borrower's present or future indebtedness, obligations and liabilities to Secured Party, Borrower hereby grants, assigns, transfers, and conveys a security interest to Secured Party, as security, but not as an ownership interest, in and to Borrower's entire right, title and interest in, to and under the following (all of which shall collectively be called the "Collateral"): (a) All of present and future United States registered copyrights and copyright registrations, including, without limitation, the registered copyrights, maskworks, software, computer programs and other works of authorship subject to United States copyright protection listed in Exhibit A-1 to this ----------- Agreement (and including all of the exclusive rights afforded a copyright registrant in the United States under 17 U.S.C. Sec.106 and any exclusive rights which may in the future arise by act of Congress or otherwise) and all present and future applications for copyright registrations (including applications for copyright registrations of derivative works and compilations) (collectively, the "Registered Copyrights"), and any and all royalties, payments, and other amounts payable to Borrower in connection with the Registered Copyrights, together with all renewals and extensions of the Registered Copyrights, the right to recover for all past, present, and future infringements of the Registered Copyrights, and all computer programs, computer databases, computer program flow diagrams, source codes, object codes and all tangible property embodying or incorporating the Registered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto. (b) All present and future copyrights, maskworks, software, computer programs and other works of authorship subject to (or capable of becoming subject to) United States copyright protection which are not registered in the United States Copyright Office (the "Unregistered Copyrights"), whether now owned or hereafter acquired, including without limitation the Unregistered Copyrights listed in Exhibit A-2 to this Agreement, and any and all royalties, ----------- payments, and other amounts payable to Borrower in connection with the Unregistered Copyrights, together with all renewals and extensions of the Unregistered Copyrights, the right to recover for all past, present, and future infringements of the Unregistered Copyrights, and all computer programs, computer databases, computer program flow diagrams, source codes, object codes and all tangible property embodying or incorporating the Unregistered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto. The Registered Copyrights and the Unregistered Copyrights collectively are referred to herein as the "Copyrights." (c) All right, title and interest in and to any and all present and future license agreements with respect to the Copyrights, including without limitation the license agreements listed in Exhibit A-3 to this Agreement (the "Licenses"). ----------- (d) All present and future accounts, accounts receivable and other rights to payment arising from, in connection with or relating to the Copyrights. (e) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; 113 (f) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (g) All patents, patent applications and like protections including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, including without limitation the patents and patent applications set forth on Exhibit B attached --------- hereto (collectively, the "Patents"); (h) Any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks, including without limitation those set forth on Exhibit C attached hereto (collectively, the "Trademarks"); provided, ---------- -------- however, that Secured Party shall not acquire any interest in any intent to use - ------- a federal trademark application for a trademark, servicemark, or other mark filed on Borrower's behalf prior to the filing under applicable law of a verified statement of use (or equivalent) for such mark that is the subject of such application; (i) Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (j) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (k) All amendments, extensions, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (l) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. 2. Authorization and Request. Borrower authorizes and requests that ---------------------------- the Register of Copyrights and the Commissioner of Patents and Trademarks record this Agreement. 3. Covenants and Warranties. Borrower represents, warrants, covenants -------------------------- and agrees as follows: (a) Borrower is now the sole owner of the Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. (b) Listed on Exhibits A-1 and A-2 are all copyrights owned by Borrower, in which Borrower has an interest, or which are used in Borrower's business. (c) Each employee, agent and/or independent contractor who has participated in the creation of the property constituting the Collateral has either executed an assignment of his or her rights of authorship to Borrower or is an employee of Borrower acting within the scope of his or her employment and was such an employee at the time of said creation. (d) All of Borrower's present and future maskworks, software, computer programs and other works of authorship subject to (or capable of becoming subject to) United States copyright protection, the sale, licensing or other disposition of which results in royalties receivable, license fees receivable, accounts receivable or other sums owing to Borrower (collectively, "Receivables"), have been and shall be registered with the United States Copyright Office prior to the date Borrower requests or accepts any loan from Secured Party with respect to such Receivables and prior to the date Borrower includes any such Receivables in any accounts receivable aging, borrowing base report or certificate or other similar report provided to Secured Party, and Borrower shall provide to Secured Party copies of all such registrations promptly upon the receipt of the same. (e) Borrower shall undertake all reasonable measures to cause its employees, agents and independent contractors to assign to Borrower all rights of authorship to any copyrighted material in which Borrower has or may 114 subsequently acquire any right or interest. (f) Performance of this Agreement does not conflict with or result in a breach of any agreement to which Borrower is bound, except to the extent that certain intellectual property agreements prohibit the assignment of the rights thereunder to a third party without the licensor's or other party's consent and this Agreement constitutes an assignment. (g) During the term of this Agreement, Borrower will not transfer or otherwise encumber any interest in the Collateral, except for Permitted Liens (as such term is defined in the Loan Agreement) and non-exclusive licenses granted by Borrower in the ordinary course of business or as set forth in this Agreement; (h) Each of the Patents, Trademarks, and Copyrights is valid and enforceable, and no part of the Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Collateral violates the rights of any third party; (i) Borrower shall promptly advise Secured Party of any material adverse change in the composition of the Collateral, including but not limited to any subsequent ownership right of the Borrower in or to any Trademark, Patent or Copyright not specified in this Agreement; (j) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Secured Party in writing of material infringements detected and (iii) not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Secured Party, which shall not be unreasonably withheld unless Borrower determines that reasonable business practices suggest that abandonment is appropriate. (k) Borrower shall promptly register the most recent version of any of Borrower's Copyrights, if not so already registered, and shall, from time to time, execute and file such other instruments, and take such further actions as Secured Party may reasonably request from time to time to perfect or continue the perfection of Secured Party's interest in the Collateral; (l) This Agreement creates, and in the case of after acquired Collateral, this Agreement will create at the time Borrower first has rights in such after acquired Collateral, in favor of Secured Party a valid and perfected first priority security interest in the Collateral in the United States securing the payment and performance of the obligations evidenced by the Loan Agreement upon making the filings referred to in clause (m) below; (m) To its knowledge, except for, and upon, the filing with the United States Patent and Trademark office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights necessary to perfect the security interests created hereunder and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any U.S. governmental authority or U.S. regulatory body is required either (i) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Borrower in the U.S. or (ii) for the perfection in the United States or the exercise by Secured Party of its rights and remedies thereunder; (n) All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Borrower with respect to the Collateral is accurate and complete in all material respects. (o) Borrower shall not enter into any agreement that would materially impair or conflict with Borrower's obligations hereunder without Secured Party's prior written consent, which consent shall not be unreasonably withheld. Borrower shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interest in any property included within the definition of the Collateral acquired under such contracts, except that certain contracts may contain anti-assignment provisions that could in effect prohibit the creation of a security interest in such contracts. (p) Upon any executive officer of Borrower obtaining actual knowledge thereof, Borrower will promptly notify Secured Party in writing of any event that materially adversely affects the value of any material Collateral, the ability of Borrower to dispose of any material Collateral or the rights and remedies of Secured Party 115 in relation thereto, including the levy of any legal process against any of the Collateral. 4. Secured Party's Rights. Secured Party shall have the right, but not ----------------------- the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Agreement to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Secured Party for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this section 4. 5. Inspection Rights. Borrower hereby grants to Secured Party and its ------------------- employees, representatives and agents the right to visit, during reasonable hours upon prior reasonable written notice to Borrower, and any of Borrower's plants and facilities that manufacture, install or store products (or that have done so during the prior six-month period) that are sold utilizing any of the Collateral, and to inspect the products and quality control records relating thereto upon reasonable written notice to Borrower and as often as may be reasonably requested, but not more than one (1) in every six (6) months; provided, however, nothing herein shall entitle Secured Party access to Borrower's trade secrets and other proprietary information. 6. Further Assurances; Attorney in Fact. ----------------------------------------- (a) Borrower will, subject to any prior licenses, encumbrances and restrictions and prospective licenses, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places in the United States, all such instruments, including, appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademarks Office and the Register of Copyrights, and take all such action as may reasonably be deemed necessary or advisable, or as requested by Secured Party, to perfect Secured Party's security interest in all Copyrights, Patents and Trademarks and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to Secured Party the grant or perfection of a security interest in all Collateral. (b) Upon an Event of Default, Borrower hereby irrevocably appoints Secured Party as Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower, Secured Party or otherwise, from time to time in Secured Party's discretion, upon Borrower's failure or inability to do so, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) To modify, in its sole discretion, this Agreement without first obtaining Borrower's approval of or signature to such modification by amending Exhibit A-1, Exhibit A-2, Exhibit A-3, Exhibit B and Exhibit C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims any right, title or interest; and (ii) To file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law. 7. Events of Default. The occurrence of any of the following shall -------------------- constitute an Event of Default under this Agreement: (a) An Event of Default occurs under the Loan Agreement; or (b) Borrower breaches any warranty or agreement made by Borrower in this Agreement. 8. Remedies. Upon the occurrence and continuance of an Event of --------- Default, Secured Party shall have the right to exercise all the remedies of a secured party under the California Uniform Commercial Code, including without limitation the right to require Borrower to assemble the Collateral and any tangible property in which Secured Party has a security interest and to make it available to Secured Party at a place designated by Secured Party. Secured Party shall have a nonexclusive, royalty free license to use the Copyrights, Patents and Trademarks to the extent reasonably necessary to permit Secured Party to exercise its rights and remedies upon the occurrence of an Event of Default. Borrower will pay any expenses (including reasonable attorney's fees) incurred by Secured Party in connection with the exercise of any of Secured 116 Party's rights hereunder, including without limitation any expense incurred in disposing of the Collateral. All of Secured Party's rights and remedies with respect to the Collateral shall be cumulative. 9. Indemnity. Borrower agrees to defend, indemnify and hold harmless ---------- Secured Party and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement, and (b) all losses or expenses in any way suffered, incurred, or paid by Secured Party as a result of or in any way arising out of, following or consequential to transactions between Secured Party and Borrower, whether under this Agreement or otherwise (including without limitation, reasonable attorneys fees and reasonable expenses), except for losses arising form or out of Secured Party's gross negligence or willful misconduct. 10. Release. At such time as Borrower shall completely satisfy all of -------- the obligations secured hereunder, Secured Party shall execute and deliver to Borrower all lien releases and other instruments as may be reasonably necessary or proper to terminate Secured Party's security interest in the Collateral, subject to any disposition of the Collateral which may have been made by Secured Party pursuant to this Agreement. For the purpose of this Agreement, the obligations secured hereunder shall be deemed to continue if Borrower enters into any bankruptcy or similar proceeding at a time when any amount paid to Secured Party could be ordered to be repaid as a preference or pursuant to a similar theory, and shall continue until it is finally determined that no such repayment can be ordered. 11. No Waiver. No course of dealing between Borrower and Secured Party, nor --------- any failure to exercise nor any delay in exercising, on the part of Secured Party, any right, power, or privilege under this Agreement or under the Loan Agreement or any other agreement, shall operate as a waiver. No single or partial exercise of any right, power, or privilege under this Agreement or under the Loan Agreement or any other agreement by Secured Party shall preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege by Secured Party. 12. Rights Are Cumulative. All of Secured Party's rights and remedies with ---------------------- respect to the Collateral whether established by this Agreement, the Loan Agreement, or any other documents or agreements, or by law shall be cumulative and may be exercised concurrently or in any order. 13. Course of Dealing. No course of dealing, nor any failure to -------------------- exercise, nor any delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 14. Attorneys' Fees. If any action relating to this Agreement is ----------------- brought by either party hereto against the other party, the prevailing party shall be entitled to recover reasonable attorneys fees, costs and disbursements. 15. Amendments. This Agreement may be amended only by a written ----------- instrument signed by both parties hereto. To the extent that any provision of this Agreement conflicts with any provision of the Loan Agreement, the provision giving Secured Party greater rights or remedies shall govern, it being understood that the purpose of this Agreement is to add to, and not detract from, the rights granted to Secured Party under the Loan Agreement. This Agreement, the Loan Agreement, and the documents relating thereto comprise the entire agreement of the parties with respect to the matters addressed in this Agreement. 16. Severability. The provisions of this Agreement are severable. If ------------ any provision of this Agreement is held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such provision, or part thereof, in such jurisdiction, and shall not in any manner affect such provision or part thereof in any other 117 jurisdiction, or any other provision of this Agreement in any jurisdiction. 17. California Law and Jurisdiction. This Agreement shall be governed ---------------------------------- by the laws of the State of California, without regard for choice of law provisions. Borrower and Secured Party consent to the nonexclusive jurisdiction of any state or federal court located in Santa Clara County, California. 18. Confidentiality. In handling any confidential information, Secured ---------------- Party shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that the disclosure of this information may be made (i) to the affiliates of the Secured Party, (ii) to prospective transferee or purchasers of an interest in the obligations secured hereby, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulation, rule or order, subpoena judicial order or similar order and (iv) as may be required in connection with the examination, audit or similar investigation of Secured Party. 19. WAIVER OF RIGHT TO JURY TRIAL. SECURED PARTY AND BORROWER EACH --------------------------------- HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SECURED PARTY AND BORROWER; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF SECURED PARTY OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SECURED PARTY OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. [remainder of page intentionally left blank; signature page follows] 118 20. Counterparts. This Agreement may be executed in two or more ------------- counterparts, each of which shall be deemed an original but all of which together shall constitute the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. BORROWER: GENUS, INC. By: -------------------------- Title: ----------------------- Name (please print): ----------------------------- ADDRESS OF BORROWER: 1139 Karlstad Dr. Sunnyvale, Ca 94089 SECURED PARTY: SILICON VALLEY BANK By: -------------------------- Title: ----------------------- Name (please print): ----------------------------- ADDRESS OF SECURED PARTY: 3003 Tasman Drive Santa Clara, California 95054 119 STATE OF ) ----------------- ) ss. COUNTY OF ) ---------------- On , 200 , before me, ------------- -- ----------------------------------- , Notary Public, personally appeared - ---------------------------------------- , - ------------------------------------------------------------------------------ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. Witness my hand and official seal. --------------------------------- (Seal) STATE OF ) ----------------- ) ss. COUNTY OF ) ---------------- On , 200 , before me, ------------- -- ----------------------------------- , Notary Public, personally appeared - ---------------------------------------- , - ------------------------------------------------------------------------------ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. Witness my hand and official seal. --------------------------------- (Seal) 120 EXHIBIT "A-1" REGISTERED COPYRIGHTS --------------------- (including copyrights that are the subject of an application for registration) Copyright Country Registration/Application Registration/Application - --------- ------- ------------------------ ------------------------ Number Date ------ ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 121 EXHIBIT "A-2" UNREGISTERED COPYRIGHTS ----------------------- 122 EXHIBIT "A-3" DESCRIPTION OF LICENSE AGREEMENTS --------------------------------- 123 EXHIBIT "B" PATENTS ------- (including patents that are the subject of an application for registration) Patent Country Serial/Application Filing Date Status - ------ ------- ------------------ ------------ ------ Number ------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 124 EXHIBIT "C" TRADEMARKS ---------- TRADEMARKS ---------- (including trademarks that are the subject of an application for registration) Mark Country Serial/Application Filing Date Status - ---- ------- ------------------ ------------ ------ Number ------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 125 EX-10.12 6 doc5.txt EXHIBIT 10.12 SILICON VALLEY BANK CERTIFIED RESOLUTION AND INCUMBENCY CERTIFICATE BORROWER: GENUS, INC., A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA DATE: NOVEMBER , 2001 --- I, the undersigned, Secretary or Assistant Secretary of the above-named borrower, a corporation organized under the laws of the state set forth above, do hereby certify that the following is a full, true and correct copy of resolutions duly and regularly adopted by the Board of Directors of said corporation as required by law, and by the by-laws of said corporation, and that said resolutions are still in full force and effect and have not been in any way modified, repealed, rescinded, amended or revoked. RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"), from time to time, such sum or sums of money as, in the judgment of the officer or officers hereinafter authorized hereby, this corporation may require. RESOLVED FURTHER, that any officer of this corporation be, and he or she is hereby authorized, directed and empowered, in the name of this corporation, to execute and deliver to Silicon, and Silicon is requested to accept, the loan agreements, security agreements, notes, financing statements, and other documents and instruments providing for such loans and evidencing and/or securing such loans, with interest thereon, and said authorized officers are authorized from time to time to execute renewals, extensions and/or amendments of said loan agreements, security agreements, and other documents and instruments. RESOLVED FURTHER, that said authorized officers be and they are hereby authorized, directed and empowered, as security for any and all indebtedness of this corporation to Silicon, whether arising pursuant to this resolution or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or deed in trust for its benefit, any property of any and every kind, belonging to this corporation, including, but not limited to, any and all real property, accounts, inventory, equipment, general intangibles, instruments, documents, chattel paper, notes, money, deposit accounts, furniture, fixtures, goods, and other property of every kind, and to execute and deliver to Silicon any and all grants, transfers, trust receipts, loan or credit agreements, pledge agreements, mortgages, deeds of trust, financing statements, security agreements and other hypothecation agreements, which said instruments and the note or notes and other instruments referred to in the preceding paragraph may contain such provisions, covenants, recitals and agreements as Silicon may require and said authorized officers may approve, and the execution thereof by said authorized officers shall be conclusive evidence of such approval. RESOLVED FURTHER, that Silicon may conclusively rely upon a certified copy of these resolutions and a certificate of the Secretary or Ass't Secretary of this corporation as to the officers of this corporation and their offices and signatures, and continue to conclusively rely on such certified copy of these resolutions and said certificate for all past, present and future transactions until written notice of any change hereto or thereto is given to Silicon by this corporation by certified mail, return receipt requested. 126 The undersigned further hereby certifies that the following persons are the duly elected and acting officers of the corporation named above as borrower and that the following are their actual signatures: NAMES OFFICE(S) ACTUAL SIGNATURES ----- --------- ------------------ - ------------------ ---------------------- X ----------------- - ------------------ ---------------------- X ----------------- - ------------------ ---------------------- X ----------------- - ------------------ ---------------------- X ----------------- IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or Assistant Secretary on the date set forth above. ---------------------------------------- Secretary or Assistant Secretary 127 EX-10.13 7 doc6.txt EXHIBIT 10.13 MASTER SECURITY AGREEMENT CITICAPITAL' Master Security Agreement No. L2116440 THIS MASTER SECURITY AGREEMENT (the "Agreement") is by and between Citicorp Vendor Finance, Inc., a Delaware corporation, having its principal office at 700 East Gate Drive, Mount Laurel, New Jersey 08054-5404 ("Secured Party") and Genus, Inc., a California corporation, having its chief executive office at 1139 Karlstad Drive, Sunnyvale, California 94089 ("Debtor"). In consideration of the covenants and conditions contained herein, Secured Party and Debtor agree as follows: 1. GRANT OF SECURITY INTEREST. For valuable consideration, the receipt and -------------------------- sufficiency of which is hereby acknowledged by Debtor, Debtor hereby grants to Secured Party a continuing general lien and security interest in the items of equipment and collateral set forth from time to time in each Secured Promissory Note issued pursuant to this Master Security Agreement (individually a "Note", and collectively the "Notes") including, without limitation, all accessories, additions, alterations, attachments, parts, and repairs now or hereafter affixed thereto or used in connection therewith and substitutions and replacements thereof or of any part thereof (collectively, the "Equipment") and all proceeds of the foregoing including, without limitation, the proceeds of any insurance payable to Debtor or Secured Party with respect to the foregoing; any cash or cash equivalent deposits made by Debtor to Secured Party from time to time to secure Debtor's obligations under any Note or other agreement with Secured Party, (a "Security Deposit"); and any and all real or personal property as Debtor from time to time leases or has leased from Secured Party or that from time to time secures or has secured any indebtedness of Debtor to Secured Party (collectively, the "Collateral"). The security interest granted herein shall attach to each item of Equipment at the earlier of (i) Debtor's execution and delivery of the Note with respect to such item which shall occur upon Debtor's acceptance of such item pursuant to the terms of any purchase order or agreement with the vendor of such item; or (ii) the time that Secured Party advances any funds on behalf of Debtor in complete or partial payment for such Equipment. Any Security Deposit shall not bear interest, may be commingled with other funds of Secured Party and shall be immediately restored by Debtor if applied under Section 9(e). 'I The continuing general lien and security interest granted hereby is to secure payment of all Notes at any time outstanding and all obligations of Debtor to Secured Party, thereunder, hereunder or under any other agreement, including, without limitation, equipment leases or title retention or conditional sales agreements, or otherwise, whether due or to become due hereafter, and whether now existing or hereafter arising whether entered into or acquired by Secured Party. 128 2. Payments.Debtor shall make the payments under any Note issued --------------- hereunder on the dates and in the amounts set forth in such Note. 3. 'SECURED PARTY'S DISCLAIMER OF WARRANTIES.SECURED PARTY MAKES NO ---------------------------------------------- WARRANTY OR REPRESENTATION OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO THE COLLATERAL OR AS TO THE DESIGN, CONDITION, OR QUALITY OF THE COLLATERAL OR THE MATERIAL OR WORKMANSIIIP UTELIZED IN CONNECTION WITH THE COLLATERAL, AND SECURED PARTY MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT THERETO, OR AS TO ANY OTHER MATTER. Debtor acknowledges that it has selected the Collateral on the basis of its own judgment and expressly disclaims any reliance upon any statements or representations made by Secured Party. Debtor understands and agrees that neither the vendor of the Collateral nor any agent of the vendor is an agent of Secured Party or is authorized to waive or alter any term or condition of this Agreement or of any Note and no representation as to the Collateral or any other matter by the vendor shall in any way affect Debtor's duty to perform its obligations as set forth in any Note or this Agreement, which obligations are unconditional and absolute. 4. DEBTOR'S REPRESENTATIONS AND WARRANTIES. Debtor represents and ------------------------------------------ warrants to Secured Party as of the date hereof and as of the date of each Note hereunder that: (a) Debtor is a business organization and with its chief executive office both as set forth in the first paragraph hereof duly organized and in good standing under the laws of its state of organization, is duly qualified and in good standing wherever necessary to carry on its business as now being conducted and to own or lease its properties, including the Equipment, and has full power to carry on its business as now being conducted and to own or lease its properties. (b) Debtor has full power and authority to execute, deliver and perform this Agreement and each Note, and this Agreement has been and each Note will be duly authorized by all necessary and proper action on the part of Debtor. No consent or approval of stockholders, or if the Debtor is a limited liability corporation, of its members or of any public authority is required to connection with the execution, delivery or performance by Debtor of this Agreement or any Note. The execution, delivery or performance by Debtor of this Agreement and each Note will not violate any provision of law, or any judgment or decree applicable to Debtor and will not conflict with or result in a breach of or create a default under any corporate charter or by-laws or partnership agreement or certificate or any agreement, bond, note or indenture to which it is a party or by which it is bound. (c) This Agreement has been and each Note will be duly executed and delivered, and constitute the valid and legally binding obligations of Debtor, enforceable in accordance with their respective terms. (d) Debtor has good title to, and is the lawful owner of the Collateral, free from all adverse claims, liens, encumbrances, charges or security interests whatsoever, except for the lien and security interest granted by this Agreement. 129 (e) The provisions of this Agreement will create a valid and first perfected security interest in the Collateral as set forth in each Note, enforceable in accordance with the terms hereof, subject to no prior or equal lien, charge, encumbrance or security interest, upon the filing of appropriate Uniform Commercial Code financing statements or equivalent security or lien instruments with respect to the Collateral, which shall be timely delivered to Secured Party for filing at- the appropriate offices. To the extent lawful, Debtor hereby appoints Secured Party and its agents as its attorney-in-fact (without requiring Secured Party to act as such) to execute any financing statement in the name of Debtor and to perform all other acts that Secured Party deems appropriate to perfect and continue its security interest in, and to protect and preserve, the Collateral. DEBTOR WAIVES THE RIGHT TO FILE ANY AMENDMENTS OR TERMINATIONS OF FINANCING STATEMENTS WITHOUT SECURED PARTY'S SIGNATURE. 5. DEBTOR'S COVENANTS. Debtor covenants and agrees that Debtor will: ------------------- (a) at its own expense, keep the Collateral in first class order, repair, and running condition, replace any worn, broken or defective parts, provide for all maintenance services strictly in accordance with the specifications of the vendor of the Collateral; (b) make no material alterations in or to the Collateral without the prior written consent of Secured Party; (c) promptly pay all taxes levied or assessed against the Collateral and keep the Collateral free from all adverse claims, liens, encumbrances, charges or security interests whatsoever; (d) at reasonable times, upon at least two days notice, and at its own expense Secured Party and its representatives shall have the right to inspect the Collateral; (e) promptly notify Secured Party in writing of any loss of or damage to the Collateral or any part thereof. (f) indemnify and hold Secured Party harmless from and against any and all claims, losses, damages, and expenses (including attorneys' fees and costs) arising out of or connected with the ownership or use of the Collateral; (g) reimburse Secured Party upon demand for all expenses reasonably incurred in connection with perfecting the security interest granted herein or the satisfaction thereof; (h) not abandon the Collateral; (i) not sell, assign, lease, mortgage or otherwise dispose of any interest in the Collateral without the prior written consent of Secured Party; (j) not use or permit the Collateral to be used for any unlawful purpose or in violation of any federal, state or municipal law, statute or ordinance; 130 (k) not permit the Collateral to become a part of or to be affixed to any real property; (1) not permit the Collateral to be removed from the address set forth herein where the Collateral is kept without the written consent of Secured Party; (m) on demand of Secured Party, do any of the following: furnish further assurance of title, execute any written agreement or do any other acts necessary to effectuate the purposes and provisions of this Agreement and any Note issued hereunder, execute any instrument or statement required by law or otherwise in order to perfect, continue or terminate the security interest of Secured Party in the Collateral and pay all costs of filing in connection therewith; (n) deliver its annual financial statements and such-quarterly financial statements, as Secured Party requests, to the Secured Party, and (o) promptly notify Secured Party in writing of any change of location of its chief executive office, the location of any Collateral, change of its name or form of business organization, or material change in its business affairs or financial condition. If Debtor fails to observe or perform any covenant or agreement contained in this Agreement, which failure is not remedied by Debtor, within 10 days after written notice thereof, Secured Party may, in addition to any other remedy, take whatever action may be necessary to remedy such failure, and should such action require the expenditure of monies (including, without limitation, payment of insurance premiums, repairs, storage, transportation and removal of liens), then the amount of such expenditure shall become forthwith due and payable by Debtor and Debtor shall pay a late charge equal to 5% of the amount of any such expenditure plus interest at the rate of 1 1/4% per month from the date on which such amount was due and payable, but not in excess of the highest rate Secured Party is entitled to receive under applicable law. If Secured Party takes any action authorized hereunder, Secured Party shall not be liable to Debtor for damages as a result of delays, temporary withdrawals of the Collateral from service, or any other causes. 6. PREPAYMENT. Debtor may not prepay any Note except in its entirety at any ---------- time during its term. Any such prepayment shall be in an amount equal to the outstanding principal balance on the date of such prepayment, together with a premium equal to 5% of such principal balance if prepayment occurs during the first year of such term, 4% of such principal balance if prepayment occurs during the second year, 3% of such principal balance if prepayment occurs during the third year, 2% of such principal balance if prepayment occurs during the fourth year, 1% of such principal balance if prepayment occurs during the fifth year and 0% if prepayment occurs thereafter, and any then existing late charges and accrued interest. The principal balance at any time outstanding on a fixed rate note shall be calculated in accordance with the "Rule of 78's". 7. INSURANCE. Debtor shall obtain and maintain at its own expense for the --------- entire term of this Agreement Comprehensive General Liability and Property Damage Insurance including products, completed operations and contractual liability and all Risk Physical Damage Insurance including earthquake and flood, in such amounts and form and with such insurers as shall be satisfactory to Secured Party, provided, however, that the amount of insurance on the Equipment shall not be less than the greater of (i) the full replacement value of each piece of Equipment or (ii) the aggregate unpaid principal amount of all Notes at any time outstanding hereunder. 131 Each insurance policy or certificate shall name Debtor as the insured and Secured Party as loss payee and as an additional named insured as its interest may appear, and shall provide that Secured Party shall receive 30 days prior written notice of any termination, cancellation, or material change of the terms of such insurance and shall provide that the coverage afforded to Secured Party shall not be rescinded, impaired or invalidated by any act or neglect of Debtor. Debtor shall furnish to Secured Party a certificate of insurance or other evidence that such insurance coverage is in effect provided however that Secured Party shall be under no duty either to ascertain the existence of or to examine such insurance policy or certificate or to advise Debtor in the event such insurance coverage shall not comply with the requirements hereof. Secured Party may, at its option, apply any insurance monies received under such policies to the cost of repairs to the Collateral and/or payment of any of the indebtedness of Debtor secured hereby, in any order Secured Party may determine, whether or not due, and shall remit any surplus to Debtor. In addition to the foregoing minimum insurance coverage, Debtor shall procure and maintain such other insurance coverage as Secured Party may require from time to time during the term of this Agreement. 8. EVENTS OF DEFAULT. The occurrence of any of the following events shall -------------------- constitute an Event of Default as such term is used herein and in each Note: (a) Debtor shall fail to pay any principal of or interest on any Note, or to pay any other sum secured hereby, when the same becomes due and payable, whether at maturity or by declaration or otherwise; or (b) Debtor is in default under any other agreement between Debtor and Secured Party or upon an event of default under any other agreement entered into by guarantors, the vendor of the Equipment, principals of Debtor or others, which agreement(s) was or were executed to induce Secured Party to enter into this Agreement or any Note; or (c) Debtor fails to perform or observe any of the terms, covenants or conditions contained in this Agreement, any Note or other lease or other agreement between Secured Party and Debtor, other than as provided above, and Debtor fails to cure any such breach within ten (10) days after notice thereof; or (d) any statement, representation or warranty of Debtor contained in this Agreement, any Note or any other agreement between Secured Party and Debtor, or in any credit or other information submitted to Secured Party by or on behalf of the Debtor in connection with this transaction is untrue or incorrect; or (e) without the prior written consent of Secured Party, a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes, after the date of this Agreement, the "beneficial owner" (as defined in Rule l3d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of more than 30% of the total voting power of all classes of capital stock then outstanding of Debtor entitled to vote in the election of directors; or (f) Debtor becomes insolvent or makes an assignment for the benefit of creditors; or (g) a receiver, trustee, conservator or liquidator of Debtor or of all or a substantial part of its assets is appointed with or without the application or consent of Debtor; or (h) a voluntary petition is filed by or an involuntary petition is filed against Debtor under the Bankruptcy Code or any amendment thereto, or under any other insolvency law or laws, providing for the relief to debtors which is not cured by the dismissal thereof within 60 days after the date commenced; or (i) the Collateral shall be substantially damaged or destroyed or Secured Party shall reasonably deem the Collateral unsafe or at any risk; or j) Debtor shall default in meeting any of its trade, tax, or other obligations as they mature, except to the extent Debtor contests such obligations in good faith and has established adequate reserves therefore (it being acknowledged that 132 Debtor may, in good faith, pay its trade obligations subject to generally acceptable, commercially reasonable business practices). Debtor shall promptly notify Secured Party or any holder(s) or assignee(s) of all Notes of the occurrence and continuance of any default or the occurrence or existence of any event or condition which, with the giving of notice, lapse of time, or both may become a default. 9. REMEDIES ON DEFAULT. Upon an Event of Default, Secured Party may, --------------------- at its sole option and discretion, to the extent permitted by applicable law, exercise one or more of the following remedies with respect to the Collateral: (a) to declare any or all Notes and all other obligations secured hereby immediately due and payable at the option of Secured Party, without notice or demand and, following such declaration, Debtor shall pay interest on such amount due and payable at the rate of 16% per annum until such amount is paid in full to Secured Party, but such rate or amount shall not be in excess of the highest rate or amount Secured Party is permitted to receive under applicable law; (b) to the extent permitted by applicable law, enter the premises of Debtor or such place or places where any of the Collateral may be located and take title to and/or remove the same by any of its representatives with or without process; (c) to dispose of all or part of the Collateral, or any interest therein, at any public sale or private sale in any manner permitted by applicable law and upon such other terms as Secured Party may deem advisable (at which sale Secured Party may be the purchaser); (d) to require Debtor to pay any and all pre and post judgment expenses of Secured Party arising out of such default or in connection with the exercise of any remedies hereunder, including, without limitation, reasonable attorneys' fees and costs and brokerage charges; (e) to apply the proceeds of such sale or of any Security Deposit to all expenses of Secured Party arising out of such default or in connection with the exercise of any remedies hereunder or toward the payment of all or any Notes and other obligations of Debtor to Secured Party in such order of application as Secured Party may from time to time elect; (f) to require Debtor to assemble the Collateral upon Secured Party's demand at Debtor's expense, and make it available to Secured Party; or (g) to exercise any one or more rights or remedies accorded by the Uniform Commercial Code or otherwise available at law or in equity. Each right, power and remedy of Secured Party provided for in this Agreement or in any Note, or now or hereafter existing at law or in equity or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by Secured Party of any one or more of the rights, powers remedies provided for in this Agreement or in any Note, or now or hereafter existing at law or in equity 133 or otherwise, shall not preclude the simultaneous or later exercise by Secured Party of all such other rights, powers or remedies, and no failure or delay on the part of Secured Party to exercise any such right, power or remedy shall operate as a waiver thereof. If the proceeds of any such sale are insufficient to pay the expenses, as aforesaid, all Notes, and the obligations secured hereby, Debtor agrees to pay any deficiency to Secured Party upon demand, and if such proceeds are more than sufficient to pay such expenses and the principal and interest on all Notes and all other sums secured hereby, Secured Party agrees to pay any surplus to Debtor. Upon an Event of Default and declaration that all amounts due under a Note are due and payable, any payment thereafter must also include the Prepayment premium set forth in Section 6 hereof, calculated as of the time of the Event of Default. Secured Party shall not be liable or responsible in any way for the safeguarding of any of the Collateral, for any loss or damage thereto, for any diminution in the value thereof, or for any act of default of any carrier, warehouseman, forwarding agency, or other person whomsoever. 10. ABSOLUTE AND UNCONDITIONAL OBLIGATIONS OFDEBTOR. DEBTOR AGREES AND ---------------------------------------------------- ACKNOWLEDGES THAT SECURED PARTY'S RIGHTS TO RECEIVE ALL INSTALLMENTS AND AMOUNTS PAYABLE UNDER EACH NOTE AND THIS AGREEMENT ARE ABSOLUTE AND UNCONDITIONAL AND SHALL CONTINUE WITHOUT DEDUCTION, DEFENSE, SET-OFF OR COUNTERCLAIM FOR ANY REASON WHATSOEVER, AND DEBTOR WAIVES AGAINST SECURED PARTY ANY AND ALL CLAIMS OR DEFENSES, NOW OR HEREAFTER EXISTING, THAT IT MAY HAVE AGAINST THE VENDOR OF THE COLLATERAL OR ANY OTHER PARTY FOR ANY REASON WHATSOEVER (EXCEPT IN -THE EVENT OF EITHER ACTUAL NEGLIGENCE OR MISCONDUCT BY SECURED PARTY OR ITS REPRESENTATIVES WHICH GIVES RISE TO SUCH CLAIM). 11. CHATTEL PAPER. To the extent this Agreement may be considered "chattel ------------- paper" as defined in the Uniform Commercial Code, only Counterpart Number One of any of the manually executed counterparts of this Agreement shall constitute the original of this Agreement, and no interest in this Agreement may be created or transferred except by transfer of possession of that counterpart. 12. ASSIGNMENT; WAIVER OF DEFENSES; QUIET ENJOYMENT.DEBTOR SHALL NOT ----------------------------------------------------- ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE OF, ENCUM13ER OR PERMIT A LIEN UPON OR AGAINST ANY INTERESTS IN THIS AGREEMENT, ANY NOTE OR THE COLLATERAL OR PERMIT THE EQUIPMENT TO BE USED BY ANYONE OTHER THAN DEBTOR OR DEBTOR'S EMPLOYEES WITHOUT SECURED PARTY'S PRIOR WRITTEN CONSENT. Secured Party may, without consent or notice to Debtor, assign or transfer this Agreement or any Note or grant a security interest in any Equipment, or any other sums due or to become due hereunder, and in such event Secured Party's assignee, transferee or grantee shall have all the rights, powers, privileges, and remedies of Secured Party hereunder. Debtor agrees that, following its receipt of notice of any assignment by Secured Party of this Agreement, any Note or any payments payable hereunder, it will pay the payments due hereunder directly to the assignee (or to whomever the assignee shall designate). Debtor agrees that no assignee of Secured Party shall be bound to perform any duty, covenant, condition or warranty attributable to Secured Party, and Debtor further agrees not to raise any claim or defense arising out of this Agreement or otherwise which it may have against Secured Party as a defense, counterclaim, or offset to any action by an assignee or secured party hereunder and Secured Party shall at all times remain liable to Debtor for such obligations. Upon Secured Party's 134 request, Debtor will execute a consent and acknowledgment of Secured Party's assignment to its assignee. Nothing contained herein is intended to relieve Secured Party of any of its obligations. 13. GOVERNING LAW; JURISDICTION AND VENUE; WAIVER OF TRIAL BY JURY AND ---------------------------------------------------------------------- RIAHTS AND REMEDIES UNDER THE UNIFORM COMMERCIAL CODE. THIS AGREEMENT SHALL BE - ------------------------------------------------------- GOVERNED BY THE LAWS OF THE STATE OF NEW JERSEY. DEBTOR CONSENTS TO THE PERSONAL JURISDICTION OF THE FEDERAL AND STATE COURTS OF THE STATE OF NEW JERSEY WITH RESPECT TO ANY ACTION ARISING OUT OF THIS AGREEMENT, ANY NOTE OR THE EQUIPMENT, PROVIDED, HOWEVER, SECURED PARTY MAY, IN ITS SOLE DISCRETION, ENFORCE THIS AGREEMENT AND ANY NOTE IN ANY COURT HAVING LAWFUL JURISDICTION THEREOF. THIS MEANS ANY LEGAL ACTION ARISING OUT OF THIS AGREEMENT MAY BE FILED IN NEW JERSEY, AND DEBTOR MAY BE REQUIRED TO DEFEND AND LITIGATE ANY SUCH ACTION IN NEW JERSEY. DEBTOR AGREES THAT SERVICE OF PROCESS IN ANY SUIT MAV BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO DEBTOR AT THE ADDRESS SET FORTH HEREIN. TO THE EXTENT PERM11TTED BY LAW, DEBTOR WAIVES TRIAL BY JURY IN ANY ACTION BY OR AGAINST SECURED PARTY ARISING OUT OF THIS AGREEMENT, ANY NOTE, OR THE EQUIPMENT. 14. MISCELLANEOUS. This Agreement in addition to and not in limitation of ------------- any other rights and remedies Secured Party may have by virtue of any other instrument or agreement executed by Debtor, whenever executed, or by law or otherwise. If any provision of this Agreement is contrary to applicable law, such provision shall be deemed ineffective without invalidating the remaining provisions hereof. If and to the extent that applicable law confers any rights or imposes any duties inconsistent with or in addition to any of the provisions of this Agreement, the affected provision shall be considered amended to conform thereto. Secured Party shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder. It is expressly understood and agreed that whenever the service of any notice to Debtor is required hereby or is otherwise required such notice shall be effective when personally delivered or mailed to Debtor by first-class mail, postage prepaid, to the address shown at the beginning of this Agreement. This Agreement shall be binding upon and enforceable by the successors and assigns of the parties hereto. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. There are not representations, warranties or agreements except as set forth herein. This Agreement may not be amended, nor may rights hereunder be waived, except by an instrument in writing signed by the party charged with such amendment or waiver. The term "Debtor" as used herein shall mean and include any and all Debtors who sign hereunder and on each Note, each of whom shall be jointly and severally bound hereby and thereby. This Agreement shall not be binding on Secured Party until executed by Secured Party. IN WITNESS W11EREOF, the parties hereto have duly executed this Master Security Agreement by their duly authorized representatives 135 DATED AS OF December 21,2001 DEBTOR: GENUS, INC. SECURED PARTY: CITICORP VENDOR FINANCE, INC BY: s/s SHUM MUKHERJEE BY: s/s DANIEL J. FERGUSON TITLE: CHIEF FINANCIAL OFFICER TITLE: VICE PRESIDENT THIS AMENDMENT dated the 21-day of December 2001 to that certain Master Security Agreement No. L2116440 dated 12/21/2001, . Secured Promissory Note No. 200052896 thereto, (collectively the "Loan"), by and between Citicorp Vendor Finance, Inc. ("Secured Party") and Genus, Inc., ("Debtor"). WHEREAS, Secured Party and Debtor are party to the above-described Loan; and desire to make certain changes, amendments and additions to the Loan as hereinafter set forth. 1. THE FOLLOWING SHALL BE ADDED TO MASTER SECURITY AGREEMENT NO. L2116440 AS IT PERTAINS TO SECURED PROMISSORY NOTE NO. 200052896 ONLY: Notwithstanding any provision of the Loan to the contrary, it being acknowledged by Secured Party that Silicon Valley Bank ("SVB") holds a blanket lien on the real and personal property of Debtor and that Secured Party as of the date of this Amendment has obtained from SVB, a waiver of such lien so that its interest do not conflict with that of SVB. 2. Except as modified herein, all other terms and conditions of the Loan shall remain unchanged and are hereby ratified by the parties. Genus, Inc. Citicorp Vendor Finance, Inc. BY: s/s Shum Mukerhjee By: s/s Daniel J. Ferguson Shum Mukherjee Daniel J. Ferguson - -------------- ------------------ Chief Financial Officer Vice President - ----------------------- --------------- (PRINT OR TYPE NAME & (PRINT OR TYPE NAME & TITLE OF ABOVE SIGNATURE) TITLE OF ABOVE SIGNATURE) ATTEST: s/s T.P. Bohn 136 EX-23.1 8 doc7.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-64072, 333-29999, 333-70815, 333-84837 and 333-40332) and on Forms S-3 (No 333-62010 and 333-82354) of Genus, Inc. of our report dated February 11, 2002, except as to the fourth paragraph of Note 6, which is as of March 27, 2002, relating to financial statements, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 11, 2002, relating to the financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP San Jose, California March 28, 2002 137 -----END PRIVACY-ENHANCED MESSAGE-----