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[EXECUTION COPY]
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Sixth Amendment and Limited Waiver, dated as of June 15, 2001 (the
"Sixth Amendment"), to Revolving Credit and Term Loan Agreement by and among
GENRAD, INC., a Massachusetts corporation (the "Company"), GENRAD EUROPE
LIMITED, a private company limited by shares organized under the laws of England
and Wales, with registered number 02873907 ("GenRad Europe"), GENRAD LIMITED, a
private company limited by shares organized under the laws of England and Wales,
with registered number 00790061 ("GenRad Limited"), GENRAD HOLDINGS LIMITED, a
private company limited by shares organized under the laws of England and Wales,
with registered number 01761564 ("Holdings"), GIGANTISSIMO 2209 AKTIEBOLAG, a
corporation organized under the laws of Sweden ("GenRad Sweden" and,
collectively with the Company, GenRad Europe, GenRad Limited and Holdings, the
"Borrowers" and each individually, a "Borrower"), FLEET NATIONAL BANK (FORMERLY
KNOWN AS BANKBOSTON, N.A.) and the other lending institutions listed on SCHEDULE
1 to the Credit Agreement (as hereinafter defined) (the "Banks") and FLEET
NATIONAL BANK (LONDON BRANCH) as Overdraft Bank (as defined in the Credit
Agreement referred to below), amending certain provisions of the Revolving
Credit and Term Loan Agreement dated as of March 24, 2000 (as amended and in
effect from time to time, including the Sixth Amendment, the "Credit Agreement")
by and among the Borrowers, the Banks, the Overdraft Bank and FLEET NATIONAL
BANK in its capacity as agent for the Banks (the "Agent"). Terms not otherwise
defined herein which are defined in the Credit Agreement shall have the same
respective meanings herein as therein.
WHEREAS, pursuant to the Credit Agreement, the Banks have made Loans
and other credit extensions to the Borrowers which remain outstanding;
WHEREAS, certain Events of Default have occurred and are continuing;s
WHEREAS, notwithstanding the existence of such Events of Default, the
Borrowers have requested that the Agent and the Banks, and the Agent and the
Banks are willing to waive such Events of Default and to modify certain terms
and conditions of the Credit Agreement, in each case as specifically set forth
herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. LIMITED WAIVER. Subject always to compliance by the
Borrowers with the terms and conditions of this Sixth Amendment and the terms
and conditions set forth in the Credit Agreement and the other Loan Documents,
from and after the Effective Date (as defined in Section 10 hereof), the Banks
hereby waive compliance, as at March 31, 2001 and, if applicable, June 30,
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2001 with the financial covenants contained in Sections 12.3 and 12.4 of the
Credit Agreement and waive compliance as at March 31, 2001 through and including
September 28, 2001 with the financial covenants contained in Sections 12.1 and
12.2 of the Credit Agreement, until the date (the "Waiver Termination Date")
which is the earliest to occur of (a) 5:00 p.m. (Boston time) on September 28,
2001 and (b) any Borrower's failure to comply with the terms and conditions of
this Sixth Amendment, the Credit Agreement or the other Loan Documents. After
the Waiver Termination Date, the Borrowers shall be required to comply with the
covenants contained in Sections 12.3 and 12.4 of the Credit Agreement as of
March 31, 2001 and shall be required to comply with the covenants contained in
Sections 12.1 and 12.2 of the Credit Agreement at all times after 5.00 p.m.
(Boston time) on September 28, 2001.
SECTION 2. LIMITATIONS ON NEW REVOLVING CREDIT LOANS AND LETTERS OF
CREDIT.
(a) The Borrowers hereby agree that from the Effective Date
through the Waiver Termination Date (such period hereinafter referred to as the
"Sixth Amendment Waiver Period").
(i) the Borrowers will not request any Revolving Credit
Loans (including, without limitation, advances under the Overdraft
Facility), borrow any Revolving Credit Loans (including, without
limitation, advances under the Overdraft Facility) or request the
issuance, extension or renewal of any Letters of Credit; and
(ii) the Banks and the Agent shall have no obligation to
make Revolving Credit Loans (including without limitation advances on
the Overdraft Facility) or issue, extend or renew any Letter of Credit.
if, after giving effect to any such loan request or request for the issuance,
extension or renewal of any Letters of Credit, the outstanding principal amount
of all Revolving Credit Loans (including the Total Overdraft Usage and including
after giving effect to all amounts requested) plus the Maximum Drawing Amount
and all Unpaid Reimbursement Obligations exceeds the lesser of (x) the Borrowing
Base and (y) Maximum Availability.
(b) From and after the Waiver Termination Date, any
obligations of the Banks and the Agent to make Revolving Credit Loans and to
issue, extend or renew Letters of Credit shall be subject to the terms and
conditions set forth in the Credit Agreement and the Banks and the Agent shall
have all the rights and remedies set forth in the Credit Agreement.
SECTION 3. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1.1
of the Credit Agreement is hereby amended as follows:
(a) the definition of "Applicable Margin" is hereby amended
in its entirety to read as follows:
APPLICABLE MARGIN. For each period commencing on an
Adjustment Date through the date immediately preceding the next
Adjustment Date (each a "Rate Adjustment Period"), the Applicable
Margin shall be the applicable margin set forth
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below, as determined for the fiscal period of the Company and its
Subsidiaries ending on the fiscal quarter ended immediately prior to
the applicable Rate Adjustment Period.
<Table>
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Sterling Euro
Base Base Currency Letter of
Rate Rate Rate Credit Commitment
Loans Loans Loans Fees Fees
======================================================================
2.75% 3.75% 3.75% 3.75% 0.75%
----------------------------------------------------------------------
</Table>
Notwithstanding the foregoing, so long as no Default or Event of
Default shall have occurred and be continuing, in the event that (i)
the Company shall achieve the First Benchmark, PROVIDED that such First
Benchmark relates to a Type A Event, the Applicable Margin shall be
reduced by 0.25% from the Applicable Margin set forth above, effective
on the date that the First Benchmark shall have been achieved and (ii)
the Company shall achieve the Second Benchmark, the Applicable Margin
shall be reduced by (w) 0.25%, PROVIDED the such Second Benchmark
relates to a Type A Event (x) 0.15%, PROVIDED that such Second
Benchmark relates to a Type B Event and (y) 0.25%, PROVIDED that such
Second Benchmark (but solely with respect to the Company's outsourcing
of its manufacturing activities) relates to a Type C Event; PROVIDED
HOWEVER, that none of the foregoing items (i) or (ii) shall apply in
respect of determining the interest pursuant to Section 6.11.
(b) the definition of "Eligible Inventory" is hereby amended
by inserting immediately before the words "finished goods inventory" the
following words: "raw materials work-in-progress and".
(c) the definition of "Interest Payment Date" is hereby
amended in its entirety to read as follows:
INTEREST PAYMENT DATE. (a) As to any Base Rate Loan, the
twenty-ninth(29th) day of the calendar month with respect to interest
accrued since the first Drawdown Date of such Base Rate Loan or the
immediately preceding Interest Payment Date; and (b) as to any
Eurocurrency Rate Loan, the twenty-ninth (29th) day of the calendar
month with respect to interest accrued since the first Drawdown Date of
such Eurocurrency Rate Loan or the immediately preceding Interest
Payment Date and, in addition, the last day of such Interest Period.
(d) the definition of "Interest Period" is hereby amended by
inserting the following sentence at the end of the definition thereof:
Notwithstanding, any of the foregoing, during the Sixth
Amendment: Waiver Period, no Interest Period with respect to a
Eurocurrency Rate Loan shall extend beyond September 28, 2001.
(e) Section 1.1 of the Credit Agreement is further amended
by inserting the following new definitions in the appropriate alphabetical
order:
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FIRST BENCHMARK. (a) the receipt by the Company of a letter of
intent or an expression of interest in writing by a third party in
connection with (i) any merger of the Company and/or one or more of its
Subsidiaries with such third party or (ii) any Asset Sale by the
Company and/or any of its Subsidiaries to such third party and (b) the
Board of Directors of the Company shall have resolved that such
potential merger or Asset Sale is within a reasonable range of values
such that the parties to the transaction, including the Company and
such third party, may proceed to engage in further due diligence
relating to such potential merger or Asset Sale, and written evidence
of such resolution shall have been provided to the Agent and the Banks.
MAXIMUM AVAILABILITY. On and after the Effective Date to July
12, 2001, the "Maximum Availability" shall be $38,000,000. On and after
July 13, 2001 to August 5, 2001, PROVIDED that the Company shall have
achieved the First Benchmark relating to a Type A Event on or prior
thereto, and no Default or Event of Default shall have occurred and be
continuing (including, without limitation, in respect of Section 12.5
of the Credit Agreement), the "Maximum Availability" shall be
$40,000,000. On and after August 6, 2001 to the Waiver Termination
Date, PROVIDED that the Company shall have achieved the First Benchmark
relating to a Type A Event on or prior thereto, and no Default or Event
of Default shall have occurred and be continuing (including, without
limitation, in respect of Section 12.5 of the Credit Agreement), the
"Maximum Availability" shall be $43,000,000.
SECOND BENCHMARK. The execution and delivery of a definitive
agreement (such as a merger agreement or a purchase and sale agreement)
in connection with (i) any merger of the Company and/or one or more of
its Subsidiaries with any other entity or (ii) any Asset Sale
(including outsourcing of the Company's manufacturing activities), in
each case, on terms and conditions reasonably satisfactory to the Agent
and the Majority Banks.
SIXTH AMENDMENT. The Sixth Amendment and Limited Waiver, dated
as of June 15, 2001, by and among the Borrowers, the Agent and the
Banks.
SIXTH AMENDMENT WAIVER PERIOD. The period from the "Effective
Date" as defined in the Sixth Amendment through the date which is the
earliest to occur of (a) 5:00 p.m. (Boston time) on September 28, 2001
and (b) any Borrower's failure to comply with the terms and conditions
of this Sixth Amendment, the Credit Agreement or the other Loan
Documents.
TYPE A EVENT. Any transaction (including, without limitation,
a merger or Asset Sale) which the Board of Directors of the Company, in
its reasonable determination, concludes will result in the payment in
full in cash of all Obligations owed to the Banks and the Agent.
TYPE B EVENT. Any transaction (including, without limitation,
a divestiture of one or more divisions) which the Board of Directors of
the Company, in its reasonable determination, concludes will result in
the payment of (i) more than $25,000,000 of
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Obligations owed to the Banks and the Agent BUT (ii) less than an
amount sufficient to pay in full in cash all Obligations owed to the
Banks and the Agent.
TYPE C EVENT. Any event that shall result in (i) cost savings
to the Company and/or any of its Subsidiaries in an aggregate amount
projected on an annualized basis to be not less than $8,000,000 (such
projections having been confirmed by the Bank's financial advisor) and
(ii) the Board of Directors of the Company, in its reasonable
determination, concludes will result on an annualized basis in a
permanent reduction of the Total Commitment to $38,000,000 or less.
SECTION 4. AMENDMENT TO SECTION 2 OF THE CREDIT AGREEMENT. Section 2 of
the Credit Agreement is hereby amended as follows:
(a) The definition of "UK Borrower Sublimit" in Section 2.1 of the
Credit Agreement is amended by deleting the amount "$25,000,000" which appears
therein and substituting in place thereof the amount "$10,000,000".
SECTION 5. AMENDMENT TO SECTION 4 OF THE CREDIT AGREEMENT. Section 4.4
of the Credit Agreement is amended by (i) deleting the word "or" which appears
at the end of clause (b) thereof and substituting in place thereof a comma and
(ii) inserting a new clause (d) at the end of clause (c) thereof to read as
follows:
(d) cash proceeds in excess of $100,000 in the aggregate received in
respect of federal and/or state income tax refunds of the Company or any of its
Subsidiaries.
SECTION 6. AMENDMENT TO SECTION 5 OF THE CREDIT AGREEMENT. Section
5.1.1 of the Credit Agreement is amended by (i) deleting the words "standby or
documentary letters of credit" which appears therein and substituting in place
thereof the words "trade or documentary letters of credit" and (ii) deleting the
amount "$15,000,000" which appears therein and substituting in place thereof the
amount "$7,500,000".
SECTION 7. AMENDMENT TO SECTION 10 OF THE CREDIT AGREEMENT. Clause
(e) of Section 10.4 of the Credit Agreement is amended by deleting item (i)
thereof in its entirety and substituting in place thereof a new item (i) to read
as follows:
(i) on or prior to the Wednesday of each week, a Borrowing Base Report
setting forth the Borrowing Base as at the end of such week and
certifying as to the last day of the proceeding week with respect to
Eligible Accounts Receivable; PROVIDED, HOWEVER, that it shall be
acceptable for the Borrowing Base Report to certify as to the last day
of the preceding month with respect to Eligible Inventory. For
informational purposes, the Borrowing Base shall be on a consolidated
and consolidating basis (the term "consolidating" means that the
relevant information shall be separately identified for (i) the Company
and the Domestic Subsidiaries on the one hand and (ii) the European
Borrowers and the Foreign Subsidiaries on the other hand);
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SECTION 8. AMENDMENT TO SECTION 12 OF THE CREDIT AGREEMENT. Section 12
of the Credit Agreement is hereby amended by inserting a new Section 12.5 to
read as follows:
12.5 REVENUE TEST. The Company will not, for the quarter
ending June 30, 2001, permit the actual revenues on the consolidated
statement of income of the Company and its Subsidiaries for said
quarter delivered pursuant to Section 10.4(b) to be less than
$53,620.000.
SECTION 9. FEES AND EXPENSES. Each of the Borrowers and the Guarantors
hereby agree to pay or reimburse the Agent upon demand, the following fees and
expenses:
(a) For the account of each Bank in accordance with their respective
Commitment Percentages, an amendment fee (the "Amendment Fee") payable (and
subject to being waived) as follows: (i) $483,000 on the Effective Date and (ii)
$483,000 on September 20, 2001; PROVIDED, HOWEVER, that in the event that the
Company or any of its Subsidiaries shall have paid in full in cash all
Obligations owned to the Banks and the Agent on or before September 20,2001, the
amount of the Amendment Fee in item (ii) shall be waived. The entire Amendment
Fee shall be deemed earned on the Effective Date. The Amendment Fee is
irrevocable and non-refundable in all circumstances, except with respect to item
(ii) above.
(b) For the account of each Bank in accordance with their respective
Commitment Percentages, a one-time irrevocable and non-refundable drawdown fee
in an amount equal to $30,000, payable on the first day that the aggregate
Revolving Credit Loans shall exceed $38,000,000.
(c) All reasonable fees and expenses of the Bank's Financial Advisor,
as defined in and according to Section 12(a) hereof.
(d) All reasonable fees and expenses of the appraisers referred to in
Section 12(b) hereof.
(e) All its reasonable out-of-pocket costs and expenses incurred in
connection with (i) the preparation of this Sixth Amendment and (ii) any action
taken by the Agent or its counsel in order to obtain and perfect any security
interest or guarantee pursuant to Section 12(b) hereof, in each case, including,
without limitation, the reasonable fees and disbursements of counsel to the
Agent.
(f) Each of the Borrowers and the Guarantors hereby agree that, in
furtherance of the provisions of Sections 9(a), (b), (c), (d) and (e) hereof and
Section 18 of the Credit Agreement, the Agent shall be entitled, upon one
Business Day's notice to the Borrowers, to debit the Fleet Concentration Account
to collect costs and expenses to which the Agent is entitled pursuant to
Sections 9(a), (b), (c), (d) and (e) hereof and Section 18 of the Credit
Agreement.
SECTION 10. CONDITIONS TO EFFECTIVENESS. This Sixth Amendment shall
become effective on the date (the "Effective Date") that the following
conditions are satisfied:
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(a) receipt by the Agent of a counterpart of the Sixth Amendment,
executed and delivered by the Borrowers, each Guarantor and the Majority Banks;
(b) receipt by the Agent of an executed Perfection Certificate in the
form of Exhibit A hereto, with clauses (a), (b), (c) and (d) of Section 3
thereof completed with respect to the Company and its Subsidiaries;
(d) receipt by the Agent of payment by the Borrowers of the first
installment of the Amendment Fee in an amount equal to $483,000; and
(e) receipt by the Agent of payment in full in cash of its invoiced and
unpaid fees and out-of-pocket expenses, including, without limitations, the
reasonable fees and disbursements of counsel to the Agent.
SECTION 11. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers
hereby repeats, on and as of the date hereof, each of the representations and
warranties made by it in Section 9 of the Credit Agreement, PROVIDED, that all
references therein to the Credit Agreement shall refer to such Credit Agreement
as amended hereby. In addition, each of the Borrowers hereby represents and
warrants that the execution and delivery by each Borrower of this Sixth
Amendment and the performance by each Borrower of all of their agreements and
obligations under the Credit Agreement as amended hereby are within the
corporate authority of each Borrower and have been duly authorized by all
necessary corporate or other similar action on the part of each Borrower.
SECTION 12. COVENANTS. Each of the Borrowers hereby covenants and
agrees as follows:
(a) The Company shall (i) continue the retention of Argus Management
Corporation, or upon consultation with the Agent, another financial advisor (the
"Company Financial Advisor") reasonably acceptable to the Agent, (ii) continue
the retention of William Blair & Co., or upon consultation with the Agent,
another investment banker (the "Investment Banker") reasonably acceptable to the
Agent and (iii) continue to pay the Agent all reasonable fees and disbursements
of Deloitte and Touche, or another financial advisor selected by the Agent (the
"Bank Financial Advisor"). Upon request, the Agent, the Banks and their advisors
(including the Bank Financial Advisor) shall be provided reasonable access to
the Company Financial Advisor and the Investment Banker and shall receive copies
of all material written information provided to or from any of them (other than
information provided to the Board of Directors of the Company).
(b) Each Borrower hereby agrees to cooperate fully with appraisers to
be selected by the Agent with respect to obtaining for the benefit of the Agent
and the Banks appraisals of certain items of Collateral, including, without
limitation, fixed assets (including machinery and equipment).
(c) The Company shall deliver to the Agent and the Banks on or before
July 12, 2001 an officer's certificate of the Company dated as of the date of
such delivery as to the compliance
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by the Company with the financial covenant for the quarter ending June 30, 2001
set forth in Section 12.5 of the Credit Agreement.
(d) The Company shall deliver to the Agent and the Banks on or before
July 13, 2001 a plan describing in detail the results of the initiatives
described as "Strategic Initiatives" and "Cash Saving Initiatives" in the
Company's presentation to the Banks dated June 1, 2001.
(e) The Company shall deliver to the Agent and the Banks on or before
August 15, 2001, a high-level pro forma business plan (the "Business Plan")
reviewing the effect of the "Strategic Initiatives" and "Additional Cash Savings
Initiatives" that the Company has implemented or is likely to implement,
including the (i) timing of the implementation and (ii) the anticipated effect
of the initiatives on a quarterly basis over the following four quarters on the
Company's financial position and results of operations. The Business Plan shall
be in form and substance reasonably satisfactory to the Agent.
(f) The Company shall deliver to the Agent and the Banks (i) on or
before Wednesday of each week a sixteen week rolling cash flow forecast prepared
by the Company Financial Advisor, which shall detail all sources and uses of
cash on a weekly basis and shall report any variances from the prior week and
(ii) on or before June 18, 2001, July 23, 2001, August 17, 2001 and September
17, 2001, (x) a summary financial report for the immediately preceding fiscal
month on a consolidated and consolidating basis and (y) a current reporting
package, in cash case, in form and substance satisfactory to the Agent.
(g) On or before the last Friday of each other week, the Company shall
deliver to the Agent and the Banks bi-weekly written progress reports prepared
by the Company or the Investment Banker (the "Progress Reports"), and shall,
upon request by the Agent, cause the Investment Banker to be available in person
or by telephone, to discuss the Progress Reports with the Agent and the Banks.
The Progress Reports shall provide updates regarding the Company's marketing
efforts in connection with certain of its divisions, including with respect to
the valuation of such divisions, and shall be in form and substance
satisfactory to the Agent.
(h) On or prior to June 21, 2001, the Company shall deliver to the
Agent an executed and fully-completed Perfection Certificate in the form of
Exhibit A hereto. In the event that the Agent shall determine to obtain and
perfect security interests and guarantees with respect to the Company or any of
the Company's Subsidiaries, the Company shall (i) assist the Agent in such
efforts, (ii) on or prior to June 27, 2001, execute and deliver all documents
requested and presented by the Agent at a reasonable time prior thereto in
respect of such Collateral, including amendments to the existing Security
Agreements among the Company and the Domestic Subsidiaries which are guarantors
and the Agent, reflecting all necessary changes to comply with Revised Article 9
of the Uniform Commercial Code as shall be in effect in the State of
Massachusetts, if and when adopted (PROVIDED, HOWEVER, that with respect to such
documents as to which consents of third party are required, such date shall be
extended to a date reasonably determined by the Agent, and the Company hereby
agrees to use reasonable efforts to assist the Agent in obtaining such third
party consents), and (iii) reimburse the Agent for all costs and out-of-pocket
expenses incurred in connection therewith.
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(i) For purpose of the Credit Agreement, the agreements of the
Borrowers contained in this Section 11 shall be deemed to be, and shall be the
agreements under the Credit Agreement.
SECTION 13. NO CLAIMS. Each Borrower hereby acknowledges and agrees
that (a) none of the Company nor any Subsidiary has any claim or cause of action
against the Agent or any of the Banks (or any of their directors, officers,
employees, agents or Affiliates) arising on or prior to the date hereof from any
transactions under this Sixth Amendment, under the Credit Agreement or any of
the other Loan Documents, (b) none of the Company nor any Subsidiary has offset
rights, counterclaims or defenses of any kind against any of their Obligations
indebtedness or liabilities to the Agent or any of the Banks and (c) the Agent
and each of the Banks has heretofore properly performed and satisfied in a
timely manner all of its obligations to the Company and any Subsidiary. The
Agent and the Banks desire (and each Borrower agrees) to eliminate any
possibility that any past conditions, acts, omissions, events, circumstances or
matters would impair or otherwise adversely affect any of the rights, interests,
contracts, collateral security or remedies of the Agent and the Banks.
Therefore, each Borrower unconditionally releases, waives and forever discharges
(i) any and all liabilities, obligations, duties, promises or indebtedness of
any kind of the Agent or of any of the Banks to any Borrower, except the
obligations to be performed by the Agent and the Banks for the Company and its
Subsidiaries hereafter, as expressly stated in this Sixth Amendment, the Credit
Agreement and the other Loan Documents and (ii) all claims offsets, causes of
action, suits or defenses of any kind whatsoever (if any), whether known or
unknown, which the Company and its Subsidiaries might otherwise have against the
Agent or any of the Banks or any of their directors, officers, employees, agents
or Affiliates with respect to the obligations performed or to be performed by
the Agent or any of the Banks for the Company and its Subsidiaries, as set forth
in the Credit Agreement and the other Loan Documents, in either case, (i) or
(ii) above, on account of any condition, act, omission, event, contract,
liability, obligation, indebtedness, claim, cause of action, defense,
circumstance or matter of any kind whatsoever which existed, arose or occurred
at any time prior to the date hereof.
SECTION 14. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto,
including, but not limited to the Security Documents, are hereby ratified and
confirmed in all respects and shall continue in full force and effect. The
Credit Agreement and this Sixth Amendment shall be read and construed as a
single agreement. All references in the Credit Agreement or any related
agreement or instrument to the Credit Agreement shall hereafter refer to the
Credit Agreement as amended hereby.
SECTION 15. NO WAIVER. Except as expressly set forth in Section 1
hereof, nothing contained herein shall constitute a waiver of, impair or
otherwise affect any Obligations, any other obligation of the Borrowers or any
rights of the Agent, the Overdraft Bank or the Bank consequent thereon.
SECTION 16. COUNTERPARTS. This Sixth Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
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SECTION 17. GOVERNING LAW. THIS SIXTH AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
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IN WITNESS WHEREOF, the parties hereto have executed this Sixth
Amendment as a document under seal as of the date first above written.
GENRAD, INC.
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: CFO
GENRAD HOLDINGS LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GENRAD EUROPE LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GENRAD LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GIGANTISSIMO 2209 AKTIEBOLAG
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
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IN WITNESS WHEREOF, the parties hereto have executed this Sixth
Amendment as a document under seal as of the date first above written.
FLEET NATIONAL BANK as Agent and a Bank
By: /s/
--------------------------------
Name:
Title:
FLEET NATIONAL BANK (LONDON BRANCH) as
Overdraft Bank
By: /s/
--------------------------------
Name:
Title:
KEYBANK NATIONAL ASSOCIATION
By: /s/
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By: /s/
--------------------------------
Name:
Title:
NATIONAL CITY BANK OF KENTUCKY
By: /s/
--------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By: /s/
--------------------------------
Name:
Title:
SUMMIT BANK
By:
-----------------------------------
Name:
Title:
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CITIZENS BANK OF MASSACHUSETTS
By: /s/
--------------------------------
Name:
Title:
FIRST MASSACHUSETTS BANK, N.A.
By: /s/
--------------------------------
Name:
Title:
BANK ONE, NA (Main Office Chicago)
By: /s/
--------------------------------
Name:
Title:
LLOYDS TSB BANK PLC
By: /s/
--------------------------------
Name:
Title:
ABN AMRO BANK N.V.
By: /s/
--------------------------------
Name:
Title:
By: /s/
------------------------------------
Name:
Title:
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RATIFICATION OF GUARANTY
Each of the undersigned Guarantors hereby acknowledges and consents to
the foregoing Sixth Amendment dated as of June 15, 2001, and agrees that the
applicable Guarantee from such Guarantor dated as of March 24, 2000 in favor of
the Agent for the benefit of the Agent and the Banks and all other Loan
Documents to which each of the Guarantors are a party remain in full force and
effect, and each of the Guarantors confirms and ratifies all of its obligations
thereunder.
GENRAD MEXICO, INC
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GENRAD HOLDINGS LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GENRAD LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
GENRAD EUROPE LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
TAVSTOCK LIMITED
By: /s/ Walter A. Shephard
--------------------------------
Name: Walter A. Shephard
Title: Director
<Page>
EXHIBIT A
PERFECTION CERTIFICATE
GenRad, Inc., a Massachusetts corporation, ( the "COMPANY"),
hereby certifies to Fleet National Bank, as Agent, and each Bank (as defined
below), in connection with the Sixth Amendment and Limited Waiver dated as of
June 15, 2001 (the "SIXTH AMENDMENT"), by and among the Company, GenRad Europe
Limited, a private company limited by shares organized under the laws of
England and Wales ("GENRAD EUROPE"), GenRad Limited, a private company limited
by shares organized under the laws of England and Wales ("GENRAD LIMITED"),
GenRad Holdings Limited, a private company limited by shares organized under the
laws of England and Wales ("HOLDINGS"), Gigantissimo 2209 Aktiebolag, a
corporation organized under the laws of Sweden ("GENRAD SWEDEN" and,
collectively with GenRad, GenRad Europe, GenRad Limited and Holdings, the
"BORROWERS" and each individually, a "BORROWER"), Fleet National Bank (formerly
known as BankBoston, N.A.) and the other lending institutions listed on Schedule
1 to the Credit Agreement (as hereinafter defined) (the "BANKS") and Fleet
National Bank (London Branch) as Overdraft Bank, and Fleet National Bank in its
capacity as agent for the Banks (the "AGENT"), that all of the information
contained in this Perfection Certificate is true and correct.
For purpose of this Perfection Certificate, the term "LOAN
PARTIES" shall refer to the Company and all Subsidiaries of the Company which is
a Guarantor on the date hereof (including, without limitation, any Foreign
Subsidiary). Unless otherwise defined herein, capitalized terms used herein have
the meanings assigned in the Revolving Credit and Term Loan Agreement dated as
of March 24, 2000 (as amended and in effect from time to time, the "CREDIT
AGREEMENT").
SECTION 1. CAPITAL STRUCTURE
(a) SUBSIDIARIES. The following identifies the Loan Parties and every
entity owned, in whole or in part, by any of the Loan Parties, including, with
respect to each such entity, the (i) jurisdiction of organization, (ii) number
of shares authorized, (iii) number of shares outstanding, (iv) ownership
interests and (v) number of shares covered by outstanding options, warrants,
rights of conversion or purchase and similar rights:
See Schedule 1(a)
(b) NAMES. The following identifies the Loan Parties and every entity
owned, in whole or in part, by any of the Loan Parties, including, with respect
to each such entity, the (i) exact corporate names, as such names appear in
their respective certificates of incorporation, memorandum of association or
similar organizational document, (ii) each other corporate name since its
organization, together with the date of the relevant change, (iii) any change in
identity or corporate structure in any way within the past five years, (iv) all
other names (including trade names or similar appellations) used by them or any
of their divisions or other business units at any time during the past five
years, (v) as to the Company and each of its U.S. Subsidiaries, the
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exact corporate taxpayer identification numbers and (vi) as to each other
Loan Party, each other corporate identification number:
See Schedule 1(b)
SECTION 2. PERSONAL PROPERTY
(a) CHIEF EXECUTIVE OFFICE. The following is a list of locations of the
chief executive offices of the Company and each Domestic Subsidiary of the
Company (on a state-by-state basis):
See Schedule 2(a)
(b) PRINCIPAL PLACE OF BUSINESS. The following is a list of locations
of the principal places of business of the Company and each Domestic Subsidiary
of the Company (on a state-by-state basis), that were not otherwise identified
in Schedule 2(a):
See Schedule 2(b)
(c) PLACES OF BUSINESS. The following is a list of locations of places
of business of the Loan Parties and every entity owned, in whole or in part, by
any of the Loan Parties, that were not otherwise identified in Schedule 2(a) or
2(b):
See Schedule 2(c)
(d) RECEIVABLES AND GENERAL INTANGIBLES. The following is a list of
locations where the Loan Parties and every entity owned, in whole or in part, by
any of the Loan Parties maintain any books and records relating to any of the
Collateral consisting of accounts, contract rights, chattel paper, general
intangibles or mobile goods, that were not otherwise identified in Schedule
2(a), 2(b) or 2(c):
See Schedule 2(d)
(e) EQUIPMENT AND INVENTORY. The following is a list of locations of
equipment and inventory owned by the Loan Parties and every entity owned, in
whole or in part, by any of the Loan Parties (identify whether locations are (i)
owned by such Loan Party, (ii) leased by another Loan Party or a Subsidiary
thereof or (iii) public warehouses):
See Schedule 2(e)
(f) THIRD PARTIES RELATING TO EQUIPMENT AND INVENTORY. The following
are the names and addresses of all persons other than the Loan Parties or their
Subsidiaries (i) which have possession of any of the Equipment owned by Loan
Parties or their Subsidiaries or (ii) which have possession or are intended to
have possession of any of the Collateral (other than
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Equipment), including, without limitation, lessees, consignees, warehouseman or
purchasers of chattel paper:
See Schedule 2(f)
SECTION 3. INTELLECTUAL PROPERTY
(a) PATENTS AND PATENT APPLICATIONS. The following is a list of all
United States and foreign patents registered or for which patent applications
are pending in the name of the Loan Parties and every entity owned, in whole or
in part, by any of the Loan Parties:
See Schedule 3(a)
(b) TRADEMARKS AND TRADEMARK APPLICATIONS. The following is a list of
all trademarks registered or for which trademark applications are pending in the
name of the Loan Parties and every entity owned, in whole or in part, by any of
the Loan Parties:
See Schedule 3(b)
(c) COPYRIGHTS AND COPYRIGHT APPLICATIONS. The following is a list of
all copyrights and copyright applications registered or for which copyright
applications are pending in the name of the Loan Parties and every entity owned,
in whole or in part, by any of the Loan Parties:
See Schedule 3(c)
(d) LICENSES. The following is a list of all patent, trademark (with
respect to the Company and each Domestic Subsidiary of the Company, including
all State trademarks, service marks and tradename registrations) and copyright
licenses under which the Loan Parties, and every entity owned, in whole or in
part, by any of the Loan Parties, are licensees:
See Schedule 3(d)
(e) SOFTWARE SYSTEMS. The following is a list of all software that is
owned or licensed by the Loan Parties and every entity owned, in whole or in
part, by any of the Loan Parties:
See Schedule 3(e)
SECTION 4. REAL PROPERTY
(a) FEE PROPERTIES. The following is a list of all real property owned
in fee by the Loan Parties and every entity owned, in whole or in part, by any
of the Loan Parties:
See Schedule 4(a)
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(b) LEASED PROPERTIES. The following is a list of all real property
leased by the Loan Parties and every entity owned, in whole or in part, by any
of the Loan Parties:
See Schedule 4(b)
SECTION 5. ACCOUNTS
(a) DEPOSIT ACCOUNTS. The following is a list of all deposit accounts
(including certificates and instruments evidencing such deposit accounts) held
by the Loan Parties and every entity owned, in whole or in part, by any of the
Loan Parties:
See Schedule 5(a)
SECTION 6. MISCELLANEOUS PROPERTY
(a) DEBT. The following is a list of all debt payable to the Loan
Parties and every entity owned, in whole or in part, by any of the Loan Parties,
including without limitation, all inter-company notes:
See Schedule 6(a)
(b) INVESTMENT PROPERTY. The following is a list of all "investment
property" (as defined in the New York Uniform Commercial Code) (other than that
which is listed on Schedule 1(a)) owned by the Loan Parties and every entity
owned, in whole or in part, by any of the Loan Parties, including without
limitation, (i) securities, such as stocks, bonds, interests in limited
liability companies, partnership interests, treasuries, certificates of deposit
and mutual fund shares, (ii) security entitlements, such as the rights to any
securities account and the financial assets held by a securities intermediary in
such securities account and free credit balance or other money owing by any
securities intermediary with respect to that amount, (iii) securities accounts,
(iv) commodity contracts and (v) commodity accounts (provide name of issuer, a
description of the security and value):
See Schedule 6(b)
(c) AGREEMENTS. The following is a list of all agreements to which the
Loan parties and every entity owned, in whole or in part, by any of the Loan
Parties, is a party:
See Schedule 6(c)
(d) RECORDS. The following is a list of locations at which there
exists, with respect to the Loan Parties and every entity owned, in whole or in
part, by any of the Loan Parties, corporate or business records, customer lists,
credit files, computer program printouts or other computer material and records:
See Schedule 6(d)
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IN WITNESS WHEREOF, we have hereunto set our hand to this ___ day of
June, 2001
GENRAD, INC.
By:
-----------------------
Name:
Title:
<Table>
<Caption>
ATTACHMENTS:
Schedule 1(a) Subsidiaries
Schedule 1(b) Names
Schedule 2(a) Chief Executive Office
Schedule 2(b) Principal Place of Business
Schedule 2(c) Places of Business
Schedule 2(d) Receivables and General Intangibles
Schedule 2(e) Equipment and Inventory
Schedule 2(f) Third Parties relating to Equipment and Inventory
Schedule 3(a) Patents and Patent Applications
Schedule 3(b) Trademarks and Trademark Applications
Schedule 3(c) Copyrights and Copyright Applications
Schedule 3(d) Licenses
Schedule 3(e) Software Systems
Schedule 4(a) Fee Properties
Schedule 4(b) Leased Properties
Schedule 5(a) Deposit Accounts
Schedule 6(a) Debt
Schedule 6(b) Investment Property
Schedule 6(c) Agreements
Schedule 6(d) Records
</Table>
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EXHIBIT 99
RISK FACTORS
WE EXPECT TO GENERATE A SIGNIFICANT PORTION OF OUR FUTURE REVENUES FROM SALES OF
OUR PRODUCTS TO THE DISTRIBUTED POWER AND POWER QUALITY MARKETS, AND NO
ASSURANCE CAN BE GIVEN THAT WE WILL REALIZE ANY OF THESE REVENUES.
On-site distributed power and power quality solutions, such as fuel
cells and microturbines, which utilize our products are relatively new methods
of producing electricity and have not historically accounted for much revenue in
the electricity generation market. We have no experience manufacturing large
volumes of our products for mass marketed fuel cell and microturbine systems,
and, as a result, we currently generate only limited revenues from these
products. Additionally, the existing market for these alternative distributed
power products is limited, and there can be no assurance that this market will
develop or that our products will be demanded in sufficient quantities to
generate our expected revenues. If any of the foregoing were to occur, we would
not achieve our anticipated levels of profitability and growth, and we may have
to refocus our business on other new or existing product lines.
WE CANNOT ASSURE MARKET ACCEPTANCE OR COMMERCIAL VIABILITY OF OUR DISTRIBUTED
POWER AND POWER QUALITY PRODUCTS.
We intend to continue to expand development of our products for the
distributed power generation and power quality markets. However, we cannot
assure you that manufacturers of these distributed power solutions will select
our products to be incorporated into their solutions. Additionally, we cannot
assure you that our customers products will realize market acceptance, that they
will meet the technical demands of their end users or that they will offer
cost-effective advantages over existing utilities. Our marketing efforts to date
involve development contracts with several customers, identification of specific
market segments of power and energy management systems and the continuation of
marketing efforts of recently acquired businesses. We cannot know if our
commercial marketing efforts will be successful in the future. Furthermore, we
cannot assure you that our products, in their current form will be suitable for
specific commercial applications or that further design modifications, beyond
anticipated changes to accommodate different markets, will not be necessary.
Additionally, we may not able to develop competitive products, our products may
not receive market acceptance, and we may not be able to profitably compete in
this market even if market acceptance is achieved. If our products do not gain
market acceptance or commercial viability, we will not achieve our anticipated
levels of profitability and growth.
WE HAVE NO EXPERIENCE MANUFACTURING PRODUCTS FOR DISTRIBUTED POWER AND POWER
QUALITY SYSTEMS ON A COMMERCIAL BASIS.
To date, we have focused primarily on research and development and have
no experience manufacturing products for distributed power and power quality
systems on a commercial basis. We have a semi-automated production line in our
Marlborough, Massachusetts facility that we expect to be capable of producing up
to 25,000 of our residential fuel cell power conversion systems annually. We are
also continuing to develop our manufacturing capabilities and processes. We do
not know whether or when we will able to fully develop efficient, low-cost
manufacturing capability and processes that will enable us to meet the quality,
price, engineering design and production standards of production volumes
required to successfully mass market our distributed power and power quality
products. Even if we are successful in developing our manufacturing capability
and processes, we do not know whether we will do so in time to meet our product
commercialization schedule or to satisfy the requirements of our customers.
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WE HAVE RECENT AND ANTICIPATED OPERATING LOSSES.
We have recorded net losses for the fiscal years ended September 30,
1995, 1996, 1997, 1998, 1999 and 2000 and for the quarters ended December 31,
2000, March 31, 2001 and June 30, 2001. In order to achieve profitability, we
must achieve all or some combination of the following:
- successfully compete in the market for distributed power and power
quality products.
- develop new products for our existing markets,
- sell these products to existing and new customers,
- increase gross margins through higher volumes and manufacturing
efficiencies,
- control our operating expenses, and
- develop and manage our distribution capability.
If our revenue does not increase significantly or the increase in our
expenses is greater than expected, we may not achieve or sustain profitability
or generate positive cash flow in the future. We cannot assure you that we will
accomplish these objectives or be profitable in the future. We expect to
continue to incur operating losses at least through fiscal year 2001, and we may
never become profitable.
WE MAY NOT BE ABLE TO DEVELOP OR SELL OUR DISTRIBUTED POWER, POWER QUALITY AND
OTHER PRODUCTS UNDER DEVELOPMENT.
We have a number of potential products under development including our
residential fuel cell power conversion system and the converter, inverter and
controller contained in this conversion system. We face many technological
challenges that we must successfully address to complete our development
efforts. Our product development involves a high degree of risk and may require
significant capital resources to enable us to be a low-cost, high-volume
manufacturer of reliable products meeting our customers' needs. Returns to our
investors are dependent upon successful development and commercialization of our
potential products. For example, the successful development of our distributed
power and power quality products will require significant investment in research
and development before we can determine whether the development of our
technology was successful and whether the resulting products will be
commercially viable and accepted by the marketplace. In addition, many proposed
products based on our technologies will require significant additional
expenditures for research and development. We cannot assure you that any of the
products we are developing, or those that we develop in the future, will be
technologically feasible or accepted by the marketplace. Also, we cannot assure
you that any of our product development will be completed on schedule, or at all
and as a result, you may lose all or part of your investment.
WE ARE HEAVILY DEPENDENT ON CONTRACTS WITH THE U.S. GOVERNMENT, AND PARTICULARLY
THE U.S. DEPARTMENT OF ENERGY, FOR REVENUE TO DEVELOP OUR DISTRIBUTED POWER AND
POWER QUALITY PRODUCTS, AND THE LOSS OF ONE OF OUR GOVERNMENT CONTRACTS COULD
PRECLUDE US FROM ACHIEVING OUR ANTICIPATED LEVELS OF GROWTH AND REVENUES.
Our ability to develop and market our products is heavily dependent
upon maintaining our U.S. government contract revenue and research grants. Most
of our U.S. government contracts are funded incrementally on a year-to-year
basis. Approximately 21% of our revenue during fiscal year 2000 was derived from
government contracts and subcontracts. Any change in our relationship with the
U.S. government or its agencies whether as a result of market economic, or
competitive pressures, including any decision by the U.S. government to alter
its commitment to our research and development efforts could harm our business
and financial condition by depriving us of the resources necessary to develop
our distributed power and power quality products. Furthermore, contracts with
the U.S. government may be terminated or suspended by the U.S. government at any
time, with or without cause. There can be no assurance that our U.S. government
contracts will not be terminated or suspended in the future, or that
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contract suspensions or terminations will not result in unreimbursable expenses
or charges or other adverse effects on us.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency or by other
appropriate agencies of the U.S. government. These agencies have the right to
challenge our cost estimates or allocations with respect to any such contract.
Additionally, a substantial portion of the payments to us under U.S. government
contracts are provisional payments that are subject to potential adjustment upon
audit by such agencies. Adjustments that result from inquiries or audits of our
contracts could have a material adverse impact on our financial condition or
results of operations. Since our inception, we have not experienced any material
adjustment as a result of any inquiries or audits, but there can be no assurance
that our contracts will not be subject to material adjustments in the future.
In the event that any of our government contracts are terminated for
cause, it could significantly affect our ability to obtain future government
contracts which could seriously harm our ability to develop our technologies and
products. In addition, our participation in various government business programs
depends upon our continuing eligibility under the regulations of the United
States Small Business Administration. Qualification under these regulations is
based upon the standard industrial classification of the product or service that
is the subject of the program and the level of our revenues and the number of
our employees. Although our current awards under government programs such as the
Small Business Innovative Research, or SBIR, program and small business
procurement set-asides and preferences will not be affected by increases in the
level of our revenues or the number of our employees, as we grow, we may lose
our ability to participate in these programs in the future. Under these
circumstances, although we will still be able to participate in general
government contract and cooperative agreement programs, we will lose our ability
to benefit in the future from many of the programs in which we have historically
participated. During our fiscal years ended September 30, 1999 and 2000, 11.9%
and 5.8% respectively, of our revenues have been obtained under the SBIR
program.
A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM CONTRACTS WITH THE U.S.
GOVERNMENT AND ITS AGENCIES OR FROM SUBCONTRACTS WITH THE U.S. GOVERNMENT'S
PRIME CONTRACTORS, AND A SLOWDOWN IN GOVERNMENT SPENDING MAY ADVERSELY AFFECT
OUR ABILITY TO OBTAIN ANTICIPATED REVENUES.
Changes in government policies, priorities or funding levels through
agency or program budget reductions by the U.S. Congress or executive agencies
or the imposition of budgetary constraints could significantly impair or ability
to achieve this level of revenue going forward. Any reductions or slowdowns in
government spending could also severely inhibit our ability to successfully
complete the development and commercialization of our products.
THE U.S. GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR INTELLECTUAL PROPERTY.
Many of our patents are the result of retaining ownership of inventions
made under U.S. government-funded research and development programs. With
respect to any invention made with government assistance, the government has a
nonexclusive, nontransferable, irrevocable, paid-up license to use the
technology or have the technology employed for or on behalf of the U.S.
government throughout the world. Under certain conditions, the U.S. government
also has "march-in rights." These rights enable the U.S. government to require
us to grant a nonexclusive, partially exclusive, or exclusive license in any
field of use to responsible applicants, upon terms that are reasonable under the
circumstances. If we refuse, the government can grant the license itself,
provided that it determines that such action is necessary because we have not
achieved practical application of the invention, or to alleviate health or
safety needs, or to meet requirements for public use specified by federal
regulations or, because products using such inventions are not being produced
substantially in the United States. The exercise of these rights by the
government could create potential competitors for us if we later determine to
further develop the technologies and utilize the inventions in which the
government has exercised these rights.
IF WE ARE UNABLE TO MAINTAIN OUR TECHNOLOGICAL EXPERTISE IN DESIGN AND
MANUFACTURING PROCESSES, WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE.
We believe that our future success will depend upon our ability to
develop and provide distributed power and power quality products that meet the
changing needs of our customers. This requires that we successfully
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anticipate and respond to technological changes in design and manufacturing
processes in a cost-effective and timely manner. As a result, we continually
evaluate the advantages and feasibility of new product design and manufacturing
processes. We cannot, however, assure you that our process development efforts
will be successful. The introduction of new products embodying new technologies
and the emergence of shifting customer demands changing industry standards could
render our existing products obsolete and unmarketable which would have a
significant impact on our ability to generate revenue. Our future success will
depend upon our ability to continue to develop and introduce a variety of new
products and product enhancements to address the increasingly sophisticated
needs of our customers. This will require us to continue to make substantial
product development investments. We may experience delays in releasing new
products and product enhancements in the future. Material delays in introducing
new products or product enhancements may cause customers to forego purchases of
our products and purchase those of our competitors.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PATENTS
AND PROPRIETARY TECHNOLOGY.
We currently own 65 U.S. patents which expire between 2009 and 2019. We
also have 13 patent applications pending with the U.S. Patent and Trademark
Office. As a qualifying small business from our inception to date, we have
retained commercial ownership rights to proprietary technology developed under
various U.S. government contracts and grants.
Our patent and trade secret rights are of significant importance to us
and to our future prospects. Our ability to compete effectively against other
companies in our industry will depend, in part, on our ability to protect our
proprietary technology and systems designs relating to our distributed power and
power quality products. Although we have attempted to safeguard and maintain our
proprietary rights, we do not know whether we have been or will be successful in
doing so. Further, our competitors may independently develop or patent
technologies that are substantially equivalent or superior to ours. No assurance
can be given as to the issuance of additional patents or, if so issued, as to
their scope. Patents granted may not provide meaningful protection from
competitors. Even if a competitor's products were to infringe patents owned by
us, it would be costly for us to pursue our rights in an enforcement action, it
would divet funds and resources which otherwise could be used in our operations
and there can be no assurance that we would be successful in enforcing our
intellectual property rights. Because we intend to enforce our patents,
trademarks and copyrights and protect our trade secrets, we may be involved from
time to time in litigation to determine the enforceability, scope and validity
of these rights. This litigation could result in substantial costs to us and
divert efforts by our management and technical personnel. In addition, effective
patent, trademark, service mark, copyright and trade secret protection may not
be available in every country where we operate or sell our products.
WE MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF OUR PROPRIETARY KNOWLEDGE.
In addition to our patent rights, we also rely on treatment of our
technology as trade secrets and upon confidentiality agreements, which all of
our employees are required to sign, assigning to us all patent rights and
technical or other information developed by the employees during their
employment with us. We also rely, in part on contractual provisions to protect
our trade secrets and proprietary knowledge. Our employees have also agreed not
to disclose any trade secrets or confidential information without our prior
written consent. These agreements may be breached, and we may not have adequate
remedies for any breach. Our trade secrets may also be known without breach of
these agreements or may be independently developed by competitors. Our inability
to maintain the proprietary nature of our technology and information could harm
our business, results of operations and financial condition by adversely
affecting our ability to compete in our markets.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS.
We believe that we do not infringe the proprietary rights of others
and, to date, no third parties have asserted an infringement claim against us,
but we may be subject to infringement claims in the future. The defense of any
claims of infringement made against us by third parties could involve
significant legal costs and require our management to divert time from our
business operations. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary
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licenses or other rights, or if these licenses are costly, our operating results
may suffer either from reductions in revenues through our inability to serve
customers or from increases in costs to license third-party technologies.
WE HAVE EXCLUSIVELY LICENSED OUR INTELLECTUAL PROPERTY RIGHTS FOR OUR FLYWHEEL
TECHNOLOGY FOR STATIONARY, TERRESTRIAL APPLICATIONS TO OUR AFFILIATE, BEACON
POWER CORPORATION, WHOM WE NO LONGER CONTROL, AND BEACON POWER'S DECISIONS
REGARDING THE USE OR DEVELOPMENT OF THIS INTELLECTUAL PROPERTY MAY NOT BE IN OUR
BEST INTEREST.
In 1997, we granted Beacon Power a perpetual, worldwide, royalty-free,
exclusive right and license to our flywheel technology for stationary,
terrestrial applications. In the future, we may not agree with strategic
decisions made by Beacon Power, including decisions relating to product
development, marketing and market focus, and we will be unable to alter any
strategic decisions with which we do not agree. There can be no assurance that
Beacon Power will pursue market opportunities that complement our products in a
timely manner, or at all. As a result even though we developed the technology
used by Beacon Power, we may not be able to address the market demand for
stationary, terrestrial flywheel energy storage systems unless we develop or
license alternative technology to meet the needs of our customers. There can be
no assurance that any alternative technology will be developed or will be
available to us under a license on acceptable terms, or at all. In addition, we
may not agree with the terms and conditions of any future Beacon Power
financings. We anticipate that our economic stake in Beacon Power will continue
to be substantially diluted in the future as Beacon Power obtains additional
public or private funding to pursue its business plan.
WE CANNOT ASSURE MARKET ACCEPTANCE OR COMMERCIAL VIABILITY OF BEACON POWER'S
STATIONARY FLYWHEEL ENERGY STORAGE SYSTEM OR ANY OF ITS OTHER PRODUCTS.
The existing market for Beacon Power's alternative distributed power
products is limited, and there can be no assurance that this market will develop
or that Beacon Power's products will realize market acceptance or be demanded in
sufficient quantities to generate anticipated revenues. Even if market
acceptance is achieved, there can be no assurance that Beacon Power can
profitably compete in this market. In addition, Beacon Power's products may not
function as anticipated or may not compete effectively with other products
produced by their competitors, and we cannot assure you that Beacon Power's
products will meet the technical demands of their end users or that they will
offer cost-effective advantages over existing technologies. If any of the
foregoing were to occur, Beacon Power would not achieve its anticipated levels
of profitability and growth which would diminish the value of our investment in
Beacon Power.
Many proposed products based on technologies owned by or licensed to
Beacon Power will require significant additional capital expenditures for
research and development. We cannot assure you that any of the products Beacon
Power is developing, or those that they develop in the future, will be
technologically feasible, suitable for specific commercial applications without
design modifications beyond anticipated changes to accommodate different markets
or accepted by the marketplace. In addition, we cannot assure you that Beacon
Power's product development will be completed on schedule, or at all. If Beacon
Power is unable to successfully develop and market, on a commercially viable
basis, its flywheel products, the value of our investment in Beacon Power could
be significantly diminished.
LOSS OF ANY OF OUR KEY PERSONNEL, AND PARTICULARLY OUR CHIEF EXECUTIVE OFFICER,
COULD HURT OUR BUSINESS BECAUSE OF THEIR EXPERIENCE, CONTACTS AND TECHNOLOGICAL
EXPERTISE.
The loss of the services of one or several of our key employees or an
inability to attract, train and retain qualified and skilled employees,
specifically engineering and sales personnel, could result in the loss of
customers or otherwise inhibit our ability to operate and grow our business
successfully. In addition, our ability to successfully integrate acquired
facilities or businesses depends, in part, on our ability to retain and motivate
key management and employees hired by us in connection with these acquisitions.
We are particularly dependent upon the services of David B. Eisenhaure, our
president, chief executive officer, chairman of the board and founder, as a
result of his business and academic relationships, understanding of government
contracts and technical expertise. The loss of Mr. Eisenhaure's services would
have a material adverse effect on our business and results of operations,
including our ability to attract employees and obtain future contract research
and development.
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WE EXPECT SIGNIFICANT COMPETITION FOR OUR PRODUCTS AND SERVICES.
To date, we have faced only limited competition in providing research
services, prototype development and custom and limited quantity manufacturing.
We expect competition to intensify greatly as commercial applications increase
for our products under development. Many of our competitors and potential
competitors are well established and have substantially greater financial,
research and development, technical, manufacturing and marketing resources than
we do. Some of our competitors and potential competitors are much larger than we
are. If these larger competitors decide to focus on the development of
distributed power and power quality products. They have the manufacturing,
marketing and sales capabilities to complete research, development and
commercialization of these products more quickly and effectively than we can.
There can also be no assurance that current and future competitors will not
develop new or enhanced technologies perceived to be superior to those sold or
developed by us. There can be no assurance that we will be successful in this
competitive environment.
PRICE INCREASES OF MATERIALS OR COMPONENTS USED BY US COULD ADVERSELY AFFECT THE
VOLUME OF OUR SALES.
We use materials and components obtained from third-party suppliers to
manufacture many of our products. We expect this to continue as we increase our
manufacturing capabilities and move into high volume production. If prices of
materials and components that we use were to increase, we may not be able to
afford them or to pass these costs on to our customers. In addition, if we were
required to raise the price of our products as a result of increases in the
price of materials or components that we use, demand for our products may
decrease which would reduce our sales. To date, we have not entered into
long-term contracts which fix prices or limit price increases for materials or
components during the term of the contract, and we do not expect to do so in the
future.
WE ARE DEPENDENT ON THIRD-PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR PRODUCTS.
From time to time, shipments can be delayed because of industry-wide or
other shortages of necessary materials and components from third-party
suppliers. A supplier's failure to develop and supply components in a timely
manner, or to supply components that meet our quality, quantity or cost
requirements, or our inability to obtain substitute sources of these components
on a timely basis or on terms acceptable to us, could impair our ability to
manufacture our products. In addition, to the extent the processes that our
suppliers use to manufacture components are proprietary, we may be unable to
obtain comparable components from alternative suppliers.
LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR BUSINESS, AND REDUCTIONS,
CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We do not usually obtain long-term purchase orders or commitments from
our customers. Instead, we work closely with our customers to develop
non-binding forecasts of the future volume of orders. Customers may cancel their
orders, change production quantities from forecasted volumes or delay production
for a number of reasons beyond our control. Significant or numerous
cancellations, reductions or delays in orders by our customers would reduce our
net sales. From time to time we make capital investments in anticipation of
future business opportunities like the significant investment we made to install
a semi-automated production line in our Marlborough, Massachusetts facility for
residential fuel cell power conversion systems. There can be no assurance that
we will receive the anticipated business that supports these investments. If we
are unable to obtain this anticipated business, we may not be able to
successfully compete in our markets.
IF WE EXPERIENCE A PERIOD OF SIGNIFICANT GROWTH OR EXPANSION, IT COULD PLACE A
SUBSTANTIAL STRAIN ON OUR RESOURCES.
If we are successful in obtaining rapid market penetration of our
products, we will be required to deliver large volumes of quality products or
components to our customers and licensees on a timely basis and at reasonable
costs to us. We have limited experience in delivering large volumes of our
products and have limited capacity to meet wide-scale production requirements.
We cannot assure you that our efforts to expand our manufacturing and quality
assurance activities will be successful, that we will be able to satisfy
large-scale commercial production on a timely and cost-effective basis or that
growth will not strain our management, operational and technical resources.
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We will also be required to continue to improve our operational, management and
financial systems and controls to meet anticipated growth. Failure to manage our
growth could damage our relationships with our customers and our investors and
be extremely costly to try to resolve.
WE MAY NEED ADDITIONAL FINANCING FOR OUR FUTURE CAPITAL NEEDS AND MAY NOT BE
ABLE TO RAISE ADDITIONAL FUNDS ON TERMS ACCEPTABLE TO US, OR AT ALL.
If we are unable to increase our revenues and achieve positive cash
flow, we will need to raise additional funds. We may also need additional
financing if we:
- need additional cash to fund research and development costs of
products currently under developments,
- decide to expand faster than currently planned,
- develop new or enhanced services or products ahead of schedule,
- need to respond to competitive pressures, or
- decide to acquire complementary products, businesses or technologies.
We cannot assure you that we will be able to raise additional funds on
terms acceptable to us, if at all. If future financing is not available or is
not available on acceptable terms, we may not be able to fund our future needs
which would significantly limit our ability to implement our business plan. In
addition, we may have to issue securities that may have rights, preferences and
privileges senior to our common stock.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, AND FAILURE TO SUCCESSFULLY
INTEGRATE ACQUIRED BUSINESSES OR ASSETS MAY ADVERSELY AFFECT OUR FINANCIAL
PERFORMANCE.
A component of our business strategy is to seek the acquisition of
businesses, products, assets and technologies that complement or augment our
existing businesses, products, assets and technologies. Since 1997, we have
expanded our business and capabilities through the acquisition of seven
businesses and intellectual property, tooling and other assets from another
entity.
Acquisitions are difficult to identify and complete for a number of
reasons, including competition among prospective buyers and the need for
regulatory approvals, including antitrust approvals. We cannot assure you that
we will be able to successfully identify acquisition candidates or complete
future acquisitions. We cannot assure you that we will be able to operate
acquired businesses profitably or otherwise implement our growth strategy
successfully. The successful combination of companies in a rapidly changing
industry such as ours may be more difficult to accomplish than in other
industries. Our ability to integrate any newly acquired entities will require us
to continue to improve our operational, financial and management information
systems and to motivate and effectively manage our employees. If our management
is unable to manage growth effectively, the quality of our products, our ability
to identify, hire and retain key personnel and our results of operations could
be materially and adversely affected.
Although successfully completing future acquisitions is an important
part of our overall business strategy, any future acquisitions that we make
could result in:
- difficulty in integrating our operations, technologies, systems,
products and services with those of the acquired facility,
- difficulty in operating in foreign countries, in the case of
acquisitions that we make outside the United States, and over
significant geographical distances,
- diversion of our capital and our management's attention away from
other business issues.
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- an increase in our expenses and our working capital requirements,
- potential loss of our key employees and customers of facilities or
businesses we acquire, and
- financial risks, such as:
- potential liabilities of the facilities and businesses we acquire,
- our need to incur additional indebtedness, and
- dilution if we issue additional equity securities.
OUR BUSINESS COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability claims which are
inherent in the manufacturing, marketing and sale of our products, and we may
face substantial liability for damages resulting from the faulty design or
manufacture of products or improper use of products by end users. We currently
maintain a low level of product liability insurance, and there can be no
assurance that this insurance will provide sufficient coverage in the event of a
claim. Also, we cannot predict whether we will be able to maintain such coverage
on acceptable terms at all, or that a product liability claim would not harm
our business or financial condition. In addition, negative publicity in
connection with the faulty design or manufacture of our products would adversely
affect our ability to market and sell our products.
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TO POTENTIAL
FINANCIAL LIABILITY.
Our operations are regulated under a number of federal, state and
foreign environmental and safety laws and regulations that govern, among other
things, the discharge of hazardous materials into the air and water as well as
the handling, storage and disposal of these materials. These laws and
regulations include the Clean Air Act, the Clean Water Act, the Resource,
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act, as well as analogous state and foreign laws.
Because we use hazardous materials in our manufacturing processes, we are
required to comply with these environmental laws. In addition, because we
generate hazardous wastes, we, along with any other person who arranges for the
disposal of our wastes, may be subject to potential financial exposure for costs
associated with an investigation and any remediation of sites at which we have
arranged for the disposal of hazardous wastes if those sites become contaminated
and even if we fully comply with applicable environmental laws. In the event of
a violation of environmental laws, we could be held liable for damages and for
the costs of remedial actions. Environmental laws could also become more
stringent over time, imposing greater compliance costs and increasing risks and
penalties associated with any violation.
BUSINESSES AND CONSUMERS MIGHT NOT ADOPT ALTERNATIVE DISTRIBUTED POWER SOLUTIONS
AS A MEANS FOR OBTAINING THEIR ELECTRICITY AND POWER NEEDS.
On-site distributed power generation solutions, such as fuel cell and
microturbine products, which utilize our products provide an alternative means
for obtaining electricity and are relatively new methods of obtaining
electricity and other forms of power that businesses and consumers may not adopt
at levels sufficient to sustain our business. Traditional electricity
distribution is based on the regulated industry model whereby businesses and
consumers obtain their electricity from a government regulated utility. For
alternative methods of distributed power to succeed, businesses and consumers
must adopt new purchasing practices and must be willing to rely less upon
traditional means of purchasing electricity, and market participants must be
willing to produce products for alternative methods of power distribution. We
cannot assure you that businesses, consumers or market participants will choose
to utilize or service this on-site distributed power market at levels sufficient
to sustain our business. The development of a mass market for our products may
be impacted by many factors which are out of our control, including:
- market acceptance of fuel cell and microturbine systems that
incorporate our distributed power and power quality products,
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- the cost competitiveness of fuel cell and microturbine systems that
incorporate our distributed power and power quality products,
- the future costs of natural gas, propane and other fuels used by our
customers' products versus future costs of other forms of fuel and/or
power,
- consumer reluctance to try a new product,
- consumer perceptions regarding the safety of our customers' products,
- regulatory requirements, and
- the emergence of newer, more competitive technologies and products.
If a mass market fails to develop or develops more slowly than we
anticipate, we may be unable to recover the losses we will have incurred to
develop these products.
A MASS MARKET FOR HYBRID-ELECTRIC VEHICLES MAY NEVER DEVELOP OR MAY TAKE LONGER
TO DEVELOP THEN WE ANTICIPATE.
If a mass market fails to develop or develops more slowly than we
anticipate for hybrid-electric automobiles, we may be unable to recover the
expenditures we will have incurred to develop our products and may be unable to
achieve profitability in that portion of our business which could negatively
impact our overall profitability. Many factors which are out of our control may
have a negative effect on the development of a mass market for our
hybrid-electric vehicle components. These factors include:
- the competitiveness of alternative fuel vehicles,
- the availability, future costs and safety of hydrogen, natural gas or
other potential alternative fuels,
- consumer reluctance to adopt alternative fuel products,
- original equipment manufacturer reluctance to replace current
technology,
- consumer perceptions,
- regulatory requirements, and
- the emergence of newer, breakthrough technologies and products by our
competitors in the alternative fuel vehicle market.
THE DISTRIBUTED POWER GENERATION INDUSTRY MAY BECOME SUBJECT TO FUTURE
GOVERNMENT REGULATION WHICH MAY IMPACT OUR ABILITY TO MARKET OUR PRODUCTS.
We do not believe that our products will be subject to existing federal
and state regulations governing traditional electric utilities and other
regulated entities. We do believe that our products will be subject to oversight
and regulation at the local level in accordance with state and local ordinances
relating to building codes, safety pipeline connections and related matters.
This regulation may depend, in part, upon whether an on-site distributed power
system is placed outside or inside a home. At this time, we do not know which
jurisdictions, if any, will impose regulations upon our products. We also do not
know the extent to which any existing or new regulations may impact our ability
to sell and service our products. Once our customers' products reach the
commercialization stage and they begin distributing systems to their target
markets, federal, state or local government entities may seek to impose
regulations. Any new government regulation of our products, whether at the
federal, state or local level,
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including any regulations relating to installation and servicing of our
products, may increase our costs and the price of our products and may have a
negative impact on our revenue and profitability.
UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE DEREGULATION OF THE ELECTRIC
UTILITY INDUSTRY OR ANY OF OUR MAJOR CUSTOMERS MAY HARM OUR OPERATING RESULTS.
The growth of our distributed power generation business depends in
large part on the continued deregulation of the electric utility industry.
Existing utility companies, which have historically operated without
competition, may attempt to deter or delay the deregulation process. In
addition, our customers may not be able to compete effectively against existing
utility companies in a deregulated market. Changes in federal and state
regulation may also have the effect of deterring further investment in research
and development of alternative energy sources, including fuel cells and
microturbines. Any changes in the deregulation process or procedures, the
inability of our customers to compete effectively against existing utility
companies or changes in federal or state regulation which deter further
investment in alternative energy sources would significantly limit the demand
for our products and our ability to generate anticipated levels of revenue.
OUR SHARE PRICE HAS BEEN SUBJECT TO EXTREME PRICE FLUCTUATIONS.
The markets for equity securities in general, and for those of other
companies in our industry, have been volatile, and the market price of our
common stock, which is traded on the Nasdaq National Market under the symbol
SATC, may be subject to significant fluctuations. This could be in response to
operating results, announcements of technological innovations or new products by
us, our competitors or our customers, patent or proprietary rights developments
and market conditions for distributed energy and high technology stocks in
general. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of individual companies. These market fluctuations,
as well as general economic conditions, may adversely affect the market price of
our common stock. Past fluctuations have coincided with fluctuations of other
public companies in the alternative energy sector, market responses to national
issues, public release of information regarding the introduction of new
products, the award of significant contracts, analyst downgrades of our
projected stock price and investment community enthusiasm for the alternative
energy sector. There can be no assurance that the trading price of our common
stock will remain at or near its current level.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, AND IF WE FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR SHARE PRICE MAY
DECREASE SIGNIFICANTLY.
Our annual and quarterly results may vary significantly depending on
various factors, many of which are beyond our control and may not meet the
expectations of securities analysts or investors. If this occurs, the price of
our stock could decline. Past material quarterly fluctuations have been caused
by:
- variations in the timing and volume of customer orders relative to
our manufacturing capacity and staffing levels,
- the timing of our expenditures in anticipation of future orders,
- introduction and market acceptance of our customers' new products,
and
- the level of research and development expenses incurred by us which
are unreimbursed.
Future quarterly fluctuations could be caused by these factors and:
- our effectiveness in managing our manufacturing processes,
- changes in competitive and economic conditions generally or in our
customers' markets,
- the timing of, and the price we pay for, acquisitions and related
integration costs,
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- changes in the cost or availability of components or skilled labor,
and
- general economic conditions.
Because our operating expenses are based on anticipated revenue levels,
our sales cycle for development work is relatively long and a high percentage of
our expenses are fixed for the short term, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter.
EXISTING STOCKHOLDERS CAN EXERT CONSIDERABLE CONTROL OVER US.
Our officers and directors, and their affiliates, beneficially hold
over one-third of our outstanding shares of common stock, a majority of which is
beneficially held by Mr. Eisenhaure, our president, chief executive officer,
chairman of the board and founder. If all of these stockholders were to vote
together as a group, they would have the ability to exert significant influence
over our board of directors and its policies. As a practical matter, Mr.
Eisenhaure may have the ability to elect our directors and to determine the
outcome of corporate actions requiring stockholder approval, including votes
concerning director elections, bylaw amendments and possible mergers, corporate
control contests and other significant corporate transactions, irrespective of
how some of our other stockholders may vote. Accordingly, such concentration of
ownership may have the effect of delaying, deterring or preventing a change in
control, impeding a merger, consolidation, takeover or other business
combination involving us, or discouraging a potential acquirer from making a
lender offer or otherwise attempting to obtain control of us, which in turn
could have an adverse effect on the market price of our common stock.
WE COULD ISSUE ADDITIONAL COMMON STOCK, WHICH MIGHT DILUTE THE BOOK VALUE OF OUR
COMMON STOCK.
We have authorized 50,000,000 shares of our common stock, of which
16,539,597 shares were issued and outstanding as of August 9, 2001. Our board of
directors has the authority, without action or vote of our stockholders, to
issue all or part of any authorized but unissued shares. Such stock issuances
may be made at a price which reflects a discount from the then-current trading
price of our common stock. These issuances would dilute your percentage
ownership interest, which will have the effect of reducing your influence on
matters on which our stockholders vote, and might dilute the book value of our
common stock. You may incur additional dilution of net tangible book value if
holders of stock options, whether currently outstanding or subsequently granted,
exercise their options or if warrantholders exercise their warrants to purchase
our common stock.
THE SALE OF LARGE NUMBERS OF SHARES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK
PRICE.
In addition, as of July 31, 2001, we have reserved 3,496,621 shares of
common stock for issuance upon exercise of stock options and warrants and
473,500 shares for future issuances under our stock plans. As of July 31, 2001,
holders of warrants and options to purchase an aggregate of 705,050 shares of
our common stock may exercise those securities and transfer the underlying
common stock at any time subject, in some cases, to Rule 144. In accordance with
registration rights that we have granted to various individuals and entities
requiring us to register their shares for public resale, we also have resale
registration statements in effect registering 4,935,322 shares of our common
stock. The market price of our common stock could decline as a result of sales
of large number of shares of our common stock in the market, or the perception
that these sales could occur. These sales might also make it more difficult for
us to sell equity securities in the future at a price that we think is
appropriate, or at all.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY, DETER OR PREVENT
THE ACQUISITION OF SATCON, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Some provisions of our certificate of incorporation and bylaws may
delay, deter or prevent a change in control of SatCon or a change in our
management that you as a stockholder may consider favorable. These provisions
include:
- authorizing the issuance of "blank check" preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares and deter a takeover attempt,
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- a classified board of directors with staggered, three-year terms,
which may lengthen the time required to gain control of our board of
directors,
- prohibiting cumulative voting in the election of directors, which
would otherwise allow less than a majority of stockholders to elect
director candidates, and
- limitations on who may call special meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law and
provisions in some of our stock incentive plans may delay, deter or prevent a
change in control of SatCon. These provisions serve to limit the circumstances
in which a premium may be paid for our common stock in proposed transactions, or
where a proxy contest for control of our board may be initiated. If a change of
control or change in management is delayed, deterred or prevented, the market
price of our common stock could suffer.
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