EXHIBIT 10.120


 


GUARANTEE AGREEMENT


 


REGARDING


 


10 MILLION US$ CREDIT FACILITY


 


                This
Agreement is made as of May 6, 1997 by and between Southwall Technologies Inc.,
a Delaware corporation whose principal business offices are at 1029 Corporation
Way, Palo Alto, California 94303 (hereinafter called "Southwall")


 


and


 


                Teijin
Limited, a Japanese corporation whose registered office is at 6-7,
Minami-honmachi 1-chome, Chuo-ku, Osaka 541, Japan (hereinafter called
"Teijin").


 


WITNESSETH:


 


                WHEREAS,
Southwall wishes to obtain a loan facility amounting to Ten Million US Dollars
(US$10,000,000, hereinafter called the "LOAN") from The Sanwa Bank,
Limited, San Francisco Branch at 444 Market Street, 18th Floor, San Francisco,
CA 94111 (hereinafter called "LENDER") and Southwall requests that
TEIJIN provide LENDER with a letter of guarantee (hereinafter called
"L/G") as an inducement to LENDER to extend a LOAN to Southwall;


 


                WHEREAS,
Teijin is, on the above request from Southwall, willing to issue a L/G to
LENDER;


 


                NOW
THEREFORE, the parties hereto have agreed as follows:


 


ARTICLE 1. LOAN FACILITY


 


                The
summary of the LOAN extended to Southwall by LENDER is described below:


 


 


 

















 


 


	
   

  	
  (1)

  	
   

  	
  Date of Credit Agreement
  by and between Southwall and LENDER:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  May 6, 1997

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (2)

  	
   

  	
  Principal amount:
  US$10,000,000.00

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (3)

  	
   

  	
  First Draw-Down Date: May
  6, 1997, for US$5,000,000.00

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Second Draw-Down Date:
  November 6, 1997, for the balance of the principal amount

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (4)

  	
   

  	
  Grace period: Four (4)
  years after the First Draw-Down Date. During this period, Southwall shall
  make semi-annual, interest-only payments.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (5)

  	
   

  	
  Repayments: Eight (8)
  semi-annual equivalent principal repayments, plus accrued interest starting
  forty-eight (48) months after the First Draw-Down Date.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (6)

  	
   

  	
  Interest rate: The LIBOR
  Rate, as defined in the Credit Agreement between LENDER and Southwall, plus
  0.4375%.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (7)

  	
   

  	
  Prepayment: Southwall may
  have the right to prepay this LOAN in full or in part, subject to the terms
  of the Credit Agreement.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (8)

  	
   

  	
  Kind of assurance: L/G
  issued by Teijin

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  



 


 


ARTICLE 2. 
L/G & RISK BEARING COMMISSION


 


	
  2.1

  	
   

  	
  Teijin hereby agrees to
  submit the L/G to LENDER on the condition that Southwall pays Teijin a risk
  bearing commission as a Guarantee Fee (hereinafter called "Guarantee
  Fee") at the rate of 0.5625% per year on the outstanding amount of the
  principal amount of the LOAN.

  
	
   

  	
   

  	
   

  
	
  2.2

  	
   

  	
  The Guarantee Fee shall be
  paid in arrears on each Interest Payment Date for the Period commencing
  either on and including the date of the 

  



 


2

















 


	
   

  	
   

  	
  First Draw-Down, or on and
  including the immediately preceding Interest Payment Date up to and including
  the date immediately preceding such relevant Interest Payment Date.

  
	
   

  	
   

  	
   

  
	
  2.3

  	
   

  	
  The Guarantee Fee shall
  accrue daily and shall be computed on the basis of a year of three hundred
  and sixty (360) days and the actual number of days elapsed.

  
	
   

  
	
  ARTICLE 3.  PAYMENT

  
	
   

  
	
  3.1

  	
   

  	
  Guarantee Fee shall be
  made by wire transfer by Southwall to Teijin in US Dollars to Teijin's account
  No. 403-401 with The Sanwa Bank, Limited, Osaka Head Office.

  
	
   

  	
   

  	
   

  
	
  3.2

  	
   

  	
  Any taxes, charges, or
  other expenses with respect to each Guarantee Fee payment made to Teijin by
  Southwall shall be borne by Southwall. Nevertheless, Southwall may deduct
  withholding tax duly levied on Guarantee Fee payments to the extent that a
  tax credit will be obtained by such party under the convention for the
  avoidance of double taxation between the governments of U.S.A. and Japan.
  Southwall shall secure for Teijin a tax receipt acceptable to Japanese tax
  authorities for the said tax purpose and send it to Teijin within thirty (30)
  days after such payment.

  
	
   

  	
   

  	
   

  
	
  ARTICLE 4.  FINANCIAL COVENANTS

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  During the term of the
  LOAN, Southwall shall maintain the following financial covenants, as measured
  on a quarterly basis as of the last day of each fiscal quarter of Southwall
  from financial data publicly reported in Southwall's Form 10-Q and Form 10-K
  Reports filed with the Securities and Exchange Commission, or from supporting
  data for such reports:

  



 


	
   

  	
  (1)

  	
   

  	
  Minimum Quick Ratio:   1.00 to 1.00

  



 


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  Minimum Quick Ration is
  defined as Cash and Equivalents plus Short Term Investments plus Accounts
  Receivables to Total Current Liabilities.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (2)

  	
   

  	
  Minimum Tangible Net
  Worth:  $24,000,000 and to increase
  annually by 50% of annual Net After Tax Profits, such increases to be
  cumulative. Southwall shall remain profitable in each fiscal year.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Tangible Net Worth is
  defined as Stockholders Equity plus Subordinated Debt minus Intangible Assets
  (including Goodwill, Patents and Licenses).

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Net After Tax Profits is
  defined as Net Operating Income minus recorded Tax Provision for the period,
  excluding any extraordinary adjustments due to changes in accounting rules as
  provided by the Financial Accounting Standard Board or for recording of Net
  Operating Loss Carryforward or other tax assets or liabilities relating to
  prior year results or activities.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (3)

  	
   

  	
  Maximum Debt to Tangible
  Net Worth ratio: 0.65 to 1.00

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Debt is defined as Total
  Liabilities minus Subordinated Debt.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Southwall shall provide to
  Teijin with a quarterly certificate, signed by a responsible officer of
  Southwall, together with a copy of the current quarter's Form 10-Q Report, as
  early as reasonably possible but no later than sixty (60) days following the
  last day of the fiscal quarter, or following the end of Southwall's fiscal
  fourth quarter, a copy of the Form 10-K Report, as early as reasonably
  possible but no later than one hundred and twenty (120) days following the
  last day of the fiscal quarter.

  



 


4

















 


	
  ARTICLE 5. DEFAULT

  	 

	
   

  	
   

  	 

	
  5.1

  	
   

  	
  In the event of any actual
  or expected default by Southwall in any payment of principal or interest on
  the LOAN or of any actual or expected default by Southwall in any financial
  covenants in ARTICLE 4, Southwall shall immediately give a written notice of
  such actual or expected default to Teijin. Such notice shall include detailed
  information on the LOAN including the payment amount and due date for the
  payment which is or may become in default. After receiving such notice, the
  parties hereto shall call a meeting and discuss the concerned matter.

  
	
   

  	
   

  	
   

  
	
  5.2

  	
   

  	
  If Teijin shall make a
  payment when due of any amount demanded by LENDER under L/G, then Teijin
  shall have the right to exercise any right of reimbursement, indemnity or
  subrogation against Southwall.

  
	
   

  	
   

  	
   

  
	
  ARTICLE 6.  OFFER OF COLLATERAL SECURITY

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In order to secure the
  repayment obligation of Southwall to Teijin referred to in paragraph 5.2,
  Southwall shall execute and deliver to Teijin a Reimbursement and Security
  Agreement substantially in the form of Exhibit A attached hereto.

  
	
   

  	
   

  	
   

  
	
  ARTICLE 7.  VALIDITY

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  This Agreement shall come
  into effect on the day when signed by the parties hereto.

  
	
   

  	
   

  	
   

  
	
  ARTICLE 8. MISCELLANEOUS

  	 

	
   

  	
   

  	
   

  	 

	
  8.1

  	
   

  	
  This Agreement shall be
  interpreted and construed in accordance with the laws of Japan.

  	 

					



 


5

















 


	
  8.2

  	
   

  	
  All disputes or
  controversies concerning the interpretation or construction of this Agreement
  shall be settled amicably by the parties hereto. In the event the parties
  cannot reach an amicable settlement, arbitration under paragraph 13.6 of the
  Basic Agreement dated April 9, 1997 between Southwall and Teijin shall be the
  final settlement.

  
	
   

  	
   

  	
   

  
	
  8.3

  	
   

  	
  This Agreement shall not
  be assigned without the prior written consent of the other party hereto.

  
	
   

  	
   

  	
   

  
	
  8.4

  	
   

  	
  This Agreement shall be
  amended only by a written instrument signed by duly authorized
  representatives of both parties hereto.

  



 


                IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and signed in their respective names by their duly authorized representatives
as of the date and year first above written.


 


 


 


	
   

  	
  FOR SOUTHWALL TECHNOLOGIES
  INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  /s/ L. Ray Christie

  
	
   

  	
  Name:

  	
   

  	
  L. Ray Christie

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Vice President, Chief
  Financial Officer, and Secretary

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  FOR TEIJIN LIMITED

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  /s/ Shosaku Yasui

  
	
   

  	
  Name:

  	
   

  	
  Shosaku Yasui

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Senior Managing Director

  
	
   

  	
   

  	
   

  	
  Member of the Board

  



 


6

















 


Exhibit A


 


REIMBURSEMENT AND SECURITY AGREEMENT


 


                This REIMBURSEMENT AND SECURITY AGREEMENT, dated as
of May 6, 1997 (this “Agreement”), is made by SOUTHWALL TECHNOLOGIES, INC., a
Delaware corporation (the “Grantor”), and TEIJIN LIMITED, a Japanese
corporation, as secured party (the “Secured Party”).


 


                PRELIMINARY STATEMENTS:


 


                (1)           The
Secured Party has entered into that certain Guarantee Agreement Regarding 10
Million US$ Credit Facility, dated as of the date hereof (said agreement, as it
may hereafter be amended or otherwise modified from time to time, the “Guaranty
Agreement”; the terms defined therein and not otherwise defined herein are used
herein as therein defined), under which the Secured Party has agreed to provide
LENDER with a letter of guarantee (the “Letter of Guarantee”) as an inducement
to extend a LOAN to the Grantor.


 


                (2)           It
is a condition precedent to the making of the guarantee by the Secured Party
under the Guaranty Agreement that the Grantor shall have agreed to the
reimbursement and security interest contemplated by this Agreement.


 


                NOW, THEREFORE, in consideration of the premises and
in order to induce the Secured Party to make the guarantee under the Guaranty
Agreement, the Grantor hereby agrees with the Secured Party as follows.


 


                SECTION 1. Reimbursement; Assignment and Grant of
Security Interest.


 


                (a)           The
Grantor hereby agrees to reimburse the Secured Party on demand for and in the
amount of any payment made by the Secured Party to LENDER under the Letter of
Guarantee. All payments made by the Grantor under this Agreement shall be made
by the Grantor free and clear of and without deduction for any and all present
and future taxes, levies, charges, deductions and withholdings, excluding, in
the case of the Secured Party, any of the foregoing imposed on or measured by
its net income or gross receipts by the jurisdiction (or any political
subdivision thereof) under the laws of which the Secured Party is organized or
maintains a lending office (“Taxes”). To the extent applicable law requires a
deduction or withholding for Taxes, then the gross amount of such payment made
by the Grantor shall be increased at the Grantor’s sole cost and expense such
that the net payment to the Secured Party or its assignee equals that amount
which the Secured Party or its assignee would have received if such deduction
or withholding were not made. In addition, the Grantor shall pay upon demand
any stamp or other taxes, levies or charges of any jurisdiction with respect to
the execution, delivery, registration, performance and enforcement of this
Agreement.


 

















 


Upon request by the Secured
Party,  the Grantor shall furnish
evidence satisfactory to the Secured Party that all requisite authorizations
and approvals by, and notices to and filings with, governmental authorities and
regulatory bodies have been obtained and made and that all requisite taxes,
levies and charges have been paid. Any amounts payable by the Grantor to the
Secured Party hereunder not paid upon demand shall bear interest at an annual
rate equal to the six (6) months LIBOR rate established by BBA at the time of
non-payment plus five percent (5%).


 


                (b)           The
Grantor hereby assigns to the Secured Party for its benefit, and hereby grants
to the Secured Party for its benefit a security interest in, all of the
Grantor’s right, title and interest in and to Grantor’s property set forth on
Exhibit A attached hereto (the “Collateral”), andall proceeds of any and all of
the foregoing Collateral. The list of Collateral may be amended from time to
time by mutual agreement of the parties; provided, however, that the Secured
Party shall have no obligation to agree to the amendment of the list of
Collateral if it believes that such amendment would impair the security
interest in the Grantor’s property created hereunder.


 


                SECTION 2. Security for Obligations. This Agreement
secures the payment of all obligations of the Grantor now or hereafter existing
under the Guaranty Agreement and under this Agreement (all such obligations
being the “Obligations”).


 


                SECTION 3. 
Representations, Warranties and Covenants.  The Grantor represents and warrants as follows.


 


                (a)           The
Grantor is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; the Grantor has the lawful power to
own its properties and to engage in the businesses it conducts, and is duly
qualified and in good standing as a foreign corporation in the jurisdictions
wherein the failure to so qualify would have a material adverse effect on the
Grantor or its business or prospects.


 


                (b)           The
Grantor is not in default with respect to any of its existing indebtedness, and
the making and performance of this Agreement will not (immediately or with the
passage of time, the giving of notice, or both):


 


                                (i)            violate
the  articles of  incorporation,  by-laws or other organizational of the Grantor or violate any
laws or result in a default under any contract, agreement, or instrument to
which the Grantor is a party or by which the Grantor or any of its property is
bound; or


 


                                (ii)           result
in the creation or imposition of any security interest in, or lien or
encumbrance upon, any of the assets of the Grantor, other than in favor of the
Secured Party.


 


 


2

















 


 


                (c)           The
Grantor has the power and authority to enter into and perform this Agreement
and to incur the obligations herein provided for, and has taken all actions
necessary to authorize the execution, delivery, and performance of this
Agreement.


 


                (d)           This
Agreement is valid, binding, and enforceable in accordance with its terms.


 


                (e)           The
chief place of business and chief executive office of the Grantor and the
office where the Grantor keeps its records concerning the Collateral, are
located at 1029 Corporation Way, Palo Alto, California 94303.


 


                (f)            The
Grantor is, or as soon as practicable following the Closing will be, the legal
and beneficial owner of the Collateral free and clear of any lien, security
interest, option or other charge or encumbrance except for the security
interest created by this Agreement and Permitted Liens. No effective financing
statement or other document similar in effect covering all or any part of the
Collateral is on file in any recording office, except such as may have been
filed in favor of the Secured Party relating to this Agreement and Permitted
Liens. As used herein, “Permitted Liens” means (i) liens to secure taxes,
assessments or charges not yet due or which are being contested in good faith
and by appropriate proceedings and for which adequate reserves are maintained;
(ii) carriers’, mechanics’, warehousemen’s artisans’, repairmen’s or similar
liens arising in the ordinary course of business which are not overdue or which
are being contested in good faith and by appropriate proceedings and for which adequate
reserves are maintained; and (iii) liens and encumbrances which (A) existed on
property acquired by the Grantor before the time of its acquisition and was not
created in anticipation of such event, or (B) were taken or retained by the
seller of such property to secure all or part of its price or created solely
for the purpose of securing indebtedness representing, or incurred to finance
or refinance the cost of such property; provided that no such Lien shall extend
to or cover any property of the Grantor other than the property so acquired and
improvements on such property.


 


                (g)           This
Agreement creates a valid and perfected first priority security interest in the
Collateral (other than with respect to Permitted Liens given priority as a
matter of law), securing the payment of the Obligations, and all filings and
other actions necessary or desirable to perfect and protect such security
interest have been duly taken.


 


                (h)           No
consent of any other person or entity and no authorization, approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required (i) for the grant by the Grantor of the assignment
and security interest granted hereby or for the execution, delivery or
performance of this Agreement by the Grantor, (ii) for the perfection or
maintenance of the assignment and security interest created hereby (including
the first priority nature of such assignment and security interest) or (iii)
except as required by applicable law, for the exercise by the Secured Party of
its rights and remedies hereunder.


 


 


3

















 


 


                (i)            There
are no conditions precedent to the effectiveness of this Agreement that have
not been satisfied or waived.


 


                (j)            Grantor
shall pay Secured Party a risk bearing commission as a Guarantee Fee
(hereinafter called “Guarantee Fee”) at the rate of 0.5625% per year on the
outstanding amount of the principal amount of the LOAN, as specified in the
Guaranty Agreement.


 


                (k)           The
Guarantee Fee shall be paid by Grantor in arrears on each Interest Payment Date
(as such term is defined in the Guaranty Agreement) for the period commencing
either on and including the date of the First Draw-Down, or on and including
the immediately preceding Interest Payment Date up to and including the date
immediately preceding such relevant Interest Payment Date, as specified in the
Guaranty Agreement.


 


                (l)            The
Guarantee Fee shall accrue daily and shall be computed on the basis of a year
of three hundred and sixty (360) days and the actual number of days elapsed.


 


                (m)          Guarantee
Fee payments shall be made by wire transfer by Grantor to Secured Party in US
Dollars to Secured Party’s Account No. 403-401 with The Sanwa Bank, Limited,
Osaka Head Office.


 


                (n)           Any
taxes, charges, or other expenses with respect to each Guarantee Fee payment
made to Secured Party by Grantor shall be borne by Grantor. Nevertheless,
Grantor may deduct withholding tax duly levied on Guarantee Fee payments to the
extent that a tax credit will be obtained by such party under the convention
for the avoidance of double taxation between the governments of U.S.A. and
Japan. Grantor shall secure for Secured Party a tax receipt acceptable to
Japanese tax authorities for said tax purpose and will send it to Secured Party
within thirty (30) days after such payment.


 


                (o)           During
the term of the LOAN, as specified in the Guaranty Agreement, Grantor shall
maintain the following financial covenants, as measured on a quarterly basis as
of the last day of each fiscal quarter of Grantor from financial data publicly
reported in Grantor’s Form 10-Q and Form 10-K Reports filed with the Securities
and Exchange Commission, or from supporting data for such reports:


 


(1)           Minimum Quick Ratio: 1.00 to 1.00


 


Minimum
Quick Ratio is defined as Cash and Equivalents plus Short Term Investments plus
Accounts Receivables to Total Current Liabilities.


 


(2)           Minimum Tangible Net Worth:
$24,000,000 and to increase annually by 50% of 

annual Net After Tax Profits, such increases to be cumulative. Grantor shall
remain profitable in each fiscal year.


 


 


4

















 


 


Tangible
Net Worth is defined as Stockholders 
Equity plus Subordinated Debt minus Intangible Assets (including
Goodwill, Patents and Licenses).


 


Net
After Tax Profits is defined as Net Operating Income minus recorded Tax
Provision for the period, excluding any extraordinary adjustments due to
changes in accounting rules as provided by the Financial Accounting Standard
Board or for recording of Net Operating Loss Carryforward or other tax assets
or liabilities relating to prior year results or activities.


 


Maximum
Debt to Tangible Net Worth ratio: 0.65 to 1.00


 


Debt is
defined as Total Liabilities minus Subordinated Debt.


 


Grantor
shall provide to Secured Party a quarterly certificate, signed by a responsible
officer of Grantor, together with a copy of the current quarter’s Form 10-Q
Report as early as reasonably possible but no later than sixty (60) days
following the last day of the fiscal quarter, or following the end of Grantor’s
fiscal fourth quarter, a copy of the Form 10-K Report, as early as reasonably
possible but no later than one hundred and twenty (120) days following the last
day of the fiscal quarter.


 


                (p)           In
the event of any actual or expected default by Grantor in any payment of
principal or interest on the LOAN or of any actual or expected default by
Grantor in any financial covenants in Section 3(o), Grantor shall immediately
give a written notice of such actual or expected default to Secured Party. Such
notice shall include detailed information on the LOAN including the payment
amount and due date for the payment which is or may become in default.


 


                SECTION 4. Further Assurances.


 


                (a)           The
Grantor agrees that from time to time, at the expense of the Grantor, the
Grantor will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that the Secured Party may reasonably request, in order to perfect and protect
the assignment and security interest granted or purported to be granted hereby
or to enable the Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the generality of
the foregoing, the Grantor will: (i) if any Collateral shall be evidenced by a
promissory note or other instrument or chattel paper, promptly notify the
Secured Party thereof and, if requested, deliver and pledge to the Secured
Party hereunder such note or instrument or chattel paper duly endorsed and
accompanied by duly executed instruments of transfer or assignment, all inform
and substance reasonably satisfactory to the Secured Party; (ii) execute and
file such financing or continuation statements, or amendments thereto, and such
other instruments or notices, as may be necessary or desirable, or as the
Secured Party may


 


 


5

















 


 


reasonably request, in order to
perfect and preserve the assignment and security interest granted or purported
to be granted hereby; and (iii) mark conspicuously any Collateral and, at the
request of the Secured Party, each of its records pertaining to the Collateral
with a legend, in form and substance reasonably satisfactory to the Secured
Party, indicating that such Collateral is subject to the assignment and
security interest granted pursuant hereto.


 


                (b)           The
Grantor hereby authorizes the Secured Party to file one or more financing or
continuation statements, and amendments thereto, relating to all or any part of
the Collateral without the signature of the Grantor where permitted by law. A
photocopy or other reproduction of this Agreement or any financing statement
covering the Collateral or any party thereof shall be sufficient as a financing
statement where permitted by law.


 


                (c)           During
the term of the LOAN, as specified in the GuarantyAgreement, the amount of
Grantor’s inventory, consisting of raw materials, work-in-process and finished
goods (“Inventory”), that shall constitute a part of the Collateral will at all
times be an amount equal to the difference between 120% of the principal and
accrued interest then owing under the LOAN and the net value (defined as the
purchase price for the equipment less accumulated depreciation calculated at the
rate of 10% per annum) of the equipment and machinery that constitutes a part
of the Collateral. The Secured Party agrees that its security interest in
Inventory shall be limited to Inventory having a value equal to the amount
described in the preceding sentence. The Grantor acknowledges that, upon the
occurrence of a Default, the Secured Party intends to look to the components of
the Inventory in the following order of priority: finished goods,
work-in-process and raw materials.


 


                (d)           The
Secured Party agrees to execute such agreements and documents that may be
reasonably necessary to confirm the scope of its interest in the Inventory upon
the reasonable request of Grantor.


 


                SECTION 5. Place of Perfection; Records. The Grantor
shall keep its chief place of business and chief executive offices and the
offices where it keeps its records concerning the Collateral, and the original
copies of all chattel paper or other documents or instruments that evidence the
Collateral at the locations therefor specified in Section 3(e) or, upon 30
days’ prior written notice to the Secured Party, at any other locations in a
jurisdiction where all action required by Section 4 shall have been taken with
respect to the Collateral. The Grantor will hold and preserve such records, and
such chattel paper, documents and instruments and will permit representatives
of the Secured Party at any time during normal business hours and upon
reasonable notice to inspect and make abstracts from such records, chattel
paper, documents and instruments.


 


                SECTION 6. As to the Collateral.


 


                (a)           The
Grantor shall at its expense:


 


 


 


6

















 


 


                                (i)            properly
maintain the Collateral and take all such action to such end as may be from
time to time reasonably requested by the Secured Party; and


 


                                (ii)           furnish
to the Secured Party promptly upon receipt thereof copies of all notices,
requests and other documents received by the Grantor relating to the
Collateral, and from time to time (A) furnish to the Secured Party such
information and reports regarding the Collateral as the Secured Party may
reasonably request and (B) upon request of the Secured Party make to any other
party such demands and requests for information and reports or for action as
the Grantor is entitled to make, respecting the Collateral.


 


                (b)           The
Grantor shall not:


 


                                (i)            sell,
assign (by operation of law or otherwise) or otherwise dispose of, or grant any
option with respect to, any of the Collateral (other than a proposed sale or
other disposition of obsolete or worn-out equipment, in which events Grantor
shall provide Secured Party with thirty (30) days advanced written notice), or
create or permit to exist any lien, security interest, option or other charge
or encumbrance upon or with respect to any of the Collateral, except for the
assignment and security interest under by this Agreement or Permitted Liens; or


 


                                (ii)           take
any other action in connection with the Collateral which would impair the value
thereof or the interest or rights of the Grantor therein or which would impair
the interest or rights of the Secured Party therein.


 


                SECTION 7. Secured Party Appointed Attorney-in-Fact.
The Grantor hereby appoints the Secured Party the Grantor’s attorney-in-fact,
with full authority in the place and stead of the Grantor and in the name of
the Grantor or otherwise, from time to time, after the Secured Party has
notified the Grantor of a Default under this Agreement and for so long as any
such Default exists, in the Secured Party’s discretion to take any action and
to execute any instrument which the Secured Party may deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation:


 


                                (i)            to
ask, demand, collect, sue for, recover, compromise, receive and give acquitance
and receipts for moneys due and to become due under or in connection with the
Collateral;


 


                                (ii)           to
receive, endorse and collect any drafts or other instruments, documents and
chattel paper in connection therewith; and


 


                                (iii)          to
file any claims or take any action or institute any proceedings which the
Secured Party may deem necessary or desirable to enforce the rights of the
Secured Party with respect to any of the Collateral.


 


                SECTION 8. Secured Party May Perform. If the Grantor
fails to perform any agreement contained herein after having a reasonable
opportunity therefor, the Secured Party may itself perform, or cause
performance of, such agreement, and the


 


 


 


7

















 


 


expenses of the Secured Party incurred
in connection therewith shall be payable by the Grantor under Section 11(b).


 


                SECTION 9. The Secured Party’s Duties. The powers
conferred on the Secured Party hereunder are solely to protect its interest in
the Collateral and shall not impose any duty upon it to exercise any such
powers. Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Secured Party
shall have no duty as to any Collateral or as to the taking of any necessary
steps to preserve rights against any parties or any other rights pertaining to
any Collateral. The Secured Party shall be deemed to have exercised reasonable
care in the custody and preservation of any Collateral in its possession if
such Collateral is accorded treatment substantially equal to that which the
Secured Party accords its own property.


 


                SECTION 10. Remedies. If after five (5) days’ written
notice the Grantor fails to reimburse or pay any amounts due to the Secured
Party under Section 1(a) of this Agreement, or if the Grantor fails to observe
or perform any other material term of this Agreement which continues unremedied
for a period of thirty (30) days after written notice thereof (each a
“Default”):


 


                (a)           The
Secured Party may exercise any and all legal or equitable rights and remedies
of the Grantor in connection with or in respect of the Collateral in any court
or other tribunal of proper jurisdiction; the Grantor and the Secured Party
acknowledge and agree that the remedies of the Secured Party under this
Agreement are not subject to the arbitration provisions set forth in Section
8.2 of the Guaranty Agreement;


 


                (b)           All
payments received by the Grantor in connection or in respect of the Collateral
shall be received in trust for the benefit of the Secured Party, shall be
segregated from other funds of the Grantor and shall be forthwith paid over to
the Secured Party in the same form as so received (with any necessary
endorsement);


 


                (c)           All
payments made under or in connection with or in respect of the Collateral, and
all cash proceeds in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral, received by the Secured
Party may, in the discretion of the Secured Party, beheld by the Secured Party
as collateral for, and/or then or at any time thereafter applied (after payment
of any amounts payable to the Secured Party pursuant to Section 11) in whole or
in part by the Secured Party against, all or any part of the Obligations in
such order as the Secured Party shall elect. Any surplus of such payments or
cash proceeds held by the Secured Party and remaining after payment in full of
all the Obligations shall be paid over to the Grantor or to whomsoever may be
lawfully entitled to receive such surplus; and


 


                (d)           The
Secured Party may exercise in respect of the Collateral, in addition to other
rights and remedies provided for herein or otherwise available to it, all the
rights and remedies of a secured party on default under the Uniform Commercial
Code in


 


 


 


8

















 


 


 


effect in the State of
California, at that time (the “Code”) (whether or not the Code applies to the
affected Collateral).


 


                SECTION 11. Indemnity and Expenses; Payments.


 


                (a)           The
Grantor agrees to indemnify the Secured Party from and against any and all
claims, losses and liabilities (including reasonable attorneys' fees) growing
out of or resulting from this Agreement (including, without limitation,
enforcement of this Agreement), except claims, losses or liabilities resulting
from the Secured Party’s gross negligence or willful misconduct.


 


                (b)           The
Grantor will upon demand pay to the Secured Party the amount of any and all
reasonable out-of-pocket expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, which the Secured Party may incur
in connection with (i) the administration of this Agreement, (ii) the custody
or preservation of, or the sale of, collection from or other realization upon,
any of the Collateral, (iii) the exercise or enforcement of any of the rights
of the Secured Party hereunder or (iv) the failure by the Grantor to perform or
observe any of the provisions hereof.


 


                SECTION 12. Amendments; etc. No amendment or waiver
of any provision of this Agreement, and no consent to any departure by the
Grantor here from shall in any event be effective unless the same shall be in
writing and signed by the Secured Party, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.


 


                SECTION 
13.  Addresses  for 
Notices.  All  notices and other communications provided
for hereunder shall be in writing (including telecopier, telegraphic, telex or
cable communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered to it, if to the Grantor, at its address at 1029 Corporation Way,
Palo Alto, California 94303, Attention: Chief Executive Officer, Facsimile
415/967-8713, and if to the Secured Party, at its address at 1-1, Uchisaiwaicho
2-Chome, Chiyoda-ku, Tokyo 100, Japan, Attention: General Manager, Films
Planning and Administration Dept., Facsimile 011-81-3-3506-4378, or, as to
either party, at such other address as shall be designated by such party in a
written notice to the other party. All such notices and other communications
shall be effective, if sent via facsimile, upon confirmation via telephone of
receipt of transmission in legible form, if sent via air courier express
delivery, upon the third business day after deposit for delivery with an
international air courier service, if sent via telegraph, telex or cable, when
delivered to the telegraph company, confirmed by telex answerback or delivered
to the cable company, respectively, or if mailed, upon the first business day
of the recipient that is after the tenth day after the date deposited into the
U.S. or Japanese mail, or if delivered, upon delivery.


 


                SECTION 14. Continuing Assignment and Security
Interest; Assignments Under Credit Agreement. This Agreement shall create a
continuing assignment of and


 


 


 


9

















 


 


security interest in the
Collateral and shall (i) remain in full force and effect until the later of
(X), the payment in full of the Obligations and all other amounts payable under
this Agreement and (Y) the expiration or termination of the Guaranty Agreement,
(ii) be binding upon the Grantor, its successors and assigns, and (iii) inure,
together with the rights and remedies of the Secured Party hereunder, to the
benefit of the Secured Party and its successors, transferees and assigns.
Without limiting the generality of the foregoing clause (iii), if the Secured
Party assigns or otherwise transfers all or any portion of its rights and
obligations under the Guaranty Agreement to any other person or entity, such
other person or entity shall thereupon become vested with all the benefits in
respect hereof granted to the Secured Party herein or otherwise. Upon the later
of the payment in full of the Obligations and all other amounts payable under
this Agreement and the expiration or termination of the Guaranty Agreement, the
security interest granted hereby shall terminate and all rights to the
Collateral shall revert to the Grantor. Upon any such termination, the Secured
Party will, at the Grantor’s expense, execute and deliver to the Grantor such
documents as the Grantor shall reasonably request to evidence such termination.


 


                SECTION 15. Governing Law; Terms. This Agreement
shall be governed by and construed in accordance with the laws of the State of
California, except to the extent that the validity or perfection of the
assignment and security interest hereunder, or remedies hereunder, in respect
of any particular Collateral are governed by the laws of a jurisdiction other
than the State of California. Unless otherwise defined herein, terms used in
Division 9 of the Uniform Commercial Code in effect in the State of California
are used herein as therein defined.


 


                SECTION 16. Waiver of Jury Trial. THE GRANTOR AND
SECURED PARTY BOTH HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY
RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN),
OR ACTIONS OF THE GRANTOR AND SECURED PARTY.


 


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10

















 


 


                IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.


 


	
   

  	
  SOUTHWALL TECHNOLOGIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ L. Ray Christie

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  L. Ray Christie

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Vice President, Chief
  Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  TEIJIN LIMITED

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Shasaku Yasui

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Shasaku Yasui

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Senior Managing Director

  
	
   

  	
   

  	
  Member of the Board

  



 


 


 


11

















 


 


EXHIBIT A


 


1.             Inventory in an amount as described in Section 4(c).


 


2.             The following equipment and
machinery located at the Southwall Technologies, Inc. facility at 8175 S. Hardy
Street, Tempe, Arizona 85284:


 


	
  ITEMS

  
	
   

  
	
  Custom Designed and
  Fabricated High Vacuum Planar Magnetron Sputter Roll Coating System, known as
  PM5

  
	
   

  
	
  15 Planar Magnetron Sputter
  Sources with Supported Fixed Flange, Gas Inlets, Electrical Feedthrough,
  Water Cooling Connections, Backing Plates and Power Adaption Modules, for use
  with PM5

  
	
   

  
	
  Power Generation System for
  use with PM5

  
	
   

  
	
  Vacuum Deposition Machine,
  known as PM6

  
	
   

  
	
  Power Generation System for
  use with PM6

  
	
   

  
	
  Trane Chiller RTHB-150 460 A,
  Process Chilling System

  
	
   

  
	
  Water Cooled Dual Zone
  Chiller/Heater, Process Chilling System

  
	
   

  
	
  Resistance Monitoring
  Equipment; Non-contact Resistance Monitoring

  
	
   

  
	
  Solvent Based Tandem Coating
  Line

  
	
   

  
	
  5500 SCFM Catalytic System
  with Allen-Bradley SLC502 PLC networked to coating line

  
	
   

  
	
  610 Slitter/Rewinder

  
	
   

  
	
  Toray Sheeting Machine