SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 0-22341
AUGMENT SYSTEMS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3089539
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2 ROBBINS ROAD WESTFORD, MA 01886
--------------------------- -----
(Address of principal executive offices) (Zip Code)
508-392-8626
------------
(Registrant's telephone number, including area code)
Transitional Small Business Disclosure Format:
Yes No X
------- -------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES NO X
------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
Stock, as of the latest practicable date: As of August 15, 1997,
Class Outstanding at August 15, 1997
----- ------------------------------
Common Stock, $.01 par value per share 4,713,739
AUGMENT SYSTEMS, INC.
INDEX
PAGES
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of June 30, 1997
and December 31, 1996 3
Statements of Operations for the three months
and six months ended June 30, 1997 and 1996 4
Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 5
Notes to Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
Item 3 Defaults Upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security-Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports or Form 8-K 10
Signatures 11
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,688,391 $ 452,753
Accounts Receivable 513,761 $ -
Inventories 1,644,932 589,351
Prepaid expenses 115,700 97,500
---------------- ----------------
Total current assets 4,962,784 1,139,604
Property and equipment, net 329,199 348,889
Deferred financing costs, net - 176,815
Other assets 13,745 13,745
---------------- ----------------
Total assets $ 5,305,728 $ 1,679,053
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,089,862 $ 601,274
Accrued expenses 91,796 196,104
Short term promissory notes 400,000 1,051,248
Short term advance - 575,000
Deposits from Customers 22,951
Current portion of capital lease obligations 19,395 19,013
---------------- ----------------
Total current liabilities 1,624,005 2,442,639
Convertible promissory notes 41,495 62,248
Capital lease obligations, less current portion 17,938 27,530
Deferred Revenue 22,125
---------------- ----------------
Total liabilities 1,705,563 2,532,417
---------------- ----------------
Commitments
Stockholders' deficit:
Common stock, $.01 par value; 30,000,000 shares authorized;
4,713,319 and 2,865,512 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 47,133 28,655
Additional paid-in capital 13,874,710 6,177,194
Accumulated Deficit (10,321,678) (7,059,213)
---------------- ----------------
Total stockholders' deficit 3,600,165 (853,364)
---------------- ----------------
Total liabilities and stockholders' deficit $ 5,305,728 $ 1,679,053
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 567,223 $ -- $ 567,223 $ --
Cost of sales 247,481 -- 247,481 --
----------- -----------
Gross margin 319,742 -- 319,742 --
Operating expenses:
Research and development 662,873 383,809 1,126,920 515,151
General and administrative 580,160 255,873 1,069,298 411,047
Sales and marketing 700,400 -- 1,242,087 --
----------- ----------- ----------- -----------
Total cost and expenses $ 1,943,433 $ 639,682 $ 3,438,305 $ 926,198
----------- ----------- ----------- -----------
Loss from operations $(1,623,691) $ (639,682) $ 3,118,563 $ 926,198
----------- ----------- ----------- -----------
Other expense:
Net interest expense $ 49,771 $ 36,272 $ 143,902 $ 51,343
----------- ----------- ----------- -----------
Total other expense, net $ 49,771 $ 36,272 $ 143,902 $ 51,343
----------- ----------- ----------- -----------
Net loss $(1,673,462) $ (675,954) $(3,262,465) $ (977,541)
=========== =========== =========== ===========
Net loss per common share (0.43) (0.54) (0.96) (0.84)
=========== =========== =========== ===========
Weighted average common and common 3,902,330 1,241,262 3,410,557 1,166,627
=========== =========== =========== ===========
equivalent shares outstanding
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOW
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss (3,262,465) (977,541)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 42,033 55,083
(Increase) decrease in operating assets and liabilities:
Prepaid expenses (18,200) (107,300)
Accounts receivable (513,761) --
Inventory (1,055,581) (6,822)
Other assets -- (1,934)
Accounts payable 488,588 74,793
Accrued expenses (104,308) 216,142
---------- ----------
Net cash used in operating activities (4,423,694) (747,579)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment 57,493 182,463
---------- ----------
Net cash used for investing activities 57,493 182,463
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 8,985,240 1,054,862
Proceeds from issuance of convertible promissory notes -- 791,662
Proceeds from noninterest bearing loans from stock-
holders -- 3,392
Proceeds from issuance of short-term promissory notes 2,775,000 --
Repayment of short-term advance (575,000) --
Payments on capital lease obligations (9,210) (739)
Payments on short-term promissory notes (3,585,000) (150,000)
Payment on long-term convertible promissory notes (20,753) --
Interest on short-term promissory notes (137,283) --
Purchase of treasury stock -- (7,000)
Deferred financing costs (716,170) (114,971)
---------- ----------
Net cash provided by financing activities 6,716,825 1,577,206
---------- ----------
Net increase (decrease) in cash 2,235,638 647,164
Cash at beginning of period 452,753 242,734
---------- ----------
Cash at end of period 2,688,391 889,898
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
In fiscal year 1996, and for the first three months of fiscal year 1997, Augment
Systems, Inc. (the "Company"), formerly Augment Systems Incorporated, was a
development stage company engaged in the development of high-end super server
products designed to move large image and text files rapidly and efficiently
over computer networks. The Company's initial target markets are the electronic
publishing industry and the Internet/Intranet market. The Company plans to
introduce in 1997 a Windows NT-based super server targeted to meet the growing
demand for Windows NT-based high performance Internet/Intranet World Wide Web
servers and a super server system designed to support multi-platform networks
comprised of Macintosh, Windows NT and UNIX-based workstations.
The accompanying unaudited financial statements are presented in accordance with
the requirements for Form 10-QSB and do not include all the disclosures required
by generally accepted accounting principles for complete financial statements.
Reference should be made to the Company's Prospectus for its initial public
offering declared effective on May 12, 1997 for additional disclosures including
a summary of the Company's accounting policies.
In the opinion of management of the Company, the financial statements include
all adjustments, consisting of only normal recurring accruals, necessary for a
fair presentation of the financial position of Augment Systems, Inc. The results
of operations for the three and six month periods ended June 30, 1997 or any
other interim period, are not necessarily indicative of the results to be
expected for the full year.
2. NET LOSS PER SHARE OF COMMON STOCK
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the earnings per
share ("EPS") calculation by replacing primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings available to common stockholders by
weighted average shares outstanding. Fully-diluted EPS, now called diluted EPS,
is still required. Early application is prohibited, although footnote disclosure
of proforma EPS amounts computed is required. Under SFAS 128, proforma basic EPS
and diluted EPS for the six months ended June 30, 1997 would not have changed
from the amount reported. All other EPS amounts for the periods presented remain
the same. Common stock equivalents issued prior to this period have not been
included since their effect would be anti-dilutive.
3. STOCKHOLDERS EQUITY
In April 1997, the Board of Directors declared a three-for-four reverse stock
split of the Company's Common Stock. All Common Stock and per share information
discussed in the financial statements and notes have been adjusted to give
effect for this stock split.
On May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from
-6-
the Company's initial public offering, after deducting underwriting discounts
and commissions and estimated expenses payable by the Company were approximately
$8,484,000.
In May 1997, certain warrant holders agreed to the cancellation of warrants to
purchase 235,878 shares of Common Stock issued in connection with Short Term
Promissory Notes issued between November 1996 and February 1997. No
consideration was given in connection with the cancellation of these warrants.
4. SHORT-TERM PROMISSORY NOTES
In April 1997, the Company issued to Venture Management Consultants, LLC
("Venture Management"), of which Fred L. Chanowski, a director of the Company,
is a 20% member, a promissory note in the principal amount of $200,000 in
consideration for $200,000. The promissory note bears interest at 18% per annum
with interest and principal payable at maturity on May 31, 1998. The principal
balance of this note was repaid in August 1997.
In May 1997, the Company issued to Venture Management a promissory note in the
principal amount of $200,000 in consideration for $200,000. The promissory note
bears interest at 18% per annum with interest and principal payable at maturity
on June 30, 1998. The principal balance of this note was repaid in August 1997.
5. SUBSEQUENT EVENTS
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
.50%. Borrowings are limited to 75% of eligible domestic accounts receivable,
and are secured by all assets of the Company.
-7-
AUGMENT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THE THREE AND SIX
MONTH PERIOD ENDED JUNE 30, 1996
INTRODUCTION
Since October 1995 and through March 1997, the Company had been operating as a
development stage company and had been engaged principally in research and
development, recruitment of personnel and financing activities. The Company had
engaged in limited marketing activities and did not commence shipments of its
initial products, which are high-end Macintosh-based super servers, until
February 1997. During the second quarter ended June 30, 1997, the Company
commenced commercial shipment of its server product and recognized initial
product revenue in April 1997.
The initial target market for the Company's super server is the electronic
publishing industry, both for the creation and preparation of printed material
(prepress) and for electronic publishing via the Internet/Intranet. Each of
these markets requires the rapid and efficient movement of large image and data
files over networks. During 1997, the Company plans to introduce a Windows
NT-based server targeted to meet the growing demand for high performance Windows
NT-based Internet/Intranet WEB servers. Additionally, the Company plans to
introduce a super server system designed to support a multi-platform network
comprised of Macintosh, Windows NT and UNIX-based workstations.
RESULTS OF OPERATION
During the three months ended June 30, 1997, the Company recognized initial
product revenues of $567,223. Gross product margins on product sales were 56%.
The Company anticipates increased revenues for the balance of 1997 with the
continued development of its sales channels. Gross product margins may vary
slightly with the distribution of products into OEM's, third party resellers and
end users. Prior to the second quarter ended June 30, 1997, the Company was a
development stage company and had not recognized revenues.
The Company recognized a net loss of $1,673,462 and $3,262,465, respectively,
for the three and six month periods ended June 30, 1997 as compared to net
losses of $675,954 and $977,541 for the same periods in 1996. The increases in
net loss of $997,508 and $2,284,924 for the three and six month periods,
respectively, are attributable primarily to an increase in personnel to support
research and development, sales and marketing and administration. In addition,
the Company increased the level of spending to support engineering development
of its server products, began a marketing program consisting of attending trade
shows and distributing promotional sales material and began to establish a
worldwide sales organization.
Research and development costs for the three and six month periods ended June
30, 1997 were $662,873 and $1,126,920 as compared to $383,809 and $515,151 for
the same periods in 1996. The $279,064 and $611,769 increases for the three and
six month periods, respectively, are attributable primarily to additional
engineering personnel and increased use of consultants associated with the
development of the Company's server product. The Company also increased spending
for associated engineering supplies and prototype materials used in the
development of its server product. The Company anticipates that research and
development costs will continue to increase through the balance of 1997 as
compared to comparable periods in 1996. These costs are expected to be incurred
in connection with the development of additional products to support Windows NT
and Unix platforms.
General and administrative costs for the three and six month periods ended June
30, 1997 were $580,160 and $1,069,298 as compared to $255,873 and $411,047 for
the same periods in 1996. The $324,287 and $658,251 increases for the three and
six month periods, respectively, are primarily attributable to additional
-8-
administrative support, increased spending for outside legal and accounting
support and other normal operating expenses.
Selling and marketing costs for the three and six month periods ended June 30,
1997 were $700,400 and $1,242,087. The $541,687 increase is attributable to an
increase in marketing support and sales personnel, participation in various
trade shows and increased spending on sales promotional material. The Company
anticipates that selling and marketing expenses will continue to increase
through the balance of 1997 as the Company develops its sales and distribution
channels and expands its marketing efforts.
The Company currently has 50 full-time employees and 12 independent contractors
and plans to hire an additional 50 full-time employees in various capacities
over the next 12 months. Additional personnel may be required depending on the
level of business activity. The Company expects, however, to continue its
current practice of utilizing independent consultants on an as-needed basis
rather than exclusively hiring additional full time employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally from a
combination of debt and equity financings totaling approximately $18,280,000.
From October 1995 through April 1996, the Company issued convertible promissory
notes in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the principal balance of these notes plus accrued interest were
converted into shares of Common Stock in November 1996 at a conversion price of
$4.00 per share. In December 1996 and February 1997, the Company raised gross
proceeds of $3,585,000 in a private placement of promissory notes and common
stock purchase warrants. The promissory notes, bearing interest at 12% per
annum, were repaid from the proceeds of its initial public offering. In
addition, from September 1995 through August 1996, the Company issued 1,653,623
shares of its Common Stock for approximately $3,372,000 in gross proceeds. In
each of April 1997 and May 1997 the Company issued to Venture Management
Consultants, LLC, of which Fred Chanowski, a director of the Company, is a 20%
member, a promissory note in the principal amount of $200,000 in consideration
for $200,000. The promissory notes both bear interest at 18% per annum with
interest and principal payable at maturity on May 31, 1998 and June 30, 1998,
respectively. The principal balance of these notes was repaid in August 1997.
On May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company were approximately $8,484,000. The net proceeds of the Company's initial
public offering plus cash anticipated to be generated from operations and funds
available under the Company's line of credit, are expected to meet the Company's
funding needs to achieve its objectives and growth strategy for at least the
next 12 months.
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
.50%. Borrowings are limited to 75% of eligible domestic accounts receivable and
are secured by all assets of the Company.
As a result of the Company's recurring losses, the Company's auditors have
expressed substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recovery and classification of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, rapid technology changes, regulatory uncertainty, level of
demand for the Company's products and services, product acceptance, industry
wide competitive factors, timing of completion of major equipment projects and
political, economic or other conditions. Furthermore, market trends are subject
to changes which could adversely affect future results. Reference should be made
to the Company's Prospectus for its initial public offering declared effective
on May 12, 1997 for additional discussion concerning such risk factors.
-9-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1996 a lawsuit was filed against the Company in
Suffolk Superior Court (Massachusetts) by an executive
recruitment agency alleging a breach of contract and seeking
damages in the amount of $50,000. In connection with the
lawsuit, one of the Company's bank accounts has been attached
in the amount of $50,000 pending the resolution of this
matter.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.20 - Loan Letter Agreement with Fleet Bank
10.21 - $3,000,000 Promissory Note issued to Fleet Bank
-10-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUGMENT SYSTEMS, INC.
Date: August 14, 1997 By: /s/Lorrin G. Gale
-----------------
Lorrin G. Gale
President & Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1997 By: /s/Duane A. Mayo
----------------
Duane A. Mayo
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
& Accounting Officer)
-11-
AUGMENT SYSTEMS, INC.
2 Robbins Road
Westford, MA 01886
August 4, 1997
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between
Augment Systems, Inc., a Delaware corporation (the "Borrower") and Fleet
National Bank (the "Bank") with respect to Revolving Loans (hereinafter defined)
to be made by the Bank to the Borrower and with respect to letters of credit
which may hereafter be issued by the Bank for the account of the Borrower. In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
I. AMOUNTS AND TERMS
-----------------
1.1. Reference to Documents. Reference is made to (i) that certain
$3,000,000 face principal amount promissory note (the "Revolving Note") of even
date herewith made by the Borrower and payable to the order of the Bank, (ii)
that certain Inventory, Accounts Receivable and Intangibles Security Agreement
and that certain Supplementary Security Agreement -Security Interest in Goods
and Chattels, each of even date herewith, from the Borrower to the Bank
(collectively, the "Security Agreement"), and (iii) assignments and notices of
assignment (collectively, the "Intellectual Property Assignments"), if any, from
the Borrower to the Bank relating to the Borrower's registered trademarks,
patents and copyrights, if any.
1.2. The Borrowing; Revolving Note. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
ss.5.2 or ss.6.7; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Within such limits, and subject to the terms and conditions hereof, the Borrower
may obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans
again on one or more occasions. The Revolving Loans shall be evidenced by the
Revolving Note
and interest thereon shall be payable at the times and at the rate provided for
in the Revolving Note. Overdue principal of the Revolving Loans and, to the
extent permitted by law, overdue interest shall bear interest at a fluctuating
rate per annum which at all times shall be equal to the sum of (i) two (2%)
percent per annum plus (ii) the per annum rate otherwise payable under the
Revolving Note (but in no event in excess of the maximum rate from time to time
permitted by then applicable law), compounded monthly and payable on demand. The
Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on
a schedule attached to the Revolving Note or on the books of the Bank, at or
following the time of making each Revolving Loan and of receiving any payment of
principal, an appropriate notation reflecting such transaction and the then
aggregate unpaid principal balance of the Revolving Loans. The amount so noted
shall constitute presumptive evidence as to the amount owed by the Borrower with
respect to principal of the Revolving Loans. Failure of the Bank to make any
such notation shall not, however, affect any obligation of the Borrower or any
right of the Bank hereunder or under the Revolving Note. All payments of
interest, principal and any other sum payable hereunder and/or under the
Revolving Note shall be made to the Bank, in immediately available funds, at its
office at 75 State Street, Boston, MA 02109 or to such other address as the Bank
may from time to time direct. All payments received by the Bank after 2:00 p.m.
on any day shall be deemed received as of the next succeeding Business Day. All
monies received by the Bank shall be applied first to fees, charges, costs and
expenses payable to the Bank under this letter agreement, the Revolving Note
and/or any of the other Loan Documents, next to interest then accrued on account
of any Revolving Loans or letter of credit reimbursement obligations and only
thereafter to principal of the Revolving Loans and letter of credit
reimbursement obligations. All interest and fees payable hereunder and/or under
the Revolving Note shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
1.3. Repayment; Renewal. The Borrower shall repay in full all Revolving
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date or (ii) an acceleration under ss.5.2(a) following an Event of Default. The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan. In addition, if at any time the Borrowing Base is
in an amount which is less than the then outstanding Aggregate Bank Liabilities,
the Borrower will forthwith prepay so much of the Revolving Loans as may be
required (or arrange for the termination of such letters of credit as may be
required) so that the Aggregate Bank Liabilities will not exceed the Borrowing
Base. The Bank may, at its sole discretion, renew the financing arrangements
described in this letter agreement by extending the Expiration Date in a writing
signed by the Bank and accepted by the Borrower. Neither the inclusion in this
letter agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.
1.4. Advances and Payments. The proceeds of all Revolving Loans shall be
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The
-2-
proceeds of each Revolving Loan will be used by the Borrower solely for working
capital purposes and to repay $42,000 in loans heretofore made to the Borrower.
The Bank may charge any general deposit account of the Borrower at the
Bank with the amount of all payments of interest, principal and other sums due,
from time to time, under this letter agreement and/or the Revolving Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so charged. The failure of the Bank so to charge any account or to
give any such notice shall not affect the obligation of the Borrower to pay
interest, principal or other sums as provided herein or in the Revolving Note or
with respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time. All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.
1.5. Letters of Credit. At the Borrower's request, the Bank may, from
time to time, in its sole discretion issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Bank Liabilities will in no event exceed the
lesser of (i) $3,000,000 or (ii) the then effective Borrowing Base. Any such
letter of credit will be issued for such fee and upon such terms and conditions
as may be agreed to by the Bank and the Borrower at the time of issuance. The
Borrower hereby authorizes the Bank, without further request from the Borrower,
to cause the Borrower's liability to the Bank for reimbursement of funds drawn
under any such letter of credit to be repaid from the proceeds of a Revolving
Loan to be made hereunder. The Borrower hereby irrevocably requests that such
Revolving Loans be made.
1.6. Conditions to Advance. Prior to the making of the initial Revolving
Loan or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreement, the Intellectual Property Assignments, the Revolving Note and the
documents and other items listed on the Closing Agenda delivered herewith by the
Bank to the Borrower, all of which, as well as all legal matters incident to the
transactions contemplated hereby, shall be satisfactory in form and substance to
the Bank and its counsel.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):
-3-
(a) All statements, representations and warranties of the Borrower made
in this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be.
(b) All covenants and agreements of the Borrower contained herein
and/or in any of the other Loan Documents shall have been complied with in all
material respects on and as of the date of such Revolving Loan or the date of
issuance of such letter of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time
or both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance
of any letter of credit, and each acceptance by the Borrower of the proceeds of
any Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be, and
after giving effect thereto all of the conditions set forth in the foregoing
clauses (a)-(d) of this ss.1.6 will be satisfied. Each request for a Revolving
Loan or letter of credit issuance will be accompanied by a borrowing base
certificate on a form satisfactory to the Bank, executed by the chief financial
officer of the Borrower, unless such a certificate shall have been previously
furnished setting forth the Borrowing Base as at a date not more than 30 days
prior to the date of the requested borrowing or the requested letter of credit
issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1. Representations and Warranties. In order to induce the Bank to
enter into this letter agreement and to make Revolving Loans hereunder and/or
issue letters of credit hereunder, the Borrower warrants and represents to the
Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of Delaware. The Borrower has full corporate
power to own its property and conduct its business as now conducted, to grant
the security interests contemplated by the Security Agreement and the
Intellectual Property Assignments and to enter into and perform this letter
agreement and the other Loan Documents. The Borrower is duly qualified to do
business and is in good standing in Massachusetts and is also duly qualified to
do business in and is in good standing in each other jurisdiction in which the
Borrower maintains any facility, sales office, warehouse or other location, and
in each other jurisdiction where the failure so to qualify could (singly or in
the aggregate with all other such failures) have a material adverse effect on
the financial condition, business or prospects of the Borrower, all such
jurisdictions being listed on item 2.1(a) of the attached Disclosure Schedule.
At the date hereof, the Borrower has no
-4-
Subsidiaries, except as shown on said item 2.1(a) of the attached Disclosure
Schedule. The Borrower is not a member of any partnership or joint venture.
(b) At the date of this letter agreement, no Person is known by the
Borrower to hold more than 5% of the outstanding equity securities of the
Borrower of any class, except as set forth on item 2.1(b) of the attached
Disclosure Schedule.
(c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other
than filings under the Uniform Commercial Code), registration, consent
or approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the
Borrower, or result in a breach of or constitute a default or require
any waiver or consent under any indenture or loan or credit agreement
or any other material agreement, lease or instrument to which the
Borrower is a party or by which the Borrower or any of its properties
may be bound or affected or require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any
lien, security interest or other encumbrance (other than in favor of
the Bank), upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or
by-laws as now in effect. Neither the Borrower nor any Subsidiary of the
Borrower is in material violation of any term of any mortgage, indenture or
judgment, decree or order, or any other instrument, contract or agreement to
which it is a party or by which any of its property is bound.
-5-
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower
is in compliance) with all requirements of law, federal, state and local, and
all requirements of all governmental bodies or agencies having jurisdiction over
it, the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits, certificates and authorizations needed
for the conduct of its business and the use of its properties and all premises
occupied by it, as now conducted, owned and used.
(i) The audited financial statements of the Borrower as at December 31,
1996 and the management-generated statements of the Borrower as at March 31,
1997, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the
management-generated statements do not have footnotes and thus do not present
the information which would normally be contained in footnotes to financial
statements. The Borrower has no liability, contingent or otherwise, not
disclosed in the aforesaid financial statements or in any notes thereto that
could materially affect the financial condition of the Borrower. Since December
31, 1996, there has been no material adverse development in the business,
condition or prospects of the Borrower, and except as disclosed in the
Borrower's Form SB-2 Registration Statement declared effective on May 12, 1997
and its Form 10-QSB filed with the SEC on July 26, 1997, the Borrower has not
entered into any transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 2 Robbins Road, Westford, MA 01886 (the "Premises"). All
of the books and records of the Borrower are located at said address. Except as
described on item 2.1(j) of the attached Disclosure Schedule, no material assets
of the Borrower are located at any other address. Said item 2.1(j) of the
attached Disclosure Schedule sets forth the names and addresses of all record
owners of the Premises.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises ("Intellectual
Property") now being used to conduct its business, all of which are described on
item 2.1(k) of the attached Disclosure Schedule. None of the Intellectual
Property owned by the Borrower is represented by a registered copyright,
trademark, patent or other federal or state registration, except as shown
-6-
on said item 2.1(k). To the Borrower's knowledge, the conduct of its business as
now operated does not conflict with valid patents, licenses, copyrights,
trademarks, trade names or franchises of others in any manner that could
materially adversely affect the business, prospects, assets or condition,
financial or otherwise, of the Borrower.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now
has or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
------------------------------------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
3.1. Legal Existence; Qualification; Compliance. The Borrower will
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will qualify to do business and will remain qualified and in good
standing (and the Borrower will cause each Subsidiary of the Borrower to qualify
and remain qualified and in good standing) in each jurisdiction where the
Borrower or such Subsidiary, as the case may be, maintains any facility, sales
office, warehouse or other location and in each other jurisdiction in which the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower or any such Subsidiary. The Borrower will comply (and
will cause each Subsidiary of the Borrower to comply) with its charter documents
and by-laws. The Borrower will comply with (and will cause each Subsidiary of
the Borrower to comply with) all applicable laws, rules and regulations
(including, without limitation, ERISA and those relating to environmental
protection) other than (i) laws, rules or regulations the validity or
applicability of which the Borrower or such Subsidiary shall be contesting in
good faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws, rules and regulations the failure to comply with
any of which could not (singly or in the aggregate) have a material adverse
effect on the financial condition, business or prospects of the Borrower or any
such Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements
-7-
thereof. The Borrower will maintain all such insurance as may be required under
the Security Agreement and will also maintain, with financially sound and
reputable insurers, insurance with respect to its property and business against
such liabilities, casualties and contingencies and of such types and in such
amounts as shall be reasonably satisfactory to the Bank from time to time and in
any event all such insurance as may from time to time be customary for companies
conducting a business similar to that of the Borrower in similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, all trade debt, purchase money obligations, equipment lease
obligations and all of its other material Indebtedness. The Borrower will
perform and fulfill all material covenants and agreements under any leases of
real estate, agreements relating to purchase money debt, equipment leases and
other material contracts. The Borrower will maintain in full force and effect,
and comply with the terms and conditions of, all permits, permissions and
licenses necessary or desirable for its business.
3.4. Accounts. The Borrower will maintain its principal depository and
operating accounts with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
(i) Within 90 days after the end of each fiscal year of the
Borrower (commencing with the fiscal year ending December 31, 1997), a
copy of the Borrower's Annual Report on Form 10-KSB for such fiscal
year and (whether or not contained in such Annual Report on Form
10-KSB) all of the following: the annual audit report for such fiscal
year for the Borrower, including therein consolidated and consolidating
balance sheets of the Borrower and Subsidiaries as at the end of such
fiscal year and related consolidated and consolidating statements of
income, stockholders' equity and cash flow for the fiscal year then
ended. The annual consolidated financial statements shall be certified
by independent public accountants selected by the Borrower and
-8-
reasonably acceptable to the Bank, such certification to be in such
form as is generally recognized as "unqualified".
(ii) Within 45 days after the end of each fiscal quarter of
the Borrower, a copy of the Borrower's Quarterly Report on Form 10-QSB
for such fiscal quarter and (whether or not contained in such Quarterly
Report on Form 10-QSB) all of the following: consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries and
related consolidated and consolidating statements of income and cash
flow, unaudited but complete and accurate and prepared in accordance
with generally accepted accounting principles consistently applied
fairly presenting the financial condition of the Borrower as at the
dates thereof and for the periods covered thereby (except that such
quarterly statements need not contain footnotes) and certified as
accurate (subject to normal year-end audit adjustments, which shall not
be material) by the chief financial officer of the Borrower, such
balance sheets to be as at the end of each such fiscal quarter and such
statements of income and cash flow to be for such fiscal quarter and
for the year to date, in each case together with a comparison to
budget.
(iii) At the time of delivery of each annual or quarterly
statement of the Borrower, a certificate executed by the chief
financial officer of the Borrower stating that he or she has reviewed
this letter agreement and the other Loan Documents and has no knowledge
of any default by the Borrower in the performance or observance of any
of the provisions of this letter agreement or of any of the other Loan
Documents or, if he or she has such knowledge, specifying each such
default and the nature thereof. Each financial statement given as at
the end of any fiscal quarter of the Borrower will also set forth the
calculations necessary to evidence compliance with ss.ss.3.7-3.10.
(iv) Monthly, within 30 days after the end of each month, (A)
an aging report in form satisfactory to the Bank covering all
Receivables of the Borrower outstanding as at the end of such month,
and (B) a certificate of the chief financial officer of the Borrower
setting forth the Borrowing Base as at the end of such month, all in
form reasonably satisfactory to the Bank.
(v) Promptly after receipt, a copy of all audits or reports
submitted to the Borrower by independent public accountants in
connection with any annual, special or interim audits of the books of
the Borrower and any "management letter" from such accountants.
(vi) As long as any securities of the Borrower are publicly
traded, the Borrower will furnish to the Bank, promptly upon same
becoming available, one copy of each financial statement, report,
notice or proxy statement sent by the Borrower to stockholders or the
holders of debt securities generally, and of each regular or periodic
report and any registration statement, prospectus or listing
application filed by the Borrower with the National Association of
Securities Dealers, any securities exchange or the SEC.
-9-
(vii) As soon as possible and in any event within five days of
the occurrence of any Event of Default or any event which, with the
giving of notice or passage of time or both, would constitute an Event
of Default, the statement of the Borrower setting forth details of each
such Event of Default or event and the action which the Borrower
proposes to take with respect thereto.
(viii) Promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, to which the Borrower or any Subsidiary of the
Borrower is a party.
(ix) Promptly upon applying for, or being granted, a federal
or state registration for any copyright, trademark or patent or
purchasing any registered copyright, trademark or patent, written
notice to the Bank describing same, together with all such documents as
may be required to give the Bank a fully perfected first priority
security interest in each such copyright, trademark or patent.
(x) Promptly after the Borrower has knowledge thereof, written
notice of any development or circumstance which may reasonably be
expected to have a material adverse effect on the Borrower or its
business, properties, assets, Subsidiaries or condition, financial or
otherwise.
(xi) Promptly upon request, such other information respecting
the financial condition, operations, Receivables, inventory, machinery
or equipment of the Borrower or any Subsidiary as the Bank may from
time to time reasonably request.
3.7. Debt to Worth. The Borrower will maintain as at the end of each
fiscal quarter (commencing with its results as at June 30, 1997) on a
consolidated basis a Leverage Ratio of not more than 2.0 to 1. As used herein,
"Leverage Ratio" means, as at any date when same is to be determined, the ratio
of (x) the Adjusted Senior Debt of the Borrower and/or its Subsidiaries then
outstanding to (y) the Borrower's then consolidated Capital Base.
3.8. Capital Base. The Borrower will maintain as at the end of each
fiscal quarter (commencing with its results as at June 30, 1997) a consolidated
Capital Base of not less than $2,200,000.
3.9. Profitability. The Borrower will not prove to have incurred a
quarterly consolidated Net Loss in excess of $2,000,000 for its fiscal quarter
ended June 30, 1997. The Borrower will not incur a quarterly consolidated Net
Loss in excess of $1,500,000 for its fiscal quarter ending September 30, 1997.
The Borrower will achieve quarterly consolidated Net Income of at least $1.00
for its fiscal quarter ending December 31, 1997 and for each fiscal quarter
thereafter.
-10-
3.10. Liquidity. The Borrower will maintain as at the end of each fiscal
quarter of the Borrower (commencing with June 30, 1997) a ratio of Current
Assets to Adjusted Current Liabilities, which ratio shall be not less than 1.5
to 1.
3.11. Books and Records. The Borrower will maintain (and will cause each
of its Subsidiaries to maintain) complete and accurate books, records and
accounts which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied. The Borrower will, at any reasonable time and from time to
time upon reasonable notice and during normal business hours (and at any time
and without any necessity for notice following the occurrence of an Event of
Default), permit the Bank, and any agents or representatives thereof, to examine
and make copies of and take abstracts from the records and books of account of,
and visit the properties of the Borrower and any of its Subsidiaries, and to
discuss its affairs, finances and accounts with its officers, directors and/or
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this ss.3.11. Each
financial statement of the Borrower hereafter delivered pursuant to this letter
agreement will be complete and accurate and will fairly present the financial
condition of the Borrower as at the date thereof and for the periods covered
thereby.
3.12. Landlord's Waiver. Prior to the Bank making the first Revolving
Loan, the Borrower will obtain, and will thereafter maintain in effect at all
times, waivers from the owners of all premises in which any material amount of
Collateral is located, such waivers to be in form and substance satisfactory to
the Bank.
IV. NEGATIVE COVENANTS
------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or suffer
to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation,
the Indebtedness represented by the Revolving Note and any Indebtedness
in respect of letters of credit issued by the Bank;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
-11-
(iii) unsecured current liabilities of the Borrower or any
Subsidiary (other than for money borrowed or for purchase money
Indebtedness with respect to fixed assets) incurred upon customary terms
in the ordinary course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to
equipment vendors and/or lessors for equipment purchased or leased by
the Borrower for use in the Borrower's business, provided that the total
of Indebtedness permitted under this clause (iv) plus presently-existing
equipment financing permitted under clause (v) of this ss.4.1 will not
exceed $500,000 in the aggregate outstanding at any one time;
(v) other Indebtedness existing at the date hereof (including,
without limitation, existing Subordinated Debt), but only to the extent
set forth on item 4.1 of the attached Disclosure Schedule; and
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant to ss.4.3.
4.2. Liens. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies
on property of the Borrower or any of its Subsidiaries if the same shall
not at the time be delinquent or thereafter can be paid without interest
or penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course
of business for sums not yet due or which are being contested in good
faith and by appropriate proceedings which serve as a matter of law to
stay the enforcement thereof and as to which adequate reserves have been
made;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
ss.4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed; or
-12-
(vi) other Liens existing at the date hereof, but only to the
extent and with the relative priorities set forth on item 4.2 of the
attached Disclosure Schedule.
4.3. Guaranties. The Borrower will not, without the prior written
consent of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock.
4.5. Loans and Advances. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
advances will not exceed, in the aggregate, $100,000 outstanding at any one
time.
4.6. Investments. The Borrower will not, without the Bank's prior
written consent, invest in, hold or purchase any stock or securities of any
Person (nor will the Borrower permit any of its Subsidiaries to invest in,
purchase or hold any such stock or securities) except (i) readily marketable
direct obligations of, or obligations guarantied by, the United States of
America or any agency thereof, (ii) other investment grade debt securities,
(iii) mutual funds, the assets of which are primarily invested in items of the
kind described in the foregoing clauses (i) and (ii) of this ss.4.6, (iv)
deposits with or certificates of deposit issued by the Bank and any other
obligations of the Bank or the Bank's parent, (v) deposits in any other bank
organized in the United States having capital in excess of $100,000,000, and
(vi) investments in any Subsidiaries now existing or hereafter created by the
Borrower pursuant to ss.4.7 below; provided that in any event the Tangible Net
Worth of the Borrower alone (exclusive of its investment in Subsidiaries and any
debt owed by any Subsidiary to the Borrower) will not be less than 90% of the
consolidated Tangible Net Worth of the Borrower and Subsidiaries.
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the
prior written consent of the Bank, form or acquire any Subsidiary or make any
other acquisition of the stock of any other Person or of all or substantially
all of the assets of any other Person. The Borrower will not become a partner in
any partnership.
-13-
4.8. Merger. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9. Affiliate Transactions. The Borrower will not, without prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms'-length transaction with any Person not an
affiliate; provided that nothing in this ss.4.9 shall be deemed to prohibit the
payment of salary or other similar payments to any officer or director of the
Borrower at a level consistent with the salary and other payments being paid at
the date of this letter agreement and heretofore disclosed in writing to the
Bank, nor to prevent the hiring of additional officers at a salary level
consistent with industry practice, nor to prevent reasonable periodic increases
in salary. For the purposes of this letter agreement, "affiliate" means any
Person which, directly or indirectly, controls or is controlled by or is under
common control with the Borrower; any officer or director or former officer or
director of the Borrower; any Person owning of record or beneficially, directly
or indirectly, 5% or more of any class of capital stock of the Borrower or 5% or
more of any class of capital stock or other equity interest having voting power
(under ordinary circumstances) of any of the other Persons described above; and
any member of the immediate family of any of the foregoing. "Control" means
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of any Person, whether through ownership
of voting equity, by contract or otherwise.
4.10. Change of Address, etc. The Borrower will not change its name or
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
ss.2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral at any location other than
the Premises without, in each instance, giving the Bank at least 30 days' prior
written notice and providing all such financing statements, certificates and
other documentation as the Bank may request in order to maintain the perfection
and priority of the security interests granted or intended to be granted
pursuant to the Security Agreement. The Borrower will not change its fiscal year
or methods of financial reporting unless, in each instance, prior written notice
of such change is given to the Bank and prior to such change the Borrower enters
into amendments to this letter agreement in form and substance satisfactory to
the Bank in order to preserve unimpaired the rights of the Bank and the
obligations of the Borrower hereunder.
4.11. Hazardous Waste. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the
-14-
Borrower or any such Subsidiary, or transport or arrange the transport of, any
hazardous material or oil (the terms "hazardous material", "oil", "site" and
"vessel", respectively, being used herein with the meanings given those terms in
Mass. Gen. Laws, Ch. 21E or any comparable terms in any comparable statute in
effect in any other relevant jurisdiction). The Borrower shall provide the Bank
with written notice of (i) the intended storage or transport of any hazardous
material or oil by the Borrower or any Subsidiary of the Borrower, (ii) any
known release or known threat of release of any hazardous material or oil at or
from any site or vessel owned, occupied or operated by the Borrower or any
Subsidiary of the Borrower, and (iii) any incurrence of any expense or loss by
any government or governmental authority in connection with the assessment,
containment or removal of any hazardous material or oil for which expense or
loss the Borrower or any Subsidiary of the Borrower may be liable.
Notwithstanding the foregoing, the Borrower and its Subsidiaries may use, store
and transport, and need not notify the Bank of the use, storage or
transportation of, (x) oil in reasonable quantities, as fuel for heating of
their respective facilities or for vehicles or machinery used in the ordinary
course of their respective businesses and (y) hazardous materials that are
solvents, cleaning agents or other materials used in the ordinary course of the
respective business operations of the Borrower and its Subsidiaries, in
reasonable quantities, as long as in any case the Borrower or the Subsidiary
concerned (as the case may be) has obtained and maintains in effect any
necessary governmental permits, licenses and approvals, complies with all
requirements of applicable federal, state and local law relating to such use,
storage or transportation, follows the protective and safety procedures that a
prudent businessperson conducting a business the same as or similar to that of
the Borrower or such Subsidiary (as the case may be) would follow, and disposes
of such materials (not consumed in the ordinary course) only through licensed
providers of hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Revolving Loan shall be used
directly or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt. In any event, the Borrower will not make any payment of any principal of
or interest on any Subordinated Debt at any time when there exists, or if there
would result therefrom, any Event of Default hereunder.
V. DEFAULT AND REMEDIES
--------------------
5.1. Events of Default. The occurrence of any one of the following
events shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note on or before the date when due; or the Borrower
shall fail to pay when due any amount owed to the Bank in respect of any letter
of credit now or hereafter issued by the Bank; or
-15-
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.1, 3.3, 3.6, 3.7, 3.8, 3.9 or 3.10
or Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with respect
to any Subordinated Debt of the Borrower or with respect to any instrument
evidencing, guaranteeing or otherwise relating to any such Subordinated Debt, or
any such Subordinated Debt shall not have been paid when due, whether by
acceleration or otherwise, or shall have been declared to be due and payable
prior to its stated maturity, or any event or circumstance shall occur which
permits, or with the lapse of time or the giving of notice or both would permit,
the acceleration of the maturity of any Subordinated Debt by the holder or
holders thereof; or
(g) Any default shall exist and remain unwaived or uncured with respect
to any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $100,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $100,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice or both would permit, the acceleration of
the maturity of any such Indebtedness by the holder of holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Subsidiary
of the Borrower shall become insolvent or bankrupt or shall cease paying its
debts as they mature or shall make an assignment for the benefit of creditors,
or a trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
-16-
(i) Any attachment, execution or similar process shall be issued or
levied against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or
(j) Any final uninsured judgment in excess of $100,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) The Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or
(m) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank or other action by
the Bank or the failure of the Bank to file timely continuation statements) not
be fully perfected liens and security interests; or
(n) At any time, 50% or more of the outstanding shares of any class of
equity securities of the Borrower shall be owned by any Person or by any "group"
(as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder), other than by one or more of the Persons listed on item
5.1(n) of the attached Disclosure Schedule; or
(o) Lorrin Gale shall for any reason not be an executive officer of the
Borrower actively involved in the management of the Borrower, unless he is
promptly replaced in such position by another individual selected by the
Borrower's Board of Directors and having experience and skill comparable to or
greater than that of Mr. Gale; or
(p) There shall occur any other material adverse change in the
condition (financial or otherwise), operations, properties, assets, liabilities
or earnings of the Borrower.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event
of Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
-17-
(a) Declare the entire unpaid principal amount of the Revolving Note
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving
Note, under the Security Agreement, under the Intellectual Property Assignments
and under each and any other agreement with the Bank; and exercise all other
rights and remedies which the Bank may have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code.
5.4. Letters of Credit. Without limitation of any other right or remedy
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
VI. MISCELLANEOUS
-------------
6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any
-18-
Revolving Loan or any letter of credit issued hereunder and any amendments or
modifications of any of the foregoing, as well as the costs and expenses
(including, without limitation, the reasonable fees and expenses of legal
counsel) incurred by the Bank in connection with preserving, enforcing or
exercising, upon default, any rights or remedies under this letter agreement,
the Security Agreement, the Revolving Note and all other instruments and
documents delivered or to be delivered hereunder or in connection herewith, all
whether or not legal action is instituted. In addition, the Borrower shall be
obligated to pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this letter agreement,
the Security Agreement, the Revolving Note and all other instruments and
documents to be delivered in connection with any Obligation. Any fees, expenses
or other charges which the Bank is entitled to receive from the Borrower under
this Section shall bear interest from the date of any demand therefor until the
date when paid at a rate per annum equal to the per annum rate otherwise payable
under the Revolving Note (but in no event in excess of the maximum rate
permitted by then applicable law).
6.2. Capital Adequacy. If the Bank shall have determined that the
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the within-described revolving loan facility and/or letters of
credit issued for the account of the Borrower to a level below that which the
Bank could have achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, phase-in, change
or compliance and assuming that the Bank's capital was then fully utilized) but
for such adoption, phase-in, change or compliance by any amount deemed by the
Bank to be material: (i) the Bank shall promptly after its determination of such
occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay
forthwith to the Bank as an additional fee such amount as the Bank certifies to
be the amount that will compensate it for such reduction with respect to the
Revolving Loans, the within-described revolving loan facility and/or such
letters of credit.
A certificate of the Bank claiming compensation under this Section
shall be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to it hereunder and the method by which
such amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall in any way
reduce any obligation of the Borrower to the Bank under this Section.
-19-
6.3. Facility Fees. With respect to the within arrangements for
Revolving Loans, the Borrower will pay to the Bank, on the last day of each
calendar quarter (commencing on September 30, 1997) as long as the
within-described revolving loan arrangements are in effect and on the Expiration
Date or earlier date of termination of the within revolving loan facility,
non-refundable commitment fees, computed quarterly in arrears on the daily
average unused portion of the revolving credit amount during the calendar
quarter for which such commitment fees are to be determined. As used herein, the
"unused portion of the revolving credit amount" as at any date means the amount
by which (x) $3,000,000 exceeds (y) the sum of the Aggregate Revolving Loans
plus the aggregate undrawn amounts of all letters of credit then outstanding.
Such commitment fees will be payable, based on such daily average unused portion
of the revolving credit amount, at the rate of 0.75% per annum. In addition, if
the within-described revolving financing arrangements are terminated by the
Borrower for any reason or by the Bank as the result of the Borrower's default,
the Borrower shall forthwith upon such termination pay to the Bank a sum equal
to all of the commitment fees which would have become due pursuant to this
Section for the period from the date of such termination through the Expiration
Date assuming that no Revolving Loans and no letters of credit would be
outstanding during such period. Fees described in this Section are in addition
to any balances and fees required by the Bank or any of its affiliates in
connection with any other services now or hereafter made available to the
Borrower.
6.4. Other Agreements. The provisions of this letter agreement are not
in derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.
6.5. Governing Law. This letter agreement and the Revolving Note shall
be governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder shall be in writing and shall be
mailed or delivered to the applicable party at the address indicated below:
-20-
If to the Borrower:
Augment Systems, Inc.
2 Robbins Road
Westford, MA 01886
Attention: Duane A. Mayo, Chief Financial Officer
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street
Boston, MA 02109
Attention: Kimberly A. Martone, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.7. Binding Effect; Assignment; Termination. This letter agreement
shall be binding upon the Borrower, its successors and assigns and shall inure
to the benefit of the Borrower and the Bank and their respective permitted
successors and assigns. The Borrower may not assign this letter agreement or any
rights hereunder without the express written consent of the Bank. The Bank may,
in accordance with applicable law, from time to time assign or grant
participation in this letter agreement, the Revolving Loans, the Revolving Note
and/or the letters of credit issued hereunder. The Borrower may terminate this
letter agreement and the financing arrangements made herein by giving written
notice of such termination to the Bank together with payment of the sum
described in the fourth sentence of ss.6.3; provided that no such termination
will release or waive any of the Bank's rights or remedies or any of the
Borrower's obligations under this letter agreement or any of the other Loan
Documents unless and until the Borrower has paid in full the Revolving Loans and
all interest thereon and all fees and charges payable in connection therewith
and all letters of credit issued hereunder have been terminated.
6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in such a court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of
-21-
proper jurisdiction by a suit upon such judgment, provided that service of
process in such action, suit or proceeding shall have been effected upon the
Borrower in one of the manners specified in the following paragraph of this
ss.6.8 or as otherwise permitted by law.
The Borrower hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this ss.6.8 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set forth
in ss.6.6 (as such address may be changed from time to time pursuant to said
ss.6.6) or (ii) by serving a copy thereof upon it at its address set forth in
ss.6.6 (as such address may be changed from time to time pursuant to said
ss.6.6).
6.9. Severability. In the event that any provision of this letter
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.
VII. DEFINED TERMS
-------------
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Adjusted Current Liabilities" - All Current Liabilities of the Borrower
and/or any of its Subsidiaries, other than any such Current Liabilities which
represent the current portion of Deferred Revenue.
"Adjusted Senior Debt" - All Indebtedness of the Borrower and/or any of
its Subsidiaries, other than (i) any such Indebtedness which consists of
Deferred Revenue and (ii) any such Indebtedness which constitutes Subordinated
Debt.
"Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Revolving Loans then outstanding, plus (ii) all then undrawn
amounts of letters of credit issued by the Bank for the account of the Borrower,
plus (iii) all amounts then drawn on any such letter of credit which at said
date shall not have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - As determined at any date, 75% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a
public holiday under the laws of the United States of America or The
Commonwealth of Massachusetts applicable to a national bank.
-22-
"Capital Base" - At any time, the sum of (i) the consolidated Tangible
Net Worth of the Borrower and Subsidiaries then existing, plus (ii) the
principal amount of Subordinated Debt of the Borrower then outstanding (nothing
contained herein being deemed to authorize the incurrence of any additional
Subordinated Debt).
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in ss.7.2(b) below.
"Current Assets" - All assets of the Borrower and its Subsidiaries which
are properly shown as current assets on a consolidated balance sheet of the
Borrower prepared in accordance with generally accepted accounting principles
consistently applied; excluding, however, any and all amounts due from
affiliated entities.
"Current Liabilities" - All liabilities of the Borrower and/or any
Subsidiary of the Borrower which are properly shown as current liabilities on a
consolidated balance sheet of the Borrower prepared in accordance with generally
accepted accounting principles consistently applied. Further, "Current
Liabilities" will in any event be deemed to include all Revolving Loans.
"Deferred Revenue" - Any liabilities of the Borrower which represent
sums actually received by the Borrower under hardware, software and service
maintenance contracts and which, in accordance with generally accepted
accounting principles consistently applied, are properly shown as "deferred
revenue" on the Borrower's balance sheet.
"ERISA" - The Employee Retirement Income Security Act of 1974, as
amended.
"Expiration Date" - July 31, 1998, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Indebtedness" - All obligations of a Person, whether current or
long-term, senior or subordinated, which in accordance with generally accepted
accounting principles would be included as liabilities upon such Person's
balance sheet at the date as of which Indebtedness, is to be determined, and
shall also include guaranties, endorsements (other than for collection in the
ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Loan Documents" - Each of this letter agreement, the Revolving Note,
the Security Agreement, the Intellectual Property Assignments and each other
instrument, document or agreement evidencing, securing, guaranteeing or relating
in any way to any of the Revolving Loans or any of the letters of credit issued
hereunder, all whether now existing or hereafter arising or entered into.
-23-
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $3,000,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor
thereto.
"Person" - An individual, corporation, company, partnership, joint
venture, trust or unincorporated organization, or a government or any agency or
political subdivision thereof.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of bona fide sales made to customers of the Borrower (which customers
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and which remain unpaid no more than
90 days past the respective invoice dates of such Receivables, the payment of
which is not in dispute. Unless the Bank in its sole discretion otherwise
determines with respect to any Receivable, a Receivable which would otherwise be
a Qualified Receivable shall be deemed not to be a Qualified Receivable (i) if
the Bank does not have a fully perfected first priority security interest in
such Receivable; (ii) if such Receivable is not free and clear of all adverse
interests in favor of any Person other than the Bank; (iii) if such Receivable
is subject to any deduction, off-set, contra account, counterclaim or condition;
(iv) if a field examination made by the Bank fails to confirm that such
Receivable exists and satisfies all of the criteria set forth herein to be a
Qualified Receivable; (v) if such Receivable is not properly invoiced at the
date of sale; (vi) if the customer or account debtor has disputed liability or
made any claim with respect to the Receivable or the merchandise covered thereby
or with respect to any other Receivable due from said customer to the Borrower;
(vii) if the customer or account debtor has filed a petition for bankruptcy or
any other application for relief under the Bankruptcy Code or has effected an
assignment for the benefit of creditors, or if any petition or any other
application for relief under the Bankruptcy Code has been filed against said
customer or account debtor, or if the customer or account debtor has suspended
business, become insolvent, ceased to pay its debts as they become due, or had
or suffered a receiver or trustee to be appointed for any of its assets or
affairs; (viii) if the customer or account debtor has failed to pay other
Receivables so that an aggregate of 25% of the total Receivables owing to the
Borrower by such customer or account debtor has been outstanding for more than
90 days past their respective due dates; (ix) if
-24-
such Receivable is owed by the United States government or any agency or
department thereof (unless assigned to the Bank under the Federal Assignment of
Claims Act); or (x) if the Bank reasonably believes that collection of such
Receivable is insecure or that it may not be paid by reason of financial
inability to pay or otherwise, or that such Receivable is not for any reason
suitable for use as a basis for borrowing hereunder.
"Receivables" - All of the Borrower's present and future accounts,
accounts receivable and notes, drafts, acceptances and other instruments
representing or evidencing a right to payment for goods sold or for services
rendered.
"SEC" - The Securities and Exchange Commission or any successor agency.
"Subordinated Debt" - Any Indebtedness of the Borrower which is
expressly subordinated, pursuant to a subordination agreement in form and
substance satisfactory to the Bank, to all Indebtedness now or hereafter owed by
the Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower
and/or any of its Subsidiaries, directly or indirectly, owns, or has the right
to control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person. Total
intangible assets shall be deemed to include, but shall not be limited to, the
excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred expenses (including, but not limited to, unamortized debt discount and
expense, organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article
shall be taken to encompass all members of the relevant class. Any defined term
used in the singular preceded by "any" shall be taken to indicate any number of
the members of the relevant class.
7.2. Security Agreement. (a) The Borrower acknowledges and agrees that
the "Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement and/or with respect to any letter of credit
which may be issued by the Bank for the account of the Borrower.
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the Collateral described therein, all of
the Borrower's files, books and records
-25-
(including, without limitation, all electronically recorded data) all
whether now owned or existing or hereafter acquired, created or
arising. The Borrower hereby grants to the Bank a security interest in
all such Collateral in order to secure the full and prompt payment and
performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as
defined in ss.5.1 of this letter agreement), the Bank may, at any time,
notify account debtors that the Collateral has been assigned to the
Bank and that payments by such account debtors shall be made directly
to the Bank. At any time after the occurrence of an Event of Default,
the Bank may collect the Borrower's Receivables, or any of same,
directly from account debtors and may charge the collection costs and
expenses to the Borrower.
This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.
Very truly yours,
AUGMENT SYSTEMS, INC.
By
--------------------------
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By
--------------------------
Its
By
--------------------------
Its
-26-
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(b) Existing 5% stock ownership
Item 2.1(e) Litigation
Item 2.1(j) Location of Collateral; record owners of Premises
Item 2.1(k) Intellectual Property
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 5.1(n) Permitted 50% Stockholders
PROMISSORY NOTE
$3,000,000.00 Boston, Massachusetts
August 4, 1997
FOR VALUE RECEIVED, the undersigned Augment Systems, Inc., a Delaware
corporation (the "Borrower") hereby promises to pay to the order of FLEET
NATIONAL BANK (the "Bank") the principal amount of Three Million and 00/100
($3,000,000.00) Dollars or such portion thereof as may be advanced by the Bank
pursuant to ss.1.2 of that certain letter agreement of even date herewith
between the Bank and the Borrower (the "Letter Agreement") and remains
outstanding from time to time hereunder ("Principal"), with interest, at the
rate hereinafter set forth, on the daily balance of all unpaid Principal, from
the date hereof until payment in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times be equal to
the sum of (i) one-half of one (0.5%) percent per annum plus (ii) the Prime Rate
as in effect from time to time (but in no event in excess of the maximum rate
permitted by then applicable law). A change in the aforesaid rate of interest
shall become effective on the same day on which any change in the Prime Rate is
effective. Overdue Principal and, to the extent permitted by law, overdue
interest shall bear interest at a fluctuating rate per annum which at all times
shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per
annum rate otherwise payable under this note (but in no event in excess of the
maximum rate permitted by then applicable law), compounded monthly and payable
on demand. As used herein, "Prime Rate" means that rate of interest per annum
announced by the Bank from time to time as its prime rate, it being understood
that such rate is merely a reference rate, not necessarily the lowest, which
serves as the basis upon which effective rates of interest are calculated for
obligations making reference thereto. If the entire amount of any required
Principal and/or interest is not paid within ten (10) days after the same is
due, the Borrower shall pay to the Bank a late fee equal to five percent (5%) of
the required payment.
All outstanding Principal and all interest accrued thereon shall be due
and payable in full on the first to occur of: (i) an acceleration under ss.5.2
of the Letter Agreement or (ii) July 31, 1998. The Borrower may at any time and
from time to time prepay all or any portion of said Principal, without premium
or penalty. Under certain circumstances set forth in the Letter Agreement,
prepayments of Principal may be required.
Payments of both Principal and interest shall be made, in immediately
available funds, at the office of the Bank located at 75 State Street, Boston,
Massachusetts 02109, or at such other address as the Bank may from time to time
designate.
The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making any Revolving Loan (as defined in the
Letter Agreement) and of receiving any payment of Principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid balance of
Principal. Failure of the Bank to make any such notation shall not, however,
affect any obligation of the Borrower hereunder or under the Letter Agreement.
The unpaid Principal amount of this note, as recorded by the Bank from time to
time on such schedule or on such books, shall constitute presumptive evidence of
the aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement.
This note is secured by, and is entitled to the benefit of, the Security
Agreement (as defined in the Letter Agreement). This note is subject to
prepayment as set forth in the Letter Agreement. The maturity of this note may
be accelerated upon the occurrence of an Event of Default, as provided in the
Letter Agreement.
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL AUGMENT SYSTEMS, INC.
ATTEST:
____________________________ By:__________________________
Secretary Name:
Title:
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,688,391
<SECURITIES> 0
<RECEIVABLES> 513,761
<ALLOWANCES> 0
<INVENTORY> 1,644,932
<CURRENT-ASSETS> 115,700
<PP&E> 329,199
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,305,728
<CURRENT-LIABILITIES> 1,624,005
<BONDS> 0
0
0
<COMMON> 47,133
<OTHER-SE> 13,874,710
<TOTAL-LIABILITY-AND-EQUITY> 5,305,728
<SALES> 567,223
<TOTAL-REVENUES> 567,223
<CGS> 247,481
<TOTAL-COSTS> 247,481
<OTHER-EXPENSES> 3,438,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143,902
<INCOME-PRETAX> (3,262,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,262,465)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> 0
</TABLE>
