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UNITED STATES
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 September 30, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition period from to
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Commission file number 0-28484
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QualMark Corporation
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(Exact name of small business issuer as
specified in its charter)
Colorado 84-1232688
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1329 West 121st Avenue, Denver, CO 80234
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (303) 254-8800
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[ X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of latest practicable date:
The number of shares of no par value common stock at October 21, 1997 is
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3,387,134.
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Transitional Small Business Disclosure Format (check one): [ ] Yes [ X] No
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Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUALMARK CORPORATION
BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)
SEPT. 30, 1997
(UNAUDITED) DEC. 31, 1996
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ASSETS
Cash and equivalents $544 $411
Short term investments 200 1,911
Trade accounts receivable, net of
allowance for doubtful accounts of $21
at Sept. 30, 1997 and December 31, 1996 2,576 1,246
Inventories 360 536
Other current assets 79 120
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Total current assets 3,760 4,224
Property and equipment, net 1,323 1,073
Patents, net of accumulated amortization
of $266 and $254, respectively 16 28
Other assets 177 116
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Total assets $5,277 $5,441
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LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable $796 $699
Customer deposits and deferred revenue 55 47
Accrued expenses 529 984
Current portion of capital lease obligations 17 31
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Total current liabilities 1,397 1,761
Noncurrent portion of capital lease
obligations 7 18
Notes Payable 200 0
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Total long term liabilities 207 18
Shareholders' Equity:
Common stock; no par value; 15,000,000
shares authorized; 3,385,484 shares
and 3,330,484 shares issued and
outstanding at Sept. 30, 1997 and
December 31, 1996, respectively 6,265 6,131
Accumulated deficit (2,592) (2,469)
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Total shareholders' equity 3,673 3,662
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Total liabilities and shareholders' equity $5,277 $5,441
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The accompanying notes are an integral part of the financial statements.
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QUALMARK CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue $2,892 $1,531 $7,166 $3,822
Cost of revenue 1,643 796 4,171 2,188
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Gross profit 1,249 734 2,995 1,634
Selling, general and administrative expenses 1,080 690 2,974 1,735
Research and development expenses 55 27 160 128
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Income (loss) from operations 114 17 (139) (229)
Other income (expense):
Interest (3) 29 24 16
Other (2) 0 (8) (39)
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Net income (loss) $109 $46 ($123) ($252)
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Net income(loss) per share $0.03 $0.01 ($0.04) ($0.09)
Weighted average number of common shares 3,699 3,586 3,355 2,764
</TABLE>
The accompanying notes are an integral part of the financial statements.
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QUALMARK CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
For the nine For the nine
months ended months ended
Sept. 30, 1997 Sept. 30, 1996
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Cash Flows From Operating Activities:
Net loss ($123) ($252)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation 298 118
Patent amortization 12 16
Discount accretion 0 42
Change in assets and liabilities:
Accounts receivable (1,330) (442)
Inventories 176 (294)
Other assets (19) (107)
Accounts payable and accrued expenses (358) 384
Customer deposits and deferred revenue 8 (130)
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Net cash used in operating activities (1,336) (666)
Cash Flows From Investing Activities:
Acquisition of property and equipment (550) (741)
Acquisition of patents 0 (17)
Purchase of short term investments (200) 0
Proceeds on sale/redemption of short term
investments 1,911 0
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Net cash provided(used) by investing
activities 1,161 (758)
Cash Flow From Financing Activities:
Proceeds from borrowing 200 0
Repayments of borrowings - others 0 (701)
Proceeds from issuance of common stock 134 4,536
Principal payments on capital lease obligations (26) (38)
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Net cash from financing activities 308 3,797
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Net increase in cash 133 2,373
Cash at beginning of period 411 251
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Cash at end of period $544 $2,624
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NONCASH FINANCING ACTIVITIES
Conversion of debt to common stock $0 $250
Acquisition of equipment under capital lease 0 43
SUPPLEMENTAL DISCLOSURE
Interest paid $6 $43
The accompanying notes are an integral part of the financial statements.
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QUALMARK CORPORATION
NOTES TO FINANCIAL STATEMENTS
QualMark Corporation (the Company), was founded in 1991 and is a manufacturer of
physical stress systems. These systems rapidly and efficiently expose product
design and manufacturing related failures on its customers products, thereby
providing manufacturers the necessary information to improve product quality.
The Company also operates a nation-wide network of test centers that its
customers may use as an alternative, or in addition, to purchasing its systems.
NOTE 1 - Basis of Presentation
These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1996 and notes thereto.
The interim financial data as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods presented. Results for the nine months are not
necessarily indicative of results for the remainder of 1997.
NOTE 2 - Inventories
Inventories consist of the following (amounts in thousands):
9/30/97
(unaudited) 12/31/96
--------------------------
Raw materials $360 $334
Work in process 0 9
Finished goods 0 193
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$360 $536
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NOTE 3 - Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
Common shares outstanding during each period, including common equivalent shares
outstanding. Common equivalent shares consist of stock options and warrants
calculated using the treasury stock method, when dilutive.
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In February 1997, the Financial Standards Board issued Statement of Accounting
Standards No. 128, "Earnings per share" (FAS) 128. FAS 128 changes the
computation, presentation and disclosure requirements of earnings(loss) per
share that has previously been followed by the Company. FAS 128 is effective
for years ending after December 15, 1997 and early adoption is not permissible.
If the provisions of FAS 128 were adopted for the three months ended September
30, 1997 and 1996, and for the nine months ended September 30, 1997 and 1996,
the Company's basic income(loss) per share would not have been materially
different than those presented.
NOTE 4 - Litigation
On March 22, 1996, Screening Systems, Inc. ("SSI"), filed a patent
infringement action in the United States District Court for the Central District
of California, Southern Division, against the Company, alleging that the Company
has infringed U.S. Patent No. 4,181,026. SSI amended its complaint in September
to add claims for infringement of U.S. Patent Nos. 4,181,026 and 4,181,028, and
for contributory and inducing infringement. Each of the patents-in-suit is
owned by Hughes Electronics Company("Hughes") and licensed to SSI. Trial of
this matter was originally set for March 25, 1997.
In October 1996, the Company filed a motion to dismiss the action on the basis
that SSI did not alone have standing to pursue the action pursuant to the terms
of its license agreement with Hughes. In November 1996, the court ruled on the
Company's motion by ordering that Hughes be joined as an interested party.
Because Hughes declined to join the action as a plaintiff, SSI joined Hughes as
a defendant in its November 22, 1996 Second Amended Complaint.
With limited exception, the parties completed discovery on January 10, 1997. On
February 3, 1997 the Company filed motions for summary judgement of non-
infringement on each of the three patents in suit, SSI filed a motion for
summary judgement with respect to U.S. patent No. 4,181,028 and other motions
addressing the Company's defenses. On February 6, 1997, Judge McLaughlin
vacated all pending dates, including the March 25, 1997 trial date, and referred
the motions for summary judgement to Magistrate Judge Elgin Edwards for
determination.
Magistrate Judge Edwards set a hearing known as a "Markman hearing" to determine
the scope and meaning of the relevant claims and terms of the patents-in-suit
before ruling on any motions for summary judgement of non-infringement. The
hearings were originally scheduled for March 25, 1997 but were postponed to
April 10, 1997 and completed on May 20, 1997. After receiving final arguments
from the parties, the Judge will issue an interpretation of the meaning and
scope of the claims of the patents-in-suit. Based on those interpretations, the
Company expects to refile its motions
<PAGE>
for summary judgement of non-infringement. The Court has not set a new trial
date and the Company understands that no trial date will be set until after
ruling on any summary judgment motions.
The Company is convinced that the legal action by the plaintiff is without merit
and will continue to vigorously defend itself in these matters.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The statements contained in this report which are not historical in nature are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth or implied
by forward-looking statements, including but not limited to the risk of an
unfavorable outcome in the SSI litigation, variability in order flow and
operating results, the ability of the Company to find and retain qualified
personnel to staff its manufacturing and marketing operations and existing and
anticipated test centers, and the risk that the demand for the Company's systems
will not continue to grow.
Results of Operations
Revenue
Net revenue in the three months ended September 30, 1997 increased
$1,361,793 (89.0%) as compared with the three months ended September 30, 1996,
from $1,530,520 to $2,892,313. Net revenue in the nine month period ended
September 30, 1997 increased $3,344,155 (87.5%) as compared with the nine months
ended September 30, 1996, from $3,821,811 to $7,165,965.
System sales revenue in the three month period ended September 30, 1997
increased $1,153,617 (116.5%) from $989,947 to $2,143,564 as compared to the
same three month period in 1996. For the nine month period ended September 30,
1997, system revenue increased $2,636,865 (101.4%) over the same nine month
period in 1996, from $2,601,516 to $5,238,381. Unit shipments increased from
nine to seventeen in the comparable three month periods ended September 30, 1997
and 1996 and from 21 to 41 systems in the comparable nine month periods ended
September 30, 1997 and 1996.
Test center revenue for the three months ended September 30, 1997 increased
$208,176 (38.5%) from $540,573 to $748,749 over the three months ended September
30, 1996. For the nine months ended September 30, 1997, test center revenue
increased $707,290 (58.0%)
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from $1,220,295 to $1,927,585 over the same period in 1996. The Company
operated eight test centers containing ten systems during the three month period
ended September 30, 1997 compared to six test centers containing seven systems
during the same period in 1996.
The Company's quarterly operating results could be subject to fluctuations
for a variety of reasons. The Company operates with a small backlog relative to
its revenue; thus most of its sales in each quarter result from orders received
in the current or prior quarter. In addition, because prices for the Company's
products are relatively substantial, a significant portion of net sales for each
quarter is attributable to a relatively small number of units.
For the three and nine month periods ended September 30, 1997, no single
customer accounted for more than 10% of revenue in the respective periods.
Gross Margin
The gross margin in the three months ended September 30, 1997 was 43.2%
compared to a 48.0% gross margin for the same period in 1996. For the nine
months ended September 1997, the gross margin was 41.8% compared to a gross
margin of 42.7% in the same nine month period in 1996. The decrease in gross
margin is partially attributable to an increased charge to royalty expense under
an agreement the Company has with its founder. Under that agreement, if
revenues exceed certain levels, an increase in the percentage of total sales is
paid as a royalty to the founder. Recognizing that revenue is likely to reach a
level where an increase in royalty expense will occur, during the third quarter
the Company took an additional charge of $71,659 on total year-to-date revenue.
Operating Expense
General and administrative expenses increased from $445,974 to $620,779 for
the three months ended September 30, 1997 compared to the same three month
period in 1996. For the nine months ended September 30, 1997, general &
administrative cost increased from $1,152,049 to $1,779,802 over the same nine
month period in 1996. The increase reflects added costs for opening test
centers, test center administration and legal costs incurred from the Company's
involvement in a litigation matter.
Sales and Marketing expenses increased $214,715 from $244,477 for the three
months ended September 30, 1996 to $459,192 for the three months ended September
30, 1997. For the nine months ended September 30, 1997, the increase was
$611,070, from $583,170 to $1,194,240 when compared to the same nine month
period on 1996. These increases were primarily due to increases in department
headcount and sales and marketing efforts in expanding the sales force over the
comparable periods in 1996.
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Liquidity and Capital Resources
During the first nine months of 1997, the Company's operations used
$1,336,000 of cash in operating activities, invested $550,000 for equipment,
paid $25,814 in lease payments and borrowed $200,000 from its bank. The Company
also purchased $200,000 in short term investments and redeemed short term
investments of $1,911,000. Former employees exercised options to purchase
55,000 shares of common stock for a total change in common stock of $134,000.
Together, these activities resulted in a cash increase of approximately
$133,000 to a quarter ending balance of $544,000.
In September 1997 the Company renegotiated its line of credit
arrangement with its bank. The credit line provides for draws up to $1,500,000;
bears interest at prime plus 1.5%, and is secured by substantially all of the
assets of the Company. The Company must maintain certain financial and other
covenants in order to draw amounts available under the line of credit. On the
effective date of the agreement, September 18, 1997, and according to its terms,
the Company borrowed $200,000 secured by certain fixed assets. This portion of
the credit line bears interest at prime plus 1.75% and is to be repaid in equal
monthly payments over a three year term.
The Company expects to meet long term liquidity requirements through
existing cash balances and utilization of its credit line until cash flows from
operations are sufficient to sustain the Company. The Company's ability to
generate positive cash flows is dependent on the continued growth of its systems
and test center business and the satisfactory resolution of its litigation
matter.
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
See Note 4 to Financial Statements.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits - See Index to Exhibits.
(b) Reports on Form 8-K during the nine months ended
September 30, 1997 - none.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QualMark Corporation
Date: October 24, 1997 By: /s/ W. PRESTON WILSON
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W. Preston Wilson
President, Chief Executive Officer
Date: October 24, 1997 /s/ VERNON W. SETTLE
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VERNON W. SETTLE
VP, Finance & Administration
Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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4.1 Form of Certificate for shares of Common stock.(1)
4.6 Form of Warrant issued to holders of 10% secured promissory notes.(1)
10.1 QualMark Corporation 1993 Incentive Stock Plan.(1)
10.2 QualMark Corporation 1996 Incentive Stock Plan.
10.3 Agreement dated March 31, 1993 by and between QualMark Corporation and
W. Preston Wilson.(1)
10.4 Agreement dated August 15, 1994 by and between QualMark
Corporation and J. Wayne Farlow.(1)
10.5 Agreement dated September 30, 1995 by and between QualMark Corporation
and Gregg K. Hobbs.(1)
10.8 Addendum to Agreement dated December 21, 1995 by and between the
Company and Gregg K. Hobbs (1)
10.11 Loan and Security Agreement dated April 30, 1996, by and between
QualMark Corporation and Silicon Valley Bank, as amended by
Amendent to Loan and Security Agreement dated August 18, 1997.
27.1 Financial Data Schedule
(1) Similarly denoted as an exhibit to registration statement 333-1454-D and
incorporation herein by reference.
<PAGE>
QUALMARK CORPORATION
1996 STOCK OPTION PLAN
(AMENDED AS OF MARCH 6, 1997)
I. PURPOSE
The QUALMARK CORPORATION 1996 STOCK OPTION PLAN ("Plan") provides for the
grant of Stock Options to employees, directors and consultants of QUALMARK
Corporation (the "Company"), and such of its subsidiaries (as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code")
as the Board of Directors of the Company (the "Board") shall from time to
time designate ("Participating Subsidiaries") in order to advance the
interests of the Company and its Participating Subsidiaries through the
motivation, attraction and retention of key personnel.
II. INCENTIVE STOCK OPTIONS AND NON-INCENTIVE STOCK OPTIONS
The Stock Options granted under the Plan may be either:
a) Incentive Stock Options ("ISOs") which are intended to be
"Incentive Stock Options" as that term is defined in Section 422 of the
Code; or
b) Nonstatutory Stock Options ("NSOs") which are intended to be
options that do not qualify as "Incentive Stock Options" under Section 422
of the Code.
All Stock Options shall be ISOs unless the Option Agreement clearly
designates the Stock Options granted thereunder, or a specified portion
thereof, as NSOs. Subject to the other provisions of the Plan, a Participant
may receive ISOs and NSOs at the same time, provided that the ISOs and NSOs
are clearly designated as such, and the exercise of one does not affect the
exercise of the other.
Except as otherwise expressly provided herein, all of the provisions and
requirements of the Plan relating to Stock Options shall apply to ISOs and
NSOs.
III. ADMINISTRATION
This Plan shall be administered by the Board or by a committee composed
solely of two or more directors ("Committee") each of whom is a Non-Employee
Director. The Committee or the Board of Directors, as the case may be, shall
have full authority to administer this Plan, including authority to interpret
and construe any provision of this Plan and any Stock Options granted
hereunder, and to adopt such rules and regulations for administering this
Plan as it may deem necessary in order to comply with the requirements of the
Code or in order that Stock Options that are intended to be ISOs will be
classified as
<PAGE>
incentive stock options under the Code, or in order to conform to any
regulation or to any change in any law or regulation applicable thereto. The
Board of Directors may reserve to itself any of the authority granted to the
Committee as set forth herein, and it may perform and discharge all of the
functions and responsibilities of the Committee at any time that a duly
constituted Committee is not appointed and serving. All references in this
Plan to the "Committee" shall be deemed to refer to the Board of Directors
whenever the Board is discharging the powers and responsibilities of the
Committee, and to any special committee appointed by the Board to administer
particular aspects of this Plan.
All actions taken and all interpretations and determinations made by the
Board or Committee in good faith (including determinations of Fair Market
Value) shall be final and binding upon all Participants, the Company and all
other interested persons. No member of the Board or Committee shall be
personally liable for any action, determination or interpretation made in
good faith with respect to the Plan, and all members of the Board and
Committee shall, in addition to their rights as directors, be fully protected
by the Company with respect to any such action, determination or
interpretation. Rule 16b-3 under the Securities Exchange Act of 1934 (the
"Exchange Act") provides that the grant of a stock option to a director or
officer of a company will be exempt from the provisions of Section 16(b) of
the Act if the conditions set forth in said Rule are satisfied. Unless
otherwise specified by the Board or Committee, grants of Stock Options
hereunder to individuals who are officers or directors of the Company shall
be made in a manner that satisfies the conditions of said Rule.
IV. DEFINITIONS
4.1. "STOCK OPTION." A Stock Option is the right granted under the Plan
to an Employee, director, or consultant to purchase, at such time or times
and at such price or prices ("Option Price") as are determined by the Board
or Committee, the number of shares of Common Stock determined by the Board or
Committee.
4.2. "COMMON STOCK." A share of Common Stock means a share of authorized
but unissued or reacquired common stock of the Company.
4.3. "FAIR MARKET VALUE." If the Common Stock is traded publicly, the
Fair Market Value of a share of Common Stock on any date shall be the average
of the representative closing bid and asked prices, as quoted by the National
Association of Securities Dealers through NASDAQ (its automated system for
reporting quotes), for the date in question, or, if the Common Stock is
listed on the NASDAQ National Market System or is listed on a national stock
exchange, the officially quoted closing price on NASDAQ or such exchange, as
the case may be, on the date in question. If the Common Stock is not traded
publicly, the Fair Market Value of a share of Common Stock on any date shall
be determined in good faith by the Board of Directors or the Board or
Committee after such consultations with outside legal, accounting and other
experts as the Board of Directors or the Committee may deem advisable, and
the
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Board of Directors or the Committee shall maintain a written record of its
method of determining such value.
4.4. "EMPLOYEE." An Employee is an employee of the Company or any
Participating Subsidiary.
4.5. "PARTICIPANT." A Participant is an Employee, director or consultant
to whom a Stock Option is granted.
4.6. "NON-EMPLOYEE DIRECTOR." A Non-Employee Director is a person who
satisfies the definition of a "non-employee director" set forth in Rule 16b-3
under the Exchange Act or any successor rule or regulation, as it may be
amended from time to time.
4.7 "CORPORATE TRANSACTION." "Corporate Transaction" shall mean one or
more of the following transactions: (i) a merger or acquisition in which the
Company is not the surviving entity, except for a transaction the principal
purpose of which is to change the State of the Company's incorporation and
except for merger of the Company into any of its wholly owned subsidiaries;
(ii) the sale, transfer or other disposition of all or substantially all of
the Company's assets; or (iii) the transfer of shares of the Company
representing more than 50% of the total combined voting power of all Company
shares in one or more related transactions to a person or persons acting as a
group for voting purposes.
V. ELIGIBILITY AND PARTICIPATION
Grants of ISOs and NSOs may be made to Employees of the Company or any
Participating Subsidiary. Grants of NSOs may be made to directors of or
consultants to the Company or any Participating Subsidiary. Any director of
the Company or of a Participating Subsidiary who is also an Employee shall
also be eligible to receive ISOs. The Committee shall from time to time
determine the Participants to whom Stock Options shall be granted, the number
of shares of Common Stock subject to each Stock Option to be granted to each
such Participant, the Option Price of such Stock Options, all as provided in
this Plan. The Option Price of an NSO shall be determined by the Committee,
but shall be at least 85% of the Fair Market Value on the date the NSO is
granted. The Option Price of any ISO shall be not less than the Fair Market
Value of a share of Common Stock on the date on which the Stock Option is
granted. If an ISO is granted to an Employee who then owns stock possessing
more than 10% of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary corporation of the Company, the
Option Price of such ISO shall be at least 110% of the Fair Market Value of
the Common Stock subject to the ISO at the time such ISOs are granted, and
such ISO shall not be exercisable after five years after the date on which it
was granted. Each Stock Option shall be evidenced by a written agreement
("Option Agreement") containing such terms and provisions as the Committee
may determine, subject to the provisions of this Plan.
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<PAGE>
VI. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
6.1. MAXIMUM NUMBER. The maximum aggregate number of shares of Common
Stock that may be made subject to Stock Options shall be 415,000 authorized
but unissued shares (post 3 for 2 stock split). The aggregate Fair Market
Value (determined as of the time the ISO is granted) of the stock as to all
ISOs granted to an individual which may first become exercisable in a
particular calendar year may not exceed $100,000. If any shares of Common
Stock subject to Stock Options are not purchased or otherwise paid for before
such Stock Options expire, such shares may again be made subject to Stock
Options.
6.2. CAPITAL CHANGES. In the event any changes are made to the shares of
Common Stock (whether by reason of reorganization, recapitalization, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or otherwise), appropriate adjustments shall be made in:
(i) the number of shares of Common Stock theretofore made subject to Stock
Options, and in the Option Price of said shares; and (ii) the aggregate
number of shares which may be made subject to Stock Options in the future.
If any of the foregoing adjustments shall result in a fractional share, the
fraction shall be disregarded, and the Company shall have no obligation to
make any cash or other payment with respect to such a fractional share.
VII. EXERCISE OF STOCK OPTIONS
7.1 TIME OF EXERCISE. Subject to the provisions of the Plan, the
Committee, in its discretion, shall determine the time when a Stock Option,
or a portion of a Stock Option, shall become exercisable, and the time when a
Stock Option, or a portion of a Stock Option, shall expire. Such time or
times shall be set forth in the Option Agreement evidencing such Stock
Options. A Stock Option shall expire, to the extent not exercised, no later
than the tenth anniversary of the date on which it was granted. The
Committee may accelerate the vesting of any Participant's Stock Option by
giving written notice to the Participant. Upon receipt of such notice, the
Participant and the Company shall amend the Option Agreement to reflect the
new vesting schedule. The acceleration of the exercise period of a Stock
Option shall not affect the expiration date of that Stock Option.
7.2 EXCHANGE OF OUTSTANDING STOCK. The Committee, in its sole
discretion, may permit a Participant to surrender to the Company shares of
the Common Stock previously acquired by the Participant as part of full
payment for the exercise of a Stock Option. Such surrendered shares shall be
valued at their Fair Market Value on the date of exercise.
7.3. USE OF PROMISSORY NOTE; EXERCISE LOANS. The Committee may, in its
sole discretion, impose terms and conditions, including conditions relating
to the manner and timing of payments, on the exercise of Stock Options. Such
terms and conditions may include, but are not limited to, permitting a
Participant to deliver to the Company his promissory note as full or partial
payment for the exercise of a Stock Option. The Committee, in its sole
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<PAGE>
discretion, may authorize the Company to make a loan to a Participant in
connection with the exercise of Stock Options, or authorize the Company to
arrange or guarantee loans to a Participant by a third party.
7.4. TERMINATION OF EMPLOYMENT BEFORE EXERCISE. If the employment of a
Participant who was an employee of the Company or a Participating Subsidiary
when the Stock Option was granted shall terminate for any reason other than
the Participant's death or disability, any Stock Options granted to the
Participant, to the extent then exercisable under the applicable Option
Agreement(s), shall remain exercisable after the termination of his
employment for a period of three months (but not later than the specified
expiration date). If the Participant's employment is terminated because the
Participant is disabled within the meaning of Section 22(e)(3) of the Code,
any Stock Option granted to the Participant, to the extent then exercisable
under the applicable Option Agreement(s), shall remain exercisable after the
termination of his employment for a period of twelve months (but not later
than the specified expiration date). If the Participant dies while employed
by the Company or a Participating Subsidiary, or during the three-month or
twelve-month periods referred to above, his Stock Options may be exercised to
the extent that they were exercisable on the date of cessation of his
employment by his estate, or duly appointed representative, or beneficiary
who acquires the Stock Options by will or by the laws of descent and
distribution, but no further installments of his Stock Options will become
exercisable and each of his Stock Options shall terminate on the first
anniversary of the date of his death (but not later than the specified
expiration dates). If a Stock Option is not exercised during the applicable
period, it shall be deemed to have been forfeited and of no further force or
effect.
7.5. DISPOSITION OF FORFEITED STOCK OPTIONS. Any shares of Common Stock
subject to Stock Options forfeited by a Participant shall not thereafter be
eligible for purchase by the Participant, but may be made subject to Stock
Options granted to other Participants.
VIII. NO CONTRACT OF EMPLOYMENT
Nothing in this Plan shall confer upon the Participant the right to
continue in the employ of the Company, or any Participating Subsidiary, nor
shall it interfere in any way with the right of the Company, or any such
Participating Subsidiary, to discharge the Participant at any time for any
reason whatsoever, with or without cause. Nothing in this Article VIII shall
affect any rights or obligations of the Company or any Participant under any
written contract of employment.
IX. NO RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder with respect to any
shares of Common Stock subject to a Stock Option. Except as provided in
Section 6.2, no adjustment shall be made in the number of shares of Common
Stock issued to a Participant, or in any other rights of the Participant upon
exercise of a Stock Option by reason of any dividend,
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<PAGE>
distribution or other right granted to stockholders for which the record date
is prior to the date of exercise of the Participant's Stock Option.
X. ASSIGNABILITY
No Stock Option granted under this Plan, nor any other rights acquired by
Participant under this Plan, shall be assignable or transferable by a
Participant, other than by will or the laws of descent and distribution, and
Stock Options issued to a Participant are exercisable during his lifetime
only by him. Notwithstanding the preceding sentence, the Committee may, in
its sole discretion, permit the assignment or transfer of an NSO and the
exercise thereof by a person other than a Participant, on such terms and
conditions as the Committee in its sole discretion may determine. Any such
terms shall be set forth in the Option Agreement. In the event of a
Participant's death, the Stock Option may be exercised by the Personal
Representative of the Participant's estate or by the successor or successors
in interest determined under the Participant's will or under the applicable
laws of descent and distribution. The terms of any rights under this Plan in
the hands of a transferee or assignee shall be determined as if held by the
Participant and shall be of no greater extent or term than if the transfer or
assignment had not taken place.
XI. SPECIFIC CORPORATE TRANSACTIONS
11.1. At least twenty (20) days prior to the consummation of a
Corporate Transaction, the Company shall give Participants written notice of
the proposed Corporate Transaction. All Stock Options, to the extent not
previously exercised, shall terminate upon the consummation of such Corporate
Transaction and cease to be exercisable unless expressly assumed by the
successor corporation or parent thereof.
11.2. If the Company or its stockholders enter into an agreement
providing for a Corporate Transaction the vesting schedule of some or all
Stock Options may, at the sole discretion of the Committee, be accelerated so
that all or any portion of Stock Options outstanding under the Plan as of the
day before the consummation of such Corporate Transaction to the extent not
exercised, shall for all purposes under this Plan become exercisable as of
such date.
XII. AMENDMENT
The Board of Directors may from time to time alter, amend, suspend or
discontinue the Plan, including, where applicable, any modifications or
amendments as it shall deem advisable in order that ISOs will be classified
as incentive stock options under the Code, or in order to conform to any
regulation or to any change in any law or regulation applicable thereto;
provided, however, that no such action shall adversely affect the rights and
obligations with respect to Stock Options at any time outstanding under the
Plan; and provided further that no such action shall, without the approval of
the stockholders of the Company, (i) increase the
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maximum number of shares of Common Stock that may be made subject to Stock
Options (unless necessary to effect the adjustments required by Section 6.2),
(ii) materially modify the requirements as to eligibility for participation
in the Plan.
XIII. REGISTRATION OF OPTIONED SHARES
The Stock Options shall not be exercisable unless the purchase of such
optioned shares is pursuant to an applicable effective registration statement
under the Securities Act of 1933, as amended, or unless, in the opinion of
counsel to the Company, the proposed purchase of such optioned shares would
be exempt from the registration requirements of the Securities Act of 1933,
as amended, and from the registration or qualification requirements of
applicable state securities laws.
XIV. WITHHOLDING TAXES
The Company or Participating Subsidiary may take such steps as it may
deem necessary or appropriate for the withholding of any taxes (including the
withholding of shares of Common Stock otherwise issuable which have
appropriate Fair Market Value) which the Company or the Participating
Subsidiary is required by any law or regulation of any governmental
authority, whether federal, state or local, domestic or foreign to withhold
in connection with any Stock Options.
XV. BROKERAGE ARRANGEMENTS
The Committee, in its discretion, may enter into arrangements with one or
more banks, brokers, or other financial institutions to facilitate the
disposition of shares acquired upon exercise of Stock Options including,
without limitation, arrangements for the simultaneous exercise of Stock
Options and the sale of shares acquired upon exercise.
XVI. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of this Plan to stockholders of the Company for approval shall be
construed as creating any limitations on the power or authority of the Board
of Directors to adopt such other or additional incentive or other
compensation arrangements of whatever nature as the Board of Directors may
deem necessary or desirable or preclude or limit the continuation of any
other plan, practice or arrangement for the payment of compensation or fringe
benefits to employees generally, or to any class or group of employees, which
the Company or any Participating Subsidiary now has lawfully put into effect,
including, without limitation, any retirement, pension, savings and stock
purchase plan, insurance, death and disability benefits and executive
short-term incentive plans.
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XVII. EFFECTIVE DATE
This Plan was adopted by the Board of Directors and shareholders of the
Company on January 22, 1996 and became effective on January 22, 1996. No
Stock Options shall be granted subsequent to ten years after the effective
date of this Plan. Stock Options outstanding subsequent to ten years after
the effective date of this Plan shall continue to be governed by the
provisions of this Plan.
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<PAGE>
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of
August 18, 1997, by and between SILICON VALLEY BANK ("Bank") and QUALMARK
CORPORATION ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of April 30, 1996, as amended (the "Agreement"). The parties desire
to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following definitions in Section 1.1 are amended to read as
follows:
"Committed Line" means One Million Three Hundred Thousand Dollars
($1,300,000).
"Maturity Date" means August 17, 2000, provided Advances may be
requested under Section 2.1 only through August 17, 1998, on which date all
Advances under Section 2.1 shall be due and payable.
2. The second sentence of the first paragraph of Section 2.1 is amended
to read as follows:
For purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to seventy percent (70%) of Eligible Accounts.
3. Section 2.1.2 is added to the Agreement, as follows:
2.1.2 EQUIPMENT ADVANCE.
(a) Not later than September 25, 1997, Borrower may request one
(1) advance (the "Equipment Advance") from Bank in an aggregate principal
amount equal to the lesser of Two Hundred Thousand Dollars ($200,000) or
Sixty Five Percent (65%) of the book value of Equipment approved by Bank to
be financed by the Equipment Advance.
(b) Interest shall accrue from the date of the Equipment Advance
at a floating rate equal to the Prime Rate plus One and Three-quarters
Percent (1.75%) per annum. The Equipment Advance will be payable in
thirty-six (36) equal monthly installments of principal, plus accrued
interest, on the seventeenth day of each month beginning September 17,
1997. The entire principal balance and all accrued but unpaid interest
shall be due and payable on August 17, 2000.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1)
Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be in substantially the form of EXHIBIT B. The notice
shall be signed by a Responsible Officer and include a list of the
Equipment to be financed and evidence satisfactory to Bank of the book
value of such Equipment.
(d) The Equipment Advance shall be deemed an "Advance" for the
purpose of calculating availability under Sections 2.1 and 2.2 until Bank
receives evidence satisfactory to Bank that Borrower has achieved a Debt
Service Coverage of not less than 2.00 to 1.00 for two consecutive fiscal
quarters.
4. Sections 6.8, 6.9, 6.10 and 6.11 are amended, and Section 6.14 is
added, as follows:
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6.8 QUICK RATIO. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least
1.75 to 1.00.
6.9 DEBT-TANGIBLE NET WORTH RATIO. Borrower shall maintain, as of
the last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more
than 0.75 to 1.00.
6.10 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth plus Subordinated Debt of not
less than Three Million Dollars ($3,000,000).
6.11 PROFITABILITY. Beginning September 30, 1997, Borrower shall be
profitable for each fiscal quarter.
6.14 DEBT SERVICE COVERAGE. Beginning September 30, 1997, Borrower
shall maintain, as of the last day of each calendar month, Debt Service
Coverage of at least 2.00 to 1.00. "Debt Service Coverage" means net income
plus depreciation and amortization, annualized for the preceding three
month period, divided by the current portion of total long term debt.
5. The Compliance Certificate to be delivered after the date of this
Amendment shall be in substantially the form of EXHIBIT D hereto.
6. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement
remains in full force and effect.
7. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
8. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
9. As a condition to the effectiveness of this Amendment, Borrower
shall pay a Facility Fee in an amount equal to Seven Thousand Five Hundred
Dollars ($7,500), payable upon the date hereof, plus all Bank Expenses
incurred in connection with the preparation of this Amendment.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
QUALMARK CORPORATION
By: /s/ Vernon W. Settle
--------------------------------------
Title: Vice President - Administration
-----------------------------------
SILICON VALLEY BANK
By: /s/ Andrew Enroth
--------------------------------------
Title: AVP
-----------------------------------
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QUALMARK CORPORATION
LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Overadvances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Interest Rates, Payments, and Calculations. . . . . . . . . . . . . 7
2.4 Crediting Payments. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. CONDITIONS OF LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Conditions Precedent to Initial Advance . . . . . . . . . . . . . . 9
3.2 Conditions Precedent to all Advances. . . . . . . . . . . . . . . . 9
4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . 9
4.1 Grant of Security Interest. . . . . . . . . . . . . . . . . . . . . 9
4.2 Delivery of Additional Documentation Required . . . . . . . . . . . 10
4.3 Right to Inspect. . . . . . . . . . . . . . . . . . . . . . . . . . 10
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . 10
5.1 Due Organization and Qualification. . . . . . . . . . . . . . . . . 10
5.2 Due Authorization; No Conflict. . . . . . . . . . . . . . . . . . . 10
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . 10
5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . . . . 10
5.5 Merchantable Inventory. . . . . . . . . . . . . . . . . . . . . . . 10
5.6 Name; Location of Chief Executive Office. . . . . . . . . . . . . . 10
5.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.8 No Material Adverse Change in Financial Statements. . . . . . . . . 10
5.9 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . 11
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . 11
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.13 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . . . 11
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Financial Statements, Reports, Certificates . . . . . . . . . . . . 12
6.4 Inventory; Returns. . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.7 Principal Depository. . . . . . . . . . . . . . . . . . . . . . . . 13
6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 Debt-Tangible Net Worth Ratio . . . . . . . . . . . . . . . . . . . 13
6.10 Tangible Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . 13
6.11 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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6.12 Registration of Intellectual Property Rights. . . . . . . . . . . . 13
6.13 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 14
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Change in Business. . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . 14
7.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.8 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . 14
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.11 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.2 Covenant Default. . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . 15
8.4 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.5 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.6 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.9 Misrepresentations. . . . . . . . . . . . . . . . . . . . . . . . . 16
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 16
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . 16
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.3 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.4 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . . 18
9.5 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . 18
9.6 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . 19
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.1 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . 19
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.4 Severability of Provisions. . . . . . . . . . . . . . . . . . . . . 19
12.5 Amendments in Writing, Integration. . . . . . . . . . . . . . . . . 19
12.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.7 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.8 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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This LOAN AND SECURITY AGREEMENT is entered into as of April 30, 1996, by
and between SILICON VALLEY BANK ("Bank") and QualMark Corporation
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means an Advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents, whether or not suit
is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1
hereof.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Line" means Two Hundred Fifty Thousand Dollars
($250,000); provided the Committed Line shall be Seven Hundred Fifty Thousand
Dollars ($750,000) if Borrower so elects after the payment to Bank of an
additional fee of Two Thousand Five Hundred Dollars ($2,500).
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"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee
or other support arrangement.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its
Subsidiaries, as at such date, plus, to the extent not already included
therein, all outstanding Advances made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at
the option of Borrower or any Subsidiary to a date more than one year from
the date of determination, but excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; PROVIDED,
that standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon notification thereof to Borrower
in accordance with the provisions hereof. Unless otherwise agreed to by
Bank, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety
(90) days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the account debtor may
be conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for
Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
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(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes,
in its sole discretion, that there may be a basis for dispute (but only to
the extent of the amount subject to such dispute or claim), or is subject to
any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(k) Deposits by customers; and
(l) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States and that are: (1) covered by credit insurance in form and
amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one
or more letters of credit in favor of Bank as beneficiary, in an amount and
of a tenor, and issued by a financial institution, acceptable to Bank; or (3)
that Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d)
all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
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"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to
repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means April 29, 1997.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in the ordinary
course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or
any State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the
date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
and (iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank.
"Permitted Liens" means the following:
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(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, PROVIDED that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments, with maturities not to exceed 90 days,
of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which Borrower
may request Bank to issue cash advances, as specified in Section 2.1 hereof.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through
an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and
its Subsidiaries MINUS, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, AND (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
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2. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in accordance with GAAP. When used
herein, the terms "financial statements" shall include the notes and
schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 ADVANCES. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an aggregate
amount not to exceed the lesser of the Committed Line or the Borrowing Base.
For purposes of this Agreement, "Borrowing Base" shall mean an amount equal
to eighty percent (80%) of Eligible Accounts. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1
may be repaid and reborrowed at any time during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time,
on the Business Day that the Advance is to be made. Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the
form of EXHIBIT B hereto. Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer, or
without instructions if in Bank's discretion such Advances are necessary to
meet Obligations which have become due and remain unpaid. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer, and Borrower shall indemnify
and hold Bank harmless for any damages or loss suffered by Bank as a result
of such reliance. Bank will credit the amount of Advances made under this
Section 2.1 to Borrower's deposit account.
The Revolving Facility shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 and other amounts due under this
Agreement shall be immediately due and payable.
2.1.1 ACCOUNTS COLLECTION. At any time from the date of
this Agreement, Bank may notify any person or entity owing funds to Borrower
of Bank's security interest in such funds. Borrower shall open and maintain
with Bank an account (the "Collateral Account") into which all funds received
by Borrower from any source shall immediately be deposited. Borrower shall
direct all account debtors to mail or deliver all checks or other forms of
payment for amounts owing to Borrower to a post office box designated by
Bank, over which Bank shall have exclusive and unrestricted access. Bank
shall collect the mail delivered to such post office box, open such mail, and
endorse and credit all items to the Collateral Account. Borrower shall
direct all account debtors or other persons owing money to Borrower who make
payments by electronic transfer of funds to wire such funds directly to the
Collateral Account. Borrower shall hold in trust for Bank all amounts that
Borrower receives despite the directions to make payments to the post office
box or Collateral Account, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit into the Collateral Account. Borrower irrevocably
authorizes Bank to transfer to the Collateral Account any funds that have
been deposited into any other accounts or that Bank has otherwise received.
Borrower shall not establish or maintain any accounts with any Person other
than Bank except for accounts opened in the ordinary course of business from
which all funds are transferred on a daily basis to the Collateral Account.
Bank shall have all right, title and interest in all of the items from time
to time in the Collateral Account and their proceeds. Neither Borrower nor
any person claiming through Borrower shall have any right in or control over
the use of, or any right to withdraw any amount from, the Collateral Account,
which shall be under the sole control of Bank. Borrower shall enter into
such lockbox agreements as Bank may reasonably request from time to time.
2.2 OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this
Agreement is greater than the lesser of (i) the Committed Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount
of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average Daily Balance, at a rate equal
to one and one-half (1.5) percentage points above the Prime Rate.
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(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on
the last calendar day of each month during the term hereof. Bank shall, at
its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Line, in which case those amounts shall thereafter accrue interest at the
rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After
the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment on account unless such payment is of immediately available federal
funds or unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon
California time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment
shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of
such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Two Thousand Five
Hundred Dollars ($2,500), which fee shall be due on the Closing Date and
shall be fully earned and nonrefundable, and an additional fee of Two
Thousand Five Hundred Dollars ($2,500) as a condition to increase the
Committed Line to Seven Hundred Fifty Thousand Dollars ($750,000) if Borrower
elects to increase the Committed Line;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by
any court or any governmental authority charged with the administration
thereof or the compliance with any guideline or request of any central bank
or other governmental authority (whether or not having the force of law), in
each case after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
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(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank,
reduce the income receivable by Bank or impose any expense upon Bank with
respect to any loans under this Agreement, Bank shall notify Borrower
thereof. Borrower agrees to pay to Bank the amount of such increase in cost,
reduction in income or additional expense as and when such cost, reduction or
expense is incurred or determined, upon presentation by Bank of a statement
of the amount and setting forth Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest
error.
2.7 TERM. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect
for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Advances under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien
on the Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of
Bank to make the initial Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a collateral assignment and patent mortgage;
(d) financing statements (Forms UCC-1);
(e) insurance certificate;
(f) an accounts receivable audit;
(g) payment of the fees and Bank Expenses then due specified
in Section 2.5 hereof; and
(h) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank
to make each Advance, including the initial Advance, is further subject to
the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date, and no Event of Default shall have occurred
and be continuing, or would result from such Advance. The making of each
Advance shall be deemed to be a
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representation and warranty by Borrower on the date of such Advance as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants and duties under the Loan Documents. Except as set forth in
the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice,
from time to time during Borrower's usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws
of its state of incorporation and qualified and licensed to do business in,
and is in good standing in, any state in which the conduct of its business or
its ownership of property requires that it be so qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona
fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
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5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral. Borrower does not
have knowledge of any such pending or threatened actions or proceedings.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof
and Borrower's consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Bank.
5.9 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations G, T and U of the
Board of Governors of the Federal Reserve System). Borrower has complied
with all the provisions of the Federal Fair Labor Standards Act. Borrower
has not violated any statutes, laws, ordinances or rules applicable to it,
violation of which could have a Material Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release,
or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations
or filings with, and given all notices to, all governmental authorities that
are necessary for the continued operation of Borrower's business as currently
conducted.
5.15 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished
to Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty
(30) days after the end of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated
operations during such period, certified by a Responsible Officer; (b) as
soon as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) as soon as
available the audited consolidated financial statements of Borrower for
fiscal year 1994, with no changes from the draft financial statements
delivered to Bank; (d) within five (5) days upon becoming available, copies
of all statements, reports and notices sent or made available generally by
Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (e) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; and (f) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
Within fifteen (15) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer
in substantially the form of EXHIBIT C, together with aged listings of
accounts receivable.
Within fifteen (15) days after the last day of each month, Borrower shall
deliver to Bank aged listings of accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted
no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on
the same basis and in accordance with the usual customary practices of
Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Fifty Thousand Dollars ($50,000).
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6.5 TAXES. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state,
and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon
request, furnish Bank with proof satisfactory to Bank indicating that
Borrower or a Subsidiary has made such payments or deposits; provided that
Borrower or a Subsidiary need not make any payment if the amount or validity
of such payment is contested in good faith by appropriate proceedings and is
reserved against (to the extent required by GAAP) by Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to
Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the Bank
as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. Beginning December 31, 1995, Borrower shall
maintain, as of the last day of each calendar quarter, a ratio of Quick
Assets to Current Liabilities of at least 1.5 to 1.0.
6.9 DEBT-TANGIBLE NET WORTH RATIO. Beginning December 31, 1995,
Borrower shall maintain, as of the last day of each calendar quarter, a ratio
of Total Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 1.0 to 1.0.
6.10 TANGIBLE NET WORTH. Beginning December 31, 1995, Borrower
shall maintain, as of the last day of each calendar month, a Tangible Net
Worth plus Subordinated Debt of not less than Nine Hundred Thousand Dollars
($900,000), plus Seventy-Five Percent (75%) of the proceeds of the sale by
Borrower after the date hereof of its equity securities.
6.11 PROFITABILITY. Beginning December 31, 1995, Borrower (i) may
not suffer a loss in any two consecutive quarters, (ii) may not suffer a loss
of more than Two Hundred Thousand Dollars ($200,000) in any single fiscal
quarter, and (iii) subject to clauses (i) and (ii), shall be profitable for
each fiscal quarter.
6.12 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower has
registered or applied for registration with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
intellectual property rights so identified and listed on Exhibits A, B and C
to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within thirty
(30) days of the date of this Agreement. Borrower shall register or make
application for registration with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those additional
intellectual property rights developed or acquired by Borrower from time to
time in connection with any product prior to the sale or licensing of such
product to any third party, to the extent such
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intellectual property rights as are reasonably deemed by Borrower to be
material to its business, including without limitation revisions or additions
to the intellectual property rights listed on such Exhibits A, B and C.
Borrower shall execute and deliver such additional instruments and documents
from time to time as Bank shall reasonably request to perfect Bank's security
interest in such additional intellectual property rights.
6.13 FURTHER ASSURANCES. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes
of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations
or for so long as Bank may have any commitment to make any Advances, Borrower
will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i)
Transfers of Inventory in the ordinary course of business; (ii) Transfers of
non-exclusive licenses and similar arrangements for the use of the property
of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete
Equipment.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other
than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the
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ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location
set forth in Section 10 hereof and such other locations of which Borrower
gives Bank prior written notice and as to which Borrower signs and files a
financing statement where needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to
comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of,
or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of
receipt by Borrower of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or fails or neglects to perform,
keep, or observe any other material term, provision, condition, covenant, or
agreement contained in this Agreement, in any of the Loan Documents, or in
any other present or future agreement between Borrower and Bank and as to any
default under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure such default within ten (10) days after
Borrower receives notice thereof or any officer of Borrower becomes aware
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower
be cured within such ten (10) day period, and such default is likely to be
cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the
failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure
period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's
security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or
levy has not been removed, discharged or rescinded within ten (10) days, or
if Borrower is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs,
or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within ten (10) days after Borrower receives notice thereof,
provided that none of the foregoing shall constitute an Event of Default
where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Advances will be
required to be made during such cure period);
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8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
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(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or
notify account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank deems necessary to protect Bank from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.4 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.5 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one
right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
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waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and
for the specific purpose for which it was given.
9.6 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: QualMark Corporation
1329 West 121st Avenue
Denver, CO 80234
Attn: Vern Settle
FAX: (303) 254-8343
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Greg Becker
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice
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to Borrower to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in, Bank's obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
QUALMARK CORPORATION
By: /s/ Vernon W. Settle
-------------------------------
Title: Director, Finance and
Administration
SILICON VALLEY BANK
By: /s/ Frank J. Amorosso
-------------------------------
Title: Assistant Vice President
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EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 544,000
<SECURITIES> 200,000
<RECEIVABLES> 2,596,000
<ALLOWANCES> 21,000
<INVENTORY> 360,000
<CURRENT-ASSETS> 3,760,000
<PP&E> 2,011,000
<DEPRECIATION> 688,000
<TOTAL-ASSETS> 5,277,000
<CURRENT-LIABILITIES> 1,397,000
<BONDS> 0
0
0
<COMMON> 6,265,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,277,000
<SALES> 7,166,000
<TOTAL-REVENUES> 7,166,000
<CGS> 4,171,000
<TOTAL-COSTS> 3,134,000
<OTHER-EXPENSES> 8,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (24,000)
<INCOME-PRETAX> (123,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (123,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>