<PAGE> 1
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 QUARTER ENDED: SEPTEMBER 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number: 0-28556
---------------------------
BOREALIS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 88-0238203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4070 Silver Sage Drive
Carson City, NV 89701
(Address of principal executive offices)
(702) 888-3200
(Issuer's telephone number)
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. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
equity, as of the latest practicable date:
CLASS OUTSTANDING AT
Common Stock - par value $.001 ("Common Stock") September 30, 1997: 4,826,644
Transitional Small Business Disclosure Format (check one): Yes ; No X .
----- -----
<PAGE> 2
BOREALIS TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Statements of Operations (unaudited)
three and nine months ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows (unaudited)
nine months ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Risk Factors 10
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
</TABLE>
Page 2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOREALIS TECHNOLOGY CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,892,389 $ 3,921,506
Accounts receivable 222,308 2,000
Short term certificate of deposit 650,000 --
Other current assets 259,314 136,073
------------ ------------
Total current assets 4,024,011 4,059,579
Property and equipment, net 873,604 856,653
Long-term investment -- 650,000
Other assets 48,049 40,850
------------ ------------
Total assets $ 4,945,664 $ 5,607,082
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 250,000 $ --
Accounts payable 169,397 258,377
Accrued employee compensation and benefits 406,975 298,492
Promissory note 650,000 --
Other current liabilities 645,552 320,739
------------ ------------
Total current liabilities 2,121,924 877,608
Long-term obligations 31,715 738,800
------------ ------------
Total liabilities 2,153,639 1,616,408
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued and outstanding - none
Common stock, $.001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 4,826,644 and
3,184,506 at September 30, 1997 and
December 31, 1996, respectively 4,827 3,185
Additional paid-in capital 15,518,263 10,777,241
Notes receivable from stockholders (93,124) --
Accumulated deficit (12,637,941) (6,789,752)
------------ ------------
Total stockholders' equity 2,792,025 3,990,674
------------ ------------
Total liabilities and stockholders' equity $ 4,945,664 $ 5,607,082
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
Page 3
<PAGE> 4
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues $ 520,927 28,621 $ 728,281 $ 151,681
Cost of revenues 1,061 12,951 37,329 58,573
----------- ----------- ----------- -----------
Gross profit 519,866 15,670 690,952 93,108
Operating expenses:
Sales and marketing 974,667 801,386 3,350,743 1,667,410
Research and development 578,510 591,529 1,754,822 1,327,580
General and administrative 462,482 579,354 1,455,451 1,069,963
----------- ----------- ----------- -----------
Total operating expenses 2,015,659 1,972,269 6,561,016 4,064,953
----------- ----------- ----------- -----------
Loss from operations (1,495,793) (1,956,599) (5,870,064) (3,971,845)
Interest income (expense), net 7,256 45,726 21,875 (9,738)
----------- ----------- ----------- -----------
Net loss $(1,488,537) $(1,910,873) $(5,848,189) $(3,981,583)
=========== =========== =========== ===========
Net loss per common share $ (0.34) $ (0.61) $ (1.64) $ (2.55)
=========== =========== =========== ===========
Weighted average common shares outstanding 4,346,577 3,130,725 3,576,211 1,560,567
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 4
<PAGE> 5
BOREALIS TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,848,189) $(3,981,583)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 255,914 93,383
Noncash charges (credits), net 69,756 --
Changes in operating assets and liabilities:
Accounts receivable (220,308) 36,188
Other assets, net (130,440) (188,550)
Accounts payable (88,980) 41,136
Other liabilities, net 376,211 7,101
----------- -----------
Net cash used in operating activities (5,586,036) (3,992,325)
INVESTING ACTIVITIES
Investment in certificate of deposit -- (650,000)
Purchases of property and equipment (272,865) (253,030)
Proceeds from disposal of property and equipment 250 --
Loan to stockholder (18,125) --
----------- -----------
Net cash used in investing activities (290,740) (903,030)
FINANCING ACTIVITIES
Proceeds from exercise of common stock options 1,672 --
Proceeds from issuance of notes payable to stockholders -- 750,000
Repayment of notes payable to stockholders -- (971,311)
Borrowings under line of credit 250,000 650,000
Issuance of promissory note 250,000 --
Repayment of promissory note (250,000) --
Proceeds from sale of common stock, net 4,595,987 9,589,657
Proceeds from issuance of convertible promissory notes -- 675,570
----------- -----------
Net cash provided by financing activities 4,847,659 10,693,916
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,029,117) 5,798,561
Cash and cash equivalents at beginning of period 3,921,506 158,840
----------- -----------
Cash and cash equivalents at end of period $ 2,892,389 $ 5,957,401
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 5
<PAGE> 6
BOREALIS TECHNOLOGY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer to
the 1996 financial statements and footnotes thereto included in the Company's
10-KSB and the Company's registration statement on form SB-2 declared effective
by the Securities and Exchange Commission on July 21, 1997.
NOTE B - FINANCING
On July 25, 1997, the Company successfully completed a follow-on public
offering. The Company issued 1,400,000 shares of its Common Stock with proceeds
net of offering expenses and underwriter's discounts of approximately $4.0
million. On August 8, 1997, the Company issued 210,000 shares of Common Stock
pursuant to the exercise of an over-allotment option granted by the Company to
the underwriter of its follow-on public offering, with proceeds net of offering
expenses and underwriter's discounts of approximately $0.6 million.
NOTE C - LOSS PER COMMON SHARE
Loss per share was computed by dividing the net loss by the weighted average
number of shares of common stock outstanding. Common stock equivalents from
stock options and warrants are excluded from the computation because their
effect is anti-dilutive. The weighted average number of shares of common stock
and common stock equivalents has been computed in accordance with Securities and
Exchange Commission's Staff Accounting Bulletin No. 83, pursuant to which "cheap
stock," as defined, is considered outstanding even if the effect is
anti-dilutive. Fully diluted earnings per share are considered equal to primary
earnings per share in all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. A restatement of prior periods will not be necessary as common
equivalent shares from common stock options and warrants have been excluded from
the computation of net loss per share as their effect is anti-dilutive. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
NOTE D - BORROWINGS
At September 30, 1997, the Company has a promissory note payable to a bank for
$650,000. The note matures on January 11, 1998 and bears interest of 7.55% per
annum. The note is collateralized by the $650,000 certificate of deposit and
places certain business and borrowing restrictions on the Company.
In July, 1997 the Company borrowed $250,000 pursuant to a bank credit line
subject to certain restrictive covenants. These borrowings accrue interest at
10.25% per annum and are due and payable on July 14, 1998.
NOTE E - USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
Page 6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following contains forward-looking statements regarding future
events and the future financial performance of Borealis Technology Corporation
("Borealis" or the "Company") that involve risks and uncertainties. These
statements include, but are not limited to, statements related to the market
acceptance of Arsenal and the adequacy of the Company's cash reserves. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth herein under "Risk Factors" and elsewhere in this report.
The Company has experienced significant operating losses for the three
month and nine month periods ended September 30, 1997. In the quarter ended June
30, 1997, the Company completed development of its new sales force automation
product, Arsenal. To date, the Company has shipped Arsenal to 4 customers and
has received follow-on orders from 2 of its initial customers.
In mid 1995, the Company ceased sales and marketing of its entire
product line and shifted its focus to the development of Arsenal and the
establishment of a third party integrator channel. The Company's revenues in
periods prior to the quarter ended June 30, 1997 have been generated almost
entirely from the sale of consulting services and products which the Company no
longer sells and are not meaningful in predicting future performance. Due to the
shift to the development and sale of Arsenal, the Company will derive
substantially all of its revenues from licensing Arsenal and maintenance
contracts for Arsenal.
The Company's future operating results will depend on many factors,
including demand for Arsenal, which was only recently introduced in the second
quarter of 1997, the level of product and price competition, the ability of the
Company to develop and market new products and to control costs, the ability of
the Company to expand its direct sales force and indirect distribution channels
and the ability of the Company to attract and retain key personnel. In
particular, the ability of the Company to achieve revenue growth in the future
will depend on its success in adding a substantial number of direct sales
personnel and in attracting third party integrators in 1997 and future periods.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its existing sales personnel or that it can attract,
assimilate or retain additional highly qualified sales personnel in the future.
Further, the Company believes, based on interactions with its customers and
potential customers, that the purchase of its products is relatively
discretionary and generally involves a significant commitment of capital. As a
result, in the event of any downturn in any potential customer's business or the
economy in general, purchases of the Company's products may be deferred or
canceled, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company has generally recognized product license revenue not subject
to significant future obligations following execution of a licensing agreement
and delivery of the software and when collection is deemed probable. Service
revenues are recognized as services are performed while maintenance revenues are
recognized ratably over the term of the support period.
REVENUES:
Revenues have historically consisted of revenue from the licensing and
sale of products, revenue from service and maintenance agreements and revenue
from consulting and training services. Revenues increased from $28,621 for the
three months ended September 30, 1996 to $520,927 for the comparable period
ended September 30, 1997. Revenues increased from $151,681 to $728,281 between
the nine months ending September 30, 1996 and 1997, respectively. Both of these
increases are the result of the introduction and initial sales of the Company's
new sales force automation product, Arsenal. There can be no assurance that the
Company's revenues will continue to increase or fail to decrease, and any
further increases in the Company's revenues will be dependent upon, among other
things, market acceptance of Arsenal and the Company's ability to attract,
retain and assimilate additional sales personnel.
Page 7
<PAGE> 8
COST OF REVENUES:
Cost of revenues represents primarily amounts incurred pursuant to
royalty obligations and maintenance agreements on certain technology and the
wages of technical services personnel. The cost of revenues decreased from
$12,951 to $1,061 between the three months ended September 30, 1996 and 1997.
Between the nine months ended September 30, 1996 and 1997, the cost of revenues
decreased from $58,573 to $37,329. The Company anticipates that the absolute
dollar spending for cost of revenues will increase in the foreseeable future as
the Company expands its technical services organization to support customer
needs. However, since the Company only recently introduced Arsenal, the Company
believes that the ratio of cost of revenues to revenues are not meaningful in
the periods presented or indicative of future ratios.
OPERATING EXPENSES:
Total operating expenses are comprised of sales and marketing, research
and development, and general and administrative expenses. Sales and marketing
expenses increased from $801,386 to $974,667 between the three months ended
September 30, 1996 and 1997 and increased from $1,667,410 to $3,350,743 between
the nine month periods ended September 30, 1996 and 1997. Both of these
increases were the result of increased staffing as well as costs associated
with the Company's attendance at trade shows, print advertising and public
relations. Research and development expenses decreased from $591,529 to
$578,510 between the three months ended September 30, 1996 and 1997 and
increased from $1,327,580 to $1,754,822 between the nine month periods ended
September 30, 1996 and 1997. The decrease in research and development expenses
between the three months ended September 30, 1996 and 1997 is a result of a
decrease in costs expended to purchase certain technology. The increase in
research and development expenses between the nine months ended September 30,
1996 and 1997 is due to an increase in staffing and expenditures related to the
development of Arsenal. General and administrative expenses decreased from
$579,354 to $462,482 between the three months ended September 30, 1996 and 1997
and increased from $1,069,963 to $1,455,451 between the nine month periods
ended September 30, 1996 and 1997. The decrease in general and administrative
expenses between the three months ended September 30, 1996 and 1997 is
primarily due to a decrease in staffing between the third quarters of 1996 and
1997. The increase in general and administrative expenses between the nine
months ended September 30, 1996 and 1997 is due to an increase in staffing
between the first two quarters of 1996 and 1997. The Company anticipates that
total operating expenses will continue to increase for the foreseeable future
as the Company: (i) expands its sales and marketing function in order to
facilitate the market acceptance and sale of Arsenal and (ii) adds additional
software engineers to fund the development of enhancements to Arsenal and
develop new products.
Based on the Company's research and development process, costs incurred
between the establishment of technical feasibility and general release have not
been material and therefore have not been capitalized in accordance with
Statement of Financial Accounting Standards No. 86. All research and development
costs are expensed as incurred.
NET LOSS:
As a result of the factors discussed above, the net loss for the three
months ended September 30, 1997 decreased from a loss of $1,910,873 for the
three months ended September 30, 1996 to a loss of $1,488,537 for the three
months ended September 30, 1997. Between the nine months ended September 30,
1996 and 1997, the net loss increased from $3,981,583 to a loss of $5,848,189,
again, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed a follow-on public offering (the
"Offering") of 1,400,000 shares of Common Stock. In August 1997, the Company
completed the public sale of an additional 210,000 shares of Common Stock
pursuant to the exercise of an over-allotment option granted by the Company to
the underwriter of the Company's Offering. As a result of these offerings, the
Company recorded proceeds of approximately $4.6 million, net of related
underwriting discounts and offering expenses. The Company has invested the
proceeds from these offerings in investment grade, interest-bearing securities,
and has not invested in any derivative securities or other financial instruments
that involve a high level of risk.
The Company's cash and short-term investments totaled $2,892,389 at
September 30, 1997, representing 58% of total assets. The Company used $2.1
million of cash to fund operations for the third quarter of 1997. Net cash used
in operating activities was primarily for the development, sales and marketing
costs associated with Arsenal. The Company's principal investing activities
consisted of expenditures for computers and computer related equipment. The
Company's principal financing activities consisted of the Offering, the issuance
in July 1997 of a $250,000 short-term
Page 8
<PAGE> 9
promissory note, which was paid off during the third quarter, and borrowings
under a newly established $250,000 line of credit.
The $250,000 promissory note issued in July 1997 bore interest of 10%
per annum and was due on demand seven days following the closing of the
Offering. In connection with the promissory note, the Company issued a warrant
to purchase up to 50,000 shares of the Company's Common Stock. The warrant
expires five years from its execution date. In addition, in July 1997, the
Company borrowed $250,000 pursuant to a bank credit line subject to certain
restrictive covenants. These borrowings accrue interest at 10.25% per annum and
are due and payable on July 14, 1998.
The Company recently hired a new Senior Vice President of World Wide
Sales and Services, Dave Bouchard, and a new Vice President of Business
Development, Michael D'Eath. As part of Mr. Bouchard's compensation, he will be
entitled to receive a $250,000 loan, payable on his start date. Such loan will
be forgiven over three years, assuming continued employment with the Company.
Additionally, Mr. Bouchard will be entitled to receive a $425,000 loan in
January 1998, if and when the Company secures at least $3 million in additional
equity financing. Such loan will be forgiven over three years, assuming
continued employment with the Company. If the Company is not able to secure at
least $3 million in additional equity financing, Mr. Bouchard's loan for
$250,000 will be immediately forgiven and charged to expense. As part of Mr.
D'Eath's compensation, he will be entitled to receive an $80,000 bonus after 45
days of employment, but no later than January 5, 1998.
The Company's future capital requirements will depend upon many factors,
including the amount of revenues generated from operations, the cost of the
Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates that the existing capital resources and cash
generated from operations, if any, will be sufficient to meet the Company's cash
requirements for at least the next 4 months at its anticipated level of
operations, which includes increases in expenses, particularly sales and
marketing expenses, and costs of revenues. However, the Company plans to seek
additional funding during the next 4 months and will likely seek additional
funding after such time. There can be no assurance that any additional financing
will be available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors. The Company has in the past, and may continue to
experience, operational difficulties and delays in its product development due
to working capital constraints. Any such difficulties or delays could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Page 9
<PAGE> 10
RISK FACTORS
Going Concern Assumption; Future Capital Needs Uncertain; No Assurance of Future
Financing
The company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating that the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In addition, the Company had an accumulated deficit of
$12,637,941 at September 30, 1997. The Company may require substantial
additional funds in the future and there can be no assurance that any
independent auditor's report on the Company's future financial statements will
not include a similar explanatory paragraph if the Company is unable to raise
sufficient funds or generate sufficient cash from operations to cover the cost
of its operations. The existence of the explanatory paragraph may materially
adversely affect the Company's relationship with prospective customers, third
party integrators and suppliers, and therefore could have a material adverse
effect on the Company's business financial condition and results of operations.
The Company's future capital requirements will depend upon many factors,
including the amount of revenues generated from operations, the cost of the
Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates that existing capital resources and cash
generated from operations, if any, will be sufficient to meet the Company's cash
requirements for at least the next 4 months at its anticipated level of
operations, which includes increases in expenses, particularly sales and
marketing expenses, and costs of revenues. However, the Company may seek
additional funding during the next 4 months and will likely seek additional
funding after such time. There can be no assurance that any additional financing
will be available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors. The Company has in the past, and may continue to
experience, operational difficulties and delays in its product development due
to working capital constraints. Any such difficulties or delays could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Complete Dependence on Recent Product Introduction
The Company commenced sales of Arsenal, currently the Company's only
product, in April 1997. As a result, the Company will derive substantially all
of its revenues from the sale of Arsenal licenses and maintenance contracts for
Arsenal. Consequently, the Company will depend entirely on the successful
roll-out and commercial acceptance of Arsenal. Unless and until Arsenal receives
significant market acceptance, the Company will not have a source of revenue
sufficient enough to cover operating expenses. There can be no assurance that
Arsenal will achieve significant market acceptance. The Company's ability to
effectuate the roll-out of Arsenal will be substantially dependent on the hiring
and training of additional personnel and there can be no assurance that the
Company will be able to successfully hire and train such personnel. Although the
Company has begun to establish distribution channels for Arsenal, commercial
acceptance of Arsenal will require the Company to successfully establish
additional sales and distribution channels, of which there can be no assurance.
Any such failure will have a material adverse effect on the Company's business,
financial condition and results of operations. Failure of Arsenal to achieve
significant market acceptance and for the Company to achieve profitability will
have a material adverse effect on the Company's business, financial condition
and results of operations.
Recent Hires of Key Executives; Need to Fill Key Executive Position; Dependence
on Limited Number of Key Personnel
The Company's future success substantially depends on the efforts of
certain of its officers and key technical and other employees, many of whom have
only recently joined the Company. In particular, the Company's President and
Chief Executive Officer has been with the Company only since July 1997 and the
Company's Senior Vice President of World Wide Sales and Services, Dave Bouchard,
and its Vice President of Business Development, Michael D'Eath, will be joining
the Company in November 1997. Additionally, the Company is currently seeking to
hire a Vice President of Marketing. The Company's future success will require it
to recruit additional key personnel, including additional sales and marketing
personnel. The Company has not entered into employment agreements nor does it
have key man life insurance. The Company believes that its future success
depends on its ability to attract, retain and motivate highly
Page 10
<PAGE> 11
skilled employees, who are in great demand. There can be no assurance that the
Company will be successful in doing so.
Dependence on Systems Integrators and Third Party Consultants
Sales automation software products that address the needs of medium- to
large-size businesses are typically highly complex and require significant
customization that often results in an extensive implementation process. The
Company's strategy for implementing Arsenal is dependent on the utilization of
third-party integrators to install, customize and service the product.
Consequently, third-party integrators are required to undergo a substantial
amount of training to be able to apply the Company's products to the varied
needs of the Company's current and prospective customers. There can be no
assurance that the Company's training will be sufficient or that such
integrators will be able to provide the level or quality of service required to
meet the needs of the Company's current and prospective customers. The Company
will likely be dependent on third-party integrators to complete certain
post-delivery obligations prior to the Company's recognition of revenue. Any
failure of such integrators to complete such obligations could prevent the
Company from recognizing revenue and the failure to so recognize revenue could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the Company is unable to maintain effective,
long-term relationships with these integrators, or if such integrators fail to
meet the needs of the Company's current and prospective customers in a timely
fashion, or at all, such failure would result in a loss of, or delay in, market
acceptance or sales and could result in increased product support costs and an
injury to the Company's reputation, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition, the Company uses its third-party integrators as a source
for sales leads and, to some extent as part of its sales and distribution
channels. To the Company's knowledge, such use of third-party integrators by
other companies has been limited and there can be no assurance that such
third-party integrators will contribute meaningfully to the Company's sales
efforts.
The Company has not and does not plan to enter into or maintain
exclusive relationships with third-party integrators and, consequently, such
integrators may have existing relationships with, or may undertake new
relationships with, the Company's direct competitors. There can be no assurance
that such integrators will promote Arsenal effectively, or at all. The failure
of the Company to provide sufficient incentive for such integrators will
materially and adversely affect the Company's sales of Arsenal which will have a
material adverse effect on the Company's business, financial condition and
results of operations.
Recent Losses; Quarterly Fluctuations in Performance
The Company has experienced significant operating losses in each of
fiscal 1994, 1995, 1996 and for the three months and nine months ended September
30, 1997 and expects to incur significant operating losses for the foreseeable
future. In mid 1995, the Company ceased sales and marketing of its entire
product line and shifted its focus to the development of Arsenal and the
establishment of a third-party integrator channel. As a result, the Company will
derive substantially all of its revenues from the sale of Arsenal licenses and
maintenance contracts for Arsenal. There can be no assurance that the Company
will ever achieve profitability.
The Company has experienced significant fluctuations in its quarterly
operating results, and it anticipates that such fluctuations will continue and
could intensify in the future. In addition, the price of the Company's Common
Stock has fluctuated significantly since the Company's initial public offering
and is expected to continue to do so. Fluctuations in operating results may
contribute to volatility in the price of the Company's Common Stock. Operating
results may fluctuate as a result of many factors, including volume and timing
of orders received, the extent to which the Company is required to establish and
support a third-party integrator channel or hire additional sales personnel to
supplement such channel, announcements by the Company and its competitors, the
timing of commercial introduction of enhancements or
Page 11
<PAGE> 12
competitive products, the impact of price competition on the Company's average
selling prices, and the level of research and development required to complete
any future product enhancements. Almost all of these factors are beyond the
Company's control. In addition, due to the short product life cycles that
characterize the sales automation software market, the Company's failure to
introduce any Arsenal enhancements in a timely manner will have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's operating and other expenses are relatively fixed in the
short term. As a result, variations in the timing of revenues will cause
significant variations in quarterly operating results. Notwithstanding the
difficulty in forecasting future sales, the Company generally must undertake its
development, sales and marketing activities and other commitments months in
advance. Accordingly, any shortfall in revenues in a given quarter may
materially adversely affect the Company's business, financial condition and
results of operations due to the inability to adjust expenses during the quarter
to match the level of revenues for the quarter. Once commitments for such
expenditures are undertaken, the Company may be unable to reduce them quickly if
revenue is less than expected. In addition, the Company's sales expectations are
based entirely on its internal estimates of future demand. Due to these and
other factors, the Company believes that quarter-to-quarter comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
Rapid Technological Change; Risk of Product Delays or Defects
The sales automation software market is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends in large part upon its
ability to obtain market acceptance of Arsenal, develop enhancements to Arsenal
to address the changing requirements of its customers, educate third-party
integrators regarding Arsenal and anticipate or respond to technological
advances, competitive products and emerging industry standards and practices in
a timely, cost-effective manner. There can be no assurance that the Company will
be successful in marketing and supporting Arsenal or enhancements to Arsenal, if
any, or will not experience difficulties that could delay or prevent the
successful marketing and support of these products, or that Arsenal or any such
product enhancements will adequately meet the requirements of the marketplace
and achieve any significant degree of commercial acceptance. The Company has in
the past experienced delays in product development, including significant delays
in the development of Arsenal. Delays in enhancements to Arsenal, if any, may
result in customer dissatisfaction and delay or loss of product and maintenance
revenue. In addition, there can be no assurance that Arsenal or other future
products will meet the requirements of the marketplace or will conform to
industry standards and requirements.
Software products such as Arsenal often contain errors or "bugs" that
can adversely affect the performance of the product or damage a user's data. As
a result, such software defects can have a materially adverse effect on the
financial condition and operating results of the Company. There can be no
assurance that, despite testing by the Company and by potential customers,
errors will not be found in Arsenal, resulting in a loss of, or delay in, market
acceptance and sales, diversion of development resources, injury to the
Company's reputation, or increased service and warranty costs, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Page 12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1(1) Agreement and Plan of Merger between Borealis Corporation, a Nevada
corporation, and Borealis Technology Corporation, a Delaware corporation,
dated June 7, 1996.
3.1(1) Registrant's Certificate of Incorporation, as currently in effect.
3.2(1) Registrant's Bylaws, as currently in effect.
10.1(1) Real Property Lease between Registrant and Incline
Investors Group, dated June 15, 1995.
10.2(1) Real Property Sublease between Registrant and
U.S. Bank of Nevada, dated November 7, 1995.
10.3(1) 1994 Stock Plan.
10.4(1) 1996 Stock Plan.
10.5(1) 1996 Director Option Plan.
10.6(3) 1997 Employee Stock Purchase Plan.
10.7(1) Form of Indemnification Agreement.
10.8(1) Asset License and Purchase Agreement between the Registrant and
Sales Technologies, Inc., dated April 15, 1994.
10.9(1) Form of Warrant for 2,000 shares granted to Peter Pitsker on June 11, 1996.
10.10(1) Form of Warrant for 7,000 shares granted to Jerry Brooks on June 11, 1996.
10.11(1) Form of Warrant granted to H.J. Meyers & Co., Inc. in connection with the
Registrant's initial public offering.
10.12(4) Form of Warrant granted to H.J. Meyers & Co., Inc. in connection with the
Registrant's 1997 public offering.
10.13(1) Lease between the Registrant and DBB Holdings, Inc., dated June 11, 1996.
10.14(2) Promissory Note between the Registrant and US Bank, dated
July 11, 1996.
10.15(4) Solution Provider Agreement between the Company and
American Technology Corporation, dated October 4, 1996.
10.16(4) Promissory Note issued to Oxbow LLC.
10.16(4) Warrant to Purchase Shares of Common Stock issued to Oxbow LLC.
10.17(4) Rights Agreement with Oxbow LLC.
10.18 Silicon Valley Bank Business Loan Agreement
27.1 Financial Data Schedule
</TABLE>
-------------------------
Page 13
<PAGE> 14
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form SB-2 which became effective on June
20, 1996.
(2) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-QSB filed August 13, 1996.
(3) Incorporated by reference to annex filed with Registrant's Definite
Proxy Statement on Schedule 14A filed April 11, 1997.
(4) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form SB-2 which became effective on
July 21, 1997.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Registrant on September 16, 1997.
The unaudited balance sheet as of July 31, 1997 was filed as part of the
report.
Page 14
<PAGE> 15
SIGNATURE
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.
BOREALIS TECHNOLOGY CORPORATION
Registrant
BY: /s/ Elizabeth J. Gaspar
-----------------------
Elizabeth J. Gaspar
Executive Vice President
Chief Financial Officer
Date: November 14, 1997
Page 15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1(1) Agreement and Plan of Merger between Borealis Corporation, a Nevada
corporation, and Borealis Technology Corporation, a Delaware corporation,
dated June 7, 1996.
3.1(1) Registrant's Certificate of Incorporation, as currently in effect.
3.2(1) Registrant's Bylaws, as currently in effect.
10.1(1) Real Property Lease between Registrant and Incline
Investors Group, dated June 15, 1995.
10.2(1) Real Property Sublease between Registrant and
U.S. Bank of Nevada, dated November 7, 1995.
10.3(1) 1994 Stock Plan.
10.4(1) 1996 Stock Plan.
10.5(1) 1996 Director Option Plan.
10.6(3) 1997 Employee Stock Purchase Plan.
10.7(1) Form of Indemnification Agreement.
10.8(1) Asset License and Purchase Agreement between the Registrant and
Sales Technologies, Inc., dated April 15, 1994.
10.9(1) Form of Warrant for 2,000 shares granted to Peter Pitsker on June 11, 1996.
10.10(1) Form of Warrant for 7,000 shares granted to Jerry Brooks on June 11, 1996.
10.11(1) Form of Warrant granted to H.J. Meyers & Co., Inc. in connection with the
Registrant's initial public offering.
10.12(4) Form of Warrant granted to H.J. Meyers & Co., Inc. in connection with the
Registrant's 1997 public offering.
10.13(1) Lease between the Registrant and DBB Holdings, Inc., dated June 11, 1996.
10.14(2) Promissory Note between the Registrant and US Bank, dated
July 11, 1996.
10.15(4) Solution Provider Agreement between the Company and
American Technology Corporation, dated October 4, 1996.
10.16(4) Promissory Note issued to issued to Oxbow LLC.
10.16(4) Warrant to Purchase Shares of Common Stock issued to Oxbow LLC.
10.17(4) Rights Agreement with Oxbow LLC.
10.18 Silicon Valley Bank Business Loan Agreement
27.1 Financial Data Schedule
</TABLE>
- -------------------------
<PAGE> 17
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form SB-2 which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10filed August 13, 1996.
(3) Incorporated by reference to annex filed with Registrant's Definite Proxy
Statement on Schedule 14A filed April 11, 1997.
(4) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form SB-2 which became effective on July 21, 1997.
<PAGE> 1
EXHIBIT 10.18
PROMISSORY NOTE
- --------------------------------------------------------------------------------
Borrower: BOREALIS TECHNOLOGY CORPORATION Lender: Silicon Valley Bank
4070 Silver Sage Drive 3003 Tasman Drive
Carson City, NV 89701 Santa Clara, CA 95054
- --------------------------------------------------------------------------------
Principal Amount: $250,000.00 Initial Rate: 10.250%
Date of Note: July 15, 1997
PROMISE TO PAY. BOREALIS TECHNOLOGY CORPORATION ("Borrower") promises to pay to
Silicon Valley Bank ("Lender"), or order, in lawful money of the United States
of America, the principal amount of Two Hundred Fifty Thousand & 00/100 Dollars
($250,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on July 14, 1998. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning August 14,
1997, and all subsequent interest payments are due on the same day of each month
after that. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an Index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans on other rates as well. The interest rate change will
not occur more often than each time the prime rate is adjusted by Silicon Valley
Bank. The Index currently is 8.500% per annum. The interest rate to be applied
to the unpaid principal balance of this Note will be at a rate of 1.750
percentage points over the Index, resulting in an initial rate of 10.250% per
annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay
upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 6.750 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any
increased rate). Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any court
costs, in addition to all other sums provided by law. This Note has been
delivered to Lender and accepted by Lender in the State of California. If there
is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Santa Clara County, the State of California.
Lender and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower against the
other. (Initial Here _______) This Note shall be governed by and construed in
accordance with the laws of the State of California.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this note if: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
lender; or (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender.
REQUEST TO PAY ACCOUNTS. Borrower will regularly deposit funds received from its
business activities in accounts maintained by Borrower at Silicon Valley Bank.
Borrower hereby requests and authorizes Lender to debit any of Borrower's
accounts with Lender, specifically, without limitation, Account Number
____________, for payments of principal and interest due on the loan and any
other obligations owing by Borrower to Lender. Lender will notify Borrower of
all debits which Lender makes against Borrower's accounts. Any such debits
against Borrower's accounts in no way shall be deemed a set-off.
BUSINESS LOAN AGREEMENT. This Note is subject to and shall be governed by all
the terms and conditions of the Business Loan Agreement of even date herewith,
between Lender and Borrower, as such agreement may be amended from time to
time, which Business Loan Agreement is incorporated herein by reference.
PAYMENT OF LOAN FEE. This Note is subject to a loan fee in the amount of Two
Thousand Five Hundred and 00/100 Dollars ($2,500.00) plus all
<PAGE> 2
07-15-1997 PROMISSORY NOTE PAGE 2
(CONTINUED)
================================================================================
out-of-pocket expenses.
CONDITIONS. Prior to Borrower's receipt of additional equity in an amount not
less than $5,000,000.00, Lender's obligation to advance funds under this Note,
including the initial advance, is conditioned upon the unconditional and
irrevocable guarantee for the performance and payment of any or all
indebtedness owing by Borrower to Lender, as evidenced by those certain
Guaranty agreements, held with Lender, executed by the Guarantors set forth in
the Business Loan Agreement.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
any applicable statute of limitations, presentment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
BOREALIS TECHNOLOGY CORPORATION
By: /s/ ELIZABETH J. GASPER
-------------------------------------
Name: Elizabeth J. Gasper , Title: CFO
---------------------- ---------
================================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M.Off.,
Ver. 3.23(c) 1997CFI ProServices, Inc.
All rights reserved.
[CA-D20 BOREALIS.LN G1.OVL]
<PAGE> 3
BUSINESS LOAN AGREEMENT
Borrower: BOREALIS TECHNOLOGY CORPORATION Lender: Silicon Valley Bank
4070 Silver Sage Drive 3003 Tasman Drive
Carson City, NV 89701 Santa Clara, CA 95054
================================================================================
THIS BUSINESS LOAN AGREEMENT between BOREALIS TECHNOLOGY CORPORATION
("Borrower") and Silicon Valley Bank ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as the
"Loan" and collectively as the "Loans." Borrower understands and agrees that:
(a) in granting, renewing, or extending any Loan, Lender is relying upon
Borrower's representations, warranties, and agreements, as set forth in this
Agreement; (b) the granting, renewing, or extending of any Loan by Lender at
all times shall be subject to Lender's sole judgment and discretion; and (c)
all such Loans shall be and shall remain subject to the following terms and
conditions of this Agreement.
TERM. This Agrement shall be effective as of July 15, 1997, and shall continue
thereafter until all indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
Borrower. The word "Borrower" means BOREALIS TECHNOLOGY CORPORATION. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. the word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event Of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties and accommodation parties in connection
with any indebtedness.
Indebtedness. The word "Indebtedness" means and includes any and all
indebtedness of Borrower to Lender, now or hereafter arising or incurred,
including, without limitation, the Indebtedness evidenced by the Note,
including all principal and interest, together with all other indebtedness
and costs and expenses for which Borrower is responsible under this
Agreement or under any Related Documents.
Lender. The word "Lender" means Silicon Valley Bank, its successors and
assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Liquidity. The word "Liquidity" means Borrower's Liquid Assets plus fifty
percent (50%) of net accounts receivable, less than 90 days from the date
of invoice, divided by the amount outstanding under Borrower's line of
credit facility.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
<PAGE> 4
BUSINESS LOAN AGREEMENT
(CONTINUED)
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of
business and securing obligations which are not yet delinquent; (d)
equipment financing lease arrangements, purchase money liens or purchase
money security interests upon or in any property acquired or held by
Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) these liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract or
otherwise, evidencing, governing, representing, or creating a Security
interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests: (d) evidence
of insurance as required below, and (e) any other documents required under
this Agreement or by Lender or its counsel, including without limitation
any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists;
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower, do not require the consent or approval of any
other person, regulatory authority or governmental body, and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree or order applicable to Borrower.
<PAGE> 5
BUSINESS LOAN AGREEMENT
(CONTINUED)
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute
legal, valid and binding obligations of Borrower enforceable against Borrower
in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed
in Borrower's financial statements or in writing to Lender and as accepted by
Lender, and except for property tax liens for taxes not presently due and
payable, Borrower owns and has good title to all of Borrower's properties free
and clear of all Security Interests, and has not executed any security
documents or financing statements relating to such properties. All of
Borrower's properties are titled in Borrower's legal name, and Borrower has not
used, or filed a financing statement under, any other name for at least the
last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," and the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et. seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et. seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower represents and
warrants that: (a) During the period of Borrower's ownership of the properties,
there has been no use, generation, manufacture, storage, treatment, disposal,
release or threatened release of any hazardous waste or substance by any
person on, under, about or from any of the properties. (b) Borrower has no
knowledge of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release or threatened release of any
hazardous waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the properties shall use, generate, manufacture,
store, treat, dispose of, or release any hazardous waste or substance on,
under, about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and its
agents to enter upon the properties to make such inspections and tests as
Lender may deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be construed to
create any responsibility or liability on the part of Lender to Borrower or to
any other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous waste
and hazardous substances. Borrower hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b) agrees
to indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to Borrower's ownership
or interest in the properties, whether or not the same was or should have been
known to Borrower. The provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of the indebtedness and
the termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or other similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties, other
than litigation, claims, or other events, if any, that have been disclosed to
and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor Prohibited
Transaction (as defined in ERISA) has occurred with respect to any such plan,
(ii) Borrower has not withdrawn from any such plan or initiated steps to do so,
(iii) no steps have been taken to terminate any such plan, and (iv) there are
no unfunded liabilities other than those previously disclosed to Lender in
writing.
Investment Company Act. Borrower is not an "investment company" or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
Public Utility Holding Company Act. Borrower is not a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
Regulations G, T and U. Borrower is not engaged principally, or as one of its
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).
3
<PAGE> 6
BUSINESS LOAN AGREEMENT
(CONTINUED)
Location of Borrower's Offices and Records, Borrower's Place of Business,
or Borrower's Chief Executive Office. If Borrower has more than one place
of business, is located at 4070 Silver Sage Drive, Carson City, NV 89701.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
Claims and Defenses. There are no defenses or counterclaims, offsets or
other adverse claims, demands or actions of any kind, personal or
otherwise, that Borrower, Grantor, or any Guarantor could assert with
respect to the Note, Loan, Indebtedness, this Agreement, or the Related
Documents.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of
each month, Borrower's balance sheet and profit and loss statement for the
period ended and, as soon as available, but in no event later than five (5)
days after the filing with the Securities and Exchange Commission,
Borrower's form 10Q and 10K, prepared and certified as correct to the best
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios: Borrower shall maintain on a monthly basis, beginning with the
month ending August 31, 1997, a minimum Liquidity ratio of 2.00 to 1.00; a
minimum Tangible Net Worth of $1,500,000.00; and a maximum total Debt to
Tangible Net Worth ratio of 0.75 to 1.00. Furthermore, Borrower shall not
report quarterly losses in excess of: $2,500,000.00 for the quarter ending
June 30, 1997; $1,800,000.00 for the quarter ending September 30, 1997;
$1,100,000,00 for the quarter ending December 31, 1997; and $900,000.00 for
the quarter ending March 31, 1998. Thereafter, Borrower shall achieve
profitability on a quarterly basis. In addition, Borrower shall be in
receipt of additional equity in an amount not less than $5,000,000.00 no
later than August 15, 1997.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
4
<PAGE> 7
BUSINESS LOAN AGREEMENT
(CONTINUED)
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors named
below, on lender's forms, and in the amounts and under the conditions spelled
out in those guaranties.
GUARANTORS AMOUNTS
---------- -------
Curtis M. Faith $250,000.00
Peter B. Pitsker $250,000.00
Peter B. Pitsker and Polly D. Pitsker $250,000.00
Revocable Living Trust u/a/d September 11, 1985
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any
other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed upon
Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's properties, income, or profits. Provided
however, Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the legality of the
same shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with respect to
such contested assessment, tax, charge, levy, lien, or claim in accordance with
generally accepted accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the
Related Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans with Disabilities Act and with all minimum funding standards and
other requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Environmental Studies. Promptly conduct and complete, at Borrower's expense,
all such investigations, studies, samplings and testings as may be requested by
Lender or any governmental authority relative to any substance defined as toxic
or a hazardous substance under any applicable federal, state, or local law,
rule, regulation, order or directive, or any waste or by-product thereof, at or
affecting any property or facility owned, leased or used by Borrower.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party. Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any
records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
monthly, within thirty (30) days with a certificate executed by Borrower's
chief financial officer, or other officer or person acceptable to Lender,
certifying that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further certifying
that, as of the date of the certificate, no Event of Default exists under this
Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damages may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of
a permit issued by the appropriate federal, state or local governmental
authorities, shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or
not there is damage to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
5
<PAGE> 8
BUSINESS LOAN AGREEMENT
(CONTINUED)
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
excluding equipment financing lease arrangements, (b) except as allowed as
a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c) sell
with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged.
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c)
pay and dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only
so long as no Event of Default has occurred and is continuing or would
result from the payment of dividends, if Borrower is a "Subchapter S
Corporation" (as defined in the Internal Revenue Code of 1988, as amended),
Borrower may pay cash dividends on its stock to its shareholders from time
to time in amounts necessary to enable the shareholders to pay income taxes
and make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as Shareholders
of a Subchapter S Corporation because of their ownership of shares of stock
of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guarantee. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if;
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender, (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or
any other loan with Lender.
LOAN ADVANCES. Lender, in its discretion, will make loans to Borrower, in
amounts determined by Lender, up to the amounts as defined and permitted in
this Agreement and the Related Documents, including, but not limited to, any
Promissory Notes, executed by Borrower (the "Credit Limit"). Borrower is
responsible for monitoring the total amount of Loans and Indebtedness
outstanding from time to time, and Borrower shall not permit the same, at any
time to exceed the Credit Limit. If at any time the total of all outstanding
Loans and Indebtedness exceeds the Credit Limit, Borrower shall immediately pay
the amount of the excess to Lender, without notice of demand.
ACCOUNTS RECEIVABLE AUDIT. Lender shall conduct an initial audit of Borrower's
accounts receivable within six (6) months from the date hereof, thereafter, such
audits shall be conducted on a semi-annual basis. Borrower's deposit account
will be debited for the audit expense and a notification will be mailed to
Borrower.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Document is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceased to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceedings, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on
or of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
Change in Ownership. Any change in ownership of twenty-five (25%) or more
of the common stock of Borrower.
6
<PAGE> 9
BUSINESS LOAN AGREEMENT
(CONTINUED)
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents of any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's rights
and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
DEFAULT RATE. Following an Event of Default, including failure to pay upon
final maturity, Lender, at its option, may do one or both of the following: (a)
increase the variable interest rate on the Note to five percentage points
(5.000%) over the otherwise effective interest rate payable thereunder, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the interest rate provided in the Note.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts of
Santa Clara County, the State of California. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other.
(Initial Here________) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
Borrower Information. Borrower consents to the release of information on or
about Borrower by Lender in accordance with any court order, law or
regulation and in response to credit inquiries concerning Borrower.
Non-Liability of Lender. The relationship between Borrower and Lender is a
debtor and creditor relationship and not fiduciary in nature, nor is the
relationship to be construed as creating any partnership or joint venture
between Lender and Borrower. Borrower is exercising its own judgment with
respect to Borrower's business. All information supplied to Lender is for
Lender's protection only and no other party is entitled to rely on such
information. There is no duty for Lender to review, inspect, supervise, or
inform Borrower of any matter with respect to Borrower's business. Lender
and Borrower intend that Lender may reasonably rely on all information
supplied by Borrower to Lender, together with all representations and
warranties given by Borrower to Lender, without investigation or
confirmation by Lender and that any investigation or failure to investigate
will not diminish Lender's right to so rely.
Notice of Lender's Breach. Borrower must notify Lender in writing of any
breach of this Agreement or the Related Documents by Lender and any other
claim, cause of action or offset against Lender within thirty (30) days
after the occurrence of such breach or after the accrual of such claim,
cause of action or offset. Borrower waives any claim, cause of action or
offset for which notice is not given in accordance with this paragraph.
Lender is entitled to rely on any failure to give such notice.
Borrower Indemnification. Borrower shall indemnify and hold Lender harmless
from and against all claims, costs, expenses, losses, damages, and
liabilities of any kind, including but not limited to attorneys' fees and
expenses, arising out of any matter relating directly or indirectly to the
Indebtedness, whether resulting from internal disputes of the Borrower,
disputes between the Borrower and any Guarantor, or whether involving any
third parties, or out of any other matter whatsoever related to this
Agreement or the Related Documents, but excluding any claim or liability
which arises as a direct result of Lender's gross negligence or willful
misconduct. This indemnity shall survive full repayment and satisfaction of
the Indebtedness and termination of this Agreement.
7
<PAGE> 10
BUSINESS LOAN AGREEMENT
(CONTINUED)
Counterparts. This Agreement may be executed in multiple counterparts, each of
which, when so executed, shall be deemed an original, but all such counterparts,
taken together, shall constitute one and the same Agreement.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimile, and shall be effective when actually
delivered or when deposited with a nationally recognized overnight courier or
deposited in the United States mail, first class, postage prepaid, addressed to
the party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice
is to change the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute notice
to all Borrowers. For notice purposes, Borrower will keep Lender informed at all
times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower" as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL OF THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JULY
15, 1997.
BORROWER:
BOREALIS TECHNOLOGY CORPORATION
By: /s/ ELIZABETH J. GASPER
-----------------------
Name: Elizabeth J. Gasper
---------------------
Title: CFO
--------------------
LENDER:
Silicon Valley Bank
By: /s/ KEVIN J. CONWAY
-----------------------
Name: Kevin J. Conway
---------------------
Title: Vice President
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,892,389
<SECURITIES> 650,000
<RECEIVABLES> 222,308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,024,011
<PP&E> 1,382,088
<DEPRECIATION> (508,484)
<TOTAL-ASSETS> 4,945,664
<CURRENT-LIABILITIES> 2,121,924
<BONDS> 0
0
0
<COMMON> 4,827
<OTHER-SE> 15,425,139
<TOTAL-LIABILITY-AND-EQUITY> 4,945,664
<SALES> 0
<TOTAL-REVENUES> 728,281
<CGS> 0
<TOTAL-COSTS> 37,329
<OTHER-EXPENSES> 1,754,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,419
<INCOME-PRETAX> (5,848,189)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,848,189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,848,189)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
