SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File Number 0-21041
OBJECT DESIGN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0424252
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 MALL ROAD, BURLINGTON, MA 01803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 674-5000
Securities registed pursuant to Section 12(b) of the Act:
Common Stock, par value $.001
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. _________
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on February 28, 1997
as reported by the Nasdaq National Market, was approximately $77,530,285. For
purposes of the foregoing calculation, the Company has assumed that each
director, executive officer and holder of 10% or more of the voting stock of the
Company is an affiliate. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1997 the Registrant had outstanding 26,790,476 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K. Exhibit index is located on page 37
<PAGE>
PART I
Item 1. BUSINESS
OVERVIEW
Object Design develops, markets, and supports the ObjectStore database
management system and related tools, used to build and deploy Internet, Intranet
and other distributed computing applications. The Company's database products
are designed to meet the performance, scalability, and rapid time to market
requirements of this new generation of applications. ObjectStore supports
extended data types such as image, text, time series, spatial, video, audio,
HTML and Java software objects, as well as the extended relationships among data
exemplified by the non-tabular, unstructured data found on the Internet.
PRODUCTS
The Company's ObjectStore database management system, multimedia Object
Managers, DBconnect, and related development and database administration tools
provide a powerful data management solution for customers building Internet and
Intranet applications and other high-performance distributed computing
applications requiring the management of extended data types and extended data
relationships. Prices of development licenses for the Company's products range
from approximately $400 to approximately $30,000, based on hardware platform,
configuration, machine class, quantity ordered and other factors. Run-time
licenses for the Company's products are generally priced separately.
The following comprise the Company's product family:
OBJECTSTORE. ObjectStore is an object oriented database management system
that provides native support for both extended data types and extended data
relationships. Since its introduction in 1990, ObjectStore has been successfully
deployed in telecommunications, finance and engineering design and analysis
applications where high performance, reliability, concurrency, and scalability
are core requirements. The ObjectStore database delivers the following key
benefits:
[BULLET] Provides native storage and management of extended data types such as
multimedia data and software objects without requiring the programmer
to write application code to map extended data types into relational
tables. Storage and handling of extended data types with the related
behavior logic as a single object permits rapid access and processing
and eliminates the requirement to separately provide that behavior
logic in the application. Native storage of extended data types and
encapsulation of behavior logic make possible functions such as
content searching on image data -- for example, to locate an image by
shape, color or texture -- that would be difficult or impossible to
implement with a relational database.
[BULLET] Is easily extensible to permit the Company or customers to add support
for new data types or add more powerful functions to manipulate
existing data types. Through creation or modification of the class
libraries that describe the data structure and behavior of extended
data types, ObjectStore enables the rapid incorporation of new data
types and additional functions.
[BULLET] Provides for direct modeling of extended relationships among sets of
data, allowing customers to create applications optimized to navigate
and manipulate complex data structures. Because extended relationships
are stored as direct links in the database, ObjectStore enables an
Internet application to dynamically construct a Web page on demand in
response to user input by rapidly locating and assembling content from
a variety of disparate data sources.
[BULLET] Provides full support for object oriented programming methodologies.
Because data is stored in the same object oriented format in which it
will be used by the application code, ObjectStore accelerates the
development process and improves application performance by
eliminating the need to map to relational tables. ObjectStore offers
customers several programming language interfaces to the database,
including Java, C++, HTML, SQL, and ActiveX.
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OBJECT MANAGERS. ObjectStore Object Managers are modules that enable
extended data types to be stored and manipulated as objects by the
ObjectStore database. Used individually or in combination with each other,
Object Managers provide storage management and built-in functions to operate
on extended data types. The Company intends to continue to introduce new
Object Managers and increase the capabilities of existing Object Managers
through its own development projects and through partnerships. Object
Managers currently available from Object Design include:
Image Object Manager. The Image Object Manager is designed to help
customers build image-rich Internet and multimedia applications. The
Company's Image Object Manager includes visual search engine technology
licensed from Virage.
Text Object Manager. The Text Object Manager allows users to store and
retrieve unstructured text in native text formats such as word processor
formats and also includes a built-in capability to perform free text
indexing, search and retrieval. The Text Object Manager includes text search
engine technology licensed from Verity.
Video Object Manager. The Video Object Manager allows users to manage,
back up, archive and index video clips in common file formats such as MPEG
or QuickTime directly in the database.
Audio Object Manager. The Audio Object Manager allows users to manage,
back up, archive and index audio clips in common file formats such as MIDI
or .AU format directly in the database.
Spatial Object Manager. The Spatial Object Manager allows users to
store, index, and analyze spatial data with any number of dimensions and
representations.
Time Series Object Manager. The Time Series Object Manager allows users
to store, index, and analyze time series data that repeats over regular or
irregular time periods.
HTML Object Manager. The HTML Object Manager allows users to store and
retrieve HTML text, including words, phrases, paragraphs or entire HTML
pages, as HTML objects.
Java Object Manager. The Java Object Manager allows users to store Java
applets directly as objects in the ObjectStore database. The Java Object
Manager permits users to index, store, retrieve, back up, and archive Java
software objects natively.
Additional Object Managers have been developed and are sold by third
party vendors which have joined Object Design's Alliance Program.
DEVELOPMENT AND END-USER TOOLS. Object Design provides customers with tools
designed to enhance the ability of developers and end users to build and deploy
applications with the Company's products and to easily access information stored
within the ObjectStore database. The tools currently offered by Company are:
ObjectForms. ObjectForms provides a comprehensive templating facility
and point-and-click development tool which facilitate development of
HTML-based applications for ObjectStore. ObjectForms provides connectivity
between the ObjectStore database and standard Web server software through
its Webconnect module. Webconnect allows customers to connect directly
through higher-speed proprietary vendor interfaces such as Netscape's NSAPI
or Microsoft's ISAPI, as well as through the standard Common Gateway
Interface ("CGI"). Webconnect also provides automated dispatching
capabilities that permit customers to build and deploy high-volume Web sites
using the ObjectStore database.
ObjectStore Inspector is a graphical browser, editor and query tool for
the ObjectStore database.
ObjectStore Performance Expert, a graphical, interactive analysis and
monitoring tool, is designed to provide developers and database
administrators with information necessary to optimize the scalability and
concurrency and tune the performance of ObjectStore-based applications.
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ObjectStore OpenAccess, a query and reporting interface tool for the
ObjectStore database, is implemented through the Microsoft Open Database
Connectivity ("ODBC") protocol.
DBCONNECT. DBconnect is a powerful connectivity tool that allows
applications built with the ObjectStore database to access data stored in
existing relational databases.
OBJECTSTORE PSE AND OBJECTSTORE PSE PRO. In the fall of 1996, Object Design
introduced single-user versions of the ObjectStore database for C++ and Java
which provide local storage for desktop and browser applications. These products
share a consistent application programming interface with the full ObjectStore
database, enabling developers to scale applications from desktop to server.
ObjectStore PSE Pro is sold and distributed over the Internet; ObjectStore PSE
is distributed free of charge from Object Design's Web site. Selected
ObjectStore PSE products are also distributed and/or bundled by Microsoft,
Netscape, Borland, Asymetrix and other vendors.
SERVICES
The Company supplements its product offerings with training, consulting, and
technical support services. The Company has implemented a key account management
program in which technical support personnel are assigned to provide customers
with assistance in project and deployment planning with the objective of more
successful implementation of applications and greater customer satisfaction. The
Company also offers fee-based training, consulting and maintenance and support
services. Training courses are held at various Company locations around the
world or at customers' sites. The Company currently offers a schedule of eleven
different training courses covering subjects ranging from introductory object
oriented programming techniques to advanced topics such as database performance
tuning and Internet application design concepts. The Company also provides
fee-based consulting services to its customers in the form of on-site services
designed to provide high-leverage assistance at key points in the customers'
product development cycle. Maintenance and support contracts are offered with
the initial software license and typically are renewable annually. Maintenance
and support fees are set at a fixed percentage, generally 15%, of the current
list price of the product. Support services include the maintenance of the
Company's software products in accordance with specifications contained in the
user's guide for such products and access to technical support personnel.
Customers who are under an active software support contract are entitled to
product upgrades and enhancements when released by the Company. Certain of the
Company's distributors and channel partners also provide telephone and initial
support to end users.
RESEARCH, DEVELOPMENT, AND QUALITY ASSURANCE
The Company believes that its future success will depend in large part on
its ability to maintain and enhance its leadership in object oriented database
technology and develop new products that meet an expanding range of customer
requirements, particularly those customer requirements associated with the
Company's focus on Internet and Intranet applications. The Company's research
and development organization is divided into teams consisting of development
engineers, quality assurance, testing, and porting engineers, and technical
writers. Product definition is based on a consolidation of requirements from
existing and prospective customers and from the Company's technical support,
product management, and engineering groups.
The Company's research and development is focused on development of new products
and enhancement of the functionality of the Company's existing products. The
Company currently plans to release enhancements of its existing products and
several new products, including a programming language interface for Java,
currently in beta testing, to be introduced during the first half of 1997. The
Company's scheduled release dates for products and product enhancements are
forward-looking statements, and the actual release dates for such products and
enhancements could differ materially from those stated as a result of a variety
of factors, including the ability of the Company's engineers to solve technical
problems and test products as well as other factors, including factors outside
the Company's control. As of December 31, 1996, there were 55 employees on the
Company's research and development staff. The Company's research and development
expenditures during 1996, 1995, and 1994 were $7.5 million, $8.3 million, and
$9.5 million, respectively, and represented 19.5%, 25.4%, and 37.3%, of the
Company's total revenues, respectively.
SALES AND MARKETING
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The Company employs a multi-channel sales and marketing strategy, using
direct sales, systems integrators, independent software vendors, distributors
and other channel partners to address its global market.
DIRECT SALES. The Company has historically relied principally on direct
sales of its products. The Company has structured its direct sales force in
teams consisting of a field sales representative and a technical sales support
representative. As of December 31, 1996, the Company's direct sales force
consisted of 76 employees. In addition to its Burlington, Massachusetts
headquarters, the Company has domestic sales locations in Atlanta, Chicago,
Cincinnati, Dallas, Los Angeles, Melbourne, FL, New York, San Mateo, CA and
Washington, DC, and international direct sales locations in Brussels, London,
Paris, Tokyo and Weisbaden. The Company intends to hire additional sales and
support personnel to broaden its direct selling effort and distribution
capabilities.
CHANNEL PARTNER PROGRAMS. The Company conducts programs aimed at attracting
systems integrators, independent software vendors and resellers to complement
its direct sales force and broaden the worldwide penetration of the Company's
products. The Company's systems integration partners include Alta Software,
Andersen Consulting, USWeb, Indus, SAIC and TASC. The Company intends to
continue to expand its channel partner programs to attract additional channel
partners that have specifically targeted Internet and Intranet applications.
INTERNATIONAL DISTRIBUTORS. In certain international markets, the Company
uses third party distributors and resellers that are supported by the Company's
sales organization. Approximately 12.7%, 12.9%, and 8.5% of the Company's total
revenues were derived from sales to international distributors in 1996, 1995 and
1994, respectively. The Company intends to increase the number of its
international distributors.
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, trade shows, public
relations, advertising, seminars, and ongoing customer and third party
communications programs. The Company also seeks to stimulate interest in its
products and services through speaking engagements, white papers, technical
notes and other publications. The Company has also established a home page on
the World Wide Web where potential customers can obtain information about the
Company's products.
CUSTOMERS
During 1996, the Company changed its product development and marketing
strategy to focus on the Internet and Intranet computing markets. In March 1996,
the Company introduced its ObjectForms and Object Manager products, specifically
designed to address this market. Customers who are developing and deploying
advanced applications for the Internet and corporate Intranets using these new
products represent a varied group of industries and company profiles. Examples
of customers of these products range from large airlines, banks, media
companies, car manufacturers to small systems integrators implementing Web-based
applications for their customers and small entrepreneurial customers setting up
electronic commerce sites on the Internet. All these customers' applications
have in common the requirements for speed of data access, use of extended data
types and extended relationships and the desire to program in an object oriented
environment.
In 1996 most of the Company's revenue was derived from sales of its
products and services into its traditional markets of telecommunications,
network management, finance and engineeing design and analysis, where rigorous
requirements for high performance, reliability, concurrency and scalability must
be met and where conventional relational database systems have been unable to
meet the challenge of managing extended data types and extended data
relationships while providing acceptable performance. No customer accounted for
10% or more of revenue during the years of 1996, 1995 and 1994.
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BACKLOG
The Company maintains no material backlog because business typically is booked
and shipped in the same quarter.
COMPETITION
The market in which the Company competes is intensely competitive, highly
fragmented, and characterized by rapidly changing technology and standards. The
Company's current and prospective competitors offer a variety of database
solutions, including: object databases available from Computer Associates,
GemStone, Objectivity, O2, Poet and Versant; relational databases available from
Computer Associates, IBM, Informix, Microsoft, Oracle and Sybase;
extended-relational and object-relational databases available from IBM,
Informix, Oracle and UniSQL; and other specialized databases such as on-line
analytical processing databases. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing, and other resources than the Company, and many of which have well
established relationships with current and potential customers of the Company.
In the future, the Company expects to experience increased competition from
established vendors of relational database systems that may seek to offer
extended-relational, object-relational or object oriented database management
systems. It is also possible that alliances among competitors may emerge and
rapidly acquire significant market share. The Company also believes that
competition will increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins, and
loss of market share, any of which would materially adversely affect the
Company's business, results of operations and financial condition. There can be
no assurance the Company will be able to compete effectively against current and
future competitors.
The Company believes that the principal competitive factors affecting its
market include product features and functionality, ease of use, quality,
performance, price, customer service and support, effectiveness of sales and
marketing efforts and company reputation and financial viability. Although the
Company believes that it currently competes effectively with respect to such
factors, there can be no assurance that the Company will be able to maintain its
competitive position with respect to these and other important competitive
factors.
PROPRIETARY TECHNOLOGY AND LICENSED TECHNOLOGY
The Company relies on a combination of trademark, copyright, trade secret
laws, employee and third-party non-disclosure agreements, confidentiality
procedures and contractual provisions to protect its proprietary technology. The
Company seeks to protect its software, documentation, and other written
materials under trade secret and copyright laws, which offer limited protection.
The Company currently has one United States patent, covering certain virtual
memory mapping architecture used in its ObjectStore database management system.
There can be no assurance that the Company's patent will not be invalidated,
circumvented, or challenged, that the rights granted thereunder will provide
competitive advantage to the Company or that any future patent applications will
be issued with the scope of the claims sought by the Company. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. There can also be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development of similar
technology by others. Certain of the Company's software products are licensed to
customers under "shrink wrap" licenses included as part of the product
packaging. Although in larger sales the Company's shrink wrap licenses are
generally accompanied by specifically negotiated agreements signed by the
licensee, in many cases its shrink wrap licenses are not negotiated with or
signed by individual licensees. Certain provisions of the Company's shrink wrap
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of various countries in
which the Company's products may be sold may not protect the Company's products
and intellectual property rights to the same degree as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty arrangements or result
in costly litigation. If infringement is alleged, the Company could be required
to discontinue the use of certain software or to cease the use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially
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acceptable to the Company. The Company is not aware of any patent infringement
charge or any violation of other proprietary rights claimed by any third party
relating to the Company or to the Company's products. However, the computer
software market is characterized by frequent and substantial intellectual
property litigation. Intellectual property litigation is complex and expensive,
and the outcome of such litigation is difficult to predict. The Company believes
that, due to the rapid pace of technological innovation for database software
products, the Company's ability to establish and maintain a position of
technology leadership in the industry is dependent more upon the skills of its
development personnel than upon the legal protections afforded its existing
technology.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used to perform key functions such as the relational
database engine licensed from Dharma Systems and incorporated in the Company's
DBconnect and OpenAccess products, visual and text search engine technology
licensed from Virage and Verity and HTML development tools licensed from
net.Genesis. In addition, the Company has licensed technology from IBM for use
in its ObjectStore Performance Expert product and technology from ViVi Software,
for use in its ObjectStore Inspector product. As of January 16, 1997, the
Company acquired all assets of ViVi Software including the ObjectStore Inspector
product. The agreement with net.Genesis conveys a fully paid license to use the
net.Genesis technology in the Company's products. The other licensing agreements
require the Company to pay royalties to the licensors upon sale of the Company's
products containing the licensed technology. The Company believes that it will
be able to renew non-perpetual licenses or that it will be able to obtain
substitute product if needed.
EMPLOYEES
As of December 31, 1996 the Company employed 233 full-time employees, including
55 in research and development, 88 in sales and marketing, 62 in customer
support, and 28 in finance and administration. None of the Company's employees
is represented by a labor union and the Company considers its employee relations
to be good.
Item 2. PROPERTIES
Facilities
The Company's corporate headquarters are located in Burlington, Massachusetts,
in a leased facility consisting of approximately 34,000 square feet of office
space occupied under a lease expiring in November 2001 at an annual lease rate
of $677,000. The Company also leases space for sales offices in Atlanta,
Chicago, Cincinnati, Dallas, Los Angeles, Melbourne, FL, New York, San Mateo, CA
and Washington, DC, and internationally in Brussels, London, Paris, Tokyo and
Weisbaden.
Item 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the over-the-counter market under the
Nasdaq symbol ODIS. The following table sets forth the high and low sale prices
for the Company's Common Stock reported on the Nasdaq National Market for each
quarter during 1996, commencing on July 23, 1996, the date when Company's stock
began publicly trading.
High Low
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Third Quarter
(commencing July 23, 1996) $17.00 $ 6.62
Fourth Quarter $17.12 $10.25
The approximate number of holders of record of the Company's Common Stock as of
February 28, 1997 is 218. The Company has never paid cash dividends on its
Common Stock. The current policy of its Board of Directors is to retain all
earnings for the continued growth of the Company.
RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities sold by the
Company during 1996 which were not registered under the Securities Act.
(a) From January 1, 1996 through June 30, 1996 the Company issued an
aggregate of 3,154,167 shares of Common Stock to 77 directors, officers,
employees and consultants of the Company upon the exercise of options granted
pursuant to the Company's Stock Option Plans at prices ranging from $.01 to
$3.50 per share for an aggregate consideration of $858,916.
(b) On February 15, 1996, the Company issued 1,655,000 shares of Series
J Convertible Preferred Stock for an aggregate consideration of $4,965,000 to
eleven investors.
The issuances described in this Item 5 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering, and, in the case of shares
of Common Stock issued pursuant to the exercise of options granted under the
Stock Option Plans, in further reliance upon the exemption from registration set
forth in Rule 701 under the Securities Act. The foregoing transactions did not
involve a distribution or public offering. No underwriters were engaged in
connection with the foregoing issuances of securities, and no commissions or
discounts were paid.
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Item 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical consolidated
financial data, which should be read in conjunction with the Company's financial
statements and related notes included elsewhere herein.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software $ 25,640 $ 18,700 $ 15,706 $ 8,688 $ 8,607
Services 10,028 10,928 6,731 4,155 1,989
Related party software
and services 2,671 3,078 3,052 11,807 --
-------- -------- -------- -------- --------
Total revenues 38,339 32,706 25,489 24,650 10,596
Gross profit 29,593 23,786 18,513 19,333 8,511
Operating income (loss) 1,240 (10,406) (12,387) 565 (2,262)
Net income (loss) 1,693 (10,282) (12,021) 627 (2,342)
Supplementary Net income
(loss) available
to common stockholders (Note B) $.06 $ (0.40) --
Supplementary weighted
average number of
Common and common
equivalent shares
outstanding (Note B) 29,237 25,837 --
Historical net income (loss)
per common and common
equivalent share $ .02 $ (1.07) $ (1.28)
Historical weighted average
common and common
equivalent shares
outstanding 29,237 9,601 9,418
Balance Sheet Data:
Cash and cash equivalents 10,952 2,465 3,225 2,643 3,422
Working Capital 24,225 (990) 790 8,503 2,868
Total Assets 38,461 17,154 25,629 25,484 8,248
Long-term obligations 120 476 858 708 549
Total stockholders' equity
(deficit) 28,233 (32,756) (24,314) (11,698) (12,371)
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was founded in 1988, and first shipped its ObjectStore database
management system in 1990. Initially, the Company concentrated on marketing its
products for use in computer assisted design and other engineering design and
analysis applications. The Company subsequently expanded its customer base to
include customers in telecommunications, finance and other industries that
required specialized database management capabilities not readily available from
conventional relational database management systems.
In late 1995, the Company commenced a fundamental reappraisal of its
business strategy of concentrating on a limited number of vertical industry
markets, and in early 1996 shifted its strategy to focus on providing database
management solutions for the emerging Internet and Intranet computing market. In
March 1996, the Company released its first group of products designed
specifically to address the Internet and Intranet computing market.
In connection with its strategic realignment, the Company also embarked upon
a Company-wide restructuring program, which included layoffs and other expense
reduction measures. Restructuring charges in the aggregate amount of
approximately $2.7 million, consisting principally of severance costs and
expenses related to consolidation of the Company's facilities, were recorded in
the second and third quarters of 1995.
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As a result of the Company's strategic realignment and reallocation of its
research and development, sales and marketing and technical support resources to
focus on the Internet market, it is likely that the Company's revenues from its
historical business base will experience a lower rate of growth, or will
decline. Also, the Company historically derived a substantial portion of its
revenue from fee-based consulting services. In connection with its strategic
realignment, the Company reduced its emphasis on consulting services as a source
of revenue in favor of concentrating the efforts of its technical support staff
on a key account management program and other non-billable activities designed
to ensure customer satisfaction and success in deployment of Internet and
Intranet applications based on ObjectStore.
In April 1993, the Company entered into a relationship with IBM. At that
time IBM purchased shares of the Company's Preferred Stock convertible into an
aggregate of 3,750,695 shares of Common Stock. The Company and IBM also signed
certain business agreements (the "IBM Agreements") under which IBM would be
entitled to develop and market products in which the Company's ObjectStore
database management system would be embedded, and the parties would undertake
certain joint product development and marketing activities. Under the IBM
Agreements, either party had the option (the "Break-Up Option") of terminating
certain of the IBM Agreements and modifying the terms of certain others, upon
nine months' advance notice. In March 1996, the Company exercised the Break-Up
Option by giving written notice to IBM, effective in January 1997. As a result
of its exercise of the Break-Up Option, the Company's revenues from IBM are
likely to decline. During 1994, 1995 and 1996 revenues attributable to IBM were
$1.7 million, $3.1 million and $2.7 million, and constituted 6.9%, 9.4% and 7.0%
of the Company's total revenues for such periods, respectively.
Revenues and accounts receivable from IBM are included in related party
software and services, revenue and accounts receivable -- related party in the
Company's consolidated financial statements for such periods. Related party
revenues and accounts receivable also include amounts attributable to AT&T,
Intel, Kodak, Olivetti and Zuken, each of which was also a stockholder of the
Company during such periods. However, no customer, including IBM, has accounted
for more than 10% of the Company's revenues in any of the foregoing periods.
RESULTS OF OPERATIONS
The following table sets forth certain revenue and cost data as a percentage
of the Company's total revenues for each period presented:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software................................ 66.9% 57.2% 61.6%
Services................................ 26.1 33.4 26.4
Related party software and services..... 7.0 9.4 12.0
------- -------- -------
Total revenues....................... 100.0 100.0 100.0
------ ------
Cost of revenues:
Cost of software........................ 4.2 3.3 6.0
Cost of services........................ 17.4 21.2 16.8
Cost of related party software and services 1.2 2.8 4.6
------- ------- -------
Total cost of revenues............... 22.8 27.3 27.4
------ ------ ------
Gross profit.............................. 77.2 72.7 72.6
Operating expenses:
Selling and marketing................... 45.5 59.9 71.6
Research and development................ 19.5 25.4 37.3
General and administrative.............. 9.0 10.9 12.3
Restructuring charges.................... -- 8.3 ---
-------- ------- ------
Total operating expenses............. 74.0 104.5 121.2
Operating income (loss)................... 3.2 (31.8) (48.6)
Other income 1.3 0.4 1.5
------- --- ------
Income (loss) before provision (benefit) for 4.6 (31.4) (47.1)
income taxes
Provision (benefit) for income taxes...... 0.2 (0.0) 0.1
---- ------
Net income (loss)......................... 4.4 (31.4)% (47.2)%
===== =====
</TABLE>
10
<PAGE>
1996 COMPARED TO 1995
Software Revenue. Software revenue increased 37.1% to $25.6 million in 1996
compared with $18.7 million in 1995. The increase was due to growth in volume of
sales of ObjectStore which more than offset a decline in the product's average
selling price ("ASP"). The Company continued to expand its customer base from
its traditional customers in the telecommunications, networking, finance,
engineering and engineering design industries to a growing number of customers
in a broader group of industries as the result of the Company's new focus of
selling to customers that are developing and deploying applications on the
Internet and Intranet. The Company's sales to Internet and Intranet customers
have had a lower ASP than have sales to its traditional customer base, as the
result of a different pricing structure for the Internet and Intranet market. It
is expected for the future quarters that the Company's ASP will continue to
decline as Internet revenues make up a growing percentage of revenues.
Services Revenue. Services revenue declined 8.2% to $10.0 million in 1996
compared with $10.9 million in 1995. The decrease was due primarily to a
decrease in consulting revenues consistent with the Company's strategy to
reassign certain of its consultants to be technical account managers to manage
deployments on a non-billable basis. This decrease was only partially offset by
an increase in maintenance revenues as a result of growth in the Company's
installed base.
Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, declined 13.2% to
$2.7 million from $3.1 million. This decline was the outcome of the cancellation
of a joint development and marketing agreement with IBM in March 1996.
.
Income from International Operations. Revenues from international operations
decreased as a percentage of the Company's total revenues to 30.7% in 1996
compared with 36.9% in 1995, primarily from a faster sales growth rate in North
America. As a result of revenue growth exceeding expense growth in the Company's
international subsidiaries, particularly in Asia, the Company recorded a reduced
loss of $128,000 from international operations in 1996, compared to a loss of
$1.5 million in 1995.
Cost of Software. Cost of software increased 46.8%, to $1.6 million for 1996
compared with $1.1 million for 1995, and increased as a percentage of software
revenue to 4.2% from 3.3% for such periods, respectively. The increase in dollar
amount and as a percentage of total revenues was primarily attributable to the
broadening of the Company's product offerings and the associated costs of media,
manuals, packaging materials and duplication to support them and certain
associated third party software royalties. Cost of software as a percentage of
software revenues also increased in 1996 as compared to 1995 due to the effect
of declining average sales prices.
Cost of Services. Cost of services decreased 3.7%, to $6.7 million in 1996
compared with $6.9 million in 1995, and represented 66.6% of services revenue in
1996, up from 63.4% in the prior year. The decrease in dollar amount was
attributable to a decline in average staffing levels in the consulting
organization in 1996 vs. 1995 as a result of the strategic re-alignment of that
organization. The increase in cost as a percent of service revenue is also the
result of the strategic realignment of the consulting business, shifting certain
consultants to non-billable roles as technical account managers to help ensure
successful customer deployments.
Cost of Related Party Software and Services. Cost of related party software
and services decreased 47.5%, to $475,000 for 1996 compared with $904,000 for
1995, and represented 17.8% and 29.4% of related party software and services
revenue for such periods, respectively. The reduction as a percentage of revenue
was attributable to a shift in the mix of revenues toward higher margin software
revenue in 1996 from lower margin consulting revenue in 1995.
Selling and Marketing Expense. Selling and marketing expense decreased
11.0%, to $17.4 million in 1996 compared with $19.6 million in 1995, and
decreased as a percentage of the Company's total revenues to 45.5% from 59.9%
for such periods, respectively. The decrease in each case reflects the effects
of the Company's restructuring in the second half of 1995 and related headcount
reductions. The Company intends to expand its direct sales force and
significantly increase its expenditures on marketing focused on the Internet
opportunity throughout 1997.
11
<PAGE>
Research and Development Expense. Research and development expense decreased
9.8%, to $7.5 million compared with $8.3 million in 1995, and represented 19.5%
and 25.4% of total revenues for such periods, respectively. The decreases
reflect the effects of the Company's restructuring and headcount reductions in
the second half of 1995. The Company expects that research and development
expense will increase in dollar amount in future periods as the Company
continues to enhance ObjectStore and its current related products and supports
the introduction of new products for the Internet.
General and Administrative Expense. General and administrative expense
decreased 4.2%, to $3.4 million in 1996 compared with $3.6 million in 1995, and
decreased as a percentage of the Company's total revenues to 9% from 11.0% for
such periods, respectively. The decrease in both cases was due to the Company's
restructuring and related headcount reductions in the second half of 1995. This
decrease was partially offset by increases in consulting fees and some temporary
duplication in personnel cost associated with the Company's strategic
realignment and transition in senior management in late 1995 and early 1996 and
costs associated with becoming a public company in third quarter 1996.
Restructuring Charges. Restructuring charges in 1995 consist primarily of
severance payments and costs related to consolidation of the Company's
facilities in connection with its restructuring and strategic realignment in the
second and third quarters of 1995. See Note M of Notes to Consolidated Financial
Statements.
Other Income. Other income increased by 326.2% to $520,000 in 1996 compared
with $122,000 in 1995. This increase was largely the result of increased
interest income on increased cash balances resulting from the Company's initial
public offering in July 1996.
Provision (Benefit) for Income Taxes. The Company's effective tax rate of
3.8% for the year 1996 reflects the federal alternative tax provision. The
effective tax rate in all periods presented is lower than the statutory rate,
principally due to the utilization of net operating loss carryforwards.
1995 COMPARED TO 1994
Software Revenue. Software revenue increased 19.1% to $18.7 million in 1995
compared with $15.7 million in 1994. The increase was due to growth in volume of
sales of ObjectStore as the Company continued to expand its customer base from
the engineering industry to customers in the telecommunications, data
communications, finance and other industries.
Services Revenue. Services revenue increased 62.4% to $10.9 million in 1995
compared with $6.7 million in 1994. The increase was due primarily to an
increase in consulting revenues and to an increase in maintenance revenues
attributable to growth of the Company's installed base.
Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, was $3.1 million in
each of 1995 and 1994.
Income from International Operations. Revenues from international operations
increased as a percentage of the Company's total revenues to 36.9% in 1995
compared with 28.8% in 1994. The increase resulted primarily from a more
established direct sales presence in certain markets in Europe and Asia. As a
result of costs related to its continued investment in Europe and Asia Pacific
subsidiaries, the Company recorded a loss of $1,531,000 from international
operations in 1995, compared to a loss of $2,075,000 in 1994. The larger loss in
1994 was attributable to start-up costs associated with the Company's
establishment of a direct presence in Europe and the Asia Pacific region.
Cost of Software. Cost of software decreased 29.0%, to $1.1 million for 1995
compared with $1.5 million for 1994, and decreased as a percentage of software
revenue to 5.8% from 9.8% for such periods, respectively. The decrease in dollar
amount and as a percentage of total revenues was primarily attributable to
successful efforts by management to reduce the costs of media, manuals,
packaging materials and duplication.
12
<PAGE>
Cost of Services. Cost of services increased 62.4%, to $6.9 million in 1995
compared with $4.3 million in 1994, and represented 63.4% of services revenue in
each period. The increase in dollar amount was attributable to growth in the
size of the Company's consulting staff in the first half of 1995.
Cost of Related Party Software and Services. Cost of related party software
and services decreased 23.1%, to $904,000 for 1995 compared with $1.2 million
for 1994, and represented 29.4% and 38.5% of related party software and services
revenue for such periods, respectively. The reduction as a percentage of revenue
was attributable to a shift in the mix of revenues toward higher margin software
revenue in 1995 from lower margin consulting revenue in 1994.
Selling and Marketing Expense. Selling and marketing expense increased 7.4%,
to $19.6 million in 1995 compared with $18.2 million in 1994, but decreased as a
percentage of the Company's total revenues to 59.9% from 71.6% for such periods,
respectively. The increase in dollar amount reflected expansion of the Company's
direct sales force during the first half of 1995 and higher commission expense
associated with increased software license revenues, which were partially offset
by the effects of the Company's restructuring and related reductions in
headcount and marketing expense in late 1995. The decrease as a percentage of
revenue was attributable to higher productivity of the Company's sales force in
1995.
Research and Development Expense. Research and development expense decreased
12.8%, to $8.3 million in 1995 compared with $9.5 million in 1994, and
represented 25.4% and 37.3% of total revenues for such periods respectively. The
decrease in dollar amount and as a percentage of total revenues was due
primarily to the Company's restructuring in late 1995 and the related reduction
in research and development headcount, as well as to the Company's suspension of
certain non-strategic product development efforts.
General and Administrative Expense. General and administrative expense
increased 14.2%, to $3.6 million in 1995 compared with $3.1 million in 1994, but
decreased as a percentage of the Company's total revenues to 10.9% from 12.3%
for such periods, respectively. The increase in dollar amount was attributable
primarily to increased headcount to support the Company's expanding domestic and
international operations.
Restructuring Charges. Restructuring charges in 1995 consist primarily of
severance payments and costs related to consolidation of the Company's
facilities in connection with its restructuring and strategic realignment in the
second and third quarters of 1995. See Note M of Notes to Consolidated Financial
Statements.
Other Income. Other income decreased by 68.2% to $122,000 in 1995 compared
with other income of $384,000 in 1994. This decrease was largely the result of
decreased interest income related to lower cash balances during 1995 as compared
to 1994.
Provision (Benefit) for Income Taxes. Differences between the Company's
effective tax rates in 1995 and 1994 are attributable to the effect of foreign
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in July 1996, the Company had financed
its operation through a combination of sales of Preferred Stock, bank lines of
credit and capital and operating leases. In July 1996, the Company completed its
initial public offering and sold an aggregate of 3,000,000 shares of common
stock at $7.00 per share resulting in net proceeds to the Company, after
underwriting commissions and other costs, of approximately $18.5 million.
As of December 31, 1996, the Company had cash and cash equivalents of $11.0
million and working capital of $28.4 million.
The Company's operating activities used cash of $3.6 million, $6.2 million,
and $4.3 million, in 1996, 1995, and
13
<PAGE>
1994, respectively. Cash used in operations during 1996 was primarily due to an
increase in accounts receivable as a result of increased sales and a decrease in
the amount of cash received in the form of prepaid license fees. The use of cash
in 1995 and 1994 was primarily the result of the Company's net losses.
Investing activities used $10.2 million of cash in 1996 and provided $5.9
million in 1995 and $2.4 million in 1994 respectively. The use of cash in 1996
was primarily attributable to net purchases of marketable securities of $16.8
million in 1996. The cash provided by investment activities in 1995 was
primarily due to the proceeds from the sale of marketable securities. The use of
cash in 1994 was primarily the result of capital expenditures in that year.
Cash provided by financing activities was $22.4 million in 1996. Cash used
by financing activities was $486,000 in 1995 and financing activities provided
$7.3 million in cash in 1994. The net cash provided in 1996 from financing
activities was primarily the result of the initial public offering and $4.9
million raised through the sale of preferred stock in February 1996. The use of
cash in 1995 was the result primarily of principal payments on long-term
borrowings. The source of cash in 1994 was primarily proceeds from the issuance
of preferred stock and the from long-term bank borrowings.
Capital expenditures, including capital leases, were approximately $1.3
million, $1.2 million, $2.7 million in 1996, 1995, and 1994, respectively. These
expenditures consisted principally of purchases of property and equipment,
primarily computer hardware and software.
The Company's revolving credit agreement with Fleet Bank expired in April
1995 and the Company entered into a line of credit with Bank of Boston in
December 1996 in the amount of $2,000,000. At December 31, 1996 ,no borrowings
were outstanding under the line of credit, but letters of credit in the amount
of $800,000 had been issued for the account of the Company under the line of
credit. The line of credit is collateralized by substantially all the assets of
the Company. The Company's agreements with the Bank contain various covenants,
including financial covenants tested on a quarterly basis, that require
maintenance of a specified quick ratio, leverage ratio and minimum capital base
and prohibit losses in excess of a specified maximum. Upon the occurrence of an
event of default under the Bank agreements that is not waived by the Bank or
cured, the Bank is entitled to, among other things, demand payment of all
outstanding amounts and terminate the letters of credit. At December 31, 1996,
the Company was in compliance with the Bank's covenants.
The Company believes that its current cash, cash equivalents marketable
securities, capital leases, facilities and funds generated from operations, if
any, will provide adequate liquidity to meet the Company's capital and operating
requirements through at least 1997.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward looking statements" which involve risks and uncertainties.
The words "expect", "anticipate", "internal", "plan", "believe," "seek",
"estimate" and similar statements are intended to identify such forward looking
statements. In particular, statements in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" relating to the Company's
future shipments, revenue and expense levels and profitability, as well as the
sufficiency of capital to meet working capital and capital expenditure
requirements, may be forward-looking statements. This Report also contains other
forward-looking statements. Such statements are not guarantees of future
performance, and involve certain risks, uncertainties and assumptions that could
cause the Company's future results to differ materially from those expressed in
any forward-looking statements. The Company disclaims any intent or obligation
to update publicly any forward-looking statements whether in response to new
information, future events or otherwise. Important factors that may cause the
Company's actual results to differ from such forward-looking statements include,
but are not limited to, the factors discussed below.
The Company's results of operations will depend to a substantial extent on
the acceptance of the Company's technology by future purchasers, specifically in
the newly targeted and competitive marketplace of the Internet. This is a new
and evolving market and there can be no assurance that the Internet will develop
as a viable medium for business communications and activity in the long term, or
that the Company's Internet-related products and
14
<PAGE>
services will achieve or maintain market acceptance. The Company will need to
continue to expand its sales force rapidly in order to gain market share in the
short term. Sales personnel are difficult to recruit and retain and the Company
has limited experience in training and managing a large and growing sales force.
As the Company expands its sales and marketing efforts into the Internet
marketplace, the profile of customers is shifting from large telecommunications
and financial institutions to a broader group of small and large companies in
many industry segments. As a result, sales personnel now need to develop and
manage an increasing number of smaller dollar value transactions. The result
could be less accurate sales forecasting. The Company's marketing department
also needs to develop a stream of qualified leads at a more accelerated pace
than in the past in order to keep the sales force at optimum productivity or
sales productivity could be lower than planned. The credit profile of certain of
the Company's smaller Internet customers is weaker overall than that of the
Company's historical customer base. Failure of the Company to implement new
credit policies and reserves could result in write-offs that could adversely
affect the Company's results of operations. The Company is reliant on product
innovation and new product releases to keep it competitive. Any delay in the
release of products or failure of released products to meet the market
expectation of functionality and features could undermine the Company's
competitive position. Furthermore certain of the Company's competitors are
significantly larger and are expending greater amounts on research and
development and sales and marketing than is the Company. The result could be new
competitive product introductions that could limit the salability of the
Company's products, put pressure on sales prices, or diminish the reputation of
the Company as a leader in object oriented database technology. The Company
typically receives the majority of its revenue in any quarter in the last month
of the quarter. This pattern, common to many software companies, makes it
difficult to accurately forecast, increasing the possibility of missing a
quarterly revenue or profit target. As a result of the foregoing and other
factors, the Company may experience material fluctuations in future operating
results on a quarterly or annual basis which could materially and adversely
affect its business, financial condition, operating results and stock price.
15
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following statements are filed as part of this Annual Report on Form 10K:
Item Page No.
---- --------
Report of Independent Accountants 17
Consolidated Balance Sheets as of December 31, 1996 and 1995 18
Consolidated Statements of Operations for the three
years ended December 31, 1996, 1995, 1994 19
Consolidated Statements of Cash Flows for the three
years ended December 31, 1996, 1995, 1994 20
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996, 1995, 1994 21
Notes to Consolidated Financial Statements 22
Schedule II - Valuation and Qualifying Accounts 35
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Object Design, Inc.:
We have audited the accompanying consolidated balance sheets of Object Design,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Object Design,
Inc. as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 11, 1997
17
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,952 $ 2,465
Marketable securities (Note D) 11,087 1,488
Accounts receivable, less allowances of $823
and $592 at December 31, 1996 and
1995 respectively 11,694 7,631
Accounts receivable - related parties 2 433
Prepaid expenses and other current assets 598 445
-------- --------
Total current assets 34,333 12,462
Marketable securities (Note D) -- 748
Property and equipment, net (Notes C,F) 3,218 3,569
Other assets 910 375
-------- --------
Total assets $ 38,461 $ 17,154
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portion of long-term obligations (Notes E,F) $ 55 $ 733
Accounts payable 1,850 1,622
Accrued expenses 2,506 2,251
Accrued compensation 1,531 1,806
Deferred revenue 3,874 5,640
Deferred revenue - related parties 292 1,400
-------- --------
Total current liabilities 10,108 13,452
Long-term obligations (Note E) 120 476
Redeemable convertible preferred stock (Note G),
$.01 par value; 16,837,521 shares authorized at
December 31, 1995 and no shares
authorized at December 31, 1996; 16,236,654 shares
issued and outstanding at December 31, 1995 -- 35,982
Commitments and contingencies (Note F)
Stockholders' equity (deficit): (Note H)
Preferred stock, $0.01 par value: no shares authorized at
December 31, 1995 and 5,000,000 shares authorized
at December 31, 1996; no shares issued and
outstanding at December 31, 1995, or 1996 -- --
Common stock, $.001 par value; 22,500,000 shares
authorized at December 31, 1995 and 200,000,000
shares authorized at December 31, 1996; 2,373,786
shares issued and outstanding at December 31, 1995
and 26,602,830 shares issued and outstanding
at December 31, 1996 27 2
Additional paid-in capital 62,928 1,673
Accumulated deficit (33,533) (34,053)
Net unrealized holding gain (loss) on marketable
securities 7 (13)
Cumulative translation adjustment (218) (43)
Advances to stockholders (887) (200)
Unearned compensation (91) (122)
-------- --------
Total stockholders' equity (deficit) 28,233 (32,756)
Total liabilities and stockholders'
equity (deficit) $ 38,461 $ 17,154
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software $25,640 $18,700 $15,706
Services 10,028 10,928 6,731
Related party software and services 2,671 3,078 3,052
------- -------- --------
Total revenues 38,339 32,706 25,489
Cost of revenues:
Cost of software 1,597 1,088 1,533
Cost of services 6,674 6,928 4,267
Cost of related party software
and services 475 904 1,176
------- -------- --------
Total cost of revenues 8,746 8,920 6,976
Gross profit 29,593 23,786 18,513
Operating expenses:
Selling and marketing 17,435 19,596 18,245
Research and development 7,481 8,298 9,514
General and administrative 3,437 3,589 3,141
Restructuring charges -- 2,709 --
------- -------- --------
Total operating expenses 28,353 34,192 30,900
Operating income (loss) 1,240 (10,406) (12,387)
Other income 520 122 384
Income (loss) before provision (benefit)
for income taxes 1,760 (10,284) (12,003)
Provision (benefit) for income taxes 67 (2) 18
------- -------- --------
Net income (loss) $ 1,693 $(10,282) $(12,021)
======= ======== ========
Accretion of redeemable preferred stock $(1,173) $ --
------- -------- --------
Net income (loss) available to common
stockholders (Note B) $ 520 $(10,282) $(12,021)
======= ======== ========
Supplementary Net income (loss) available to
common shareholders - (Note B) $ .06 $ (0.40) --
======= ======== ========
Supplementary weighted average number of common
and common equivalent shares outstanding (Note B) 29,237 25,837 --
======= ======== ========
Historical net income (loss) per common and
common equivalent share (Note B) $ 0.02 $ (1.07) $ (1.28)
======= ======== ========
Historical weighted average number of common and
common equivalent shares outstanding (Note B) 29,237 9,601 9,418
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,693 $(10,282) $(12,021)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 1,664 1,818 1,493
Bad debt expense 715 572 434
Restructuring charges -- 2,709 --
Non-cash compensation for stock
options to employee -- 37 --
Other 8 (1) (20)
Net realized loss on sale of marketable
securities -- 30 1
Net changes in operating assets and
liabilities:
Accounts receivable (4,347) (454) 785
Prepaids and other current assets (153) (82) (88)
Other assets (543) (6) (241)
Accounts payable 228 (109) 586
Accrued expenses (20) (2,069) 2,515
Deferred revenue (2,874) 1,666 2,290
------- ------ ------
Net cash used for operating activities (3,629) (6,171) (4,266)
------- ------ ------
Investing activities:
Capital expenditures (1,313) (1,195) (2,712)
Purchases of marketable securities (16,837) (509) (11,413)
Proceeds from sale/maturity of available for sale
marketable securities 8,045 7,649 11,836
Purchase of minority interest (53) -- (113)
------- ------ ------
Net cash (used) provided by investing
activities (10,158) 5,945 (2,402)
------- ------ ------
Financing activities:
Proceeds from issuance of redeemable
convertible preferred stock 4,917 -- 6,941
Proceeds from IPO, net 18,216 -- --
Proceeds from exercise of stock options 350 142 22
Proceeds from long-term borrowings -- 322 1,143
Principal payments on long-term borrowings (678) (864) (633)
Principal payments on capital lease obligations (356) (86) (210)
------- ------ ------
Net cash provided (used) by financing
activities 22,449 (486) 7,263
Effect of exchange rate changes on cash (175) (47) (13)
------- ------ ------
Net change in cash and cash equivalents 8,487 (759) 582
Cash and cash equivalents, beginning of year 2,465 3,224 2,643
------- ------ ------
Cash and cash equivalents, end of year $10,952 $2,465 $3,225
======= ====== ======
Supplemental disclosure of cash flow information:
Interest paid $ 68 $ 136 $ 121
Income taxes paid $ 67 $ -- $ --
Supplemental disclosure of noncash transactions:
Equipment purchased under capital leases $ -- $ 100 $ --
Equipment purchases accrued $ -- $ -- $ 144
</TABLE>
The accompanying notes are an intregral part of the consolidated financial
statements.
20
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
For the years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Net Unrealized
Additional Holding (loss) gain Cumulative
Common Paid-In Accumulated on Marketable Translation
Stock Capital Deficit Securities Adjustment
------ ---------- ----------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 2 $ 34 $(11,750) $ 17
---- ------- -------- -----
Exercise of stock options -- 22
Issuance of note to officer
Net unrealized holding loss on
securities available for sale $(404)
Foreign currency translation adjustment (13)
Net loss (12,021)
---- ------ -------- ----- -----
Balance at December 31, 1994 2 56 (23,771) (404) 4
---- ------ -------- ----- -----
Exercise of stock options -- 141
Compensation on stock options for
employees 1,354
Stock options granted to employees
below fair value 122
Net unrealized holding gain on
securities available for sale 391
Foreign currency translation adjustment (47)
Net loss (10,282)
---- ------ -------- ----- -----
Balance at December 31, 1995 2 1,673 (34,053) (13) (43)
---- ------ -------- ----- -----
Exercise of stock options 4 353
Amortization of unearned compensation
Net unrealized holding loss/gain on
securities available for sale 20
Foreign currency translation adjustment (175)
Accretion of preferred stock to
redemption value (1,173)
Advances to stockholders
Shares issued in the initial public
offering 21 60,902
Net income 1,693
---- ------ -------- ----- -----
Balance at December 31, 1996 27 62,928 (33,533) 7 (218)
==== ====== ======== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Advances to Unearned Stockholders'
Stockholders Compensation Equity
------------ ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1993 $(11,698)
----- ----- --------
Exercise of stock options 22
Issuance of note to officer $(200) (200)
Net unrealized holding loss on
securities available for sale (404)
Foreign currency translation adjustment (13)
Net loss (12,021)
----- ----- --------
Balance at December 31, 1994 (200) -- (24,314)
----- ----- --------
Exercise of stock options 141
Compensation on stock options for
employees 1,354
Stock options granted to employees
below fair value $(122) --
Net unrealized holding gain on
securities available for sale 391
Foreign currency translation adjustment (47)
Net loss (10,282)
----- ----- --------
Balance at December 31, 1995 (200) (122) (32,757)
----- ----- --------
Exercise of stock options 357
Amortization of unearned compensation 31 31
Net unrealized holding loss/gain on
securities available for sale 20
Foreign currency translation adjustment (175)
Accretion of preferred stock to
redemption value (1,173)
Advances to stockholders (687) (687)
Shares issued in the initial public
offering 60,923
Net income 1,693
----- ----- --------
Balance at December 31, 1996 (887) (91) 28,233
===== ===== ========
</TABLE>
The accompanying notes are an integral part of the consolodiated financial
statements.
21
<PAGE>
OBJECT DESIGN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
Object Design, Inc. (the "Company") develops, produces, markets and provides
customer support services for an object-oriented database management system and
related development tools.
Historically, the Company had marketed its ObjectStore database management
system primarily to customers in certain industries, such as telecommunications,
finance and engineering design and analysis, that required specialized database
management capabilities unavailable from conventional relational database
management systems. In early 1996, the Company shifted its strategy to focus on
providing database management solutions for the emerging Internet and Intranet
computing market.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Object Design Japan Co. Ltd., Object Design
Software GmbH, Object Design (UK) Ltd., Object Design Pty. Ltd., Object Design
S.A.R.L., and Object Design Securities Corp. In September 1995, the shares of
Object Design Pty. Ltd. were sold as part of the Company's restructuring (See
Note M). All intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The marketable securities of the Company have been classified as available
for sale. They are carried at their fair value, based on quoted market prices
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity (deficit). Realized gains and losses on
disposition of securities are determined on the specific identification method
and are reflected in the consolidated statements of operations. The Company
considers all highly liquid investments having a maturity, at date of
acquisition, of three months or less to be cash equivalents. Those instruments
with original maturities greater than three months and remaining maturity of
less than twelve months from the balance sheet date are considered to be
short-term marketable securities. Instruments with scheduled maturities greater
than one year from the balance sheet date are considered to be long-term
marketable securities.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income.
22
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the shorter of
the estimated useful lives of the assets, or remaining terms of leases, which
range from three to five years.
Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations.
REVENUE RECOGNITION
Revenue from software license agreements is recognized upon execution of a
contract and shipment of the software, provided that no significant obligations
remain outstanding and collection of the related receivable is deemed probable
by management. Revenue from maintenance contracts is recognized ratably over the
life of the contract, generally one year. Revenue from training and consulting
is recognized as the services are provided. Revenues from contracts involving
nonrecurring engineering services are recorded using the
percentage-of-completion method of accounting based on contract milestones.
Estimates of costs to complete are reviewed periodically, and provisions for
anticipated losses are made in the period in which they first become
determinable. Amounts that have been billed before these criteria are met are
reflected as deferred revenues until such criteria are met.
PRODUCT WARRANTY
The Company's software license agreements include a warranty period,
generally one year, that the Company does not consider to represent a
cancellation privilege. Anticipated costs associated with the warranty program
are accrued when revenue is recognized and are determined on the basis of
estimated future costs to fulfill the warranty commitment. Such costs in each
year during the three-year period ended December 31, 1996, respectively, have
been immaterial.
FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries, all of whose
functional currency is the local currency, are translated using exchange rates
in effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. Foreign currency translation
adjustments are recorded as a separate component of stockholders' equity
(deficit). The Company also engages in transactions denominated in a foreign
currency, and gains and losses from these transactions, which have been
immaterial, are included in results of operations.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, marketable securities and
trade receivables. The Company invests its excess cash primarily in deposits
with commercial banks, U.S. Government or agency issues and municipal
obligations and any losses recognized to date have been insignificant.
The Company sells to a broad base of customers representing various
geographic locations and industries. The Company performs ongoing credit
evaluations of its customers but does not require collateral or other security
to support customer receivables. The Company maintains reserves for potential
credit losses. Such losses have been within management's expectations.
In addition, the Company has certain receivables, payables and other assets
denominated in foreign currencies, which are not hedged and therefore, are
subject to exchange rate fluctuations. To date, the Company has not incurred
significant losses as a result of currency fluctuations.
23
<PAGE>
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to operations as incurred.
The Company considers that technological feasibility has been established once a
working model of a product has been produced and tested. To date, the Company
has not capitalized software development costs after technological feasibility
has been established since costs incurred subsequent to the establishment of
technological feasibility have not been material.
INCOME TAXES
The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method a valuation allowance is
required against net deferred tax assets, if based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
INTANGIBLES
The Company has classified as goodwill, and included in other assets, the
cost in excess of fair value of the net assets related to the 1994 purchase of
the remaining minority interest in Object Design Software GmbH as well as the
contingent payments made as defined in the purchase agreement (see Note F). The
Company provides for amortization of goodwill using the straight-line method
over a period of five years. The Company evaluates the possible impairment of
long-lived assets, including intangible assets, whenever events or circumstances
indicate the carrying value my not be recoverable.
The Company has included in other assets the cost of licensing third party
software and is amortizing the cost over the terms of the agreements, generally
four years.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common share is based upon the weighted average number
of common shares and common equivalent shares outstanding. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83 ("SAB No. 83"), all common, and common equivalent shares issued
during the twelve month period prior to the date of the initial filing of the
Registration Statement for the Company's initial public offering ("IPO") have
been included in the calculations as if they were outstanding for all periods
prior to the Company's IPO. As permitted under SAB No. 83, equivalent shares
prior to the Company's IPO, which consist of stock options, were determined
using the treasury stock method and assumed an initial public offering price of
$10.00 per share. Dilutive common equivalent shares for the period after the
Company's initial public offering, consist of stock options calculated using the
treasury stock method.
Supplemental net income (loss) per common share has been computed in the
same manner except that all outstanding shares of Preferred Stock that were
convertible into common stock upon the effectiveness of the IPO are treated as
having been converted into Common Stock at the date of the original issuance.
Net income (loss) per common share on a pro forma basis is the same as net
income (loss) per common share on a supplementary basis.
24
<PAGE>
Net income (loss) per common share on a supplementary basis is as follows:
Year Ended December 31,
( in thousands, except per share data)
1996 1995 1994
------------- ------------- ---------
Net income (loss) $ 1,693 $ (10,282) $ (12,021))
========= =========== ===========
Net income (loss) per
common share $ 0.06 $ (1.07) $ (1.28)
========== =========== ===========
Weighted average number
of common and common
equivalent shares
outstanding 29,237 9,601 9,418
========= ===== =====
Fully diluted net income (loss) per share is not presented as it is the same
as the amounts disclosed in supplementary net income (loss) per share for the
years ended December 31, 1994, 1995 and 1996.
FAIR VALUE FINANCIAL INSTRUMENTS
The Company's financial instruments consists primarily of cash and cash
equivalents, investments, trade receivable and trade payables. The carrying
amounts of cash and cash equivalents, investments, trade receivables and trade
payables approximates fair value due to the short maturity of these instruments.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) and
No. 129, "Disclosure of Information About Capital Structure" (SFAS 129), which
are effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier application is not permitted. However, SFAS 128 permits an
entity to disclose pro forma earnings per share amounts computed using SFAS 128
in the notes to financial statements in periods prior to adoption. The Statement
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, Earnings Per Share (IAS 33). SFAS
129 requires the disclosure of certain information about an entity's capital
structure, which would include a brief discussion of rights and privileges of
securities outstanding. It replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation on the income statement for entities with complex capital
structures. The Company plans to adopt SFAS 128 and 129 in 1997 and has not yet
determined the impact.
C. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following, in thousands:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Computer and computer-related equipment $ 6,469 $ 5,502 $ 4,774
Office equipment, furniture and purchased
computer software 2,271 2,096 1,815
Leasehold improvements 360 120 218
Automobiles 341 226 107
---------- ---------- ----------
9,441 7,944 6,914
Less accumulated depreciation and amortization
(6,223) (4,375) (2,693)
---------- ---------- ----------
$ 3,218 $ 3,569 $ 4,221
========== ========== ==========
</TABLE>
25
<PAGE>
The equipment under capital leases consisted of the following, in thousands:
December 31,
1996 1995 1994
---- ---- ----
Computer and computer-related equipment 0 0 $ 369
-------- -------- ---------
Automobiles $ 342 $ 226 107
-------- -------- ---------
342 226 476
Less accumulated amortization (165) (96) (359)
-------- -------- ---------
$ 177 $ 130 $ 117
======== ======== =========
Depreciation expense was $1,444,711, $1,763,121 and $1,663,840 for the years
ended December 31, 1994, 1995 and 1996 respectively.
D. MARKETABLE SECURITIES:
At December 31, 1995, marketable securities can be summarized as follows, in
thousands:
<TABLE>
<CAPTION>
Unrealized Unrealized
Amortized Holding Holding
Cost Fair Value Gains Losses
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Marketable securities, current:
U.S. Government and its agencies $ 1,500 $ 1,488 $ (11)
Marketable securities, non-current:
U.S. Government and its agencies 750 748 -- (2)
---------- ---------- --------
$ 2,250 $ 2,236 -- $ (13)
========== ========== =======
</TABLE>
At December 31, 1996, marketable securities can be summarized as follows, in
thousands:
<TABLE>
<CAPTION>
Unrealized Unrealized
Amortized Holding Holding
Cost Fair Value Gains Losses
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Marketable securities, current:
U.S. Government and its agencies $ 11,094 $ 11,087 $ 7 (11)
---
Marketable securities, non-current:
U.S. Government and its agencies --- --- --- ---
---------- ---------- ---------- ---------
$ 11,094 $ 11,087 $ 7 $ 0
========== ========== ========== =========
</TABLE>
At December 31, 1996, the contractual maturities of the current marketable
securities available for sale range from over 3 months to 12 months.
E. CREDIT AGREEMENT:
CREDIT AGREEMENT
The Company entered into a line of credit with Bank of Boston in December
1996 in the amount of $2,000,000. At December 31, 1996 ,no borrowings were
outstanding under the line of credit, but letters of credit in the amount of
$800,000 had been issued for the account of the Company under the line of
credit. The line of credit is collateralized by substantially all the assets of
the Company. The Company's agreements with the Bank contain various covenants,
including financial covenants tested on a quarterly basis, that require
maintenance of a specified quick ratio, leverage ratio and minimum capital base
and prohibit losses in excess of a specified maximum. Upon the occurrence of an
event of default under the Bank agreements that is not waived by the Bank or
cured, the Bank
26
<PAGE>
is entitled to, among other things, demand payment of all outstanding
amounts and terminate the letters of credit. At December 31, 1996, the Company
was in compliance with the Bank's covenants.
LONG-TERM OBLIGATIONS
The Company's long-term obligations consist of the following, in thousands:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------ ------------ --------
<S> <C> <C> <C>
Installment notes payable were paid in full in September $ -- $ 1,076 $ 1,618
1996 with IPO proceeds.
Capital lease obligations (Note F) 175 134 119
--------- --------- --------
175 1,210 1,737
Amounts due within one year 55 733 879
--------- --------- --------
Long-term portion $ 120 $ 477 $ 858
========= ========= ========
</TABLE>
F. COMMITMENTS:
CAPITAL AND OPERATING LEASES
The Company leases certain equipment and automobiles under noncancelable
capital leases that mature at various dates through 1998.
In addition, the Company leases its primary office facility and several
sales offices under various noncancelable leases with terms that expire through
2004, with certain renewal terms. Total rent expense under operating leases was
approximately $1,797,000, $2,063,000 and $1,365,742 for the years ended December
31, 1994, 1995 and 1996, respectively.
Future minimum lease payments under capital and operating leases are as
follows, in thousands:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1997 $ 55 $ 1,167
1998 60 1,065
1999 60 944
2000 0 861
2001 to 2004 0 1,099
-------- --------
Total future minimum lease payments 175 $ 5,136
==========
Less amount representing interest 20
--------
Present value of net future minimum lease payments 155
Less current portion of capital lease obligations 55
--------
Long-term portion of capital lease obligation $ 100
========
</TABLE>
PURCHASE OF MINORITY INTEREST
In 1994, the Company purchased the remaining 24,000 shares in Object Design
Software GmbH from the minority shareholder. The purchase price, as defined by
the purchase agreement, is subject to adjustment based upon the financial
results of the subsidiary through December 31, 1997. The excess of the adjusted
purchase price over the fair value of the shares has remained at $112,526, for
each of the three years ended December 31, 1996 and has been recorded as
goodwill. Accumulated amortization totaled $9,376, $31,876 and $56,251 at
December 31, 1994, 1995 and 1996, respectively. All future contingent payments,
to a maximum additional purchase price of DM 139,058 (approximately $97,000),
will be recorded as an increase to goodwill.
27
<PAGE>
G. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The authorized preferred stock of the Company at December 31, 1995 and March
31, 1996 consists of Redeemable Convertible Preferred Stock (Series A through J)
(collectively the "Preferred Stock"). The following table presents Preferred
Stock activity for the three years ended December 31, 1996. As of July 23, 1996
17,891,654 shares converted to common stock at par value.
<TABLE>
<CAPTION>
(In thousands) Shares Amount
----------- ---------
<S> <C> <C>
Balance at December 31, 1992 (Series A through D) 11,236 $ 16,377
Issuance of 2,601,877 and 1,148,818 shares of Series E and F,
respectively, on April 12, 1993 and 250,000 shares of Series G
Preferred Stock on May 14, 1993, net of issuance costs of
$162,623 4,001 12,664
------------ ---------
Balance at December 31, 1993 15,237 29,041
Issuance of Series I Preferred Stock on March 31, 1994 net of
issuance costs of $57,729 1,000 6,941
------------ ---------
Balance at December 31, 1994 16,237 35,982
------------ ---------
16,237 35,982
Balance at December 31, 1995
Issuance of Series J Preferred Stock on February 15, 1996 net
of issuance of costs of $48,002 1,655 4,917
Accretion of Series J Preferred Stock to redemption value 1,173
---------
Conversion to common stock on July 23, 1996 upon Company's
IPO (17,892) (42,072)
============ =========
Balance at December 31, 1996 $ 0 $ 0
============ =========
</TABLE>
PREFERRED STOCK WARRANT
In 1990, the Company issued a warrant to purchase 57,858 shares of Series B
Preferred Stock at an exercise price of $1.40 per share to a leasing company.
The warrant expires upon the earlier of October 1, 2000 or the closing of an
initial public offering. On July 23, 1996, 46,286 shares of common stock was
issued upon the exercise in full, on a "net exercise" basis of the warrant.
H. STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
Each share of common stock has full voting rights. The terms of the
Company's 1996 line of credit prohibit the payment of cash dividends on the
common stock.
STOCK OPTION PLANS
The Company's has adopted the disclosure requirements of the Statement Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation."
The Company continues to recognize compensation costs using the intrinsic value
based method described in Accounting Principles Board Opinion No. 25,
"Accounting for stock issued to employees." No compensation costs were
recognized in 1996, 1995 and 1994.
The Company has three stock option plans currently in effect under which future
grants may be issued. A total of 11,342,000 shares has been authorized by the
Company for grants of options or shares. Stock Options granted during 1996 and
1995 generally have a maximum term of ten years and vest over four to five
years.
<PAGE>
A summary of the Company's stock option activity for the years ended December 31
follows:
Weighted
Number Average
of Options Exercise Price
---------- --------------
Outstanding at
December 31, 1993 2,100,828 $1.42
Granted, 1994 526,475 3.32
Exercised, 1994 (67,788) 0.38
Cancelled, 1994 (113,425) 2.31
Outstanding at
December 31, 1994 2,446,090 1.83
Granted, 1995 5,615,400 0.57
Exercised, 1995 (276,062) 0.52
Cancelled, 1995 (2,187,350) 2.53
Outstanding at
December 31, 1995 5,598,078 0.36
Granted, 1996 1,494,950 3.91
Exercised, 1996 (3,334,524) 0.29
Cancelled, 1996 (491,513) 1.33
---------- -----
Outstanding at
December 31, 1996 3,266,991 1.90
========== =====
At December 31, 1996, 1995 and 1994, respectively, options to purchase
1,024,589, 887,575 and 903,894 shares of common stock were exercisable with a
weighted average exercise price of $0.69, $0.56 and $0.53, respectively.
Exercise prices for options outstanding as of December 31, 1996 ranged from $.01
to $16.50. The weighted average remaining contractual life of those options is
8.1 years.
The weighted average fair value of the common stock at date of grant
for options granted during 1996 and 1995 was $0.29 and $0.06 per option,
respectively. The fair value of these options at date of grant was estimated
using the Black-Scholes model with the following weighted average assumptions
for 1996 and 1995, respectively: risk free interest rates of 6.2% and 5.6%
dividend yields of 0 % and 0%; volatility factors of the expected market price
of the Company's common stock of 60% and 60% and a weighted average expected
life of the options of 5 years.
Had compensation cost of the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1996 and 1995 consistent
with the provisions of SFAS No. 123, using the method described above, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
---- ----
Net income (loss) - historical $520 ($10,282)
Net income (loss) - pro forma $395 ($10,338)
Net income (loss) per share - historical $0.02 ($0.40)
Net income (loss) per share - pro forma $0.01 ($0.40)
The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
29
<PAGE>
At December 31, 1995 and December 31, 1996, options to purchase 881,226 and
488,394 shares of common stock respectively, had vested under the Plans and
options to purchase 2,400,136 and 1,415,611 shares of common stock,
respectively, were available for grant.
The following table summarizes information about stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Range of Exercise Number of Shares Weighted Avg. Weighted Number Weighted Avg.
Prices Outstanding Remaining Avg. Exercisable Exercise Price
Contract Life Exercise
Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.01 - $.75 1,882,507 7.4 $.30 845,482 $.29
$1.75 - $6.0 1,025,084 8.9 2.11 179,107 $2.57
$6.75 - $16.5 359,400 9.7 9.7 -- --
------------- ------- --- --- ------- -----
Total 3,266,991 8.1 $1.9 1,024,0589 $.69
</TABLE>
On April 1, 1996, options to purchase 2,760,000 shares of common stock
issued to two officers of the Company during December 1995 were accelerated, and
the officers exercised these options in exchange for cash of $2,760 and full
recourse promissory notes in the amount of $687,240. The promissory notes bear
interest at 7.0% and are due on the earlier of April 1, 2001 or upon termination
of employment. Pursuant to these agreements, the shares may be repurchased by
the Company at the amounts paid by the officers for the shares under certain
conditions such that, economically, the original vesting schedule for these
options remains in effect.
Except as set forth below, the exercise price for each of the above grants
was determined by the Board of Directors of the Company to be equal to the fair
value of the common stock on the date of grant. In reaching this determination,
at the time of each such grant, the Board considered a broad range of factors
including the illiquid nature of an investment in the Company's common stock,
the Company's historical financial performance, the preferences (including
liquidation) of the Company's outstanding convertible preferred stock, and the
Company's future prospects. Subsequent to the IPO, all options are issued at the
market value of the common stock at date of grant.
In connection with the severance of certain key employees pursuant to the
Company's restructuring plan (see Note M), during 1995 the Company converted
465,311 incentive stock options to nonqualified stock options. Simultaneously,
the exercise period for these options was extended and consequently,
approximately $1,317,000 was charged to operations and included in restructuring
charges. This charge represented the differences between the aggregate fair
value of those options and the aggregate exercise amounts on the remeasurement
date.
In December 1995 and pursuant to the 1995 Nonqualified Stock Option Plan,
the Company, as authorized by the Board of the Directors, granted certain
employees non-qualified stock options to purchase 507,775 shares at an exercise
price of $0.01 per share, which was less than fair value at the date of grant.
Unearned compensation related to these options amounting to approximately
$122,000 has been recorded in the Company's stockholders' equity (deficit) and
will be recognized as expense ratably over the vesting period of five years.
The Board of Directors adopted on May 23, 1996, and the stockholders of the
Company approved by written consent in July 1996, the 1996 Incentive and
Nonqualified Stock Option Plan of the Company (the "1996 Stock Option Plan").
The 1996 Stock Option Plan authorizes (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) the grant of options that do not so qualify
("Nonqualified Options"). Options to purchase up to 2,700,000 shares of Common
Stock may be granted under the 1996 Stock Option Plan, provided that prior to
May 23, 1997, options to purchase no more than 1,200,000 shares of Common Stock
may be issued under the Plan, with such number increasing by 300,000 on each of
the first five anniversaries of the adoption of the Plan by the Board of
Directors, up to a maximum of 2,700,000 shares.
The terms of the options to be issued under the 1996 Stock Option Plan,
including exercise price, vesting and term, will be similar to the terms of the
1989 and 1995 Plans; however, the 1996 Stock Option Plan also provides for
certain automatic grants of nonqualified options to non-employee directors of
the Company.
30
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
On May 23, 1996, the Board of Directors adopted, and the stockholders of the
Company approved by written consent in July 1996, an Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which options to purchase up to 300,000
shares of Common Stock may be granted to employees of the Company.
The maximum number of shares which may be purchased by an employee under the
Stock Purchase Plan will be determined on the first day of the offering period
pursuant to a formula under which the employee's projected payroll deductions
over the Offering Period are divided by 85% of the market value of one share of
Common Stock on the first day of the Offering Period, and the quotient is
multiplied by two. During each Offering Period, the price at which the employee
will be able to purchase the Common Stock will be 85% of the last reported sale
price of the Common Stock on the Nasdaq National Market on the first or last day
of the Offering Period, whichever is lower.
The Stock Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees who meet certain minimum criteria based on
hours worked per week and length of tenure with the Company are eligible to
participate in the Stock Purchase Plan and no employee will be able to purchase
shares pursuant to the Stock Purchase Plan if after such purchase such employee
would own more than a specific percentage of the total combined voting power or
value of the stock of the Company.
The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, par value $0.001 per share and 5,000,000 shares of undesignated
preferred stock, par value $0.01 per share. The Board of Directors is
authorized, subject to any limitations prescribed by Delaware law, to issue
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to establish or alter
the voting powers, designations, preferences and relative, participating,
optional or other rights, or the qualifications, limitations or restrictions
thereof, and to increase (but not above the total number of authorized shares of
the class) or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series without any further vote or
action by the stockholders. The Board of Directors is authorized to issue
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock.
On May 23, 1996 the Board of Directors voted to retire the 18,900 treasury
shares.
I. INCOME TAXES:
Income (loss) before income taxes for domestic and foreign operations is as
follows, in thousands:
Year Ended December 31,
1996 1995 1994
-------- ----------- ----------
Domestic $ 1,887 $ (8,716) $ (11,182)
Foreign (127) (1,568) (821)
-------- ----------- ----------
$ 1,760 $ (10,284) $ (12,003)
======== =========== ==========
The provision (benefit) for income taxes consists of the following, in
thousands:
Year Ended December 31,
1996 1995 1994
---------- ---------- --------
Currently payable
(refundable):
Foreign $ 1 $ (2) $ 18
Federal 56 -- --
State 10 -- --
------- ------- -------
$ 67 $ (2) $ 18
======= ======== =======
31
<PAGE>
The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:
Year Ended December 31,
1996 1995 1994
---- ---- ----
U.S. federal statutory rate 34.0% 34.0% 34.0%
Disallowed meal & entertainment 4.5
State taxes, net of federal
benefit 0.4
Foreign tax difference from
U.S. rate 2.5
Federal and state tax credits (26.9)
Alternative minimum tax 2.5
Change in valuation allowance
and other (13.1) (34.0) (34.0)
----- ----- -----
3.8% -- --
===== ===== =====
The approximate tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is as follows, in
thousands:
December 31,
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards
(domestic) $ 10,158 $ 11,211
Net operating loss carryforward
(foreign) 1,029 848
Tax credit carryforwards 2,060 1,819
Accounts receivable reserves 274 173
Vacation and benefits reserves 228 241
Restructuring reserves -- 132
Stock option compensation -- 530
Other 530 --
Depreciation and amortization 109
Deferred tax liabilities:
Depreciation and amortization -- (123)
-------- --------
14,396 14,831
Valuation allowance (14,396) (14,831)
-------- --------
Net deferred tax assets $ 0 $ 0
======== ========
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, the net deferred tax assets have been fully
offset by a valuation allowance.
As of December 31, 1996, the Company had federal net operating loss ("NOL")
and research and experimentation credit carryforwards of approximately
$26,100,000 and $1,358,000, respectively, available to offset future federal
income tax liabilities, which expire at various dates through 2011. The
utilization of a portion of the NOL and research and experimentation credit
carryforwards is subject to Section 382 of the Internal Revenue Code. This
section established an annual limitation, based on changes in the Company's
ownership, on the amount of income which may be offset by these tax attributes.
As of December 31, 1996, the Company's foreign subsidiaries had NOL
carryforwards of approximately $2,500,000.
J. 401(K) PLAN:
The Company sponsors a defined contribution employees' investment and
savings plan under Section 401(k) of the Internal Revenue Code. This plan covers
all eligible (as defined) employees of the Company. The Company made no matching
contributions to the plan during 1994, 1995 and 1996.
32
<PAGE>
K. AGREEMENTS WITH RELATED PARTIES:
During 1994, 1995 and 1996, the Company sold a total of $3,052,000,
$3,078,000 and $2,671,000 respectively, in software and services, to
stockholders of the Company.
During 1993, the Company entered into a series of agreements with IBM (a
related party) encompassing product licenses, customized development, consulting
and maintenance. The agreements cover a three-year period. During 1993, 1994,
1995 and 1996, the Company recognized approximately $9,900,000, $1,745,000,
$3,078,000, $2,671,000, respectively, of revenue under the terms of these
agreements comprising 40.2%, 6.9%, 9.4% , 7.0%, respectively, of the total
revenues of the Company for the respective periods. At December 31, 1994, 1995
and 1996, the Company had approximately $742,000, $359,000 and $2,000,
respectively, in accounts receivable due from IBM. During 1993 and concurrent
with the aforementioned agreements, IBM purchased 3,750,695 shares of the
Company's Series E and F Preferred Stock for approximately $11,800,000. IBM did
not participate in the purchase of preferred shares of the Series J offering on
February 15, 1996.
Under the terms of the IBM agreements, either party had the option (the
"Break-Up Option") of terminating certain of the IBM agreements and modifying
the terms of certain others upon nine months' advance notice. On March 5, 1996,
the Company exercised the Break-Up Option by giving written notice to IBM. Upon
the effectiveness of the Break-Up Option, the rate of royalties paid to the
Company by IBM for ObjectStore-based products was substantially increased, IBM
is no longer be entitled to a discount on training and consulting services
provided by the Company and the Company's joint development and marketing
efforts with IBM may be curtailed or eliminated.
Deferred revenue at December 31, 1995 and 1996 includes $1,400,000 and
$292,000, respectively, collected from IBM pursuant to a $1,800,000 development
contract. IBM directed the Company to suspend development efforts on this
contract during the quarter ended March 31, 1996 and, accordingly, the Company
recognized $650,000 in revenues related to certain contract milestones. On April
2, 1996, this contract was terminated and, in accordance with the terms of the
contract, the Company recognized the remaining $750,000 of revenues. The Company
has no further obligations under this contract.
During 1993, the Company entered into a cooperative marketing agreement with
IBM pursuant to which the Company pays fees to IBM for marketing the Company's
products and services. In addition IBM charges the Company for certain equipment
rentals, maintenance and other expenses. Total charges from IBM during the years
ended December 31, 1993, 1994, 1995 and 1996 amounted to approximately $19,000,
$166,000, $1,289,000, and $674,431, respectively.
L. GEOGRAPHIC DATA:
The Company's operations consist of a single line of business comprised of
developing and marketing computer software and providing related maintenance and
consulting services.
The Company has sales and marketing operations located outside the United
States in the United Kingdom, France, Germany, Japan, and, until September 1995,
in Australia. Revenues are reflected in the geographic areas from which the
sales are made. Financial information for the Asia Pacific region for the
quarter ended
33
<PAGE>
December 31, 1996 reflects solely the Company's operations located in Japan.
Financial information, summarized by geographic area, is as follows, in
thousands:
<TABLE>
<CAPTION>
North United Rest Of Asia
America Kingdom Europe Pacific Eliminations Consolidated
------------ ----------- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Revenues:
From unaffiliated customers $ 20,319 $ 2,247 $ 2,085 $ 838 -- $ 25,489
Intercompany transfers 1,738 -- -- -- $ (1,738) --
------------ ----------- ---------- ----------- ------------
Total revenues $ 22,057 $ 2,247 $ 2,085 $ 838 $ (1,738) $ 25,489
============ =========== ========== =========== ============
Income (loss) from operations $ (10,312) $ 69 $ (803) $ (1,341) $ -- $ (12,387)
============ =========== ========== =========== ============
Identifiable assets $ 39,563 $ 1,528 $ 1,482 $ 2,263 $ (19,407) $ 25,429
============ =========== ========== =========== ============
Year ended December 31, 1995
Revenues:
From unaffiliated customers $ 24,867 $ 2,681 $ 3,178 $ 1,980 -- $ 32,706
Intercompany transfers 2,644 -- -- -- $ (2,644) --
-------------------------- ---------- ----------- ------------
Total revenues $ 27,511 $ 2,681 $ 3,178 $ 1,980 $ (2,644) $ 32,706
============ =========== ========== =========== ============
Loss from operations $ (8,876) $ (54) $ (816) $ (660) $ -- $ (10,406)
============ =========== ========== =========== ============
Identifiable assets $ 18,666 $ 2,354 $ 1,936 $ 1,049 $ (6,851) $ 17,154
============ =========== ========== =========== ============
Year ended December 1, 1996
Revenues:
From unaffiliated customers $ 26,570 $ 3,542 $ 4,287 $ 3,940 -- $ 38,339
Intercompany transfers 5,694 -- -- -- $ (5,694) --
------------ ----------- ---------- ----------- ------------
Total $ 32,264 $ 3,542 $ 4,287 $ 3,940 $ (5,694) $ 38,339
============ =========== ========== =========== ============
Income (loss) from operations $ 1,317 $ (701) $ 50 $ 523 -- $ 1,693
============ =========== ========== =========== ============
Identifiable assets $ 56,600 $ 3,266 $ 2,366 $ 3,172 $ (26,945) $ 38,461
============ =========== ========== =========== ============
</TABLE>
Intercompany transfers primarily represent shipments of software to foreign
subsidiaries and are charged at fixed percentages of the net selling prices to
the ultimate customers. These transfers have been eliminated from consolidated
revenues.
<PAGE>
M. RESTRUCTURING CHARGES:
During fiscal 1995, the Company recorded restructuring charges aggregating
approximately $2,709,000. The restructuring plan was developed to re-focus the
Company's product strategies and reduce the Company's cost structure and
included severance payments to 36 terminated employees (including the Company's
President and four Vice Presidents, all telesales personnel and certain
marketing personnel) totaling approximately $2,100,000 (including the extension
of exercise periods of certain stock options totaling approximately $1,317,000),
loss on the sale of the Company's Australian subsidiary amounting to
approximately $76,000 and losses on vacated office leases approximately
$533,000. The revenues and net operating losses of the Company's Australian
operation were not material. As of December 31, 1996, the restructuring plan was
complete.
Activity related to the restructuring change and the related accrued
restructuring reserve (included in accrued expenses) is summarized as follows,
in thousands:
<TABLE>
<CAPTION>
Reserve At Reserve At
Provision December 31, December
During 1995 Payments 1995 Payments 1996
------------ ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Employee severance $ 783 $ (691) $ 92 $ (92) --
Vacated office leases and related
costs 408 (173) 235 (235) $ --
---------- ---------- -------- ---------- --------
Total restructuring
reserve 1,191 $ (864) $ 327 $ (327) $ ---
========== ======== ========== ========
Stock option remeasurement 1,317
Abandoned leaseholds 125
Loss on sale of subsidiary 76
----------
Total restructuring
charges $ 2,709
==========
</TABLE>
34
<PAGE>
OBJECT DESIGN, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
---------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $591,123 $715,000 $483,013 $823,110
Year ended December 31, 1995
Allowance for doubtful accounts $399,842 $571,644 $380,363 $591,123
Year ended December 31, 1994 $394,360 $433,957 $428,475 $399,842
Allowance for doubtful accounts
</TABLE>
35
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Directors and Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 28, 1997, which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year ended
December 31, 1996 (the "Definitive Proxy Statement"), is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Remuneration of Executive Officers
and Directors" in the Definitive Proxy Statement is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Definitive Proxy Statement is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Definitive Proxy Statement is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, 1994 Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995, 1994 Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995, 1994 Notes to Consolidated Financial
Statements
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because the required information is either
inapplicable or presented in the Consolidated Financial Statements.
36
<PAGE>
(3) EXHIBITS
EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
*3.3 Restated Certificate of Incorporation, as amended
*3.5 By-laws of the Company
*4.1 Specimen certificate for Common Stock of the Company
*10.1* 1989 Incentive and Nonqualified Stock Option Plan
*10.2* 1995 Nonqualified Stock Option Plan
*10.3* 1996 Incentive and Nonqualified Stock Option Plan
*10.4* 1996 Employee Stock Purchase Plan
*10.12 Lease dated September 15, 1993 between the Company and 25 Mall Road Trust.
*10.13 First Amendment to Lease dated June 28, 1994 between the Company and 25 Mall Road Trust
*10.14 Second Amendment to Lease dated March 1, 1996 between the Company and 25 Mall Road Trust
*10.15* Employment Agreement dated December 21, 1995 between the Company and Robert N. Goldman as
amended by Amendment to Employment Agreement dated May , 1996
*10.16* Employment Agreement dated December 21, 1995 between the Company and Justin J. Perreault, as
amended by Employment Agreement dated May, 1996
*10.17* Severance Agreement dated March 1, 1996 between the Company and Thomas M. Atwood
*10.20 Sixth Amended and Restated Stockholders' Agreement dated February 13, 1996 among the Company
and certain of its stockholders
*10.21 Amended and Restated IBM Stockholders' Agreement dated May 14,
1993 among the Company, International Business Machines
Corporation ("IBM") and certain other stockholders of the
Company, as amended by a Second Amendment dated March 31, 1994,
as further amended by a Third Amendment dated June 10, 1994 and
as further amended by a Fourth Amendment dated February 14, 1996
*10.22 Amended and Restated Registration Rights Agreement dated June 29, 1990 between the Company and
certain of its stockholders, as amended by Amendment No. 1 dated October 1, 1990, as further
amended by Amendment No. 2 dated July 29, 1991, as further amended by Amendment No. 3 dated
March 12, 1992, as further amended by Amendment No. 4 dated April 12, 1993, as further amended
by Amendment No. 5 dated May 14, 1993, as further amended by Amendment No. 6 dated March 31,
1994 and as further amended by Amendment No. 7 dated February 13, 1996
*10.23 Master Lease and Warrant Agreement dated October 1, 1990 between the Company and PacifiCorp
Credit, Inc. d/b/a Pacific Venture Finance, Inc. ("PacifiCorp")
*10.24 Preferred Stock Purchase Warrant dated October 1, 1990 between the Company and PacifiCorp.
*10.25 Internal Use and Substrate Agreement dated April 10, 1993 between the Company and IBM
*10.26 Break-Up Agreement dated April 10, 1993 between the Company and IBM
*10.27 Escrow Agreement dated April 10, 1993 between the Company and IBM
*10.28 Master Agreement dated April 10, 1993 between the Company and IBM
*10.29 First Amended and Restated Agreement Regarding Confidential Information dated February 11, 1993
between Company and IBM
10.30 Loan and Security Agreement dated December 17, 1996 between the Company and The First National
Bank of Boston
10.31 $2,000,000 Revolving Note dated December 17, 1996 by the Company payable to The First National
Bank of Boston
11.1 Computation of Earnings per Share
*21.1 List of Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
</TABLE>
* before an exhibit number: This exhibit is incorporated by reference to the
similarly-numbered exhibit filed as part of the Company's Registration Statement
on Form S-1, Registration No. 333-05241.
* after an exhibit number: Management contracts and compensatory arrangements.
37
<PAGE>
(B) REPORTS ON FORM 8-K
The Company did not file any Report on Form 8-K during the quarter ended
December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OBJECT DESIGN, INC.
Date: March 31, 1997 /s/ ROBERT N. GOLDMAN
-------------------------------
Robert N. Goldman
President and Chief Executive Officer
Date: March 31, 1997 /s/ LACEY BRANDT
-------------------------------
Lacey Brandt
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert N. Goldman President and Chief
____________________________ Executive Officer
Robert N. Goldman (Principal Executive
Officer and Director) March 31, 1997
/s/ Lacey Brandt Chief Financial
____________________________ Officer (Principal
Lacey Brandt Financial and Accounting
Officer) March 31, 1997
/s/Gerald Bay Director March 31, 1997
- ----------------------------
Gerald Bay
/s/Arthur Marks Director March 31, 1997
- ----------------------------
Arthur Marks
/s/Tim Palmer Director March 31, 1997
- ----------------------------
Tim Palmer
38
<PAGE>
/s/Scott Sperling Director March 31, 1997
- ----------------------------
Scott Sperling
/s/Steven Walske Director March 31, 1997
- ----------------------------
Steven Walske
</TABLE>
39
Exhibit 10.30
LOAN AND SECURITY AGREEMENT
OBJECT DESIGN, INC.
Dated as of December 17, 1996
THE FIRST NATIONAL BANK OF BOSTON
40
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title Page
- ------- ----- ----
<S> <C> <C>
SECTION I - DEFINITIONS
1.1 Definitions......................................................................... 5
1.2 Accounting Terms.................................................................... 14
SECTION II - DESCRIPTION OF CREDIT
2.1 The Loans........................................................................... 14
2.2 The Letters of Credit............................................................... 14
2.3 Notice and Manner of Borrowing of Loans............................................. 14
2.4 Commitment and other Fee............................................................ 15
2.5 Reduction of Commitment Amount...................................................... 15
2.6 The Note............................................................................ 15
2.7 Interest Rates and Payments of Interest............................................. 16
2.8 Capital Requirements................................................................ 16
2.9 Payments and Prepayments of the Loans............................................... 16
2.10 Method of Payment................................................................... 17
2.11 Overdue Payments.................................................................... 17
2.12 Computation of Interest and Fees.................................................... 17
SECTION III - CONDITIONS OF LOAN
3.1 Conditions Precedent to Effectiveness of Agreement.................................. 17
3.2 Conditions Precedent to all Loans and Letters of Credit............................. 18
SECTION IV - REPRESENTATIONS AND WARRANTIES
4.1 Organization and Qualification; Corporate/
Trade Names; Chief Executive Office............................................... 19
4.2 Corporate Authority................................................................. 20
4.3 Valid Obligations................................................................... 20
4.4 Consents or Approvals............................................................... 20
4.5 Title to Properties; Absence of Encumbrances........................................ 20
4.6 Financial Statements................................................................ 20
<PAGE>
Section Title Page
- ------- ----- ----
4.7 Changes............................................................................. 21
4.8 Defaults............................................................................ 21
4.9 Taxes............................................................................... 21
4.10 Litigation.......................................................................... 21
4.11 Use of Proceeds..................................................................... 21
4.12 Subsidiaries........................................................................ 21
4.13 Investment Company Act.............................................................. 21
4.14 Compliance with ERISA............................................................... 21
4.15 Environmental Matters............................................................... 22
4.16 Security Interest................................................................... 22
SECTION V - AFFIRMATIVE COVENANTS
5.1 Financial Statements and other Reporting
Requirements....................................................................... 23
5.2 Conduct of Business................................................................. 24
5.3 Maintenance and Insurance........................................................... 25
5.4 Taxes............................................................................... 25
5.5 Inspection by the Bank.............................................................. 25
5.6 Maintenance of Books and Records.................................................... 25
5.7 Quick Ratio......................................................................... 25
5.8 Consolidated Total Liabilities to Consolidated
Tangible Net Worth Ratio.......................................................... 26
5.9 Profitability....................................................................... 26
5.10 Operating Accounts.................................................................. 26
5.11 Subsidiaries........................................................................ 26
5.12 Further Assurances.................................................................. 26
SECTION VI - NEGATIVE COVENANTS
6.1 Indebtedness........................................................................ 27
6.2 Contingent Liabilities.............................................................. 27
6.3 Leases.............................................................................. 27
6.4 Sale and Leaseback.................................................................. 28
6.5 Encumbrances........................................................................ 28
6.6 Merger; Consolidation; Sale or Lease of Assets...................................... 29
6.7 Additional Stock Issuance............................................................ 29
6.8 Equity Distributions................................................................ 29
-ii-
<PAGE>
Section Title Page
- ------- ----- ----
6.9 Capital Expenditures................................................................ 29
6.10 Investments......................................................................... 29
6.11 ERISA............................................................................... 30
-iii-
<PAGE>
Section Title Page
- ------- ----- ----
SECTION VII - SECURITY AGREEMENT
7.1 Creation of Security Interest....................................................... 30
7.2 Covenants Pertaining to Collateral.................................................. 30
7.3 Notices and Reports Pertaining to Collateral........................................ 34
7.4 Bank's Rights with Respect to Collateral............................................ 34
7.5 Bank's Rights and Remedies.......................................................... 35
7.6 Waivers............................................................................. 37
SECTION VIII - DEFAULTS
8.1 Events of Default................................................................... 38
8.2 Remedies............................................................................ 40
SECTION XI - MISCELLANEOUS
9.1 Notices............................................................................. 40
9.2 Expenses............................................................................ 41
9.3 Set-Off............................................................................. 41
9.4 Term of Agreement................................................................... 41
9.5 No Waivers.......................................................................... 41
9.6 Governing Law....................................................................... 41
9.7 Amendments.......................................................................... 42
9.8 Binding Effect of Agreement......................................................... 42
9.9 Counterparts........................................................................ 42
9.10 Partial Invalidity.................................................................. 42
9.11 Captions............................................................................ 42
9.12 Confidentiality.......................................................................42
9.13 Waiver of Jury Trial................................................................ 43
9.14 Entire Agreement.................................................................... 43
</TABLE>
-iv-
<PAGE>
EXHIBITS
EXHIBIT A - Form of Promissory Note
EXHIBIT B - Form of Notice of Borrowing
EXHIBIT C - Indebtedness; Encumbrances
EXHIBIT D - Litigation; Environmental Matters
EXHIBIT E - Subsidiaries
EXHIBIT F - Form of Compliance Report
EXHIBIT G - Form of Borrowing Base Report
EXHIBIT H - Form of Opinion of Counsel to the Company
EXHIBIT I - Form of Letter of Credit Application
EXHIBIT J - Form of Subsidiary Guaranty
SCHEDULES
SCHEDULE I - Collateral Locations
SCHEDULE II - Intellectual Property
-v-
<PAGE>
LOAN AND SECURITY AGREEMENT
Dated as of December 17, 1996
THIS LOAN AND SECURITY AGREEMENT is made as of December 17, 1996, by
and between OBJECT DESIGN, INC. (the "Company"), a Delaware corporation having
its chief executive office at 25 Mall Road, 5th Floor, Burlington, MA 01803 and
THE FIRST NATIONAL BANK OF BOSTON (the "Bank"), a national banking association
having its head office at 100 Federal Street, Boston, Massachusetts 02110.
SECTION I
DEFINITIONS
1.1. Definitions.
All capitalized terms used in this Agreement or in the Note or in any
certificate, report or other document made or delivered pursuant to this
Agreement (unless otherwise defined therein) shall have the meanings assigned to
them below. Where not inconsistent with this Agreement all terms used herein
with respect to the Collateral shall have the meanings ascribed to them in the
Uniform Commercial Code as in effect on the date hereof.
Accounts. All rights of the Company to payment for goods sold or leased
or for services rendered including, without limitation, software license
receivables, all sums of money or other proceeds due or becoming due thereon,
all instruments pertaining thereto, all guarantees and security therefor, and
the Company's rights pertaining to and interest in such goods, including the
right of stoppage in transit, replevin or reclamation; all chattel paper; all
amounts due from affiliates of the Company; all insurance proceeds; all other
rights and claims to the payment of money, under contracts or otherwise; and all
other property constituting "accounts" as such term is defined in the Uniform
Commercial Code.
Agreement. This Agreement, as the same may be supplemented or amended
from time to time.
Applicable Margin. A percentage per annum as shown by the following
table determined by referenced to the ratio of Consolidated Total Liabilities to
Consolidated Tangible Net Worth.
Ratio of Total Consolidated Liabilities
to Consolidated Tangible Net Worth Applicable Margin
---------------------------------- -----------------
Less than .50 to 1 0.0%
-vi-
<PAGE>
.50:1 or more, but less than 1.0:1 0.25%
1.0:1 or more, but less than 1.5:1 0.50%
1.5:1 or more, but less than 2.0:1 0.75%
2.0:1 or greater 1.00%
The Applicable Margin at any time shall be that determined by the financial
statements most recently delivered pursuant to Section 5.01(a) or 5.01(b),
whichever is most recent. If the Company fails to deliver such financial
statements within the time period provided for in Sections 5.10(a) or 5.01(b),
as the case may be, the Applicable Margin shall be the highest Applicable Margin
until the delivery to the Bank of the required financial statements, at which
time the Applicable Margin shall be determined in accordance with this
definition. Any change in the Applicable Margin shall become effective on the
third Business Day following the receipt of such statements by the Bank.
Approved Foreign Customer. Any account debtor having its principal
place of business in Canada and the following entities: British Telecom, Mitsui
Engineering & Shipbuilding Co., Ltd, and Toyo Information Systems Co., Ltd.
Bank. See Preamble.
Base Rate. The greater of (i) the rate of interest announced from time
to time by the Bank at its head office as its Base Rate, and (ii) the Federal
Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to
the next 1/8 of 1%).
Borrowing Base. The lesser of (i) the Commitment Amount and (ii) 80%
of Eligible Accounts.
Borrowing Base Report. A Borrowing Base Report in substantially the
form of Exhibit G hereto.
Business Day. Any day other than a Saturday, Sunday, legal holiday or
other day on which banks in Boston, Massachusetts, are required or permitted by
law to close.
Code. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended and remain in effect.
Collateral. See Section 7.1.
Collateral Documents. All Uniform Commercial Code financing statements
filed pursuant to Section 3.1(h) hereof (and all amendments thereto and renewals
or replacements or continuations thereof), and any other documents executed and
delivered by the Company with respect to the Collateral.
-vii-
<PAGE>
Commitment Amount. $2,000,000, or any lesser amount, including zero,
resulting from a termination or reduction of such amount in accordance with
Section 2.4 or Section 7.2.
Company. See Preamble.
Consolidated Current Liabilities. At any date as of which the amount
thereof shall be determined, all amounts that should, in accordance with
generally accepted accounting principles, be included as current liabilities on
the consolidated balance sheet of the Company and its Subsidiaries as at such
date.
Consolidated Quick Assets. At any date as of which the amount thereof
shall be determined, the consolidated cash and accounts receivable of the
Company and its Subsidiaries.
Consolidated Tangible Net Worth. At any date as of which the amount
thereof shall be determined, the consolidated total assets of the Company and
its Subsidiaries minus (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, (c) all reserves not already deducted from
assets, (d) any write-up in the book value of assets resulting from any
revaluation thereof subsequent to the date of the financial statements referred
to in Section 4.6 and (e) the value of any minority interests in Subsidiaries
and (ii) Consolidated Total Liabilities.
Consolidated Total Liabilities. At any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
generally accepted accounting principles, be classified as liabilities on the
consolidated balance sheet of the Company and its Subsidiaries.
Controlled Group. All trades or businesses (whether or not
incorporated) under common control that, together with the Company, are treated
as a single employer under Section 414(b) or 414(c) of the Code or Section 400l
of ERISA.
Credit Documents. This Agreement, the Note, the Letter of Credit
Applications and each Letter of Credit issued thereunder, and any other
documents evidencing or otherwise given in connection therewith.
Default. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.
Eligible Account. An Account which meets all of the following
requirements:
(i) such Account is subject to a first perfected security interest in
favor of the Bank and is subject to no other Encumbrance whatsoever other than a
Permitted Encumbrance;
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(ii) such Account is owned by the Company and represents a complete
bona fide transaction which requires no further act under any circumstances on
part of the Company to make such Account payable by the account debtor;
(iii) such Account is not past due more than 30 days;
(iv) such Account is evidenced by an invoice or other documentation
in form reasonably acceptable to the Bank;
(v) such Account is not payable more than ninety (90) days after the
date of the original invoice giving rise to such Account:
(vi) the amount owing on the invoice evidencing such Account is a
valid, legally enforceable obligation of the account debtor with respect thereto
and is not subject to any material present or contingent offset, deduction or
counterclaim, dispute or other defense on the part of such account debtor, and
no facts exist which are the basis for any future such action or claim;
(vii) such Account is not evidenced by chattel paper or an instrument
of any kind unless such chattel paper or instrument has been delivered to the
Bank;
(viii) the Account arose from a license of software under which the
Company was the licensor or provision of services related thereto;
(ix) such Account is not owing by an account debtor whose then-existing
accounts owing to the Company exceed in face amount 10% of the Company's total
Eligible Accounts;
(x) such Account is not owing by an account debtor when 20% of all
then-existing accounts owing to the Company by such account debtor are past due
more than 60 days;
(xi) the account debtor with respect to such Account is not insolvent
or the subject of any bankruptcy or insolvency proceedings of any kind or of any
other proceeding or action, threatened or pending, which might have a materially
adverse effect on such account debtor and is not, in the reasonable discretion
of the Bank, deemed ineligible for credit or other reasons;
(xii) the account debtor with respect thereto is not an affiliate or
employee of the Company;
(xiii) if the account debtor with respect thereto is located outside
of the United States of America and is not an Approved Foreign Customer,
either (a) the goods which gave rise to such Account were shipped after receipt
by the Company from the account debtor of an irrevocable letter of credit issued
or confirmed by a financial institution reasonably acceptable to the Bank
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and in form and substance reasonably acceptable to the Bank, payable in the
amount of the face value of the Account in Dollars at a place of payment located
within the United States or (b) such Account is (and remains) fully insured as
to credit and political risk by one of the following: the Export-Import Bank of
the United States, the Massachusetts Industrial Finance Authority or an insurer
rated AA- or better by A.M. Best Company;
(xiv) such Account is not subject to the Assignment of Claims Act of
1940, as amended from time to time, or any applicable law similar in effect
thereto, as determined in the reasonable discretion of the Bank, or to any
provision prohibiting its assignment or requiring notice of or consent to such
assignment; and
(xv) such Account is not determined by the Bank to be ineligible for
any other reason based upon such credit and collateral considerations as the
Bank may reasonably deem appropriate.
Encumbrances. See Section 6.5.
ERISA. The Employee Retirement Income Security Act of 1974 and the
rules and regulations thereunder, collectively, as the same may from time to
time be supplemented or amended and remain in effect.
Environmental Laws. Any and all applicable foreign, federal, state and
local environmental, health or safety statutes, laws, regulations, rules,
ordinances, policies and rules or common law whether now existing or hereafter
enacted or promulgated, relating to injury to, or the protection of, real or
personal property or human health or the environment.
Equipment. All machinery, equipment and fixtures, office furniture,
furnishings and trade fixtures, specialty tools and parts, motor vehicles and
materials handling equipment of the Company, together with the Company's
interest in, and right to, any and all manuals, computer programs, data bases
and other materials relating to the use, operation or structure of any of the
foregoing; and all other property constituting "equipment" as such term is
defined in the Uniform Commercial Code.
Event of Default. Any event described in Section 8.1.
Federal Funds Effective Rate. For any day, a fluctuating interest rate
per annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by the Bank
from three Federal funds brokers of recognized standing selected by the Bank.
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General Intangibles. All rights with respect to trademarks, service
marks, trade names, trade styles, patents, patent applications, copyrights,
copyright applications, mask works, trade-secrets information, other proprietary
rights and rights to prevent others from doing acts that constitute unfair
competition with the Company or misappropriation of its property, including,
without limitation, those described on Schedule II hereto and also including
without limitation any sums (net of expenses) that the Company may receive
arising out of any claim for infringement of its rights in any of the foregoing,
and all rights of the Company under contracts to enjoy performance by others or
to be entitled to enjoy rights granted by others, including without limitation
any licenses; all tax refunds; all rights, title and interest of the Company in
and to all documents, books, records and other information (on whatever medium
recorded, and including without limitation computer programs, tapes, discs,
punch cards, data processing software and related property and rights)
maintained by the Company that reflect the conduct of the Company's business,
such as financial records, marketing and sales records, research and development
records, and design, engineering and manufacturing records; all rights under
service bureau service contracts; all computer data and the concepts and ideas
on which said data is based; all developmental ideas and concepts, papers,
plans, schematics, drawings, blueprints, sketches and documents; all data bases;
all customer lists; and all other property constituting "general intangibles" as
such term is defined in the Uniform Commercial Code.
Guarantees. As applied to the Company and its Subsidiaries, all
guarantees, endorsements or other contingent or surety obligations with respect
to obligations of others (other than under a Subsidiary Guaranty) whether or not
reflected on the consolidated balance sheet of the Company and its Subsidiaries,
including any obligation to furnish funds, directly or indirectly (whether by
virtue of partnership arrangements, by agreement to keep-well or otherwise),
through the purchase of goods, supplies or services, or by way of stock
purchase, capital contribution, advance or loan, or to enter into a contract for
any of the foregoing, for the purpose of payment of obligations of any other
person or entity but excluding any general indemnity of officers or directors of
the Company or its Subsidiaries given in the ordinary course of business.
Hazardous Material. Any substance which is or becomes defined as a
"hazardous waste", "hazardous material" or "hazardous substance" or "controlled
industrial waste" or "pollutant" or "contaminant" under any Environmental Law or
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental authority or instrumentality or which contains gasoline, diesel
fuel or other petroleum products, asbestos or polychlorinated biphenyls
("PCB's").
Indebtedness. As applied to the Company and its Subsidiaries, (i) all
obligations for borrowed money or other extensions of credit whether or not
secured or unsecured, absolute or contingent, including, without limitation,
unmatured reimbursement obligations with respect to letters of credit or
guarantees issued for the account of or on behalf of the Company and its
Subsidiaries and all obligations representing the deferred purchase price of
property, other than accounts payable arising in the ordinary course of
business, (ii) all obligations evidenced by
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bonds, notes, debentures or other similar instruments, (iii) all
obligations secured by any mortgage, pledge, security interest or other lien on
property owned or acquired by the Company or any of its Subsidiaries whether or
not the obligations secured thereby shall have been assumed, (iv) that portion
of all obligations arising under capital leases that is required to be
capitalized on the consolidated balance sheet of the Company and its
Subsidiaries, (v) all Guarantees, and (vi) all obligations that are immediately
due and payable out of the proceeds of or production from property now or
hereafter owned or acquired by the Company or any of its Subsidiaries.
Inventory. All goods, merchandise and other personal property
(including warehouse receipts and other negotiable and non-negotiable documents
of title covering any such property) of the Company that are held for sale,
lease or other disposition, or for display or demonstration, or leased or
consigned, or that are raw materials, piece goods, work-in-process or materials
used or consumed or to be used or consumed in the Company's business, whether in
transit or in the possession of the Company or another, including without
limitation all goods covered by purchase orders and contracts with suppliers and
all goods billed and held by suppliers and goods located on the premises of any
carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or
other third parties; all proprietary rights, patents, plans, drawings, diagrams,
schematics, assembly and display materials relating to any of the foregoing; and
all other property constituting "inventory" as such term is defined in the
Uniform Commercial Code.
Investment. As applied to the Company and its Subsidiaries, the
purchase or acquisition of any share of capital stock, partnership interest,
evidence of indebtedness or other equity security of any other person or entity,
any loan, advance or extension of credit to, or contribution to the capital of,
any other person or entity, any real estate held for sale or investment, any
commodities futures contracts held other than in connection with bona fide
hedging transactions, any other investment in any other person or entity, and
the making of any commitment or acquisition of any option to make an Investment.
Letter of Credit. A standby letter of credit opened for the account of
the Company pursuant to the terms of Section 2.2 of this Agreement, and "Letters
of Credit" means all of such Letters of Credit, collectively.
Letter of Credit Application. A Standby Letter of Credit Application
and Agreement, substantially in the form of Exhibit H hereto, delivered to the
Bank pursuant to Section 2.2 hereof, and "Letter of Credit Applications" means
all of such Letter of Credit Applications, collectively.
Loan. A loan made to the Company by the Bank pursuant to Section II
of this Agreement, and "Loans" means all of such loans, collectively.
Net Cash Proceeds. With respect to any sale, lease, transfer or other
disposition of any asset or the sale or issuance of any capital stock, any
securities convertible into or exchangeable
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for capital stock or any warrants, rights or options to acquire capital
stock by any Person, the aggregate amount of cash received by or on behalf of
such Person in connection with such transaction (including, without limitation,
cash received by way of deferred payment pursuant to a note receivable,
conversion of non-cash consideration, cash payments in respect of purchase price
adjustments or otherwise, but only as and when such cash is received) after
deducting therefrom only (a) reasonable and customary brokerage commissions,
underwriting fees and discounts, legal fees, finderis fees and other similar
fees and commissions and (b) the amount of taxes payable in connection with or
as a result of such transaction and (c) the amount of any Indebtedness secured
by a lien on such asset that, by the terms of such transaction, is required to
be repaid upon such disposition, in each case to the extent, but only to the
extent, that the amounts so deducted are, at the time of receipt of such cash,
actually paid to a Person that is not an Affiliate and are properly attributable
to such transaction or to the asset that is the subject thereof.
Note. A promissory note of the Company, substantially in the form of
Exhibit A hereto, evidencing the obligation of the Company to the Bank to
repay the Loans.
Notice of Borrowing. See Section 2.2.
Obligations. Any and all obligations of the Company to the Bank of
every kind and description, whether direct or indirect, absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter arising,
regardless of how they arise or by what agreement or instrument, if any, and
including obligations to perform acts and refrain from taking action as well as
obligations to pay money, including without limitation under the Note and under
the Letter of Credit Applications and each Letter of Credit issued thereunder.
PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding
to any or all of its functions under ERISA.
Permitted Encumbrances. See Section 6.5.
Plan. At any time, an employee pension or other benefit plan that is
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by the Company or any
member of the Controlled Group for employees of the Company or any member of the
Controlled Group or (ii) if such Plan is established, maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which the Company or any member of the
Controlled Group is then making or accruing an obligation to make contributions
or has within the preceding five Plan years made contributions.
Prepayment Event. (a) The sale, transfer or other disposition of any
business unit, asset or other property of the Company or any Subsidiary
(including dispositions in the nature of casualties (to the extent covered by
insurance) or condemnations)(an Asset Sale Prepayment
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Event),(b) the issuance or sale by the Company or any Subsidiary of any
equity securities (other than the issuance of equity securities to the Company
or any of its wholly-owned Subsidiaries) or any obligations convertible into or
exchangeable for, or giving any Person any right, option or warrant to acquire
from the Company or any Subsidiary, any equity securities or any such
convertible or exchangeable obligations. Notwithstanding the foregoing, the term
iPrepayment Eventi shall not include:
(i) sales, transfers and other dispositions of used
or surplus equipment, vehicles and other assets in the
ordinary course of business to the extent that the gross
proceeds from all such sales does not exceed 10% of
Consolidated Tangible Net Worth in the aggregate in any fiscal
year;
(ii) sales of inventory in the ordinary course of
business (including, without limitation, sales of damaged or
obsolete inventory) and sales of Qualified Investments; and
(iii) the receipt of insurance or condemnation
proceeds except to the extent in excess of $50,000 in the
aggregate in any fiscal year.
Proceeds. Whatever is received upon the sale, lease, exchange,
collection or other disposition of the Collateral including, but not limited to,
all Accounts, Inventory, Equipment, goods, money, checks, deposit accounts, and
insurance proceeds.
Qualified Investments. As applied to the Company and its Subsidiaries,
investments in (i) notes, bonds or other obligations of the United States of
America or any agency thereof that as to principal and interest constitute
direct obligations of or are guaranteed by the United States of America; (ii)
certificates of deposit or other deposit instruments or accounts of banks or
trust companies organized under the laws of the United States or any state
thereof that have capital and surplus of at least $100,000,000, (iii) commercial
paper that is rated not less than prime-one or A-1 or their equivalents by
Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively,
or their successors, (iv) any repurchase agreement secured by any one or more of
the foregoing, and (v) loans to officers of the Company or its Subsidiaries not
to exceed $1,100,000 in the aggregate outstanding at any one time.
Revolving Credit Period. The period beginning on the date of this
Agreement and extending through and including the Revolving Credit Termination
Date or such earlier date on which the commitment to make Revolving Loans is
terminated or the Commitment Amount is reduced to zero in accordance with the
terms hereof.
Revolving Credit Termination Date. September 30, 1997.
Revolving Loans. The Loans made to the Company pursuant to Section 2.1
of this Agreement.
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Securities. All of the securities and instruments of the Company,
including without limitation all stocks, bonds, Treasury bills, certificates of
deposit and mutual or money market fund shares; and all sums due or to become
due on any of the foregoing, and all securities, instruments or other property
purchased or acquired as a result of the investment and reinvestment thereof as
hereinafter provided.
Significant Subsidiary. A Subsidiary which contributed more than ten
percent (10%) of the Companyis consolidated revenues in the fiscal quarter most
recently ended at the time of determination.
Subsidiary. Any corporation, association, joint stock company, business
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a majority of the members of the board of directors or
other governing body of such entity is held or controlled by the Company or a
Subsidiary of the Company; or any other such organization the management of
which is directly or indirectly controlled by the Company or a Subsidiary of the
Company through the exercise of voting power or otherwise; or any joint venture,
whether incorporated or not, in which the Company has a 50% ownership interest.
Subsidiary Guaranty. A Guaranty substantially in the form of Exhibit I
hereto executed by a Subsidiary pursuant to the terms of this Agreement.
Uniform Commercial Code. The Uniform Commercial Code as in effect in
The Commonwealth of Massachusetts.
1.2. Accounting Terms. All terms of an accounting character shall have
the meanings assigned thereto by generally accepted accounting principles
applied on a basis consistent with the financial statements referred to in
Section 4.6 of this Agreement, modified to the extent, but only to the extent,
that such meanings are specifically modified herein.
SECTION II
DESCRIPTION OF CREDIT
2.1. The Loans. Subject to the terms and conditions hereof, the Bank
will make Revolving Loans to the Company, from time to time until the close of
business on the Revolving Credit Termination Date, in such sums as the Company
may request, provided that the aggregate principal amount of all Loans at any
one time outstanding hereunder shall not exceed the Borrowing Base less the face
amount of all Letters of Credit then outstanding. The Company may borrow, prepay
pursuant to Section 2.9 and reborrow, from the date of this Agreement until the
Revolving Credit Termination Date, the full amount of the Borrowing Base,
reduced by the face amount of all Letters of Credit then outstanding, as
aforesaid, or any lesser sum that is at least $100,000 and an integral multiple
of $10,000. Any Revolving Loan not repaid by the
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Revolving Credit Termination Date shall be due and payable on the Revolving
Credit Termination Date.
2.2. The Letters of Credit. (a) Subject to the terms hereof and of each
Letter of Credit Application, the Bank agrees to issue Letters of Credit for the
account of the Company from time to time until the Revolving Credit Termination
Date, in an aggregate face amount not to exceed at any time $1,000,000; provided
that the aggregate amount of outstanding Letters of Credit shall not, when added
to the total amount of Loans at any one time outstanding, exceed the Borrowing
Base. Each Letter of Credit shall be issued in such amount and for such period
of time as the Company shall request, provided that, subject to such terms for
automatic extension as may be set forth therein, the expiration date for a
Letter of Credit may not be more than one year from the date of issuance, and
provided, further, that the expiration date for a Letter of Credit may not
extend beyond the Revolving Credit Termination Date.
(b) Whenever the Company wishes the Bank to issue a Letter of Credit,
the Company shall deliver to the Bank a Letter of Credit Application with the
blanks therein appropriately completed. Unless any condition specified in
Section III hereof shall not have been satisfied, the Bank shall issue the
Letter of Credit on the date requested and otherwise in accordance with the
terms and conditions of the applicable Letter of Credit Application.
2.3. Notice and Manner of Borrowing of Loans. (a) Whenever the Company
desires to obtain a Loan the Company shall notify the Bank (which notice shall
be irrevocable) by telex, telegraph or telephone received no later than 10:00
a.m. (Boston time) on the date one Business Day before the day on which the
requested Loan is to be made. Such notice shall specify the effective date and
amount of each Loan subject to the limitations set forth in Section 2.1. Each
such notification (a "Notice of Borrowing") shall be immediately followed by a
written confirmation thereof by the Company in substantially the form of Exhibit
B hereto, provided that if such written confirmation differs in any material
respect from the action taken by the Bank, the records of the Bank shall control
absent manifest error.
(b) Subject to the terms and conditions hereof, the Bank shall make
each Loan on the effective date specified therefor by crediting the amount of
such Loan to the Company's demand deposit account with the Bank.
2.4. Commitment and other Fees. (a) The Company shall pay to the Bank
a Closing Fee in an amount equal to 1% of the initial Commitment Amount.
(b) The Company shall pay to the Bank during the Revolving Credit
Period a commitment fee computed at the rate of one-half of one percent (1/2 %)
per annum on the average daily amount of the unborrowed portion of the
Commitment Amount during each quarter or portion thereof. Commitment fees shall
be payable quarterly in arrears, on the last day of March, June, September and
December of each year beginning September 30, 1996, and on the last day of the
Revolving Credit Period.
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(c) The Company shall pay to the Bank upon the issuance of each Letter
of Credit, a Letter of Credit fee equal to 2.0% per annum of the face amount of
such Letter of Credit (pro-rated for the number of days such Letter of Credit is
outstanding).
(d) The Company shall pay to the Bank, on demand from time to time,
such fees and expenses as are customarily charged by the Bank in connection with
the opening, amendment, negotiation and administration of each Letter of Credit.
2.5. Reduction of Commitment Amount. The Company may from time to time
by written notice delivered to the Bank at least three Business Days prior to
the date of the requested reduction, reduce by integral multiples of $100,000
any unborrowed portion of the Commitment Amount. The Commitment Amount shall
automatically be reduced in an amount equal to 100% of the mandatory prepayment
due upon the occurrence of an Asset Sale Prepayment Event (but in no event to an
amount less than the aggregate dollar amount of outstanding Letters of Credit at
such time), such reduction to occur on the date such mandatory prepayment is
required to be made under the terms of Section 2.9 hereof. No reduction of the
Commitment Amount shall be subject to reinstatement.
2.6. The Note. (a) The Loans shall be evidenced by the Note, payable to
the order of the Bank and having a final maturity of September 30, 1997.
The Note shall be dated on or before the date of the first Loan and shall have
the blanks therein appropriately completed.
(b) The Bank shall, and is hereby irrevocably authorized by the Company
to, enter on the schedule forming a part of the Note or otherwise in its records
appropriate notations evidencing the date and the amount of each Loan and the
date and amount of each payment of principal made by the Company with respect
thereto; and in the absence of manifest error, such notations shall constitute
conclusive evidence thereof. The Bank is hereby irrevocably authorized by the
Company to attach to and make a part of the Note a continuation of any such
schedule as and when required. No failure on the part of the Bank to make any
notation as provided in this subsection (b) shall in any way affect any Loan or
the rights or obligations of the Bank or the Company with respect thereto.
2.7. Interest Rates and Payments of Interest. (a) Each Loan shall bear
interest on the outstanding principal amount thereof at a rate per annum equal
to the Base Rate plus the then-current Applicable Margin, which rate shall
change contemporaneously with any change in the Base Rate. Such interest shall
be payable on the last day of each month commencing November 30, 1996, and when
such Loan is due (whether at maturity, by reason of acceleration or otherwise).
2.8. Capital Requirements. If after the date hereof the Bank determines
that (i) the adoption of or change in any law, rule, regulation or guideline
regarding capital requirements for banks or bank holding companies, or any
change in the interpretation or application thereof by
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any governmental authority charged with the administration thereof, or (ii)
compliance by the Bank or its parent bank holding company with any guideline,
request or directive of any such entity regarding capital adequacy (whether or
not having the force of law), has the effect of reducing the return on the
Bank's or such holding company's capital as a consequence of the Bank's
commitment to make Loans or otherwise extend credit hereunder to a level below
that which the Bank or such holding company could have achieved but for such
adoption, change or compliance (taking into consideration the Bank's or such
holding company's then existing policies with respect to capital adequacy and
assuming the full utilization of such entity's capital) by any amount deemed by
the Bank to be material, then the Bank shall notify the Company thereof. The
Company agrees to pay to the Bank the amount of such reduction in return on
capital as and when such reduction is determined, upon presentation by the Bank
of a statement in the amount and setting forth the Bank's calculation thereof,
which statement shall be deemed true and correct absent manifest error. In
determining such amount, the Bank may use any reasonable averaging and
attribution methods.
2.9. Payments and Prepayments of the Loans.
(a) Mandatory Prepayments. If at any time the aggregate principal
amount of outstanding Loans plus the aggregate face amount of outstanding Letter
of Credit shall exceed the Borrowing Base in effect at such time, then the
Company shall promptly upon becoming aware of such circumstance prepay Loans in
an amount equal to such excess or, if less, the entire principal amount of Loans
then outstanding and, if after such prepayment the aggregate face amount of
outstanding Letters of Credit exceeds such Borrowing Base, the Company shall
provide cash collateral as described in Section 8.2(c) of this Agreement. In
addition, as soon as practicable following the occurrence of a Prepayment Event
(and, in any event, within one Business Day following receipt by the Company or
any Subsidiary of the Net Cash Proceeds therefrom), the Company shall prepay the
Loans in the amount equal to 100% of such Net Cash Proceeds.
(b) Voluntary Prepayments. Revolving Loans may be prepaid at any time,
without premium or penalty, upon one Business Day's notice. Any interest accrued
on the amounts so prepaid to the date of such payment must be paid at the time
of any such payment. No prepayment of the Revolving Loans during the Revolving
Credit Period shall affect the Commitment Amount or impair the Company's right
to borrow as set forth in Section 2.1.
2.10. Method of Payment. All payments and prepayments of principal, all
reimbursement payments for drawings under any Letter of Credit and all payments
of interest, fees, commissions and other amounts payable hereunder shall be made
by the Company to the Bank at its head office in immediately available funds, on
or before 11:00 a.m. (Boston, Massachusetts time) on the due date thereof, free
and clear of, and without any deduction or withholding for, any taxes or other
payments. The Bank may, and the Company hereby authorizes the Bank to, debit the
amount of any payment not made by such time to the demand deposit account of the
Company with the Bank.
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2.11. Overdue Payments. Overdue principal (whether at maturity, by
reason of acceleration or otherwise) and, to the extent permitted by applicable
law, overdue interest and fees or any other amounts payable hereunder or under
the Note or any Letter of Credit Application or Letter of Credit issued
thereunder shall bear interest from and including the due date thereof until
paid, compounded daily and payable on demand, at a rate per annum equal to four
percent (4%) above the rate then applicable to the Loans.
2.12. Computation of Interest and Fees. Interest and all fees payable
hereunder shall be computed daily on the basis of a year of 360 days and paid
for the actual number of days for which due. If the due date for any payment of
principal is extended by operation of law, interest shall be payable for such
extended time. If any payment required by this Agreement becomes due on a day
that is not a Business Day such payment may be made on the next succeeding
Business Day, and such extension shall be included in computing interest in
connection with such payment.
SECTION III
CONDITIONS OF LOANS
3.1. Conditions Precedent to Effectiveness of Agreement. The
effectiveness of this Agreement and the obligation of the Bank to make its
initial Loan or issue the first Letter of Credit hereunder is subject to the
condition precedent that the Bank shall have received, in form and substance
satisfactory to the Bank and its counsel, the following:
(a) this Agreement and the Note, duly executed by the Company;
(b) a Subsidiary Guaranty, duly executed by Object Design Security
Corporation
(c) a certificate of the Secretary or an Assistant Secretary of the
Company and each Subsidiary with respect to resolutions of the Board of
Directors authorizing the execution and delivery of each Credit Document to
which it is a party and identifying the officer(s) authorized to execute,
deliver and take all other actions required under this Agreement and the other
Credit Documents, and providing specimen signatures of such officers;
(d) the certificate of incorporation of the Company and all amendments
and supplements thereto, filed in the office of the Secretary of State of
Delaware, each certified by said Secretary of State as being a true and correct
copy thereof;
(e) the Bylaws of the Company and all amendments and supplements
thereto, certified by the Secretary or an Assistant Secretary as being a
true and correct copy thereof;
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(f) a certificate of the Secretary of Delaware as to legal existence
and good standing in such state and listing all documents on file in the
office of said Secretary of State;
(g) a certificate of good standing from the appropriate legal authority
of each jurisdiction in which the Company is required to be qualified or
licensed to do business including without limitation, Massachusetts;
(h) an opinion addressed to it from Foley, Hoag, & Eliot LLP, counsel
to the Company, substantially in the form of Exhibit H hereto;
(i) executed Uniform Commercial Code financing statements covering the
Collateral, and evidence of any other filing or document which may be necessary
to create and perfect the security interest and liens granted by Section VII, as
the Bank may reasonably require;
(j) satisfactory evidence of the insurance required to be maintained
pursuant to Section 5.3 and 7.2(f);
(k) A landlord's waiver, in form and substance satisfactory to the
Bank, for all premises leased by the Company and in which any of the Collateral
may be located (except that no such waiver shall be required if the Company has
used its best efforts to obtain such waiver and has been unable to do so);
(l) Payment of the Closing Fee required under Section 2.4(a); and
(m) such other documents, and completion of such other matters, as
counsel for the Bank may deem necessary or appropriate.
3.2. Conditions Precedent to all Loans and Letters of Credit. The
obligation of the Bank to make each Loan or issue each Letter of Credit,
including the initial Loan and Letter of Credit, is further subject to the
following conditions:
(a) timely receipt by the Bank of the Notice of Borrowing or Letter of
Credit Application as provided in Section 2.2;
(b) the representations and warranties contained in Section IV shall be
true and accurate in all material respects on and as of the date of such Notice
of Borrowing or Letter of Credit Application and on the effective date of the
making of each Loan or issuance of each Letter of Credit as though made at and
as of each such date (except to the extent that such representations and
warranties expressly relate to an earlier date), and no Default shall have
occurred and be continuing, or would result from such Loan or Letter of Credit;
(c) the Bank shall have in its possession the most recent Borrowing
Base Report required under the terms of Section 5.1(d);
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(d) the resolutions referred to in Section 3.1(c) shall remain in full
force and effect; and
(e) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for the Bank, would make
it illegal or against the policy of any governmental agency or authority for the
Bank to make Loans or issue Letters of Credit hereunder.
The making of each Loan and issuance of each Letter of Credit shall be
deemed to be a representation and warranty by the Company on the date of the
making of such Loan or issuance of such Letter of Credit as to the accuracy of
the facts referred to in subsection (b) of this Section 3.2.
SECTION IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement and to extend
credit hereunder, the Company represents and warrants to the Bank that:
4.l. Organization and Qualification; Corporate/Trade Names; Chief
Executive Office. (a) Each of the Company and its Subsidiaries (i) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, (ii) has all requisite corporate power to
own its property and conduct its business as now conducted and as presently
contemplated and (iii) is duly qualified and in good standing as a foreign
corporation and is duly authorized to do business in each jurisdiction where the
nature of its properties or business requires such qualification except where
such failure would not have a material adverse effect on the condition, business
or prospects of the Company and its Subsidiaries, taken as a whole.
(b) Except as otherwise disclosed to the Bank, during the five year
period preceding the date of this Agreement the Company has not been known or
done business as or used any name other than the name appearing on the first
page hereof.
(c) The address of the Company set forth on the first page hereof is
the Company's chief executive office and the place where its business records
are kept. The Company has not changed the location of its chief executive office
within the five year period preceding the date of this Agreement, except that
the Company changed its chief executive office from One New England Executive
Park, Burlington, MA 10853 to its present location within such period. Except as
disclosed to the Bank, all tangible Collateral other than Securities is located
at such chief executive office.
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4.2. Corporate Authority. The execution, delivery and performance of
each Credit Document and the transactions contemplated hereby and thereby are
within the corporate power and authority of the Company and have been authorized
by all necessary corporate proceedings, and do not and will not (a) require any
consent or approval of the stockholders of the Company, (b) contravene any
provision of the charter documents or by-laws of the Company or any law, rule or
regulation applicable to the Company, (c) contravene any provision of, or
constitute an event of default or event that, but for the requirement that time
elapse or notice be given, or both, would constitute an event of default under,
any other agreement, instrument, order or undertaking binding on the Company, or
(d) result in or require the imposition of any Encumbrance on any of the
properties, assets or rights of the Company.
4.3. Valid Obligations. Each of the Credit Documents and all of their
respective terms and provisions are the legal, valid and binding obligations of
the Company, enforceable in accordance with their respective terms except as
limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally, and except as the
remedy of specific performance or of injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be brought.
4.4. Consents or Approvals. The execution, delivery and performance of
each Credit Document and the transactions contemplated herein and therein do not
require any approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party, except the filing
of the Uniform Commercial Code financing statements referred to in Section
3.1(h) and the timely filing of continuation statements with respect to such
financing statements.
4.5. Title to Properties; Absence of Encumbrances. Each of the Company
and its Subsidiaries has good and marketable title to all of the properties,
assets and rights of every name and nature now purported to be owned by it,
including, without limitation, such properties, assets and rights as are
reflected in the financial statements referred to in Section 4.6 (except such
properties, assets or rights as have been disposed of in the ordinary course of
business since the date thereof), free from all Encumbrances except Permitted
Encumbrances or those Encumbrances disclosed in Exhibit C hereto, and, except as
so disclosed, free from all defects of title that might materially adversely
affect such properties, assets or rights, taken as a whole.
4.6. Financial Statements. The Company has furnished the Bank its
consolidated balance sheet as of December 31, 1995 and its consolidated
statements of income, changes in stockholders' equity and cash flow for the
fiscal year then ended, and related footnotes, audited and certified by Coopers
& Lybrand. The Company has also furnished the Bank its consolidated balance
sheet as of June 30, 1996 and its consolidated statements of income, changes in
stockholders' equity and cash flow for the fiscal quarter then ended, certified
by the principal financial officer of the Company but subject, however, to
normal, recurring year-end adjustments that shall not in the aggregate be
material in amount. All such financial statements were prepared in accordance
with generally accepted accounting principles applied on a consistent
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basis throughout the periods specified and present fairly the financial
position of the Company and its Subsidiaries as of such dates and the results of
the operations of the Company and its Subsidiaries for such periods, except for
interim statements that are prepared without footnotes. There are no
liabilities, contingent or otherwise, not disclosed in such financial statements
that involve a material amount.
4.7. Changes. Since the date of the audited and certified financial
statements referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, business or prospects of the Company or any of
its Subsidiaries other than changes in the ordinary course of business, the
effect of which has not, in the aggregate, been materially adverse.
4.8. Defaults. As of the date of this Agreement, no Default exists.
4.9. Taxes. The Company and each Subsidiary have filed all federal,
state and other tax returns required to be filed, and all taxes, assessments and
other governmental charges due from the Company and each Subsidiary have been
fully paid. The Company and each Subsidiary have established on their books
reserves adequate for the payment of all federal, state and other tax
liabilities.
4.10. Litigation. Except as set forth on Exhibit D hereto, there is no
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of the Company's or any Subsidiary's officers, threatened, against the
Company or any Subsidiary that, if adversely determined, could result in a
material judgment not fully covered by insurance, could result in a forfeiture
of all or any substantial part of the property of the Company or its
Subsidiaries, or could otherwise have a material adverse effect on the assets,
business or prospects of the Company or any Subsidiary.
4.11. Use of Proceeds. No portion of any Loan or Letter of Credit is to
be used for the "purpose of purchasing or carrying" any "margin stock" as such
terms are used in Regulations U and X of the Board of Governors of the Federal
Reserve System, l2 C.F.R. 22l and 224, as amended; and following the application
of the proceeds of each Loan, the value of all "margin stock" of the Company
will not exceed 25% of the value of the total assets of the Company that are
subject to the restrictions set forth in Section 6.5 and 6.6.
4.12. Subsidiaries. As of the date of this Agreement, all the
Subsidiaries of the Company are listed on Exhibit E hereto. The Company or a
Subsidiary of the Company is the owner, free and clear of all liens and
encumbrances, of all of the issued and outstanding stock of each Subsidiary. All
shares of such stock have been validly issued and are fully paid and
nonassessable, and no rights to subscribe to any additional shares have been
granted, and no options, warrants or similar rights are outstanding.
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4.13. Investment Company Act. Neither the Company nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of
1940, as amended.
4.14. Compliance with ERISA. The Company and each member of the
Controlled Group have fulfilled their obligations under the minimum funding
standards of ERISA and the Code with respect to each Plan and are in compliance
in all material respects with the applicable provisions of ERISA and the Code,
and have not incurred any liability to the PBGC or a Plan under Title IV of
ERISA; and no "prohibited transaction" or "reportable event" (as such terms are
defined in ERISA) has occurred with respect to any Plan.
4.15. Environmental Matters. The Company and each of its Subsidiaries
are in compliance, in all material respects, with all Environmental Laws in all
jurisdictions in which the Company or any Subsidiary owns or operates, or has
owned or operated, a facility or site, or arranges or has arranged for disposal
or treatment of any Hazardous Materials or other wastes, accepts or has accepted
for transport any Hazardous Materials or other wastes or holds or has held any
interest in real property or otherwise. No demand, claim, notice, suit, suit in
equity, action, administrative action, investigation or inquiry whether brought
by any governmental authority, private person or entity or otherwise, arising
under, relating to or in connection with any Environmental Laws is pending or
threatened against the Company or any of its Subsidiaries, any real property in
which the Company or any such Subsidiary holds or, to the Company's knowledge,
has held, an interest or any past or present operation of the Company or any
such Subsidiary. Neither the Company nor any of its Subsidiaries (i) is the
subject of any federal or state investigation evaluating whether any remedial
action is needed to respond to a release of any Hazardous Materials or other
wastes into the environment, (ii) has received any notice of any Hazardous
Materials or other wastes in or upon any of its properties in violation of any
Environmental Laws, or (iii) knows of any basis for any such investigation,
notice or violation, except as disclosed to the Bank on Exhibit D, and as to
such matters disclosed on such Exhibit, none will have a material adverse effect
on the financial condition, business, operations or prospects of the Company or
the Company and its Subsidiaries on a consolidated basis.
4.16. Security Interest. (a) The Company is the sole legal and
equitable owner of the Collateral, holds good title to the same free and clear
of all liens, charges, encumbrances and security interests or rights of others
of every kind and nature whatsoever except for the security interests granted
hereunder to the Bank and any Permitted Encumbrances, and has good right and
legal authority to assign, deliver, and/or create a security interest in the
Collateral in the manner hereby provided or contemplated. The Collateral is
genuine and is what it purports to be. The Collateral is not subject to any
restriction on transfer contained in any agreement to which the Company is a
party or by which the Company is bound which would prohibit or restrict the
assignment, delivery or creation of a security interest in the Collateral
hereunder except property subject to a capitalized lease. Schedule II contains a
complete and accurate listing and description of all trademarks, service marks,
tradenames, trade styles, patents, patent applications, copyrights and trade
secrets owned by, licensed to or utilized by the Company in the course of its
business.
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(b) This Agreement constitutes a valid and continuing first lien on and
first perfected security interest in favor of the Bank in the Collateral
(except, Securities which are not Scheduled Securities and motor vehicles and
General Intangibles in which a security interest may not be perfected by filing
under the Uniform Commercial Code, in the Copyright Office or in the Patent and
Trademark Office), prior to all other liens, encumbrances, security interests
and rights of others (except for Permitted Encumbrances), and is enforceable as
such against creditors of the Company, any owner of the real property where any
of the Equipment is located, any purchaser of such real property and any present
or future creditor obtaining a lien on such real property. No financing
statement under the Uniform Commercial Code of any state or other instrument
evidencing a lien which names the Company as debtor (other than those with
respect to Permitted Encumbrances or those that have been terminated) is on file
and the Company has not signed any such document or any security agreement
authorizing any secured party thereunder to file any such financing statement or
instrument. No instruments or documents are on file in the United States Patent
and Trademark Office or the United States Copyright Office evidencing a lien
which names the Company as debtor or licensor or purports to create or perfect a
lien on or convey an interest in any of the property of the Company (other than
those with respect to Permitted Encumbrances or those that have been
terminated).
SECTION V
AFFIRMATIVE COVENANTS
So long as the Bank has any commitment to extend credit hereunder or
any Loan, Letter of Credit or other Obligation remains outstanding, the Company
covenants as follows:
5.1. Financial Statements and other Reporting Requirements. The Company
shall furnish to the Bank:
(a) (i) as soon as available to the Company, but in any event within 90
days after the end of each of its fiscal years, its consolidated and
consolidating balance sheet as of the end of, and the related consolidated and
consolidating statements of income, changes in stockholders' equity and cash
flow for, such year (iAnnual Statementsi), audited and certified by Coopers &
Lybrand (or other independent certified public accountants acceptable to the
Bank) in the case of such consolidated statements, and certified by the chief
financial officer in the case of such consolidating statements; and,
concurrently with such financial statements, a copy of said certified public
accountants' management report;
(b) as soon as available to the Company, but in any event within 45
days after the end of each of its fiscal quarters, its consolidated and
consolidating balance sheet as of the end of, and the related consolidated and
consolidating statements of income and cash flow for, the period
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then ended, certified by the principal financial officer of the Company but
subject, however, to normal, recurring year-end adjustments that shall not in
the aggregate be material in amount;
(c) concurrently with the delivery of each financial statement pursuant
to subsections (a) and (b) of this Section 5.1, a Compliance Report in
substantially the form of Exhibit F hereto signed on behalf of the Company by
its chief financial officer;
(d) as soon as available to the Company, but in any event within 30
days of the end of each month (1) a consolidated balance sheet as of the end of
such month and a related consolidated statement of income and cash flow for the
period then ended, certified by the principal financial officer of the Company
but subject, however, to normal, recurring year-end adjustments that shall not
in the aggregate be material in amount, and (2) a Borrowing Base Report signed
on behalf of the Company by its chief financial officer;
(e) promptly after the receipt thereof by the Company, copies of any
reports submitted to the Company by independent public accountants in connection
with any interim review of the accounts of the Company made by such accountants;
(f) promptly after the same are available, copies of all proxy
statements, financial statements and reports as the Company shall send to its
stockholders or as the Company may file with the Securities and Exchange
Commission or any governmental authority at any time having jurisdiction over
the Company or its Subsidiaries;
(g) if and when the Company gives or is required to give notice to the
PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with
respect to any Plan that might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that any member of the Controlled Group or the
plan administrator of any Plan has given or is required to give notice of any
such Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;
(h) immediately upon becoming aware of the existence of any condition
or event that constitutes a Default, written notice thereof specifying the
nature and duration thereof and the action being or proposed to be taken with
respect thereto;
(i) promptly upon becoming aware of any litigation or of any
investigative proceedings by a governmental agency or authority commenced or
threatened against the Company or any of its Subsidiaries of which it has
notice, the outcome of which would or be likely to have a materially adverse
effect on the assets, business or prospects of the Company and its Subsidiaries
on a consolidated basis, written notice thereof and the action being or proposed
to be taken with respect thereto;
(j) promptly upon becoming aware of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Company or
any of its
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Subsidiaries regarding any potential violation of Environmental Laws or any
spill, release, discharge or disposal of any Hazardous Material, written notice
thereof and the action being or proposed to be taken with respect thereto; and
(k) from time to time, such other financial data and information about
the Company or its Subsidiaries as the Bank may reasonably request.
5.2. Conduct of Business. Each of the Company and its Subsidiaries
shall:
(a) duly observe and comply in all material respects with all
applicable laws and valid requirements of any governmental authorities relative
to its corporate existence, rights and franchises, to the conduct of its
business and to its property and assets (including without limitation all
Environmental Laws and ERISA), and shall maintain and keep in full force and
effect all licenses and permits necessary in any material respect to the proper
conduct of its business except where such failure would not have a material
adverse effect on the conditions, business or prospects of the Company and its
Subsidiaries, taken as a whole.
(b) maintain the corporate existence of the Company and each
Significant Subsidiary; and
(c) remain engaged substantially in developing and producing software.
5.3. Maintenance and Insurance. Each of the Company and its
Subsidiaries shall maintain its properties in good repair, working order and
condition as required for the normal conduct of its business. Each of the
Company and its Subsidiaries shall at all times maintain liability and casualty
insurance with financially sound and reputable insurers in such amounts as the
officers of the Company in the exercise of their reasonable judgment deem to be
adequate. In the event of failure to provide and maintain insurance as herein
provided, the Bank may, at its option, provide such insurance and charge the
amount thereof to the account of the Company or any of its Subsidiaries with the
Bank. The Company shall furnish to the Bank certificates evidencing compliance
with the foregoing insurance provisions.
5.4. Taxes. The Company shall pay or cause to be paid all taxes,
assessments or governmental charges on or against it or any of its Subsidiaries
or its or their properties on or prior to the time when they become due;
provided that this covenant shall not apply to any tax, assessment or charge
that is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been established and are being
maintained in accordance with generally accepted accounting principles if no
lien shall have been filed to secure such tax, assessment or charge.
5.5. Inspection by the Bank. The Company shall permit the Bank or its
designees, at any reasonable time and at reasonable intervals of time, and upon
reasonable notice (or if a Default shall have occurred and is continuing, at any
time and without prior notice), to (i) visit
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and inspect the properties of the Company and its Subsidiaries, (ii)
examine and make copies of and take abstracts from the books and records of the
Company and its Subsidiaries, and (iii) discuss the affairs, finances and
accounts of the Company and its Subsidiaries with their appropriate officers,
employees and accountants.
5.6. Maintenance of Books and Records. Each of the Company and its
Subsidiaries shall keep adequate books and records of account, in which true and
complete entries will be made reflecting all of its business and financial
transactions, and such entries will be made in accordance with generally
accepted accounting principles consistently applied and applicable law.
5.7. Quick Ratio. The Company shall maintain Consolidated Quick Assets,
determined as of the end of each fiscal quarter, equal to at least 225% of the
total (without duplication) of Consolidated Current Liabilities, the aggregate
face amount of outstanding Letters of Credit and outstanding long-term debt
(iConsolidated Liabilitiesi) for each fiscal quarter ending after the date of
this Agreement.
5.8. Consolidated Total Liabilities to Consolidated Tangible Net Worth
Ratio. The Company shall at all times maintain a ratio of Consolidated Total
Liabilities (excluding deferred federal and state income taxes) to Consolidated
Tangible Net Worth of not greater than 2.3:1.0.
5.9. Profitability. The Company shall earn consolidated net income of
at least $1.00 in every fiscal quarter.
5.10. Operating Accounts. The Company will maintain its principal
operating accounts with the Bank.
5.11. Subsidiaries. Immediately following the creation of any
Subsidiary of the Company following the date hereof, or the acquisition of any
corporation by the Company or any Subsidiary thereof pursuant to which such
corporation becomes a direct or indirect Subsidiary of the Company, or promptly
upon the request of the Bank with regard to any Subsidiary listed on Exhibit E
which has not previously executed and delivered a Subsidiary Guaranty, the
Company (a) shall cause such Subsidiary to become a party to a Subsidiary
Guaranty or to execute and deliver such other guaranties, in form and substance
satisfactory to the Bank, guaranteeing payment of the Obligations, and (b)
notify the Bank in writing of the creation or acquisition of such Subsidiary.
The Company shall, and shall cause the appropriate Subsidiaries of the Company
to, promptly (i) execute and deliver to the Bank such number of copies as the
Bank may specify of documents creating such guaranties, and (ii) deliver such
legal opinions, certificates, evidences of corporate action or other documents
as the Bank may reasonably request (in light of states of fact and applicable
law existing at such time) all in form and substance reasonably satisfactory to
the Bank, relating to the satisfaction of the Companyis obligations under this
Section 5.11. The requirements of this Section 5.11 shall be in addition to any
applicable restrictions or requirements imposed by Section 6.10 regarding
Investments.
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5.12. Further Assurances. At any time and from time to time the Company
shall, and shall cause each of its Subsidiaries to, execute and deliver such
further instruments and take such further action as may reasonably be requested
by the Bank to effect the purposes of each of the Credit Documents.
SECTION VI
NEGATIVE COVENANTS
So long as the Bank has any commitment to extend credit hereunder or
any Loan, Letter of Credit or other Obligation remains outstanding, the Company
covenants as follows:
6.1. Indebtedness. Neither the Company nor any of its Subsidiaries
shall create, incur, assume or be or remain liable with respect to any
Indebtedness other than the Contingent Liabilities described in Section 6.2
below and the following:
(a) Indebtedness of the Company or any of its Subsidiaries to the Bank
or any of its affiliates;
(b) Indebtedness existing as of the date of this Agreement and
disclosed on Exhibit C hereto or in the financial statements referred to in
Section 4.6;
(c) Indebtedness of the Company secured by Permitted Encumbrances in
respect of any purchase money obligations for tangible property used in its
business, in amounts not exceeding in the aggregate at any time $50,000;
(d) capitalized lease obligations of the Company in amounts not
exceeding in the aggregate at any time $400,000;
(e) other Indebtedness of the Company not exceeding in the aggregate
outstanding principal amount at any time $50,000; and
(f) trade accounts payable and accrued expenses.
6.2. Contingent Liabilities. Neither the Company nor any of its
Subsidiaries shall create, incur, assume, or remain liable with respect to any
Guarantees other than the following:
(a) Guarantees in favor of the Bank or any of its affiliates;
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(b) Guarantees existing on the date of this Agreement and disclosed on
Exhibit C hereto or in the financial statements referred to in Section 4.6;
(c) Guarantees resulting from the endorsement of negotiable instruments
for collection in the ordinary course of business;
(d) Guarantees with respect to surety, appeal performance and
return-of-money and other similar obligations incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money) not
exceeding in the aggregate at any time $50,000;
(e) Guarantees of normal trade debt relating to the acquisition of
goods and supplies; and
(f) Guarantees for products and/or services contained in licensing,
maintenance and/or professional services agreements in the ordinary course of
business.
6.3. Leases. Neither the Company nor any of its Subsidiaries shall
during any fiscal year enter into any leases of real or personal property as
lessee, except for capital leases or leases providing for payments in any one
fiscal year (whether or not such payments are termed rent) in the aggregate of
less than $1,200,000.
6.4. Sale and Leaseback. Neither the Company nor any of its
Subsidiaries shall enter into any arrangement, directly or indirectly, whereby
it shall sell or transfer any property owned by it in order to lease such
property or lease other property that the Company or any such Subsidiary intends
to use for substantially the same purpose as the property being sold or
transferred.
6.5. Encumbrances. Neither the Company nor any of its Subsidiaries
shall create, incur, assume or suffer to exist any mortgage, pledge, security
interest, lien or other charge or encumbrance, including the lien or retained
security title of a conditional vendor upon or with respect to any of its
property or assets ("Encumbrances"), or assign or otherwise convey any right to
receive income, including the sale or discount of accounts receivable with or
without recourse, except the following ("Permitted Encumbrances"):
(a) Encumbrances in favor of the Bank or any of its affiliates;
(b) Encumbrances existing as of the date of this Agreement and
disclosed in Exhibit C hereto;
(c) liens for taxes, fees, assessments and other governmental charges
to the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;
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(d) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen's and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;
(e) judgment liens that shall not have been in existence for a period
longer than 30 days after the creation thereof or, if a stay of execution
shall have been obtained, for a period longer than 30 days after the expiration
of such stay;
(f) rights of lessors under capitalized leases permitted by Section
6.1(d);
(g) Encumbrances securing Indebtedness permitted by Section 6.1(c),
provided that any such Encumbrances shall not extend to property and assets of
the Company or any such Subsidiary not financed by such a purchase money
obligation;
(h) easements, rights of way, restrictions and other similar charges or
Encumbrances relating to real property and not interfering in a material way
with the ordinary conduct of its business; and
(i) Encumbrances on its property or assets created in connection with
the refinancing of Indebtedness secured by Permitted Encumbrances on such
property, provided that the amount of Indebtedness secured by any such
Encumbrance shall not be increased as a result of such refinancing and no such
Encumbrance shall extend to property and assets of the Company or any such
Subsidiary not encumbered prior to any such refinancing.
6.6. Merger; Consolidation; Sale or Lease of Assets. Neither the
Company nor any of its Subsidiaries shall sell, lease or otherwise dispose of
assets or properties (valued at the lower of cost or market), other than sales
of inventory in the ordinary course of business or the disposition of damaged
and/or obsolete equipment, in the aggregate in excess of 10% of Consolidated
Tangible Net Worth in any fiscal year; or liquidate, merge or consolidate into
or with any other person or entity, provided that any Subsidiary of the Company
may merge or consolidate into or with (i) the Company if no Default has occurred
and is continuing or would result from such merger and if the Company is the
surviving company, or (ii) any other wholly-owned Subsidiary of the Company.
6.7. Additional Stock Issuance. The Company shall not permit any of its
Subsidiaries to issue any additional shares of its capital stock or other equity
securities, any options therefor or any securities convertible thereto other
than to the Company. Neither the Company nor any of its Subsidiaries shall sell,
transfer or otherwise dispose of any of the capital stock or other equity
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securities of a Subsidiary, except (i) to the Company or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section 6.6.
6.8. Equity Distributions. The Company shall not pay any dividends on
any class of its capital stock or make any other distribution or payment on
account of or in redemption, retirement or purchase of such capital stock;
provided that this Section shall not apply to (i) the issuance, delivery or
distribution by the Company of shares of its common stock pro rata to its
existing shareholders and (ii) the purchase or redemption by the Company of its
capital stock with the proceeds of the issuance of additional shares of capital
stock.
6.9. Capital Expenditures. Neither the Company nor any of its
Subsidiaries shall purchase or agree to purchase, or incur any obligations
(including that portion of the obligations arising under capital leases that is
required to be capitalized on the consolidated balance sheet of the Company and
its Subsidiaries) for, any equipment or other property constituting fixed assets
in any fiscal year in excess of $2,000,000 in any one fiscal year.
6.10. Investments. Neither the Company nor any of its Subsidiaries
shall make or maintain any Investments other than (i) existing Investments in
Subsidiaries and (ii) Qualified Investments, provided, however, that the Company
may, subject to Section 5.11, make investments in new Subsidiaries if the
consideration paid by the Company consists entirely of capital stock of the
Company and no Default or Event of Default exists at the time of such investment
or would exist immediately thereafter.
6.11. ERISA. Neither the Company nor any member of the Controlled Group
shall permit any Plan maintained by it to (i) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code, (ii) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or
not waived, or (iii) terminate any Plan in a manner that could result in the
imposition of a lien or encumbrance on the assets of the Company or any of its
Subsidiaries pursuant to Section 4068 of ERISA.
SECTION VII
SECURITY AGREEMENT
7.1. Creation of Security Interest. To secure the payment and
performance in full of the Obligations, the Company hereby assigns and pledges
to the Bank all of its rights, title and interest in, and grants to the Bank a
continuing security interest in, all personal property of the Company, including
without limitation all Accounts, Inventory, Equipment, Securities and General
Intangibles of the Company, whether now owned or existing or hereafter arising
or acquired; together with all goods, instruments, documents of title, policies
and certificates of insurance, securities, chattel paper, deposits, cash or
other property owned by the Company or in which the Company has an interest that
are now or may hereafter be in the possession, custody or
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control of the Bank or its assigns for any purpose; and any and all
additions, substitutions, replacements and accessions thereto; and all Proceeds
and products of any of the foregoing (collectively, the "Collateral").
7.2. Covenants Pertaining to Collateral. The Company covenants that:
(a) Sales and Further Encumbrances. The Company will not sell, grant,
assign or transfer any interest in, or permit to exist any Encumbrance on, any
of the Collateral other than in favor of the Bank or its affiliates except for
(i) sales of Inventory or grants of licenses and other rights in the ordinary
course of the Company's business for cash or on open account and on terms of
payment ordinarily extended to its customers; (ii) so long as no Event of
Default hereunder has occurred and is continuing, (a) sales of Securities, other
than Securities representing ownership of its Subsidiaries, if such sales are
made on fair and reasonable terms in arms-length transactions, or (b)
dispositions of Equipment, other than Equipment that has become worn out or
obsolete or that has been replaced by other Equipment; or (iii) as otherwise
permitted by the Bank in writing or included in this Agreement. The Company
shall defend its title to and the Bank's interest in the Collateral against all
claims and take any action necessary to remove any Encumbrances other than those
permitted hereunder and defend the right, title and interest of the Bank in and
to any of the Company's rights in the Collateral.
(b) Validity of Accounts. At any time any Account becomes subject to a
security interest in favor of the Bank, such Account shall be a valid, legal and
binding obligation of the party purported to be obligated thereon, enforceable
in accordance with its terms and free of material setoffs, defenses or
counterclaims.
(c) Fixture Conflicts; Required Waivers. The Company shall ensure, to
the extent not inconsistent with applicable law, that the Collateral shall
remain personal property of the Company and shall not be deemed to be a fixture
irrespective of the manner of its attachment to any real estate. The Company
will deliver to the Bank such disclaimer, waiver, or other document as the Bank
may request, executed by each person having an interest in such real estate.
(d) Inspection and Verification of Collateral. The Company will at all
reasonable times allow the Bank to examine, inspect or make extracts from or
copies of the Company's books and records, inspect the Collateral and arrange
for verification of Accounts constituting Collateral directly with the Company's
accountants, the account debtors or by other methods.
(e) Accounts: Collection and Delivery of Proceeds. The Company will
diligently collect all of its Accounts constituting Collateral until the Bank
exercises its rights to collect the Accounts pursuant to this Agreement. The
Company shall, at the request of the Bank, notify account debtors that payment
of Accounts is to be made directly to the Bank. The Company shall maintain a
Lockbox under a Lockbox Agreement with the Bank or an affiliate of the Bank or,
with the prior written consent of the Bank, will maintain an Agency Account with
a financial
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institution or institutions satisfactory to the Bank under agreements
satisfactory to the Bank, and will direct that all payments of Accounts or
proceeds of Inventory constituting Collateral will be remitted to such Lockbox
or Agency Account, with the collections to be remitted to the Bank on a daily
basis for application to the Loans. Any proceeds of Accounts or Inventory
constituting Collateral received by the Company, whether in the form of cash,
checks, notes or other instruments, shall be held in trust for the Bank and the
Company shall deliver said proceeds daily to the Bank, without commingling, in
the identical form received (properly endorsed or assigned where required to
enable the Bank to collect same).
(f) Equipment and Inventory: Insurance. The Company will keep the
Collateral insured at all times by insurance in such form and amounts as may be
satisfactory to the Bank, and in any event (without specific request by the
Bank) will insure the Collateral against physical hazard insurance on an "all
risks" basis, including fire, theft, and, in the case of motor vehicles,
collision. Such insurance shall be with insurance companies satisfactory to the
Bank and shall be payable to the Bank as an additional insured and the Company,
as their respective interests may appear. Such insurance shall provide for not
less than 30 days' notice of cancellation, change in form or non-renewal to the
Bank.. The Company shall insure the Collateral in amounts sufficient to prevent
the application of any co-insurance provisions. The Company shall evidence its
compliance with the foregoing by delivering a certificate with respect to each
policy concurrently with the execution hereof, annually thereafter, and from
time to time upon the request of the Bank.
(g) Equipment and Inventory: Maintenance and Use, Payment of Taxes. The
Company will keep the Collateral in good order and repair, will not use the
same in violation of law or any policy of insurance thereon, and will pay
promptly when due all taxes and assessments on the Collateral or on its use or
operation.
(h) General Intangibles: Registration, Maintenance of Copies. The
Company will apply for, and pursue diligently applications for, registration of
its ownership of the General Intangibles constituting Collateral and for which
registration is appropriate in the Companyis reasonable discretion, and will use
such other measures as are appropriate in the Companyis reasonable discretion to
preserve its rights in its other General Intangibles constituting Collateral.
The Company will, at the request of the Bank, retain off-site current copies of
all materials created by or furnished to the Company on which is recorded
then-current information about any computer programs or data bases that the
Company has developed or otherwise has the right to use from time to time. Such
materials include, without limitation, magnetic or other computer media on which
object, source or other code is recorded or that are documentation of those
computer programs or data bases, in the nature of listing printouts, narrative
descriptions, flow diagrams and similar things. The Company will, at the request
of the Bank, deliver a set of such copies to the Bank for safekeeping and
retention or transfer in the event of foreclosure.
(i) Securities: Voting, Dividends, Certificates, Options, etc. Until
the occurrence of an Event of Default hereunder, the Company shall retain the
right to vote any of the Securities
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constituting Collateral in a manner not inconsistent with the terms of this
Agreement. If the Company, as registered holder of Securities issued by any
Subsidiary, receives (i) any dividend or other distribution in cash or other
property in connection with the liquidation or dissolution of the issuer of such
Securities, or in connection with the redemption or payment of such Securities,
or (ii) any stock certificate, option or right, or other distribution, whether
as an addition to, in substitution of, or in exchange for, such Securities, or
otherwise, the Company agrees to accept same in trust for the Bank and to
deliver same forthwith to the Bank or its designee, in the exact form received,
with the Company's endorsement or reassignment when necessary, to be held by the
Bank as Collateral.
(j) Securities: Delivery or Registration. Upon request of the Bank, the
Company will (i) deliver all of its Securities constituting Collateral and
represented by certificates, including without limitation all stock of its
Subsidiaries, to the Bank to hold pursuant to the terms of this Agreement, and
(ii) register in the name of the Bank or its designee any uncertificated
Security constituting Collateral or the Bank's security interest therein on the
books maintained by or on behalf of the issuer thereof or the depository
therefor.
(k) Changes. The Company will not change its name, identity or
organizational structure or chief executive office or place where its business
records are kept, or move any tangible Collateral (other than Securities) to a
location other than those set forth on Schedule I hereto, or merge into or
consolidate with any other entity, unless the Company shall have given the Bank
at least 10 days' prior written notice thereof and shall have delivered to the
Bank such new Uniform Commercial Code financing statements or other
documentation as may be necessary or required by the Bank to ensure the
continued perfection and priority of the security interests granted by this
Agreement.
(l) Further Assurances. (i) Upon the written request of the Bank, and
at the sole expense of the Company, the Company will promptly execute and
deliver such further instruments and documents and take such further actions as
the Bank may deem desirable to obtain the full benefits of this Agreement and of
the rights and powers herein granted, including, without limitation, filing of
any financing statement under the Uniform Commercial Code, execution and
delivery of assignments of General Intangibles, delivery of appropriate stock or
bond powers, transfer of Collateral (other than Inventory, Accounts and
Equipment) to the Bank's possession. The Company authorizes the Bank to file any
such financing statement without the signature of the Company to the extent
permitted by applicable law, and to file a copy of this Agreement in lieu of a
financing statement. If any amount payable under or in connection with any of
the Collateral shall be or become evidenced by any promissory note or other
instrument, such note or instrument shall be immediately delivered to the Bank,
duly endorsed in a manner satisfactory to it.
(ii) If the Company has or obtains an ownership interest in
any patent or patent application that is not identified on Schedule II on the
date hereof, or any trademark, service mark, trademark or service mark
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registration, or application for trademark or service mark registration that is
not on Schedule II on the date hereof, or any copyright or copyright application
that is not identified on Schedule II on the date hereof: (i) the provisions of
this Agreement shall automatically apply to such patent, patent application,
trademark, service mark, trademark or service mark registration, application for
trademark or service mark registration, or copyright or copyright application,
and such patent, patent application, trademark, service mark, trademark or
service mark registration, application for trademark or service mark
registration or copyright or copyright application, shall automatically become
part of the Collateral; and (ii) the Company shall (A) within 60 days after
acquiring or becoming aware of such ownership interest, deliver to the Bank for
attachment hereto revised schedules to this Agreement reflecting all such
additional Collateral and (B) to the extent requested by the Bank, prepare,
execute and file in the United States Patent and Trademark Office, the United
States Copyright Office, or if appropriate in the equivalent agencies in any
other countries, all documents that are known by the Company to be necessary or
that the Bank reasonably requests in order to perfect the interest of the Bank
in any such Collateral.
(iii) The Company agrees to do each of the following, except
to the extent not necessary in its reasonable business judgment to the
continuing operations of the Company and provided that the failure to do the
following would not be reasonably likely to have a material adverse effect on
the business prospects or condition of the Company: (i) to take all necessary
steps in any proceeding before the United States Patent and Trademark Office,
the United States Copyright Office, or any similar office or agency in any other
country or any political subdivision thereof or in any court, to maintain each
material patent, registered trademark, service mark, trademark or service mark
registration, copyright and license agreement, and to pursue each patent
application or application for trademark or service mark registration or
copyright application now or hereafter included in the Collateral, including the
filing of divisional, continuation, continuation-in-part and substitute
applications, the filing of applications for reissue, renewal or extensions, the
payment of maintenance fees, and the participation in interference,
reexamination, opposition and infringement proceedings; and (ii) to take
corresponding steps with respect to material unpatented inventions on which the
Company is now or hereafter becomes entitled to seek patent protection; and with
respect to each new or other material trademark, service mark, trademark or
service mark registration, or material application for trademark or service mark
registration or license agreement to which the Company is now or later becomes
entitled.
(iv) The Company agrees to notify the Bank promptly and in
writing if it learns (i) that any material patent, trademark or copyright
collateral may become abandoned or dedicated or (ii) of any adverse
determination or any adverse development (including without limitation the
institution of any proceeding in the United States Patent and Trademark Office,
the United States Copyright Office, or the equivalent agencies in any other
country or any court) regarding any material patent, trademark or copyright
collateral.
(v) The Company shall continue to use reasonable and proper
statutory notice in connection with its use of each registered trademark,
service mark or copyright.
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7.3. Notices and Reports Pertaining to Collateral. The Company will:
(a) promptly furnish to the Bank, from time to time upon request,
reports with respect to the Collateral, in form and detail satisfactory to the
Bank;
(b) promptly notify the Bank of any Encumbrance asserted against the
Collateral, including any attachment, levy, execution or other legal process
levied against any of the Collateral, and of any information received by the
Company relating to the Collateral, including the Accounts, the account debtors,
or other persons obligated in connection therewith, that may in any way
adversely affect the value of the Collateral or the rights and remedies of the
Bank with respect thereto;
(c) promptly notify the Bank when it obtains knowledge of actual or
imminent bankruptcy or other insolvency proceeding of any account debtor or
issuer of Securities;
(d) deliver to the Bank, as the Bank may from time to time request,
delivery receipts, customers' purchase orders, shipping instructions, bills of
lading and any other evidence of shipping arrangements;
(e) concurrently with the reports required to be furnished under
subsection (a), and immediately if material in amount, notify the Bank of any
return or adjustment, rejection, repossession, or loss or damage of or to
merchandise represented by Accounts or constituting Inventory and of any credit,
adjustment or dispute arising in connection with the goods or services
represented by Accounts or constituting Inventory; and
(f) promptly after the application by the Company for registration of
any General Intangibles, as contemplated in Section 7.2(h), notify the Bank
thereof.
The Company authorizes the Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to the Bank in
connection with the transactions contemplated herein at any time subsequent to
12 months from the time such items are delivered to the Bank.
7.4. Bank's Rights with respect to Collateral. The Bank may, at its
option and at any time after the occurrence and during the continuance of an
Event of Default, whether or not the Obligations are due, without notice or
demand on the Company, take the following actions with respect to the
Collateral:
(a) with respect to any Accounts (i) notify account debtors of the
security interest of the Bank in such Accounts and that payment thereof is to be
made directly to the Bank; (ii) demand, collect, and receipt for any amounts
relating thereto, as the Bank may determine; (iii) commence and prosecute any
actions in any court for the purposes of collecting any such
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Accounts and enforcing any other rights in respect thereof; (iv) defend,
settle or compromise any action brought and, in connection therewith, give such
discharges or releases as the Bank may deem appropriate; (v) receive, open and
dispose of mail addressed to the Company and endorse checks, notes, drafts,
acceptances, money orders, bills of lading, warehouse receipts or other
instruments or documents evidencing payment, shipment or storage of the goods
giving rise to such Accounts or securing or relating to such Accounts, on behalf
of and in the name of the Company; and (vi) sell, assign, transfer, make any
agreement in respect of, or otherwise deal with or exercise rights in respect
of, any such Accounts or the goods or services which have given rise thereto, as
fully and completely as though the Bank were the absolute owner thereof for all
purposes;
(b) with respect to any Equipment and Inventory (i) make, adjust and
settle claims under any insurance policy related thereto and place and pay for
appropriate insurance thereon; (ii) discharge taxes and other Encumbrances at
any time levied or placed thereon; (iii) make repairs or provide maintenance
with respect thereto; and (iv) pay any necessary filing fees and any taxes
arising as a consequence of any such filing. The Bank shall have no obligation
to make any such expenditures nor shall the making thereof relieve the Company
of its obligation to make such expenditures; and
(c) with respect to any Securities (i) transfer them at any time to
itself, or to its nominee, and receive the income thereon and hold the same as
Collateral hereunder or apply it to any matured Obligations; and (ii) demand,
sue for, collect or make any compromise or settlement it deems desirable.
Except as otherwise provided herein, the Bank shall have no duty as to the
collection or protection of the Collateral nor as to the preservation of any
rights pertaining thereto, beyond the safe custody of any Collateral in its
possession.
7.5. Bank's Rights and Remedies.
(a) So long as any Event of Default shall have occurred and is
continuing:
(i) the Bank may, at its option, without notice or demand, cause all of
the Obligations to become immediately due and payable and take immediate
possession of the Collateral, and for that purpose the Bank may, so far as the
Company can give authority therefor, enter upon any premises on which any of the
Collateral is situated and remove the same therefrom or remain on such premises
and in possession of such Collateral for purposes of conducting a sale or
enforcing the rights of the Bank;
(ii) the Company will, upon demand, assemble the Collateral and make it
available to the Bank at a place and time designated by the Bank that is
reasonably convenient to both parties;
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(iii) the Bank may collect and receive all income and proceeds in
respect of the Collateral and exercise all rights of the Company with respect
thereto, including without limitation the right to exercise all voting and
corporate rights at any meeting of the shareholders of the issuer of any
Securities and to exercise any and all rights of conversion, exchange,
subscription or any other rights, privileges or options pertaining to any
Securities as if the Bank were the absolute owner thereof, including the right
to exchange, at its discretion, any and all of any Securities upon the merger,
consolidation, reorganization, recapitalization or other readjustment of the
issuer thereof, all without liability except to account for property actually
received (but the Bank shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any failure to do
so or delay in so doing);
(iv) the Bank may sell, lease or otherwise dispose of the Collateral at
a public or private sale, with or without having the Collateral at the place of
sale, and upon such terms and in such manner as the Bank may determine, and the
Bank may purchase any Collateral at any such sale. Unless the Collateral
threatens to decline rapidly in value or is of the type customarily sold on a
recognized market, the Bank shall send to the Company prior written notice
(which, if given within five days of any sale, shall be deemed to be reasonable)
of the time and place of any public sale of the Collateral or of the time after
which any private sale or other disposition thereof is to be made. The Company
agrees that upon any such sale the Collateral shall be held by the purchaser
free from all claims or rights of every kind and nature, including any equity of
redemption or similar rights, and all such equity of redemption and similar
rights are hereby expressly waived and released by the Company. In the event any
consent, approval or authorization of any governmental agency is necessary to
effectuate any such sale, the Company shall execute all applications or other
instruments as may be required; and
(v) in any jurisdiction where the enforcement of its rights hereunder
is sought, the Bank shall have, in addition to all other rights and remedies,
the rights and remedies of a secured party under the Uniform Commercial Code.
(b) Prior to any disposition of Collateral pursuant to this Agreement
the Bank may, at its option, cause any of the Collateral to be repaired or
reconditioned (but not upgraded unless mutually agreed) in such manner and to
such extent as to make it salable.
(c) The Bank is hereby granted a license or other right to use, without
charge, the Company's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks and advertising matter, or any property
of a similar nature, relating to the Collateral, in completing production of,
advertising for sale and selling any Collateral; and the Company's rights under
all licenses and all franchise agreements shall inure to the Bank's benefit.
(d) The Company recognizes that the Bank may be unable to effect a
public sale of all or a part of the Securities by reason of certain prohibitions
contained in the Securities Act of 1933 (as amended from time to time, the
"Securities Act") or the securities laws of various states (the "Blue Sky
Laws"), but may be compelled to resort to one or more private sales to a
restricted
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group of purchasers who will be obliged to agree, among other things, to
acquire the Securities for their own account, for investment and not with a view
to the distribution or resale thereof. The Company acknowledges that private
sales so made may be at prices and upon other terms less favorable to the seller
than if the Securities were sold at public sales. The Company agrees that the
Bank has no obligation to delay sale of any of the Securities for the period of
time necessary to permit the Securities to be registered for public sale under
the Securities Act or the Blue Sky Laws, and that private sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
(e) The Bank shall be entitled to retain and to apply the proceeds of
any disposition of the Collateral, first, to its reasonable expenses of
retaking, holding, protecting and maintaining, and preparing for disposition and
disposing of, the Collateral, including attorneys' fees and other legal expenses
incurred by it in connection therewith; and second, to the payment of the
Obligations in such order of priority as the Bank shall determine. Any surplus
remaining after such application shall be paid to the Company or to whomever may
be legally entitled thereto, provided that in no event shall the Company be
credited with any part of the proceeds of the disposition of the Collateral
until such proceeds shall have been received in cash by the Bank. The Company
shall remain liable for any deficiency.
7.6. Waivers. The Company waives presentment, demand, notice, protest,
notice of acceptance of this Agreement, notice of any loans made, credit or
other extensions granted, collateral received or delivered or any other action
taken in reliance hereon and all other demands and notices of any description,
except for such demands and notices as are expressly required to be provided to
the Company under this Agreement or any other document evidencing the
Obligations. With respect to both the Obligations and the Collateral, the
Company assents to any extension or postponement of the time of payment or any
other forgiveness or indulgence, to any substitution, exchange or release of
Collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromise or adjustment of any thereof, all in such manner and at
such time or times as the Bank may deem advisable. The Bank may exercise its
rights with respect to the Collateral without resorting, or regard, to other
collateral or sources of reimbursement for Obligations.
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SECTION VIII
DEFAULTS
8.1. Events of Default. There shall be an Event of Default hereunder
if any of the following events occurs:
(a) the Company shall fail to pay (i) any amount of principal of any
Loans or any reimbursement obligation arising under any Letter of Credit when
due, or (ii) any amount of interest thereon or any fees, commissions or expenses
payable hereunder or under the Note, any Letter of Credit Application or Letter
of Credit issued thereunder within five days of the due date therefor; or
(b) The Company shall fail to perform any term, covenant or agreement
contained in Sections 5.1(g), 5.5, 5.7, 5.8, 5.9, or Sections VI or VII; or
(c) the Company shall fail to perform any covenant contained in
Sections 5.1(f), 5.1(h), 5.1(i) or 5.2, and such failure shall continue for 30
days; or
(d) the Company shall fail to perform any term, covenant or agreement
(other than in respect of subsections 8.1(a) through (c) hereof) contained in
this Agreement and such default shall continue for 30 days after notice thereof
has been sent to the Company by the Bank; or
(e) any representation or warranty of the Company made in this
Agreement or in the Note or any other documents or agreements executed in
connection with the transactions contemplated by this Agreement or in any
certificate delivered hereunder shall prove to have been false in any material
respect upon the date when made or deemed to have been made; or
(f) there shall occur any material adverse change in the assets,
liabilities, financial condition, business or prospects of the Company and its
Subsidiaries, taken as a whole, as determined by the Bank acting in good faith;
or
(g) the Company or any of its Significant Subsidiaries shall fail to
pay at maturity, or within any applicable period of grace, any obligations in
excess of $250,000 in the aggregate for borrowed monies or advances, or for the
use of real or personal property, or fail to observe or perform any term,
covenant or agreement evidencing or securing such obligations for borrowed
monies or advances, or relating to such use of real or personal property, the
result of which failure is to permit the holder or holders of such obligations
to cause such Indebtedness to become due prior to its stated maturity upon
delivery of required notice, if any; or
(h) the Company or any of its Significant Subsidiaries shall (i) apply
for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, liquidator or similar official of itself or of all
or a substantial part of its property, (ii) be generally not paying
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its debts as such debts become due, (iii) make a general assignment for the
benefit of its creditors, (iv) commence a voluntary case under the Federal
Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence
any case or proceeding under any law relating to bankruptcy, insolvency,
reorganization, winding-up or composition or adjustment of debts, or any other
law providing for the relief of debtors, (vi) fail to contest in a timely or
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Federal Bankruptcy Code or other law, (vii) take
any action under the laws of its jurisdiction of incorporation or organization
similar to any of the foregoing, or (viii) take any corporate action for the
purpose of effecting any of the foregoing; or
(i) a proceeding or case shall be commenced, without the application or
consent of the Company or any of its Significant Subsidiaries in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization,
dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
of all or any substantial part of its assets, or (iii) similar relief in respect
of it, under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts or any other law providing for
the relief of debtors, and such proceeding or case shall continue undismissed,
or unstayed and in effect, for a period of 30 days; or an order for relief shall
be entered in an involuntary case under the Federal Bankruptcy Code, against the
Company or such Significant Subsidiary; or action under the laws of the
jurisdiction of incorporation or organization of the Company or any of its
Significant Subsidiaries similar to any of the foregoing shall be taken with
respect to the Company or such Significant Subsidiary and shall continue
unstayed and in effect for any period of 30 days; or
(j) a judgment or order for the payment of money shall be entered
against the Company or any of its Subsidiaries by any court, or a warrant of
attachment or execution or similar process shall be issued or levied against
property of the Company or such Subsidiary, that in the aggregate exceeds
$50,000 in value and such judgment, order, warrant or process shall continue
undischarged or unstayed for 30 days; or
(k) the Company or any member of the Controlled Group shall fail to pay
when due an amount or amounts aggregating in excess of $50,000 that it shall
have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or
notice of intent to terminate a Plan or Plans shall be filed under Title IV of
ERISA by the Company, any member of the Controlled Group, any plan administrator
or any combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate or to cause a trustee to be appointed to
administer any such Plan or Plans or a proceeding shall be instituted by a
fiduciary of any such Plan or Plans against the Company and such proceedings
shall not have been dismissed within 30 days thereafter; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any such Plan or Plans must be terminated; or
(l) loss, theft or substantial damage of or to a substantial part of
the Collateral, or the issuance of an injunction against the Company affecting
any material portion of the Collateral; or
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default under any instrument constituting, or under any agreement
(including without limitation any insurance policy) relating to, any Collateral;
or at any time the Bank, exercising reasonable judgment, shall deem the
Collateral inadequate or unsafe or in danger of misuse unless said condition is
corrected within 30 days after receipt of written notice from the Bank.
8.2. Remedies. Upon the occurrence of an Event of Default described in
subsections 8.1(h) and (i), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at the Bank's option and upon the Bank's
declaration:
(a) the Bank's commitment to make any further Loans or issue Letters
of Credit hereunder shall terminate;
(b) the unpaid principal amount of the Loans together with accrued
interest and all other Obligations shall become immediately due and payable
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived;
(c) the Bank may demand that the Company deposit and maintain in a
special interest-bearing cash collateral account at the Bank cash in an amount
sufficient to pay at all times the amount of all outstanding Letters of Credit
and all fees and commissions with respect thereto, and the Company shall have no
control over the funds so deposited; and
(d) the Bank may exercise any and all rights it has under this
Agreement, the Note, the Letter of Credit Applications and Letters of Credit
issued thereunder or any other documents or agreements executed in connection
herewith, or at law or in equity, and proceed to protect and enforce the Bank's
rights by any action at law, in equity or other appropriate proceeding.
SECTION IX
MISCELLANEOUS
9.1. Notices. Unless otherwise specified herein, all notices hereunder
to any party hereto shall be in writing and shall be deemed to have been given
when delivered by hand, when properly deposited in the mails postage prepaid,
when sent by telex, answerback received, or electronic facsimile transmission,
or when delivered to the telegraph company or overnight courier, addressed to
such party at its address indicated below:
If to the Company, at
25 Mall Road
Burlington, MA 01803
-xliii-
<PAGE>
Attention:Lacey Brandt
Facsimile: 617-674-5415
If to the Bank, at
THE FIRST NATIONAL BANK OF BOSTON 100 Federal Street Boston,
Massachusetts 02110
Attention: Daniel G. Head, Jr., Mail Stop 01-08-04
Facsimile: 617-434-0819
or at any other address specified by such party in writing.
9.2. Expenses. The Company will pay on demand all expenses of the Bank
in connection with the preparation, waiver or amendment of any of the Credit
Documents or other documents executed in connection therewith, or the
administration, default or collection of the Loans, Letters of Credit or other
Obligations or in connection with the Bank's exercise, preservation or
enforcement of any of its rights, remedies or options thereunder, including,
without limitation, fees of outside legal counsel or the allocated costs of
in-house legal counsel, accounting, consulting, brokerage or other similar
professional fees or expenses, and any fees or expenses associated with any
travel or other costs relating to any appraisals or examinations conducted in
connection with the Obligations or any collateral therefor, and the amount of
all such expenses shall, until paid, bear interest at the rate applicable to
principal hereunder (including any default rate).
9.3. Set-Off. Regardless of the adequacy of any collateral or other
means of obtaining repayment of the Obligations, any deposits, balances or other
sums credited by or due from the head office of the Bank or any of its branch
offices to the Company may, at any time and from time to time after the
occurrence of an Event of Default hereunder, without notice to the Company or
compliance with any other condition precedent now or hereafter imposed by
statute, rule of law, or otherwise (all of which are hereby expressly waived) be
set off, appropriated, and applied by the Bank against any and all obligations
of the Company to the Bank or any of its affiliates in such manner as the head
office of the Bank or any of its branch offices in their sole discretion may
determine, and the Company hereby grants the Bank a continuing security interest
in such deposits, balances or other sums for the payment and performance of all
such obligations.
9.4. Term of Agreement. This Agreement shall continue in full force and
effect so long as the Bank has any commitment to make Loans or issue Letters of
Credit hereunder or any Loan, Letter of Credit or any other Obligation shall be
outstanding.
9.5. No Waivers. No failure or delay by the Bank in exercising any
right, power or privilege hereunder or under the Note, the Letter of Credit
Applications and the Letters of Credit issued thereunder or under any other
documents or agreements executed in connection herewith
-xliv-
<PAGE>
shall operate as a waiver thereof; nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies provided herein, in the
Note and in the Letter of Credit Applications and the Letters of Credit issued
thereunder are cumulative and not exclusive of any rights or remedies otherwise
provided by agreement or law.
9.6. Governing Law. Each of the Credit Documents shall be deemed to be
contracts made under seal and shall be construed in accordance with and governed
by the laws of The Commonwealth of Massachusetts (without giving effect to any
conflicts of laws provisions contained therein).
9.7. Amendments. Neither this Agreement nor the Note, any Letter of
Credit Application or any Letter of Credit issued thereunder nor any
provision hereof or thereof may be amended, waived, discharged or terminated
except by a written instrument signed by the Bank and, in the case of
amendments, by the Company.
9.8. Binding Effect of Agreement. This Agreement shall be binding upon
and inure to the benefit of the Company and the Bank and their respective
successors and assigns; provided that the Company may not assign or transfer its
rights or obligations hereunder. Provided that the Bank retains a majority
interest and administrative responsibilities, the Bank may sell or transfer its
interests, or grant participations, herein or in the Note or any Letter of
Credit without the prior written consent of the Company, and the Company agrees
that any transferee or participant shall be entitled to the benefits of Sections
2.8 and 9.3 to the same extent as if such transferee or participant were the
Bank hereunder; provided that notwithstanding any such transfer or
participation, the Company may, for all purposes of this Agreement, treat the
Bank as the person entitled to exercise all rights hereunder and under the other
Credit Documents and to receive all payments with respect thereto.
9.9. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.
9.10. Partial Invalidity. The invalidity or unenforceability of any
one or more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.
9.11. Captions. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.
9.12 Confidentiality. Any non-public information that the Bank
receives, either through reporting by the Company or through its own inspection
and/or requests pursuant to this Agreement, shall be considered as confidential
(iConfidential Informationi). The Bank agrees to hold such Confidential
Information in confidence both during the term of this Agreement and for
-xlv-
<PAGE>
a period of one (1) year after termination of this Agreement. Except as
expressly described below, the Bank agrees not to make Confidential Information
available in any form to any third party, to limit its access to employees who
need to know such Confidential Information, or to use such Confidential
Information for any purpose other than in connection with its present or
prospective business relations with the Company. In handling such Confidential
Information the Bank shall exercise the same degree of care that it exercises
with respect to its own proprietary information of the same types, except that
disclosure of such information may be made (i) to the subsidiaries or affiliates
of the Bank in connection with their present or prospective business relations
with the Company, provided that they agree to be bound by the confidentiality
terms and conditions contained herein (ii) to prospective transferees or
purchasers of an interest in the Loans, provided that they agree in writing to
be bound by the confidentiality terms and conditions contained herein (iii) as
required by law, regulation, rule or order, subpoena, judicial order or similar
order and (iv) as may be required in connection with the examination, audit or
similar investigation of the Bank.
9.13. WAIVER OF JURY TRIAL. THE BANK AND THE COMPANY AGREE THAT NEITHER
OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT
OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR
THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY
SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT
BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE
BANK AND THE COMPANY, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS.
NEITHER THE BANK NOR THE COMPANY HAS AGREED WITH OR REPRESENTED TO THE OTHER
THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL
INSTANCES.
9.14. Entire Agreement. This Agreement, the Note and the documents and
agreements executed in connection herewith constitute the final agreement of the
parties hereto and supersede any prior agreement or understanding, written or
oral, with respect to the matters contained herein and therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
OBJECT DESIGN, INC.
By___________________________________
Title:
THE FIRST NATIONAL BANK OF BOSTON
-xlvi-
<PAGE>
By___________________________________
Title:
-xlvii-
<PAGE>
EXHIBIT A
OBJECT DESIGN, INC.
PROMISSORY NOTE
December 17, 1996
$2,000,000 Boston, Massachusetts
For value received, the undersigned hereby promises to pay to THE FIRST
NATIONAL BANK OF BOSTON (the "Bank"), or order, at the head office of the Bank
at 100 Federal Street, Boston, Massachusetts 02110, the principal amount of TWO
MILLION Dollars ($2,000,000) or such lesser amount as shall equal the principal
amount outstanding hereunder on, September 30, 1997 (the "Revolving Credit
Termination Date") in lawful money of the United States of America and in
immediately available funds, and to pay interest on the unpaid principal balance
hereof from time to time outstanding, at said office and in like money and
funds, at a rate per annum which shall at all times equal the Base Rate plus the
Applicable Margin, as defined in the Agreement (hereafter defined). Interest
shall be payable in arrears on the first day of each month beginning on the
first such date after the date hereof and when the principal balance hereof is
due (whether at maturity, by reason of acceleration or otherwise). All principal
remaining unpaid and any accrued but unpaid interest shall in any event be due
and payable on September 30, 1997.
The term "Base Rate" shall mean the greater of (i) the rate of interest
announced from time to time by the Bank at its head office as its Base Rate and
(ii) the Federal Funds Effective Rate (as defined in the below-mentioned
Agreement) plus one half of one percent (1/2%) (rounded upwards, if necessary,
to the nearest one eighth of one percent (1/8%)). The rate of interest shall
vary from time to time as the Base Rate varies, and any change in the rate of
interest will become effective on the effective date of a change in the Base
Rate. Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed.
Overdue payments of principal (whether at stated maturity, by
acceleration or otherwise), and, to the extent permitted by law, overdue
interest, shall bear interest, compounded daily and payable on demand in
immediately available funds, at a rate per annum equal to four percent (4%)
above the rate that would otherwise be applicable to principal hereunder.
If a payment of principal or interest hereunder is not made within 10
days of its due date, the undersigned will also pay on demand a late payment
charge equal to 5% of the amount of such payment. Nothing in the preceding
sentence shall affect the Bank's rights to exercise any of
<PAGE>
its rights and remedies provided in the Agreement (as defined below) if an
Event of Default (as defined in the Agreement) has occurred.
This Note is issued pursuant to, and entitled to the benefits of, and
is subject to, the provisions of a certain Loan and Security Agreement dated as
of December 17, 1996 by and between the undersigned and the Bank (herein, as the
same may from time to time be amended or extended, referred to as the
"Agreement"), but neither this reference to the Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
undersigned maker of this Note to pay the principal of and interest on this Note
as herein provided.
As provided in the Agreement, this Note is secured by certain personal
property of the undersigned and is subject to mandatory prepayment in certain
circumstances.
In case an Event of Default (as defined in the Agreement) shall occur,
the aggregate unpaid principal of and accrued interest on this Note shall become
or may be declared to be due and payable in the manner and with the effect
provided in the Agreement.
The undersigned may at its option prepay all or any part of the
principal of this Note before maturity upon the terms provided in the Agreement.
The undersigned maker hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, except for
notices which are specifically required to be provided under the terms of the
Agreement.
This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
OBJECT DESIGN, INC.
By:________________________________
Title:
-ii-
<PAGE>
EXHIBIT B
OBJECT DESIGN, INC.
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Attention:
Re: Loan and Security Agreement
Dated as of (the+"Agreement")
Gentlemen:
Pursuant to Section 2.2 of the Agreement the undersigned hereby
confirms its request made on ___________________, 19__ for a Loan in the amount
of $_____________________ on ____________________, 199___.
The representations and warranties contained or referred to in Section
IV of the Agreement are true and accurate on and as of the effective date of the
Loan as though made at and as of such date (except to the extent that such
representations and warranties expressly relate to an earlier date); and no
Default has occurred and is continuing or will result from the Loan.
OBJECT DESIGN, INC.
____________________________________
Title:
_________________________
Date
<PAGE>
EXHIBIT C
OBJECT DESIGN, INC.
INDEBTEDNESS; ENCUMBRANCES
1. Master Lease and Warrant Agreement by and between Object Design, Inc.
and PacifiCorp Credit, Inc. d/b/a Pacific Venture Finance, Inc.
covering a lease line of up to $900,000 of furniture and equipment and
the issuance of a warrant to purchase 11,571 shares of the Company's
Common Stock.
2. A Letter of Credit, collateralized by cash, issued by Fleet Bank in the
amount of $150,000 for the benefit of Sanwa Leasing which will expire
on June 16, 1997. This Letter of Credit to be replaced by a similar
Letter of Credit from Bank of Boston prior to the closing of the
transaction contemplated by this Agreement.
3. A Letter of Credit, collateralized by cash, issued by Fleet Bank in the
amount of $600,000 for the benefit of Spaulding and Slye which will
expire on December 1, 2001. This Letter of Credit to be replaced by a
similar Letter of Credit from Bank of Boston prior to the closing of
the transaction contemplated by this Agreement.
4. Security interest of and UCC-1 filed by Xerox Corporation on April 27,
1992 covering a Xerox 5065FIN copier together with any and all
additions, substitutions, accessories or other or different equipment
added to or replacing parto of the specified equipment, and all
proceeds including, without limitation, all equipment and specified
items of collateral which are acquired with any cash proceeds.
5. Security interest of and UCC-1 filed by Xerox Corporation on November
12, 1993 covering a Xerox 5385 copier together with any and all
additions, substitutions, accessories or other or different equipment
added to or replacing parto of the specified equipment, and all
proceeds including, without limitation, all equipment and specified
items of collateral which are acquired with any cash proceeds.
6. Security interest of and UCC-1s filed by BellSouth Financial Services
Corporation on November 18, 1993 and January 24, 1994 respectively,
covering a Meridian 1 Option 5 Telephone System and a Meridian 1 Option
11 Telephone System respectively, together with all replacements,
parts, repairs, additions and accessories incorporated therein or
affixed thereto.
<PAGE>
7. Security interest of and UCC-1 filed by Silicon Valley Bank on April
27, 1992, as amended, covering all items of equipment specifically
listed therein, all accessions to same and all proceeds (including
insurance proceeds) thereof. UCC-3s terminating this security interest
to be completed by the Closing.
UCC search results of the Massachusetts Secretary of State's Office:
DOC. # DESCRIPTION DATE
1. 088249 Original financing statement 4/27/92
Silicon Valley Bank, Secured Party
171028 Amendment to original financing 7/1/93
statement #088249 (4/27/92)
Silicon Valley Bank, Secured Party
2. 088294 Original financing statement 4/27/92
Xerox Corporation, Secured Party
3. 197380 Original financing statement 11/12/93
Xerox Corporation, Secured Party
4. 198671 Original financing statement 11/18/93
BellSouth Financial Services
Corporation, Secured Party
5. 211786 Original financing statement 1/24/94
BellSouth Financial Services
Corporation, Secured Party
UCC search results of the Burlington Town Clerk's Office
DOC. # DESCRIPTION DATE
1. 290 Silicon Valley Bank 7/7/92
Wellesley, MA 02181
Amendment filed 7/1/93
<PAGE>
EXHIBIT D
OBJECT DESIGN, INC.
LITIGATION; ENVIRONMENTAL MATTERS
NONE
<PAGE>
EXHIBIT E
OBJECT DESIGN, INC.
SUBSIDIARIES
All of the following subsidiaries are limited liability companies.
1. Object Design Security Corporation
One New England Executive Park
Burlington, MA 01803
(Note: Amendment to the Articles of Organization to be done changing
the corporate address to 25 Mall Road, Burlington, MA 01803).
2. Object Design (UK) Ltd.
L'Avenir
Opladen Way
Bracknell, Berkshire RG120PJ
United Kingdom
3. Object Design Software GmbH
Kreuzberger Ring 64
65205 Wiesbaden
Germany
4. Object Design France
74 rue du Chateau
92100 Boulogne
France
5. Object Design Japan Co., Ltd.
818 Shuwa Kioicho Tbr Building
5-7 Kojimachi
Chiyoda-ku, Tokyo 102
Japan
<PAGE>
EXHIBIT F
OBJECT DESIGN, INC.
COMPLIANCE REPORT
OBJECT DESIGN, INC. (the "Company") HEREBY CERTIFIES that:
This Report is furnished pursuant to Section 5.1(d) of the Loan and
Security Agreement dated as of _____________________________ by and between the
Company and The First National Bank of Boston (the "Agreement"). Unless
otherwise defined herein, the terms used in this Report have the meanings given
to them in the Agreement.
As required by Section 5.1(a) and (b) of the Agreement, consolidated
financial statements of the Company and its Subsidiaries for the
[year/month/quarter] ended ________________, 19___ (the "Financial Statements")
prepared in accordance with generally accepted accounting principles
consistently applied accompany this Report. The Financial Statements present
fairly the consolidated financial position of the Company and its Subsidiaries
as at the date thereof and the consolidated results of operations of the Company
and its Subsidiaries for the period covered thereby (subject only to normal
recurring year-end adjustments and the omission of footnotes).
The figures set forth in Schedule A for determining compliance by the
Company with the financial covenants contained in the Agreement are true and
complete as of the date hereof.
The activities of the Company and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by the Chief Financial
Officer or by employees or agents under his immediate supervision. Based on such
review, to the best knowledge and belief of the Chief Financial Officer, and as
of the date of this Report, no Default has occurred.*
WITNESS my hand this ______________ day of ___________, 19______.
OBJECT DESIGN, INC.
By:________________________________
Title:
- -----------------------
* If a Default has occurred, this paragraph is to be modified with an
appropriate statement as to the nature thereof, the period of existence
thereof and what action the Company has taken, is taking, or proposes to
take with respect thereto.
<PAGE>
SCHEDULE A
to
EXHIBIT F+
FINANCIAL COVENANTS
Quick Ratio (Section 5.7)
REQUIRED: at least 225%
ACTUAL:
(i) Consolidated Quick Assets $+++++++++
(ii) Consolidated Liabilities $+++++++++
(iii) Line (i) divided by line (ii) +++++:+1.00+
Ratio of Consolidated Total Liabilities to Consolidated
Tangible Net Worth (Section 5.8)+++++++++++++++++++
REQUIRED: not greater than 2.3:+1.00+
ACTUAL:
(i) Consolidated Total Liabilities $+++++++++
(excluding deferred taxes)
(ii) Consolidated Tangible Net Worth $+++++++++
(iii) Line (i) divided by line (ii) +++++:+1.00+
Profitability (Section 5.9)
REQUIRED: at least $1.00
ACTUAL:
Consolidated net income $________
WITNESS my hand this _________ day of __________, 19__.
OBJECT DESIGN, INC.
By:_______________________________
Title:
-ii-
<PAGE>
EXHIBIT G
OBJECT DESIGN, INC.
BORROWING BASE CERTIFICATE
This Certificate is furnished pursuant to Section 5.1(d) of the Loan and
Security Agreement dated as of ______________________, 19__ (the "Agreement") by
and between OBJECT DESIGN, INC. (the "Company") and THE FIRST NATIONAL BANK OF
BOSTON. Unless otherwise defined herein, the terms used in this Certificate have
the meanings given to them in the Agreement. I am duly authorized to deliver
this Certificate on behalf of the Company and hereby certify to the best of my
knowledge after due inquiry that:
A. The following numbers are correct as of the end of ______________ 19__:
1. Total Accounts Receivable $+++++++++
2. Amount of Line 1 consisting of Accounts:
(i) more than 30 days past due $+++++++++
---------
(ii) payable more than 90 days from invoice $________
(iii) evidenced by chattel paper
or promissory note $+++++++++
(iv) due from employees or affiliates $+++++++++
(v) due from non-U.S. debtors (uninsured) $+++++++++
(other than Approved Foreign Customers)
(vi) due from governmental authorities $+++++++++
(vii) due from debtor owing in the
aggregate in excess of 5%
of Borrower's total Eligible Accounts $+++++++++
(viii) due from debtor with 20% or
more in face value of accounts
more than 60 days past due $+++++++++
---------
(ix) otherwise ineligible under
<PAGE>
definition of Eligible Accounts
in Agreement $+++++++++
Total of Line 2 $+++++++++
---------
3. Total Net Amount Eligible Accounts
[Line (1) minus Line (2)] $+++++++++
=========
4. 80% of Line 3 $+++++++++
=========
9. Total Borrowing Base Amount
[Lesser of $2,000,000 or Line 4] $+++++++++
=========
10. Loans and Letters of Credit Outstanding ($+++++++++)
---------
11. Availability [Line 9 minus Line 10)] $+++++++++
=========
B. No Default or Event of Default has occurred and is continuing.*
WITNESS my hand this ____________ day of __________, 199_.
___________________________________
By:____________________________
Title:
- ---------------------
* Or modify with appropriate statement as to nature of any such event, the
period of existence thereof and action taken, or proposed with respect
thereto.
-ii-
<PAGE>
EXHIBIT H
FORM OF OPINION OF COUNSEL TO THE COMPANY
---------------------------
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Attention:
RE: Loan and Security Agreement dated as of _________________
by and between THE FIRST NATIONAL BANK OF BOSTON (the "Bank")
and OBJECT DESIGN, INC. (the "Company")
Gentlemen:
We have acted as counsel to OBJECT DESIGN, INC. (the "Company") in
connection with the preparation, execution and delivery of the Loan and Security
Agreement, dated as of ____________________________ (the "Agreement") between
The First National Bank of Boston (the "Bank") and the Company pursuant to which
the Company has executed and delivered to the Bank its Note in the principal
amount of $_______________. All terms defined in the Agreement shall have the
same meanings herein.
We have examined executed counterparts of each of the Credit Documents
and originals, or copies, the authenticity of which has been established to our
satisfaction, of such other documents, corporate records, agreements and
instruments and certificates of public officials and officers of the Company as
we have deemed necessary as the basis for the opinions herein expressed. As to
the questions of fact material to such opinions we have, when relevant facts
were not independently established, relied upon certifications by officers of
the Company.
Based on the foregoing and having regard for legal considerations as we
have deemed relevant, it is our opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has all requisite
corporate power to own its
<PAGE>
property and conduct its business as now conducted and is duly qualified
and in good standing as a foreign corporation and duly authorized to do business
in each jurisdiction wherein the nature of its properties or business requires
such qualification, except where the failure to be so qualified would not have a
material adverse effect on its business, financial condition, assets or
properties taken as a whole.
2. The execution and delivery of each of the Credit Documents and
performance by the Company of its obligations thereunder and of the transactions
contemplated thereby are within the corporate power and authority of the
Company, and have been authorized by proper corporate proceedings and do not
contravene any provision of law of the United States or its political
subdivisions or the Certificate of Incorporation or By-Laws of the Company, or,
to the best of our knowledge, contravene any provision of, or constitute an
event of default or event which, with the lapse of time or the giving of notice,
or both, would constitute an event of default under, any other agreement,
instrument or undertaking binding on the Company.
3. Each of the Credit Documents has been duly executed and delivered by
the Company. We know of no reason why the choice of law provisions of each of
the Credit Documents, which set forth Massachusetts law as the governing law,
would not be enforced by the courts of the state of _____, as agreed upon by the
parties. However, if the law of the state of _____ is deemed to be the governing
law, in whole or part, each of the Credit Documents and all of the terms and
provisions thereof are the legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms except as limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
enforcement of creditors' rights generally, and except as the remedy of specific
performance or of injunctive relief is subject to the discretion of the court
before which any proceeding therefor may be brought.
4. The execution, delivery and performance of each of the Credit
Documents and the transactions contemplated thereby do not require any approval
or consent of, or filing or registration with, any governmental or other agency
or authority, or any other party other than the filing of UCC-1 financing
statements referred to in paragraph 10 below.
5. Except as set forth on Exhibit D to the Agreement, there is no
litigation, proceeding or investigation pending, or, to the best of our
knowledge after due inquiry, threatened, against the Company or any Subsidiary
which, if adversely determined, would result in a material judgment not
substantially covered by insurance or would otherwise have a material adverse
effect on the assets, business or prospects of the Company or any Subsidiary.
6. Each Subsidiary of the Company is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, has all requisite corporate power to own its property and conduct
its businesses as now conducted and is duly qualified and in good standing as a
foreign corporation and is duly authorized to do business in each jurisdiction
where the nature of its properties or businesses requires such qualification,
-ii-
<PAGE>
except where the failure to be so qualified would not have a material adverse
effect on its business, financial condition, assets or properties taken as a
whole.
7. As of the date of the Agreement, all the Subsidiaries of the Company
are listed on Exhibit E thereto. The Company is the record holder of all of the
issued and outstanding stock of each of its Subsidiaries. All shares of such
stock have been validly issued and are fully paid and nonassessable, and no
rights to subscribe to any additional shares have been granted, and no options,
warrants or similar rights are outstanding.
8. Neither the Company nor any Subsidiary is subject to regulation
under the Investment Company Act of 1940, as amended.
9. All state and local recording, franchise, stamp, documentary and
other taxes and governmental charges and assessments required to be paid in
connection with the execution, delivery, filing or recordation of, or as a
condition to the enforcement of, each of the Credit Documents including, without
limitation, the security interest grants contained therein and any of the
transactions contemplated thereby, have been duly paid.
10. Uniform Commercial Code Financing Statements naming the Bank as
Secured Party and the Company as Debtor have been duly filed in ______________,
as set forth in Schedule 1 hereto, these being the only places provided by the
laws of the State of _____________________ for filing in order to perfect a
security interest in the Collateral to the extent that such is subject to the
________________ Uniform Commercial Code. These financing statements, together
with the Agreement, create in favor of the Bank a valid and perfected security
interest in, and continuing lien on, the Collateral now owned or hereafter
acquired by the Company, which is enforceable against the Company as security
for the Obligations, whether now outstanding or hereafter incurred. Except as
set forth in Schedule 1, there are no other financing statements on file in the
offices listed thereon naming the Company as Debtor that were filed prior to the
financing statements listed on Schedule 1.
Very truly yours,
-iii-
<PAGE>
EXHIBIT J
GUARANTY
GUARANTY, dated as of ___________________, l9___ by
___________________________________ (the "Guarantor"), in favor of THE FIRST
NATIONAL BANK OF BOSTON, a national banking association with its head office at
l00 Federal Street, Boston, Massachusetts 02110, and its foreign branches (the
"Bank"). In consideration of the Bank's giving, in its discretion, time, credit
or banking facilities or accommodations to OBJECT DESIGN, INC.
(together with its successors, the "Customer"), the Guarantor agrees as follows:
1. GUARANTY OF PAYMENT AND PERFORMANCE. The Guarantor hereby guarantees
to the Bank the full and punctual payment when due (whether at maturity, by
acceleration or otherwise), and the due and punctual performance, of all
liabilities, agreements and other obligations of the Customer to the Bank,
whether direct or indirect, absolute or contingent, due or to become due,
secured or unsecured, now existing or hereafter arising or acquired. This
Guaranty is an absolute, unconditional and continuing guaranty of the full and
punctual payment and performance of the Obligations and not of their
collectibility only and is in no way conditioned upon any requirement that the
Bank first attempt to collect any of the Obligations from the Customer or resort
to any security or other means of obtaining their payment. Should the Customer
default in the payment or performance of any of the Obligations, the obligations
of the Guarantor hereunder shall become immediately due and payable to the Bank,
without demand or notice of any nature, all of which are expressly waived by the
Guarantor. Payments by the Guarantor hereunder may be required by the Bank on
any number of occasions.
2. GUARANTOR'S AGREEMENT TO PAY. The Guarantor further agrees, as the
principal obligor and not as a guarantor only, to pay to the Bank, on demand,
all costs and expenses (including court costs and legal expenses) incurred or
expended by the Bank in connection with the Obligations, this Guaranty and the
enforcement thereof, together with interest on amounts recoverable under this
Guaranty from the time such amounts become due until payment, at the rate per
annum equal to l8% or, if higher, the rate of interest announced by the Bank
from time to time at its head office as its Base Rate, plus 4%; provided that if
such interest exceeds the maximum amount permitted to be paid under applicable
law, then such interest shall be reduced to such maximum permitted amount.
3. UNLIMITED GUARANTY. The liability of the Guarantor hereunder shall
be unlimited. It is the desire and intent of each of the Guarantor and the Bank
that this Guaranty shall be enforced against the Guarantor to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. If, however, and to the
<PAGE>
extent that, the obligations of the Guarantor under this Guaranty shall be
adjudicated to be invalid or unenforceable for any reason (including, without
limitation, because of any applicable state or federal law relating to
fraudulent conveyances or transfers), then the amount of the Obligations
guaranteed hereunder shall be deemed to be reduced to, and Guarantor shall pay,
the maximum amount of the Obligations which would be permissible under
applicable law.
4. WAIVERS BY GUARANTOR; BANK'S FREEDOM TO ACT. The Guarantor agrees
that the Obligations will be paid and performed strictly in accordance with
their respective terms regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Bank with respect thereto. The Guarantor waives presentment,
demand, protest, notice of acceptance, notice of Obligations incurred and all
other notices of any kind, all defenses which may be available by virtue of any
valuation, stay, moratorium law or other similar law now or hereafter in effect,
any right to require the marshalling of assets of the Customer, and all
suretyship defenses generally. Without limiting the generality of the foregoing,
the Guarantor agrees to the provisions of any instrument evidencing, securing or
otherwise executed in connection with any Obligation and agrees that the
obligations of the Guarantor hereunder shall not be released or discharged, in
whole or in part, or otherwise affected by (i) the failure of the Bank to assert
any claim or demand or to enforce any right or remedy against the Customer or
with respect to any Obligation; (ii) any extensions or renewals of any
Obligation; (iii) any rescissions, waivers, amendments or modifications of any
of the terms or provisions of any agreement evidencing, securing or otherwise
executed in connection with any Obligation; (iv) the substitution or release of
any person or entity primarily or secondarily liable for any Obligation; (v) the
adequacy of any rights the Bank may have against any collateral or other means
of obtaining repayment of the Obligations; (vi) the impairment of any collateral
securing the Obligations, including without limitation the failure to perfect or
preserve any rights the Bank might have in such collateral or the substitution,
exchange, surrender, release, loss or destruction of any such collateral; or
(vii) any other act or omission which might in any manner or to any extent vary
the risk of the Guarantor or otherwise operate as a release or discharge of the
Guarantor, all of which may be done without notice to the Guarantor. The
Guarantor acknowledges and confirms that it has established its own means of
obtaining from the Customer all information desired by the Guarantor concerning
the financial condition and affairs of the Customer and that the Bank is not in
any way obligated to inform Guarantor of changes in the Customeris financial
condition of affairs.
5. UNENFORCEABILITY OF OBLIGATIONS AGAINST CUSTOMER. If for any reason
the Customer has no legal existence or is under no legal obligation to discharge
any of the Obligations, or if any of the Obligations have become irrecoverable
from the Customer by operation of law or for any other reason, this Guaranty
shall nevertheless be binding on the Guarantor to the same extent as if the
Guarantor at all times had been the principal obligor on all such Obligations.
In the event that acceleration of the time for payment of the Obligations is
stayed upon the insolvency, bankruptcy or reorganization of the Customer, or for
any other
-2-
<PAGE>
reason, all such amounts otherwise subject to acceleration under the terms
of any agreement evidencing, securing or otherwise executed in connection with
any Obligation shall be immediately due and payable by the Guarantor.
6. SUBROGATION; SUBORDINATION. The Guarantor waives any right against
the Customer arising as a result of any payment by the Guarantor hereunder, by
way of subrogation, reimbursement, indemnification, contribution or otherwise.
The Guarantor will not prove or prosecute any claim in respect of any payment
hereunder, whether in bankruptcy or insolvency proceedings or otherwise, and the
Guarantor will not claim any set-off or counterclaim against the Customer in
respect of any liability of the Guarantor to the Customer. The payment of any
amounts due with respect to any indebtedness of the Customer now or hereafter
held by the Guarantor is hereby subordinated to the prior payment in full of the
Obligations, provided that so long as no default in the payment or performance
of the Obligations has occurred and is continuing, or no demand for payment of
any of the Obligations has been made that remains unsatisfied, the Customer may
make, and the Guarantor may demand and accept, any scheduled payments of
principal of and interest on such subordinated indebtedness in the amounts, at
the rates and on the dates specified in such instruments, securities or other
writings as shall evidence such subordinated indebtedness. The Guarantor agrees
that after the occurrence of any default in the payment or performance of the
Obligations, the Guarantor will not demand, sue for or otherwise attempt to
collect any such indebtedness of the Customer to the Guarantor until the
Obligations shall have been paid in full. If, notwithstanding the foregoing
sentence, the Guarantor shall collect, enforce or receive any amounts in respect
of such indebtedness, such amounts shall be collected, enforced and received by
the Guarantor as trustee for the Bank and be paid over to the Bank on account of
the Obligations without affecting in any manner the liability of the Guarantor
under the other provisions of this Guaranty.
7. SECURITY; SET-OFF. The Guarantor grants to the Bank, as security for
the full and punctual payment and performance of the Guarantor's obligations
hereunder, a continuing lien on and security interest in all securities or other
property belonging to the Guarantor now or hereafter held by the Bank and in all
deposits (general or special, time or demand, provisional or final) and other
sums credited by or due from the Bank to the Guarantor or subject to withdrawal
by the Guarantor; and regardless of the adequacy of any collateral or other
means of obtaining repayment of the Obligations, the Bank is hereby authorized
at any time and from time to time, without notice to the Guarantor (any such
notice being expressly waived by the Guarantor) and to the fullest extent
permitted by law, to set off and apply such deposits and other sums against the
obligations of the Guarantor under this Guaranty, whether or not the Bank shall
have made any demand under this Guaranty and although such obligations may be
contingent or unmatured.
8. FURTHER ASSURANCES. The Guarantor agrees that it will, from time to
time at the request of the Bank, provide to the Bank its most recent tax
returns, audited and unaudited
-3-
<PAGE>
balance sheets and related statements of income and changes in financial
condition (prepared on a consolidated basis with the Guarantor's subsidiaries,
if any) and such other information relating to the business and affairs of the
Guarantor as the Bank may reasonably request. The Guarantor also agrees, upon
request after any change in the condition or affairs (financial or otherwise) of
the Guarantor deemed by the Bank to be adverse and material, to secure the
payment and performance of its obligations hereunder by delivering, assigning or
transferring to the Bank or granting the Bank a security interest in additional
collateral of a value and character satisfactory to the Bank, and authorizes the
Bank to file any financing statement deemed by the Bank to be necessary or
desirable to perfect any security interest granted by the Guarantor to the Bank,
and as agent for the Guarantor, to sign the name of the Guarantor thereto. The
Guarantor also agrees to do all such things and execute all such documents,
including financing statements, as the Bank may consider necessary or desirable
to give full effect to this Guaranty and to perfect and preserve the rights and
powers of the Bank hereunder.
9. TERMINATION; REINSTATEMENT. This Guaranty shall remain in full force
and effect until the Bank is given written notice of the Guarantor's intention
to discontinue this Guaranty, notwithstanding any intermediate or temporary
payment or settlement of the whole or any part of the Obligations. No such
notice shall be effective unless received and acknowledged by an officer of the
Bank at its head office or at the branch of the Bank where this Guaranty is
given. No such notice shall affect any rights of the Bank or of any affiliate
hereunder including, without limitation, the rights set forth in Sections 4 and
6, with respect to Obligations incurred prior to the receipt of such notice or
Obligations incurred pursuant to any contract or commitment in existence prior
to such receipt, and all checks, drafts, notes, instruments (negotiable or
otherwise) and writings made by or for the account of the Customer and drawn on
the Bank or any of its agents purporting to be dated on or before the date of
receipt of such notice, although presented to and paid or accepted by the Bank
after that date, shall form part of the Obligations. This Guaranty shall
continue to be effective or be reinstated, notwithstanding any such notice, if
at any time any payment made or value received with respect to an Obligation is
rescinded or must otherwise be returned by the Bank upon the insolvency,
bankruptcy or reorganization of the Customer, or otherwise, all as though such
payment had not been made or value received.
10. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon the
Guarantor, its heirs, successors and assigns, and shall inure to the benefit of
and be enforceable by the Bank and its successors, transferees and assigns.
Without limiting the generality of the foregoing sentence, the Bank may assign
or otherwise transfer any agreement or any note held by it evidencing, securing
or otherwise executed in connection with the Obligations, or sell participations
in any interest therein, to any other person or entity, and such other person or
entity shall thereupon become vested, to the extent set forth in the agreement
evidencing such assignment, transfer or participation, with all the rights in
respect thereof granted to the Bank herein.
-4-
<PAGE>
11. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Guaranty nor consent to any departure by the Guarantor therefrom shall be
effective unless the same shall be in writing and signed by the Bank. No failure
on the part of the Bank to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right.
12. NOTICES. All notices and other communications called for hereunder
shall be made in writing and, unless otherwise specifically provided herein,
shall be deemed to have been duly made or given when delivered by hand or sent
by first class mail postage prepaid or, in the case of telegraphic or telexed
notice, when transmitted, answer back received, or in the case of electronic
facsimile transmission, electronic confirmation received, addressed as follows:
if to the Guarantor, at the address set forth beneath its signature hereto, and
if to the Bank, at l00 Federal Street, Boston, Massachusetts 02110, Telex:
996527 BOSTONBK BSN, Facsimile No. ______, Attention:_________________, or at
such address as either party may designate in writing.
13. GOVERNING LAW; CONSENT TO JURISDICTION. This Guaranty is intended
to take effect as a sealed instrument and shall be governed by, and construed in
accordance with, the laws of The Commonwealth of Massachusetts without regard to
its conflicts of laws provisions. The Guarantor agrees that any suit for the
enforcement of this Guaranty may be brought in the courts of The Commonwealth of
Massachusetts or any federal court sitting therein and consents to the
non-exclusive jurisdiction of such court and to service of process in any such
suit being made upon the Guarantor by mail at the address specified in Section
12 hereof. The Guarantor hereby waives any objection that it may now or
hereafter have to the venue of any such suit or any such court or that such suit
was brought in an inconvenient court.
14. MISCELLANEOUS. This Guaranty constitutes the entire agreement of
the Guarantor with respect to the matters set forth herein. The rights and
remedies herein provided are cumulative and not exclusive of any remedies
provided by law or any other agreement, and this Guaranty shall be in addition
to any other guaranty of the Obligations. The invalidity or unenforceability of
any one or more sections of this Guaranty shall not affect the validity or
enforceability of its remaining provisions. Captions are for the ease of
reference only and shall not affect the meaning of the relevant provisions. The
meanings of all defined terms used in this Guaranty shall be equally applicable
to the singular and plural forms of the terms defined.
IN WITNESS WHEREOF, the Guarantor has executed and delivered this
Guaranty, or caused this Guaranty to be executed and delivered by its duly
authorized officer, as of the date appearing on page one.
-5-
<PAGE>
WITNESS:
____________________________________________________
GUARANTOR:__________________________________________
Name: ___________________________________________
By ___________________________________________
Print/Type Full Name Title:*
Address: ___________________________________________
Address: ___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
Telex:_____________________________________
Facsimile:_________________________________
Note - A separate guaranty must be signed by each guarantor.
- -----------------------------
*To be completed if Guarantor is other than an individual.
-6-
<PAGE>
CERTIFICATE
The undersigned certifies to THE FIRST NATIONAL BANK OF BOSTON that:
1. He is the ________________________________________________(1) of
the Guarantor which executed the foregoing Guaranty and in that capacity has
the authority to make this certificate on behalf of the Guarantor.
2. The Guarantor is a ____________________________________________(2),
validly organized or formed and existing in good standing and in the full
enjoyment of its powers and franchises under the laws of
_____________________________________________________3.
3. The foregoing Guaranty has been duly executed and delivered on
behalf of the Guarantor, such actions have been duly authorized by all necessary
corporate or other action, and the execution, delivery and performance of the
Guaranty by the Guarantor will not contravene any existing law, rule or
regulation, or any provision of its certificate of incorporation or by-laws or
other document or documents evidencing its establishment or governing the
conduct of its affairs or any agreement to which it is a party or by which it is
bound.
IN WITNESS WHEREOF, the undersigned has made this certificate on behalf
of the Guarantor this __________________________ day of
________________________, l9____.
_______________________________________
[Seal](4)
- -------------------
1 Insert Secretary, Clerk, partner or other authorized official.
2 Insert type of business organization of Guarantor, i.e., corporation,
business trust, partnership, as the case may be.
3 Insert jurisdiction in which the Guarantor was formed.
4 Impress corporate or common seal, if any.
-7-
<PAGE>
-8-
Exhibit 10.31
OBJECT DESIGN, INC.
PROMISSORY NOTE
December 17, 1996
$2,000,000 Boston, Massachusetts
For value received, the undersigned hereby promises to pay to THE FIRST
NATIONAL BANK OF BOSTON (the "Bank"), or order, at the head office of the Bank
at 100 Federal Street, Boston, Massachusetts 02110, the principal amount of TWO
MILLION Dollars ($2,000,000) or such lesser amount as shall equal the principal
amount outstanding hereunder on, September 30, 1997 (the "Revolving Credit
Termination Date") in lawful money of the United States of America and in
immediately available funds, and to pay interest on the unpaid principal balance
hereof from time to time outstanding, at said office and in like money and
funds, at a rate per annum which shall at all times equal the Base Rate plus the
Applicable Margin, as defined in the Agreement (hereafter defined). Interest
shall be payable in arrears on the first day of each month beginning on the
first such date after the date hereof and when the principal balance hereof is
due (whether at maturity, by reason of acceleration or otherwise). All principal
remaining unpaid and any accrued but unpaid interest shall in any event be due
and payable on September 30, 1997.
The term "Base Rate" shall mean the greater of (i) the rate of interest
announced from time to time by the Bank at its head office as its Base Rate and
(ii) the Federal Funds Effective Rate (as defined in the below-mentioned
Agreement) plus one half of one percent (1/2%) (rounded upwards, if necessary,
to the nearest one eighth of one percent (1/8%)). The rate of interest shall
vary from time to time as the Base Rate varies, and any change in the rate of
interest will become effective on the effective date of a change in the Base
Rate. Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed.
Overdue payments of principal (whether at stated maturity, by
acceleration or otherwise), and, to the extent permitted by law, overdue
interest, shall bear interest, compounded daily and payable on demand in
immediately available funds, at a rate per annum equal to four percent (4%)
above the rate that would otherwise be applicable to principal hereunder.
If a payment of principal or interest hereunder is not made within 10
days of its due date, the undersigned will also pay on demand a late payment
charge equal to 5% of the amount of such payment. Nothing in the preceding
sentence shall affect the Bank's rights to exercise any of its rights and
remedies provided in the Agreement (as defined below) if an Event of Default (as
defined in the Agreement) has occurred.
This Note is issued pursuant to, and entitled to the benefits of, and
is subject to, the provisions of a certain Loan and Security Agreement dated as
of December 17, 1996 by and between the undersigned and the Bank (herein, as the
same may from time to time be amended or extended, referred to as the
"Agreement"), but neither this reference to the Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
undersigned maker of this Note to pay the principal of and interest on this Note
as herein provided.
As provided in the Agreement, this Note is secured by certain personal
property of the undersigned and is subject to mandatory prepayment in certain
circumstances.
-9-
<PAGE>
In case an Event of Default (as defined in the Agreement) shall occur,
the aggregate unpaid principal of and accrued interest on this Note shall become
or may be declared to be due and payable in the manner and with the effect
provided in the Agreement.
The undersigned may at its option prepay all or any part of the
principal of this Note before maturity upon the terms provided in the Agreement.
The undersigned maker hereby waives presentment, demand, notice of
dishonor, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, except for
notices which are specifically required to be provided under the terms of the
Agreement.
This instrument shall have the effect of an instrument executed under
seal and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
OBJECT DESIGN, INC.
By:________________________________
/s/ Lacey Brandt
-10-
Exhibit 11.1
Object Design, Inc.
Statement Regarding Computation of Net Income (Loss)
per Common and Common Equivalent Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Historical - Primary:
Weighted average issued common
stock outstanding 26,500 2,237 2,054
Weighted average common stock
equivalents and cheap stock (2) 2,737 7,364 7,364
Less: assumed purchases of
treasury shares -- -- --
------- -------- --------
Weighted average number of
common and common
equivalent shares outstanding 29,237 9,601 9,418
======= ======== ========
Net income (loss) 1,693 (10,282) (12,021)
Less: accretion of redeemable convertible
preferred stock to redemption value (1,173) -- --
------- -------- --------
Net income (loss) available to common
stockholders $ 520 $(10,282) $(12,021)
======= ======== ========
Net income (loss) per common and
common equivalent share $ 0.02 $ (1.07) $ (1.28)
Supplementary (1)
Weighted average issued common
and preferred stock outstanding (1) 26,500
Weighted average common stock
equivalents and cheap stock (2) 2,737
Less: assumed purchases of treasury
shares --
-------
Weighted average number of
common and common
equivalent shares outstanding 29,237
=======
Net income (loss) $ 1,693
Net income (loss) per share $ 0.06
=======
</TABLE>
Notes:
(1) All shares of convertible preferred stock are considered, on a supplementary
basis, to be common stock and are included using the if-converted method on
the dates of their original issuance.
(2) In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of common stock, common stock equivalents and
Series J Preferred Stock within one year prior of the initial filing of the
registration statement, at share prices below the assumed initial public
offering price of $10.00 per share are considered to have been made in
anticipation of the contemplated public offering for which this registration
statement was prepared. Accordingly, these stock issuances are treated as if
issued and outstanding, using the treasury stock method for options, since
the inception of the Company.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Object Design, Inc. on Form S-8 (file no. 333-14741) of our report dated
February 11, 1997, on our audits of the consolidated financial statements and
financial statement schedule of Object Design, Inc. as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995, and 1994 which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,952
<SECURITIES> 11,087
<RECEIVABLES> 11,694
<ALLOWANCES> 823
<INVENTORY> 0
<CURRENT-ASSETS> 34,333
<PP&E> 9,441
<DEPRECIATION> 6,223
<TOTAL-ASSETS> 38,461
<CURRENT-LIABILITIES> 10,108
<BONDS> 120
0
0
<COMMON> 27
<OTHER-SE> 28,206
<TOTAL-LIABILITY-AND-EQUITY> 28,233
<SALES> 25,640
<TOTAL-REVENUES> 38,339
<CGS> 1,597
<TOTAL-COSTS> 8,746
<OTHER-EXPENSES> 28,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,760
<INCOME-TAX> 67
<INCOME-CONTINUING> 1,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,693
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
