UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ____________________ to ____________________
Commission File Number: 0-21793
VERSATILITY INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1214354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, Virginia 22033
(703) 591-2900
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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 [ ]
As of December 2, 1997 there were 7,542,902 shares of common stock outstanding,
par value $.01 per share.
<PAGE>
VERSATILITY INC.
Form 10-Q
TABLE OF CONTENTS
<TABLE>
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Page No.
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 1997 and October 31, 1997 3
Condensed Consolidated Statements of Operations for the Three Months Ended October 31, 1996
and 1997 and the Six Months Ended October 31, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 31, 1996 and
1997 6
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended
October 31, 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 21
</TABLE>
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 30, October 31,
1997 1997
---- ----
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $18,825,764 $10,997,266
Short-term investments............................. 6,039,255 5,239,625
Accounts receivable, net of allowance for doubtful
accounts of $356,195 and $341,951................ 15,971,315 15,834,957
Prepaid expenses................................... 1,181,865 2,190,361
Inventory.......................................... 18,880 105,683
Notes receivable-trade............................. -- 2,307,212
Note receivable-related party...................... 519,305 --
Related party receivables.......................... 153,381 185,928
Income taxes receivable............................ -- 1,378,223
Deferred income taxes.............................. 230,729 230,729
----------- -----------
Total current assets.......................... 42,940,494 38,469,984
----------- -----------
Other assets:
Deposits........................................... 187,650 275,808
Investments........................................ 1,433,464 1,426,499
Deferred income taxes.............................. 248,932 261,200
Assets held for sale............................... 648,314 827,041
Purchased software, net of accumulated amortization
of $62,098 and $104,021.......................... 357,136 319,849
----------- -----------
Total other assets............................ 2,875,496 3,110,397
----------- -----------
Property and equipment
Computers.......................................... 1,168,246 1,371,783
Office furniture and equipment..................... 665,597 764,823
Leasehold improvements............................. 206,402 222,556
Capital leases..................................... 652,533 652,533
----------- -----------
2,692,778 3,011,695
Less: Accumulated depreciation and amortization ... (1,675,749) (1,860,440)
----------- -----------
Net property and equipment.................... 1,017,029 1,151,255
----------- -----------
Total assets............................................ $46,833,019 $42,731,636
=========== ===========
</TABLE>
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 30, October 31,
1997 1997
---- ----
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,107,630 $ 1,218,048
Accrued liabilities.................................. 2,016,656 2,336,735
Related party payables............................... 28,030 9,307
Income taxes payable................................. 662,042 --
Capital lease payable................................ 181,069 171,383
Line of credit....................................... 2,288,319 2,519,892
Deferred revenue..................................... 978,008 223,893
------------ -----------
Total current liabilities....................... 8,261,754 6,479,258
------------ -----------
Other liabilities:
Capital lease payable, less current maturities....... 287,120 178,076
Deferred rent........................................ 316,360 350,432
------------ -----------
Total other liabilities......................... 603,480 528,508
------------ -----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued or outstanding....... -- --
Common stock, par value $.01 -- 20,000,000 shares
authorized, 7,297,365 shares issued and outstanding
at April 30, 1997; 7,534,554 shares issued and 72,974 75,346
outstanding at October 31, 1997...................
Additional paid-in capital........................... 34,349,298 34,710,200
Foreign currency translation adjustments............. (83,880) (106,128)
Retained earnings.................................... 3,629,393 1,044,452
------------ -----------
Total stockholders' equity...................... 37,967,785 35,723,870
------------ -----------
Total liabilities and stockholders' equity................ $ 46,833,019 $42,731,636
============ ===========
</TABLE>
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C>
Revenue:
License revenue................................... $3,760,246 $ 4,290,389 $ 7,548,410 $ 9,416,634
Service and maintenance revenue................... 2,291,226 3,307,275 3,923,094 7,192,193
---------- ----------- ----------- -----------
Total revenue................................ 6,051,472 7,597,664 11,471,504 16,608,827
---------- ----------- ----------- -----------
Cost of revenue:
License revenue................................... 204,252 431,208 409,476 603,059
Service and maintenance revenue................... 1,239,331 3,058,068 2,471,013 5,668,133
---------- ----------- ----------- -----------
Total cost of revenue........................ 1,443,583 3,489,276 2,880,489 6,271,192
---------- ----------- ----------- -----------
Gross margin.......................................... 4,607,889 4,108,388 8,591,015 10,337,635
---------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative............... 3,555,459 5,226,561 6,592,245 9,944,234
Research and development.......................... 661,399 1,501,002 1,279,965 2,482,278
Litigation settlement and related costs........... -- -- -- 600,000
Restructuring charge.............................. -- 1,431,255 -- 1,431,255
Depreciation and amortization..................... 57,267 114,056 107,083 222,616
---------- ----------- ----------- -----------
Total operating expenses..................... 4,274,125 8,272,874 7,979,293 14,680,383
---------- ----------- ----------- -----------
Income (loss) from operations......................... 333,764 (4,164,486) 611,722 (4,342,748)
Interest income (expense), net........................ (6,939) 177,543 (12,551) 426,246
---------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes............................................... 326,825 (3,986,943) 599,171 (3,916,502)
Provision (benefit) for income taxes.................. 111,000 (1,355,561) 181,000 (1,331,561)
---------- ----------- ----------- -----------
Net income (loss)..................................... 215,825 (2,631,382) 418,171 (2,584,941)
========== =========== =========== ===========
Net income (loss) per share........................... $ 0.04 $ (0.36) $ 0.07 $ (0.35)
========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding....................... 5,603,205 7,412,089 5,603,205 7,365,984
========== =========== =========== ===========
</TABLE>
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1996 1997
---- ----
<S> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 418,171 $(2,584,941)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation................................... 95,583 179,366
Amortization................................... 11,500 43,250
Loss on equity investment...................... 6 --
Deferred income taxes.......................... -- (12,268)
Changes in assets and liabilities:
Accounts receivable........................ (2,453,322) 136,358
Prepaid expenses........................... (458,603) (1,008,496)
Inventory.................................. (15,997) (86,803)
Related party receivables.................. (9,165) (32,547)
Deposits................................... (512) (88,158)
Accounts payable........................... 338,360 (889,582)
Accrued liabilities........................ 845,548 320,079
Related party payables..................... 74,636 (18,723)
Income taxes payable/receivable............ (118,625) (2,040,265)
Deferred rent.............................. 61,113 34,072
Deferred revenue........................... 513,680 (754,115)
------------ -----------
Net cash used in operating activities..... (697,627) (6,802,773)
------------ -----------
Cash flows from investing activities:
Purchase of investments............................ -- 806,595
Purchase of property and equipment and assets
held for sale.................................... (239,777) (498,282)
Notes receivable................................... -- (2,307,212)
Related party note receivable...................... (516,174) 519,305
------------ -----------
Net cash used in investing activities..... (755,951) (1,479,594)
------------ -----------
Cash flows from financing activities:
Borrowings under line of credit.................... 2,490,214 231,573
Payments under line of credit...................... (1,318,250) --
Proceeds from sale of common stock, net............ -- 363,274
Principal payments under capital leases............ (19,264) (118,730)
------------ -----------
Net cash provided by financing activities. 1,152,700 476,117
------------ -----------
Effect of exchange rate changes on cash................ 3,631 (22,248)
------------ -----------
Net decrease in cash and cash equivalents.............. (297,247) (7,828,498)
Cash and cash equivalents, beginning of period......... 2,280,273 18,825,764
------------ -----------
Cash and cash equivalents, end of period............... $1,983,026 $10,997,266
============ ===========
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 66,195 $ 136,257
============ ===========
Income taxes paid.................................. $ 303,635 $ 669,000
============ ===========
</TABLE>
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Number of Foreign
Shares of Additional Currency
Common Common Paid-in Translation Retained
Stock Stock Capital Adjustments Earnings Total
---------- --------- ----------- ----------- -------- -----------
<S> <C>
Balance, April 30, 1997..................... 7,297,365 $72,974 $34,349,298 $ (83,880) $3,629,393 $37,967,785
Issuance of common stock related to
exercise of stock options.............. 237,189 2,372 360,902 363,274
Foreign currency translation adjustments. (22,248) (22,248)
Net loss................................. (2,584,941) (2,584,941)
--------- ------- ----------- --------- ---------- -----------
Balance, October 31, 1997................... 7,534,554 $75,346 $34,710,200 $(106,128) $1,044,452 $35,723,870
========= ======= =========== ========= ========== ===========
</TABLE>
<PAGE>
VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for any future period. Certain information and
footnote disclosures normally contained in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in Versatility Inc.'s Annual Report on Form
10-K for the fiscal year ended April 30, 1997.
2. LITIGATION SETTLEMENT AND RELATED COSTS
One of the Company's former VARs filed a claim for arbitration against the
Company in connection with the termination of the VAR's reseller agreement with
the Company, claiming not less than $1.0 million in damages. In August 1997, the
Company settled the litigation with the former VAR for $250,000. The Company has
recorded a one-time charge in the quarter ending July 31, 1997 related to this
litigation for $600,000, which includes the settlement charge and other costs
and expenses associated with defending the litigation.
3. RESTRUCTURING CHARGE
In October 1997, the Company undertook a program to restructure certain of its
operations and personnel, and to exit a certain business. The Company informed
its value added resellers (known as VIP's) that it would no longer provide
support for the Versatility CallCenter CD-ROM-based application. This support
included assistance with the implementation of the product and any product
upgrades. As a result of the discontinuance of support, the Company informed its
VIP's that it would make certain concessions to its VIP's, including the
forgiveness of outstanding accounts receivable and unbilled receivables for
work-in-process. The forgiveness of outstanding accounts receivable and unbilled
receivables for work-in-process is included in the restructuring charge. In
addition, the restructuring charge includes severance costs related to the
stream-lining of senior management subsequent to the discontinuance of the
product and the cost of marketing collateral specific for the CallCenter product
and other miscellaneous charges. The following is a breakdown of the charges
included in the restructuring charge:
<TABLE>
<S> <C>
Forgiveness of accounts receivable and unbilled work-in-process $1,180,441
Severance 152,500
Write-off of marketing collateral and other charges 98,314
----------
$1,431,255
==========
</TABLE>
As of October 31, 1997, the outstanding liability for the restructuring charge
was $231,251. The Company expects that all of the outstanding amounts due will
be paid within the next six months. For the three months ended October 31, 1996
and 1997, revenue from the CallCenter product was $268,000 and $9,000,
respectively. For the first six months of fiscal 1997 and 1998, revenue from the
CallCenter product was $513,000 and $9,000, respectively. The net operating
income (loss) for the above mentioned periods would decrease by approximately
the same amount as the decrease in revenue, since almost all employees involved
with the CallCenter product were reassigned within the Company.
4. LINE OF CREDIT
On October 29, 1997, the Company obtained a new $5.0 million operating line of
credit from a bank for financing accounts receivable and working capital and a
new $2.0 million equipment line of credit from the same bank to finance
acquisition of
<PAGE>
property and equipment. These lines of credit expire on November 5, 1998 and are
secured by all of the Company's assets. The lines of credit have various
covenants, including limitations on disposition of assets. The Company also must
maintain certain financial ratios and is prohibited from paying cash dividends.
As of October 31, 1997, the Company is in non-compliance with one of its
financial covenants. The bank has granted a temporary waiver subject to review
of the Company's October 31, 1997 Form 10-Q. The Company expects a permanent
waiver through March 15, 1998 once this review is completed. If the waiver is
not granted, the Company has sufficient funds to pay the outstanding balance.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This document contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by management. Such
statements are subject to various risks and uncertainties which could cause
actual results to vary materially from those contained in such forward looking
statements. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Certain of
these risks and uncertainties as well as other risks and uncertainties are
described in Factors Which May Effect Future Operating Results herein and in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, and declared effective on December 12, 1996 and the
Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997.
Overview
Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate their telemarketing and teleselling
capabilities. Founded in 1981 as an information management consulting firm,
Versatility introduced its first commercial product in 1985, a telemarketing
application product based on the Digital Equipment Corporation ("DEC") VAX/VMS
System. The Company operated as a DEC value-added reseller, supplying turnkey
call center solutions to large and mid-sized companies in a variety of
industries, until the end of fiscal 1994. In November 1993, the Company began
developing applications based on the client/server architecture, which
culminated with the release of the Versatility Series in May 1995. Beginning in
fiscal 1996, substantially all of the Company's revenue is derived from sales or
services related to the Versatility Series. In August 1996, the Company released
Versatility CallCenter, a CD-ROM-based call center software application that
supports call centers of 50 agents or less. In October 1997, Versatility
CallCenter was discontinued (see discussion of restructuring expense below).
The Company's revenue is derived principally from two sources: (i) product
license fees for the use of the Company's software products and (ii) service
fees for implementation, maintenance, consulting and training related to the
Company's software products. Historically, the Company's service and maintenance
revenue has increased with license revenue. However, to the extent the Company
is successful in implementing its strategy of distributing a greater proportion
of its products through third party systems integrators and VARs, who will
perform such services, the Company expects that, in future periods, service and
maintenance revenue will decrease as a percentage of total revenue.
The Company's contracts with its customers often involve significant
customization and installation obligations. In these situations, license revenue
is recognized based on the percentage of completion method, which is based on
achievement of certain milestones. When the Company is under no obligation to
install or customize the software, license revenue is recognized upon shipment.
Service revenue for implementation, consulting and training is recognized as the
service is performed. Revenue from maintenance services is recognized ratably
over the term of the service agreement.
The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. Because the Company generally
has no obligation to provide installation, maintenance, training or other
services under such arrangements, the Company generally recognizes software
license revenue from third party systems integrators and VARs upon shipment of
an order. The Company does not expect to receive substantial amounts of service
or maintenance revenue under such arrangements.
For the first six months of fiscal 1997, British Telecommunications Plc
("BT") and Avantel, S.A. accounted for 24.9% and 18.7%, respectively, of the
Company's total revenue. For the first six months of fiscal 1998, BT and CSI
Data, Inc. accounted for 20.5% and 11.5%, respectively, of the Company's total
revenue. Although the particular customers may change from period to period, the
Company expects that large sales to a limited number of customers will continue
to account for a significant percentage of its total revenue in any particular
period. Given the customer concentration and the duration of the sales and
implementation cycle, the loss of a major customer or any reduction or delay in
sales to or implementation by these or other customers could have a material
adverse effect on the Company's operating results in any particular period.
Revenue from customers outside the United States accounted for 53.6% and
28.0% of the Company's total revenue for the first six months of fiscal 1997 and
1998, respectively. While the Company's expenses incurred in foreign countries
are typically denominated in the local currencies, revenue generated by the
Company's international sales typically is paid in U.S. dollars or British
pounds. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that
<PAGE>
fluctuations in currency exchange rates in the future will not have a material
adverse impact on the Company's international operations. The Company currently
does not engage in hedging activities.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Percentage of Total Revenue
Three Months Ended Six Months Ended
October 31, October 31,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C>
Revenue:
License revenue......................... 62.1% 56.5% 65.8% 56.7%
Service and maintenance revenue......... 37.9 43.5 34.2 43.3
----- ----- ----- -----
Total revenue...................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
License revenue......................... 3.4 5.7 3.6 3.6
Service and maintenance revenue......... 20.5 40.2 21.5 34.2
----- ----- ----- -----
Total cost of revenue.............. 23.9 45.9 25.1 37.8
----- ----- ----- -----
Gross margin................................. 76.1 54.1 74.9 62.2
----- ----- ----- -----
Operating expenses:
Selling, general and administrative..... 58.7 68.9 57.5 59.9
Research and development................ 10.9 19.7 11.2 15.0
Litigation settlement and related costs. -- -- 3.6
Restructuring charge.................... -- 18.8 -- 8.6
Depreciation and amortization........... 1.0 1.5 0.9 1.3
----- ----- ----- -----
Total operating expenses........... 70.6 108.9 69.6 88.4
----- ----- ----- -----
Income (loss) from operations................ 5.5 (54.8) 5.3 (26.2)
Interest income (expense), net............... (0.1) 2.3 (0.1) 2.6
----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 5.4 (52.5) 5.2 (23.6)
Provision (benefit) for income taxes......... 1.8 (17.8) 1.6 (8.0)
----- ----- ----- -----
Net income (loss)............................ 3.6% (34.7) 3.6% (15.6)%
===== ===== ===== =====
</TABLE>
The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C>
Cost of license revenue..................... 5.4% 10.1% 5.4% 6.4%
Cost of service and maintenance revenue..... 54.1% 92.5% 63.0% 78.8%
</TABLE>
Revenue. Total revenue increased 25.6% from $6.1 million in the three months
ended October 31, 1996 to $7.6 million in the three months ended October 31,
1997, and 44.8% from $11.5 million in the first six months of fiscal 1997 to
$16.6 million in the first six months of fiscal 1998. The increase in total
revenue was influenced by the continuing development of Versatility's indirect
channels. For the first six months of fiscal 1997, the domestic and
international indirect sales groups together generated 21.3% of total revenue.
These groups generated 30.2% of total revenue for the first six months of fiscal
1998. Revenue from license fees increased 14.1% from $3.8 million in the three
months ended October 31, 1996, or 62.1% of total revenue, to $4.3 million in the
three months ended October 31, 1997, or 56.5% of total revenue. Revenue from
license fees increased 24.7% from $7.5 million in the six months ended October
31, 1996, or 65.8% of total revenue, to $9.4 million in the six months ended
October 31, 1997, or 56.7% of total revenue. The increase was due to the
increase in the number of customers for the Company's telesales and teleservices
solutions. Service revenue increased 44.3% from $2.3 million in the three months
ended October 31, 1996 to $3.3 million in the three months ended October 31,
1997, and 83.3% from $3.9 million in the first six months of fiscal 1997 to $7.2
million in the first six months of fiscal 1998. This increase was due to greater
demand for the Company's implementation and project management services. The mix
of revenue changed from approximately 66% licenses revenue to 34% service
revenue in the prior year to approximately 57% licenses revenue to 43% services
revenue in the current year, due to the increase in service
<PAGE>
revenue for the first six months of fiscal 1998. In addition, the shift in
revenue mix may be attributed to (i) the impact of personnel changes that the
Company made to its domestic sales and professional services organizations for
fiscal 1998, and (ii) the Company's decision to allocate more of its resources
towards performing services for existing customers.
Cost of Revenue. Cost of license revenue is comprised of the costs of media,
packaging, documentation and incidental hardware costs. Cost of service and
maintenance revenue consists of salaries, wages, benefits and other direct costs
related to installing, customizing and supporting customer implementations.
These costs also include telephone support and training.
Total cost of revenue increased from $1.4 million in the three months ended
October 31, 1996, or 23.9% of total revenue, to $3.5 million in the three months
ended October 31, 1997, or 45.9% of total revenue, and from $2.9 million for the
first six months of fiscal 1997, or 25.1% of total revenue, to $6.3 million for
the first six months of fiscal 1998, or 37.8% of total revenue. Cost of license
revenue increased from $204,000 in the three months ended October 31, 1996, or
5.4% of license revenue to $431,000 in the three months ended October 31, 1997,
or 10.1% of license revenue, and from $409,000 in the first six months of fiscal
1997, or 5.4% of license revenue, to $603,000 in the first six months of fiscal
1998, or 6.4% of license revenue. Cost of service and maintenance revenue
increased from $1.2 million in the three months ended October 31, 1996, or 54.1%
of service and maintenance revenue, to $3.1 million in the three months ended
October 31, 1997, or 92.5% of service and maintenance revenue. Cost of service
and maintenance revenue increased from $2.5 million in the first six months of
fiscal 1997, or 63.0% of service and maintenance revenue, to $5.7 million in the
first six months of fiscal 1998, or 78.8% of service and maintenance revenue.
The increase was the result of additions to the Company's consulting,
customization and implementation staff to support the growing number of the
Company's customers. Total cost of revenue was adversely affected in the current
year compared to the same period in the prior year due to the change in revenue
mix between licenses and services and the use of consultants, which
significantly reduced the profit margin on service and maintenance revenue.
Selling, General and Administrative. Selling expenses consist of personnel
costs, including compensation and benefits and costs of travel, advertising,
public relations, seminars and trade shows. General and administrative expenses
represent the costs of executive, finance and support personnel and unallocated
corporate expenses such as rent, utilities, legal and auditing. Selling, general
and administrative expenses increased from $3.6 million for the three months
ended October 31, 1996, or 58.7% of total revenue, to $5.2 million for the three
months ended October 31, 1997, or 68.9% of total revenue, and from $6.6 million
for the first six months of fiscal 1997, or 57.5% of total revenue, to $9.9
million for the first six months of fiscal 1998, or 59.9% of total revenue. This
increase was attributable to additions to the Company's headcount, primarily
sales and marketing staff. At October 31, 1996, sales, marketing and
administrative had 90 employees versus 148 employees at October 31, 1997.
Research and Development. Research and development expenses consist of
personnel costs and direct overhead costs incurred in developing software
features and functionality. Research and development expenses increased from
$661,000 for the three months ended October 31, 1996, or 10.9% of total revenue,
to $1.5 million for the three months ended October 31, 1997, or 19.7% of total
revenue, and from $1.3 million for the first six months of fiscal 1997, or 11.2%
of total revenue, to $2.5 million for the first six months of fiscal 1998, or
15.0% of total revenue. The increase was due to the hiring of additional
software engineers to support increased development activities. At October 31,
1996, research and development had 30 employees versus 60 employees at October
31, 1997. In addition, in the second quarter, the Company used outside
consultants to assist with quality assurance testing.
Litigation Settlement and Related Costs. One of the Company's former VARs
filed a claim for arbitration against the Company in connection with the
termination of the VAR's reseller agreement with the Company, claiming not less
than $1.0 million in damages. In August 1997, the Company settled the litigation
with the former VAR for $250,000. The Company has recorded a one-time charge in
the quarter ending October 31, 1997, related to this litigation for $600,000,
which includes the settlement charge and other costs and expenses associated
with defending the litigation.
Restructuring Charge. In October 1997, the Company undertook a program to
restructure certain of its operations and personnel, and to exit a certain
business. The Company informed its value added resellers (known as VIP's) that
it would no longer provide support for the Versatility CallCenter CD-ROM-based
application. This support included assistance with the implementation of the
product and any product upgrades. As a result of the discontinuance of support,
the Company informed its VIP's that it would make certain concessions to its
VIP's, including the forgiveness of outstanding accounts receivable and unbilled
receivables for work-in-process. The forgiveness of outstanding accounts
receivable and unbilled receivables for work-in-process is included in the
restructuring charge. In addition, the restructuring charge includes severance
costs related to the stream-lining of senior management subsequent to the
discontinuance of the product and the cost of marketing collateral specific for
the CallCenter product and other miscellaneous charges. The total restructuring
charge was $1,431,255.
<PAGE>
Depreciation and Amortization. Depreciation and amortization expenses were
$57,000 in the three months ended October 31, 1996, and $114,000 in the three
months ended October 31, 1997, and $107,000 for the first six months of fiscal
1997 and $223,000 for the first six months of fiscal 1998.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $(7,000) and $178,000
for the three months ended October 31, 1996 and 1997, respectively, and
$(13,000) and $426,000 for the first six months of fiscal 1997 and fiscal 1998,
respectively. The difference results from interest income attributable to the
cash raised through the initial public offering in the third quarter of fiscal
1997, partially offset by interest expense related to borrowings on the line of
credit.
Provision (Benefit) for Income Taxes. The Company accounts for income taxes
under Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes"("SFAS 109"). The provision (benefit) for income taxes is computed based
on pretax income, with deferred income taxes recorded for the differences
between pretax accounting and pretax taxable income (loss). The Company's
provision (benefit) for income taxes was $111,000 and $(1.4 million) for the
three months ended October 31, 1996 and 1997, respectively, with an effective
tax rate of approximately 34.0%. The Company's provision (benefit) for income
taxes was $181,000 and $(1.3 million) in the first six months of fiscal 1997 and
fiscal 1998, respectively, with an effective tax rate of approximately 30.2% and
34%, respectively. The favorable effective tax rate for fiscal 1997 reflected a
significant portion of sales through the Company's Foreign Sales Corporation and
other tax benefits.
Net Income (Loss). Net income (loss) decreased from $216,000 to $(2.6
million) for the three months ended October 31, 1996 and 1997, respectively. Net
loss for the three months ended October 31, 1997, would have been $(1.7 million)
if the one-time restructuring charge was excluded. Net income (loss) decreased
from $418,000 to $(2.6 million) for the first six months of fiscal 1997 and
fiscal 1998, respectively. Net loss for the first six months of fiscal 1998
would have been $(1.2 million) if the one-time restructuring charge and
litigation settlement and related costs were excluded.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash
generated from operations, through the private sale of preferred stock in
January 1996 totaling $3.5 million, from funds obtained from revolving credit
facilities with commercial banks and the Company's initial public offering in
December 1996 that raised $30.6 million in net proceeds. The Company's existing
$5.0 million line of credit had an outstanding balance of $2.5 million at
October 31, 1997. Advances under the working capital line bear interest at a
variable annual rate equal to the prime rate of the bank plus 0.5%. The line of
credit expires on November 5, 1998. As of October 31, 1997, the Company is in
non-compliance with one of its financial covenants. The bank has granted a
temporary waiver subject to review of the Company's October 31, 1997 Form 10-Q.
The Company expects a permanent waiver through March 15, 1998, once this review
is completed. If the waiver is not granted, the Company has sufficient funds to
pay the outstanding balance.
At October 31, 1997, the Company had $16.2 million in cash, cash equivalents
and short-term investments and $15.8 million in accounts receivable. For the six
months ended October 31, 1997, net cash used in operations totaled $6.8 million.
In addition, the Company used $1.5 million for investing activities, which
included $498,000 for capital expenditures and $2.3 million for notes
receivables related to several customers. These uses of cash were partially
offset by borrowings of $232,000 under the Company's working capital line of
credit and $519,000 related to employees exercising stock options, resulting in
a net cash decrease of $7.8 million.
The Company anticipates that its existing cash balances and funds
anticipated to be generated from operations will be adequate to satisfy its
working capital requirements for its current and planned operations for at least
the next twelve months. The Company's future operating and capital requirements
will depend on numerous factors, including the progress of the Company's
internal research and development programs, the level of resources the Company
devotes to the development of marketing and sales capabilities, technological
advances, the status of competing products, and the successful development and
timely introduction of its own products. In the longer term, the Company may
require additional equity or debt financing. No assurance can be given that
these funds will be available to the Company on acceptable terms, if at all.
<PAGE>
Factors Which May Effect Future Operating Results
The Company does not provide forecasts of future, financial performance.
While the Company's management is optimistic about its long-term prospects, the
following issues and uncertainties, among others, should be considered in
evaluating its growth outlook.
Dependence on New Products; Risk Associated with Servicing the Customer
Interaction Software Market. The Company currently derives substantially all of
its revenue from sales of its Versatility Series software and related services.
The Versatility Series was introduced in May 1995, and the Company expects that
this product and related services will continue to account for a substantial
portion of the Company's revenue for the foreseeable future. However, the
Company has little operating history with the Versatility Series and Versatility
CallCenter products. The Company's financial results for periods prior to fiscal
1996 reflect sales of the Company's previous generation of products, which the
Company no longer actively markets. The lifecycle of the Company's current
products is difficult to estimate as a result of many factors, including the
unknown future demand for customer interaction software and the effects of
competition in this market. Moreover, although the Company intends to enhance
these products and develop related products, the Company's strategy is to
continue to focus on providing customer interaction software applications as its
sole line of business. As a result, any factor adversely affecting the market
for customer interaction software applications in general, or the Versatility
Series product in particular, could adversely affect the Company's business,
financial condition and results of operations. The market for customer
interaction software products is intensely competitive, highly fragmented and
subject to rapid change. The Company's future success will depend on continued
growth in the market for customer interaction applications. There can be no
assurance that the market for customer interaction applications will continue to
grow. If this market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations would be materially adversely affected.
Dependence on Large License Fees and Customer Concentration. A relatively
small number of customers have accounted for a significant percentage of the
Company's revenue in any given period. In fiscal 1997, the Company's eight
largest customers accounted for 59.3% of the Company's total revenue, of which,
BT accounted for 23.6%. For the first six months of fiscal 1998, BT and CSI
Data, Inc. accounted for 20.5% and 11.5%, respectively, of the Company's total
revenue. Although the particular customers may change from period to period, the
Company expects that large sales to a limited number of customers will continue
to account for a significant percentage of its revenue in any particular period
for the foreseeable future. Therefore, the loss, deferral or cancellation of an
order could have a significant impact on the Company's operating results in a
particular quarter. The Company has no long-term contracts with its customers
and there can be no assurance that its current customers will place additional
orders, or that the Company will obtain orders of similar magnitude from other
customers. The loss of any major customer or any reduction, delay in or
cancellation of orders by any such customer, or the failure of the Company to
market successfully to new customers could have a materially adverse effect on
the Company's business, financial condition and results of operations. In fiscal
1997, the Company's accounts receivable balance increased significantly. While
some of the Company's increase in accounts receivable resulted in the ordinary
course from the Company's growth in revenue year to year, approximately $3
million of the accounts receivable at April 30, 1997 represented balances over
90 days past due from customers which negotiated extended payment terms as a
condition to their purchase or during the course of the implementation process.
As of October 31, 1997, the balance on those accounts was approximately
$735,000. In the first six months of fiscal 1998, the Company signed notes with
three customers. Two of the notes are due January 31, 1998, and do not bear
interest. The third note is due October 31, 1998, and bears interest at prime
plus one percent per annum. To the extent that significant customers of the
Company continue to have the negotiating leverage to obtain extended payment
terms, the Company's working capital requirements will be increased.
Quarterly Fluctuations in Revenue and Operating Results. The Company's
revenue and operating results could fluctuate significantly from quarter to
quarter due to a combination of factors, including variations in the demand for
the Company's products, the level of product and price competition, the length
of the Company's sales process, the size and timing of individual transactions,
the mix of products and services sold, the mix of sales through direct and
indirect channels, any delay in or cancellation of customer implementations, the
Company's success in expanding its customer support organization, direct sales
force and indirect distribution channels, the timing of new product
introductions and enhancements by the Company or its competitors, the ratio of
international to domestic sales, commercial strategies adopted by competitors,
changes in foreign currency exchange rates, customers' budgets constraints, and
the Company's ability to control costs. In addition, a limited number of
relatively large customer orders has accounted for and is likely to continue to
account for a substantial portion of the Company's total revenue in any
particular quarter. The timing of such orders can be difficult to predict given
the average size of the Company's orders and the length of its sales process.
The Company has in the past recognized a substantial portion of its revenue in
the last month of a
<PAGE>
quarter. Therefore, the loss, deferral or cancellation of an order could have a
significant adverse impact on the Company's revenue and operating results in a
particular quarter. Because the Company's operating expense levels are
relatively fixed and tied to anticipated levels of revenue, any delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter. Based upon
all of the foregoing, the Company believes that quarter-to-quarter comparisons
of its results of operations are not necessarily meaningful and such comparisons
should not be relied upon as indications of future performance. It is also
likely that the Company's future quarterly operating results in any given period
will not meet the expectations of market analysts or investors, which could have
an adverse effect on the price of the Company's common stock.
Consistent with many companies in the software industry, the Company's
business model is characterized by a very high degree of operating leverage.
Employee and facility expenditures comprise a significant portion of the
Company's operating costs and expenses, and are therefore, relatively fixed at
least over the short term. In addition, the Company's expense levels and hiring
plans are based, in significant part, on the Company's expectations as to near
term future revenue levels. If revenue levels falls below expectations, net
income is likely to be disproportionately adversely affected. There can be no
assurance that the Company will be able to increase or even maintain its current
level of profitability on a quarterly or annual basis in the future. Due to the
foregoing, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public securities market
analysts. In such event, the price of the Company's common stock would likely be
materially adversely affected.
Length of Sales and Implementation Processes. Selling the Company's products
generally requires the Company to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's products.
In addition, implementation of the Company's products involves a significant
commitment of resources by prospective customers and is commonly associated with
substantial integration efforts which may be performed by the Company, by the
customer, or by a third party systems integrator. For these and other reasons,
the length of time between the date of initial contact with the potential
customer and the implementation of the Company's products is often lengthy,
typically ranging from two to nine months or more, and is subject to delays over
which the Company has little or no control. The Company's implementation cycle
could be lengthened by increases in the size and complexity of its
implementations and by delays in its customers' adoption of client/server
computing environments. Delay in or cancellation of the sale or implementation
of applications could have a materially adverse effect on the Company's
business, financial condition and results of operations and cause the Company's
operating results to vary significantly from quarter to quarter.
Expansion of Sales Force and Channels of Distribution. Historically, the
Company has distributed its products primarily through its direct sales force.
An integral part of the Company's strategy includes expanding its direct sales
force while developing additional marketing, sales and implementation
relationships with third party systems integrators and VARs. The Company's
ability to achieve significant revenue growth in the future will depend on its
ability to attract, train and retain additional qualified direct sales
personnel. In addition, the Company currently is investing, and intends to
continue investing, significant resources to develop its relationships with
third party systems integrators and VARs, especially in international markets.
The Company has only limited experience distributing its products through
indirect channels. If the Company is unable to develop its relationships with
third party systems integrators and VARs, or if the third party systems
integrators and VARs with which the Company develops relationships are unable to
effectively market, sell and implement the Company's software applications, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Dependence on Indirect Distribution Channels; Potential for Channel
Conflict. The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. These independent sales
organizations, which generally install and support the product lines of a number
of companies, are not under the direct control of the Company, are not subject
to any minimum purchase requirements and can discontinue marketing the Company's
products at any time without cause. Many of the Company's third party systems
integrators and VARs sell or co-market potentially competitive products.
Accordingly, the Company must compete for the focus and sales efforts of its
third party systems integrators and VARs. Additionally, selling through indirect
channels may limit the Company's contacts with its customers. As a result, the
Company's ability to accurately forecast sales and revenue, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered. In
addition, the Company's gross profit on sales to third party systems integrators
and VARs tends to be lower than on its direct sales, although the Company's
selling and marketing expenses and servicing costs also tend to be lower with
respect to these sales. There can be no assurance that the Company's current
third party systems integrators and VARs will continue to distribute or
recommend the Company's products or do so successfully. There can also be no
assurance that one or more of these companies will not begin to
<PAGE>
market products in competition with the Company. The termination of one or more
of these relationships could adversely affect the Company's business, financial
condition and results of operations.
The Company's strategy of marketing its products directly to end-users and
indirectly through VARs and third party systems integrators may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels in
a manner to avoid potential conflicts, there can be no assurance that channel
conflicts will not materially adversely affect its relationships with existing
third party systems integrators or VARs or adversely affect its ability to
attract new third party systems integrators and VARs.
Dependence on Practice Partners. The Company is currently enlisting the
support of a specific group of professional services organizations which will
engage in the practice of implementing and customizing the Company's software
products. Referred to as "Practice Partners," these organizations do not resell
or otherwise market the Company's products. Instead, the Company intends to
support the Practice Partners' efforts to learn to install, customize and
support the Company's products. The Company's future revenues may depend on the
ability of the Practice Partners to achieve this goal. Further, the costs
required to enlist, train and assist the Practice Partners could have a
materially adverse affect on the Company's business, financial condition and
results of operations.
International Operations. Revenue from sales outside the United States in
fiscal 1995, 1996 and 1997 and the first six months of fiscal 1998 accounted for
approximately 16.3%, 40.8%, 41.2% and 28.0% respectively, of the Company's total
revenue. International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, changes in demand for the Company's products resulting from fluctuations
in exchange rates, unexpected changes in legal and regulatory requirements
including those relating to telemarketing activities, changes in tariffs,
seasonality of sales, costs of localizing products for foreign markets, longer
accounts receivable collection periods and greater difficulty in accounts
receivable collection, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences and political and economic
instability. There can be no assurance that the Company will be able to sustain
or increase international revenue, or that the factors listed above will not
have a material adverse impact on the Company's international operations. While
the Company's expenses incurred in foreign countries are typically denominated
in the local currencies, revenue generated by the Company's international sales
typically is paid in U.S. dollars or British pounds. Although exposure to
currency fluctuations to date has been insignificant, there can be no assurance
that fluctuations in currency exchange rates in the future will not have a
material adverse impact on the Company's international operations. The Company
currently does not engage in hedging activities.
A significant element of the Company's strategy is to continue the expansion
of its operations in international markets. This expansion has required and will
continue to require significant management attention and financial resources to
develop international sales channels. Because of the difficulty in penetrating
new markets, along with the Company's size and geographic location, there can be
no assurance that the Company will be able to maintain or increase international
revenue. To the extent that the Company is unable to do so, the Company's
financial condition and results of operations could be materially adversely
affected. A substantial portion of the Company's international sales are
expected to be made using indirect selling channels, such as third party systems
integrators and VARs. A reduction in sales by all or some of these distributors
or a termination of their relationships with the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. The market for the Company's products is intensely competitive,
highly fragmented and subject to rapid change. Because the Company offers
multiple applications, which can be purchased separately or integrated as part
of the Versatility Series, the Company competes with a variety of companies
depending on the target market for their applications software products. The
Company's principal competitors in the customer interaction software market are
Brock International, Inc., Digital Systems International, Inc., Information
Management Associates, Inc., Scopus Technology, Inc. and The Vantive
Corporation. For installations where telephony functions are of prime
importance, competitors include Davox Corporation, Early Cloud and Company (a
division of IBM) and EIS International, Inc. The Company also competes with
third party professional service organizations that develop custom software and
with the information technology departments of potential customers, which
develop applications internally. Among the Company's potential competitors are
also a number of large hardware and software companies that may develop or
acquire products that compete with the Company's products. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and results of operations. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, they may
be able to respond more
<PAGE>
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of products
than can the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations.
Management of Growth. The Company has recently experienced significant
growth in revenue, operations and personnel. Continued growth will challenge the
Company's management systems and resources and require the Company to improve
and upgrade its management information systems. In addition, the Company will
need to hire more technical, sales and marketing, support and administrative
personnel to adequately service and support its growing customer base. There can
be no assurance that the Company will be able to successfully upgrade its
systems or to attract, retain and successfully train the necessary personnel to
accomplish its growth strategies or that it will not experience constraints that
will adversely affect its ability to satisfy customer demand in a timely fashion
or to satisfactorily support its customers. Any of these events could injure the
Company's reputation or lead to loss of customers. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations could be adversely affected.
Dependence on Growth of Client/Server Computing Environment. The
client/server software environment is relatively new. The Company markets its
products solely to customers that have committed or are committing their call
center systems to client/server environments, or are converting legacy systems,
in part or in whole, to a client/server environment. The Company's success will
depend on further development of and growth in the number of organizations
adopting client/server computing environments. There can be no assurance,
however, that the client/server market will maintain its current rate of growth.
There also can be no assurance that the client/server computing trends
anticipated by the Company will occur or that the Company will be able to
respond effectively to the evolving requirements of this market. If the
client/server market fails to grow, or grows at a rate slower than experienced
in the past, the Company's business, financial condition and results of
operations could be materially adversely affected.
Rapid Technological Change and Product Development Risks. The customer
interaction software market is subject to rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. As a result,
the Company's position in this market could be eroded rapidly by unforeseen
changes in application features and functions. The life cycles of the Company's
products are difficult to estimate. The Company's growth and future operating
results will depend in part upon its ability to enhance existing applications
and develop and introduce new applications that meet or exceed technological
advances in the marketplace, that meet changing customer requirements, that
respond to competitive products and that achieve market acceptance. The
Company's product development and testing efforts are expected to require
substantial investments by the Company. There can be no assurance that the
Company will possess sufficient resources to make these necessary investments.
The Company has in the past experienced delays both in developing new products
and in customizing existing products, and there can be no assurance that the
Company will not experience difficulties that could cause delays in the future.
In addition, there can be no assurance that such products will meet the
requirements of the marketplace and achieve market acceptance, or that the
Company's current or future products will conform to industry standards. If the
Company is unable, for technological or other reasons, to develop and introduce
new and enhanced products in a timely manner, the Company's business, financial
condition and results of operations could be materially adversely affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has, in the past, discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. In particular, the computing environment is characterized
by a wide variety of standard and non-standard configurations that make
pre-release testing for programming or compatibility errors very difficult and
time consuming. There can be no assurance that, despite extensive testing by the
Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation, or increased service
and warranty costs, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Difficulty in Protecting Proprietary Technology; Risk of Infringement. The
Company relies on a combination of copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect its proprietary
rights in its products and technology. The Company does not rely upon patent
protection and does not currently expect to seek patents on any aspects of its
technology. There can be no assurance that the confidentiality agreements and
other methods on which the Company relies to protect its trade secrets and
proprietary technology will be adequate. Further, the Company may be subject to
additional
<PAGE>
risks as it enters into transactions in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protections of the
Company's rights may be ineffective in such countries. Litigation to defend and
enforce the Company's intellectual property rights could result in substantial
costs and diversion of resources and could have a materially adverse effect on
the Company's business, financial condition and results of operations,
regardless of the final outcome of such litigation. Despite the Company's
efforts to safeguard and maintain its proprietary rights both in the United
States and abroad, there can be no assurance that the Company will be successful
in doing so or that the steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of the
Company's technology or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. There also
can be no assurance that others will not independently develop similar
technologies or duplicate any technology developed by the Company. Any such
events could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that these customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. Entering into such agreements may
increase the likelihood of misappropriation by third parties.
As the number of customer interaction software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel, and on its ability to continue to attract,
retain and motivate qualified personnel, such as experienced software developers
and sales personnel. Competition for such employees is very intense. The Company
has no long-term employment contracts with any of its employees. The loss of the
services of one or more of the Company's executive officers, software developers
or other key personnel or the Company's inability to recruit replacements for
such personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company maintains $1.0
million of key-man life insurance on Ronald R. Charnock, the Company's Chairman
of the Board, President and Chief Executive Officer.
Regulatory Environment. Federal, state and foreign law regulate certain uses
of outbound call processing systems. Although the compliance with these laws may
limit the potential use of the Company's products in some respects, the
Company's systems can be programmed to operate automatically in full compliance
with these laws through the use of appropriate calling lists and calling
campaign time parameters. There can be no assurance, however, that future
legislation further restricting telephone solicitation practices, if enacted,
would not adversely affect the Company.
Volatility of Stock Price. The market price for the Company's common stock
has been and is expected to continue to be significantly affected by factors
such as the announcement of new products or product enhancements by the Company
or its competitors, technological innovations by the Company or its competitors,
quarterly variations in the Company's results of operations or the results of
operations of the Company's competitors, changes in earnings estimates or
recommendations by securities analysts and general market conditions. In
particular, the stock prices for many companies in the technology and emerging
growth sector have experienced wide fluctuations, which have often been
unrelated to the operating performance of such companies. Such fluctuations may
adversely affect the market price of the Company's common stock.
<PAGE>
Part II: Other Information
Item 1: Legal Proceedings:
The Company is a party to various legal disputes and proceedings
arising from the ordinary course of general business activities. In the
opinion of management, resolution of these matters is not expected to
have a material adverse effect on the financial position of the
Company. However, depending on the amount and timing, an unfavorable
resolution of some or all of these matters could materially affect the
Company's future results of operations or cash flows in a particular
period.
Item 2: Changes in Securities and Use of Proceeds
On December 12, 1996, the Company's Registration Statement on Form S-1
(File No. 333-13771) became effective. The Company has filed Form SR
disclosing the sale of securities and the use of proceeds through March
12, 1997. The net proceeds from the offering were $30,625,564. No
information has changed, except for the use of proceeds. The following
are the use of proceeds from the effective date (December 12, 1996)
through October 31, 1997:
Purchase and installation of machinery and equipment $ 1,656,436
Repayment of indebtedness 1,526,195
Working capital 27,442,933
-----------
Total $30,625,564
===========
None of these payments were made to directors, officers, general
partners of the Company or their associates, or to persons owning ten
percent or more of any class of equity securities of the Company, and
to the affiliates of the Company.
Item 3: Defaults upon Securities:
Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
The Annual Meeting of Stockholders (the "Annual Meeting") was held on
August 26, 1997 at the Holiday Inn Fair Oaks. In connection with the
Annual Meeting, proxies representing 6,628,636 shares or 90.5% of the
total outstanding shares were present and voted in the following
manner:
<TABLE>
<CAPTION>
Number of Votes Cast
---------------------
Description of Matter For Withheld Instructed
--------------------- --- -------- ----------
<S> <C>
1 To elect two Class I directors to serve on the Board of Directors for
a three-year term or until their successors are elected and qualified.
Marcus W. Heth 6,621,521 7,115 1,550
Charles A. Johnson 6,623,071 5,656 1,550
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
2 To ratify the selection of the firm of Deloitte & Touche LLP as
independent auditors for the fiscal year ending April 30, 1998. 6,624,576 2,500 1,560 0
</TABLE>
Item 5: Other Information:
Not Applicable.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K:
A. Exhibits
Exhibit No. Exhibits
- ----------- --------
10.10 Loan and Security Agreement between the Company and Silicon
Valley Bank, dated as of October 29, 1997
11.1 Statement Regarding Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
B. Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
October 31, 1997.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSATILITY INC.
Dated: December 15, 1997 By: /s/ Donald C. Yount
________________________________
Donald C. Yount
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 10.10
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as
of October __, 1997 by and between SILICON VALLEY BANK, a California-chartered
bank ("Bank") with its principal place of business at 3003 Tasman Drive, Santa
Clara, California 95054 and with a loan production office located at One Central
Plaza, 11300 Rockville Pike, Suite 1205, Rockville, Maryland 20852, doing
business under the name "Silicon Valley East" and VERSATILITY, INC., a
corporation duly organized and in good standing under the laws of the State of
Delaware and the Subsidiary set forth on the signature page hereto
(collectively, "Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Accounts" means all presently existing and
hereafter arising accounts, contract rights, and all other forms of
obligations owing to Borrower arising out of the sale or lease of goods
(including, without limitation, the licensing of software and other technology)
or the rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing.
"Advance" or "Advances" means an advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person,
any Person that owns or controls directly or indirectly such Person, any
Person that controls or is controlled by or is under common control with such
Person, and each of such Person's senior executive officers, directors, partners
and, for any Person that is a limited liability company, such Person's managers
and members.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents (including fees and expenses of appeal or review, or those
incurred in any Insolvency Proceeding); and Bank's reasonable attorneys' fees
and expenses incurred in amending, enforcing or defending the Loan Documents,
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books
and records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Business Day" means any day that is not a
Saturday, Sunday, or other day on which banks in the State of California or
the State of Maryland are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the Virginia Uniform Commercial Code.
<PAGE>
"Collateral" means the property described on Exhibit
A attached hereto.
"Committed Revolving Line" means the line of credit
in the maximum principal amount of Five Million Dollars ($5,000,000).
"Committed Equipment Line" means a credit extension
of up to Two Million Dollars ($2,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Credit Extension" means each Advance, Equipment Term
Loan, Advance, or any other extension of credit by Bank for the benefit of
Borrower hereunder.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at the
option of Borrower or any Subsidiary to a date more than one year from the date
of determination, but excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts
and attachments in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in
Section 2.4(a).
"Equipment Availability End Date" has the meaning set
forth in Section 2.4(b).
"Equipment Term Loan Advance" means an advance under
the Committed Equipment Line.
"Equipment Term Loan Maturity Date" means October 5,
2001.
2
<PAGE>
"Equipment Term Note" means one of the two equipment
term notes now or hereafter delivered by Borrower to Bank in connection with the
Committed Equipment Line in substantially the form of Exhibit E, together with
all renewals, amendments, modifications and substitutions hereafter.
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"Exam Date" means the date on which Bank confirms
in writing to Borrower that it has conducted an exam of Borrower's Accounts, the
results of which are satisfactory to Bank in all respects.
"Exchange Contacts" has the meaning set forth in
Section 2.3.
"GAAP" means generally accepted accounting principles
as in effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including without limitation reimbursement and other obligations with respect to
surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations, and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory
in which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Letter of Credit" and "Letters of Credit" have the
meanings set forth in Section 2.2.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this
Agreement, the Revolving Promissory Note, the Equipment Term Notes, any note
or notes now or hereafter executed by Borrower, and any other present or future
agreement entered into between Borrower and/or for the benefit of Bank in
connection with this Agreement, all as amended, extended or restated from time
to time.
"Material Adverse Effect" means a material
adverse effect on (i) the business operations or condition (financial or
otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability
of Borrower to repay the Obligations or otherwise perform its obligations under
the Loan Documents.
3
<PAGE>
"Maturity Date" means the latter of the Revolving
Maturity Date or the maturity of the Committed Equipment Line.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Note" means the Revolving Promissory Note or an
Equipment Term Note, and "Notes" mean collectively the Revolving Promissory Note
and the Equipment Term Notes.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to the
Notes, this Agreement or any other agreement, whether absolute or contingent,
due or to become due, now existing or hereafter arising, including any interest
that accrues after the commencement of an Insolvency Proceeding and including
any debt, liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Payment Date" means the fifth calendar day of each
month.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to Bank pursuant to the terms and provisions of any instrument, or agreement now
or hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred
in the ordinary course of business; and
(e) Indebtedness in connection with any Permitted
Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or
other governmental charges or levies, either not delinquent or being contested
in good faith by appropriate proceedings, and as to which adequate reserves are
4
<PAGE>
maintained on Borrower's Books in accordance with GAAP, provided the same have
no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment
acquired or held by Borrower or any of its Subsidiaries to secure the purchase
price of such Equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such Equipment, or (ii) existing on such Equipment
at the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
Equipment; and
(d) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole
proprietorship, partnership, limited liability company, joint venture, trust,
unincorporated organization, association, corporation, institution, public
benefit corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest,
per annum, most recently announced by Bank, as its "prime rate," whether or
not such announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments, with maturities not to exceed one (1) year,
of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means November 5, 1998.
"Revolving Promissory Note" means that certain
Revolving Promissory Note of even date herewith in substantially the form of
Exhibit D hereto in the maximum principal amount of Five Million Dollars
($5,000,000) from Borrower in favor of Bank, together with all renewals,
amendments, modifications and substitutions therefore.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means the Subsidiary on the signature
page of this Agreement, together with any corporation or partnership in which
(i) more than fifty percent (50%) of the partnership interests or (ii) more than
fifty percent (50%) of the stock of which by the terms thereof ordinary voting
power to elect the Board of Directors, managers or trustees of the entity shall,
at the time as of which any determination is being made, be owned by Borrower,
either directly or through an Affiliate.
"Tangible Net Worth" means at any date as of
which the amount thereof shall be determined, the consolidated total assets
of Borrower and its Subsidiaries, plus preferred stock of the Borrower and its
Subsidiaries, minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all reserves
not already deducted from assets, and (ii) Total Liabilities.
5
<PAGE>
"Total Liabilities" means at any date as of
which the amount thereof shall be determined, all obligations that should,
in accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto. The
terms "including"/ "includes" shall always be read as meaning "including (or
includes) without limitation", when used herein or in any other Loan Document.
2. LOANS AND TERMS OF PAYMENT
2.1 Advances. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an aggregate amount
not to exceed the Committed Revolving Line, minus (i) the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) and minus (iii) the Foreign Exchange. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may
be repaid and reborrowed at any time during the term of this Agreement.
On the Closing Date, Borrower shall execute and deliver to Bank the
Revolving Promissory Note.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m., Washington, D.C.
time, on the Business Day that the Advance is to be made. Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's deposit
account.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.2 Letters of Credit. (a) Subject to the terms and conditions
of this Agreement, Bank agrees to issue, or cause to be issued, standby letters
of credit (each a "Letter of Credit" and correctly, "Letters of Credit") for the
account of Borrower in an aggregate face amount not to exceed (i) the Committed
Revolving Line minus (ii) the then outstanding principal balance of the
Advances, provided that the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) and the total gross amount
of all Exchange Contracts to which Borrower is a party shall not in any case
exceed in the aggregate One Million Five Hundred Thousand Dollars ($1,500,000).
Each such Letter of Credit shall have an expiration date no later than the
Revolving Maturity Date. All such Letters of Credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of application and Letter of Credit
agreement.
(b) The obligation of Borrower to immediately reimburse Bank
for drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any Letters of Credit.
2.3 Foreign Exchange Contract; Foreign Exchange Settlements.
(a) Subject to the terms of this Agreement, Borrower may utilize up to One
Million Five Hundred Thousand Dollars ($1,500,000) of the Committed Revolving
Line for foreign exchange contracts (the "Exchange Contracts"), pursuant to
which Bank shall
6
<PAGE>
sell to or purchase from Borrower foreign currency on a spot or future basis.
All Exchange Contracts must provide for delivery of settlement on or before the
Revolving Maturity Date. The limit available at any time shall be reduced by the
following amounts (the "Foreign Exchange Reserve") on each day (the
"Determination Date"): on all outstanding Exchange Contracts on which delivery
is to be effected or settlement allowed more than two (2) Business Days from the
Determination Date, ten percent (10%) of the gross amount of the Exchange
Contracts; plus on all outstanding Exchange Contracts on which delivery is to be
effected or settlement allowed within two (2) Business Days after the
Determination Date, one hundred percent (100%) of the gross amount of the
Exchange Contracts. In lieu of the Foreign Exchange Reserve for one hundred
percent (100%) of the gross amount of any Exchange Contract, Borrower may
request that Bank treat such amount as an Advance under the Committed Revolving
Line.
(b) Bank may, in its discretion, terminate the
Exchange Contracts at any time (a) that an Event of Default occurs or (b) that
there is no sufficient availability under the Committed Revolving Line and
Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without
limitation of any applicable indemnities, Borrower agrees to reimburse Bank for
any and all fees, costs and expenses relating thereto or arising in connection
therewith.
(c) Borrower shall not permit the face amount
of outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) and the total gross amount of all Exchange Contracts on which delivery
is to be effected and settlement allowed in any two (2) Business Day period to
be more than One Million Five Hundred Thousand Dollars ($1,500,000) nor shall
Borrower permit the face amount of outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit) and the total gross amount of all
Exchange Contracts to which Borrower is a party, outstanding at any one time, to
exceed One Million Five Hundred Thousand Dollars ($1,500,000).
(d) Borrower shall execute all standard form
applications and agreements of Bank in connection with the Exchange Contracts
and, without limiting any of the terms of such applications and agreements,
Borrower will pay all standard fees and charges of Bank in connection with the
Exchange Contracts.
2.4 Committed Equipment Line.
(a) Subject to and upon the terms and
conditions of this Agreement, at any time from the date hereof through
October 31, 1998 (the "Equipment Availability End Date"), Borrower may from time
to time request advances (each an "Equipment Advance" and collectively, the
"Equipment Advances") to Borrower in an aggregate outstanding amount not to
exceed the Committed Equipment Line. Amounts borrowed pursuant to this Section
2.4 may not be readvanced.
(b) Equipment Advances shall be made in
one of two tranches. All Equipment Advances made prior to March 31, 1998 (the
"Tranche One End Date") shall be evidenced by an Equipment Term Note ("Equipment
Term Note No. 1") to be executed and delivered by Borrower to Bank on the
Closing Date. All Equipment Advances made prior to the Tranche One End Date
shall be repaid in accordance with the terms of Equipment Term Note No. 1. All
Equipment Advances made after the Tranche One End Date, but prior to the
Equipment Availability End Date shall be evidenced by an Equipment Term Note
("Equipment Term Note No. 2") to be executed by Borrower and delivered to Bank
on the Closing Date. All Equipment Advances made after the Tranche One End Date
shall be repaid in accordance with the terms of Equipment Term Note No. 2.
(c) Borrower shall deliver to Bank at the
time of each Equipment Advance an invoice for the Equipment to be purchased or
for any Equipment previously purchased by Borrower for which an Equipment
Advance under this Agreement is permitted and has not been made. With respect to
Equipment Advances on Equipment Term Note No.1, Bank will only finance Equipment
purchased prior to the Tranche One End Date, but on or after July 31, 1997. With
respect to Equipment Advances on Equipment Term Note No. 2, Bank will only
finance Equipment purchased after the Tranche One End Date and on or before the
Equipment Availability End Date. The Equipment Advances shall be used by
Borrower only to purchase new Equipment and shall not
7
<PAGE>
exceed one hundred percent (100%) of the invoice amount of such Equipment
approved from time to time by Bank, including software, but excluding taxes,
shipping, warranty charges, freight discounts and installation expense. Software
may not at any time exceed twenty five percent (25%) of the aggregate amount of
all Equipment Advances.
(d) Interest shall accrue from the date of
each Equipment Advance at the rate specified in each of the Equipment Term Notes
and shall be payable monthly on each Payment Date, as more fully provided
therein. Any Equipment Advances that are outstanding under Equipment Term Note
No. 1 on the Tranche One End Date will be payable in thirty-six (36) equal
consecutive monthly installments of principal, plus all accrued interest,
beginning on April 5, 1998 and thereafter on each subsequent Payment Date. Any
Equipment Advances that are outstanding under Equipment Term Note No. 2 on the
Equipment Availability End Date will be payable in thirty-six (36) equal
consecutive monthly installments of principal, plus all accrued interest,
beginning on November 5, 1998 and continuing on each subsequent Payment Date.
(e) When Borrower desires to obtain an
Equipment Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later than 10:00 a.m.
Washington, D.C. time, one (1) Business Day before the Business Day on which the
Equipment Advance is to be made. Such notice shall be substantially in the form
of Exhibit B. The notice shall be signed by a Responsible Officer or its
designee and include a copy of the invoice for the Equipment to be financed.
2.5 Additional Terms.
(a) Interest Rate. All Advances and
Equipment Term Loan Advances shall bear interest, on the average Daily
Balance, at the rate or rates set forth in the Notes.
(b) Default Rate. All Obligations shall
bear interest, from and after the occurrence of an Event of Default, at a
rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest under each Note shall
be due and payable on the Payment Date of each month during the term thereof.
Borrower hereby authorizes Bank to debit any accounts with Bank, including,
without limitation, Account Number 3300018441 for payments of principal and
interest due on the Obligations and any other amounts owing by Borrower to Bank.
Bank will notify Borrower of all debits which Bank makes against Borrower's
accounts. Any such debits against Borrower's accounts in no way shall be deemed
a set-off. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest under the
Notes shall be increased or decreased effective as of 12:01 a.m. on the day the
Prime Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.
2.6 Crediting Payments. Prior to the occurrence of an Event
of Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 10:00 a.m.
Washington, D.C. time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of
8
<PAGE>
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.7 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to
Seventeen Thousand Five Hundred Dollars ($17,500), shall be due and payable on
the Closing Date and shall be fully earned and non-refundable;
(b) Financial Examination and Appraisal
Fees. Bank's customary fees and out-of-pocket expenses for Bank's
examinations of Borrower's Accounts, and for each appraisal of Collateral
performed from time to time by Bank or its agents; provided, however, that such
examinations and appraisals shall be conducted at reasonable times and upon
reasonable notice and (so long as no Event of Default has occurred hereunder)
shall not be conducted at the Borrower's expense more than once in a twelve (12)
month period; and
(c) Bank Expenses. Upon demand from Bank,
including, without limitation, upon the date hereof, all Bank Expenses
incurred through the date hereof, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, appraisal fees, search fees, collection costs,
recordation taxes, and filing fees, as and when they become due.
2.8 Additional Costs. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of Bank imposed by the United States
of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement, and the result of any of the
foregoing is to increase the cost to Bank, reduce the income receivable by Bank
or impose any expense upon Bank with respect to any loans, Bank shall notify
Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in
cost, reduction in income or additional expense as and when such cost, reduction
or expense is incurred or determined, upon presentation by Bank of a statement
of the amount and setting forth Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest error.
2.9 Term. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Equipment Term Loan
Maturity Date. Notwithstanding the foregoing, Bank shall have the right to
terminate its obligation to make Credit Extensions under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance or Equipment Term Loan Advance is subject to
the condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
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(a) this Agreement;
(b) the Revolving Promissory Note;
(c) the Equipment Term Notes;
(d) a certificate of the Secretary of
Borrower with respect to incumbency and resolutions authorizing the execution
and delivery of this Agreement;
(e) an opinion of Borrower's and each
Subsidiary's counsel;
(g) financing statements (Forms UCC-1);
(h) insurance certificate;
(i) payment of the fees and Bank Expenses
then due specified in Section 2.7 hereof; and
(j) such other documents, and completion of
such other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The
obligation of Bank to make each Credit Extension, including the initial Advance
or Equipment Term Loan Advance, is further subject to the following conditions:
(a) timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and
(b) the representations and warranties
contained in Section 5 shall be true and correct in all material respects on and
as of the date of such Payment/Advance Form and on the effective date of each
Credit Extension as though made at and as of each such date, and no Event of
Default shall have occurred and be continuing, or would result from such Credit
Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Credit Extension as
to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's
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Books and to make copies thereof and to check, test, and appraise the Collateral
in order to verify Borrower's financial condition or the amount, condition of,
or any other matter relating to, the Collateral, provided that Bank shall use
reasonable efforts so as not to interfere with Borrower's business operations,
and provided further, that so long as no Event of Default has occurred and is
continuing, Bank shall not conduct such inspections or appraisals more than once
in a twelve (12) month period.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where a failure
to be so qualified would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.5 Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have either (i) a Material Adverse Effect, or (ii) a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower does
not have knowledge of any such pending or threatened actions or proceedings.
5.6 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.7 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as and when they mature.
5.8 Regulatory Compliance. Borrower and each Subsidiary has
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). To the best of Borrower's knowledge, Borrower has complied with
all the provisions of
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the Federal Fair Labor Standards Act. To best of Borrower's knowledge, Borrower
has not violated any statutes, laws, ordinances or rules applicable to it,
violation of which could have a Material Adverse Effect.
5.9 Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.10 Taxes. Borrower and each Subsidiary has filed or caused
to be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, except those
being contested in good faith and by appropriate proceedings.
5.11 Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.12 Government Consents. To the best of its knowledge,
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all governmental authorities that are necessary for the continued operation
of Borrower's business as currently conducted.
5.13 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) as soon as available, but in any event within forty
five (45) days after the end of each fiscal quarter, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during such period,
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certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon
as available, but in any event, within twenty five (25) days after the end of
each fiscal quarter, an account receivables and payables aging report, in form
and detail satisfactory to Bank in all material respects; (c) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (d) promptly upon receipt of notice thereof, a
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of One Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within forty five (45) days after the end of each fiscal
quarter, Borrower shall deliver to Bank with the quarterly financial statements
a Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit C hereto.
Bank shall have a right from time to time hereafter to examine
the Collateral at Borrower's expense, provided that such examinations will be
conducted no more often than every twelve (12) months, unless an Event of
Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as ordinarily
insured against by other owners in similar businesses conducted in the locations
where Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
Bank as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Bank before canceling its policy for any
reason. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
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6.7 Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
6.8 Liquidity. Borrower shall maintain, as of the last day of
each fiscal calendar quarter, a ratio of Quick Assets to Current Liabilities,
less deferred revenues of at least 2.5 to 1.0.
6.9 Minimum Cash. Borrower shall maintain, as of the last day
of each fiscal calendar quarter, cash, cash equivalents and investments with
maturities of less than one (1) year, in an amount equal to not less than
Fifteen Million Dollars ($15,000,000).
6.10 Minimum Tangible Net Worth. Borrower shall maintain as of
last day of each fiscal calendar quarter, a Tangible Net Worth of not less than
the following amounts at the following times:
<TABLE>
<S> <C>
Closing Date through
April 29, 1998 $34,000,000;
April 30, 1998 and the greater of (i) $34,000,000 or
thereafter (ii) ninety percent (90%) of Tangible Net
Worth as reported by Borrower for the
fiscal year then ending.
</TABLE>
6.11 Minimum Debt Service Coverage. Borrower shall maintain,
tested as of the last day of each of Borrower's fiscal calendar quarters for the
four (4) quarter period ending on that date on a consolidated basis, a ratio of
net income, plus depreciation and interest expense, less capitalized software,
divided by the current portion of long term debt, plus interest expense of at
least 1.50 to 1.00.
6.12 Trademarks. Borrower will continue to use its trademarks
and will file any and all renewals of its trademarks with the Patent and
Trademark Office of the United States and any State or local governmental
agency, prior to any Trademark lapsing.
6.13 Newly Created Intellectual Property. Borrower will
promptly notify Bank of all new trademark, patent and copyright registrations
and applications for registration now or hereafter filed by Borrower.
6.14 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to make
any Credit Extension, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
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related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership (other than as a result of a public offering), management
or directors. Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, unless
Borrower gives Bank not less than ten (10) days prior notice of said merger or
consolidation and said merger or consolidation is with a Person in a like or
same, business, the Responsible Officers of the resulting entity will be the
same as Borrower and after the completion of said merger or consolidation,
Borrower is in compliance with all of the material terms and conditions of this
Agreement.
7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.7 Investments. Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives Bank
prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
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Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any
of the Obligations.
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement; or
(b) If Borrower fails or neglects to perform, keep,
or observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to have cured such default
shall not be deemed an Event of Default (provided that no Credit Extensions will
be required to be made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material
adverse change in the business, operations, or condition (financial or
otherwise) of Borrower, or (ii) is a material impairment of the prospect of
repayment of any portion of the Obligations or (iii) is a material impairment of
the value or priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded or bonded over within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, and the same is not
paid within ten (10) days after Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith contest
by Borrower (provided that no Credit Extensions will be required to be made
during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
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<PAGE>
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, (after giving effect to any applicable grace
or cure periods) Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank
in an amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims
directly with account debtors for amounts, upon terms and in whatever order
that Bank reasonably considers advisable;
(e) Without further notice to or demand upon
Borrower, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank's determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's owned premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, for up to one hundred twenty (120) days in
order to exercise any of Bank's rights or remedies provided herein, at law, in
equity, or otherwise;
(f) Without further notice to Borrower set off and
apply to the Obligations any and all (i) balances and deposits of Borrower
held by Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and
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<PAGE>
selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable;
(i) Bank may credit bid and purchase at any public
sale;
(j) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower; and
(k) Bank may enjoin Borrower from further use or
licensing of any name, trade secrets, trade names, trademarks, service marks,
and advertising matter, or any property of a similar nature, of Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default (after giving effect to any
applicable grace or cure period), Borrower hereby irrevocably appoints Bank (and
any of Bank's designated officers, or employees) as Borrower's true and lawful
attorney to: (a) send requests for verification of Accounts or notify account
debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name
on any checks or other forms of payment or security that may come into Bank's
possession; (c) sign Borrower's name on any invoice or bill of lading relating
to any Account, drafts against account debtors, schedules and assignments of
Accounts, verifications of Accounts, and notices to account debtors; (d) make,
settle, and adjust all claims under and decisions with respect to Borrower's
policies of insurance; (e) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which Bank
determines to be reasonable; and (f) in furtherance of the exercise of any of
the Bank's rights and remedies set forth in Section 9.1 hereof, provided Bank
may exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence of
an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Committed Revolving Line as Bank deems necessary to protect
Bank from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any amounts
so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Bank shall not constitute an agreement by Bank to make similar payments in
the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
18
<PAGE>
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower VerSatility, Inc.
11781 Lee Jackson Memorial Highway, Suite 600
Fairfax, Virginia 22033
Attn: Donald Yount
FAX: (703) 591-2992
If to Bank: Silicon Valley East
One Central Plaza
11300 Rockville Pike, Suite 1205
Rockville, Maryland 20852
Attn: Shawn E. Beckerman
Assistant Vice President
FAX: (301) 984-6282
With a Copy to: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Loan Services
Fax: (408) 496-2426
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Maryland, without regard to
principles of conflicts of law. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION
WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY
STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF MARYLAND IN ANY
ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY
19
<PAGE>
REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT
AVAIL ITSELF OF THE COURTS OF MARYLAND, BORROWER ACCEPTS JURISDICTION OF THE
COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH
HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
Section 12.7 have been satisfied, and Bank has no commitment to make any Credit
Extensions or to make any other loans to Borrower,
20
<PAGE>
Bank shall release all security interests granted hereunder and redeliver all
Collateral held by it in accordance with applicable law.
12.8 Confidentiality. In handling any confidential information
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order and (iv) as may be required
in connection with the examination, audit or similar investigation of Bank.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
12.9 Countersignature. This Agreement shall become effective
only when it shall have been executed by Borrower and Bank (provided, however,
in no event shall this Agreement become effective until signed by and officer of
Bank in California).
12.10 Right of Contribution. Borrower and the Bank agree that
on and after the Closing Date, each Borrower (an "Entitled Borrower") shall be
entitled to contribution from each other Borrower to the extent, if any, that
(a) an Entitled Borrower incurs any Obligations in excess of such Entitled
Borrowers Net Valuation (as hereinafter defined) or (b) the Obligations incurred
by such Entitled Borrower would leave such Entitled Borrower with an
unreasonably small amount of capital to enable the Entitled Borrower to operate
the business in which it is engaged, and/or the Obligations incurred by such
Entitled Borrower prevent such Entitled Borrower from paying its debts as such
debts mature; provided, however, that such right of contribution shall be
subordinated to the payment of the Obligations and may not be exercised by any
Borrower until all of the Obligations have been paid in full. Nothing in this
Section shall be deemed to in any manner impair the joint and several liability
of each Borrower for any and all of the Obligations. The provisions of this
Section shall be in addition to and shall in no manner limit any other rights of
contribution available to any Borrower. The term "Net Valuation" as used in this
Section means the amount by which (1) an Entitled Borrower's property at a fair
valuation exceeds (2) such Entitled Borrower's debts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VERSATILITY, INC
By:______________________________________
Name:
Title:
VERSATILITY (U.K.), LTD.
By:______________________________________
Name:
Title:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By:______________________________________
Shawn E. Beckerman
21
<PAGE>
Assistant Vice President
SILICON VALLEY BANK
By:_____________________________________
Name:
Title:
(Signed in Santa Clara County, California)
<PAGE>
EXHIBITS
A. Description of Collateral
B. Loan/ Payment Advance Telephone Request Form
C. Compliance Certificate
E. Revolving Promissory Note
F. Equipment Term Note
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale
or disposition of any of the foregoing and any documents of title
representing any of the above, and Borrower's Books relating to any of
the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not
earned by performance, and any and all credit insurance, guaranties,
and other security therefor, as well as all merchandise returned to or
reclaimed by Borrower and Borrower's Books relating to any of the
foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work
thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements
and confidential information, now owned or hereafter acquired; all mask
work or similar rights available for the protection of semiconductor
chips, now owned or hereafter acquired; all claims for damages by way
of any past, present and future infringement of any of the foregoing;
and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: TIME:
FROM:
CLIENT NAME VERSATILITY, INC.
REQUESTED BY: __________________________________________________
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT # _________________________________ TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
__________________________ _____________________
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
<PAGE>
BANK USE ONLY
TELEPHONE REQUEST:
__________________
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester Phone # ( )____________________________
Received By (Bank) Phone # ( )____________________________
Authorized Signature (Bank)
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: VERSATILITY, INC.
The undersigned authorized officer of VerSatility hereby certifies that
in accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ____________________, 1997 with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
- ------------------ -------- --------
<S> <C>
Quarterly financial statements Quarterly within 45 days Yes/No
Annual (CPA Audited) FYE within 90 days Yes/No
A/R & A/P Agings Quarterly within 25 days Yes/No
A/R Audit Annual Yes/No
<CAPTION>
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Liquidity 2.5 to 1.0 ____ to 1.0 Yes/No
Minimum Tangible Net Worth $34,000,000 $________ Yes/No
April 30, 1998 and thereafter Greater of $34,000,000
or 90% of reported
TNW for year end $_________ Yes/No
Minimum Cash $15,000,000 $_________ Yes/No
Minimum Debt Service Coverage 1.5 to 1.0 ____ to 1.0 Yes/No
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
BANK USE ONLY
Received by:
AUTHORIZED SIGNER
Date:
Verified:
AUTHORIZED SIGNER
Date:
Compliance Status: Yes No
- --------------------------------------------------------------------------------
Comments Regarding Exceptions: See Attached.
Sincerely,
VERSATILITY, INC.
By:_______________________
Title
Date__________________, 199__
<PAGE>
DISCLOSURE SCHEDULE
-------------------
Exhibit 11.1
Computation of Historical Net Income (Loss) Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C>
Net income (loss) $ 215,825 $(2,631,382) $ 418,171 $(2,584,941)
============ =========== =========== ===========
Weighted average number of shares
outstanding 4,000,000 7,412,089 4,000,000 7,365,984
Add:
Shares issuable upon conversion of
Series A Redeemable Convertible
Preferred Stock 992,061 -- 992,061 --
Shares issuable from the assumed
exercise of options as determined
by the application of the treasury
stock method 611,144 -- 611,144 --
------------ ----------- ----------- -----------
5,603,205 7,412,089 5,603,205 7,365,984
============ =========== =========== ===========
Net income (loss) per common share $ 0.04 $ (0.36) $ 0.07 $ (0.35)
============ =========== =========== ===========
</TABLE>
The above computations include all common equivalent shares issued within the 12
months preceding the filing date as if they were outstanding for all periods
presented (using the treasury stock method) and the as if converted method with
regards to the Series A redeemable convertible preferred stock.
For the three and six months ended October 31, 1997, there are no shares
issuable from the assumed exercise of options, since they would be
anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 10,997,266
<SECURITIES> 5,239,625
<RECEIVABLES> 18,484,120
<ALLOWANCES> 341,951
<INVENTORY> 105,683
<CURRENT-ASSETS> 38,469,984
<PP&E> 3,011,695
<DEPRECIATION> (1,860,440)
<TOTAL-ASSETS> 42,731,636
<CURRENT-LIABILITIES> 6,479,258
<BONDS> 178,076
0
0
<COMMON> 75,346
<OTHER-SE> 35,648,524
<TOTAL-LIABILITY-AND-EQUITY> 42,731,636
<SALES> 9,416,634
<TOTAL-REVENUES> 16,608,827
<CGS> 603,059
<TOTAL-COSTS> 6,271,192
<OTHER-EXPENSES> 14,680,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,916,502)
<INCOME-TAX> (1,331,561)
<INCOME-CONTINUING> (2,584,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,584,941)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
