<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-14007
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SONIC FOUNDRY, INC.
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(Exact name of small business issuer as specified in its charter)
MARYLAND 39-1783372
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
754 Williamson Street, Madison, WI 53703
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(Address of principal executive offices)
(608)256-3133
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
Outstanding
Class May 10, 1999
----- ------------
Common Stock, $0.01 par value 2,665,935
Transitional Small Business Disclosure Format (check one)
Yes No X
---- ----
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SONIC FOUNDRY, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION --------
Item 1. Financial Statements
Balance Sheets - March 31, 1999 (Unaudited) and 3
September 30, 1998
Statements of Operations (Unaudited) - three-months 5
ended March 31, 1999 and 1998, six-months ended
March 31, 1999 and 1998
Statements of Cash Flows (Unaudited) - six-months 6
ended March 31, 1999 and 1998.
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION 16
EXHIBITS 18
SIGNATURES 20
2
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Sonic Foundry, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, March 31,
1998 1999
--------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 6,939,533 $ 5,386,109
Marketable securities 3,000,000 -
Accounts receivable, net of allowances of $73,344 and
$167,766 at September 30, 1998 and March 31, 1999,
respectively 1,690,175 3,404,092
Revenues in excess of billings for software license fees 705,263 -
Inventories 316,140 580,784
Prepaid expenses and other current assets 285,703 361,290
--------------------------------------
Total current assets 12,936,814 9,732,275
Property and equipment:
Land 190,000 190,000
Buildings and improvements 1,491,228 1,663,647
Equipment 1,186,818 1,584,337
Furniture and fixtures 132,802 178,827
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3,000,848 3,616,811
Less accumulated depreciation 389,863 617,367
--------------------------------------
Net property and equipment 2,610,985 2,999,444
Capitalized software development costs, net 401,629 370,377
Other assets 261 113,487
--------------------------------------
Total assets $15,949,689 $13,215,583
======================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
September 30, March 31,
1998 1999
--------------------------------------
Liabilities and stockholders' equity (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 828,086 $ 639,125
Accrued liabilities 316,677 483,401
Current portion of long-term obligations 636,081 48,100
--------------------------------------
Total current liabilities 1,780,844 1,170,626
Long-term obligations 77,472 677,208
Contingencies - -
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 5,000,000 shares; none
issued and outstanding - -
5% preferred stock, Series B, voting, cumulative, convertible, $.01
par value (liquidation preference at par), authorized 10,000,000 shares,
issued and outstanding 7,223,719 shares at September 30, 1998
and March 31, 1999 72,237 72,237
Common stock, $.01 par value, authorized 20,000,000 shares; issued and
outstanding 2,665,935 shares at September 30, 1998 and March
31, 1999 26,660 26,660
Common stock warrants 159,500 324,500
Additional paid-in capital 15,297,096 15,297,096
Accumulated deficit (1,464,120) (4,352,744)
--------------------------------------
Total stockholders' equity 14,091,373 11,367,749
--------------------------------------
Total liabilities and stockholders' equity $15,949,689 $13,215,583
======================================
</TABLE>
See accompanying notes.
4
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Sonic Foundry, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1999 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software license fees $1,342,291 $ 2,760,722 $2,273,768 $ 5,516,289
Cost of software license fees 524,781 701,208 684,196 1,521,630
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817,510 2,059,514 1,589,572 3,994,659
Selling and marketing expenses 670,158 1,970,404 1,319,478 4,042,795
General and administrative
expenses 364,395 987,015 681,670 1,761,911
Product development expenses 130,147 657,888 237,031 1,215,522
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1,164,700 3,615,307 2,238,179 7,020,228
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Loss from operations (347,190) (1,555,793) (648,607) (3,025,569)
Other income (expense):
Interest expense (35,646) (2,362) (57,736) (5,957)
Interest and other income 134 51,321 134 142,902
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(35,512) 48,959 (57,602) 136,945
-------------------------------------------------------------------------------
Loss before income taxes (382,702) (1,506,834) (706,209) (2,888,624)
Income tax expense - - - -
===============================================================================
Net Loss $ (382,702) $(1,506,834) $ (706,209) $(2,888,624)
===============================================================================
Loss per common share -
Basic and Diluted $ (0.99) $ (0.57) $ (2.27) $ (1.08)
===============================================================================
</TABLE>
See accompanying notes.
5
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Sonic Foundry, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
1998 1999
----------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (706,209) $ (2,888,624)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 85,610 228,190
Amortization of debt discount 5,417 -
Amortization of capitalized software development costs 67,345 132,863
Loss on disposal of property and equipment - 754
Noncash charge for common stock warrants - 51,600
Changes in operating assets and liabilities:
Accounts receivable (441,936) (1,008,654)
Inventories (82,207) (264,644)
Prepaid expenses and other assets (55,913) (75,587)
Accounts payable and accrued liabilities 363,697 (22,237)
----------------------------------------------
Total adjustments (57,987) (957,715)
----------------------------------------------
Net cash used in operating activities (764,196) (3,846,339)
Investing activities
Purchases of property and equipment (190,308) (621,086)
Proceeds from sale of marketable securities - 3,000,000
Proceeds from disposals of property and equipment - 3,857
Capitalized software development costs (248,299) (101,611)
----------------------------------------------
Net cash provided by (used in) investing activities (438,607) 2,281,160
Financing activities
Initial public offering costs (153,342) -
Proceeds from sale of common stock, net of issuance costs 655,600 -
Proceeds from debt 1,022,200 632,000
Payments on line of credit, net (220,000) -
Payments on long-term debt (21,223) (620,245)
----------------------------------------------
Net cash provided by financing activities 1,283,235 11,755
----------------------------------------------
Net increase (decrease) in cash 80,432 (1,553,424)
Cash and cash equivalents at beginning of period 114,737 6,939,533
==============================================
Cash and cash equivalents at end of period $ 195,169 $ 5,386,109
==============================================
Supplemental cash flow information:
Interest paid $ 59,056 $ 5,957
Noncash transactions -
Conversion of notes payable into common stock 40,000 -
</TABLE>
See accompanying notes.
6
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1. Basis of Presentation and Significant Accounting Policies
Interim Financial Data
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's annual report filed on Form
10-KSB for the fiscal year ended September 30, 1998. In the opinion of
management, all adjustments (consisting only of adjustments of a normal and
recurring nature) considered necessary for a fair presentation of the results of
operations have been included. Operating results for the six-month period ended
March 31, 1999 are not necessarily indicative of the results that might be
expected for the year ended September 30, 1999.
2. Net Loss Per Share
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended March 31, March 31,
1998 1999 1998 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Denominator
Denominator for basic and diluted loss per share -
weighted average common shares 385,827 2,665,935 311,627 2,665,935
===================================================
Securities that could potentially dilute basic
earnings per share in the future that are
not included in the computation of diluted loss
per share as their impact is antidilutive
(treasury stock method)
Options and warrants 380,817 566,881 373,428 529,143
Convertible Series B Preferred Stock 3,439,866 3,611,860 3,439,866 3,611,860
</TABLE>
3. Contingencies and subsequent event
In June 1998 the Board of Directors approved the issuance of guarantees of
certain obligations of certain officers of the Company. The guarantees were
executed in June and July of 1998 to a bank in order to facilitate the issuance
of loans to the officers. The guarantees carry an aggregate maximum limit of
approximately $300,000.
During the quarter ended March 31, 1999, the Company guaranteed the operating
lease of another company in exchange for common stock of the lessee. The
operating lease has a
See accompanying notes.
7
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five-year term with aggregate base lease payments of approximately $500,000.
Subsequent to March 31, 1999, the Company purchased additional shares of common
stock in the company for $500,000. The Company owns less than 20% of the other
company; accordingly, the investment will be accounted for using the cost
method.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and
notes thereto included elsewhere in this form 10-QSB and the Company's annual
report filed on form 10-KSB for the fiscal year ended September 30, 1998. In
addition to historical information, this discussion contains forward-looking
statements such as statements of the Company's expectations, plans, objectives
and beliefs. These statements use such words as "may", "will", "expect",
"anticipate", "believe", "plan", and other similar terminology. Actual results
could differ materially due to changes in the market acceptance of Sonic
Foundry's products, market introduction or product development delays, global
and local business conditions, legislation and governmental regulations,
competition, the Company's ability to effectively maintain and update its
product portfolio, shifts in technology, political or economic instability in
local markets, and currency and exchange rates.
Overview
The Company is a leading provider of audio software products designed to run
under the Windows and Windows NT operating systems. The Company's current
products allow musicians, audio engineers and home users the ability to create,
edit and deliver audio files and record or master their own audio CD's. The
Company has also developed, and expects to continue developing, production and
encoding software tools for Internet and Intranet content developers.
The Company began shipment of Sound Forge, a Windows based audio editing
software program developed by one of the Company's founders, in 1994. By 1996,
the Company had released Sound Forge versions 3.0 and 4.0, which significantly
expanded the effects and processes available in its editor, thereby meeting the
needs of professional musicians and audio engineers. Additionally, the product
line was expanded to include Sound Forge XP, a scaled down version of Sound
Forge, as well as various plug-in products whose functions include noise
reduction, spectrum analysis and batch conversion. In June 1997, the Company
released CD Architect, an audio mastering software product and in August 1997,
offered a convolution algorithm called Acoustic Mirror, which allows users to
map the acoustic signature of any environment upon an audio file. In January
1998 the Company began shipping Soft Encode, a software product which provides
an economical
See accompanying notes.
8
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method of authoring Dolby-certified AC-3 files, and in May 1998, the Company
released a music creation software product called ACID. ACID allows musicians,
media professionals, Internet developers and others to compose royalty free,
loop based music. The Company expects the product, which includes hundreds of
pre-recorded loops, to have broad-based use among customers who create and
enhance dance music, add background music to business and entertainment videos
and develop web pages. Additionally, in October 1998, the Company introduced
consumer versions of ACID for home entertainment use. Both ACID products are
supported by loop library CD's which offer professionals and consumers a variety
of music genres to choose from when composing music.
In June 1998, the Company completed an initial public offering of 2,097,775
shares of common stock and 1,145,387 common stock purchase warrants. The Company
is using and intends to continue using the net proceeds of the offering of
$13,258,359 for development of new products, capital expenditures, sales and
marketing, expansion of internal operations, potential acquisition activities
and/or joint venture activities and working capital and general corporate
purposes.
In November 1998, the Company announced the beta release of Windows Media
On-Demand Producer ("WMODP"), a product utilizing the Company's Vegas technology
(a development allowing a software specific solution to audio and video
authoring) and developed under contract with Microsoft Corporation. Designed for
both the experienced web developer and new entrants to the streaming media
market, WMODP delivers production and encoding features for Internet and
Intranet content developers who are deploying media content in areas such as
communication, entertainment and training. Microsoft began distributing the
final release of this new encoding tool in February 1999 as a no-charge addition
to the Windows Media tools available on the Microsoft Windows Media Technologies
website. While no revenues will be realized directly from the agreement with
Microsoft, the Company expects to generate greater brand recognition and access
to Microsoft customers. The Company anticipates that certain users of WMODP will
require more features than those found in WMODP. The Company retained the
product rights to WMODP, allowing the Company to offer those users Stream
Anywhere, a product with the same look and feel as the WMODP but with the
ability to encode media in multiple formats including the RealNetworks
RealSystem G2, MPEG-1, MP3 and Apple Quick-Time. Stream Anywhere was released as
a free beta download from the Company's web site in March 1999 and is expected
to be sold in its final form by the summer of 1999. The Company has made, and
may continue to make, investments in related areas such as high-speed Internet
access cable modem companies.
The Company invested significant resources in sales, marketing, research and
other operating activities during the last several years. During the quarter
ended December 31, 1998, the Company initiated a marketing campaign for its
consumer products, - ACID Music, ACID DJ and ACID Rock. Many of these
initiatives, including in-store promotions, radio ads, trade shows, print ads
and other promotions, continued or were
See accompanying notes.
9
<PAGE>
expanded upon in the current quarter. The Company believes some of the benefits
of these expenditures are being realized now but expects the full impact to take
one to two years. The Company believes that its success depends largely on
developing brand recognition early in a product's life cycle, building superior
technology and quality into its products, and extending its technological lead
on the competition. Accordingly, the Company expects operating costs to increase
in the near future, especially in periods of new product or market
introductions.
In light of the Company's limited operating history and rapid improvements in
technology and marketing of its products, the Company believes that its revenues
and operating results, including its gross profit and operating expenses as a
percentage of total net revenues, will vary significantly from period to period.
The Company's efforts in developing OEM bundling arrangements with hardware and
software developers have contributed, and are expected to continue contributing,
to this variability. Such OEM transactions typically have higher margins and
volumes than traditional distribution methods and may be material in certain
periods.
Results of Operations
Software License Fees
Revenues consist of fees charged for the licensing of Windows based software
products including Sound Forge, Sound Forge XP, CD Architect, Acoustic Mirror,
Soft Encode, ACID and various plug-in products and music libraries. Software
license fees are recognized upon delivery, net of allowances for estimated
returns, provided that no significant obligations of the Company remain and
collection of the resulting receivable is deemed probable. Revenues from
software license agreements with OEMs are recognized when the software product
has been delivered to the OEM, the fee to the Company is fixed and determinable,
and collectibility is probable. Additionally, revenues include fees recorded
pursuant to long-term contracts, using the percentage of completion method of
accounting, when significant customization or modification is required. Software
license fees increased by $1,329,000, or 106%, to $2,761,000 for the three-month
period ended March 31, 1999 from $1,419,000 during the three-month period ended
March 31, 1998. Software license fees increased by $3,242,000, or 143%, to
$5,516,000 for the six-month period ended March 31, 1999 from $2,274,000 during
the six-month period ended March 31, 1998. The increases resulted primarily from
the release of the ACID family of products in 1998. The retail sales sector saw
the greatest increase in revenues, fueled by the October 1998 introduction of
the consumer versions of ACID, including ACID DJ, ACID Rock and ACID Music. The
remainder of the increase was attributable to growth from existing products
driven by expenditures on sales and marketing personnel, advertising and other
product marketing activities.
See accompanying notes.
10
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Software license fees to customers outside of North America accounted for 12.7%
and 24.7% of software license fees for the three-month periods ended March 31,
1998 and 1999, respectively and were 13.1% and 18.8% of software license fees
for the six-month periods ended March 31, 1998 and 1999, respectively. Increases
in the percentage of revenues from sources outside North America reflect the
onsite sales and marketing efforts of the Company's recently established office
in Delft, Netherlands.
Cost of Software License Fees
Cost of software license fees increased by $176,000 to $701,000 for the
three-month period ended March 31, 1999 from $525,000 during the three-month
period ended March 31, 1998 and were 39.1% and 25.4% of software license fees
during the 1998 and 1999 periods, respectively. Cost of software license fees
increased by $838,000 to $1,522,000 for the six-month period ended March 31,
1999 from $684,000 during the six-month period ended March 31, 1998 and were
30.1% and 27.6% of software license fees during the 1998 and 1999 periods,
respectively. The majority of the decreases as a percentage of net software
license fees resulted primarily from a shift in mix toward higher margin
stand-alone software sales versus products bundled with purchased third party CD
recordable disk drives. Royalty costs partially offset these reduced material
costs, both in absolute dollars and as a percentage of software license fees,
due to agreements reached with artists to license the distribution of various
audio loops included in the Company's ACID products and sold separately in loop
libraries. The remainder of the increase in absolute dollars related to the
increased volume of software products sold during the period.
Selling and Marketing Expenses
Selling and marketing expenses increased by $1,300,000 to $1,970,000 during the
three-month period ended March 31, 1999 from $670,000 during the three-month
period ended March 31, 1998 and were 49.9% and 71.4% as a percentage of software
license fees, respectively. Selling and marketing expenses increased by
$2,724,000 to $4,043,000 during the six-month period ended March 31, 1999 from
$1,319,000 during the six-month period ended March 31, 1998 and were 58.0% and
73.3% as a percentage of software license fees, respectively. Increased selling
and marketing costs in absolute dollars were impacted in large part by marketing
and promotional expenses relating to its new line of ACID consumer products,
including trade shows, print and radio advertisements, concert promotions, store
demos and other marketing related activities. Both absolute dollars and costs as
a percentage of software license fees were impacted by European trade show and
other marketing costs incurred by the Company's recently established sales and
marketing office in Delft, Netherlands. The remaining increase related to
personnel costs to support the growth in revenues from existing products and for
future product releases.
See accompanying notes.
11
<PAGE>
General and Administrative Expenses
General and administrative expenses increased by $623,000 to $987,000 during the
three-month period ended March 31, 1999 from $364,000 during the three-month
period ended March 31, 1998 and were 27.1% and 35.7% as a percentage of software
license fees, respectively. General and administrative expenses increased by
$1,080,000 to $1,762,000 during the six-month period ended March 31, 1999 from
$682,000 during the six-month period ended March 31, 1998 and were 30.0% and
31.9% as a percentage of software license fees, respectively. The increase in
both absolute dollars and as a percentage of software license fees related to
wages and related recruitment and benefit costs, professional fees, facility
costs, and other expenses. These costs were required to build an infrastructure
to support existing and future products and to satisfy reporting and other
requirements of a public company.
Product Development Expenses
Product development expenses increased by $528,000 to $658,000 during the
three-month period ended March 31, 1999 from $130,000 during the three-month
period ended March 31, 1998. Product development expenses as a percentage of
software license fees were 9.7% and 23.8% for the 1998 and 1999 periods,
respectively. Product development expenses increased by $979,000 to $1,216,000
during the six-month period ended March 31, 1999 from $237,000 during the
six-month period ended March 31, 1998 and were 10.4% and 22.0% as a percentage
of software license fees, respectively. In accordance with SFAS Number 86, the
Company capitalizes the cost of development of software products that have
reached the level of technological feasibility. The Company's ACID product fell
into this category during both of the three-month and six-month periods ended
March 31, 1998, resulting in capitalization of $123,000 and $248,000 of
development costs, respectively. Development of the Company's Vegas product
reached the beta stage in March 1999 resulting in capitalization of $102,000
during the quarter ended March 31, 1999. The addition of software engineers to
accelerate development of the Company's expanding line of software products
caused the remaining increase in product development costs between the two
periods.
Income Tax Expense (Benefit)
No Federal or State tax expense was recorded during either of the three or
six-month periods ended March 31, 1998 or 1999 due to the Company's Federal and
State net operating loss position. No deferred tax benefit was recorded in the
quarter ended March 31, 1999 as the Company continues to record a valuation
allowance equal to the balance of net deferred tax assets.
See accompanying notes.
12
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Liquidity and Capital Resources
Cash was used in operating activities of $764,000 and $3,846,000 for the
six-month periods ended March 31, 1998 and 1999, respectively. A loss of
$706,000 was the primary factor in the use of cash during the 1998 period. The
ACID product launch contributed to a loss and use of cash, of $2,889,000 in
1999. Additional investments in accounts receivable, inventory and other assets
of $580,000 and $1,349,000 also impacted cash used in operations for the
six-month periods ended March 31, 1998 and 1999, respectively. Cash invested in
such assets for the six-month periods ended March 31, 1998 were partially offset
by additional credit obtained from trade creditors of $364,000. The impact of
noncash charges such as depreciation, amortization, issuance of common stock
warrants and deferred tax charges for the six-month periods ended March 31, 1998
and 1999 totaled $158,000 and $413,000, respectively.
Cash provided by (used in) investing activities of ($439,000) and $2,281,000 for
the six-month periods ended March 31, 1998 and 1999, respectively, included net
purchases of fixed assets of $190,000 and $617,000, respectively. Leasehold
expenditures for the company's administrative and engineering offices in 1998
and purchases of computers, furniture and other assets were the primary fixed
asset additions. Investing activities also included capitalized software
development efforts of $248,000 and $102,000 for the six-month periods ended
March 31, 1998 and 1999, respectively. The primary generator of cash provided by
investing activities in the six months ended March 31, 1999 were the proceeds
from the sale of marketable securities of $3,000,000.
Cash provided by financing activities of $1,283,000 and $12,000 for the
six-month periods ended March 31, 1998 and 1999, were impacted by proceeds from
debt of $1,022,000 and $632,000, respectively and from payments on debt of
$241,000 and $620,000, respectively. The 1998 period was also impacted by the
issuance of $656,000 of common stock and partially offset by $153,000 of advance
payments toward the initial public offering completed in June 1998.
In February 1997, the Company entered into a $620,000 construction loan with a
bank to fund the purchase and renovation of a 10,000 square foot facility to
house the Company's expanded operations. On January 8, 1998, the Company
converted the construction loan into a term loan due January 3, 2003. The loan
was paid in full in October 1998.
The Company received the proceeds of a $40,000 unsecured note in August 1997
from relatives of a Company officer. The note paid interest monthly at 15% per
annum and was convertible into Common Stock at $5.00 per share at the election
of the Company. The Company exercised its right and converted the note into
8,000 shares of Common Stock in October 1997.
See accompanying notes.
13
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In June 1998, the Company completed an initial public offering, including over
allotment shares, of 2,097,775 shares of common stock at a price of $7.50 per
share and 1,145,387 common stock purchase warrants at a price of $0.10 each. The
net proceeds to the Company from the offering, after deduction of underwriting
discounts and other expenses relating to the offering, were approximately
$13,258,359. The Company is using and intends to continue using the net proceeds
for development of new products, capital expenditures, sales and marketing,
expansion of internal operations, acquisition activities and/or joint venture
activities and working capital and general corporate purposes.
In March 1999, the Company received the proceeds from a mortgage with a bank on
its sales and marketing facility of $632,000. The agreement provides for monthly
payments of interest and principal of $5,050 based on an interest rate of 7.375%
percent per annum. Simultaneously, the Company entered into a back-up revolving
line of credit agreement. The agreement allows for maximum borrowings of
$5,000,000 or a lesser amount based on the level of customer accounts receivable
and inventory acceptable to the bank. The agreement, if drawn upon, would
require monthly interest payments calculated at a rate equal to the 30 day
London Interbank Offer (LIBOR) plus 2.25%, initially 7.19% per annum. Principal
amounts are due January 31, 2000. For advances to be available, the Company must
maintain certain financial covenants including minimum tangible net worth,
current and debt ratios, as well as restrictions on the level of capital
acquisitions, payment of dividends, issuance of additional indebtedness and
others.
Although the Company has no substantial commitments for capital expenditures,
management anticipates there will be a need for increased capital expenditures
and lease commitments in the next 12 months consistent with the anticipated
growth in operations and infrastructure.
The Company has significantly increased its operating expenses since its
inception and expects the need for significant investment in marketing and other
support staff and associated costs to continue. Management believes that the net
proceeds of the initial public offering completed in June 1998, its revolving
credit facility and cash provided by operations will enable the Company to meet
its operational and capital requirements for at least the next 12 months.
Year 2000 Impact
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties,
including customers, vendors, and manufacturers, with whom the Company deals.
Failures of the Company's and/or third
See accompanying notes.
14
<PAGE>
parties' computer systems could have a material impact on the Company's ability
to conduct its business.
The Company believes its software products are year 2000 compliant. The
Company's products obtain date information, such as creation dates and
modification dates, directly from the computer's operating system. Microsoft
Corporation has stated that their operating systems will continue to operate
into the twenty-first century.
With regard to the Company's internal processing and operational systems, the
Company has designed a Year 2000 readiness plan including the following steps:
(i) conducting an inventory of the Company's internal systems, including
information technology systems and non-information technology and the systems
acquired or to be acquired by the Company from third parties; (ii) assessing and
prioritizing any required remediation; (iii) remediating any problems by
repairing or, if appropriate, replacing the non-compliant systems; (iv) testing
of all remediated systems for Year 2000 compliance; and (v) developing
contingency plans that may be employed in the event that any system used by the
Company is unexpectedly affected by an unanticipated Year 2000 problem. The
Company has completed the inventory and assessment phases of this plan. Although
the Company has not discovered any material operational issues or costs
associated with preparing internal systems for the Year 2000, there can be no
assurance that the Company will not experience material adverse effects from
undetected errors or the failure of such systems to be Year 2000 compliant. Any
such failures could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to assessing its own systems, the Company has reviewed its
dependence on its vendors, service providers and third party business partners.
The Company believes there are numerous sources and alternatives to vendors for
which it relies on for products or services. Further, no customer accounts for
more than 10% of the Company's revenues. Despite the Company's lack of
dependence, there can be no guarantee that the Company will not be adversely
impacted by non-compliance of one or more vendors, service providers or
customers. The actual impact on the Company resulting from non-compliance of
these entities cannot be determined at this time.
To date, the Company has expended an immaterial amount in conjunction with its
Year 2000 readiness plan. The Company further expects that the cost of
completing the Year 2000 readiness plan, including replacement of any necessary
computer systems, will not be material.
See accompanying notes.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM
1. Legal Proceedings
On March 23, 1999, the Company received a letter alleging the Company's
Sound Forge XP product infringes the Patent rights of a company in the
telephony industry. The Company believes it holds full right and title to
the technology included within its Sound Forge XP product and that, in any
event, the claim alleges an infringement only within the telephony industry
which represents a relatively minor portion of the Company's product base.
2. Changes in Securities
(a) None
(b) None
(c) None
(d) The information in this paragraph 2(d) relates to the
registrant's Registration Statement on Form SB-2, Registration
No. 333-46005 (the "Registration Statement"). The managing
underwriters for the offering of the securities sold pursuant to
the Registration Statement (the Offering) were Dirks & Company,
Inc. and Security Capital Trading, Inc. (the Underwriters).
The Offering commenced on April 22, 1998, and was completed on
June 10, 1998, following the Underwriters' partial exercise
of their option to purchase shares of stock and warrants to cover
over allotments (the Over-Allotment Option). The following
chart sets forth the securities sold pursuant to the Offering,
the offering price and the aggregate offering price of the
amount sold.
<TABLE>
<CAPTION>
Offering
Security Amount Sold Price Amount
-------- ----------- -------- ------
<S> <C> <C> <C>
Common Stock 2,097,775 $7.50 $15,733,312.50
Warrants 1,145,387 0.10 114,538.70
--------------
Total $15,847,851.20
Expenses of Offering:
Underwriting Discount $1,378,763.05
Underwriting Non-Accountable
Expense Allowance 475,435.54
Other Expenses 735,294.00
--------------
Net Proceeds $13,258,358.61
--------------
</TABLE>
16
<PAGE>
Use of Proceeds
From the effective date of the Registration Statement through March 31, 1999,
the Company applied an aggregate of $1,600,000 toward repayment of indebtedness,
$2,011,000 towards facility and other capital expenditures and $4,456,000 toward
product development, selling and marketing, expansion of internal operations,
working capital and general corporate purposes. The Company believes that none
of the proceeds were paid, directly or indirectly, to (i) directors or officers
of the Company or their affiliates, (ii) persons owning ten percent or more of
the common stock or (iii) affiliates of the Company. To date, the Company
believes that it has used the net proceeds of the Offering in a manner
consistent with the use of proceeds described in the Registration Statement and
the Prospectus dated April 22, 1998. The remaining net proceeds of the Offering
in the amount of $5,191,000 have been invested in cash and cash equivalents.
3. Defaults upon Senior Securities - None
4. Submission of Matters to a vote of Security Holders
At the Annual Meeting of Stockholders held on March 10, 1999, a quorum,
consisting of approximately 90% of the Company's common and preferred stock
outstanding and entitled to vote at the meeting, was present in person or by
proxy. At the meeting, the following proposals were approved by the
stockholders: Proposal #1 David C. Kleinman was re-elected as a Class one
Director; Proposal #2 Adoption of the 1995 Stock Option Plan and the options
granted thereunder was ratified; Proposal #3 Adoption of the Non-Employee
Directors Stock Option Plan and the options granted thereunder was ratified; and
Proposal #4 Appointment of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending September 30, 1999 was ratified.
FOR WITHHELD
--- --------
Proposal #1 9,311,949 16,425
FOR AGAINST ABSTAIN
--- ------- -------
Proposal #2 8,031,208 111,390 10,360
Proposal #3 8,058,068 85,780 9,110
Proposal #4 9,289,584 35,800 2,990
Rimas Buinevicius, Monty Schmidt, Curtis Palmer, Frederick Kopko and Arnold
Pollard continued as directors following the meeting.
5. Other Information - None
6. Exhibits and Reports on Form 8-k
(a) Exhibit (see exhibit list)
(b) Reports on Form 8-k - None
17
<PAGE>
ITEM 6(a) EXHIBIT LIST
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Registrant,
filed as Exhibit No. 3.1 to the Registration Statement, and hereby
incorporated by reference.
3.2 Amended and Restated By-Laws of the Registrant, filed as Exhibit No.
3.2 to the Registration Statement, and hereby incorporated by
reference.
4.1 Specimen Common Stock Certificate, filed as Exhibit No. 4.1 to the
Registration Statement, and hereby incorporated by reference.
4.2 Form of Warrant Agreement, including Warrant Certificate, filed as
Exhibit No. 4.2 to the Registration Statement, and hereby incorporated
by reference.
4.3 Form of Representatives' Warrant Agreement, including Specimen
Representatives' Warrant Certificate, filed as Exhibit No. 4.3 to the
Registration Statement, and hereby incorporated by reference.
10.1 Registrant's 1995 Stock Option Plan, filed as Exhibit No. 10.1 to the
Registration Statement, and hereby incorporated by reference.
10.2 Registrant's Non-Employee Directors' Stock Option Plan, filed as
Exhibit No. 10.2 to the Registration Statement, and hereby incorporated
by reference.
10.3 Commercial Lease between Registrant and The Williamson Center, LLC
regarding 740 and 744 Williamson Street, Madison, Wisconsin dated
January 20, 1998, filed as Exhibit No. 10.3 to the Registration
Statement, and hereby incorporated by reference.
10.4 Employment Agreement between Registrant and Rimas Buinevicius dated as
of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.4 to the Registration Statement, and hereby incorporated
by reference.
10.5 Employment Agreement between Registrant and Monty R. Schmidt dated as
of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.5 to the Registration Statement, and hereby incorporated
by reference.
10.6 Employment Agreement between Registrant and Curtis J. Palmer dated as
of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.6 to the Registration Statement, and hereby incorporated
by reference.
10.7 Digital Audio System License Agreement between Registrant and Dolby
Laboratories Licensing Corporation dated July 28, 1997, filed as
Exhibit No. 10.7 to the Registration Statement, and hereby incorporated
by reference.
18
<PAGE>
10.8 Digital Audio System License Agreement between Registrant and Dolby
Laboratories Licensing Corporation dated July 28, 1997, filed as
Exhibit No. 10.8 to the Registration Statement, and hereby incorporated
by reference.
10.9 Start-up Agreement between Registrant and Ingram Micro Inc. dated
October 16, 1997, filed as Exhibit No. 10.9 to the Registration
Statement, and hereby incorporated by reference.
10.10 Form of Lock-up Agreement between Registrant and all directors,
officers, and non-selling stockholders, filed as Exhibit No. 10.10 to
the Registration Statement, and hereby incorporated by reference.
10.11 Form of Lock-up Agreement between Registrant and all selling
stockholders, filed as Exhibit No. 10.11 to the Registration Statement,
and hereby incorporated by reference.
10.12 Software License Agreement, effective as of September 29, 1998, between
Registrant and Hewlett-Packard Company - CONFIDENTIAL MATERIAL FILED
SEPARATELY.
10.13 Commercial Lease between Registrant and Seven J's, Inc. regarding 627
Williamson Street, Madison, Wisconsin dated March 26, 1999.
10.14 Loan Agreement, dated March 3, 1999 between Registrant and Associated
Bank South Central.
10.15 Business Note Agreement, dated March 3, 1999 between Registrant and
Associated Bank South Central.
27.1 Financial Data Schedule
19
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
Sonic Foundry, Inc.
(Registrant)
May 14, 1999 By: /s/ Rimas P. Buinevicius
----------------------------
Rimas P. Buinevicius
Chairman and Chief Executive
Officer
May 14, 1999 By: /s/ Kenneth A. Minor
----------------------------
Kenneth A. Minor
Chief Financial Officer
May 14, 1999 By: /s/ Frederick Kopko
----------------------------
Frederick Kopko
Secretary
20
<PAGE>
Exhibit 10.13
L E A S E
THIS LEASE (the "Lease") is entered into as of the 26th day of March,
1999, by and between The Seven J's, Inc., a Wisconsin Corporation ("Landlord"),
whose address is c/o Jeffrey D. Coatta, 816 Lexington Drive, Waunakee, Wisconsin
53597 and Sonic Foundry, Inc., a Maryland Corporation ("Tenant"), whose address
is 318 S. Livingston, Madison, Wisconsin 53703.
ARTICLE I
GRANT AND TERM
SECTION 1.01. PREMISES. Landlord leases to Tenant, and Tenant leases
from Landlord, that portion of the office/retail building (the "Building")
located at 613 Williamson Street, Madison, Wisconsin 53703, now or hereafter to
be constructed which portion consists of an office or offices situated in the
basement, first and second floors of the Building and outlined on the site plan
attached as Exhibit A (the "Premises"), containing approximately 2,200 square
feet in the basement, 3,187 square feet on the first floor and 6,089 square feet
on the second floor, for a total of approximately Eleven Thousand Four Hundred
Seventy-Six (11,476) square feet. The Premises leased to Tenant do not include
the land under the Building or the roof or outer walls of the building or
buildings comprising the Building. Landlord reserves the right to place,
maintain, repair and replace utility lines, pipes, tunneling and the like in,
under, over, upon or through the Premises as may be reasonably necessary or
advisable for the servicing of the Premises or other existing or future portions
of the Office Building. Landlord further reserves the air rights above the
Premises and the Office Building for Landlord's use. No rights or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
this Lease. Tenant, its employees, agents and invitees shall have access to the
Building and the Premises twenty-four (24) hours per day, and seven (7) days per
week.
SECTION 1.02. LEASE TERM. The term of this Lease shall be for three (3)
Lease Years, unless terminated sooner pursuant to any of the provisions of this
Lease. The term of this Lease and Tenant's obligation to pay rent and other
charges due hereunder and to perform all other obligations set forth herein
shall begin on (i) July 1, 1999, or (ii) the date on which Tenant opens for
business in the Premises, whichever occurs first (the "Commencement Date").
Tenant may access the Premises for the purpose of completing its improvements
upon execution hereof. Tenant shall be responsible for all utility charges
beginning on the Commencement Date. The term of this Lease shall end on the last
day of the last full Lease Year unless terminated sooner pursuant to any of the
provisions hereof. The term "Lease Year" means a period of twelve (12)
consecutive calendar months. The first Lease Year shall begin on the
Commencement Date if that date is the first day of a calendar month, and, if
not, then on the first day of the first, full calendar month following the
Commencement Date.
1
<PAGE>
SECTION 1.03. SURRENDER. On the last day of the term of this Lease, or
any extension or renewal thereof, or on any sooner termination, Tenant shall
surrender the Premises in the same condition as the Premises existed on the
Commencement Date, broom clean, reasonable wear and tear excepted, and shall
surrender all keys to Landlord.
SECTION 1.04. RIGHT OF ENTRY. Landlord and its authorized
representatives shall have the right to enter the Premises at all reasonable
times upon reasonable notice to Tenant under the circumstances then existing
(except in cases of emergencies) or at any time during or after an emergency
without notice, for any lawful purpose, as Landlord may reasonably deem
necessary, without the same constituting an eviction of Tenant in whole or in
part, and rent shall not abate as a result of such entry. Nothing herein shall
imply any duty upon the part of Landlord to do any work or perform any other act
which Tenant may be required to perform under this Lease, and the performance
thereof by Landlord shall not constitute a waiver of Tenant's default in failing
to perform it. During the six (6) months prior to the expiration of the term of
this Lease, Landlord may place upon the Premises notice "To Let" or "For Rent."
If Tenant is not present to permit entry into the Premises, Landlord may, in
case of emergency, enter by master key, or may forcibly enter, without rendering
Landlord liable therefor.
SECTION 1.05. OPTION TO EXTEND. Provided Tenant is not in default
hereunder, Tenant shall have one (1) option to extend this Lease for an extended
term of five (5) Lease Years. The option to extend shall be exercisable by
Tenant upon written notice to Landlord given on or before one hundred twenty
(120) days prior to the expiration of the original or any extended term. Each
extended term shall be governed by the terms, covenants and conditions of this
Lease.
ARTICLE II
SECURITY DEPOSIT
SECTION 2.01. AMOUNT OF DEPOSIT. Tenant shall pay a security deposit
equal to zero ($0.00). No interest on the deposit shall be due and payable by
Landlord, and the deposit may be commingled by Landlord with other funds. The
deposit shall not be trust funds in the hands of the Landlord. Landlord's
delivery of the security deposit to a purchaser of Landlord's interest in the
Premises, or to any successor to Tenant's interest in the Premises, shall
discharge Landlord from liability for the deposit.
ARTICLE III
RENT
SECTION 3.01. BASE RENT.
(a) Tenant shall, for the entire term of this Lease, pay to
Landlord, at such place as Landlord may from time to time in writing designate,
an annual minimum rent (the "Base
2
<PAGE>
Rent") in equal monthly installments, payable in advance on the first day of
each calendar month, without any set off, counterclaim or deduction whatsoever
or any prior demand. Commencing with the Commencement Date of this Lease, and
continuing on the first day of each month during the first Lease Year, the Base
Rent shall be equal to $17.00 per square foot of Rentable Floor Area, as that
term is defined below, for the second floor premises and $16.00 per square foot
of Rentable Floor Area for the first floor premises. There shall be no rental
charged for the basement premises provided, however, that the basement premises
may only be used for limited access storage purposes.
(b) Base Rent for any Lease Year after the first Lease Year,
including any Lease Year of the Extended Term, if this Lease has been extended,
shall be increased by an amount equal to 3% of the previous year's Base Rent.
(c) For the purposes of calculating the yearly and monthly
amount of Tenant's Base Rent, the Rentable Floor Area of the Tenant's Premises
shall be calculated by Landlord's architect, in accordance with the following
definition: Rentable Floor Area shall be equal to the square foot area of all
floor space within the Tenant's Premises as measured from the dominant portion
of the interior surfaces of exterior building walls, and the exterior surface of
interior walls of the Premises. No deduction shall be made for columns, stairs
or interior construction, fixtures or equipment.
SECTION 3.02. ADDITIONAL RENT. Tenant shall also pay to Landlord, at
such place as Landlord may from time to time in writing designate, as additional
rent (the "Additional Rent"), (i) Tenant's proportionate share of Real Estate
Taxes (as defined in subsection (b), below) and Parking Lot Rent (as defined in
subsection (c) below), and (ii) the Other Costs and Expenses (as defined in
subsection (d), below), due from or chargeable to Tenant under this Lease, at
the times herein specified, without any set off, counterclaim or deduction
whatsoever or any prior demand.
(a) Tenant's Proportionate Share. As used herein, Tenant's
proportionate share of Real Estate Taxes shall be the total amount of the
increase in Real Estate Taxes for any period subsequent to calendar year 2000,
or that calendar year which is subsequent to the calendar year in which Full
Occupancy, as that term is defined below, occurs, multiplied by a fraction the
numerator of which shall be the number of Rentable Floor Area of the Premises
calculated in accordance with Section 3.01(c) and the denominator of which shall
be the number of square feet of Rentable Floor Area within the entire Building.
For the Purposes of this section, the definition of "Rentable Floor Area"
contained in Section 3.01 (c), above, shall be applied to the entire area of all
floor space within the Building that is leased or leasable and that is either
occupied, or can be readied for occupancy within sixty (60) days, and shall
include floor area on all levels, including mezzanines, except the basement
space. No deduction shall be made for columns, stairs or interior construction,
fixtures or equipment. Any changes in Rentable Floor Area shall be deemed in
effect on the first day of the next succeeding month following such change. As
used herein, the term "Full
3
<PAGE>
Occupancy" shall mean that 80% of all Rentable Floor Area of the Building has
been leased. The first payment of Tenant's proportionate share of the increase
in Real Estate Taxes shall be payable on or before fifteen (15) days after
receipt of a bill for the same from Landlord. The first tax year for which such
a bill could be generated is the year 2001.
(b) Real Estate Taxes. As used herein, the term "Real Estate
Taxes" shall include all taxes, charges, and assessments, general and special,
of every nature and kind whatsoever, levied, assessed, imposed, due or payable
against the land, buildings and all other improvements within the Building
including, but not limited to, those relating to or arising from the improvement
or maintenance of adjoining streets or pedestrian walkways, and all water and
sewage charges levied, assessed, imposed, due or payable during the term of the
Lease, whether such tax, charge or assessment shall be for city, county, state,
federal or any political subdivision thereof, or any other purpose whatsoever,
together with any costs and fees incurred by Landlord in contesting or
negotiating the same. Should any governmental agency or political subdivision
impose any taxes or assessments, whether or not now customary or within the
contemplation of the parties hereto, including a sales, use or other tax levy on
rental receipts, either by way of substitution for taxes or assessments
presently levied and assessed against the land, buildings, or any other
improvements within the Building, or otherwise, such taxes and assessments shall
be deemed to constitute a tax or assessment for the purposes of this section.
Copies of tax bills submitted by Landlord to Tenant shall be conclusive of the
amount levied or assessed as Real Estate Taxes.
(c) Parking Lot Rent. Landlord covenants and agrees to provide
Tenant with twenty-two (22) reserved parking stalls in the parking lot
immediately adjoining the Building at such location in the lot as will be
designated by Landlord. The parking lot rent shall be equal to $60.00 per month
for each of the parking stalls leased to Tenant. The parking stall rent as set
forth in the immediately preceding sentence shall be payable on a monthly basis,
in advance, commencing on the Commencement Date. On the first day of the second
Lease Year, and on the first day of each Lease Year thereafter, including any
Lease Year during any extended term, the parking lot rent shall be increased by
an amount equal to 3% of the parking lot rent for the previous Lease Year,
payable on a monthly basis. All parking stalls which are located in the parking
lot adjoining the Building shall be guaranteed available to Tenant during normal
business hours, which shall be 7:00 o'clock a.m. to 5:30 o'clock p.m.
(d) Other Costs and Expenses. As used herein, the term "Other
Costs and Expenses" shall include any and all amounts to be paid by Tenant to
Landlord under the terms of this Lease other than Base Rent or Tenant's
proportionate share of the increase in Real Estate Taxes. All such other costs
and expenses shall be due and payable to Landlord on or before fifteen (15) days
after written demand.
4
<PAGE>
ARTICLE IV
ALTERATIONS AND ADDITIONS
SECTION 4.01. ALTERATIONS. Tenant shall not, without Landlord's prior
written consent, which shall not be unreasonably withheld, make any alterations,
improvements, additions or utility installations upon the Premises, except for
minor nonstructural alterations. The term "utility installations," as used
herein, shall include without limitation power panels, space heaters,
fluorescent fixtures, conduits and wiring.
SECTION 4.02. LANDLORD'S WORK. Landlord shall, at its expense, perform
or cause to be performed the construction work on the Premises specifically
enumerated on the attached Exhibit B as Landlord's Work; and hereby assigns to
Tenant, effective as of the Commencement Date, any warranties that Landlord may
have procured from its contractors respecting any item of Landlord's Work.
Landlord, at its expense, shall make the foregoing improvements to the Premises
in accordance with the plans and the specifications provided by Tenant. The
improvements shall be completed in a good and workmanshiplike manner, and shall
comply with all applicable laws, ordinances, rules and regulations of
governmental authorities having jurisdiction. Landlord warrants that on the
Commencement Date, the Premises will comply with all applicable laws,
ordinances, rules and regulations of such governmental authorities with respect
to Landlord's Work and any other work which Landlord has performed with respect
to the Premises. During the term of this Lease, Landlord shall comply with all
applicable laws, rules and regulations regarding the Premises, subject to
Tenant's rights and obligations hereunder, and the Building.
SECTION 4.03. TENANT'S WORK. With the exception of the items
specifically enumerated in Exhibit B as Landlord's Work, Tenant shall, at
Tenant's expense, perform all work and supply all installations described in
Exhibit C ("Tenant's Work") and shall fully equip the Premises with all trade
fixtures, furniture, furnishings, special equipment and other items necessary
for the completion of the Premises and the proper and efficient operation of
Tenant's business in accordance with Tenant's plans and specifications as
approved by Landlord. All materials, fixtures and furnishings installed by
Tenant shall be of first class quality, fully paid for by Tenant and shall
conform to the general design and character of the Office Building. Tenant shall
not undertake any of Tenant's Work or fixture, furnish or decorate the Premises
without Landlord's prior written consent to plans and specifications therefor, a
complete set of which shall be submitted to Landlord for review, approval and
initialing. Thereafter, no changes shall be made in Tenant's plans and
specifications without the written consent of Landlord. Commencing upon
execution hereof, Tenant may have access to the Premises for completion of
Tenant's Work, and thereafter shall diligently complete its construction in a
good and workmanlike manner as provided in accordance with all applicable
federal, state and municipal regulations. Tenant shall do nothing to create any
work stoppage, picketing or other labor disruption. Landlord reserves the right
to approve Tenant's general contractor and subcontractors, and such approval
shall not constitute a waiver of Tenant's obligations hereunder. Landlord
further reserves the right to
5
<PAGE>
direct Tenant to locate any unusually heavy items to be located within the
Premises to such areas within the Premises that are particularly reinforced.
SECTION 4.04. CONSTRUCTION LIENS. Any of Tenant's Work which is not
paid for out of Landlord's Allowance, as that term is defined in Exhibit "C,"
shall be paid by Tenant when due, and Tenant agrees to indemnify, defend and
hold Landlord harmless from, all claims for labor or materials furnished or
alleged to have been furnished to Tenant for use in the Premises, which claims
are or may be secured by any construction lien against the Premises or any
interest therein, arising out of such work. Tenant shall not permit any liens
under the construction lien law to be filed against the Premises or any interest
therein and shall immediately obtain a release from any lien so filed. Nothing
in the Lease shall be construed in any way as constituting the consent or
request of Landlord to any contractor, subcontractor, laborer, or materialman
for the performance of any labor or the furnishing of any materials for any
alteration, addition, improvement or repair to the Premises or any other part of
the Building nor as giving Tenant any right, power or authority to contract for
or permit the rendering of services or the furnishing of materials that would
give rise to the filing of a construction lien against the Premises or the
Building.
SECTION 4.05. REMOVAL OF IMPROVEMENTS. All items of Landlord's Work,
all heating and air conditioning equipment and any other fixtures, trade
fixtures, improvements or equipment paid for by Landlord, and all alterations
and other improvements thereto by Tenant, shall become the property of Landlord
and shall not be removed from the Premises. All trade fixtures, furniture,
furnishings and signs installed in the Premises by Tenant and paid for by Tenant
shall remain the property of Tenant and may be removed upon the expiration or
termination of this Lease; provided that any of such items as are affixed to the
Premises and require severance may be removed only if Tenant repairs any damage
caused by such removal and that Tenant shall have fully performed all of the
terms, conditions and covenants to be performed by Tenant under this Lease. If
Tenant fails to remove such items from the Premises by the expiration of, or
earlier termination of Tenant's right to possession of the Premises, all such
trade fixtures, furniture, furnishings and signs shall become the property of
Landlord, unless Landlord elects to require their removal, in which case Tenant
shall, at its sole cost and expense, promptly remove the same and restore the
Premises to the condition existing just prior to the removal. The covenants
contained in this Section shall survive the expiration or termination of this
Lease.
ARTICLE V
REPAIRS AND MAINTENANCE
SECTION 5.01. LANDLORD'S OBLIGATIONS. Landlord shall keep the exterior
of the Building and the foundations, roof, and structural portions of the walls
of the Premises (except interior walls erected by Tenant or by Landlord as
Landlord's Work) and all building equipment such as elevators and plumbing,
electrical, heating and air conditioning equipment in good condition and repair
except for repairs required thereto by reason of the
6
<PAGE>
acts or omissions of Tenant, Tenant's employees, agents, invitees, licensees or
contractors. Tenant shall give Landlord written notice of the need for any such
repairs to be made by Landlord. Except for Landlord's negligence in actually
completing, once commenced, any repairs required of Landlord hereunder, Landlord
shall have no liability whatsoever for any damage or injury, however caused,
arising out of Landlord's failure to make such repairs, if, within a reasonable
time following receipt of such notice, Landlord commences reasonable efforts to
make such repairs and diligently prosecutes the completion of the same. Landlord
shall also be responsible for the maintenance and repair of the Common Areas (as
defined in Section 6.02). As used in this section, the term "repairs" shall
include replacements and other improvements as are necessary to maintain the
property in good order and condition. If Landlord is required to make exterior
or structural repairs or repairs to equipment by reason of Tenant's acts or
omissions, Landlord shall have the right, but shall not be obligated, to make
such repairs or replacements on behalf of and for the account of Tenant. In such
event, such work shall be paid for in full by Tenant as Additional Rent in
accordance with Section 3.02. The provisions of this Section shall not apply in
the case of damage or destruction by fire or other casualty or by condemnation,
in which events the obligations of Landlord shall be controlled by Articles IX
and X, respectively.
SECTION 5.02. TENANT'S OBLIGATIONS. Except as provided in Section 5.01,
Tenant shall keep the Premises and every part thereof and any fixtures,
facilities or equipment contained therein, in good condition and repair,
including, but not limited to, interior doors and window frames, and shall make
any replacements thereof and of all broken and cracked interior glass and of
lamps, bulbs, tubes, starters and ballasts which may become necessary during the
term of this Lease.
ARTICLE VI
COMMON AREAS
SECTION 6.01. USE OF COMMON AREAS. Use by Tenant of the Premises shall
include the non-exclusive use, in common with others, of the Common Areas, as
defined herein, and subject to the provisions of Section 6.02.
SECTION 6.02. CONTROL OF COMMON AREAS. Tenant shall have the reasonable
non-exclusive right to use, under a revocable license and not as a part of the
Premises (and in common with Landlord and other tenants of the Building and all
others to whom Landlord has or may hereafter grant rights to use the same) such
parking lots (subject to the limitation on the number of stalls Tenant may use
as contained in paragraph 3.02(c), above), sidewalks, driveways, public and
common washrooms, elevators, stairways, corridors and other common areas and
facilities as may from time to time exist and be generally available to all
occupants of the Building (the "Common Areas"). Landlord shall at all times have
full control, management and direction of the Common Areas and reserves the
right at any time and from time to time to reduce, increase, enclose or
otherwise change the size, number, location, layout and nature of the Common
Areas so as to construct additional rentable areas
7
<PAGE>
through use and/or enclosure of the Common Areas, to place signs on the Building
and to make reasonable uniform rules for the use thereof and for the conduct of
tenants in the Building; provided, however, that Landlord shall not impair
access to the Premises or make the Premises less desirable or attractive.
ARTICLE VII
COVENANTS OF TENANT
SECTION 7.01. USE OF PREMISES. Tenant covenants and agrees that it
shall continuously and without interruption use and occupy the entire Premises
(and not less than one hundred percent (100%) of the Premises) solely as a
business or professional office and for no other purpose. Tenant's business in
the Premises shall be conducted under the following trade name: Sonic Foundry,
Inc..
SECTION 7.02. OPERATION OF BUSINESS. Tenant, as a further inducement to
Landlord to enter into this Lease, covenants and agrees:
(a) Appearance. To keep the Premises clean and attractive in
appearance at all times and to keep any refuse in proper containers in the
interior of the Premises out of sight until the same is removed;
(b) Insurance. To neither do nor suffer anything to be done or
kept in or about the Premises which contravenes Landlord's insurance policies or
increases the premiums therefor;
(c) Sound; Odors. To permit no reproduction of sound which is
audible outside the Premises nor permit odors to be unreasonably dispelled from
the Premises provided, however, that the foregoing restriction on odors shall
not apply to any tenant which is a restaurant or food service;
(d) Parking. To park Tenant's vehicles and to require all
employees to park vehicles only in such places as may be designated from time to
time by Landlord for the use of Tenant and its employees;
(e) Loading. To load, unload and permit the loading or
unloading of merchandise, equipment or other property only from doors of the
Premises designated by Landlord for that purpose;
(f) Heating and Cooling. To separately pay for its own heating
and cooling service so as to adequately heat and cool the Premises;
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(g) Solicitation. To solicit no business in the Common Areas,
nor distribute handbills or other advertising matter to customers, nor place the
same in or on automobiles in the Common Areas (including the Parking Facility);
(h) Compliance with Laws. To comply with all applicable
ordinances, rules, regulations, orders and requirements of all federal, state
and municipal governments which relate to the Premises or the business Tenant
conducts on or from the Premises, and with any direction, pursuant to law, of
any public officer which shall impose upon Tenant any duty with respect to the
Premises or the use and occupation thereof; and
(i) Compliance with Rules. To comply with rules, as they may
from time to time be established by Landlord for the use and care of the
Premises, the Common Areas, and other facilities and buildings that comprise the
Building and the Parking Facility.
SECTION 7.03. SIGNS. Except provided in Section 7.07, Tenant covenants
and agrees that it shall not erect or install any sign, lettering or placards,
or place or permit to be placed any sign, advertising material or lettering upon
the interior surface of any door or window or any point inside the Premises from
which the same may be visible from outside the Premises, without Landlord's
prior, written consent, which consent shall not be unreasonably withheld.
SECTION 7.04. UTILITIES SUPPLIED BY TENANT. Tenant covenants and agrees
that it shall be solely responsible and shall pay when due all charges for
utility meters, gas, electricity or any other utility whatsoever used in or
supplied to the Premises other than those to be provided by Landlord under
Section 7.05 hereof, beginning on the Commencement Date.
SECTION 7.05. UTILITIES SUPPLIED BY LANDLORD. Landlord covenants and
agrees that it shall supply during normal business hours the following utility
services, at its sole cost and expense:
(a) Heat and air conditioning for the Common Areas sufficient
to maintain the interior temperature of the Common Areas during normal business
hours at a level that is customarily maintained in similar office buildings;
(b) Reasonable amounts of hot and cold water to the public
lavatories and sinks situated on each floor of the Office Building;
(c) Janitorial service for the Premises of such scope and
frequency as may be determined by Landlord, but in no event less than three (3)
times per week;
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(d) Window washing service for the interior and exterior
surfaces of outside windows, of such frequency as may be determined by Landlord,
but in no event less than twice in each calendar year.
If Tenant wishes to obtain any of the services described in this
Section 7.05 (with the exception of (a) and (b)) outside of normal business
hours (which shall be deemed to be from 7:00 a.m. to 5:30 p.m., Monday through
Friday, not including federal holidays), then, if such service is available
outside of such hours, Tenant must make special arrangements with Landlord
therefor and Tenant shall pay, upon demand, Landlord's standard charge for such
service. Except for Landlord's negligent acts, Landlord shall not be liable for
any damages arising out of, and Tenant shall not be entitled to any abatement or
reduction of rental by reason of, Landlord's failure to furnish, or by reason of
any interruption in, any of the services described in this Section 7.05.
Furthermore, Landlord shall not be liable for any damages arising out of the
provision of any of the services described in this Section 7.05, including
without limitation any damages to documents, files or other property damaged,
destroyed or lost through acts or omissions of the personnel providing
janitorial or cleaning service. Tenant agrees at all times to cooperate fully
with Landlord and to abide by all the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of all heating,
ventilating and air conditioning systems. Wherever there are heat-generating
machines or equipment to be used in the Premises which shall affect the
temperature otherwise maintained by the air conditioning system, Landlord
reserves the right to install supplementary air conditioning units in the
Premises and the cost of installation, operation, and maintenance thereof shall
be paid by Tenant to Landlord, upon demand. Tenant will not, without the prior
written consent of Landlord, use any apparatus or device in the Premises, which
will in any way increase the amount of heat, air conditioning or water usually
furnished or supplied for use within the Premises, nor connect with electric
current, except through existing electrical wiring or water or air. If Tenant
shall require heat, air conditioning or water in excess of that usually
furnished or supplied for use of the Premises, then (a) Tenant shall first
procure the written consent of Landlord to the use thereof, which consent
Landlord may refuse, and (b) Tenant shall pay, as Additional Rent and upon
demand, an appropriate amount for the additional services expected to be
consumed by Tenant in the Premises.
SECTION 7.06. MUNICIPAL, COUNTY, STATE OR FEDERAL TAXES. Tenant
covenants and agrees that it shall pay, before delinquency, all municipal,
county and state or federal taxes assessed against any leasehold interest of
Tenant or any fixtures, furnishings, equipment, merchandise, improvements,
alterations, stock-in-trade or other personal property of any kind owned,
installed or upon the Premises.
SECTION 7.07. DIRECTORY AND EXTERIOR SIGNAGE. Tenant shall be entitled
to have its name shown upon the directory board of the Office Building; but the
design and style of such identification, and the location of such directory
board and allocation of the space thereon among the tenants and occupants of the
Office Building, shall be determined
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at Landlord's sole discretion. Landlord's obligation under this Section shall be
limited to the designation of a firm or company name and location within the
Office Building. Tenant shall be responsible for all costs associated with the
designation of individual members, officers, principals or employees of such
firm or company, as they may change from time to time. Tenant shall be allowed
one (1) exterior sign near the main entrance to the Building of a size, design
and specific location, to be consented to by Landlord in the reasonable exercise
of Landlord's discretion, with the size to bear some relationship to the
percentage of Rentable Area which Tenant leases in the Building. Within the
first and second floor common areas, Tenant shall be allowed one (1) or more
directional signs for the purposes of allowing its customers and invitees to
locate Tenant's premises within the Building, of a size, design, and location,
to be pre-approved by Landlord in the reasonable exercise of Landlord's
discretion, and to be uniform in size and design with other such directional
signage in the Building. All such signs shall be installed at Tenant's sole cost
and expense.
ARTICLE VIII
INSURANCE AND INDEMNITIES
SECTION 8.01. INSURANCE BY TENANT. Tenant shall obtain, at Tenant's
expense, beginning on the date that Tenant exercises its right of access to the
Premises pursuant to Section 1.02, and shall maintain through the expiration or
termination of this Lease, the following insurance coverages:
(a) Public Liability. A policy of comprehensive public
liability insurance naming Landlord, Tenant and any other party designated by
Landlord as the insured, to insure against injury to property, person or loss of
life arising out of the ownership, use, occupancy or maintenance of the Premises
with limits of public liability not less than $1,000,000.00 combined single
limit per occurrence/aggregate. Said insurance shall be written on an occurrence
basis and not on a claims made basis. The policy shall contain, if available,
supplemental endorsements covering liability for intentional acts of the insured
and contractual liability voluntarily assumed by the insured.
(b) Business Interruption. A policy of business interruption
or loss-of-rent insurance, naming Landlord as the insured, in such face amount
determined by Landlord, to insure the payment of all amounts of Base Rent,
Percentage Rent, Additional Rent and any other charges, expenses and fees
whatsoever required to be paid by Tenant to Landlord for a period of not less
than twelve (12) months.
(c) Plate Glass. A policy of plate glass insurance in an
amount determined by the Landlord to be sufficient to cover the replacement cost
of all interior plate glass on the Premises.
(d) Other. All other insurance, if any, customarily maintained
by businesses of like type, or required by any ordinance, law, or governmental
regulation to be
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carried or maintained by Tenant, as may be reasonably required by Landlord or by
any ordinance, law or governmental regulation.
SECTION 8.02. INSURANCE BY LANDLORD. Landlord shall obtain before the
date that Tenant gains access to the Premises pursuant to Section 1.02, and
shall maintain through the expiration or termination of this Lease, the
following insurance coverages:
(a) Public Liability. A policy of comprehensive public
liability insurance on the Common Areas with limits of public liability of not
less than $1,000,000.00 combined single limit per occurrence aggregate.
(b) Comprehensive. A comprehensive policy of coverage
containing fire, extended coverage, vandalism, malicious mischief and other
endorsements deemed advisable by Landlord insuring the leasehold improvements of
the Office Building, including the Premises and all appurtenances thereto
(excluding Tenant's merchandise, trade fixtures, furnishings, equipment,
personal property and excluding plate glass) for the full insurable replacement
value thereof, with such deductibles as Landlord deems advisable. Tenant shall
be solely responsible for carrying personal property insurance sufficient to
cover the loss or damage to Tenant's personal property.
(c) Other. Such other insurance as Landlord may reasonably
deem necessary or advisable provided the same is reasonable and customary in the
industry.
SECTION 8.03. INSURANCE POLICIES. Insurance required of Tenant under
Section 8.01 shall be written by companies duly qualified to do business in the
State of Wisconsin, acceptable to Landlord in its reasonably exercised
discretion, and satisfactory in all respects to the holder of any mortgage
against the Office Building. Tenant shall deliver copies of such policies or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses satisfactory to Landlord. No such policy shall be cancelable or
subject to reduction of coverage or modification except after thirty (30) days
prior written notice to Landlord. At least ten (10) days prior to the expiration
of Tenant's policies, Tenant shall furnish Landlord with renewals or "binders"
thereof, or Landlord may order such insurance and charge the cost to Tenant as
Additional Rent. Tenant shall not do or permit anything to be done which will
invalidate the insurance policies furnished by Tenant or Landlord pursuant to
Sections 8.01 and 8.02. If Tenant does or permits anything to be done which
shall increase the cost of the insurance policies furnished by Landlord, Tenant
shall pay to Landlord, as Additional Rent, the amount of any such additional
premiums. Landlord may from time to time require that the policy limits of any
or all such insurance be increased to reflect the effects of inflation and
changes in normal commercial insurance practices. If Tenant fails to comply with
the requirements of this Section or Section 8.01, Landlord may obtain such
insurance and maintain it in effect, and Tenant shall pay Landlord the premium
cost and any other costs or expenses incurred by Landlord as Additional Rent.
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SECTION 8.04. EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby
agrees that except for the negligent acts of Landlord, Landlord shall not be
liable for injury to Tenant's business or any loss of income or other
consequential damages or for damage to the fixtures, furnishings, improvements
or other property of Tenant, Tenant's employees, invitees, customers,
sublessees, agents, occupants, contractors, or any other person in or about the
Premises, nor shall Landlord be liable for injury to the person of Tenant,
Tenant's employees, agents, contractors, occupants, invitees, customers,
sublessees, or any other person in or about the Premises, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinkler, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause whatsoever, whether said damage or injury results from
conditions arising upon the Premises, or from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Tenant. Landlord shall not be liable for
any damages arising from any act or neglect of any other tenant of the Office
Building.
SECTION 8.05. INDEMNIFICATION. Except where caused by Landlord's
negligence, Tenant shall indemnify, defend and hold harmless Landlord from and
against any and all claims arising from Tenant's use of the Premises, or from
the conduct of Tenant's business or from any activity, work or things done,
permitted or suffered by Tenant in or about the Premises or elsewhere and shall
further indemnify, defend and hold harmless Landlord from and against any and
all claims arising from any breach or default in the performance of any
obligation on Tenant's part to be performed under the terms of this Lease, or
arising from any negligence of the Tenant, or any of Tenant's sublessees,
agents, customers, invitees, contractors, occupants, or employees, and from and
against all costs, attorneys' fees, expenses and liabilities incurred in the
defense of any such claim or any action or proceeding brought thereon; and in
case any action or proceeding be brought against Landlord by reason of any such
claim, Tenant upon notice from Landlord, shall defend the same at Tenant's
expense by counsel satisfactory to Landlord. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk of damage to property or
injury to persons, in, upon or about the Premises arising from any cause, and
Tenant hereby waives all claims in respect thereof against Landlord.
SECTION 8.06. WAIVER OF SUBROGATION. Nothing in this Lease shall be
construed so as to authorize or permit any insurer of Tenant to be subrogated to
any right of Tenant against Landlord arising under this Lease. Tenant hereby
releases Landlord to the extent of any perils to be insured against by Tenant
under the terms of this Lease, whether or not such insurance has actually been
secured, and to the extent of its insurance coverage for any loss or damage
caused by any such casualty, even if such incidents shall be brought about by
the fault or negligence of Landlord. Tenant shall obtain appropriate waivers of
subrogation from its insurance carrier giving effect to this paragraph.
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ARTICLE IX
DAMAGE OR DESTRUCTION
In the event (i) the Premises are damaged by fire, explosion or other
casualty insured under Landlord's fire and extended coverage insurance policy
(an "Insured Casualty") to the extent of twenty-five percent (25%) or more of
the insurable value thereof immediately preceding the casualty, (ii) the
Building of which the Premises are a part is damaged by an Insured Casualty to
the extent of fifty percent (50%) or more of the insurable value thereof
immediately preceding the casualty, or (iii) the Premises are damaged by a
casualty or occurrence other than Insured Casualty, Landlord may terminate this
Lease by giving Tenant written notice of termination within sixty (60) days
after the happening of the event causing the damage. In the event the damage is
not extensive enough to give rise to Landlord's option to terminate this Lease
or Landlord does not elect to terminate this Lease, Landlord shall promptly
repair and replace the roof, exterior walls (excluding store front), foundation
and any other improvements furnished as a part of Landlord's Work or existing on
the date that Tenant was entitled to access to the Premises pursuant to Section
1.02, to the condition existing immediately preceding such fire, explosion or
other casualty. Upon completion of such repairs and replacements by Landlord,
Tenant shall promptly repair or replace all portions of the Premises not
repaired or replaced by Landlord and repair or replace all furniture, fixtures
and equipment to the condition existing immediately preceding such fire,
explosion or other casualty. During any period of reconstruction or repair of
the Premises, Tenant shall operate its business in the Premises to the extent
practicable. Rent or other sums payable under this Lease shall be abated during
the period of such repair and restoration in proportion to the area of the
Leased Premises which is not useable by Tenant in connection with its business
operations.
ARTICLE X
CONDEMNATION
SECTION 10.01. TAKING OF WHOLE. In the event (i) the whole of the
Premises shall be taken or condemned for a public or quasi-public use or
condemned for a public or quasi-public use or purpose by a competent authority,
or (ii) such a portion of the Premises shall be taken so that the balance cannot
be used for the same purpose and with substantially the same utility to Tenant
as immediately prior to such taking, this Lease shall terminate upon delivery of
possession to the condemning authority, and any award, compensation or damages
(the "Award") shall be paid to and be the sole property of Landlord whether the
Award shall be made as compensation for diminution of the value of the leasehold
estate or the fee of the Premises or otherwise, and Tenant hereby assigns to
Landlord all of Tenant's right, title and interest in and to any and all of the
Award. Tenant shall have no claim against Landlord by reason of such taking or
termination and shall not have any claim or right to any portion of the Award to
be paid to Landlord. Tenant shall continue to pay rent and other charges
hereunder until the Lease is terminated.
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SECTION 10.02. PARTIAL TAKING. In the event only a part of the Premises
or Building is taken or condemned but the Premises or the part remaining can
still be used for the same purpose and with substantially the same utility to
Tenant as immediately prior to such taking, this Lease shall not terminate and
Landlord shall repair and restore the Premises provided the cost and expense of
such repair and restoration does not exceed the amount of the Award. If the cost
of such repair and restoration exceeds the amount of the Award, Landlord may
terminate this Lease by giving Tenant written notice of termination to Tenant
within sixty (60) days of the delivery of possession to the condemning
authority. If Landlord is obligated to repair and restore the Premises as herein
provided, there shall be no abatement or reduction in any rental because of such
taking or condemnation.
SECTION 10.03. TENANT'S AWARD. Tenant shall have the right to claim and
recover from the condemning authority, but not from Landlord, such compensation
as may be separately awarded to Tenant for any damage to Tenant's business by
reason of such condemnation and for any cost or loss incurred by Tenant in
removing Tenant's merchandise, fixtures and furnishings.
ARTICLE XI
DEFAULTS; REMEDIES
SECTION 11.01. DEFAULTS. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Tenant:
(a) Abandonment. The abandonment of the Premises or the
cessation of business by Tenant, where such abandonment or cessation shall
continue for a period of twenty (20) days after written notice thereof from
Landlord or Tenant.
(b) Failure to Pay. The failure of Tenant to make any payment
of rent or any other payment required to be made by Tenant under this Lease,
when due, where such failure shall continue for a period of ten (10) days after
written notice thereof from Landlord to Tenant.
(c) Failure to Observe Other Covenants. The failure by Tenant
to repair any waste or to observe or perform any of the terms, covenants or
conditions of this Lease to be observed or performed by Tenant where such
failure shall continue for a period of twenty (20) days after written notice
thereof from Landlord to Tenant (or without notice in case of emergency or a
hazardous condition or in case any fine, penalty, interest or cost may otherwise
be imposed or incurred). Except as otherwise provided herein, in the event of a
breach of a term, covenant or condition of this Lease which requires more than
the payment of money to cure and which cannot because of the nature of such
default be cured within said twenty (20) days, then Tenant is deemed to be
complying with said notice if, promptly upon receipt of such notice, Tenant
immediately takes steps to cure the default as soon as reasonably possible and
proceeds thereafter continuously with due diligence to cure the
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default within a period of time which, under all prevailing circumstances, shall
be reasonable. Failure to send a notice shall not be construed as a waiver of
such breach or as to any subsequent breach.
(d) Insolvency. (i) The making by Tenant of any general
assignment, or general arrangement for the benefit of creditors; (ii) the filing
by or against Tenant of a petition to have Tenant adjudged a bankrupt or a
petition for reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same is dismissed
within sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where possession is not restored to Tenant
within sixty (60) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where such seizure is not discharged within
sixty (60) days.
SECTION 11.02. LANDLORD'S REMEDIES. If any default by Tenant shall
occur and shall continue uncured following notice of default, if any, as
required by this Lease, then Tenant's right to possession of the Premises shall
automatically terminate (without terminating this Lease) and Landlord shall be
entitled to exercise any equitable or legal remedy or remedies allowed under
applicable Wisconsin law. In the event of default by Tenant, Landlord shall be
entitled to collect from Tenant, in addition to all other damages allowed by
law, its reasonable , actual attorney fees incurred in connection with such
default, as well as all costs incurred in reletting the Premises.
SECTION 11.03. LANDLORD MAY PERFORM. Landlord shall have the right at
any time, after ten (10) days notice to Tenant (or without notice with respect
to matters described in Article IX, and in case of emergency or a hazardous
condition or in case any fine, penalty, interest or cost may otherwise be
imposed or incurred), to make any payment or perform any act required of Tenant
under any provision in this Lease, and in exercising such right, to incur
necessary and incidental costs and expenses, including reasonable attorneys'
fees. Nothing herein shall obligate Landlord to make any payment or perform any
act required of the Tenant, and this exercise of the right to so do shall not
constitute a release of any obligation or a waiver of any default. All payments
made and all costs and expenses incurred in connection with any exercise of such
right shall be reimbursed to Landlord by Tenant as Additional Rent.
ARTICLE XII
ASSIGNMENT AND SUBLETTING
SECTION 12.01. ASSIGNMENT BY TENANT. Tenant shall not voluntarily or by
operation of law assign, transfer, mortgage, lease, sublet, grant license or
rights to a concessionaire or otherwise transfer or encumber all or any part of
Tenant's interest in this Lease or in the Premises, or permit the use or
occupancy of the Premises or any part thereof
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by anyone other than Tenant, without Landlord's prior written consent. Any
attempted assignment, transfer, mortgage, use, lease, occupancy, encumbrance or
subletting without such consent shall be void and shall constitute a default
under this Lease. Notwithstanding the foregoing, Tenant may assign or sublease
part or all of the Premises, without Landlord's advance written consent, but
with advance written notice to Landlord, to: (a) any corporation, partnership or
other entity that controls, is controlled by or is under common control with,
Tenant; or (b) any corporation, partnership or other entity resulting from a
merger or consolidation with Tenant, or to any entity that acquires all of
Tenant's assets as a going concern of the business that is being conducted on
the Premises, as long as the assignee or subtenant is a bonafide entity and
assumes the obligations of Tenant.
SECTION 12.02. NO RELEASE OF TENANT. Notwithstanding anything to the
contrary contained in this Lease, and regardless of Landlord's consent, no such
assignment, encumbrance, subletting, transfer, lease or other permission for the
use or occupancy of all or any part of the Premises shall release Tenant of
Tenant's obligation to pay the rent and to perform all other obligations to be
performed by Tenant under this Lease, and Tenant and each respective assignor
hereby waives notice of default in the payment and performance by the tenant in
possession without notice to, and without the consent of, Tenant or any such
assignor, and any and all extensions of time, modifications, or waivers shall be
deemed to be made with the consent of Tenant and any such assignor. The
acceptance of rent by Landlord from any other person shall not be deemed to be a
waiver by Landlord of any provision hereof. Consent to one assignment shall not
be deemed consent to any subsequent assignment.
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.01. ESTOPPEL CERTIFICATE.
(a) Tenant shall upon execution hereof at any time thereafter,
upon not less than ten (10) days after the giving of written notice by Landlord,
execute, acknowledge and deliver to Landlord or to such person designated by
Landlord, a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, nor any offsets,
counterclaims or defenses to the Lease on the part of Tenant, or specifying such
defaults if any are claimed, and (iii) certifying as to any other matters as may
be reasonably requested by Landlord. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
(b) If Landlord desires to sell or finance or refinance the
Office Building, or any part thereof, Tenant shall deliver to any purchaser
and/or lender designated by Landlord
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such financial information concerning Tenant as may be reasonably required by
such purchaser and/or lender. Such statements shall include, but shall not be
limited to, the past three (3) years' financial statements of Tenant. All such
financial information shall be received by Landlord in confidence and shall be
used only for the purposes herein set forth.
SECTION 13.02. LANDLORD'S LIABILITY. The term "Landlord" as used in
this Lease, shall mean only the owner or owners at the time in question of the
fee title or the tenant's interest in the ground lease of the Premises, if any
then exists, it being expressly acknowledged by the parties hereto that none of
the terms or conditions to be performed or observed by Landlord under this Lease
are personal to the party originally named "Landlord" hereunder. In the event of
any transfer of such title or interest, Landlord shall be released from all
liability as respects Landlord's obligations thereafter to be performed,
provided that any funds held by Landlord at the time of such transfer, in which
Tenant has an interest, shall be delivered to the grantee.
SECTION 13.03. SEVERABILITY. The invalidity of any provision of this
Lease, or of its application to any person or circumstance as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof and each term, covenant, condition and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
SECTION 13.04. TIME OF ESSENCE. Time is of the essence.
SECTION 13.05. CAPTIONS. Article, section and paragraph captions are
not a part of this Lease.
SECTION 13.06. INCORPORATION OF PRIOR AGREEMENTS. This Lease and the
attached exhibits set forth all the agreements, terms, covenants, or conditions,
oral or written, between them other than those herein contained. No amendment,
change or addition to this Lease shall be binding upon Landlord or Tenant unless
it is in writing and signed by each party.
SECTION 13.07. TENANT'S REMEDIES. If Landlord shall fail to perform any
covenant, term or condition of this Lease required to be performed by Landlord,
if any, and if as a consequence of such default, Tenant shall recover a money
judgment against Landlord, such judgment shall be satisfied only out of the
proceeds of sale received upon execution of such judgment and levied thereon
against the right, title and interest of Landlord in the Premises and out of
rents or other income from such property receivable by Landlord, or out of the
consideration received by Landlord from the sale or other disposition of all or
any part of Landlord's right, title and interest in the Premises, and Landlord
shall not be personally liable for any deficiency.
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SECTION 13.08. ATTORNMENT OF TENANT. Tenant shall in the event of the
sale, assignment, or other transfer of Landlord's interest in the Premises or in
this Lease, or in the event of any proceedings brought for the foreclosure of,
or in the event of exercise of the power of sale under any mortgage made by
Landlord covering the Premises, attorn to the transferee and recognize such
transferee as Landlord under this Lease.
SECTION 13.09. RENT COVENANT. The covenant to pay rent, whether Base or
Additional, is hereby declared to be an independent covenant on the part of
Tenant to be kept and performed, and no offset shall be permitted or allowed.
Tenant's covenant to pay such rent shall survive the expiration or earlier
termination of this Lease.
SECTION 13.10. DELINQUENT RENT TO BEAR INTEREST; LATE PAYMENT FEE. Any
rent whether Base or Additional, or such other sums, if any, required to be paid
by Tenant pursuant to the terms of this Lease which are not paid when due shall
bear interest at the rate of eighteen percent (18%) per annum, or the maximum
rate permitted by law, whichever is less, from the date due until paid. The
payment of such interest shall not excuse or cure any default by Tenant under
this Lease. If Base or Additional Rent is not received on or before ten (10)
days after its due date, a late payment fee equal to $150.00 shall be due and
payable in addition to the Additional or Base Rent due and owing.
SECTION 13.11. NOTICES. All notices and demands hereunder shall be in
writing, and shall be deemed given if (a) hand delivered; (b) sent by Express
Mail or a national commercial courier service (e.g., Purolator Delivery Service
or Federal Express) for next-day delivery, to be confirmed in writing by said
courier or service; or (c) when deposited in the United States Mail, certified
or registered, return receipt requested, with sufficient postage prepaid thereon
to carry it to its addressed destination; (d) when faxed to the telecopier
number appearing below, with a confirmation copy sent next business day via U.S.
Mail, postage prepaid; and when addressed as follows:
LANDLORD:
Seven J's, Inc.
Attn: Jeffrey D. Coatta
816 Lexington Drive
Waunakee, Wisconsin 53597
TENANT:
Ken Minor
Sonic Foundry, Inc.
754 Williamson Street
Madison, WI 53703
The above names and addresses may be changed at any time or from time
to time by notice as above provided.
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SECTION 13.12. WAIVERS. No waiver by Landlord of any provision of this
Lease shall be deemed a waiver of any other provision hereof or of any
subsequent breach by Tenant of the same or any other provision. Landlord's
consent to or approval of any act shall not be deemed to render unnecessary the
obtaining of Landlord's consent to or approval of any subsequent act by Tenant.
The acceptance of rent hereunder by Landlord shall not constitute a waiver of
any breach by Tenant even if Landlord knows of such breach at the time of
acceptance of such rent. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent then due shall be deemed to be other than on account of the
earliest rent due, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord shall accept such check or payment without prejudice
to Landlord's right to recover the balance of such rent or pursue any other
remedy in this Lease provided.
SECTION 13.13. RECORDING. Tenant shall not record this Lease without
Landlord's prior written consent and such recordation shall, at the option of
Landlord, constitute a non-curable default of Tenant hereunder. Either party
shall, upon request of the other, execute, acknowledge and deliver to the other
a "short form" memorandum of this Lease for recording purposes.
SECTION 13.14. HOLDING OVER. Tenant shall surrender the Premises upon
the expiration or termination of the Lease. Any holdover not consented to by
Landlord shall not result in a new tenancy or interest and, in such case,
Landlord may treat Tenant as a trespasser. If Tenant remains in possession of
the Premises or any part thereof after the expiration of the term of this Lease
without the express written consent of Landlord, Tenant shall pay rent equal to,
in the absence of proof of greater damages, the amount of twice the amount
actually paid as rent by Tenant under Article III during the final lease Year,
prorated on a daily basis for each day after the last day of the term of this
Lease.
SECTION 13.15. CUMULATIVE REMEDIES. No remedy or election hereunder
shall be deemed exclusive but shall, wherever possible, be cumulative with all
other remedies at law or in equity. Any reference in this Lease to the recovery
of, or entitlement to, attorney fees, is hereby modified to state "reasonable
attorney fees." Any reference in this lease to the giving of any consent by
either the Landlord or the Tenant is hereby modified to the effect that any such
consent shall not be unreasonably withheld or delayed.
SECTION 13.16. COVENANTS AND CONDITIONS. Each provision of this Lease
performable by Tenant shall be deemed both a covenant and a condition.
SECTION 13.17. BINDING EFFECT: CHOICE OF LAW. This Lease shall bind the
parties, their heirs, personal representatives, successors and assigns. This
Lease shall be governed by and be construed and interpreted in accordance with
the laws of the State of Wisconsin.
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SECTION 13.18. SUBORDINATION.
A) This Lease is subject to and subordinate to any existing or
subsequent mortgages against the real property of which the Premise form a part.
If any mortgage is foreclosed, then:
(i) This Lease shall continue;
(ii) Tenant's quiet possession shall not be
disturbed if Tenant is not in default; and
(iii) Tenant will attorn to and recognize the
mortgagee or purchaser at foreclosure sale (the "Successor Landlord") as
Tenant's Landlord for the remaining term; and
(iv) The Successor Landlord shall not be bound by:
a) Any payment of Rent or Additional Rent for
more than one month in advance; and
b) Any amendment, modification or termination
of this Lease without Successor Landlord's consent after the Successor
Landlord's name is given to Tenant unless the amendment, modification, or
termination is specifically authorized by the original Lease and does not
require Landlord's prior agreement or consent; and
c) Any liability for any act or omission of a
prior Landlord.
B) Self Operating: This Section 13.18 shall be self-operative,
and no agreement shall be necessary or required in order to effectuate its
terms. However, notwithstanding the foregoing, upon request of Landlord, Tenant
shall promptly execute and deliver any documents needed to confirm the terms of
this Section 13.18.
SECTION 13.19. CORPORATE AUTHORITY. If Tenant is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of said corporation, in accordance with a duly adopted resolution of the
Board of Directors of said corporation, and that this Lease is binding upon said
corporation in accordance with its terms. If Tenant is a corporation, Tenant
shall, within thirty (30) days after execution of this Lease, deliver to
Landlord a certified copy of a resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
21
<PAGE>
SECTION 13.20 ROOFTOP TRANSMITTER UNIT. Landlord hereby consents to the
construction and installation by Tenant on the roof of the Building of a rooftop
transmitter unit for the purpose of facilitating communications between Tenant's
existing offices and the Premises, of a size, design and function as previously
demonstrated to Landlord, at the location previously agreed upon between
Landlord and Tenant. Any changes to the design, size, utility, or location of
the rooftop transmitter unit from that previously agreed upon by Landlord and
Tenant shall be subject to Landlord's advance written consent, which consent
shall not be unreasonably withheld or delayed. Construction and installation of
the rooftop transmitter unit shall be undertaken by Tenant at Tenant's sole cost
and expense, pursuant to all applicable laws, codes, rules and ordinances
regarding the same.
ARTICLE XIV
ENVIRONMENTAL MATTERS
SECTION 14.01. DEFINITIONS.
(a) Environmental Laws: "Environmental Laws" means any
federal, state and local laws including statutes, regulations, rulings, orders,
administrative interpretations and other governmental restrictions and
requirements relating to the discharge of air pollutants, water pollutants or
process wastewater or otherwise relating to the environment or Hazardous
Substances (as defined herein) including, but not limited to, Chapters 144 and
162, Wisconsin Statutes, the Federal Toxic Substances Control Act, the Federal
Safe Drinking Water Act, the Federal Solid Waste Disposal Act, the Federal Clean
Air Act, the Federal Clean Water Act, the Federal Resource Conservation and
Recovery Act of 1976, the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, regulations of the Environmental
Protection Agency, regulations of the Nuclear Regulatory Agency, and regulations
of any state department of natural resources or state environmental protection
agency now or at any time hereafter in effect.
(b) Hazardous Substances: "Hazardous Substances" means any
hazardous waste or substance, asbestos or asbestos-containing material,
pollutant, solid, liquid, gaseous, or thermal irritant or contaminant (such as
smoke, vapor, soot, fumes, acids, alkalis, chemicals or waste, including
materials to be recycled in the future, reconditioned or reclaimed),
polychlorinated biphenyl (in the form of electrical transformers, fluorescent
light fixtures with ballasts, cooling oils or any other device or form) or
urea-formaldehyde foamed-in-place insulation, all as defined or included under
Environmental Laws or otherwise, whether now or in the future.
SECTION 14.02. TENANT'S COVENANT WITH RESPECT TO ENVIRONMENTAL MATTERS.
Tenant covenants and agrees that Tenant will not violate any Environmental Laws
or discharge Hazardous Substances in, on or about the Building or Tenant's
Premises. Tenant covenants and agrees to indemnify and hold Landlord harmless
from and against all losses, cost, expenses (including reasonable attorneys' and
witnesses' fees, deposition costs
22
<PAGE>
and copying and telephone charges) or damages of any kind arising from a breach
of Tenant's obligations hereunder.
SECTION 14.03. TENANTS DUTIES WITH RESPECT TO ENVIRONMENTAL LAWS AND
HAZARDOUS SUBSTANCES. In the event Tenant receives any notice or knowledge of,
or has reason to believe that Tenant or Tenant's agents, employees, contractors,
subcontractors, or invitees (collectively referred to herein and in Section
14.02 above as "Tenant"), has violated any Environmental Laws in connection with
or as a part of Tenant's use, occupancy or enjoyment of the Premises, or has
discharged or caused to be discharged any Hazardous Substance on, about or into
the Premises, or any such violation or discharge is threatened, Tenant shall as
soon as practicable thereafter comply with the following requirements:
(a) Provide the Landlord, immediately upon receipt thereof,
copies of any correspondence, notice, pleading, citation, indictment, complaint,
order, decree or other document from any source asserting or alleging violation
by the Tenant of any Environmental Law, or asserting or alleging a circumstance
or condition which may require a financial contribution by the Tenant or a
cleanup, remedial action or other response by or on the part of the Tenant under
Environmental Laws.
(b) Advise the Landlord in writing as soon as the Tenant
becomes aware of any condition or circumstance which constitutes a violation of
section 14.02, above.
(c) Permit the Landlord, in the event the Landlord has
reasonable cause to believe that there exists a condition or circumstance
warranting an environmental inspection or audit, at the Tenant's expense, to
retain an architect or engineer selected by the Landlord to perform an
environmental inspection and/or audit of the Leased Premises to evaluate the
Tenant's compliance with Environmental Laws, and to test for the existence of or
contamination caused by Hazardous Substances on the Leased Premises, and for
risks associated with exposure to Hazardous Substances. The Tenant shall permit
the Landlord and its employees and agents access to the Leased Premises and the
books and records of the Tenant as necessary for the performance of the
environmental inspection and/or audit. This environmental inspection and/or
audit shall be performed solely for the benefit of the Landlord and it may not
be relied upon by the Tenant for any purpose. This provision shall not relieve
the Tenant from conducting its own environmental inspections and/or audits or
taking other steps necessary to comply with Environmental Laws.
IN WITNESS WHEREOF, this Lease has been executed by Landlord and Tenant as
of the date first above written.
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<PAGE>
* LANDLORD *
SEVEN J'S, INC., A Wisconsin Corporation
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
* TENANT *
SONIC FOUNDRY, INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Attest:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
24
<PAGE>
EXHIBIT "A"
-----------
Floor Plan of Leased Premises
[To Be Supplied.]
<PAGE>
EXHIBIT "B"
-----------
Landlord's Work
Base Building construction shall include, without limitation, metering
the Premises; janitor closets on the second floor; completed men's and women's
washroom facilities on the second floor; fire exit signs; the leveling of all
floors of the Premises so that they are ready to receive carpeting or other
covering; heating, ventilating, air conditioning brought to the Premises with
all "main loops" and major distribution lines in place; all perimeter walls and
core walls if shown in Landlord's plans, drywalled, taped and ready for
painting; all smoke detectors installed as required in the common area; and any
ADA requirements or other life safety requirements to the common areas of the
second floor including the restrooms. Additionally, other base building work in
the common area such as elevator and lobby finishes, common area ceilings,
after-hour security systems, air conditioning and lighting) shall be installed
at no expense to Tenant. Notwithstanding the foregoing and in addition to the
above, Landlord will provide sandblasted, exposed brick walls, exposed beam
ceilings, new windows and an interior premises stairway connecting the first
floor and second floor premises.
<PAGE>
EXHIBIT "C"
-----------
Tenant's Work and Tenant Allowance
Landlord shall provide to Tenant an allowance (the "Allowance") in an
amount equal to $112,500.00, which shall be drawn upon by Tenant as required for
the purpose of paying for Tenant's Work as that term is defined in the Lease and
in this Exhibit. The Allowance shall be for the construction of the Premises
over and above the base building specifications described in Exhibit "B." The
Allowance may also be used to pay the costs of space planning, not to exceed
$2.00 per square foot without the express written consent of Landlord, which
consent shall not be unreasonably withheld. Any Allowance which remains unused
after completion of the Tenant's Work shall be used to offset Base Rent and
Additional Rent due Landlord under the terms of the Lease.
Tenant's Work shall consist of readying the Premises for Tenant's
business in accordance with the plans and specifications of the Tenant to be
provided to Landlord in accordance with Section 4.03 of this Lease. The failure
of Tenant to provide Landlord with Tenant's plans and specifications in a timely
manner shall not delay the Commencement Date of the Lease, but may delay the
date on which Tenant opens the Premises for business, which delay shall be the
sole responsibility of Tenant if caused by a delay in providing the plans and
specifications. The Commencement Date shall be determined by the terms of
Section 1.02 of the Lease.
Tenant's Work shall be constructed under the supervision of Landlord,
by a contractor or contractors approved by Landlord. Payments out of the
allowance shall be made by Landlord on a draw basis, after inspection of the
work by Landlord or Landlord's architect. Each draw shall be approved by Tenant.
Inspections of the work by Landlord shall be for purposes relating to the draw
only, and shall not constitute any approval of the work performed or a warranty
of such work.
Tenant shall be responsible for all costs and expenses relating to
Tenant's Work which exceed the Allowance. Such costs and expenses shall be
billed to Tenant as incurred, and if Tenant shall fail to pay the same on or
before twenty (20) days after being billed, Landlord may, at its option, cause
the contractor to cease work on Tenant's Work without liability to Tenant for
delay in completion or otherwise. The Commencement Date shall not be delayed in
such event. Landlord's performance of any obligations under this Exhibit "C" are
specifically conditioned upon Tenant's payment of any costs relating to Tenant's
Work in excess of Tenant's Allowance. Landlord shall have no responsibility to
pay for any part of Tenant's Work, Landlord's responsibility being limited to
payment and performance of only that work which is described in Exhibit "B," and
to provide the Allowance.
<PAGE>
Landlord shall not be liable for repair of any latent defects. Landlord
shall assign to Tenant any warranties from Landlord's general contractor,
subcontractors, or the manufacturers of any equipment installed in or about the
Premises. Tenant covenants and agrees that all of Tenant's Work shall be
performed in accordance with the plans and specifications for the same, approved
in advance by Landlord.
If Tenant's Work consists of permanent or reusable improvements,
Landlord will increase the Allowance in an amount equal to 50% of the cost of
said improvements, up to a maximum increase of $50,000.00. As used herein, the
phase "permanent or reusable improvements" shall mean improvements paid for out
of the Allowance which will have a useful life of 8 years or more.
<PAGE>
Exhibit 10.14
LOAN AGREEMENT
THIS AGREEMENT, made as of the 3rd day of March, 1999, by and between
Sonic Foundry, Inc., a Maryland corporation, (hereinafter referred to as
"Borrower") and Associated Bank South Central (hereinafter referred to as
"Bank");
RECITALS
--------
A. Bank has agreed to extend credit to Borrower on the terms and conditions
described in this Agreement.
B. Borrower desires Bank to extend credit to Borrower on the terms and
conditions described in this Agreement.
AGREEMENT
---------
In consideration of the mutual promises set forth herein and other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower and Bank agree as follows:
Article 1
Defined Terms
-------------
The following terms have the meanings indicated in this Article 1 for
purposes of this Agreement:
1.1 "Borrower Obligations" means all Borrower's obligations to Bank
under this Agreement and all the other Loan Documents.
1.2 "Borrowing Base" means (a) the sum of the Qualified Inventory
Amount, the Qualified Account Amount and the Qualified Contracts Receivable
Amount, minus (b) the Return Allowance Amount, in each case equaling the amount
thereof at the time the Borrowing Base determination is made.
1.3 "Copyrights" means all of the following now or hereafter owned by
Borrower: (a) all copyright rights in any work subject to the copyright laws of
the United States or any other country, whether as author, assignee, transferee
or otherwise, including without limitation all of Borrower's proprietary source
code, and (b) all registrations and applications for registration of any such
copyright in the United States or any other country, including registrations,
recordings, supplemental registrations and pending applications for
registrations in the United States Copyright Office.
1
<PAGE>
1.4 "Foreign Account Debtor" means any corporation or other business
entity which is not organized under the laws of one of the states of the United
States.
1.5 "GAAP" means generally accepted accounting principles applied on a
consistent basis.
1.6 "Intellectual Property" means collectively all Copyrights,
Licenses, and Trademarks.
1.7 "Licenses" means any written agreement, now or hereafter in effect,
granting to any third party any right to use any Copyright or Trademark now or
hereafter owned by Borrower or which Borrower has the right to license, or any
written agreement, now or hereafter in effect granting to Borrower any right to
use any patent, Copyright or Trademark owned by a third party.
1.8 "Loan Conditions" means collectively that (a) Borrower is in
compliance with all the terms and conditions of this Agreement and all of the
other Loan Documents, (b) the aggregate amount of all Revolving Loans then
outstanding does not exceed the then current Borrowing Base, (c) Borrower has
furnished Bank with a Borrowing Base Certificate dated as of the close of
business two (2) days prior to the date of the Revolving Loan request and (d) no
Event of Default then exists.
1.9 "Loan Documents" means collectively this Agreement, the Master
Business Note, the Security Agreement and all other documents delivered by
Borrower to Bank pursuant to this Agreement.
1.10 "Master Business Note" means the note evidencing the Revolving
Loans, including any renewals, extensions or modifications thereof. The Master
Business Note will be dated the date of this Agreement and be in substantially
the form of Exhibit A attached hereto.
1.11 "Permitted Encumbrances" means liens in favor of Bank, liens for
taxes if the tax liability is being contested in good faith by appropriate
proceedings and for which appropriate reserves are maintained and the liens and
encumbrances to Madison Development Corporation described in Paragraph 1.12(c).
1.12 "Qualified Account" means an account owing to Borrower which meets
all of the following specifications:
(a) It arose from the performance of services by Borrower, or
from a bona fide sale or lease of goods which have been delivered to or shipped
to the account debtor and for which Borrower has genuine invoices, shipping
documents or receipts, provided that Bank has the right, in Bank's sole
discretion, to exclude from the Qualified Accounts any amount due Borrower from
any Foreign Account Debtor if Bank determines that Borrower has incurred
difficulty in collecting amounts due Borrower from that Foreign Account Debtor.
2
<PAGE>
(b) It is outstanding not more than ninety (90) days from the
earlier of performance of the services, delivery of goods or date of invoice. If
more than twenty (20%) percent of the aggregate outstanding amount due Borrower
from an account debtor is more than ninety (90) days past due, all obligations
of that account debtor to Borrower will be considered over ninety (90) days past
due and excluded as Qualified Accounts.
(c) It is owned by Borrower free and clear of all encumbrances
and security interests (other than Bank's security interest and security
interests to Madison Development Corporation, provided the security interests to
Madison Development Corporation shall be subordinated to Bank's security
interest in a manner acceptable to Bank).
(d) It is genuine and enforceable against the account debtor
for the amount shown as owing in the certificates furnished by Borrower to Bank.
It and the transaction out of which it arose comply with all applicable laws and
regulations.
(e) It is not subject to any set-off, credit allowance or
adjustment, except discount for prompt payment, nor has the account debtor
returned the goods or disputed account debtor's liability on the account, except
as set forth in this Agreement. Bank acknowledges that Borrower has agreed to
accept merchandise returns from Ingram Micro and Navarre in the ordinary course
of business.
(f) Its existence and amount have been certified to Bank by a
representative of Borrower in a manner satisfactory to Bank at such times as
Bank may request.
(g) Borrower has no notice or knowledge of anything which
might impair the credit standing of the account debtor.
1.13 "Qualified Account Amount" means eighty (80%) percent of the
Qualified Accounts.
1.14 "Qualified Contracts Receivable" means contract receivables from
Borrower's customers for Borrower's fully developed products which are approved
by Bank as Qualified Contracts Receivable, in Bank's sole discretion. Bank has
the right to review all documents relating to each contract payment receivable
prior to approving that contract payment receivable to be included in Qualified
Contracts Receivable. Upon Bank approving a contract payment receivable,
Borrower shall, upon request by Bank, assign all of Borrower's right, title and
interest in that contract payment receivable to Bank in a manner satisfactory to
Bank to secure all Borrower Obligations.
1.15 "Qualified Contracts Receivable Amount" means eighty (80%) percent
of the Qualified Contracts Receivable.
1.16 "Qualified Inventory" means inventory (as that term is defined in
the
3
<PAGE>
Wisconsin Uniform Commercial Code) which meets all of the following
specifications:
(a) It is in good condition and is owned by Borrower free and
clear of all encumbrances and security interests (except for Bank's security
interest and security interests to Madison Development Corporation, provided the
security interests to Madison Development Corporation shall be subordinated to
Bank's security interest in a manner acceptable to Bank); and
(b) Its nature, existence, location, amount and cost have all
been certified to Bank by a representative of Borrower in a manner satisfactory
to Bank at such times as Bank may request, provided that Bank may exclude from
Qualified Inventory any inventory that Bank determines, in Bank's sole
discretion, is not saleable in the ordinary course of Borrower's business. For
purposes of this Agreement, Borrower's inventory shall be valued using the same
accounting method that Borrower uses to value its inventory on the date of this
Agreement, exclusive of any transportation, processing or handling charges.
Work-in-process will not be considered in determining the Qualified Inventory.
Raw material will be included in Qualified Inventory determined in accordance
with Borrower's current accounting practices.
1.17 "Qualified Inventory Amount" means the lesser of (a) fifty (50%)
percent of the Qualified Inventory or (b) ten (10%) percent of the Qualified
Accounts.
1.18 "Return Allowance Amount" means the amount of Borrower's allowance
for merchandise returns as shown on Borrower's balance sheet determined in
accordance with GAAP.
1.19 "Revolving Loan Credit Limit" means Five Million Dollars
($5,000,000.00).
1.20 "Revolving Loans" means collectively all loans to be made by Bank
to Borrower from time to time pursuant to Article 2 of this Agreement, in each
case to be used solely for Borrower`s business purposes.
1.21 "Security Agreement" means the general business security agreement
executed and delivered by Borrower to Bank to secure the Borrower Obligations.
The Security Agreement will be dated the date of this Agreement and be in
substantially the form of Exhibit B attached hereto.
1.22 "Trademarks" means all of the following now or hereafter owned by
Borrower: (a) all trademarks, service marks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, trade
dress, logos, other source or business identifiers, designs, and general
intangibles of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all registration and recording
applications filed in connection therewith, including registrations and
registration applications in the United States Patent and Trademark Office, any
state of the United States or any similar offices in any other country or any
political subdivision thereof, and all extensions or renewals thereof, including
the trade names Sonic Foundry
4
<PAGE>
and design, Sound Forge, Select Stream, Selectstream, Soft Stream, Softstream
and Acid and (b) all goodwill associated therewith or symbolized thereby, and
(c) all other assets, rights and interests that uniquely reflect or embody such
goodwill.
Article 2
Revolving Loans
---------------
2.1 Loan Amount.
------------
(a) Borrower requests that Bank make Revolving Loans to
Borrower from time to time in such amounts as Borrower may request in accordance
with this Agreement and Bank agrees, subject to the terms of this Agreement, to
lend such amounts to Borrower, provided that the maximum aggregate amount of all
the Revolving Loans shall not exceed the lesser of (1) the Revolving Loan Credit
Limit, or (2) the Borrowing Base.
(b) Within said maximum loan amount, Borrower may borrow,
repay and reborrow under this Agreement. Bank is not obligated to, but may make
Revolving Loans in excess of said maximum loan amount, and in any event,
Borrower is liable for and agrees to pay all Revolving Loans.
(c) The Revolving Loans shall be evidenced by the Master
Business Note, and any renewals, extensions or modifications thereof.
2.2 Revolving Loan Procedures.
--------------------------
(a) Borrower may only obtain Revolving Loans under this
Agreement by following the procedures described in this Paragraph 2.2. Borrower
shall give Bank notice of any Revolving Loan requested under this Agreement
specifying the date Borrower requests that the Revolving Loan be made to
Borrower and the amount of the Revolving Loan request. All such requests shall
be in writing unless Bank agrees to accept telephonic requests or as otherwise
mutually agreed to by Borrower and Bank. Written requests shall be on forms
approved by Bank.
(b) If the Revolving Loan balances plus the amount then being
requested are within the maximum permitted loan amount under Paragraph 2.1(a),
and all of the Loan Conditions have been met, then within two (2) banking
business days after receiving the request, Bank will make the Revolving Loan
available to Borrower by crediting the amount of the Revolving Loan to
Borrower's account (Account No. 2210328403) with Bank.
(c) Notwithstanding the Revolving Loan Credit Limit, the
aggregate amount of all Revolving Loans at any time outstanding under this
Agreement shall never exceed the Borrowing Base. Borrower shall on demand by
Bank immediately pay Bank any amount by which the aggregate outstanding
principal balance of all Revolving Loans at any time exceeds the lesser of (1)
the Revolving Loan Credit Limit or (2) the then
5
<PAGE>
current Borrowing Base.
(d) Each Revolving Loan which does not utilize the full amount
available to Borrower under this Agreement shall be in an amount not less than
Ten Thousand ($10,000.00) Dollars.
(e) Bank is authorized to make book entries evidencing
Revolving Loans and payments under this Agreement and the aggregate unpaid
amount of all Revolving Loans as evidenced by those entries is presumptive
evidence that those amounts are outstanding and unpaid to Bank.
(f) Although the Master Business Note is expressed to be
payable in the amount of the Revolving Loan Credit Limit, Borrower is obligated
to pay only the amount actually disbursed to or for the account of Borrower,
together with interest on the unpaid balance of the sums so disbursed, which
remain outstanding from time to time as shown on the records of Bank.
Article 3
Representations and Warranties
------------------------------
Borrower represents and warrants to Bank that on the date of this
Agreement and on the date of each advance under the Revolving Loan:
3.1 Business Purpose. All Revolving Loans will be used solely for
Borrower's business purposes in the ordinary course of Borrower's business.
3.2 Regulation U. Borrower will not use any part of the proceeds of the
Revolving Loans to purchase or carry any margin stock within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System.
3.3 Paramount Security Interest. So long as Borrower is indebted to
Bank pursuant to the terms of this Agreement, or any credit is available to
Borrower hereunder, Bank will have a first and paramount perfected security
interest in those assets of Borrower now owned or hereafter acquired, which are
described in the Security Agreement.
3.4 No Litigation. There is no litigation or administrative proceeding
pending or, to the knowledge of Borrower, threatened against Borrower which
might result in any material adverse change in the business or financial
condition of Borrower.
3.5 Environmental Matters. Borrower has no notice or knowledge of any
substance which has been, is, or will be present, used, stored, deposited,
treated, or disposed of on, under or about any real estate now or at any time
owned or occupied by Borrower which would require clean up, removal or some
other remedial action under any federal, state or local laws, regulations,
ordinances, codes or rules. In the event any such
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substance is present on such real estate, Borrower shall indemnify and hold
harmless Bank, its directors, officers, employees and agents from all loss,
costs (including reasonable attorneys fees and expenses), and liability of every
kind and nature resulting from or arising out of or based upon such substance.
Borrower shall immediately notify Bank in writing of any governmental or
regulatory action or third party claim instituted or threatened in connection
with any such substance.
3.6 Tax Obligations. Borrower has paid all federal and state income
taxes and other taxes of any kind owed by Borrower for all past years and no
claim is being asserted against Borrower with respect to any federal or state
income taxes for any past years or with respect to any other federal, state, or
other taxes of any kind or nature for any past years.
3.7 Borrower's Authority. The execution and delivery of this Agreement
and the other Loan Documents, and the performance by Borrower of its obligations
under this Agreement and the other Loan Documents, are all within Borrower's
legal power, have all been duly authorized by proper action on the part of
Borrower's directors and do not require the approval or consent of any other
person or entity. This Agreement and the other Loan Documents, when executed and
delivered, will constitute the valid and legally binding obligations of Borrower
and will be enforceable against Borrower in accordance with their respective
terms.
3.8 Borrower's Organization. Borrower is a Maryland corporation validly
existing and in good standing under the laws of the State of Maryland and is
duly qualified to do business in every jurisdiction in which the nature of its
business or the ownership of its properties requires such qualification.
3.9 Financial Statements. All financial statements, balance sheets and
profit and loss statements of Borrower furnished to Bank were prepared in
accordance with GAAP, consistently applied throughout the periods involved and
are correct and complete as of their dates.
3.10 Title to Properties. Borrower has good and marketable title to
Borrower's properties and assets, including those reflected in Borrower's most
recent balance sheet furnished to Bank, free and clear of all liens and
encumbrances except Permitted Encumbrances.
3.11 Intellectual Property.
(a) Borrower owns (or has valid and enforceable rights to use)
all of the Intellectual Property as the same exists on the date hereof. Borrower
is the sole owner of all right, title and interest in the Intellectual Property
which it purports to own and, with respect to Intellectual Property licensed by
Borrower, Borrower has valid, binding and enforceable rights to use such
Intellectual Property. Bank acknowledges that the trade names Softstream and
Acid have not been registered with the United States Patent and Trademark
Office.
7
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(b) There are no interference, opposition or cancellation
proceedings pending or, to the knowledge of Borrower, threatened against
Borrower or the Intellectual Property. To the best knowledge of Borrower, the
use of the Intellectual Property and of any trade secrets, secret processes,
inventions, processes or formulas used or employed by Borrower does not infringe
upon the rights of any person or entity.
(c) In the event that it is determined that access to other
intellectual property not already owned by or licensed to Borrower is needed for
Borrower's business, Borrower will make reasonable good faith efforts to acquire
such intellectual property. No claim, suit or action is pending or, to
Borrower's knowledge, threatened alleging that Borrower is infringing upon the
intellectual property rights of others.
(d) Except by virtue of the ownership of Borrower's capital
stock, no shareholder, director, officer or employee of Borrower owns, or claims
to own, directly or indirectly, in whole or in part, any Intellectual Property.
3.12 Year 2000 Matters.
(a) Borrower has (1) initiated a review and assessment of all
areas within its business and operations (including, to the best information and
knowledge of Borrower, those affected by suppliers and vendors) that could be
adversely affected by the Year 2000 Problem, (2) developed a plan and timeline
for addressing the Year 2000 Problem on a timely basis and (3) to date,
implemented that plan generally in accordance with that timetable.
(b) Borrower reasonably believes that all computer
applications (including to the best information and knowledge of Borrower, those
of suppliers and vendors of Borrower) that are material to its business and
operations will on a timely basis be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000 (that is, be Year 2000
compliant), except to the extent that a failure to do so could not reasonably be
expected to have a material adverse effect on Borrower's business operations.
(c) For purposes of this Agreement, the term "Year 2000
Problem" means the risk that computer applications used by Borrower (or to the
best information and knowledge of Borrower, suppliers and vendors of Borrower)
may be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date after December 31, 1999.
Article 4
Other Loan Terms
----------------
4.1 Grant of Security Interest. Borrower agrees that as security for
the Borrower Obligations, Bank is hereby granted a first and paramount security
interest in the assets of
8
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Borrower whether now owned or hereafter acquired, described in the Security
Agreement and related Uniform Commercial Code ("UCC") Financing Statements
requested by Bank.
4.2 Right of Offset. Bank may at any time after the occurrence of an
Event of Default (as hereinafter defined) set off against any deposit balances
or any other money now or hereafter owed by Bank to Borrower, any amount owed by
Borrower to Bank under any of the Borrower Obligations.
4.3 Commitment Fee. Bank does not require the payment of a commitment
fee with respect to the Master Business Note, provided that one or more
Revolving Loans are outstanding for at least thirty (30) days prior to the due
date of the Master Business Note. These thirty (30) days do not need to be
consecutive. If Borrower does not have one or more Revolving Loans outstanding
for at least thirty (30) days prior to the due date of the Master Business Note,
Borrower shall pay Bank a commitment fee of Two Thousand Five Hundred ($2,500)
Dollars on January 31, 2000.
Article 5
Covenants
---------
Borrower shall comply with all of the following covenants, so long as
any amount remains unpaid under the Master Business Note, or Bank has any
commitment to make Revolving Loans under this Agreement:
5.1 Life Insurance.
(a) Borrower shall maintain in full force and effect policies
of insurance on the life of Rimas P. Buinevicius with an aggregate death benefit
equal to no less than one million and no/100 dollars ($1,000,000.00), which
policies shall be assigned to Bank upon issuance thereof, pursuant to a
collateral assignment of life insurance in form and substance satisfactory to
Bank.
(b) Borrower shall maintain in full force and effect policies
of insurance on the life of Curtis J. Palmer with an aggregate death benefit
equal to no less than one million and no/100 dollars ($1,000,000.00), which
policies shall be assigned to Bank upon issuance thereof, pursuant to a
collateral assignment of life insurance in form and substance satisfactory to
Bank.
(c) Borrower shall maintain in full force and effect policies
of insurance on the life of Monty R. Schmidt with an aggregate death benefit
equal to no less than one million and no/100 dollars ($1,000,000.00), which
policies shall be assigned to Bank upon issuance thereof, pursuant to a
collateral assignment of life insurance in form and substance satisfactory to
Bank.
(d) Each life insurance policy described in this Paragraph 5.1
shall provide that at least a thirty (30) day advance written notice be given to
Bank prior to any
9
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cancellation or other termination of any such policy. Evidence that such life
insurance policies are in full force and effect shall be provided to Bank on the
date this Agreement is signed by the parties (the "Closing Date") and at such
other times as Bank requests.
(e) All life insurance proceeds received by Bank under said
policies shall be applied against Borrower's outstanding obligations to Bank
arising under this Agreement or otherwise, including without limitation,
Borrower's obligations under any real estate mortgage loans made by Bank to
Borrower. The application of said proceeds under this Paragraph 5.1 to
Borrower's obligations to Bank may be made in such manner as Bank determines.
Any balance of such proceeds remaining after all Borrower's obligations to Bank
have been paid in full shall be paid to Borrower.
5.2 Financial Statements. Furnish to Bank, as soon as available, such
financial information of Borrower as Bank from time to time requests, and
without request furnish to Bank:
(a) Within one hundred twenty (120) days after the end of each
fiscal year of Borrower, a balance sheet of Borrower as of the close of such
fiscal year and related statements of income and retained earnings for such year
all in reasonable detail and satisfactory in scope to Bank, audited by a
certified public accounting firm acceptable to Bank in accordance with GAAP,
applied on a consistent basis, certified by Borrower's chief financial officer,
and
(b) Within forty-five (45) days after the end of the calendar
quarters ending March 31, June 30, and December 31 a balance sheet of Borrower
as of the end of such calendar quarter and related statements of income and
retained earnings for the period from the beginning of the fiscal year to the
end of such calendar quarter, acceptable to Bank, prepared in accordance with
GAAP, applied on a consistent basis, certified by Borrower's chief financial
officer, subject to normal end-of-year adjustments.
5.3 Access to Property. Permit any representative of Bank to visit and
inspect Borrower's tangible and intangible properties as often as desired by
Bank during Borrower's business hours.
5.4 Access to Information. Permit Bank, at any reasonable time during
business hours, access to all of the corporate and financial records of Borrower
to enable Bank to copy and/or audit Borrower's financial records using persons
designated by Bank. Borrower shall pay Bank, upon demand, for the reasonable
cost of such audits.
5.5 Borrowing Base Certificate and Accounts Receivable Report.
(a) By the 20th day of each calendar month, furnish to Bank
(1) a certification of the Borrowing Base in form and substance approved by Bank
(the "Borrowing Base Certificate"), calculated as of the close of the
immediately preceding calendar month and (2) an accounts receivable aging report
of Borrower's accounts receivable calculated as of the close of that same
calendar month in a form satisfactory to
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Bank.
(b) At the time of each request for a Revolving Loan under
Paragraph 2.2, furnish to Bank a Borrowing Base Certificate calculated as of the
close of business two (2) days prior to the date of the loan request.
5.6 Financial Covenants. Timely perform and observe the following
financial covenants, all calculated in accordance with GAAP, applied on a
consistent basis:
(a) Maintain on the following test dates a minimum tangible
net worth which is not less than the amount indicated for each such test date:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Test Date Minimum Tangible Net Worth Required on Applicable Test Date
- --------------------------------------------------------------------------------------------
<S> <C>
March 31, 1999 $10,500,000
- --------------------------------------------------------------------------------------------
June 30, 1999 $10,988,000
- --------------------------------------------------------------------------------------------
September 30, 1999 $11,582,000
- --------------------------------------------------------------------------------------------
December 31, 1999 $11,582,000
- --------------------------------------------------------------------------------------------
</TABLE>
(b) Maintain at all times a ratio of total liabilities to
tangible net worth which does not exceed 0.75 to 1. The ratio under this
Paragraph 5.6(b) shall be tested at the end of each calendar quarter.
(c) Maintain at all times a ratio of current assets to current
liabilities of not less than 7.00 to 1.00, provided that the outstanding
principal balance of the Master Business Note will be excluded from current
liabilities in calculating the ratio under this Paragraph 5.6(c). The ratio
under this Paragraph 5.6(c) shall be tested at the end of each calendar quarter.
5.7 Business Acquisitions and Loans. Not acquire any other business or
make any loans, advances or extensions of credit to, or any investments in, any
person or entity except:
(a) the purchase of United States government bonds and
obligations;
(b) extensions of credit to customers in the usual course of
Borrower's business;
(c) the purchase of bank certificates of deposit and prime
rated commercial paper having a maturity not exceeding one year;
(d) deposits in demand and savings accounts at banks and in
money market mutual funds of Goldman Sachs;
(e) investments in bank repurchase agreements;
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(f) loans and advances to employees and agents in the ordinary
course of business for travel and entertainment expenses and similar items; and
(g) acquisitions of other businesses and making loans to other
businesses, provided that the sum of (1) the total amount paid for all such
business acquisitions within any single fiscal year of Borrower (including
payments under consulting agreements, non-competition agreements and other
agreements entered into in connection with those business acquisitions) plus (2)
the principal amount of all loans made to other businesses in any single fiscal
year of Borrower, shall not exceed $500,000 in the aggregate; and
(h) loans to Borrower's shareholders and/or Borrower's
officers, provided the aggregate principal balances of all such loans described
in this Paragraph 5.7(h) shall not exceed $150,000.00 at any one time. For
purposes of calculating the limitation under this Paragraph 5.7(h), Borrower's
existing guaranty of consumer debt owed by Borrower's officers will not be
included in the calculation of said $150,000.00 aggregate limitation amount.
5.8 Performance of Obligations. Borrower shall pay and discharge all
lawful taxes, assessments and governmental charges upon it or against its
properties prior to the date on which penalties attach, unless such taxes,
assessments or charges are contested by Borrower in good faith and by
appropriate process.
5.9 Compliance with Laws and Agreements. Borrower shall do all things
necessary to maintain its existence, to preserve and keep in full force and
effect its agreements, rights and franchises necessary to continue its
businesses and comply with all applicable laws, regulations and ordinances.
5.10 Restrictions on Encumbrances. Borrower shall not create or permit
to exist any lien or encumbrance with respect to Borrower's property, except
Permitted Encumbrances.
5.11 Impairment of Financial Condition. Borrower shall not take any
action or permit any event to occur which materially impairs Borrower's ability
to pay the Borrower Obligations when due. Such events include, without
limitation, the fact that Borrower ceases to exist, becomes insolvent or becomes
the subject of bankruptcy or insolvency proceedings.
5.12 Depository Relationships. Borrower shall deposit in Borrower's
accounts with Bank all sums received as payments on Borrower's accounts
receivable and maintain all of Borrower's operating accounts with Bank, except
for Borrower's payroll account.
5.13 Maintenance. Borrower shall maintain, preserve and keep its
machinery, equipment and all other property in good repair and condition and
duly pay and discharge all taxes and other charges imposed upon said properties.
12
<PAGE>
5.14 Restrictions on Mergers and Acquisitions. Borrower shall not merge
or consolidate with or into any other entity, shall not dissolve or liquidate,
and in any event, shall not sell, lease or transfer or otherwise dispose of all
or any substantial part of Borrower's assets, other than sales made in the
ordinary course of Borrower's business.
5.15 Discounting Receivables. Borrower shall not discount or sell any
of Borrower's notes or accounts receivable other than in the ordinary and usual
course of business.
5.16 Sale and Leaseback. Borrower shall not sell or transfer any fixed
assets of Borrower and thereafter rent or lease as lessee any such assets from
the purchaser of those assets.
5.17 Restrictions on Indebtedness.
(a) Borrower shall not incur, assume or permit to exist any
indebtedness or liability for borrowed money, except for: (1) Borrower's
obligations to Bank under this Agreement or under any other credit extended by
Bank to Borrower; (2) debt secured by the Permitted Encumbrances including the
current debt to Madison Development Corporation; (3) trade credit; (4) wages;
(5) deferred taxes; (6) unfunded obligations with respect to Borrower's employee
benefit plans; and (7) any of Borrower's other accrued expenses which are
incurred in the ordinary and usual course of Borrower's business.
(b) Borrower shall not assume, guaranty, endorse or otherwise
become liable for or pay obligations of another person or entity except in the
ordinary and usual course of Borrower's business, provided that Bank consents to
(1) Borrower's guaranty of certain consumer debt owed by Borrower's officers as
the same exists on the date of this Agreement and (2) Borrower's guaranty of a
lease for a 7,000 square foot facility (approximate size) to be occupied by
Cadant Corporation (the "Cadant Lease") in Lisle, Illinois, provided that the
total base rent obligations guaranteed by Borrower under the Cadant Lease do not
exceed One Hundred Ten Thousand ($110,000) Dollars per year and the term of the
Cadant Lease does not exceed seven (7) years. The unpaid balance of such
consumer debt guaranteed by Borrower shall not be increased after the date of
this Agreement unless Bank gives its prior written consent to such additional
guaranty obligation.
5.18 Change in Management. Borrower's current executive management team
consists of Rimas P. Buinevicius, Curtis J. Palmer, Monty R. Schmidt, Kenneth A.
Minor and Roy G. Elkins (the "Management Team"). Borrower shall retain at least
four of the five members of the Management Team as employees during the term of
the Master Business Note. If more than one member of the Management Team ceases
to be employed by Borrower for any reason during the term of the Master Business
Note, Bank may consider that an Event of Default under this Agreement.
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<PAGE>
5.19 Asset Acquisitions.
(a) Borrower shall not make any expenditures for fixed or
capital assets which would cause the combined aggregate amount of all such
expenditures by Borrower to exceed a net amount of two million and no/100
dollars ($2,000,000.00) during any single fiscal year of Borrower. The net
amount of capital expenditures under this Paragraph 5.19(a) equals the excess of
(1) the total capital expenditures made by Borrower during the applicable fiscal
year over (2) the total combined net cash proceeds from the sale of all capital
assets disposed of by Borrower during that same fiscal year. For purposes of
determining the amount of Borrower's capital expenditures under this Paragraph
5.19(a), any amount which is required to be capitalized in accordance with GAAP
relating to a Capitalized Lease (as hereinafter defined) shall be considered a
capital expenditure.
(b) For purposes of this Agreement, the term "Capitalized
Lease" means any lease, the obligations under which have been, or in accordance
with GAAP are required to be, recorded as a capital lease liability on the
balance sheet of Borrower.
5.20 Distributions to Shareholders. Borrower shall not make any
distributions to Borrower's shareholders except as expressly set forth in this
Paragraph 5.20. For purposes of this Paragraph 5.20, distributions to Borrower's
shareholders include without limitation, dividends paid in cash, dividends paid
in tangible property, dividends paid in shares of stock or other intangible
assets, any other type of cash distribution to shareholders (other than
reasonable salaries to shareholders in their capacities as employees), and
purchasing, redeeming or otherwise acquiring outstanding stock of Borrower from
any of Borrower's shareholders. The only permitted distributions to Borrower's
shareholders are the payment of dividends on Borrower's Series B Preferred Stock
at a rate of 5% per annum based on a Series B Liquidation Value of $.01 per
share.
5.21 Public Stock Offering. Borrower shall not undertake any further
public offering of Borrower's stock without Bank's prior written consent, which
consent will not be unreasonably withheld or delayed.
5.22 Trademarks and Copyrights.
(a) Borrower (either itself or through its licensees or its
sublicensees) shall, for each Trademark material to the conduct of Borrower's
business: (1) maintain such Trademark in full force free from any claim of
abandonment or invalidity for non-use; (2) maintain the quality of products and
services offered under such Trademark; (3) display such Trademark with notice of
federal or foreign registration to the extent necessary and sufficient to
establish and preserve its maximum rights under applicable law; and (4) not
knowingly use or knowingly permit the use of such Trademark in violation of any
third-party rights.
(b) Borrower (either itself or through licensees) shall, for
each work covered by a Copyright material to the conduct of Borrower's business,
continue to publish, reproduce, display, adopt and distribute the work as
necessary and sufficient to
14
<PAGE>
establish and preserve its maximum rights under applicable copyright laws.
(c) Borrower shall notify Bank immediately if Borrower knows
of or has reason to know that any Trademark or Copyright material to the conduct
of Borrower's business may become abandoned, lost or dedicated to the public, or
of any adverse determination or development (including the institution of, or
any such determination or development in, any proceeding in the United States
Patent and Trademark Office, United States Copyright Office or any court or
similar office of any country) regarding Borrower's ownership of any Trademark
or Copyright, its right to register the same, or to keep and maintain the same.
(d) Borrower will take all necessary steps that are consistent
with the procedural requirements of the United States Patent and Trademark
Office, United States Copyright Office or any office or agency in any political
subdivision of the United States or in any other country or any political
subdivision thereof, to maintain and pursue each material application relating
to the Trademarks and/or Copyrights (and to obtain the relevant grant or
registration) and to maintain each registration of the Trademarks and Copyrights
which is material to the conduct of Borrower's business, including timely
filings of applications for renewal, affidavits of use, affidavits of
incontestability and payment of maintenance fees, and, if consistent with good
business judgment, to initiate opposition, interference and cancellation
proceedings against third parties.
(e) In the event that any Trademark or Copyright material to
the conduct of Borrower's business is believed by Borrower to have been
infringed, misappropriated or diluted by a third party, Borrower shall promptly
notify Bank after Borrower learns thereof and shall, if consistent with good
business judgment, promptly sue for infringement, misappropriation, or dilution
and to recover any and all damages for such infringement, misappropriation or
dilution, and take such other actions as are appropriate under the circumstances
to protect such Trademarks and/or Copyrights.
5.23 Compliance Certificate. Contemporaneously with the furnishing of
each quarterly financial statement required under Paragraph 5.2, Borrower shall
provide Bank with a certificate (the "Compliance Certificate") dated the same
date as such quarterly financial statement and signed by Borrower's chief
financial officer, stating (a) that Borrower is not in default under this
Agreement or any of the other Loan Documents, and (b) that no event or condition
has occurred which with notice or elapse of time or both would constitute an
Event of Default, or if any such Event of Default or other condition exists,
describing it and the steps being taken to cure it. Each Compliance Certificate
shall also show the computation of and show compliance with, each of the
covenants under Paragraph 5.6 as of the date of such quarterly financial
statements as provided herein.
15
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Article 6
Default and Acceleration
------------------------
6.1 Events of Default. Any one or more of the following events shall
constitute a default under this Agreement, the Master Business Note, and all
documents securing the loans described under this Agreement or otherwise
executed in accordance with this Agreement (each such event is hereinafter
referred to as an "Event of Default"):
(a) Borrower fails to pay any amount when due under this
Agreement, the Master Business Note, or any document securing the Master
Business Note, and such failure continues for a period ten (10) days after
written notice of such failure is given by Bank to Borrower;
(b) Any representation or warranty made under this Agreement
or information provided by Borrower in connection with this Agreement is or was
false or fraudulent in any material respect at the time made or given;
(c) A material adverse change occurs in the financial
condition of Borrower;
(d) More than one member of the Management Team for any reason
ceases to be an employee of Borrower;
(e) Borrower fails to timely observe or perform any of the
other covenants or duties contained in this Agreement not involving the payment
of money (a "Non-Payment Default") and such Non-Payment Default continues for a
period of ten (10) days after written notice of the Non-Payment Default is given
by Bank to Borrower;
(f) Any event of default occurs under any security agreement
or other document securing the Master Business Note, not involving the payment
of money, and such default is not cured within ten (10) days after written
notice thereof is given by Bank to Borrower;
(g) Borrower seeks relief in any type of bankruptcy proceeding
or insolvency proceeding, or Borrower makes a general assignment for the benefit
of creditors;
(h) Any action is sought for the composition, extension,
arrangement or adjustment of Borrower's obligations or for the appointment of a
receiver for Borrower, and such action is not dismissed within thirty (30) days
after written notice is given by Bank to Borrower;
(i) Borrower discontinues its business as a going concern;
(j) Borrower's business is taken over or control thereof is
assumed by any government or governmental agency; or
16
<PAGE>
(k) The occurrence of any changes in the software industry
which Bank determines, in good faith, could have a material adverse economic
effect on Borrower's business.
6.2 Acceleration of Payment Obligations. Upon the occurrence of any
Event of Default and the failure of Borrower to cure such default within the
applicable cure period, if any, including at any time after receipt from
Borrower of a request for a Revolving Loan, Bank's obligation to make Revolving
Loans under this Agreement shall, at Bank's option, terminate and the total
unpaid balance of the Master Business Note shall, at Bank's option, become
immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by Borrower.
6.3 Termination of Loan Advances. Bank's obligation to make Revolving
Loans will automatically terminate and the total unpaid balance of the Master
Business Note, will become due and payable in full in the event Borrower becomes
the subject of bankruptcy or other insolvency proceedings and such proceedings
are not dismissed within thirty (30) days after Bank gives written notice to
Borrower.
6.4 Waiver of Default. Bank may waive any Event of Default without
waiving any other subsequent or prior Event of Default.
6.5 Payment of Bank's Costs. Borrower shall pay (a) all Bank's cost of
administrating this Agreement, including reasonable attorneys' fees and
disbursements, and (b) all of Bank's costs of collecting amounts due Bank from
Borrower, before and after judgment, including reasonable attorneys' fees and
disbursements.
6.6 Enforcement. Upon the occurrence of an Event of Default and the
failure of Borrower to cure such default within the applicable cure period, if
any, Bank may, in Bank's sole discretion, exercise all enforcement remedies
available to Bank by law and all remedies available to Bank as provided in any
documents securing the Borrower Obligations.
6.7 Grant of License for Trademark and Copyrights.
(a) Subject to Paragraph 6.7(b), for the purpose of enabling
Bank to exercise its rights and remedies under the Security Agreement at such
time as Bank is lawfully entitled to exercise such rights and remedies, Borrower
hereby grants to Bank an irrevocable, non-exclusive license (exercisable without
payment of royalty or other compensation to Borrower) to use, license or
sub-license any of the collateral now owned or hereafter acquired by Borrower as
described in the Security Agreement, and wherever the same may be located, and
including in such license reasonable access to all media in which any of the
licensed items may be recorded or stored and to all computer software and
programs used for the compilation or printout thereof. The use of such license
by Bank may be exercised, at the option of Bank, upon the occurrence of an Event
of Default subject to Paragraph 6.7(b); provided that any license, sub-license
or other transaction
17
<PAGE>
entered into by Bank in accordance herewith shall be binding upon Borrower
notwithstanding any subsequent cure of an Event of Default. Borrower agrees to
apply the net proceeds received from any license as provided in the Security
Agreement.
(b) Paragraph 6.7(a) to the contrary notwithstanding, Bank
will not exercise its rights under Paragraph 6.7(a) during the thirty (30) day
period commencing on the date the Event of Default first occurs.
Article 7
Other Loan Terms
----------------
7.1 Venue. To the extent not prohibited by law, venue for any legal
proceeding relating to enforcement of this Agreement, or any of the other Loan
Documents, shall be, at Bank's option, the county in which Bank has its
principal office in this state, or the county in which this Agreement is
executed by Borrower.
7.2 Termination.
(a) Unless sooner terminated by Borrower's default, Borrower's
right to obtain Revolving Loans and Bank's obligation to extend the credit under
this Agreement terminates on the maturity date of the Master Business Note (the
"Termination Date").
(b) Termination of this Agreement, for whatever reason, does
not affect Bank's rights, powers and privileges, nor Borrower's duties and
liabilities, with regard to the then-existing amounts due Bank under this
Agreement or the Master Business Note issued to Bank pursuant to this Agreement.
7.3 Amendment. No amendment, modification, termination or waiver of any
provision of this Agreement, nor consent to any departure by Borrower from any
provision of the loan documents described in this Agreement, will in any event
be effective unless it is in writing and signed by Bank, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
7.4 Entire Agreement. This Agreement and the other Loan Documents are
intended by Borrower and Bank as a final expression of their agreement on the
transaction described in this Agreement and as a complete and exclusive
statement of the terms thereof, there being no conditions to the full
effectiveness of this Agreement except as set forth in this Agreement.
7.5 No Waiver; Remedies. No failure on the part of Bank to exercise,
and no delay in exercising, any right, power or remedy under this Agreement
operates as a waiver of such right, power or remedy; nor does any single or
partial exercise of any right under this Agreement preclude any other or further
exercise of the right or the exercise of any other right. The remedies provided
in this Agreement are cumulative and not exclusive of any remedies provided by
law.
18
<PAGE>
7.6 Notice.
(a) Except as otherwise provided in this Agreement, all
notices required or provided for under this Agreement shall be in writing and
shall be mailed, sent or delivered, if to Borrower, at Borrower's address shown
below, and if to Bank, at Bank's address shown below, or, as to each other
party, at such other address as shall be designated by such party in a written
notice to the other parties.
(b) All such notices will be deemed duly given when delivered
by hand, or three (3) business days after being deposited in the mail, postage
paid, provided that notice to Bank pursuant to Paragraph 7.2 is not effective
until actually received by Bank. The foregoing notwithstanding, any notice from
Bank to Borrower notifying Borrower of a Event of Default which is sent by mail,
shall be sent by certified mail, return receipt requested.
7.7 Interpretation. The validity, construction and enforcement of this
Agreement are governed by the internal laws of Wisconsin. Invalidity of any
provision of this Agreement does not effect the validity of any other provisions
of this Agreement.
7.8 Conflict between this Agreement and other Loan Documents. In the
case of any ambiguity or conflict between this Agreement and any of the other
Loan Documents, this Agreement shall govern the rights and obligations of the
parties.
7.9 Computations. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation, combination or other accounting computation is required to be
made for the purpose of this Agreement, such determination or calculation shall,
to the extent applicable and except as otherwise specified herein, be made in
accordance with generally accepted accounting principles applied on a basis
consistent with those in effect at the time of such determination.
7.10 Additional Documents. Following the closing under this Agreement,
Borrower shall execute such other documents as Bank and Bank's counsel
reasonably request for the proper closing and documentation of this Agreement
and the loans contemplated hereunder and the security therefor so that Bank will
have a first and paramount security interest in all of the collateral securing
the loans made in accordance with this Agreement.
7.11 Headings. The descriptive headings of the articles and paragraphs
of this Agreement are for convenience only and shall not be deemed to affect the
meaning or construction of any of the provisions of this Agreement.
7.12 Counterparts and Facsimile Signatures. This Agreement may be
signed in any number of counterparts of the signature page with the same force
and effect as if all signatures were on one original document. Facsimile
signatures on counterparts of the signature page of this Agreement shall for all
purposes have the same force and legal
19
<PAGE>
effect as original signatures on this Agreement.
7.13 Preparation and Closing Fees. Borrower shall reimburse Bank for
all costs and expenses incurred in connection with preparing this Agreement and
closing the loan transaction hereunder, including without limitation the
following: Uniform Commercial Code searches, filing fees, appraisals, credit
reports, attorneys' fees, disbursements of Bank's legal counsel and similar
costs and expenses.
7.14 Indemnification.
(a) Borrower shall defend, indemnify and hold harmless Bank,
its directors, officers, employees and agents, from and against any and all
loss, cost, expense, damage or liability (including reasonable attorneys' fees)
incurred in connection with any claim, counterclaim or proceeding brought as a
result of, arising out of or relating to any transaction financed or to be
financed, in whole or in part, directly or indirectly, with the proceeds of any
Revolving Loan or the entering into and performance of this Agreement or any
document or instrument relating to this Agreement by Bank.
(b) The indemnity obligations of Borrower under this Paragraph
7.13 will survive termination of this Agreement, the repayment of all the
Borrower Obligations and the discharge and release of any security documents
executed in accordance with this Agreement.
(c) The foregoing notwithstanding, Borrower is not required to
indemnify or hold Bank harmless against any loss, cost, expense, damage, or
liability arising as a result of Bank's own willful misconduct, Bank's own gross
negligence or Bank's breach of this Agreement.
[This space left intentionally blank]
20
<PAGE>
Dated as of the date first set forth above
BORROWER: BANK:
- --------- -----
SONIC FOUNDRY, INC. ASSOCIATED BANK SOUTH CENTRAL
By: By:
_________________________________ ___________________________________
Name: ___________________________ Name: _____________________________
Title: __________________________ Title: ____________________________
Attest:
_________________________________
Name: ___________________________
Title: __________________________
Address: 754 Williamson Street Address: 1720 Monroe Street
Madison, WI 53703 Madison, WI 53711
21
<PAGE>
INDEX OF DEFINED TERMS
Bank...........................................................1
Borrower.......................................................1
Borrower Obligations...........................................1
Borrowing Base.................................................1
Borrowing Base Certificate....................................10
Capitalized Lease.............................................14
Closing Date..................................................10
Compliance Certificate........................................15
Copyrights.....................................................1
Event of Default..............................................16
Foreign Account Debtor.........................................2
GAAP...........................................................2
Intellectual Property..........................................2
Licenses.......................................................2
Loan Conditions................................................2
Loan Documents.................................................2
Management Team...............................................13
Master Business Note...........................................2
Non-Payment Default...........................................16
Permitted Encumbrances.........................................2
Qualified Account..............................................2
Qualified Account Amount.......................................3
Qualified Contracts Receivable.................................3
Qualified Contracts Receivable Amount..........................3
Qualified Inventory............................................3
Qualified Inventory Amount.....................................4
Return Allowance Amount........................................4
Revolving Loan Credit Limit....................................4
Revolving Loans................................................4
Security Agreement.............................................4
22
<PAGE>
Termination Date..............................................18
Trademarks.....................................................4
UCC............................................................9
Year 2000 Problem..............................................8
23
<PAGE>
Exhibit A
to
Sonic Foundry, Inc.
Loan Agreement
-------------------------------------------
Master Business Note
<PAGE>
Exhibit B
to
Sonic Foundry, Inc.
Loan Agreement
-------------------------------------------
Security Agreement
<PAGE>
Exhibit 10.15
BUSINESS NOTE
(Use only for business purpose loans)
SONIC FOUNDRY, INC. MARCH 3, 1999 $632,000.00
- ----------------------------- --------------- -----------------
(MAKER) (DATE)
1. Promise to Pay and Payment Schedule. The undersigned ("Maker" whether one or
more) promises to pay to the order of Associated Bank South Central ("Lender")
at 1720 Monroe St., Madison 53711, Wisconsin, the sum of $632,000.00.
[Check (a), (b), (c) or (d); only one shall apply]
(a) [ ] Single Payment, In one payment on N/A, plus interest payable as set
forth below unless Interest is shown on line 4 below.
(b) [X] Installments of Principal and Interest in 35 equal payments of $5,050.00
due on APRIL 3, 1999, and on
[X] the same day of each succeeding month thereafter [ ] every 7th day
thereafter [ ] every 14th day thereafter, PLUS a final payment of
the unpaid balance and accrued interest due on MARCH 3, 2002, all
subject to modification as set forth in 2(b) below, if applicable.
All payments include principal and interest.
(c) [ ] Installments of Principal in N/A equal payments of principal of $ N/A
due on N/A , and on
[ ] the same day of each N/A month thereafter [ ] every 7th day
thereafter [ ] every 14th day thereafter, PLUS a final payment of
the unpaid principal due on N/A , PLUS interest payable as set
forth below.
(d) [ ] Other N/A
2. Interest Calculation. If the amount of interest is not shown on line 4 below,
this Notes bears interest on the unpaid principal balance before maturity.
[Check (a), (b), or complete line 4 below; only one shall apply.]
(a) [X] Fixed Rate. At the rate of 7.375% per year.
(b) [ ] Variable Rate. At the annual rate which is equal to the following Index
Rate, [ ] plus [ ] minus N/A percentage points ("Note Rate"), and the
Note Rate shall be adjusted as provided below. The Index Rate is:
[ ] The prime rate [ ] The reference rate [ ] The base rate adopted by
[ ] Lender [ ] N/A N/A from time to time as its base or reference
rate for interest rate determinations. The Index Rate may or may not be
the lowest rate charged by Lender.
[ ] N/A
The Initial Note Rate is N/A %, An adjustment in the Note Rate will
result in an increase or decrease in (1) [ ] the amount of each payment
of interest, (2) [ ] the amount of the final payment, (3) [ ] the number
of scheduled periodic payments sufficient to repay this Note in
substantially equal payments, (4) [ ] the amount of each remaining
payment of principal and interest so that those remaining payments will
be substantially equal and sufficient to repay this Note by its
scheduled maturity date, (5) [ ] the amount of each remaining payment of
principal and interest (other than the final payment) so that those
remaining payments will be substantially equal and sufficient to repay
this Note by its scheduled maturity date based on the original
amortization schedule used by Lender, plus the final payment of
principal and interest, or (6) [ ] N/A
In addition, Lender is authorized to change the amount of periodic
payments if and to the extent necessary to pay in full all accrued
interest owing on this Note. The Maker agrees to pay any resulting
payments or amounts. The Note Rate shall be adjusted only on the
following change dates: [ ] the first day of each month [ ] each
scheduled payment date [ ] as and when the Index Rate changes [ ] N/A
Interest is computed for the actual number of days principal is unpaid on the
basis of [X] 360 day year [ ] 365 day year.
3. Interest Payment. Interest is payable on N/A , and on [ ] the same day of
each N/A month thereafter, [ ] every 7th day thereafter, [ ] every 14th day
thereafter and at maturity, or if box 1(b) is checked, at the times so
indicated.
4. Other Charges. If any payment (other than the final payment) is not made on
or before the 10th day after its due date. Lender may collect a delinquency
charge of 5.00% of the unpaid amount. Unpaid principal and interest bear
interest after maturity until paid (whether by acceleration or lapse of time)
all the rate [ ] rate otherwise be applicable plus N/A percentage points [X]
of 12.35% per year, computed on the basis of [X] a 360 day year [ ] a 365 year.
Maker agrees to pay a charge of 15.00 for each check presented for payment under
this Note which is returned unsatisfied.
5. Prepayment. Full or partial prepayment of this Note [X] is permitted at any
time without penalty [ ] N/A .
THIS NOTE INCLUDE ADDITIONAL PROVISIONS ON REVERSE SIDE.
SONIC FOUNDRY
--------------------------------(SEAL)
BY /s/ KENNETH A. MINOR
--------------------------------(SEAL)
KENNETH A. MINOR CFO
BY /s/ RIMAS P. BUINEVICIUS
--------------------------------(SEAL)
RIMAS P. BUINEVICIUS CEO AND
CHAIRMAN
Inapplicable unless filled in --------------------------------(SEAL)
(use for add on loans only).
1. Loan Proceeds $ N/A --------------------------------(SEAL)
2. Cr. Life Ins Charge N/A 754 WILLIAMSON ST.
3. Cr A & B Ins. Charge N/A --------------------------------
4. Interest (Add-on) N/A MADISON, WI 53703
5. N/A --------------------------------
6. Face Amount of Note N/A (ADDRESS) (PHONE)
=======
- ------------------------------------------------------------------------------
FOR LENDER CLERICAL USE ONLY
If checked insert applicable prepayment restrictions and ??????
If credit life or accident and ?????? insurance is requested a ?????? may be
required.
L150
1st REN. & RENT ASSIGNMENTS 6006 DENNIS SAMPSON
--------------------------
LOAN OFFICER
<PAGE>
ADDITIONAL PROVISIONS
6. Default and Enforcement. If any installment is not paid when due under
this Note, If a default occurs under any other obligation of any Maker to Lender
or if Lender deems itself insecure, the unpaid balance shall, at the option of
Lender, without notice, mature and become immediately payable. The unpaid
balance shall automatically mature and become immediately payable in the event
any Maker, ?????, endorser or guarantor becomes the subject of bankruptcy or
other insolvency proceedings. Lender's rights and remedies upon such default. To
the extent not prohibited by law, Maker consents that ????? for any legal
proceeding relating to collection of this Note shall be, at Lenders option, the
country in which Lender has its principal office in this state, the county in
which any Maker resides or the county in which this Note was executed.
7. Security. This Note is secured by all existing and future security
agreements and mortgages between Lender and Maker, between Lender and any
Indorser or guarantor of this Note, and between Lender and any other person
providing collateral security for Maker's obligations, and payment may be
accelerated according to any any of them. Unless a lien would be prohibited by
law or would render a nontaxable account taxable, Maker grants to Lender a
security interest and lien in any deposit account Maker may at any time have
with Lender. Lender may, at any time after an occurrence of an event of default,
without notice or demand, set-off against any deposit balances or other money
now or hereafter owed any Maker by Lender any amount unpaid under this Note.
8. Rights and Lender. Without affecting the liability of any Maker,
indorser, surety, or guarantor, Lender may, without notice, accept partial
payments, release or impair any collateral security for the payment of this Note
or agree not to sue any party liable on its. Lender may apply prepayments, if
permitted, to such future installments as it elects. Lender may without notice
to Maker apply payments made by or for Maker to any obligations of Maker to
Lender, Without affecting the liability of any indorser, surety or guarantor,
Lender may from time to time, without notice, renew or excite the time for
prepayment.
9. Obligations and Agreements of Maker. The obligations under this Note of
all Makers are joint and several. All Makers, Indorsers, ?????, and guarantors
agree to pay all costs of collection before and after judgement, including
reasonable attorney's fees (including those incurred in successful defense or
settlement of any counterclaim brought by Maker or incident to any action or
proceeding involving Maker brought pursuant to the United States Bankruptcy
Code) and waive presentment, protest, demand and notice of dishonor. Maker
agrees to indemnify and hold harmless Lender, its directors, officers, employees
and agents, from and against any and all claims, damages, judgements, penalties,
and expenses, including reasonable attorney's fees, arising directly or
indirectly from credit extended under this Note or the activities of Maker. This
Indemnity shall survive payment payment of this Note. Each Maker acknowledges
that Lender has not made any representations or warranties with respect to, and
that Lender does not assume any responsibility to Maker for, the collectability
of this Note or the financial condition of any Maker. Each Maker has
independently determined the collectability and enforceability of this Note.
Maker authorizes Lender to disclose financial and other information about Maker
to others.
10. Interpretations. This note is intended by Maker and Lender as a final
expression of this Note and as a complete and exclusive statement of its terms,
there being no conditions to the enforceability of this Note. This Note may not
be supplemented or modified except in writing.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,386,109
<SECURITIES> 0
<RECEIVABLES> 3,571,858
<ALLOWANCES> 167,766
<INVENTORY> 580,784
<CURRENT-ASSETS> 9,732,275
<PP&E> 3,616,811
<DEPRECIATION> 617,367
<TOTAL-ASSETS> 13,215,583
<CURRENT-LIABILITIES> 1,170,626
<BONDS> 677,208
0
72,237
<COMMON> 26,660
<OTHER-SE> 11,268,852
<TOTAL-LIABILITY-AND-EQUITY> 13,215,583
<SALES> 5,516,289
<TOTAL-REVENUES> 5,516,289
<CGS> 1,521,630
<TOTAL-COSTS> 1,521,630
<OTHER-EXPENSES> 7,020,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,957
<INCOME-PRETAX> (2,888,624)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,888,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,888,624)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
