UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition from ________________ to _________________
COMMISSION FILE NUMBER 0-22823
QAD INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0462381
(State or Other Jurisdiction of (I.R.S. Employer Incorporation or
Organization) Identification No.)
6450 VIA REAL, CARPINTERIA, CALIFORNIA 93013
(Address of Principal Executive Offices)
805-684-6614
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price for the
registrant's Common Stock in the Nasdaq National Market on April 20, 1998, was
approximately $441,090,420. This calculation does not reflect a determination
that certain persons are affiliates of the registrant for any other purposes.
The number of outstanding shares of the registrant's Common Stock as of the
close of business on April 20, 1998 was 29,163,003.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10,11,12 and 13 of Part III incorporate information by reference from the
definitive proxy statement for the registrant's Annual Meeting of Stockholders
to be held on June 30, 1998.
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QAD INC.
FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS..........................................................1
ITEM 2. PROPERTIES.......................................................18
ITEM 3. LEGAL PROCEEDINGS................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..........................................................19
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)....20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................40
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............41
ITEM 11. EXECUTIVE COMPENSATION..........................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.42
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Forward Looking Statement
In addition to historical information, this form 10-K contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Factors That May Affect
Future Results and Market Price of Stock." Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in fiscal year ended January 31, 1999.
PART I
ITEM 1. BUSINESS
The Company is a provider of supply chain enabled Enterprise Resource
Planning ("ERP") software for multinational and other large manufacturing
companies. The Company's software solutions are designed to facilitate global
management of resources and information to allow manufacturers to reduce order
fulfillment cycle times and inventories, improve operating efficiencies and
measure critical company performance criteria against defined business plan
objectives. The flexibility of the Company's products also helps manufacturers
adapt to growth, organizational change, business process reengineering, supply
chain management and other challenges.
The Company's principal product, MFG/PRO software, is specifically designed
for deployment at the plant or division level of global manufacturers in five
targeted industry segments: electronics/industrial, food/beverage, consumer
packaged goods, medical and automotive. MFG/PRO software provides multinational
organizations with an integrated ERP solution that is based on an open,
client/server architecture and includes manufacturing, distribution, financial
and service/support management applications. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of object-oriented, supply chain management solutions, named
On/Q software. The Company's initial On/Q software product, Outbound Logistics,
is designed to allow for consolidation of orders, contract management, shipping
and logistics management. Outbound Logistics is currently in development and its
initial release is expected to be commercially available in the second half of
calendar year 1998. As of January 31, 1998, the Company had licensed MFG/PRO
software at approximately 3,600 sites to approximately 1,900 customers in more
than 80 countries. The Company's customers include Cargill, Inc.,
Colgate-Palmolive Company, Johnson Controls, Inc., Johnson & Johnson, Lucent
Technologies, Inc., Philips Electronics N.V., St. Jude Medical, Inc., Unilever
N.V., United Technologies Automotive, Genzyme Corp. and AT&T.
The Company was founded in 1979 and was incorporated in California as qad.inc in
1986. In February 1997, the Company's name was changed to QAD Inc. The Company
was reincorporated in Delaware in July 1997. The Company's executive offices are
located at 6450 Via Real, Carpinteria, California 93013, and its telephone
number is (805) 684-6614. "QAD," "Qwizard" and "On/Q" are trademarks and
"MFG/PRO" is a registered trademark of the Company. This form 10-K also contains
trademarks and registered trademarks of persons and companies other than QAD.
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Industry Background
In recent years, businesses have been subject to increasing global
competition, resulting in pressure to lower production costs, improve product
performance and quality, increase responsiveness to customers and shorten
product development and delivery cycles. In addition, globalization has greatly
increased the scope and complexity of multinational manufacturing organizations.
Through business process reengineering, many organizations have begun to
reengineer their critical business processes and restructure their organizations
to accommodate and exploit rapid changes in the business environment. As part of
this process, businesses are seeking ERP software solutions which will enable
them to better manage resources across the enterprise and facilitate the
integration of sales management, component procurement, inventory management,
manufacturing control, project management, distribution, transportation, finance
and other functions on a global basis. While historically many companies have
developed their ERP software internally, companies are increasingly deploying
open, client/server-based ERP applications developed by third parties which
reduce internal software development costs and enable increased flexibility and
inter-operability across a broad range of hardware and software platforms. The
Gartner Group has estimated that the global ERP software market totaled more
than $6.2 billion in 1997 and will grow to an estimated $10.0 billion by the
year 2000.
While current ERP software enables the integration and management of
critical data within enterprises, organizations increasingly are recognizing the
need to deploy new software systems that manage the global supply chain by
enhancing the flow of information to and from customers, suppliers and other
business partners outside the enterprise. More recently, the availability and
use of the Internet has created a demand for software, which will operate across
the Internet to enhance business-to-business electronic commerce.
The Company believes that the increasing complexity and diversity of
customer requirements limits the ability of any single-vendor solution to fully
meet the enterprise-wide needs of its customers and has led to the emergence of
three distinct segments within the ERP software market: (i) corporate;
(ii) plant; and (iii) supply chain management.
Corporate ERP solutions are primarily focused on the consolidated data
management, financial and human resource needs of large Fortune 1000 companies.
Leading vendors of corporate level solutions include Oracle Corporation
("Oracle"), PeopleSoft, Inc. ("PeopleSoft") and SAP AG ("SAP"). While corporate
ERP systems offer robust functionality, the Company believes that the very broad
scope, significant cost and limited flexibility of many of these systems limit
their effectiveness in addressing the needs of individual plants or divisions.
In addition, this limited flexibility makes these systems difficult to deploy
throughout the enterprise.
Plant ERP solutions are primarily focused on the specific needs of
manufacturing plants and distribution sites of global companies, such as
manufacturing planning, production control and distribution. Leading vendors of
plant ERP solutions include the Company, Baan Company N.V. ("Baan"), J.D.
Edwards & Company ("J.D. Edwards") and Systems Software Associates, Inc.
("SSA"). Given the diverse and constantly changing needs of manufacturing and
distribution sites, ERP users demand highly flexible, industry-specific plant
ERP solutions that can be deployed rapidly and cost-effectively across multiple
sites on a global basis.
Supply chain management solutions are designed to link a company more
closely with customers, suppliers and other business partners in order to
optimize manufacturing and distribution processes, reduce costs and enhance
customer satisfaction. Supply chain
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management functions include logistics and order management, advanced planning
and scheduling, global purchasing, and sales and support management. Leading
vendors in the supply chain management market include i2 Technologies, Inc.
("i2"), Industri-Matematik International, Inc. ("IMI") and Manugistics Group,
Inc. ("Manugistics"), as well as certain corporate level ERP software vendors.
The Company believes that supply chain management represents one of the greatest
current opportunities for companies to reduce costs and enhance customer
relationships.
Market Opportunity
While ERP solutions have provided significant benefits to companies by
centralizing and integrating the management of enterprise-wide data, the Company
believes that customer requirements for industry-specific functionality,
flexibility and ease of implementation pose significant challenges for many ERP
vendors. As a result, the Company believes that there is a large and rapidly
growing market demand for industry-specific software solutions that meet
customers' needs for plant-level deployments and global supply chain management.
The Company believes that the adoption of open, client/server-based ERP
solutions at the plant level will accelerate as potential customers transition
from proprietary, legacy systems in coming years. In addition, the Company
believes that supply chain management represents a compelling market
opportunity. To be successful in meeting customer requirements in these market
segments, the Company believes ERP software vendors must:
Offer localized, multi-language, multi-currency functionality to
support global deployments;
Offer industry-specific product functionality and expertise in key
vertical markets;
Provide global service and support, either directly or through third
parties;
Offer ease of implementation and rapid time to benefit;
Provide flexibility to meet the diverse needs and business practices
of global, multi-site manufacturing implementations;
Inter-operate and co-exist with corporate-level ERP solutions and
industry-leading supply chain management solutions;
Address supply chain management challenges by offering technology
which integrates and optimizes interactions between companies and
their customers, suppliers and other business partners; and
Develop and utilize advanced technologies to deliver superior product
functionality.
The QAD Solution
The Company is a leading provider of ERP software for multinational and other
large manufacturing companies. The Company's principal product, MFG/PRO
software, is a modular software program designed specifically to address the
plant-level needs of multinational manufacturers for flexible, inter-operable
and rapidly deployable ERP software solutions. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of supply chain management solutions designed to serve the
needs of multinational manufacturing companies. The Company meets customer
requirements in its vertical markets by delivering the following:
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Global Solutions for Multinational Manufacturers. The Company focuses on
the plant-level ERP and supply chain management requirements of global
manufacturers. The Company's MFG/PRO software incorporates multi-currency
capabilities, is available in 26 languages and is tailored to local financial
practices and requirements in many of its major markets. The Company's customers
have deployed MFG/PRO software in more than 80 countries.
Expertise and Functionality for Key Vertical Markets. The Company targets
and has achieved leadership positions in the electronics/industrial,
food/beverage, consumer packaged goods, medical and automotive industries. The
Company believes that its substantial expertise in these markets, together with
its strategy of developing software modules that address specific industry
needs, provides the Company with a competitive advantage. For example, the
Company's MFG/PRO software includes features which facilitate United States Food
and Drug Administration ("FDA") compliance and validation for the medical
industry, advanced pricing and promotion management for the consumer packaged
goods industry, and customer/supplier scheduling via electronic data interchange
for the automotive industry.
Global Service and Support. The Company believes that a high level of
global service and support is a critical component of its ERP solution for
multinational manufacturers. The Company offers product service and support
directly through its sales and support offices in 19 countries and indirectly
through its global network of systems integration partners and distributors
located in more than 40 countries. The Company's systems integrator and
distributor network also offers consultant services for the implementation of
its software solutions.
Ease of Implementation. The modular product design of MFG/PRO software,
together with the Company's focus and expertise in its key vertical markets,
enables rapid product implementation, often within six months at a particular
site. Product modules are designed to address the specific needs of customers in
the Company's targeted markets, limiting the need for extensive customization
upon implementation. In addition, customers are able to implement only those
modules with functionality appropriate for their needs, limiting time-consuming
implementation and training for unneeded features.
Open, Client/Server-Based Solutions. The Company's products are based on an
open, client/server computing architecture. The Company believes that this
architecture enables superior flexibility and inter-operability and addresses
the desire of customers to migrate critical business software to an open
platform. MFG/PRO software operates in Windows NT and major UNIX environments on
more than 20 hardware platforms and is compatible with Oracle and Progress
databases.
The QAD Strategy
The Company's objectives are to expand its leadership position in
plant-level solutions and become a leading provider of supply chain management
software solutions to multinational manufacturers. The key elements of the
Company's strategy for achieving these objectives include the following:
Maintain and Leverage Leadership in Plant-Level Manufacturing. The Company
believes its MFG/PRO software is the leading open systems ERP solution for
plant-level deployments worldwide. As of January 31, 1998, the Company had
licensed MFG/PRO software at approximately 3,600 sites to approximately 1,900
customers in more than 80 countries. The Company's strategy is to continue to
aggressively pursue plant-level opportunities in its targeted markets to enhance
its leadership position. The Company believes that the success of its MFG/PRO
software provides a strong existing customer base from which to license
additional modules and additional users. In addition, the Company intends to
leverage its installed base of MFG/PRO software customers in order to accelerate
the adoption of On/Q software, the Company's new supply chain management
solution.
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Focus on Global Supply Chain Management Solutions. The Company believes
that supply chain optimization represents one of the greatest current
opportunities for companies to reduce costs and enhance customer relationships.
The Company is developing a group of new applications, known as On/Q software,
for this market. The initial product, Outbound Logistics, is being developed
specifically to meet demand-side requirements of multinational manufacturing
companies, including complex high-volume order processing, import/export
management, multiple-route segmentation and logistics, distribution point
optimization, lead and sales order management, contract management and
liquidation. In addition, the Company intends to develop additional
applications, including inbound logistics and planning, and to provide seamless
inter-operability with other industry leading supply chain management solutions
for scheduling. The Company believes that these new products, coupled with its
strength in plant-level ERP solutions and the Company's products' demonstrated
ability to inter-operate with other corporate applications, positions the
Company to succeed in the emerging supply chain management marketplace.
Leverage Alliances. The Company leverages the expertise of distribution,
implementation and technology partners to meet the diverse needs of its
customers. The Company augments its direct sales organization with a global
network of more than 40 distributors and numerous implementation providers. The
Company plans to leverage its network of distributors and implementation
providers to further penetrate its vertical markets. For implementation of its
software, the Company relies almost exclusively on third-party providers,
allowing the Company to maintain its focus on developing, marketing and
distributing its software. In addition, the Company has entered into a number of
joint development agreements with third-party software developers who provide
functionality that has been embedded into or integrated with MFG/PRO software to
deliver a more complete solution for its targeted vertical markets.
Maintain Technology Leadership. The Company was one of the first providers
of open, client/server-based ERP software and is committed to maintaining its
technology leadership. The Company's technology strategy is focused on migrating
its products to a component object architecture in order to enable customers to
improve inter-operability with existing software applications and to deploy and
integrate new "best of breed" software applications across the enterprise. The
Company believes inter-operability will become an important requirement of
software applications as organizations seek fully integrated ERP solutions. In
addition, the Company believes this object architecture will enable it to
provide enhanced functionality in its new On/Q software, which is currently
under development.
Capitalize on Year 2000 Compliance. Many companies are facing significant
business problems due to the failure of their existing ERP systems to
appropriately recognize years after 1999. The Company believes that this problem
will accelerate the migration to open, client/server-based ERP solutions that
are configured to handle this transition. The Company's products are year 2000
capable. The Company believes that it is well positioned to leverage its MFG/PRO
software and its On/Q software to be a part of customers' year 2000 solutions.
Products
The Company targets its MFG/PRO software to manufacturing companies within
the electronics/industrial, food/beverage, consumer packaged goods, medical and
automotive industries. In addition, the Company is developing On/Q software, a
group of applications targeted to the supply chain management needs in these
industry segments. The first of these applications, Outbound Logistics, is
currently under development and its initial release is expected to be
commercially available in the second half of calendar year 1998.
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The Company's principal product, MFG/PRO software, provides multinational
organizations with an integrated ERP solution that includes manufacturing,
distribution, financial and service/support management applications within an
open systems environment. MFG/PRO software is composed of an extensive set of
modules designed to address the needs of customers in the Company's vertical
markets. The Company's software supports multiple currencies and global tax
management and is tailored to financial practices and requirements in many of
its major geographic markets. MFG/PRO software supports 26 languages, including
most European languages, Japanese, Chinese, Korean and Russian. MFG/PRO software
operates in both host and distributed, client/server computing environments and
supports single or multiple sites, as well as multiple production and
operational processes. These capabilities enable multinational manufacturers to
manage multiple hybrid production methods within a single organization or a
single production site, and also provide the flexibility to adapt to additional
sites and processes as an organization's business evolves. Licensing fees for
the Company's MFG/PRO software generally range from $50,000 to several million
dollars, depending on the configuration of the software, the number of sites and
the number of users. Annual maintenance fees for such software generally
approximate 15% of the list price of the software.
The modular design of MFG/PRO software enables the Company's customers to
select the modules necessary to meet their specific operational needs. Customers
generally may choose which of the base package of modules they wish to implement
and then choose additional modules to add to the base implementation. For
example, in the automotive industry, MFG/PRO software's Repetitive Manufacturing
module, coupled with the Customer Schedules and Supplier Schedules modules,
provides high-volume businesses with streamlined manufacturing capabilities. The
Product Change Control module allows electronics/industrial companies to meet
challenges presented by rapidly changing products and short product life-cycles
through sophisticated engineering change management. In the industrial and
consumer packaged goods industries, MFG/PRO software supports mixed-mode and
discrete manufacturing with powerful planning and execution management modules.
In the food/beverage industry, the Advanced Pricing Manager module tracks
product promotion life cycles from concept through analysis. In the medical
industry, MFG/PRO software has the tools to allow for accurate FDA compliance
reporting and validation.
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MFG/PRO software currently includes the following modules and distinct
functionality:
Accounts Payable
Accounts Receivable
Advanced Pricing Manager
Capacity Requirements Planning
Cash Management
Client/Server
Compliance (for FDA)
Configurator
Configurator Product Modeler
Configured Products
Cost Management
Customer Schedules
Decision Support
Distribution Requirements Planning
Electronic Data Interchange
Enterprise Operations Planning
Fixed Assets
Forecasting
Formula/Process
General Ledger
GL Report Writer
Intrastat
Inventory Control
Master Scheduling
Materials Requirements Planning
Multiple Currency
Payroll
Physical Inventory
Product Change Control
Product Line Planning
Product Structures
Purchasing
Quality Management
Repetitive Manufacturing
Resource Planning
Results Files
Routings/Work Centers
Sales Analysis
Sales Orders/Invoices
Sales Quotations
Service/Repair Orders
Service/Support Management
Shop Floor Control
Supplier Schedules
Validation (for FDA)
Work Orders
The Company has a number of business alliances to enhance the functionality of
MFG/PRO software. The Company has entered into a number of joint development
agreements with third-party software developers who provide functionality that
has been embedded into or integrated with MFG/PRO software to deliver more
complete solutions for its targeted vertical markets.
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To further enhance the rapid deployment and ease of use of MFG/PRO
software, the Company introduced Qwizard software in March 1997. Qwizard
software provides self-paced interactive training for users of MFG/PRO software.
In addition, Qwizard software includes tools to design and customize the visual
interface of MFG/PRO software to match the users' workflows and job
responsibilities.
Products Under Development
The Company's planned suite of supply chain management solutions,
On/Q software, is designed to inter-operate with MFG/PRO software and other ERP
and supply chain software solutions. The initial On/Q software product under
development, Outbound Logistics, is designed to allow for consolidation of
orders, contract management, shipping and logistics management. The Company
anticipates that the initial release of Outbound Logistics will be commercially
available in the second half of calendar year 1998. Outbound Logistics is
specifically designed to meet demand-side requirements of global multinationals,
including complex high-volume order processing, import/export management,
multiple-route segmentation and logistics, distribution point optimization, lead
and sales order management, contract management and liquidation. The Outbound
Logistics application is targeted to address supply chain issues associated with
global manufacturing operations, and is designed to allow orders to be taken
from any customer, placed with any number of plants as capacity and product mix
change, and filled from the most cost-efficient available distribution center,
while consolidating or distributing invoices to any combination of sold-to-,
ship-to- and bill-to-customers. Outbound Logistics is also designed to provide
cost-efficient consolidation and to provide multi-lingual and multi-currency
capabilities. The Company plans to follow Outbound Logistics with additional
On/Q software products. There can be no assurance, however, that any of the
Company's supply chain management solutions will be successfully developed in
accordance with planned schedules or at all, or that if successfully developed,
such software will achieve market acceptance. See "Factors That May Affect
Future Results and Market Price of Stock-Supply Chain Solutions Under
Development and Underlying Technology."
Technology
MFG/PRO software has been developed with a commercially available, fourth
generation language and tool set marketed by Progress that addresses relational
databases provided by Oracle and Progress. See "Factors That May Affect Future
Results and Market Price of Stock-Dependence on Progress Products." MFG/PRO
software is being migrated to component objects and to a Java user interface
which the Company believes will enable customers to improve inter-operability
with existing software applications and to deploy and integrate new "best of
breed" software applications across the enterprise. The Company also believes
object-orientation will enable the Company to provide enhanced functionality in
its new On/Q software under development. While the Company's MFG/PRO software is
dependent upon Progress technology, the Company's new On/Q software under
development is not dependent on Progress technology. However, both the Company's
MFG/PRO software and new On/Q software are reliant on third-party software for
specific functionality. See "Factors That May Affect Future Results and Market
Price of Stock-Reliance on and Need to Develop Additional Relationships with
Third Parties." The Company is currently in the process of converting its
MFG/PRO software modules to object-oriented technology where the Company
believes such conversion will add value. The software operates in Windows NT and
major UNIX environments on more than 20 hardware platforms. MFG/PRO software
supports distributed and mirrored databases, local and wide area networks,
character-based and graphical user interfaces.
The Company is also embracing object-oriented technology as a next
generation technology to address the complex supply chain management
requirements of companies and to improve business processes. The Company
believes that new object-based functionality will play a key role in the
competitive manufacturing, distribution, financial, planning and service/support
management strategies of customers in the Company's targeted industry
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segments. Object-oriented technology allows for the creation of systems which
are scalable and flexible and which are capable of accommodating changes in
business requirements and technology infrastructure.
The Company's deployment of object-oriented technology consists of three
main elements: component objects; Convergent Engineering methodology; and an
open interface server.
Component objects are simple building blocks of small, discrete pieces of
functionality that can be configured to create complete applications and enable
developers to rapidly create and modify systems to provide the desired set of
functionality for specific vertical markets or individual customers. The Company
has defined three types of component objects: business object frameworks, common
business objects and application objects.
Convergent Engineering methodology is a new software design methodology
employed by the Company to develop future products. Convergent Engineering
methodology allows business requirements to be captured as a series of simple
facts, actions and rules, enabling software to more flexibly accommodate current
business practices and processes.
Q/LinQ (formerly InterLinQ), the open interface server developed by the
Company, uses commercially available messaging tools along with the Company's
proprietary data mapping applications. This product is used to provide
inter-operability with other software applications, even among multiple revision
levels of the same or different products.
There can be no assurance that the Company will be successful in converting
its MFG/PRO software to component objects and to a Java user interface or
developing its new supply chain management software to incorporate component
objects and convergent engineering technology on a timely basis, if at all, or
that if converted or developed such software will achieve necessary market
acceptance. See "Factors That May Affect Future Results and Market Price of
Stock-Supply Chain Solutions Under Development and Underlying Technology."
Research and Development
The Company originally introduced its client/server-based MFG/PRO software
in 1986 and has subsequently released a number of product enhancements. The
Company's research and development staff, augmented by third-party development
resources, is focused on continuing updates and enhancements to its MFG/PRO
software, as well as the continual migration of MFG/PRO software to component
objects and to a Java user interface. The Company also maintains a separate
advanced technology development organization to research longer term software
solutions. This organization is specifically focused on developing the Company's
On/Q software supply chain management solutions, the first of which will be
Outbound Logistics. In April 1997, the Company also invested in a private
company focused on developing the Convergent Engineering methodology to
participate in research and development efforts of that company. The Company had
an option to acquire an additional interest in such company, and in September
1997 the Company exercised this option and, as a result, owns a 33% equity
interest. See Note 11 to Notes to Consolidated Financial Statements.
The Company believes that Internet capability for its products will be
important to the future success of its products. Accordingly, the Company is
developing Web-enabled versions of its products through in-house and third-party
development. The Company's Outbound Logistics product is also being designed to
include Web enablement. There can be no assurance that the Company will be
successful in developing any new products or enhancements, that the Company will
not experience difficulties that could delay or
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prevent successful development, introduction or sales of these products or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance.
Research and development expense increased significantly in recent years as
the Company has continued to focus on development of new and enhanced products.
Research and development expense, which does not include costs of product
support and customization, increased to $29.3 million for the fiscal year ended
January 31, 1998, from $25.4 million and $17.0 million for the fiscal years
ended January 31, 1997 and December 31, 1995, respectively. At January 31, 1998
the Company had 289 personnel in its research and development department. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations,""Factors That May Affect Future Results and Market Price of
Stock-Rapid Technological Change," and "-Supply Chain Solutions Under
Development and Underlying Technology."
Sales and Marketing
The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company's direct sales
organization consists of approximately 239 personnel located at its corporate
headquarters in Carpinteria, California, its regional headquarters in Mt.
Laurel, New Jersey, Hoofddorp, The Netherlands, Hong Kong, China and Sydney,
Australia, and more than 20 other direct sales offices worldwide. The Company's
sales team is organized around its five targeted vertical markets, enabling the
Company to address the specialized needs of its customers.
The Company's indirect sales channel consists of approximately 40
distributors worldwide. The Company does not grant exclusive rights to any of
its distributors. The Company's distributors primarily sell independently to
companies within their geographic territory but may also work in conjunction
with the Company's direct sales organization. In addition, the Company leverages
its relationships with implementation providers, hardware vendors and other
third parties to identify sales opportunities on a global basis.
Following the conclusion of its initial public offering, the Company has
commenced discussions with certain of its distributors regarding possible
acquisitions of controlling interests in such distributors. The Company is
pursuing this acquisition strategy to enhance the effectiveness and allegiance
of existing distributors and provide capital to help such distributors meet the
Company's growth targets.
The Company's sales and marketing strategy is to develop demand for its
products by creating visibility for the Company and awareness of its principal
product, MFG/PRO software. The Company participates in major computer and
vertical market industry trade shows and sponsors regional and worldwide user
conferences and regional alliance conferences. The Company also advertises in
leading business and targeted industry publications.
The Company's future success will depend in part upon the productivity of
its sales and marketing force and the ability of the Company to continue to
attract, integrate, train, motivate and retain new sales and marketing
personnel. Competition for sales and marketing personnel in the Company's
industry is intense. There can be no assurance the Company will be successful in
hiring such personnel in accordance with its plans. In addition, the failure by
the Company to maintain successfully its distributor relationships or to
establish new relationships in the future would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Factors That May Affect Future Results and Market Price of Stock-Dependence
Upon Development and Maintenance of Sales and Marketing Channels."
10
<PAGE>
Third-Party Implementation Providers
The Company has historically followed a strategy of utilizing almost
exclusively third parties to provide implementation and customization services
to the Company's customers. The Company chose this strategy to allow the Company
to maintain its focus on developing, marketing and distributing its software and
to enhance the effectiveness, expertise and commitment of third parties who
provide services on behalf of the Company. The Company also uses these third
parties for sales lead generation. Implementation and system integration
services are provided by a network of consultants and system integrators,
including Arthur Andersen LLP, Deloitte & Touche LLP, Ernst & Young LLP,
Integrated Systems & Services, LLC and Strategic Information Group
International, Inc. in the United States, BDM Largotim US, Inc., CSBI S.A.,
Origin Technology in Business Nederland B.V. and Sligos S.A. in Europe and Iris
Ifec Co., Ltd and STCS Systems Pte Ltd in Asia. In most cases, the Company's
distributors also deliver consulting and integration services. All third-party
providers are required to be certified in the applications and methodologies of
the Company's products. To the extent the Company implements its distributor
acquisition strategy, the Company anticipates that it will, directly or
indirectly, be providing implementation and system integration services. In
addition, in connection with the introduction of its On/Q software, the Company
intends to provide implementation services for this new product. The Company
believes this service will be an important factor in ensuring the successful
implementation of the initial installations of On/Q software and in successfully
transferring knowledge to third-party implementation partners to enable them to
provide necessary implementation services for future On/Q software
installations.
The Company typically enters into separate agreements with each of its
installation and implementation partners that provide such partners with the
non-exclusive right to promote and market the Company's products, and to provide
training, installation, implementation and other services for the Company's
products, within a defined territory for a specified period of time (generally
two years). Although the Company's installation and implementation partners do
not receive fees for the sale of the Company's software products, they generally
are permitted to set their own rates for such services and the Company typically
does not collect a royalty or percentage fee from such partners on services
performed. The Company also enters into similar agreements with its distributor
partners that grant such partners the non-exclusive right, within a specified
territory, to market, license, deliver and support the Company's products. In
exchange for such distributors' services, the Company receives a negotiated
royalty fee for the license of its software products. The Company also relies on
third parties for the development or inter-operation of key components of its
software so that users of the Company's software will obtain the functionality
demanded. Such research and product alliances include software developed to be
sold in conjunction with the Company's software products, technology developed
to be included in or encapsulated within the Company's software products and
numerous third-party software programs that generally are not sold with the
Company's software but inter-operate directly with the Company's software
through application program interfaces. The Company generally enters into joint
development agreements with its third-party software development partners that
govern ownership of the technology collectively developed. Each of the Company's
partner agreements and third-party development agreements contain strict
confidentiality and non-disclosure provisions for the service provider, end user
and third-party developer and the Company's third-party development agreements
contain restrictions on the use of the Company's technology outside of the
development process. The failure of the Company to establish or maintain
successful relationships with such third-party software providers or such
third-party installation, implementation and development partners or to failure
of such third-party software providers to develop and support their software
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Factors That May Affect Future Results and
Market Price of Stock-Reliance on and Need to Develop Additional Relationships
with Third Parties."
11
<PAGE>
Customers
The Company targets the industrial/electronics, food/beverage, consumer
packaged goods, medical and automotive sectors worldwide. As of January 31,
1998, the Company had licensed MFG/PRO software at approximately 3,600 sites to
approximately 1,900 customers in more than 80 countries. No one customer
accounted for more than 10% of total revenue during any of the Company's last
three fiscal years. The following are among companies and/or subsidiaries of
such companies in each of the Company's target vertical markets that have each
generated more than $400,000 in software license and maintenance revenue over
the last three fiscal years:
Electronics/Industrial
ABB Flakt Oy
Alcatel Services International B.V.
Allen-Bradley Co. Inc.
Aluminum Company of America
AT&T
Courtaulds plc
Ingersoll-Rand Company
Lucent Technologies Inc.
Matsushita Electric-Industrial Co., Ltd
NEC America, Inc.
Newbridge Networks Corporation
Philips International B.V.
RayChem Corporation
Schlumberger Technology Corp.
Silicon Graphics SA
Sun Microsystems, Inc.
Xerox Corporation
Food/Beverage
AEP Borden Nederland B.V.
Cargill, Incorporated
Kraft Jacobs Suchard AG
Pepsi-Cola Company
Presto Foods Products
The Quaker Oats Company
Rich Products Corporation
Consumer Packaged Goods
The Black & Decker Corporation
Colgate-Palmolive Company
Gillette Company
Johnson & Johnson
Unilever N.V.
Automotive
Aeroquip-Vickers, Inc.
Daewoo Information Systems Co. Ltd.
Ford Motor Corporation
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<PAGE>
Johnson Controls, Inc.
Lear Seating Corporation
R.J. Tower Corporation
Rockwell Automotive
United Technologies Automotive
Varity Kelsey-Hayes Company
Medical
Alza Corporation
BOC Ohmeda Inc.
Physio-Control Corporation
Rexall Sundown, Inc.
St.Jude Medical, Inc.
Sunrise Medical Inc.
Ventritex, Inc.
Genzyme Corporation
Customer Service and Support
The Company believes that providing a high level of customer service and
support is essential to customer satisfaction and the Company's long-term
success. The Company's service and support organization is based primarily in
centers located in Mt. Laurel, New Jersey, Hoofddorp, The Netherlands, Hong
Kong, China, Sydney, Australia and Sao Paulo, Brazil. Global support is also
provided through the Company's extensive network of alliance partners. This
global presence helps the Company support customers and partners in different
regions and time zones worldwide.
The Company also provides its customers with access to information and
customer support services via the World Wide Web. The Company's Internet-enabled
services facilitate the exchange of information seven days per week, 24 hours a
day and provide customers with access to QAD support databases. These databases
contain a wide variety of product information, customer support functionality,
answers to frequently asked questions, and a search-enabled online knowledge
base. In addition, ongoing training of support personnel, internal and external
consultants and the Company's alliance partners helps to ensure that customers
are up to date on the latest technologies and product enhancements offered by
the Company.
The Company offers, for a fee, a comprehensive education and training
program to its customers' information and technology staff and end-users, as
well as its implementation providers. Classes are offered through in-house
facilities at Company offices in various locations, as well as on-site training
services at customer locations. The Company has also assisted implementation
providers and customers in developing their own in-house support centers.
Competition
The ERP software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of industry
participants including consolidations among industry participants. The Company
competes in the ERP software market primarily on the basis of functionality,
ease of use and implementation, technology, time to benefit, supplier viability,
service and cost. The Company currently competes primarily with (i) other
vendors of software focused on the specific needs of manufacturing plants and
distribution sites of multinational manufacturing companies, which include Baan,
J.D. Edwards and SSA, (ii) smaller independent companies that have developed or
are attempting to develop advanced planning and scheduling software which
complement or compete with ERP or manufacturing resource planning solutions,
13
<PAGE>
(iii) internal development efforts by corporate information technology
departments and (iv) companies offering standardized or customized products on
mainframe and/or mid-range computer systems. The Company expects that
competition for its MFG/PRO software will increase as other large companies such
as Oracle and SAP, as well as other business application software vendors, enter
the market for plant-level ERP solutions. With the Company's strategic entry
into the supply chain management software market, the Company can expect to meet
substantial additional competition from companies presently serving that market,
such as i2, IMI and Manugistics, as well as from broad based solution providers
such as Baan, Oracle, PeopleSoft and SAP that the Company believes are
increasingly focusing on this segment. In addition, certain competitors, such as
Baan, Oracle, PeopleSoft and SAP, have well established relationships with
present or potential customers of the Company. The Company may also face market
resistance from the large installed base of legacy systems because of the
reluctance of these potential customers to commit the time, effort and resources
necessary to convert to an open, client/server-based software solution. Further,
as the client/server market continues to develop, companies with significantly
greater resources than the Company may attempt to increase their presence in
these markets by acquiring or forming strategic alliances with competitors,
partners or potential partners of the Company. Increased competition is likely
to result in price reductions, reduced operating margins and loss of market
share, any one of which could materially adversely affect the Company's
business, results of operations and financial condition. Many of the Company's
present or future competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition and a larger installed base of customers than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and to changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products, than can the Company. There
can be no assurance that the Company will be able to compete successfully with
existing or new competitors or that competition will not have a material adverse
effect on the Company's business, operating results and financial condition.
Proprietary Rights and Licensing
The Company's success is dependent upon its proprietary technology and
other intellectual property. The Company relies primarily on a combination of
the protections provided by applicable copyright, trademark and trade secret
laws, as well as on confidentiality procedures and licensing arrangements, to
establish and protect its rights in its software. The Company enters into
license agreements with each of its customers. Each of the Company's license
agreements provides for the non-exclusive license of the Company's MFG/PRO
software. Such licenses generally are perpetual (unless terminated by either
party upon 30 days written notice) and contain strict confidentiality and
non-disclosure provisions, a limited warranty covering MFG/PRO software and
indemnification for the customer from any infringement action related to MFG/PRO
software. The pricing policy under each license is based on a standard price
list and may vary based on the number of end-users, number of sites, number of
modules, number of languages, the country in which the license is granted and
level of ongoing support, training and services to be provided by the Company.
Payment terms are generally 30 days from the date of shipment. The Company has
no patents or pending patent applications. In order to facilitate the
customization required by most of the Company's customers, the Company generally
licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software, which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG /PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software,
14
<PAGE>
documentation and other written materials under the legal provisions relating to
trade secret, copyright and contract law. The Company's license agreements
generally allow the use of MFG/PRO software solely by the customer for internal
purposes without the right to sublicense or transfer the MFG/PRO software to
third parties. The Company believes that the foregoing measures afford only
limited protection. Despite the Company's efforts, it may be possible for third
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. In
addition, the laws of certain countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Accordingly,
there can be no assurance that the Company will be able to protect its
proprietary software against unauthorized third-party copying or use, which
could adversely affect the Company's competitive position. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exist, software
piracy can be expected to be a problem. Furthermore, there can be no assurance
that the Company's competitors will not independently develop technology similar
to that of the Company.
The Company has in the past been subject to claims of intellectual property
infringement and may increasingly be subject to such claims as the number of
products and competitors in the Company's targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although the
Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company may also initiate claims
or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation were determined in favor of the Company.
The Company has in the past and may in the future resell certain software,
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including a loss as a result of a
third-party infringement claim, could result in delays or reductions in product
shipments until equivalent software, if any, could be identified, licensed and
integrated, which could materially and adversely affect the Company's business,
operating results and financial condition. See "-Products" and "-Research and
Development."
Year 2000 Compliance
The Company's internal business information systems are primarily composed
of the same commercial application software products generally offered for
license by the Company to end-user customers. The Company is in the process of
implementing the current release of certain modules of its MFG/PRO software and
is not aware of any material operational issues or costs associated with
preparing such internal systems for the Year 2000. However, the Company utilizes
other third-party vendor network equipment,
15
<PAGE>
telecommunication products, and other third-party software products which may or
may not be Year 2000 compliant. The Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software failures and has
established a project team to assess Year 2000 risks. The project team will
coordinate the identification and implementation of changes to computer hardware
and software applications that will ensure availability and integrity of the
Company's financial systems and the reliability of its operational systems.
Although the Company has undertaken these steps to address the impact, if any,
of the Year 2000 issue surrounding such third-party products, failure of any
critical technology components to operate properly in the Year 2000 may have an
adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems.
The Company believes that all versions of its software products are "Year
2000 compliant;" that is, they are capable of adequately distinguishing 21st
century dates from 20th century dates. However, the Company's products are
generally integrated into enterprise systems involving software products
developed by other vendors and varying hardware platforms. The Company believes
that, due to the necessary interaction with such other software (including older
versions of other vendors' software) and platforms or other modifications to
older versions of the Company's software products, some of the Company's
customers are running earlier versions of the Company's software products that
in operation may not be Year 2000 compliant. The Company has produced
corrections for known non-compliant or potentially non-compliant situations and
is continuing its program of analysis for other potential non-compliant
situations involving its software. The Company has been encouraging customers to
implement corrections developed by the Company or to migrate to current product
versions.
The total cost of these Year 2000 compliance activities has not been, and
is not anticipated to be, material to the Company's financial condition or its
operating results. These costs and the timing in which the Company plans to
complete its Year 2000 modification and testing processes are based on
management's best estimates. However, there can be no assurance that the Company
will timely identify and remediate all significant Year 2000 problems, that
remedial efforts will not involve significant time and expense, or that such
problems will not have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company may in the
future be subject to claims based on Year 2000 problems arising upon the use of
the Company's products with others' products, custom modifications made by third
parties to the Company's products, or issues arising from the integration of
multiple products within an overall system. Although the Company has not been a
party to any litigation or arbitration proceeding to date involving its products
or services and related to Year 2000 compliance issues, there can be no
assurance that the Company will not in the future be required to defend its
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, operating results and financial condition.
Employees
As of January 31, 1998, the Company had 917 full-time employees of which
289 were in research and development, 173 were in customer and product support,
280 were in sales and marketing, and 175 were in general and administration and
other. In addition, the Company contracted with approximately 213 temporary
employees. None of the Company's workers is represented by collective bargaining
agreements with the exception of certain of the employees of the Company's
Netherlands subsidiary who are represented by statutory Works Councils as
required under the laws of The Netherlands. The Company believes that its
employee relations are good. The Company's success depends to a significant
extent upon a
16
<PAGE>
limited number of key employees and other members of senior management of the
Company. There can be no assurance that the Company will be successful in
attracting and retaining such personnel, and the failure to attract and retain
such personnel could have a material adverse effect on the Company's business.
See "Factors That May Affect Future Results And Market Price Of Stock-Dependence
Upon Key Personnel; Need to Hire Additional Personnel in All Areas."
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of
the Company as of January 31, 1998.
<TABLE>
<CAPTION>
Name Age Position(s)
<S> <C> <C>
Pamela M. Lopker .................... 43 Chairman of the Board and
President
Karl F. Lopker ...................... 46 Chief Executive Officer,
Chief Financial Officer and
Secretary
Rita V. Foley........................ 45 Executive Vice President, Global
Sales and Marketing
Barry R. Anderson.................... 46 Vice President, Administration
Vincent P. Niedzielski............... 44 Vice President, Development
</TABLE>
Pamela M. Lopker founded the Company in 1979 and has been its Chairman of
the Board and President since inception. Prior to founding the Company,
Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to
1979. Ms. Lopker is certified in Production and Inventory Management by the
American Production and Inventory Control Society. Ms. Lopker earned a Bachelor
of Arts degree in Mathematics from the University of California at Santa
Barbara.
Karl F. Lopker has served as Director, Chief Executive Officer and
Secretary since joining the Company in 1981. Mr. Lopker was founder and
President of Deckers Outdoor Corporation from 1973 to 1981, where he currently
serves as a Director. Mr. Lopker is certified in Production and Inventory
Management at the Fellow level by the American Production and Inventory Control
Society. Mr. Lopker studied Electrical Engineering and Computer Science at the
University of California at Santa Barbara. Mr. Lopker and Pamela Lopker are
married.
Rita V. Foley joined QAD in August 1997 as Executive Vice President, Global
Sales and Marketing. Prior to joining QAD. Mrs. Foley was with Digital
Corporation where she held progressively more responsible positions within
Sales, Marketing, Services, and Engineering. Most recently, she was Vice
President of the Partners Group. Before joining Digital, Mrs. Foley held
positions with Harris Lanier and Polaroid UK Ltd.
Barry R. Anderson has served as Vice President, Administration since April
1997. Prior to joining QAD, Mr. Anderson was Chief Administrative Officer at the
Bank South in Atlanta, Georgia. Previous experience includes ten years with
Lanier Worldwide as Vice President, Human Resources plus experience with ARAMCO
(Arabian American Oil Company), Lockheed and Pan Am. Mr. Anderson received a
Bachelor of Science degree in Business Management from Florida State University
and a Juris Doctorate degree from Atlanta Law School.
Vincent P. Niedzielski has served as Vice President, Development since
joining the Company in April 1996. Prior to joining the Company, Mr. Niedzielski
served as Vice President, Production and Development at Candle Corporation from
1984 to 1996.
17
<PAGE>
Mr. Niedzielski holds a Bachelor of Science degree in Mathema1tics from the
University of Scranton.
On March 31, 1998 A.J. Moyer joined the Company as its Chief Financial
Officer.
ITEM 2. PROPERTIES
The Company leases facilities to support its operations in several
locations throughout the world. The corporate headquarters are located in
Carpinteria, California in approximately 95,000 square feet of leased space in
two facilities subject to thirteen leases. The leases expire on dates ranging
from May 1998 to January 2003. An additional 14,000 square feet of office space
is leased in a neighboring location, with the lease expiring in February 2003.
The Company owns approximately 28 acres and 54,000 square feet of office space
in a neighboring location, which also supports portions of its operations. The
Company also owns a 34-acre parcel located in Carpinteria, California at which
it is considering developing additional facilities. Regional headquarters are
located in Mount Laurel, New Jersey, Hoofddorp, The Netherlands, Hong Kong, and
Sydney, Australia in space covering approximately 62,000, 16,000, 6,500 and
13,000 square feet and subject to leases expiring in 2001, 2000, 1998 and 2000,
respectively. Satellite offices are located in the Americas, Europe, Asia and
Australia in space covering approximately 52,000, 16,000, 10,000, and 10,000
square feet and subject to leases expiring in 2003, 2000, 1999 and 2002,
respectively. All of the Company's leases have been negotiated with independent
third parties on an arms length basis, and the Company believes they are on
commercially reasonable terms. Total rent expense for the year ended January 31,
1998 was $6.5 million. The global presence of the Company is supported by
offices located in the United States, Canada, Mexico, Brazil, The Netherlands,
United Kingdom, France, Germany, Sweden, Poland, Australia, Singapore, Japan,
Korea, India and China (Hong Kong and Shanghai). Although the Company has from
time to time sought and will in the future seek new or expanded facilities for
existing or additional regional offices, the Company expects that its current
domestic and international facilities will be sufficient to meet its needs for
at least the next 12 months. See Notes 2 and 8 of Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the Nasdaq National Market
since the Company's initial public offering in August 1997. According to records
of the Company's transfer agent, the Company had approximately 461 stockholders
of record as of January 31, 1998. The following table sets forth the low and
high sale price as of the close of market of the Company's Common Stock in each
of the fiscal quarters since the Company's initial public offering.
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
<S> <C> <C>
Fiscal 1998:
Fourth Quarter............. $11.75 $15.75
Third Quarter.............. $11.13 $23.25
</TABLE>
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future.
On June 2, 1997 the Company announced a two-for-one stock split. The
effective date of the stock split was June 19, 1997. Per share data and numbers
of common shares contained in these consolidated financial statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been adjusted to reflect the stock split for all periods
presented.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, January 31,
-------- -------- -------- -------- --------
1993 1994 1995 1997(1) 1998(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ................................................. $ 46,543 $ 66,360 $ 89,949 $126,444 $172,234
Operating income (loss) ................................. 6,442 4,084 (2,646) 2,720 14,695
Net income (loss) ....................................... 3,694 2,878 (686) 1,000 9,856
Basic net income (loss) per share (2) ................... 0.18 0.14 (0.03) 0.05 0.38
Diluted net income (loss) per share (2) ................. $ 0.18 $ 0.12 $ (0.03) $ 0.04 $ 0.38
</TABLE>
<TABLE>
<CAPTION>
December 31, January 31,
-------- -------- -------- -------- --------
1993 1994 1995 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....................... $ 1,413 $ 1,706 $ 1,519 $ 301 $ 70,082
Working capital (deficiency) .................... 5,015 2,271 (2,814) (5,976) 79,258
Total assets .................................... 26,489 44,361 68,466 77,250 190,506
Notes payable and current
installments of long-term debt ................ 2,630 4,767 9,610 8,465 143
Long-term debt, less current
installments .................................. 1,380 4,677 7,341 5,036 39
Total stockholders' equity ...................... $ 7,098 $ 11,993 $ 11,732 $ 10,804 $112,375
___________________
<FN>
(1) Effective February 1, 1996, the Company changed its financial reporting
year-end from December 31 to January 31. See Note 1 of Notes to
Consolidated Financial Statements.
(2) The basis for the determination of stock used in computing basic and
diluted net income (loss) per share is described in Note 1 of Notes to
Consolidated Financial Statements.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this form 10-K. Effective February 1, 1996, the Company changed its
financial reporting year end from December 31 to January 31. The Company's
fiscal years ending on or prior to December 31, 1995 ended December 31.
Overview
Founded in 1979, the Company is a provider of ERP software for
multinational and other large manufacturing companies. In 1986, the Company
commercially released its open, client/server based ERP application, MFG/PRO
software. Since that time, the Company has introduced several new generations of
its MFG/PRO software, and has significantly expanded its operations. As of
January 31, 1998, the Company had 917 full time employees, more than 20 direct
sales and support offices and approximately 40 distributors worldwide and
approximately 1,900 customers in more than 80 countries. Total revenues have
grown rapidly in recent years, increasing from $46.5 million to $172.2 million
in the year ended December 31, 1993 and year ended January 31, 1998,
respectively.
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<PAGE>
The Company derives its revenue from license fees, maintenance contracts
and other products and services. License fees are primarily derived from the
licensing of the Company's MFG/PRO software. License fees also include fees
received by the Company for licenses of third-party software sold in conjunction
with MFG/PRO software. Maintenance and other revenue consist primarily of
maintenance contracts and, to a lesser extent, revenue from consulting, training
and other services. Maintenance contract revenue typically represents 15% of the
software license list price (net of any distributor discounts) and is recognized
ratably over the life of the contract, which is typically 12 months. The Company
has historically followed a strategy of relying on its network of third-party
distribution and implementation alliances to provide hardware, consulting and
implementation services. As a result, the Company's revenue related to license
fees and maintenance contracts as a percentage of total revenues has increased
from 75% to 91% from the year ended December 31, 1993 to the year ended January
31, 1998, respectively. In the event the Company pursues certain acquisitions of
distributors, the Company anticipates that revenues from implementation services
may increase as a percentage of revenue. Further, if the Company is successful
in the launch of its On/Q software and the Company pursues its strategy of
directly providing implementation services for such product, the Company
anticipates that service revenue will be increased.
License fees for the Company's products generally range from $50,000 to
several million dollars, depending on the configuration of the products, the
number of sites and the number of users. No single customer has accounted for
greater than 10% of the Company's total revenues in any of the Company's last
three fiscal years. However, it is not uncommon for QAD to conclude a
multi-million dollar contract with a single customer, and the Company expects
revenue from large individual licenses to increase as a percentage of total
revenues.
The sales cycle for the Company's products is typically four to 15 months.
Like many enterprise software companies, the Company has experienced in the past
and expects to continue to experience seasonal fluctuations in its operating
results. Prior to the year ended January 31, 1998 the Company generally realized
lower total revenues (i) in July and August, due primarily to the timing of the
Company' fiscal quarter end and reduced economic activity in Europe during that
period and (ii) to a lesser extent, in the first two months of the fiscal year,
due to the Company's timing of the Company's fiscal year end and a concentration
of customers which purchase products in the fourth fiscal quarter, and their
resulting lower purchasing activity during the immediately following months. In
addition, like many enterprise software companies, the Company also typically
realizes a significant portion of its software license revenue in the last month
of each quarter. Unlike a number of the Company's competitors, the Company does
not derive material revenue from implementation in connection with its license
sales. As a result, the Company's revenue tends to be less predictable.
Furthermore, when QAD was a private company, QAD had historically focused its
efforts primarily on achieving annual financial results, with a significant
percentage of the Company's sales force compensation based on the achievement of
annual revenue goals. The Company believes that such practice had also
contributed to the weighting of total revenues to the fourth calendar quarter.
With the change in the Company's fiscal year end to January 31, the Company
experienced some shifting in revenues to the last month of each fiscal quarter.
In the year ended January 31, 1998 QAD implemented various changes designed
to mitigate the seasonal and quarterly fluctuations in its operating results.
Such changes included the hiring of additional financial personnel experienced
in quarterly budgeting, including a new Chief Financial Officer. The Chief
Financial Officer retained by the Company in the year ended January 31, 1998 was
replaced by a new Chief Financial Officer who started with the Company on March
31, 1998. Other changes included the changing of the Company's fiscal year end
from December 31 to January 31 and the changing of the Company's planning
systems to incorporate quarterly performance goals and quarterly forecasting
procedures. Additionally, the Company is including quarterly financial
incentives into its
21
<PAGE>
sales compensation system. There can be no assurance that such changes will
alleviate the seasonal, quarterly or other fluctuations in the Company's
financial results or that such changes will have a positive effect at all.
During the year ended December 31, 1995 through the year ended January 31,
1998, the Company significantly increased its sales and marketing, service and
support and research and development staffs. These increases resulted in
substantial growth in the number of its full-time employees (from 521 at
March 31, 1995, to 917 at January 31, 1998), the scope of its financial and
operating systems and the geographic distribution of its direct sales and
support operations (from 12 to 19 countries). These investments were incurred in
connection with the Company's strategy to establish and maintain a leadership
position as a global supplier of ERP solutions at the plant level as well as to
enter new markets such as supply chain management software. QAD believes that
such investments were essential in the development of the Company's products and
operations. Such commitment of resources has had, and may continue to have, a
significant impact on the Company's financial results, including annual and
quarterly profitability.
License fees revenue is recognized upon shipment of the software provided
there are no vendor obligations to be fulfilled and collectibility is probable
within a 12-month period from date of shipment. Typically, the Company's
software licenses do not include significant vendor obligations. Maintenance
revenue for ongoing customer support and product updates is recognized ratably
over the term of the maintenance period, which is typically 12 months. Other
revenue is derived mainly from training, consulting and manual sales. Training
and consulting revenue is recognized as the services are performed.
The Company records revenue primarily in United States dollars. However,
the Company has historically recorded local expenses in local currency. Foreign
currency transaction and translation gains and losses are recorded in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52. In the years
ended January 31, 1997 and 1998, the Company realized $879,000 and $407,000,
respectively, in foreign currency transaction gains, compared to a loss of
$477,000 in the year ended December 31, 1995. The Company has not previously
undertaken hedging transactions to cover its currency exposure, but may
implement programs to mitigate foreign currency exposure risk in the future as
management deems appropriate. See "Factors That May Affect Future Results and
Market Price of Stock-Risks Associated With International Operations" and
"-Exposure To Currency Fluctuations."
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected on the Company's
Consolidated Statements of Income:
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, January 31,
---- ---- -----------
1995 1997 1998
<S> <C> <C> <C>
---- ---- ----
Revenue:
License fees ................................................. 71% 68% 66%
Maintenance and other ........................................ 29 32 34
---- ---- ----
Total revenues ............................................. 100% 100% 100%
==== ==== ====
Cost and expenses:
Cost of revenues ............................................. 26 23 24
Sales and marketing .......................................... 43 42 39
Research and development ..................................... 19 20 17
General and administrative ................................... 15 13 11
---- ---- ----
Total cost and expenses .................................... 103 98 91
---- ---- ----
Operating income (loss) ........................................ (3) 2 9
Other (income) expense:
Interest income .............................................. (0) (0) (1)
Interest expense ............................................. 1 1 1
Other ........................................................ (0) (0) (1)
---- ---- ----
Total other (income) expense ............................... 1 1 (1)
---- ---- ----
Income (loss) before income taxes .............................. (4) 1 10
Income tax expense (benefit) ................................... (3) 0 4
---- ---- ----
Net income (loss) .............................................. (1)% 1% 6%
==== ==== ====
</TABLE>
For the year ended December 31, 1995 and years ended January 31, 1997 and 1998
Total Revenues. Total revenues increased 36% to $172.2 million in the year
ended January 31, 1998 from $126.4 million in the year ended January 31, 1997,
and increased 41% in the year ended January 31, 1997 from $89.9 million in the
year ended December 31, 1995. License fees as a percentage of total revenues
decreased to 66% in the year ended January 31, 1998 from 68% in the year ended
January 31, 1997 and 71% in the year ended December 31, 1995. The dollar
increases in total revenues were primarily due to growing acceptance of the
Company's MFG/PRO software, continued market penetration into its targeted
vertical markets and the Company's expansion into new geographical markets. The
decreases in license fees and increases in maintenance and other revenue as a
percentage of total revenues were primarily a result of a larger installed base
and increased maintenance renewals.
Cost of Revenues. Cost of revenues increased 43% to $41.6 million in the
year ended January 31, 1998 from $29.2 million in the year ended January 31,
1997, and increased 24% in the year ended January 31, 1997 from $23.6 million in
the year ended December 31, 1995. Cost of revenues as a percentage of total
revenues increased to 24% in the year ended January 31, 1998 from 23% in the
year ended January 31, 1997 and decreased from the 26% in the year ended
December 31, 1995. The increase in dollar amount was primarily the result of
costs associated with the year over year growth in revenues of reselling
third-party databases. The decrease in cost of revenues as a percentage of total
revenues in the year ended January 31, 1997 from the year ended December 31,
1995 was primarily due to increased sales of MFG/PRO software licenses where the
purchase of third-party tools and databases were deferred or where the licensee
obtained licenses of third-party tools and databases directly from the
third-party vendor. The increase in cost of revenue as a percentage of total
revenue in the year ended January 31, 1998 from the year ended January 31, 1997
was due to significantly higher costs associated with reselling third-party
databases.
23
<PAGE>
Sales and Marketing. Sales and marketing expense increased 26% to
$67.2 million in the year ended January 31, 1998 from $53.2 million in the year
ended January 31, 1997, and increased 39% in the year ended January 31, 1997
from $38.3 million in the year ended December 31, 1995. Sales and marketing
expense as a percentage of total revenues decreased to 39% in the year ended
January 31, 1998 from 42% in the year ended January 31, 1997 and 43% in the year
ended December 31, 1995. The increase in dollar amount was primarily due to the
expansion of the Company's global sales force, opening and supporting global
sales offices and increasing marketing expense to promote the Company's name and
products. The expansion was initiated in the year ended December 31, 1995 and
continued into the year ended January 31, 1998. The decrease in sales and
marketing expense as a percentage of total revenue was primarily due to the
fixed cost portion of the expense base not increasing commensurate with the
revenue increases.
Research and Development. Research and development expense increased 15% to
$29.3 million in the year ended January 31, 1998 from $25.4 million in the year
ended January 31, 1997, and increased 49% in the year ended January 31, 1997
from $17.0 million in the year ended December 31, 1995. Research and development
expense as a percentage of total revenues decreased to 17% in the year ended
January 31, 1998 from 20% in the year ended January 31, 1997 and 19% in the year
ended December 31, 1995. The increase in total research and development was
primarily due to ongoing enhancements to MFG/PRO software, including the ongoing
migration of MFG/PRO software to object-oriented technology. In addition, the
increases were due to increased staffing of, and associated support for, product
engineers in connection with efforts to develop On/Q software, the Company's new
supply chain management software which the Company expects to be commercially
available in the second half of calendar year 1998, and Qwizard, a
computer-based interactive training tool which became commercially available in
May 1997. The decrease in research and development expense as a percentage of
total revenue was primarily the result of the increase in revenue and the
reduction in the utilization of third-party software developers in the first
half of the year ended January 31, 1998.
General and Administrative. General and administrative expense increased
22% to $19.4 million in the year ended January 31, 1998 from $15.9 million in
the year ended January 31, 1997, and increased 17% in the year ended January 31,
1997 from $13.6 million in the year ended December 31, 1995. General and
administrative expense as a percentage of total revenues decreased to 11% in the
year ended January 31, 1998 from 13% in the year ended January 31, 1997 and 15%
in the year ended December 31, 1995. The dollar increases in general and
administrative expense were primarily the result of costs associated with the
expansion of the Company's administrative infrastructure to support increases in
the Company's total revenues. In addition, the Company recognized compensation
expense of $648,000 and $2.4 million in the year ended January 31, 1997 and the
year ended December 31, 1995, respectively, in connection with the repurchase of
stock held by employees upon their departure from the Company. The decrease in
general and administrative expense as a percentage of total revenues resulted
from total revenues growing faster than general and administrative expense. See
Note 10 of Notes to Consolidated Financial Statements.
Total Other (Income) Expense. Total other (income) expense increased 333%
to $(2,320,000) in the year ended January 31, 1998 from $997,000 in the year
ended January 31, 1997, and decreased 19% in the year ended January 31, 1997
from $835,000 in the year ended December 31, 1995. The increase in the year
ended January 31, 1998 was primarily the result of significantly reduced
interest expense as the IPO proceeds were applied to the repayment and
retirement of debt, and to interest income accruing from investment of the
remaining proceeds in short-term investment-grade securities and money market
instruments. The decrease in the year ended January 31, 1997 was primarily the
result of foreign currency transaction gains and miscellaneous rental income
offset by increased interest expense.
24
<PAGE>
Income Tax Expense (Benefit). The Company recorded income tax expense
(benefit) of $7.2 million, $723,000 and $(2.8) million in the years ended
January 31, 1998 and 1997 and the year ended December 31, 1995, respectively.
The Company's effective income tax rates were 42% in the years ended January 31,
1998 and 1997, respectively. The Company's effective income tax rate
historically has benefited from the United States research and development tax
credit and tax benefits generated from export sales made from the United States.
The tax benefit recorded in the year ended December 31, 1995 relates primarily
to loss carrybacks and carryforwards associated with the Company's entry into
new foreign taxing jurisdictions and anticipated future taxable income to be
earned in such jurisdictions. The Company has available tax benefits associated
with net operating loss carryforwards of foreign subsidiaries aggregating
$1.8 million at January 31, 1998. See Note 6 of the Notes to Consolidated
Financial Statements.
Fiscal Year Transition Period
Effective February 1, 1996, the Company changed its financial reporting
year-end from December 31 to January 31. As a result of the change, the Company
is disclosing interim financial results for the one-month period ended January
31, 1996. Total revenues, total cost and expenses, total other (income) expense
and net income (loss) were $3.5 million, $7.3 million, $65,000 and $(2.9)
million, respectively, for the one-month period. During that month, the Company
experienced normal monthly operational costs including planned increases in
headcount for the coming year. The net loss for this period reflects these
planned increases in conjunction with seasonally low revenue in the month of
January.
Liquidity and Capital Resources
On August 6, 1997, the Company completed its initial public offering of
common stock, selling 5,750,000 shares at $15.00 per share. Net proceeds to the
Company were approximately $78.5 million. Additionally, on August 12, 1997, the
Company sold, through exercise of the underwriters' options, an additional
862,500 shares of the Company's common stock, for which the Company received
additional net proceeds of approximately $12.0 million. Prior to the initial
public offering, the Company financed its operations and met its capital
expenditure requirements through cash flows from operations as well as short and
long term borrowings.
At January 31, 1998, the Company had $70.1 million of cash and cash
equivalents. Net cash provided by operating activities were $9.5 million,
$7.4 million and $4.1 million in the years ended January 31, 1998 and 1997 and
the year ended December 31, 1995, respectively. Net cash used in investing
activities was primarily related to the purchase of computer equipment, office
furniture and real estate and aggregated $16.5 million, $3.4 million and
$9.5 million in the years ended January 31, 1998 and 1997 and the year ended
December 31, 1995, respectively. Net cash provided by (used in) financing
activities were primarily related to proceeds from the initial public offering,
proceeds from (used in) borrowings and proceeds from the sale of stock to
employees and totaled $76.8 million, $(4.5) million and $5.0 million in the
years ended January 31, 1998 and 1997 and the year ended December 31, 1995,
respectively. At January 31, 1998, the Company did not have any material
commitments for capital expenditures.
At January 31, 1998, the Company had a working capital of $79.3 million.
Accounts receivable, net of allowance for doubtful accounts, increased to $75.7
million at January 31, 1998 from $46.7 million at January 31, 1997. The
Company's accounts receivable days' sales outstanding ("DSO"), calculated on a
quarterly basis (for quarters ending on April 30, July 31, October 31, and
January 31), has ranged from 125 days to 66 days over the last three years and
has demonstrated seasonal fluctuations. During each of those years, DSO peaked
in the quarter ended April 30 and (except for the year ended January 31, 1998)
improved significantly during the middle two quarters. The quarters ended
January
25
<PAGE>
31 are impacted by the significant amount of seasonal maintenance renewals. The
Company believes that the days' sales outstanding are higher than desired and
the Company is focusing on its sales terms and collection processes to improve
cash flows and working capital. Total deferred revenue increased to $43.0
million at January 31, 1998 from $29.1 million at January 31, 1997 primarily as
a result of increased billings of maintenance agreements.
Subsequent to the initial public offering the Company entered into a
revolving credit agreement with Bank of America National Trust and Savings
Association, which expires on August 4, 1999. The maximum available amount of
borrowings under the revolving credit agreement is equal to $20 million, unless
there is a voluntary termination or reduction of commitment by the Company. The
total amount of available borrowings under the revolving credit agreement at
January 31, 1998 was approximately $20 million. Borrowings under the revolving
credit agreement bear interest at a rate per annum equal to the Offshore Rate
plus the Applicable Margin or the Base Rate plus the Applicable Margin. The
Applicable Margin means, with respect to Base Rate Loans, 0%, and with respect
to Offshore Rate Loans, 1.25% when 50% or less of the loan commitment is being
utilized, and 1.50% when more than 50% of the loan commitment is being utilized.
The Company pays a commitment fee on the average unused portion of the loan
commitment to the bank, equal to one-half of one percent (.50%) per annum.
The Company believes that its available working capital, the available
borrowings under its revolving credit agreement and cash generated by
operations, will satisfy the Company's working capital requirements for at least
the next 12 months.
Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2: Software Revenue Recognition (SOP 97-2) which
is effective for software transactions entered into in fiscal years beginning
after December 15, 1997. The Company is currently evaluating the effect of this
new statement.
The Financial Accounting Standards Board has issued SFAS No. 130 Reporting
Comprehensive Income and SFAS No.131 Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 130 will affect the disclosure requirements
for the first quarter of the year ended January 31, 1999 financial statements.
SFAS No. 131 will affect the disclosure requirements for the year ended January
31, 1999 annual financial statements. The Company is currently evaluating the
effect of these new statements.
Year 2000 Compliance
In 1997, the Company developed a plan to deal with the Year 2000 problem
and began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The total cost of the project
has not been, and is not anticipated to be, material to the Company's financial
position, results of operations or liquidity. The costs of the project has been
and will continue to be funded through operating cash flows. The Company is
expensing all costs associated with these systems changes as the costs are
incurred. See "Business-Year 2000 Compliance."
International Operations
The Company has reassessed, and continues to closely monitor, its
international business risks due to the recent economic conditions in the Asian
markets. Although the Company does not anticipate that the Asian conditions will
materially impact its business,
26
<PAGE>
there can be no assurance that the current economic conditions in Asia will not
worsen or that the situation will not negatively impact the Company's financial
condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Historical Fluctuations in Quarterly Results and
Potential Future Significant Fluctuations
The Company's quarterly revenue, expenses and operating results have varied
significantly in the past, and the Company anticipates that such fluctuations
will continue in the future as a result of a number of factors, many of which
are outside the Company's control. The factors affecting these fluctuations
include demand for the Company's products and services, the size, timing and
structure of significant licenses by customers, market acceptance of new or
enhanced versions of the Company's software products and products that operate
with the Company's products, the publication of opinions about the Company, its
products and technology by industry analysts, the entry of new competitors and
technological advances by competitors, delays in localizing the Company's
products for new markets, delays in sales as a result of lengthy sales cycles,
changes in operating expenses, foreign currency exchange rate fluctuations,
changes in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors, the timing of the release of new or enhanced
versions of the Company's software products and products that operate with the
Company's products, changes in the method of product distribution (including the
mix of direct and indirect channels), product life cycles, changes in the mix of
products and services licensed or sold by the Company, customer cancellation of
major planned software development programs and general economic factors.
A significant portion of the Company's revenue in any quarter may be
derived from a limited number of large, non-recurring license sales. The Company
expects to continue to experience from time to time large, individual license
sales, which may cause significant variations in quarterly license fees. The
Company also believes that the purchase of its products is relatively
discretionary and generally involves a significant commitment of a customer's
capital resources. Therefore, a downturn in any potential customer's business
could result in order cancellations, which could have a significant adverse
impact on the Company's revenue and quarterly results. Moreover, declines in
general economic conditions could precipitate significant reductions in
corporate spending for information technology, which could result in delays or
cancellations of orders for the Company's products.
The Company has also historically recognized a substantial portion of its
revenue from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in, or at the end of, a particular quarter. If sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company is unlikely to be able to generate revenue from
alternate sources in time to compensate for the shortfall. As a result, a lost
or delayed sale could have a material adverse effect on the Company's quarterly
operating results. To the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company has also historically operated with little backlog because its
products are generally shipped as orders are received. As a result, revenue from
license fees in any quarter is substantially dependent on orders booked and
shipped in that quarter and on sales by the Company's distributors and other
resellers. Sales derived through indirect channels are harder to predict and may
have lower profit margins than direct sales.
The Company has generally realized lower revenue (i) in July and August,
due primarily to the timing of the Company's fiscal quarter end and reduced
economic activity
27
<PAGE>
in Europe during that period and (ii) to a lesser extent, in the first two
months of the fiscal year, due to the timing of the Company's fiscal year end
and the concentration by some customers of purchases in the fourth quarter of
the fiscal year, and their consequently lower purchasing activity during the
immediately following months. In addition, like many software companies, the
Company typically realizes a significant portion of its software license revenue
in the last month of the quarter and in the last quarter of the year. With the
change in the Company's fiscal year end to January 31, the Company experienced
some shifting in revenues to the last month of each new fiscal quarter. Unlike a
number of the Company's competitors, the Company does not derive material
revenue from the provision of services in connection with its license sales. As
a result, a greater proportion of the Company's revenue tends to be less
predictable and to occur later in the quarter and in the year than the revenue
of competitors who provide such services.
The Company's expense levels are relatively fixed and are based, in
significant part, on expectations of future revenue. Consequently, if revenue
levels are below expectations, expense levels could be disproportionately high
as a percentage of total revenue, and operating results would be immediately and
adversely affected and losses could occur.
Based upon the factors described above, the Company believes that its
quarterly revenue, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations are not necessarily meaningful and that, as a result, such
comparisons should not be relied upon as indications of future performance.
Moreover, although the Company's revenue has generally increased in recent
periods, there can be no assurance that the Company's revenue will grow in
future periods, at past rates or at all, or that the Company will be profitable
on a quarterly or annual basis. The Company has in the past experienced and may
in the future experience quarterly losses.
In the year ended January 31, 1998, QAD implemented various changes
designed to mitigate the seasonal and quarterly fluctuations in its operating
results. Such changes included the hiring of additional financial personnel,
including a new Chief Financial Officer, the changing of the Company's fiscal
year end from December 31 to January 31 and the changing of the Company's
planning systems to incorporate quarterly performance goals and quarterly
forecasting procedures. Additionally, the Company is including quarterly
financial incentives into its sales compensation system. There can be no
assurance that such changes will alleviate the seasonal, quarterly or other
fluctuations in the Company's financial results or that such changes will have a
positive effect at all.
In future periods, the Company's operating results may be below the
expectations of stock market analysts and investors. In such event, the price of
the Common Stock could be materially adversely affected. See "-Seasonality of
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated with Sales Cycle
Because the license of the Company's products generally involves a
significant commitment of capital (which ranges from approximately $50,000 to
several million dollars), the sales cycle associated with a customer's purchase
of the Company's products is generally lengthy (with a typical duration of four
to 15 months), varies from customer to customer and is subject to a number of
significant risks over which the Company has little or no control. These risks
include customers' budgetary constraints, timing of budget cycle, concerns about
the introduction of new products by the Company or its competitors and general
economic downturns which can result in delays or cancellations of information
systems investments. Due in part to the strategic nature of the Company's
products, potential customers are typically cautious in making product
acquisition
28
<PAGE>
decisions. The decision to license the Company's products generally requires the
Company to provide a significant level of education to prospective customers
regarding the uses and benefits of the Company's products, and the Company must
frequently commit substantial presales support resources. The Company is almost
completely reliant on third parties for implementation and systems integration
services, which may cause sales cycles to be lengthened or result in the loss of
sales. The uncertain outcome of the Company's sales efforts and the length of
its sales cycles could result in substantial fluctuations in operating results.
If sales forecasted from a specific customer for a particular quarter are not
realized in that quarter, then the Company is unlikely to be able to generate
revenue from alternative sources in time to compensate for the shortfall. As a
result, and due to the relatively large size of some orders, a lost or delayed
sale could have a material adverse effect on the Company's quarterly operating
results. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."
Seasonality of Operating Results
The Company has generally realized lower revenue (i) in July and August,
due primarily to the timing of the Company's fiscal quarter end and reduced
economic activity in Europe during that period and (ii) to a lesser extent, in
the first two months of the fiscal year, due to the timing of the Company's
fiscal year end and the concentration by some customers of purchases in the
fourth quarter of the fiscal year and their consequently lower purchasing
activity during the immediately following months. Notwithstanding the change in
the Company's fiscal year end from December 31 to January 31 and the recent
changes in the Company's planning and compensation systems, the Company
anticipates that such seasonality will continue to cause significant quarterly
fluctuations in the Company's operating results. See "-Historical Fluctuations
in Quarterly Results and Potential Future Significant Fluctuations" and
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations."
Product Concentration
The Company has historically derived substantially all of its revenue from
the licensing and maintenance of the Company's MFG/PRO software and third-party
software. In the fiscal year ended January 31, 1997 and 1998, such revenue
equaled approximately 94% and 91%, respectively, of the Company's total revenue.
The Company expects that such revenue will continue to represent substantially
all of the Company's revenue for the foreseeable future. However, in the event
the Company pursues certain acquisitions of distributors, the Company
anticipates that revenues from implementation services will increase. In
addition, if the Company is successful in the launch of its On/Q software and
the Company pursues its strategy of directly providing implementation services
for such product, the Company anticipates that service revenue will be
increased. The Company's success depends on continued market acceptance of the
Company's MFG/PRO software, as well as the Company's ability to introduce new
versions of MFG/PRO software and other products to meet the evolving needs of
its customers. Although demand for MFG/PRO software has grown in recent years,
management believes that the market for ERP software is still developing and
there can be no assurance that it will continue to grow or that, even if the
market does grow, businesses will continue to adopt MFG/PRO software. The
failure of the market for ERP software to continue to grow, any reduction in
demand for MFG/PRO software as a result of increased competition in the market
for ERP software, technological change, failure by the Company to introduce new
versions of products acceptable to the marketplace or other similar factors
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company has spent, and intends to continue
to spend, considerable resources educating potential customers about ERP in
general and about the features and functions of MFG/PRO software in particular.
However, there can be no assurance that such expenditures will enable MFG/PRO
software to achieve any additional degree of market penetration or a higher
level of market acceptance, nor can there be any assurance that any new ERP
products being
29
<PAGE>
developed by the Company will achieve the market acceptance necessary to make
such products profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business-Products."
Dependence on Progress Products
The Company's MFG/PRO software is written in a programming language that is
proprietary to Progress Software Corporation ("Progress"). The Company has
entered into a license agreement with Progress (the "Progress Agreement") that
provides the Company and each of its subsidiaries, among other things, with the
perpetual, worldwide, royalty-free right to use the Progress programming
language to develop, market, distribute and license the Company's software
products. The Progress Agreement also provides for continued software support
from Progress through June 2002 without charge to the Company. Progress may only
terminate the Progress Agreement upon the Company's adjudication as bankrupt,
its liquidation or other similar event, or if the Company has ceased business
operations in full. The Company's success is dependent upon Progress continuing
to develop, support and enhance this programming language, its tool set and
database, as well as the continued market acceptance of Progress as a standard
database program. The Company has in the past and may in the future experience
product release delays because of delays in the release of Progress products or
product enhancements. Any such delays could have a material adverse effect on
the Company's business, operating results and financial condition. MFG/PRO
software employs Progress programming interfaces, which allow MFG/PRO software
to operate with Oracle database software. However, the Company's software
programs do not run within programming environments other than Progress and the
Company's customers must acquire rights to Progress Software in order to use
MFG/PRO software. The Company's On/Q software products, the initial application
of which is currently under development and is expected to be commercially
available in the second half of calendar year 1998, are not dependent upon
Progress technology. The failure of Progress to continue its relationship with
the Company or to develop, support or enhance its programming language in a
manner competitive with enhancements of other present or future programming
languages, the increased market acceptance of programming languages other than
Progress in the Company's market or the Company's inability to adapt its
software to such other languages could have a material adverse effect on the
Company's business, operating results and financial condition.
Rapid Technological Change
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovations or changes within the computer hardware and
software industries, the introduction of new products and technologies
(including new hardware platforms and programming languages) and the emergence,
evolution or widespread adoption of industry standards. For example, increasing
commercial use of the Internet may give rise to new customer requirements and
new industry standards. The Company's future success will depend upon its
ability to continue to enhance its current product line and to develop and
introduce new products that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
In particular, the Company believes its future success will depend on its
ability to convert its products to object-oriented technology as well as its
ability to develop products that will operate across the Internet. There can be
no assurance that the Company will be successful in developing and marketing, on
a timely and cost-effective basis, product enhancements or new products that
respond to technological advances by others, or that its products will achieve
market acceptance. The Company's failure to successfully develop and market
product enhancements or new products could have a material adverse effect on the
Company's business, operating results and financial condition.
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While the Company generally takes steps to avoid interruptions of sales due
to the pending availability of new products, customers may delay their
purchasing decisions in anticipation of the general availability of new or
enhanced MFG/PRO software, which could have a material adverse effect on the
Company's business, operating results and financial condition. The actual or
anticipated introduction of new products, technologies and industry standards
can also render existing products obsolete or unmarketable or result in delays
in the purchase of such products. As a result, the life cycles of the Company's
products are difficult to estimate. The Company must respond to developments
rapidly and incur substantial product development expenses. Any failure by the
Company to anticipate or respond adequately to technology developments or
customer requirements, or any significant delays in introduction of new
products, could result in a loss of revenue. Moreover, significant delays in the
general availability of such new releases, significant problems in the
installation or implementation of such new releases, or customer dissatisfaction
with such new releases, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is also
dependent upon third parties for necessary services in connection with the
installation and implementation of the Company's products and associated
post-sales training. Any errors, delays or other deficiencies in such services
due to technology changes or other factors could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business-Products" and "-Third-Party Implementation Providers."
Supply Chain Solutions Under Development and Underlying Technology
A significant element of the Company's strategy is its development of On/Q
software, a series of new products targeted to the supply chain management needs
of manufacturing companies. Over the past two years, the Company has devoted
substantial resources to developing its On/Q software and working with third
parties to develop software components which may be included as part of or
encapsulated within On/Q software. The Company's first On/Q software product,
Outbound Logistics, is currently under development and is anticipated to be
commercially available in the second half of calendar year 1998. Although the
Company has performed preliminary tests on its Outbound Logistics software, it
has not completed its development or commenced beta testing, nor has the product
been implemented in a commercial setting. There can be no assurance that
Outbound Logistics or any other of the Company's planned On/Q software products
developed by the Company or third parties will achieve the performance standards
required for commercialization or that such products will achieve market
acceptance or be profitable. If Outbound Logistics or the Company's other
planned supply chain management software products do not achieve such
performance standards or do not achieve market acceptance, the Company's
business, operating results and financial condition would be materially and
adversely affected.
On/Q software is being designed based upon object-oriented technology.
Object-oriented applications are characterized by technology, development style
and programming languages that differ from those used in traditional software
applications, including the current version of MFG/PRO software. The Company
believes that new object-based functionality will play a key role in the
competitive manufacturing, distribution, financial, planning and service/support
management information technology strategies of customers in the Company's
targeted industry segments. The Company is also currently in the process of
converting its MFG/PRO software modules to component objects and to a Java user
interface where the Company believes such conversion will add value. There can
be no assurance that the Company will be successful in developing its new supply
chain management software or converting its MFG/PRO software to component
objects or to a Java user interface on a timely basis, if at all, or that if
developed or converted such software will achieve market acceptance. The Company
is also reliant on the Java programming language in developing and supporting
its Java user interface for MFG/PRO and its On/Q software products. The failure
to successfully incorporate component objects in
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new products, to convert MFG/PRO software to component objects, to integrate
Java user interfaces or of Java to achieve market acceptance could have a
material adverse effect on the Company's business, operating results and
financial condition.
Convergent Engineering is a new software design methodology employed by the
Company to develop future products. Convergent Engineering methodology allows
business requirements to be captured as a series of simple facts, actions and
rules, enabling software to more flexibly accommodate business practices and
processes. Although Convergent Engineering does not require the user to adopt
new business practices or principles for their own work processes, Convergent
Engineering models business management processes differently than traditional
business models. As a result, use of Company products based upon Convergent
Engineering principles will require the Company's implementation partners to be
educated in the new methodology. There can be no assurance that the Company will
gain acceptance among its implementation providers for this methodology on which
the Company's new products are based. The failure to obtain such acceptance
would have a material adverse effect on the marketability of the Company's
products under development and the Company's business, operating results and
financial condition. See "Business-Products."
Risk of Software Defects
As a result of the complexities inherent in client/server computing
environments and the broad functionality and performance demanded by customers
for ERP products, major new products and product enhancements can require long
development and testing periods. In addition, software programs as complex as
those offered by the Company may contain undetected errors or "bugs" when first
introduced or as new versions are released that, despite testing by the Company,
are discovered only after a product has been installed and used by customers.
While the Company has on occasion experienced delays in the scheduled
introduction of new and enhanced products, to date the Company's business has
not been materially adversely affected by delays or the release of products
containing errors. However, there can be no assurance that errors will not be
found in future releases of the Company's software, or that the Company will not
experience material delays in releasing product improvements or new products.
The occurrence of such errors could result in significant losses to the Company
or to customers. Such occurrences could also result in reduced market acceptance
of the Company's products, which would have a material adverse effect on the
Company's business, operating results and financial condition.
Market Concentration
The Company has made a strategic decision to concentrate its product
development and sales and marketing in five primary vertical industry segments:
electronics/industrial, food/beverage, consumer-packaged goods, medical and
automotive. An important element of the Company's strategy is to achieve
technological and market leadership recognition for its software products in
these segments. The failure of the Company's products to achieve or maintain
substantial market acceptance for its software products in one or more of these
segments could have a material adverse effect on the Company's product and
business strategy in that segment and on the business, operating results and
financial condition of the Company. If any of the industry segments targeted by
the Company experiences a material downturn in expansion or in prospects for
future growth, such downturn would materially adversely affect the demand for
the Company's products and will materially adversely affect its business,
operating results and financial condition. See "Business-Sales and Marketing."
Management of Growth
The Company's business has grown rapidly in the last seven years, with
revenue increasing from approximately $46.5 million in the fiscal year ended
December 31, 1993 to
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approximately $172.2 million in the fiscal year ended January 31, 1998. During
the fiscal year ended December 31, 1995 and continuing through the fiscal year
ended January 31, 1998, the Company significantly increased its sales and
marketing, service and support and research and development staffs, resulting in
substantial growth in the number of its full-time employees (from 521 at March
31, 1995 to 917 at January 31, 1998), the scope of its operating and financial
systems and the geographic distribution of its operations and customers. This
recent rapid growth has placed, and will continue to place, a significant strain
on the Company's management and operations. The Company expects to continue to
increase staffing levels, primarily in the sales and marketing and research and
development areas, and incur additional associated costs in future periods. The
Company's future operating results will depend on the ability of its officers
and other key employees to continue to implement and improve its operational,
customer support and financial control systems, and to effectively expand, train
and manage its employee base. There can be no assurance that the Company will be
able to manage any future expansion successfully, and any inability to do so
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company has undertaken a project to
significantly upgrade its financial planning and control systems, including an
upgrade of its current transaction accounting systems through, among other
things, the implementation of the most recent release of the Company's own
software for financial controls. The Company believes the success of such
implementation will improve its budgeting, forecasting and financial statement
reporting capabilities. However, implementation of these systems upgrades will
require significant management and other employee attention and coordination,
and there can be no assurance that the implementation will be successful. The
failure to successfully implement the upgrades could materially adversely affect
the Company's future budgeting, forecasting and financial statement reporting
capabilities.
The Company has made a strategic decision to be a global provider of its
products. To accomplish this goal, over the last two years the Company has
expanded its direct sales and support operations from 12 countries to 19
countries. In addition, during that time, the Company has significantly expanded
its distributor and partner relationships. Currently, the Company has
approximately 40 distributors worldwide. The management of these widely
dispersed international operations has placed and will continue to place
significant strain on the Company's management and operations. The Company
believes that its ability to provide products and services on a global basis is
critical to the Company's success. However, there can be no assurance that the
Company will be able to continue to successfully manage its widespread
international operations or successfully manage future expansion of such
operations, and the failure by the Company to do so would have a material
adverse effect on its business, operating results and financial condition.
The Company days' sales outstanding have generally exceeded industry
averages. If the Company experiences rapid growth, this lengthy collection cycle
could result in a significant impairment of the Company's cash position. While
the Company has undertaken efforts to reduce the length of its collection cycle,
the failure of the Company to successfully implement such changes or the failure
of such changes to reduce such collection cycle could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence Upon Key Personnel; Need to Hire Additional Personnel in All Areas
The Company's future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, including Pamela M. Lopker, its President and founder, and
Karl F. Lopker, its Chief Executive Officer, neither of whom is bound by an
employment agreement. Pamela and Karl Lopker are married to each other and
jointly own approximately 65% of the outstanding Common Stock. Although the
Company maintains key-individual insurance in the amount of $2.5
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million with respect to each of Pamela and Karl Lopker and the Company is the
beneficiary of such policies, the loss of one or more of these or other key
individuals could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and the Company has at times in the
past experienced difficulty in recruiting qualified personnel. There can be no
assurance that the Company will retain its key technical and managerial
employees or that it will be successful in attracting, assimilating and
retaining other highly qualified technical and managerial personnel in the
future. The loss of any member of the Company's key technical and senior
management personnel or the inability to attract and retain additional qualified
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business-Employees" and
"-Executive Officers of the Registrant."
Dependence Upon Development and Maintenance of Sales and Marketing Channels
The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company has made significant
expenditures in recent years in the expansion of its sales and marketing force,
primarily outside the United States, and plans to continue to expand its sales
and marketing force. The Company's future success will depend in part upon the
productivity of its sales and marketing force and the ability of the Company to
continue to attract, integrate, train, motivate and retain new sales and
marketing personnel. Competition for sales and marketing personnel in the
software industry is intense. There can be no assurance the Company will be
successful in hiring such personnel in accordance with its plans. There can be
no assurance that the Company's recent and other planned expenses in sales and
marketing will ultimately prove to be successful or that the incremental revenue
generated will exceed the significant incremental costs associated with these
efforts. In addition, there can be no assurance that the Company's sales and
marketing organization will be able to compete successfully against the
significantly more extensive and better funded sales and marketing operations of
many of the Company's current and potential competitors. If the Company were
unable to develop and manage its sales and marketing force expansion
effectively, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company's indirect sales channel consists of approximately 40
distributors worldwide. The Company does not grant exclusive rights to any of
its distributors. The Company's distributors primarily sell independently to
companies within their geographic territory but may also work in conjunction
with the Company's direct sales organization. The Company will need to maintain
and expand its relationships with its existing distributors and enter into
relationships with additional distributors in order to expand the distribution
of its products. There can be no assurance that current or future distributors
will provide the level and quality of expertise and service required to
successfully license the Company's products, that the Company will be able to
maintain effective, long-term relationships with distributors, or that selected
distributors will continue to meet the Company's sales needs. Further, there can
be no assurance that these distributors will not market software products in
competition with the Company in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and its products.
The failure by the Company to maintain successfully its existing distributor
relationships or to establish new relationships in the future would have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, if any of the Company's distributors
exclusively adopts a product other than the Company's products, or if any such
distributor materially reduces its sales efforts relating to the Company's
products or materially increases such support
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for competitive products, the Company's business, operating results and
financial condition could be materially and adversely affected. See
"Business-Sales and Marketing."
Competition
The ERP software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of industry
participants, including consolidations among industry participants. The Company
currently competes primarily with (i) other vendors of software focused on the
specific needs of manufacturing plants and distribution sites of multinational
manufacturing companies, which include Baan, J.D. Edwards and SSA, (ii) smaller
independent companies that have developed or are attempting to develop advanced
planning and scheduling software which complement or compete with ERP or
manufacturing resource planning solutions, (iii) internal development efforts by
corporate information technology departments and (iv) companies offering
standardized or customized products on mainframe and/or mid-range computer
systems. The Company expects that competition for its MFG/PRO software will
increase as other large companies such as Oracle and SAP, as well as other
business application software vendors, enter the market for plant-level ERP
solutions. With the Company's strategic entry into the supply chain management
software market, the Company can expect to meet substantial additional
competition from companies presently serving that market, such as i2, IMI and
Manugistics, as well as from broad based solution providers such as Baan,
Oracle, PeopleSoft and SAP that the Company believes are increasingly focusing
on this segment. In addition, certain competitors, such as Baan, Oracle,
PeopleSoft and SAP, have well established relationships with present or
potential customers of the Company. The Company may also face market resistance
from potential customers with large installed legacy systems because of their
reluctance to commit the time, effort and resources necessary to convert to an
open, client/server-based software solution. Further, as the client/server
market continues to develop, companies with significantly greater resources than
the Company may attempt to increase their presence in these markets by acquiring
or forming strategic alliances with competitors, partners or potential partners
of the Company. Increased competition is likely to result in price reductions,
reduced operating margins and loss of market share, any one of which could
materially adversely affect the Company's business, operating results and
financial condition. Many of the Company's present or future competitors have
longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and a larger installed
base of customers than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and to changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products, than can the Company. The Company believes that the
principal factors on which it competes in the ERP software market are
functionality, ease of use and implementation, technology, time to benefit,
supplier viability, service and cost. The Company intends to continue to
acquire, develop and allocate its resources to focus on these targeted
competitive areas, as well as to identify additional or different areas where
the Company perceives competitive advantage. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business-Competition."
Reliance on and Need to Develop Additional Relationships with Third Parties
The Company has established strategic relationships with a number of
consulting and systems integration organizations that it believes are important
to its worldwide sales, marketing, service and support activities and the
implementation of its products. The Company is particularly reliant on third
parties for installation and implementation of its products because the Company,
unlike a number of its competitors, has not historically provided these
services. In the event the Company pursues certain acquisitions of distributors
and the Company is successful in the launch of its On/Q software and pursues
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its strategy of directly providing implementation services for such product, the
Company will increase its provision of installation and implementation services.
If the Company is unable to train adequately a sufficient number of system
integrators or, if for any reason, any such integrators terminate their
relationship with the Company or do not have or devote the resources
satisfactory to provide necessary consulting and implementation of the Company's
products, the Company's business, operating results and financial condition
could be materially and adversely affected. The Company is aware that these
third-party providers do not provide systems integration services exclusively
for the Company's products and in many instances such firms have similar, and
often more established, relationships with the Company's principal competitors.
The Company expects to continue to rely upon such third parties, particularly
installation and implementation service providers, for marketing and sales, lead
generation, product installation and implementation, customer support services,
product localization, end-user training assistance in the sales process and
after-sale training and support. These relationships also assist the Company in
keeping pace with the technological and marketing developments of major software
vendors, and, in certain instances, provide it with technical assistance for its
product development efforts. Organizations providing such consulting and systems
integration and implementation services in connection with the Company's
products include Arthur Andersen LLP, Deloitte & Touche LLP, Ernst & Young LLP,
Integrated Systems & Services, LLC and Strategic Information Group
International, Inc. in the United States, BDM Largotim US, Inc., CSBI S.A.,
Origin Technology in Business Nederland B.V. and Sligos S.A. in Europe and Iris
Ifec Co., Ltd and STCS Systems Pte Ltd in Asia. In most cases distributors will
also deliver consulting and systems integration services. The Company will need
to expand its relationships with these parties and enter into relationships with
additional third parties in order to expand the distribution of its products.
There can be no assurance that these and other third parties will provide the
level and quality of service required to meet the needs of the Company's
customers, that the Company will be able to maintain an effective, long-term
relationship with such third parties, or that such third parties will continue
to meet the needs of the Company's customers. Further, there can be no assurance
that these third-party implementation providers, many of which have
significantly greater financial, technical, personnel and marketing resources
than the Company, will not market software products in competition with the
Company in the future or will not otherwise reduce or discontinue their
relationships with or support of the Company and its products. The failure by
the Company to maintain its existing relationships or to establish new
relationships in the future, or the failure of such third parties to meet the
needs of the Company's customers, would have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
if such third parties exclusively adopt a product or technology other than the
Company's products or technology, or if such third parties materially reduce
their support of the Company's products and technology or materially increase
such support for competitive products or technology, the Company's business,
operating results and financial condition will be materially and adversely
affected.
The Company typically enters into separate agreements with each of its
installation and implementation partners that provide such partners with the
non-exclusive right to promote and market the Company's products, and to provide
training, installation, implementation and other services for the Company's
products, within a defined territory for a specified period of time (generally
two years). The Company's installation and implementation partners generally do
not receive fees for the sale of the Company's software products unless they
participate actively in a sale as a sales agent. However, they generally are
permitted to set their own rates for their installation and implementation
services, and the Company typically does not collect a royalty or percentage fee
from such partners on services performed. The Company also enters into similar
agreements with its distribution partners that grant such partners the
non-exclusive right, within a specified territory, to market, license, deliver
and support the Company's products. In exchange for such distributors' services,
the Company grants a discount to the distributor for the license of its software
products. The Company also
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relies on third parties for the development or inter-operation of key components
of its software so that users of the Company's software will obtain the
functionality demanded. Such research and product alliances include software
developed to be sold in conjunction with the Company's software products,
technology developed to be included in or encapsulated within the Company's
software products and numerous third-party software programs that generally are
not sold with the Company's software but inter-operate directly with the
Company's software through application program interfaces. The Company generally
enters into joint development agreements with its third-party software
development partners that govern ownership of the technology collectively
developed. Each of the Company's partner agreements and third-party development
agreements contain strict confidentiality and non-disclosure provisions for the
service provider, end user and third-party developer and the Company's
third-party development agreements contain restrictions on the use of the
Company's technology outside of the development process. The failure of the
Company to establish or maintain successful relationships with such third-party
software providers or such third-party installation, implementation and
development partners or the failure of such third-party software providers to
develop and support their software could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business-Sales and Marketing," "-Third-Party Implementation Providers" and
"-Proprietary Rights and Licensing."
Intellectual Property Rights; Use of Licensed Technology
The Company's success is dependent upon its proprietary technology and
other intellectual property. The Company relies primarily on a combination of
the protections provided by applicable copyright, trademark and trade secret
laws, as well as on confidentiality procedures and licensing arrangements, to
establish and protect its rights in its software. The Company enters into
license agreements with each of its customers. Each of the Company's license
agreements provides for the non-exclusive license of the Company's MFG/PRO
software. Such licenses generally are perpetual (unless terminated by either
party upon 30 days written notice) and contain strict confidentiality and
non-disclosure provisions, a limited warranty covering MFG/PRO software and
indemnification for the customer from any infringement action related to MFG/PRO
software. The pricing policy under each license is based on a standard price
list and may vary based on the number of end-users, number of sites, number of
modules, number of languages, the country in which the license is granted and
level of ongoing support, training and services to be provided by the Company.
The Company has no patents or pending patent applications. In order to
facilitate the customization required by most of the Company's customers, the
Company generally licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software, which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG/PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software, documentation and other written materials under the legal provisions
relating to trade secret, copyright and contract law. The Company's license
agreements generally allow the use of MFG/PRO software solely by the customer
for internal purposes without the right to sublicense or transfer MFG/PRO
software to third parties. The Company believes that the foregoing measures
afford only limited protection. Despite the Company's efforts, it may be
possible for third parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third- party copying or
use, which could adversely affect the Company's
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competitive position. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exist, software piracy can be expected to be a
problem. Furthermore, there can be no assurance that the Company's competitors
will not independently develop technology similar to that of the Company.
The Company has in the past been subject to claims of intellectual property
infringement and may increasingly be subject to such claims as the number of
products and competitors in the Company's targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although the
Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company may also initiate claims
or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation were determined in favor of the Company.
The Company has in the past and may in the future resell certain software,
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including as a result of third-party
infringement claims, could result in delays or reductions in product shipments
until equivalent software, if any, could be identified, licensed and integrated,
which could materially and adversely affect the Company's business, operating
results and financial condition. See "Business-Products" and "-Research and
Development."
Risks Associated With International Operations
The Company derived approximately 44%, 42% and 39% of its total revenue
from sales outside the United States in the years ended December 31, 1995,
January 31, 1997 and January 31, 1998, respectively. Of the Company's
approximately 3,600 licensed sites in more than 80 countries as of January 31,
1998, over 70% are outside the United States. The Company's engineering and
research and development operations are located in the United States and Brazil
and its sales and support operations are located in the United States and in 16
other countries. The Company also has more than 40 distributors and numerous
partnerships and alliances worldwide. The geographic distance between these
locations has in the past led, and could in the future lead, to logistical and
communications difficulties. There can be no assurance that the geographic, time
zone, language and cultural differences between the Company's international
personnel and operations will not result in problems that materially adversely
affect the Company's business, operating results and financial condition.
The Company expects to commit additional time and resources to expanding
its worldwide sales and marketing activities, localizing its products for
selected markets and developing local sales and support channels. There can be
no assurance that such efforts
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will be successful. Failure to sustain or increase international revenue could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company may also experience an operating loss in one or
more regions of the world for one or more periods. The Company's ability to
manage such operational fluctuations and to maintain adequate long-term
strategies in the face of such developments will be critical to the Company's
continued growth and profitability. International operations are subject to a
number of risks, including the
Costs of localizing products for different countries, longer accounts
receivable collection periods and greater difficulty in accounts receivable
collections in certain geographic regions, unexpected changes in regulatory
requirements, changes in tax rates or applications, dependence on distributors
and technology standards, import and export restrictions and tariffs,
difficulties and costs of staffing and managing international operations,
potentially adverse tax treatment and consequences, political instability, the
burdens of complying with multiple, potentially conflicting laws and the impact
of business cycles and economic instability. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
"Business-Sales and Marketing."
Exposure to Currency Fluctuations
To date, the Company's revenue from international operations has primarily
been denominated in United States dollars. The Company prices its products in
United States dollars and over 90% of the Company's sales in the years ended
December 31, 1995, January 31, 1997 and 1998, were denominated in United States
dollars, with the remainder in ten different currencies. The Company expects
that a growing percentage of its business will be conducted in currencies other
than the United States dollar. The Company also incurs a significant portion of
its expenses in currencies other than the United States dollar, including a
substantial portion of its general and administrative expenses. As a result,
fluctuations in the values of the respective currencies relative to the other
currencies in which the Company generates revenue could materially adversely
affect its business, operating results and financial condition. While the
Company may in the future change its pricing practices, an increase in the value
of the United States dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, less competitive in other
markets. Fluctuations in currencies relative to the United States dollar will
affect period-to-period comparisons of the Company's reported results of
operations. In the fiscal year ended January 31, 1998 and 1997, the Company
recognized $879,000 and $407,000, respectively in foreign currency transaction
gains, compared to losses of $477,000 the fiscal year ended December 31, 1995.
Due to the constantly changing currency exposures and the volatility of currency
exchange rates, there can be no assurance that the Company will not experience
currency losses in the future, nor can the Company predict the effect of
exchange rate fluctuations upon future operating results. Although the Company
does not currently undertake hedging transactions the Company may choose to
hedge a portion of its currency exposure in the future as it deems appropriate.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Control by Principal Stockholders
As of January 31, 1998, Pamela and Karl Lopker jointly beneficially own
approximately 65% of the Company's outstanding Common Stock. Current directors
and executive officers as a group will own approximately 70% of the Common
Stock. Consequently, the directors and executive officers, and the Lopkers in
particular, will be able to control the outcome of all matters submitted for
stockholder action, including the election of members to the Company's Board of
Directors and the approval of significant change in control transactions, and
will effectively control the management and affairs of the Company, which may
have the effect of delaying or preventing a change in control of the Company.
The Lopkers currently constitute two of the five directors and therefore have
significant influence in directing the actions of the Board of Directors.
39
<PAGE>
Product Liability
While the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will not be subject to such claims in the future.
The Company has product liability insurance, but the Company currently does not
have errors and omissions coverage, and there can be no assurance that such
insurance will be available to the Company on commercially reasonable terms or
at all. A successful product liability or errors or omissions claim brought
against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. Moreover, defending such a
suit, regardless of its merits, could entail substantial expense and require the
time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Anti-Takeover Provisions
The Company's Certificate of Incorporation and Bylaws, contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control of the Company or unsolicited acquisition proposals that a
stockholder might consider favorable, including provisions which authorize the
issuance of "blank check" preferred stock, provide for a Board of Directors with
staggered three-year terms, require super-majority voting to effect certain
amendments to the Certificate of Incorporation and Bylaws, limit the persons who
may call special meetings of stockholders, and establish advance notice
requirements for stockholder nominations for election to the Board of Directors
or for stockholder proposals of business to be considered at stockholders
meetings. Certain provisions of Delaware law may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock and currently intends to retain any future earnings to fund the growth of
the Company's business. The payment of any future dividends will be determined
by the Board of Directors in light of conditions then existing, including the
Company's results of operations, financial condition, cash requirements,
restrictions in financing agreements, business conditions and other factors.
The Company is restricted by the terms of its outstanding debt and
financing agreements from paying cash dividends on its Common Stock, and may in
the future enter into loan or other agreements that restrict the payment of cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources"
and Note 4 of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
40
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Company is incorporated by
reference to the section entitled "Election of Directors" appearing in the
Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission (the "Commission")
within 120 days after the end of the Company's fiscal year ended January 31,
1998. Certain information with respect to persons who are or may be deemd to be
executive officers of the Registrant is set forth under the caption "Executive
Officers of the Registrant" in Part I of this form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the information set forth under the caption "Executive Compensation" in the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be filed with Commission within 120 days after the end of the Company's fiscal
year ended January 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management
Ownership" in the Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended January 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions are
incorporated by reference to the information set forth under the caption
"Certain Transactions" in the Company's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended January 31, 1998.
41
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this form 10-K:
QAD Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------
Independent Auditors' Report........................................... F-1
Consolidated Balance Sheets as of January 31, 1998 and 1997............ F-2
Consolidated Statements of Income for the years ended January 31
1998 and 1997, the one month ended January 31, 1996 and
the year ended December 31 1995................................... F-3
Consolidated Statement of Stockholders' Equity for the years ended
January 31, 1998 and 1997, the one month ended January 31, 1996
and the year ended December 31 1995............................... F-4
Consolidated Statements of Cash Flows for the years ended January 31,
1998 and 1997, the one month ended January 31, 1996
and the year ended December 31, 1995.............................. F-5
Notes to Consolidated Financial Statements............................. F-6
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this
report:
II. Valuation and Qualifying Accounts............................ S-1
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
(A) 3. EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
EXHIBIT EXHIBIT TITLE
NUMBER
3.1 Certificate of Incorporation of the Registrant, filed with the
Delaware Secretary of State on May 15, 1997*
3.2 Certificate of Amendment of Certificate of Inspection of the
Registrant, filed with the Delaware Secretary of State on June 19,
1997*
3.9 Bylaws of the Registrant*
4.1 Specimen Stock Certificate*
10.1 QAD Inc. 1994 Stock Ownership Program*
10.2 QAD Inc. 1997 Stock Incentive Program*
10.3 Form of Indemnification Agreement with Directors and Executive
Officers*
10.4 Loan and Security Agreement between Greyrock Business Credit, a
Division of Nations Credit Commercial Corporation ("GBC") and the
Registrant dated July 3, 1996*
42
<PAGE>
10.5 Schedule to Loan Agreement between GBC and the Registrant dated
July 3, 1996*
10.6 Letter Agreement between the Registrant and GBC dated July 3, 1996*
10.7 Letter Agreement between the Registrant and GBC dated July 5, 1996*
10.8 Letter Agreement between the Registrant and GBC dated July 5, 1996*
10.9 Secured Promissory Note in the original principal amount of $4,000,000
made by the Registrant to the order of GBC dated July 3, 1996*
10.10 Trademark Security Agreement between GBC and the Registrant dated
July 3, 1996*
10.11 Security Agreement in Copyrighted Works executed by the Registrant in
favor of GBC dated July 3, 1996*
10.12 Deed of Trust with respect to real property located in Santa Barbara
County, California executed by the Registrant in favor of GBC dated
July 3, 1996*
10.13 Employment Offer Letter between the Registrant and Dennis R. Raney
dated January 15, 1997*
10.14 Master License Agreement between the Registrant and Progress Software
Corporation dated June 30, 1995*+
10.15 Lease Agreement between the Registrant and Matco Enterprises, Inc.
for Suites I, K and L located at 5464 Carpinteria Ave., Carpinteria,
California dated November 30, 1992*
10.16 First Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites C and H located at 5464 Carpinteria Ave.,
Carpinteria, California dated September 9, 1993*
10.17 Second Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suite J located at 5464 Carpinteria Ave.,
Carpinteria, California dated January 14, 1994*
10.18 Third Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites B and C located at 5464 Carpinteria Ave.,
Carpinteria, California dated January 14, 1994*
10.19 Fourth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suite H located at 5464 Carpinteria Ave.,
Carpinteria, California dated February 15, 1994*
10.20 Fifth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites G and E located at 5464 Carpinteria Ave.,
Carpinteria, California dated September 12, 1994*
10.21 Sixth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites A, B, D, F and H, and Room A located at
5464 Carpinteria Ave., Carpinteria, California dated October 30, 1996*
10.22 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 3 through 8 located at
6430 Via Real, Carpinteria, California dated November 30, 1993*
10.23 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 3 through 8 located at
6430 Via Real, Carpinteria, California dated November 30, 1993*
10.24 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for 6450 Via Real, Carpinteria,
California dated November 30, 1993*
10.25 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for 6450 Via Real, Carpinteria,
California dated November 30, 1993*
10.26 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 5 located at
6460 Via Real, Carpinteria, California dated November 30, 1993*
10.27 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 5 located at
6460 Via Real, Carpinteria, California dated November 30, 1993*
10.28 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba
43
<PAGE>
South Coast Business Park for Suites 7 and 8 located at 6440 Via
Real, Carpinteria, California dated September 8, 1995*
10.29 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 7 and 8 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.30 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 9 and 10 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.31 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 9 and 10 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.32 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 and 2 located at
6430 Via Real, Carpinteria, California dated September 8, 1995*
10.33 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 and 2 located at
6430 Via Real, Carpinteria, California dated September 8, 1995*
10.34 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 7 and 10
located at 6420 Via Real, Carpinteria, California dated January 27,
1997*
10.35 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 7 and 10
located at 6420 Via Real, Carpinteria, California dated January 27,
1997*
10.36 Multi-Tenant Office Lease Agreement between the Registrant and EDB
Property Partners, LP III, successor to Laurel Larchmont Office, Inc.
located at 10,000 Midlantic Drive, Mt. Laurel, New Jersey dated
December 29, 1993*
10.37 Amendment to Multi-Tenant Office Lease Agreement between the
Registrant and EDB Property Partners, LP III, successor to Laurel
Larchmont Office, Inc. located at 10,000 Midlantic Drive, Mt. Laurel,
New Jersey dated April 26, 1994*
10.38 Second Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB Property Partners, LP III, dated May 30, 1995*
10.39 Third Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB Property Partners L.P. I dated November 30, 1995*
10.40 Agreement and Plan of Merger between QAD California and the
Registrant dated July 8, 1997*
10.41 Credit Agreement dated as of August 4, 1997 between the Registrant
and Bank of America National Trust and Savings Association
10.42 Standard Industrial Commercial Multi-Tenant Lease--Modified Net dated
as of December 29, 1997 between the Registrant and CITO Corp.
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG Peat Marwick LLP and opinion on Schedule II
27.1 Financial Data Schedule
________________________
(*) Incorporated by reference to the Registrant's Registration Statement in
Form S-1 (Commission File No. 333-28441).
(+) Certain portions of exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed
with the Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended January 31, 1998.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
QAD Inc.:
We have audited the accompanying consolidated balance sheets of QAD Inc. and
subsidiaries as of January 31, 1997 and 1998 and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1995, the one month ended January 31, 1996 and the years ended
January 31, 1997 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QAD Inc. and
subsidiaries as of January 31, 1997 and 1998 and the results of their operations
and their cash flows for the year ended December 31, 1995, the one month ended
January 31, 1996 and the years ended January 31, 1997 and 1998 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 24, 1998
F-1
<PAGE>
QAD Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 301 $ 70,082
Trade accounts receivable, net of allowances of
$3,694 and $5,510 at January 31, 1997 and 1998, respectively ......................... 46,745 75,683
Deferred income taxes ................................................................... 4,816 1,858
Other current assets .................................................................... 2,112 8,584
--------- ---------
Total current assets .................................................................... 53,974 156,207
Property and equipment, net ................................................................. 18,071 25,717
Other assets, net ........................................................................... 3,051 6,402
Deferred income taxes ....................................................................... 2,154 2,180
--------- ---------
Total assets .................. $ 77,250 $ 190,506
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current installments of long-term debt ................................ $ 8,465 $ 143
Accounts payable ........................................................................ 9,403 12,778
Accrued expenses ........................................................................ 12,739 18,110
Income taxes payable .................................................................... 741 2,282
Deferred revenue and deposits ........................................................... 28,602 43,636
--------- ---------
Total current liabilities .................. 59,950 76,949
Long-term debt, less current installments ............................................... 5,036 39
Deferred revenue - non-current .......................................................... 991 424
Other deferred liabilities .............................................................. 379 708
Minority interest ....................................................................... 90 11
Stockholders' equity:
Preferred stock, Authorized 5,000,000 shares; none issued and
outstanding .......................................................................... -- --
Common stock, no par value. Authorized 150,000,000 shares; issued and
outstanding 22,218,572 shares and 29,096,269 shares at January 31,
1997 and 1998, respectively .......................................................... 5,942 97,238
Retained earnings ....................................................................... 7,539 17,395
Receivable from stockholders ............................................................ (197) (397)
Unearned compensation-restricted stock .................................................. (2,129) (1,510)
Cumulative foreign currency translation adjustment ...................................... (351) (351)
--------- ---------
Total stockholders' equity .................. 10,804 112,375
--------- ---------
Total liabilities and stockholders' equity .................. $ 77,250 $ 190,506
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
QAD Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
<TABLE>
<CAPTION>
Year One Month Year Year
Ended Ended Ended Ended
--------- --------- --------- ---------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License fees ........................................................... $ 63,756 $ 993 $ 85,753 $ 113,447
Maintenance and other .................................................. 26,193 2,479 40,691 58,787
--------- --------- --------- ---------
Total revenues .......................... 89,949 3,472 126,444 172,234
Cost and expenses:
Cost of revenues ....................................................... 23,599 1,649 29,158 41,551
Sales and marketing .................................................... 38,341 3,294 53,194 67,249
Research and development ............................................... 17,037 1,547 25,434 29,317
General and administrative ............................................. 13,618 856 15,938 19,422
--------- --------- --------- ---------
Total cost and expenses ...................... 92,595 7,346 123,724 157,539
--------- --------- --------- ---------
Operating income (loss) .................................................... (2,646) (3,874) 2,720 14,695
Other (income) expense:
Interest income ........................................................ (38) -- (49) (1,785)
Interest expense ....................................................... 825 126 1,654 1,064
Other .................................................................. 48 (61) (608) (1,599)
--------- --------- --------- ---------
Total other (income) expense ............................................... 835 65 997 (2,320)
--------- --------- --------- ---------
Income (loss) before income taxes .......................................... (3,481) (3,939) 1,723 17,015
Income tax expense (benefit) ............................................... (2,795) (1,078) 723 7,159
--------- --------- --------- ---------
Net income (loss) .......................................................... $ (686) $ (2,861) $ 1,000 $ 9,856
========= ========= ========= =========
Basic net income (loss) per share .......................................... $ (0.03) $ (0.13) $ 0.05 $ 0.38
Diluted net income (loss) per share ........................................ $ (0.03) $ (0.13) $ 0.04 $ 0.38
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
QAD Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common Stock Retained Receivable Restricted Stock
Earnings from
Stockholders
--------------------------- -------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 20,804,858 $ 1,805 $ 10,086 -- -- --
Common Stock Issued:
Under stock purchase plan 250,750 601 -- -- -- --
Under stock options 1,024,000 74 -- -- -- --
Pursuant to performance
awards 148,514 336 -- -- -- --
Common stock repurchases (1,262,370) (624) -- -- -- --
Receivable from stockholders -- -- -- (151) -- --
Translation adjustments -- -- -- -- -- --
Net loss -- -- (686) -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, December 31, 1995 20,965,752 2,192 9,400 (151) -- --
Common Stock Issued:
Pursuant to performance
awards 23,722 57 -- -- -- --
Common stock repurchases (10,720) (26) -- -- -- --
Translation adjustments -- -- -- -- -- --
Net loss -- -- (2,861) -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, January 31, 1996 20,978,754 2,223 6,539 (151) -- --
Common Stock Issued:
Under stock purchase plan 793,438 1,411 -- -- -- --
Under stock options 105,000 185 -- -- -- --
Pursuant to performance
awards 108,062 256 -- -- -- --
Pursuant to restricted
stock awards 559,066 2,584 -- -- (559,066) (2,584)
Common stock earned under
restricted stock awards -- -- -- -- 149,954 455
Common stock repurchases (325,748) (717) -- -- -- --
Receivable from stockholders -- -- -- (46) -- --
Translation adjustments -- -- -- -- -- --
Net income -- -- 1,000 -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, January 31, 1997 22,218,572 5,942 7,539 (197) (409,112) (2,129)
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Stockholders
Adjustment Equity
------------ ------------
<S> <C> <C>
Balance, December 31, 1994 $ 102 $ 11,993
Common Stock Issued:
Under stock purchase plan -- 601
Under stock options -- 74
Pursuant to performance
awards -- 336
Common stock repurchases -- (624)
Receivable from stockholders -- (151)
Translation adjustments 189 189
Net loss -- (686)
------------ ------------
Balance, December 31, 1995 291 11,732
Common Stock Issued:
Pursuant to performance
awards -- 57
Common stock repurchases -- (26)
Translation adjustments 121 121
Net loss -- (2,861)
------------ ------------
Balance, January 31, 1996 412 9,023
Common Stock Issued:
Under stock purchase plan -- 1,411
Under stock options -- 185
Pursuant to performance
awards -- 256
Pursuant to restricted
stock awards -- --
Common stock earned under
restricted stock awards -- 455
Common stock repurchases -- (717)
Receivable from stockholders -- (46)
Translation adjustments (763) (763)
Net income -- 1,000
------------ ------------
Balance, January 31, 1997 (351) 10,804
(Continued)
</TABLE>
<TABLE>
<CAPTION>
Common Stock Retained Receivable Restricted Stock
Earnings from
Stockholders
--------------------------- ------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued:
Under initial public
offering (net of offering
costs) 6,612,500 90,516 -- -- -- --
Under stock purchase and
incentive plan 251,129 2,413 -- -- -- --
Under stock options 299,000 709 -- -- -- --
Pursuant to performance
awards 50,060 431 -- -- -- --
Pursuant to restricted
stock awards 20,400 194,000 -- -- (20,400) (194,000)
Common stock earned under
restricted stock awards 1,536 -- -- -- 208,296 663
Tax benefit associated with
stock option exercise -- 523 -- -- -- --
Common stock repurchases (334,528) (3,340) -- -- -- --
Restricted stock awards
cancelled (22,400) (150,000) -- -- 22,400 150,000
Receivable from
stockholders -- -- -- (200) -- --
Net income -- -- 9,856 -- -- --
=========== =========== =========== =========== =========== ===========
Balance, January 31, 1998 29,096,269 $ 97,238 $ 17,395 $ (397) (198,816) $ (1,510)
=========== =========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Stockholders
Adjustment Equity
------------ ------------
<S> <C> <C>
Common Stock Issued:
Under initial public
offering (net of offering
costs) -- 90,516
Under stock purchase and
incentive plan -- 2,413
Under stock options -- 709
Pursuant to performance
awards -- 431
Pursuant to restricted
stock awards -- --
Common stock earned under
restricted stock awards -- 663
Tax benefit associated with
stock option exercise -- 523
Common stock repurchases -- (3,340)
Restricted stock awards
cancelled -- --
Receivable from
stockholders -- (200)
Net income -- 9,856
========= ===========
Balance, January 31, 1998 $ (351) $ 112,375
========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
QAD Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended One Month Year Ended Year Ended
December 31, Ended January 31, January 31,
1995 January 31, 1997 1998
1996
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (686) $ (2,861) $ 1,000 $ 9,856
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,346 390 5,345 6,921
Provision for doubtful accounts and sales returns 945 (25) 3,432 4,370
Loss on disposal of equipment -- -- 25 82
Minority interest -- 106 (16) (79)
Compensation expense pursuant to stock repurchase 2,408 -- -- --
Compensation expense pursuant to stock awards 336 57 1,044 1,361
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade accounts receivable (15,103) 5,444 (14,941) (33,508)
Income tax receivable (231) 231 -- --
Deferred income taxes (3,780) (1,781) (1,398) 2,932
Other assets (1,929) (15) (2,408) (7,962)
Increase (decrease) in liabilities:
Accounts payable 6,283 (2,816) 2,991 3,375
Accrued expenses 2,236 (607) 4,137 5,577
Income taxes payable (1,192) 288 453 2,174
Deferred revenue and deposits 10,459 539 7,708 14,467
Other deferred liabilities -- -- 46 62
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities 4,092 (1,050) 7,418 9,628
Cash flows from investing activities:
Additions to land and buildings (2,341) (206) (435) (281)
Purchase of property and equipment (7,243) (735) (3,008) (13,280)
Investment in equity securities -- -- -- (3,000)
Proceeds from disposition of property and equipment 117 -- 83 51
-------------- -------------- -------------- --------------
Net cash used in investing activities (9,467) (941) (3,360) (16,510)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 24,654 4,254 84,841 9,648
Reduction of notes payable and long-term debt (19,555) (2,414) (90,131) (22,967)
Proceeds from initial public offering -- -- -- 90,516
Issuance of common stock for cash 675 -- 1,596 2,474
Repurchase of common stock (624) (26) (717) (2,692)
Receivable from stockholders (151) -- (46) (200)
-------------- -------------- -------------- --------------
Net cash provided by (used in) financing activities 4,999 1,814 (4,457) 76,779
Effect of exchange rate changes on cash and 189 121 (763) (116)
cash equivalents
Net increase (decrease) in cash and cash equivalents (187) (56) (1,162) 69,781
Cash and cash equivalents at beginning of period 1,706 1,519 1,463 301
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,519 $ 1,463 $ 301 $ 70,082
============== ============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 824 $ 99 $ 1,553 $ 892
Income taxes $ 1,087 $ 6 $ 707 $ 1,179
</TABLE>
<PAGE>
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998, the Company acquired property and
equipment under capital lease obligations aggregating $1,081,000, $79,000,
$97,000 and $0.
During the year ended December 31, 1995, the Company issued a note payable
in the amount of $2,407,788 in connection with the repurchase of common shares.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QAD Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
The Company is a provider of Enterprise Resource Planning software for
multinational and other large manufacturing companies. The Company's software
solutions are designed to facilitate global management of resources and
information to allow manufacturers to reduce order fulfillment cycle times and
inventories, improve operating efficiencies and measure critical company
performance criteria against defined business plan objectives. The flexibility
of the Company's products also helps manufacturers adapt to growth,
organizational change, business process reengineering, supply chain management
and other challenges.
Effective February 1, 1996, the Company determined that it would change its
reporting period from years ending December 31 to fiscal years ending
January 31. Accordingly, the accompanying statements of income, stockholders'
equity and cash flows include results for the one-month transition period ending
January 31, 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
QAD Inc. and its majority-owned subsidiaries. The Company also has various
branch offices worldwide. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographic locations
throughout the world. At January 31, 1997, one customer had an outstanding
receivable that constituted 12% of the Company's net trade accounts receivable.
There were no other concentrations of such credit risk for the periods
presented.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents
F-7
<PAGE>
Revenue Recognition
The Company's principal source of software license fee revenue is derived
from licensing MFG/PRO software. Revenues from maintenance and other activities
are generated from maintenance support services, training and consulting and are
billed separately from license revenues. Revenues from software license
agreements, including licenses sold through distributors, are recognized at the
time of shipment, net of any applicable distributor discount, provided there are
no remaining significant obligations to be fulfilled by the Company and
collectibility is probable. Where distributors have reproduction rights, revenue
is recognized upon notification of shipment by the distributor. Typically, the
Company's software licenses do not include significant vendor obligations. Where
license contracts call for payment terms in excess of 12 months from date of
shipment, revenue is recognized as payments become due. Maintenance revenues for
ongoing customer support and product updates are recognized ratably over the
term of the maintenance period, which is generally 12 months. Training and
consulting revenues are recognized as the services are performed. Returns and
allowances are estimated and provided for in the period of sale.
Revenue on all sales in which there are outstanding obligations to provide
resources over a period of time, as a component of the sale, is deferred and
recognized as services are provided on a percentage of completion basis. At
December 31, 1995, January 31, 1997 and 1998, $2,261,000, $811,000 and
$1,449,000, respectively, of revenue, net of related expenses, had been deferred
until future periods for recognition as services are provided. Further, the
Company recognizes revenue consistent with customer payment terms on all sales
where extended payment terms beyond one year are granted. At January 31, 1997
and 1998, sales contracts totaling $4,259,000 and $1,256,000, respectively
having payment terms through January 31, 2000 were deferred, to be recognized as
payments become due.
Depreciation and Amortization
Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the related assets. Asset lives range
from three to seven years. Leasehold improvements are amortized on a
straight-line basis over the term of the lease or the life of the related
improvements, whichever is shorter.
Computer Software Costs
Pursuant to Statement of SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," issued by the Financial
Accounting Standards Board, the Company capitalizes software development costs
incurred in connection with the localization and translation of its products
once technological feasibility has been achieved. Capitalized development costs
are amortized on a straight-line basis over three years and charged to cost of
revenues. All other development costs are expensed to research and development
as incurred.
F-8
<PAGE>
Accrued Expenses
Accrued expenses are as follows:
January 31, January 31,
1997 1998
-------------- --------------
Accrued payroll ........................ $ 7,538 $ 9,268
Accrued other .......................... 5,201 8,842
-------------- --------------
$ 12,739 $ 18,110
============== ==============
Income Taxes
The Company provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which employs an asset and liability approach in accounting for
income taxes payable or refundable at the date of the financial statements as a
result of all events that have been recognized in the financial statements and
as measured by the provisions of enacted laws. See Note 6.
Computation of Net Income (Loss) Per Share
In February 1997, the SFAS No. 128, Earnings Per Share. SFAS No. 128
specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. Some of the changes
made to simplify the EPS computations include: (a) eliminating the presentation
of primary EPS and replacing it with basic EPS, with the principal difference
being that common stock equivalents are not considered in computing basic EPS,
(b) eliminating the modified treasury stock method and the three percent
materiality provision and (c) revising the contingent share provision and the
supplemental EPS data requirements. SFAS No. 128 also makes a number of changes
to existing disclosure requirements. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. All prior period information has been restated to conform with the
provisions of the SFAS No. 128.
Net income (loss) per share has been computed using the weighted average
number of shares of common stock and common stock equivalents outstanding using
the treasury-stock method summarized as follows:
<TABLE>
<CAPTION>
Year One Month Year Year
Ended Ended Ended Ended
-------------- -------------- -------------- --------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares of common stock
outstanding used in basic income (loss) per
share calculation ............................ 21,100,000 21,230,000 21,931,000 25,701,000
Weighted average shares of common stock
equivalents issued using the treasury stock
method ....................................... -- -- 1,083,000 582,000
-------------- -------------- -------------- --------------
Weighted average shares of common stock and
common stock equivalents outstanding used in
diluted income (loss) per share calculation .. 21,100,000 21,230,000 23,014,000 26,283,000
============== ============== ============== ==============
</TABLE>
F-9
<PAGE>
Net income (loss) for basic and diluted calculation is the same in each
respective period. Shares of common stock equivalents issued using the treasury
stock method of 2,177,000 and 1,244,000 for the year ended December 31, 1995 and
one month ended January 31, 1996, respectively were not included in the diluted
calculation because they were anti-dilutive.
Foreign Currency Translation
Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity. Revenues, costs and expenses are translated
at average rates for each month. (Gains) and losses from foreign currency
transactions are reflected in net earnings in the year incurred, classified as
"other income expense," and totaled approximately $477,000, $(34,000),
$(407,000) and $(879,000) for the year ended December 31, 1995, one month period
ended January 31, 1996 and years ended January 31, 1997 and 1998, respectively.
Fair Value of Financial Instruments
The carrying amounts of the following financial instruments approximate
fair value because of the short maturity of those instruments: cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses.
The carrying value of the Company's obligations under capital leases, notes
payable and long-term debt approximates fair value and was estimated by
discounting the future cash flows of the capital leases, notes payable and
long-term debt at rates currently offered to the Company for similar capital
leases, notes payable and long-term debt of comparable maturities by the
Company's bankers.
Long-Lived Assets
The Company has adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted operating cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Accounting for Stock Options
Prior to January 1, 1996, the Company accounted for its stock option grants
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in the year
ended December 31, 1995 and future years as if the fair value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of
F-10
<PAGE>
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123 (see Note 10).
Effect of Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2: Software Revenue Recognition (SOP 97-2) which
is effective for software transactions entered into in fiscal years beginning
after December 15, 1997. The Company is currently evaluating the effect of this
new statement.
The Financial Accounting Standards Board has issued SFAS No. 130 Reporting
Comprehensive Income and SFAS No.131 Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 130 will affect the disclosure requirements
for the first quarter of the year ended January 31, 1999 financial statements.
SFAS No. 131 will affect the disclosure requirements for the year ended January
31, 1999 annual financial statements. The Company is currently evaluating the
effect of these new statements.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
2. Property and Equipment
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
-------------- --------------
<S> <C> <C>
Land and buildings .................................. $ 8,802 $ 9,082
Automobiles ......................................... 71 123
Computer equipment and software ..................... 12,306 23,479
Furniture and office equipment ...................... 6,160 7,654
Leasehold improvements .............................. 1,032 1,868
Equipment under capital lease ....................... 1,921 353
-------------- --------------
30,292 42,559
Less accumulated depreciation and amortization,
which includes $1,217 and $469 for January 31, 1997
and January 31, 1998 respectively, for equipment
under capital leases .............................. (12,221) (16,842)
-------------- --------------
Net property and equipment ................ $ 18,071 $ 25,717
============== ==============
</TABLE>
Included in land and buildings is capitalized interest aggregating $329,000
as of January 31, 1997 and 1998.
F-11
<PAGE>
3. Other Assets
Other assets at January 31, 1997 and 1998 include capitalized software
development costs of $1,065,000 and $2,416,000 (net of $2,341,000 and $3,034,000
of accumulated amortization), respectively. Amortization of these costs totaled
$694,000, $61,000, $671,000 and $693,000 during the year ended December 31,
1995, one month ended January 31, 1996, and years ended January 31, 1997 and
1998, respectively. Amortization costs are included in cost of revenues.
Software development costs incurred prior to achieving technological feasibility
are expensed as incurred as research and development. Such costs aggregated
$17,037,000, $1,547,000, $25,434,000 and $29,317,000 for the year ended
December 31, 1995, one month ended January 31, 1996, and years ended January 31,
1997 and 1998, respectively.
F-12
<PAGE>
4. Notes Payable and Long-Term Debt
Notes payable and long-term debt are summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Advances under a $16,000,000 revolving credit agreement with a bank, secured by
substantially all assets and guarantees of certain stockholders, bearing
interest at the highest LIBOR for the period (5.49% at January 31, 1997)
plus 4.875% per annum, expiring July 1997 ................................. $ 4,349 $ --
Term notes payable, secured by property and equipment, payable in monthly
installments ranging from $6,276 to $41,667, at interest rates ranging from
8.29% to 10.365% per annum, expiring from June 1997 to December 1999,
repaid in 1998 ............................................................ 5,258 --
Note payable under term portion of credit agreement, secured by real estate,
principal payable commencing August 1996 in monthly installments of $66,666
plus interest at the highest LIBOR during the month (5.49% at January 31,
1997) plus 4.875% per annum (to be no less than 8% per annum), through
July 2001, repaid in 1998 ................................................. 3,600 --
Note payable, secured by leasehold improvements, payable in monthly
installments of $681 through February 1998................................. 9 1
Capital lease obligations ..................................................... 285 181
-------------- --------------
13,501 182
Less current installments ..................................................... (8,465) (143)
-------------- --------------
$ 5,036 $ 39
============== ==============
</TABLE>
At January 31, 1998, future minimum principal payments of notes payable and
long-term debt are as follows (in thousands):
Year ending January 31:
1999 ......................... $ 143
2000 ......................... 39
--------
$ 182
========
Subsequent to the initial public offering the Company entered into a
revolving credit agreement with Bank of America National Trust and Savings
Association ("Bank"), which expires on August 4, 1999. The maximum available
amount of borrowings under the revolving credit agreement is equal to $20
million, unless there is a voluntary termination or reduction of commitment by
the Company. The total amount of available borrowings under the revolving credit
agreement at January 31, 1998 was approximately $20 million. Borrowings under
the revolving credit agreement bear interest at a rate per annum equal to the
Offshore Rate plus the Applicable Margin or the Base Rate plus the Applicable
Margin. The Applicable Margin means, with respect to Base Rate Loans, 0%, and
with respect to Offshore Rate Loans, 1.25% when 50% or less of the Commitment is
being utilized, and 1.50% when more than 50% of the Commitment is being
utilized. The Company pays a commitment fee on the average unused portion of the
Commitment to the Bank, equal to one-half of one percent (.50%) per annum.
F-13
<PAGE>
5. Deferred Revenue
The Company bills for ongoing maintenance and post-sale customer support
separately from sales of products and records such amounts as deferred revenue
when billed. Deferred revenue aggregated $29,125,000 and $43,226,000 at
January 31, 1997 and 1998, respectively. Revenue under maintenance contracts is
recognized ratably over the term of the contract, which is typically 12 months.
6. Income Taxes
Components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended One Month Year Ended
Ended --------------------------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Current:
Federal ................. $ 371 $ (1,402) $ 881 $ 1,675
State ................... 110 (203) (63) 197
Foreign ................. 503 890 227 2,421
-------------- -------------- -------------- --------------
Total 984 (715) 1,045 4,293
Deferred:
Federal ................. (1,946) 80 (94) 2,449
State ................... (290) 9 (10) (573)
Foreign ................. (1,543) (452) (218) 990
-------------- -------------- -------------- --------------
Total (3,779) (363) (322) 2,866
-------------- -------------- -------------- --------------
$ (2,795) $ (1,078) $ 723 $ 7,159
============== ============== ============== ==============
</TABLE>
SFAS No. 109 requires companies to record deferred tax assets for the
benefit to be derived from deductible temporary differences, net of appropriate
valuation reserves to reflect management estimates of realizability of such
deferred tax assets. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
F-14
<PAGE>
<TABLE>
<CAPTION>
January 31, 1997 January 31, 1998
-------------------- ---------------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts .................................. $ 1,387 $ 1,999
Accrued vacation ......................................... 524 751
Accrued commission ....................................... -- 267
Alternative minimum tax .................................. 98 98
Research and development credits ......................... 1,217 1,149
Foreign tax credits ...................................... 778 320
Stock awards/discounts ................................... -- 266
Long term contract ....................................... 328 --
Net operating loss carry forwards ........................ 5,054 2,417
Other .................................................... 34 213
-------------------- --------------------
9,420 7,480
Less valuation allowance ................................. (2,081) (1,814)
-------------------- --------------------
Net deferred tax assets ................................ 7,339 5,666
Less current portion ................................... (5,288) (2,719)
-------------------- --------------------
Long-term net deferred tax assets (net of $2,081 and $1,814
valuation allowance, respectively) ....................... 2,051 2,947
-------------------- --------------------
Deferred tax liabilities:
Capitalized translation and research and development costs 355 1,056
State income taxes ....................................... 119 (68)
Other .................................................... (2) 195
Mark to market ........................................... -- 807
Depreciation and amortization ............................ (103) (362)
-------------------- --------------------
369 1,628
Less current portion ............................... (472) (861)
-------------------- --------------------
Long-term net deferred tax liabilities ............. $ (103) $ 767
==================== ====================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
For U.S. tax purposes, management has determined that the realization of
recorded deferred tax assets arising in the United States is reasonably assured,
and accordingly, no valuation allowance has been recorded on such items. With
available tax planning strategies and projections of future income over the
periods in which the foreign deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize a portion of
the benefits of these deductible differences on tax returns filed in foreign
jurisdictions. The Company's net operating loss carryforward benefits
aggregating $5.1 million and $2.4 million at January 31, 1997 and 1998,
respectively arise principally from losses incurred by foreign subsidiaries and
expire commencing in 2001.
The Company's net operating loss carryforward benefits aggregating $5.1
million and $2.4 million at January 31, 1997 and 1998, respectively arise
principally from losses incurred by foreign subsidiaries and expire commencing
in 2001.
F-15
<PAGE>
At January 31, 1997 and 1998, the valuation allowance attributable to
deferred tax assets was $2,081,000 and $1,814,000, respectively, an overall
decrease of $267,000.
Actual income tax expense (benefit) differs from that obtained by applying
the statutory Federal income tax rate to earnings (loss) before income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
Year One Month Year Ended
Ended Ended --------------------------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Computed expected tax expense (benefit) ...... $ (1,183) $ (1,339) $ 586 $ 5,968
State income taxes, net of Federal income tax
benefit ................................... (209) (236) 103 815
Incremental tax expense from foreign
operations ................................ -- 649 117 203
Alternative minimum tax ("AMT") .............. 182 -- -- --
Net change in deferred tax assets and
liabilities ............................... (1,856) (87) 918 (267)
Meals and entertainment ...................... 279 9 286 325
Foreign sales corporation .................... 1,341 -- (539) --
Research, AMT and foreign tax credits ........ (1,386) (174) (1,082) (1,135)
Foreign dividends ............................ -- -- -- 541
Reduction of research and development credits
and foreign tax credits previously recorded -- 94 350 600
Other ........................................ 37 6 (16) 109
-------------- -------------- -------------- --------------
$ (2,795) $ (1,078) $ 723 $ 7,159
============== ============== ============== ==============
</TABLE>
7. 401(k) Plan
The Company has a defined contribution 401(k) plan, which is available to
U.S. employees after 30 days of employment. Employees may contribute up to the
maximum allowable by the Internal Revenue Code. The Company may make additional
contributions at the discretion of the Board of Directors. Participants are
immediately vested in their employee contributions. Employer contributions vest
over a five-year period. The employer contributions for the years ended
December 31, 1995, January 31, 1997 and 1998 were $101,000, $422,000 and
$371,000, respectively, which are included in general and administrative
expenses in the accompanying consolidated statements of income.
F-16
<PAGE>
8. Commitments and Contingencies
The Company finances equipment under capital leases and leases office
facilities under operating lease agreements expiring through 2004. The present
value of future minimum capital lease payments and future minimum lease payments
under non-cancelable operating leases are as follows (in thousands):
Capital Operating Leases
Leases
------------- ----------------
Year ending January 31,:
1999 .................................... $ 152 $ 4,784
2000 .................................... 41 3,402
2001 .................................... -- 2,281
2002 .................................... -- 1,548
2003 .................................... -- 639
Thereafter .............................. -- 26
------------- ---------------
Total minimum lease payments 193 $ 12,680
Less amount representing interest at rates
ranging from 11% to 14.5% .............. (12)
-------------
Present value of minimum lease payments ..... $ 181
=============
Total rent expense for the year ended December 31, 1995, one month ended
January 31, 1996 and years ended January 31, 1997 and 1998 aggregated
$4,981,000, $457,000, $5,929,000 and $6,509,000, respectively.
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
F-17
<PAGE>
9. Geographic Information
The following table shows revenues, operating income (loss) and
identifiable assets by geographic segment (in thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
December 31, January 31, January 31,
1995 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
U.S .......................... $ 49,955 $ 73,519 $ 105,446
Europe ....................... 24,619 32,725 43,027
Asia/Pacific ................. 12,354 15,543 18,354
Other ........................ 3,021 4,657 5,407
-------------- -------------- --------------
$ 89,949 $ 126,444 $ 172,234
============== ============== ==============
Operating income (loss):
U.S .......................... $ 1,094 $ 6,839 $ 12,054
Europe ....................... 1,251 341 9,870
Asia/Pacific ................. (5,621) (5,691) (8,982)
Other ........................ 630 1,231 1,753
-------------- -------------- --------------
$ (2,646) $ 2,720 $ 14,695
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
-------------- --------------
<S> <C> <C>
Identifiable assets:
U.S .......................... $ 46,959 $ 150,744
Europe ....................... 18,691 24,366
Asia/Pacific ................. 9,226 8,871
Other ........................ 2,374 6,525
-------------- --------------
$ 77,250 $ 190,506
============== ==============
</TABLE>
F-18
<PAGE>
10. Employee Stock Option, Purchase Plans and Restricted Stock Awards
Employee Stock Option Agreements
The Company has stock option agreements with certain key employees. As of
January 31, 1997 and 1998, options to purchase 1,121,000 and 2,724,000 shares of
common stock had been granted and were outstanding. Outstanding options
generally vest over a five-year period and have contractual lives of 10 years.
Transactions in stock options are summarized as follows:
<TABLE>
<CAPTION>
Shares Weighted Average Options
Exercise Price Exercisable
-------------- ------------------- ------------
<S> <C> <C> <C>
Outstanding options at December 31, 1994 2,350,000 $ 0.18 2,114,000
Options issued ......................... --
Options exercised ...................... (1,024,000) 0.02
Options expired and terminated ......... --
--------------
Outstanding options at December 31, 1995 1,326,000 0.31 1,240,000
Options issued ......................... --
Options exercised ...................... --
Options expired and terminated ......... --
--------------
Outstanding options at January 31, 1996 1,326,000 0.31 1,240,000
Options issued ......................... --
Options exercised ...................... (105,000) 0.40
Options expired and terminated ......... (100,000) 1.61
--------------
Outstanding options at January 31, 1997 1,121,000 0.18 1,121,000
Options issued ......................... 2,040,000 13.61
Options exercised ...................... (299,000) 0.21
Options expired and terminated ......... (138,000) 11.01
--------------
Outstanding options at January 31, 1998 2,724,000 $ 9.68 822,000
==============
</TABLE>
The weighted average remaining contractual life of stock options
outstanding as of January 31, 1998 was as follows:
<TABLE>
<CAPTION>
Options Exercisable
Weighted ---------------------------------
Average Weignted Weighted
Range of Number of Remaining Average Number Average
Exercise Prices Options Contractual Exercise Exercisable Exercise
Outstanding Life (years) Price Price
- --------------- ------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.12 - $ 0.39 822,000 2.3 $ 0.17 822,000 $ 0.17
$11.88 - $14.88 815,000 9.9 12.06 -- --
$15.00 - $18.75 1,087,000 9.5 15.09 -- --
------------- -------------- -------------- -------------- --------------
Total 2,724,000 7.4 $ 9.68 822,000 $ 0.17
============= ==============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost was recognized as the exercise price of
the stock options equaled the fair value at the grant date. The pro forma impact
of applying SFAS No. 123 is not presented for the years ended December 31, 1995
and January 31, 1997 as SFAS 123 is applicable only to options granted during
the year ended December 31, 1995 and later, and all options outstanding as of
January 31, 1997 were granted prior to 1995. The
F-19
<PAGE>
fair value of the options at date of grant was estimated using the Black Scholes
model with the following assumptions:
January 31, 1998
----------------
Expected Life (years).......................................... 6.00
Interest Rate.................................................. 5.95%
Volatility..................................................... 0.41
Dividend Yield................................................. $ 0.00
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income for the
year ended January 31, 1998 would have decreased as follows:
As Reported Pro Forma
----------- ---------
Net income ............... $ 9,856 $ 8,201
Basic earnings per share . $ 0.38 $ 0.32
Diluted earnings per share $ 0.38 $ 0.31
During 1995, the Company repurchased 1,000,000 shares issued to an employee
immediately upon exercise of stock options. Accordingly, the Company recorded
compensation expense of $2,408,000 in the accompanying consolidated financial
statements for the year ended December 31, 1995. Additionally, during the year
ended January 31, 1997 certain employees holding vested options with respect to
70,000 shares at an average of $0.27 per share gave noticed as to their
intention to terminate employment. The Company determined that it would
reacquire the shares, which would be issued to the employees. Accordingly,
$648,000 of compensation expense representing the difference between exercise
price and acquisition cost, has been accrued as compensation expense at
January 31, 1997.
1994 Stock Ownership Program
The Company has also established the QAD Inc. 1994 Stock Ownership Program
(the "Plan") covering 4,800,000 shares of its common stock. Subject to certain
limitations, the Plan allows eligible employees to purchase shares of common
stock at the fair market value of the common stock by direct cash payment or at
95% of the fair market value through payroll deduction. The Company has the
right, but not the obligation, to repurchase shares at fair value upon the
termination of employment. During the years ended December 31, 1995, and
January 31, 1997 and 1998, 250,750, 793,438 and 215,160 shares, respectively,
were issued under the Plan at average prices of $2.40, $1.78 and $9.42,
respectively. No shares were issued under the Plan in January 1996.
During the year ended January 31, 1997 and 1998, respectively, 559,066 and
20,400 restricted shares of the Company's common stock were granted to certain
employees. The fair market value of shares awarded was $2,584,000 and $194,000,
respectively. These amounts were recorded as unearned compensation-restricted
stock, shown as a separate component of stockholders' equity. Unearned
compensation is being amortized to expense over the periods in which the
restrictions lapse, generally one to three years from date of award. Such
expenses amounted to $788,000 and $930,000 in the years ended January 31, 1997
and 1998, respectively, $333,000 and $600,000 of which is included in accrued
expense, respectively, and $455,000 and $663,000 of which has been recorded as a
reduction in unearned compensation-restricted stock as the restricted shares are
issued to employees.
F-20
<PAGE>
During the year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998, the Company granted 148,514, 23,722,
108,062 and 50,060 unrestricted shares, respectively, to certain employees
having a fair value of $336,000, $57,000, $256,000 and $431,000 at date of
grant, respectively. Compensation expense has been recognized in each respective
period for the fair value of such stock grants.
1997 Stock Incentive Program
The Company has adopted the 1997 Stock Incentive Program (the "Program").
The Program consists of seven parts:
The first part is the Incentive Stock Option Plan under which incentive
stock options are granted. The second part is the Non-Qualified Stock Option
Plan under which nonqualified stock options are granted. The third part is the
Restricted Share Plan under which restricted shares of Common Stock are granted.
The fourth part is the Employee Stock Purchase Plan. The Plan allows
participating employees to purchase shares of common stock through payroll
deductions at 85% of the lower of the beginning or the ending calendar quarter
share price. During the three months ended December 31, 1997, 35,969 shares were
issued at $10.73. The fifth part is the Non-Employee Director Stock Option Plan
under which grants of options to purchase shares of Common Stock may be made to
non-employee directors of the Company. The sixth part is the Stock Appreciation
Rights Plan under which SARs (as defined therein) are granted. The seventh part
is the Other Stock Rights Plan under which (i) units representing the equivalent
shares of Common Stock are granted; (ii) payments of compensation in the form of
shares of Common Stock are granted; and (iii) rights to receive cash or shares
of Common Stock based on the value of dividends paid with respect to a share of
Common Stock are granted. The maximum aggregate number of shares of Common Stock
subject to the Program is 4,000,000 shares. The Program will be valid for 10
years from the date of adoption.
Total Compensation Cost Recognized for Stock-Based Compensation Plans
Total compensation cost recognized for stock-based employee compensation
awards was as follows:
<TABLE>
<CAPTION>
December 31, 1995 January 31, 1997 January 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Pursuant to performance awards ............................ $ 336,000 $ 256,000 $ 431,000
Pursuant to restricted stock grants ....................... -- 788,000 930,000
Pursuant to optioned shares repurchased immediately upon
exercise ............................................... 2,408,000 648,000 --
------------------ ------------------ ------------------
TOTAL .......................... $ 2,744,000 $ 1,692,000 $ 1,361,000
================== ================== ==================
</TABLE>
During the one-month period ended January 31, 1996 compensation cost
aggregating $57,000 was recognized pursuant to stock performance awards.
Receivable from Stockholders
In connection with the 1994 Stock Ownership Program, the Company has
guaranteed indebtedness incurred by certain stockholders to purchase shares with
cash deposited with a lending institution. These amounts are classified as
"Receivable from Stockholders" in the accompanying balance sheets.
F-21
<PAGE>
11. Quarterly information (unaudited)
The following table sets forth selected unaudited quarterly information for
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments (which consisted only of normal recurring adjustments)
have been included in the amounts stated below to present fairly the results of
such periods when read in conjunction with the financial statements and related
notes included elsewhere herein (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------
April 30 July 31 Oct. 31 Jan. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
Statement of Income Data:
Total revenues ......................... $ 20,116 $ 33,555 $ 23,806 $ 48,967
Operating income (loss) ................ (10,158) 5,545 (3,554) 10,887
Net income (loss) ...................... (7,317) 3,513 (2,790) 7,594
Basic net income (loss) per share ...... (0.33) 0.17 (0.13) 0.35
Diluted net income (loss) per share .... $ (0.33) $ 0.16 $ (0.13) $ 0.33
1998
Statement of Income Data:
Total revenues ......................... $ 32,073 $ 41,661 $ 44,021 $ 54,479
Operating income ....................... 317 2,706 2,502 9,170
Net income ............................. 560 1,665 1,385 6,246
Basic net income (loss) per share ...... 0.03 0.07 0.05 0.21
Diluted net income (loss) per share .... $ 0.02 $ 0.07 $ 0.05 $ 0.21
</TABLE>
An allocation of accrued expenses of $1.5 million has been recorded into
the second quarter ended July 31, 1997. This adjustment related primarily to
reallocation of accruals between the fourth quarter and the second quarter and
resulted in an increase in net income of $924,000, or 4 cents per share, in the
previously reported second quarter.
F-22
<PAGE>
Schedule II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Description Balance at Charged to (1) Adjustments Balance at
Beginning of Costs and Deletions End of
Period Expenses Period
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns
Year ended:
December 31, 1995 ............. $ 2,528 $ 945 $ (1,209) $ 34 $ 2,298
One month ended:
January 31, 1996 .............. 2,298 (25) -- 7 2,280
Years ended:
January 31, 1997 .............. 2,280 3,432 (1,983) (35) 3,694
January 31, 1998 .............. $ 3,694 $ 4,370 $ (2,554) $ -- $ 5,510
- ------------------
<FN>
(1) Actual write-offs and product returns.
</FN>
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 28, 1998.
QAD Inc.
By: /s/ KARL F. LOPKER
Karl F. Lpoker
Chief Executive Officer,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ PAMELA M. LOPKER Chairman of the Board April 28, 1998
Pamela M. Lopker and President
(Principal Executive Officer)
/s/ KARL F. LOPKER Director, Chief Executive Officer April 28, 1998
Karl F. Lopker and Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ KOH BOON HWEE Director April 28, 1998
Koh Boon Hwee
/s/ PETER VAN CUYLENBURG Director April 28, 1998
Peter Van Cuylenburg
/s/ EVAN M. BISHOP Director, Vice President
Evan M. Bishop Technology April 28, 1998
CREDIT AGREEMENT
Dated as of August 4, 1997
between
QAD INC.
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS ........................................................... 1
1.01 Certain Defined Terms ............................................ 1
1.02 Other Interpretive Provisions .................................... 13
1.03 Accounting Principles ............................................ 14
ARTICLE II
THE CREDIT ............................................................ 14
2.01 Amount and Terms of Commitment ................................... 14
2.02 Loan Accounts .................................................... 14
2.03 Procedure for Borrowing .......................................... 14
2.04 Conversion and Continuation Elections ............................ 15
2.05 Voluntary Termination or Reduction of Commitment ................. 15
2.06 Optional Prepayments ............................................. 16
2.07 Repayment ........................................................ 16
2.08 Interest ......................................................... 16
2.09 Commitment Fee ................................................... 16
2.10 Computation of Fees and Interest ................................. 17
2.11 Payments by the Company .......................................... 17
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY ................................ 17
3.01 Taxes ............................................................ 17
3.02 Illegality ....................................................... 18
3.03 Increased Costs and Reduction of Return .......................... 18
3.04 Funding Losses ................................................... 19
3.05 Inability to Determine Rates ..................................... 19
3.06 Survival ......................................................... 19
ARTICLE IV
CONDITIONS PRECEDENT .................................................. 19
4.01 Conditions of Initial Loan ....................................... 19
(a) Credit Agreement .................................................. 20
1
<PAGE>
(b) Resolutions; Incumbency ........................................... 20
(c) Organization Documents; Good Standing ............................. 20
(d) Legal Opinion ..................................................... 20
(e) Payment of Fees ................................................... 20
(f) Certificate ....................................................... 20
(g) Other Documents ................................................... 20
(h) Recapitalization .................................................. 21
4.02 Conditions to All Loans .......................................... 21
(a) Notice of Borrowing or Conversion/Continuation .................... 21
(b) Continuation of Representations and Warranties .................... 21
(c) No Existing Default ............................................... 21
ARTICLE V
REPRESENTATIONS AND WARRANTIES ........................................ 21
5.01 Corporate Existence and Power .................................... 21
5.02 Corporate Authorization; No Contravention ........................ 22
5.03 Governmental Authorization ....................................... 22
5.04 Binding Effect ................................................... 22
5.05 Litigation ....................................................... 22
5.06 No Default ....................................................... 23
5.07 ERISA Compliance ................................................. 23
5.08 Use of Proceeds; Margin Regulations .............................. 23
5.09 Title to Properties .............................................. 23
5.10 Taxes ............................................................ 24
5.11 Financial Condition .............................................. 24
5.12 Environmental Matters ............................................ 24
5.13 Regulated Entities ............................................... 24
5.14 No Burdensome Restrictions ....................................... 24
5.15 Copyrights, Patents, Trademarks and Licenses, etc ................ 25
5.16 Subsidiaries ..................................................... 25
5.17 Insurance ........................................................ 25
5.18 Swap Obligations ................................................. 25
5.19 Full Disclosure .................................................. 25
ARTICLE VI
AFFIRMATIVE COVENANTS ................................................. 26
6.01 Financial Statements ............................................. 26
6.02 Certificates; Other Information .................................. 26
6.03 Notices .......................................................... 27
6.04 Preservation of Corporate Existence, Etc ......................... 28
2
<PAGE>
6.05 Maintenance of Property .......................................... 28
6.06 Insurance ........................................................ 28
6.07 Payment of Obligations ........................................... 28
6.08 Compliance with Laws ............................................. 28
6.09 Compliance with ERISA ............................................ 29
6.10 Inspection of Property and Books and Records ..................... 29
6.11 Environmental Laws ............................................... 29
6.12 Use of Proceeds .................................................. 29
ARTICLE VII
NEGATIVE COVENANTS .................................................... 29
7.01 Limitation on Liens .............................................. 29
7.02 Disposition of Assets ............................................ 31
7.03 Consolidations and Mergers ....................................... 32
7.04 Loans and Investments ............................................ 32
7.05 Limitation on Indebtedness ....................................... 33
7.06 Transactions with Affiliates ..................................... 33
7.07 Use of Proceeds .................................................. 33
7.08 Contingent Obligations ........................................... 33
7.09 Joint Ventures ................................................... 34
7.10 Lease Obligations ................................................ 34
7.11 Restricted Payments .............................................. 34
7.12 ERISA ............................................................ 34
7.13 Change in Business ............................................... 34
7.14 Accounting Changes ............................................... 34
7.15 Financial Covenants .............................................. 35
(a) Adjusted Quick Ratio .............................................. 35
(b) Leverage Ratio .................................................... 35
(c) Profitability ..................................................... 35
(d) Minimum Tangible Net Worth ........................................ 35
ARTICLE VIII
EVENTS OF DEFAULT ..................................................... 35
8.01 Event of Default ................................................. 35
(a) Non-Payment ....................................................... 35
(b) Representation or Warranty ........................................ 36
(c) Specific Defaults ................................................. 36
(d) Other Defaults .................................................... 36
(e) Cross-Default ..................................................... 36
(f) Insolvency; Voluntary Proceedings ................................. 36
3
<PAGE>
(g) Involuntary Proceedings ........................................... 37
(h) ERISA ............................................................. 37
(i) Monetary Judgments ................................................ 37
(j) Non-Monetary Judgments ............................................ 37
(l) Loss of Licenses .................................................. 38
(m) Adverse Change .................................................... 38
8.02 Remedies ......................................................... 38
8.03 Rights Not Exclusive ............................................. 38
ARTICLE IX
MISCELLANEOUS ......................................................... 38
9.01 Amendments and Waivers ........................................... 38
9.02 Notices .......................................................... 38
9.03 No Waiver; Cumulative Remedies ................................... 39
9.04 Costs and Expenses ............................................... 39
9.05 Indemnification .................................................. 40
9.06 Payments Set Aside ............................................... 40
9.07 Successors and Assigns ........................................... 40
9.08 Assignments, Participations, etc ................................. 40
9.09 Confidentiality .................................................. 41
9.10 Set-off .......................................................... 42
9.11 Automatic Debits of Fees ......................................... 42
9.12 Counterparts ..................................................... 42
9.13 Severability ..................................................... 42
9.14 No Third Parties Benefited ....................................... 42
9.15 Governing Law .................................................... 42
9.16 Arbitration; Reference Proceeding ................................ 43
9.17 Entire Agreement ................................................. 44
Exhibits:
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D S-1
Schedules:
Schedule 4.02(d) Indebtedness to be Repaid
Schedule 5.16 Subsidiaries and Minority Interests
Schedule 7.01 Permitted Liens
4
<PAGE>
Schedule 7.05 Permitted Indebtedness
Schedule 7.08 Contingent Obligations
5
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of August 4, 1997, between QAD
Inc., a Delaware corporation (the "Company"), and Bank of America National Trust
and Savings Association (the "Bank").
WHEREAS, the Bank has agreed to make available to the Company a
revolving credit facility upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.01 Certain Defined Terms . The following terms have the following
meanings:
"Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or indirectly,
in (a) the acquisition of all or substantially all of the assets of a
Person, or of any business or division of a Person, (b) the acquisition
of in excess of 50% of the capital stock, partnership interests,
membership interests or equity of any Person, or otherwise causing any
Person to become a Subsidiary, or (c) a merger or consolidation or any
other combination with another Person (other than a Person that is a
Subsidiary) provided that the Company or the Subsidiary is the
surviving entity.
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, membership interests, by contract, or
otherwise.
"Agreement" means this Credit Agreement.
"Applicable Margin" means: (i) with respect to Base Rate
Loans, 0%; and (ii) with respect to Offshore Rate Loans, (a) during the
periods when 50% or less of the Commitment is being utilized, the
Applicable Margin for all Offshore Rate Loans outstanding during such
periods shall be 1.25%, and (b) during the periods when more than 50%
of the Commitment is being utilized, the Applicable Margin for all
Offshore
1
<PAGE>
Rate Loans outstanding during such periods shall be 1.50%. As a
result, the Applicable Margin for all Offshore Rate Loans outstanding
at any one time can vary from time to time depending on the amount of
the Commitment that is being utilized at any one time.
"Assignee" has the meaning specified in subsection 9.08(a).
"Attorney Costs" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the allocated
cost of internal legal services and all disbursements of internal
counsel.
"Base Rate" means, for any day, the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate, which means, for any day,
the rate set forth in the weekly statistical release designated as
H.15(519), or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, "H.15(519)") on
the preceding Business Day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day such rate is not so published
on any such preceding Business Day, the rate for such day will be the
arithmetic mean as determined by the Bank of the rates for the last
transaction in overnight Federal funds arranged prior to 9:00 a.m. (New
York City time) on that day by each of three leading brokers of Federal
funds transactions in New York City selected by the Bank; and (b) the
rate of interest in effect for such day as publicly announced from time
to time by the Bank in San Francisco, California, as its "reference
rate." (The "reference rate" is a rate set by the Bank based upon
various factors including the Bank's costs and desired return, general
economic conditions and other factors, and is used as a reference point
for pricing some loans, which may be priced at, above, or below such
announced rate.) Any change in the reference rate announced by the Bank
shall take effect at the opening of business on the day specified in
the public announcement of such change.
"Base Rate Loan" means a Loan that bears interest based on the
Base Rate.
"Borrowing Date" means any date on which a Loan is made to the
Company under Section 2.03.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in San Francisco are authorized or
required by law to close and, if the applicable Business Day relates to
any Offshore Rate Loan, means such a day on which dealings are carried
on in the applicable offshore dollar interbank market.
"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any
other law, rule or regulation, whether or not having the force of law,
in each case, regarding capital adequacy of any bank
2
<PAGE>
or of any corporation controlling a bank.
"Cash Equivalents" means:
(a) securities issued or fully guaranteed or insured
by the United States Government or any agency thereof having
maturities of not more than 12 months from the date of
acquisition;
(b) certificates of deposit, time deposits,
Eurodollar time deposits, repurchase agreements, reverse
repurchase agreements, or bankers' acceptances, having in each
case a tenor of not more than 12 months, issued by any U.S.
commercial bank or any branch or agency of a non-U.S. bank
licensed to conduct business in the U.S. having combined
capital and surplus of not less than $100,000,000 and whose
short-term securities are rated at least A-1 by Standard &
Poor's Corporation ("S&P") or at least P-1 by Moody's Investor
Service, Inc. ("Moody's");
(c) taxable and tax-exempt commercial paper of an
issuer rated at least A-l by S&P or at least P-l by Moody's
and in either case having a tenor of not more than 270 days;
(d) medium term notes of an issuer rated at least AA
by S&P or at least Aa2 by Moody's and having a remaining term
of not more than 12 months after the date of acquisition by
the Company or its Subsidiaries;
(e) municipal notes and bonds which are rated at
least SP-l or AA by S&P or at least MIG-2 or Aa by Moody's
with tenors of not more than 12 months;
(f) investments in taxable or tax-exempt money market
funds with assets greater than $500,000,000 and whose assets
have average maturities less than or equal to 180 days and are
rated at least A-l by S&P or at least P-l by Moody's;
(g) money market preferred instruments of an issuer
rated at least A-1 by S&P or at least P-1 by Moody's with
tenors of not more than 12 months; or
(h) other similar investments, subject to the
Bank's prior written approval.
"Closing Date" means the date on which all conditions
precedent set forth in Section 4.01 are satisfied or waived by the
Bank.
"Code" means the Internal Revenue Code of 1986, and
regulations promulgated thereunder.
"Commitment" has the meaning specified in Section 2.01.
"Compliance Certificate" means a certificate substantially in
the form of Exhibit C.
"Consolidated Tangible Net Worth" means, at any time of
determination, in respect of the Company and its Subsidiaries,
determined on a consolidated basis, total assets (exclusive of
goodwill, licensing agreements, patents, trademarks, trade names,
organization expense, treasury stock, unamortized debt discount and
premium, deferred charges and other like intangibles) minus total
liabilities (including accrued and deferred income taxes), at such
time.
"Contingent Obligation" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any Indebtedness, lease,
dividend, letter of credit or other obligation (the "primary
obligations") of another Person (the "primary obligor"), including any
obligation of that Person (i) to purchase, repurchase or otherwise
acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such
primary obligation, or to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency
or any balance sheet item, level of income or financial condition of
the primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of
such primary obligation, or (iv) otherwise to assure or hold harmless
the holder of any such primary obligation against loss in respect
thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that
Person is otherwise liable for reimbursement of drawings or payments;
(c) to purchase any materials, supplies or other property from, or to
obtain the services of, another Person if the relevant contract or
other related document or obligation requires that payment for such
materials, supplies or other property, or for such services, shall be
made regardless of whether delivery of such materials, supplies or
other property is ever made or tendered, or such services are ever
performed or tendered, or (d) in respect of any Swap Contract.
"Consolidated Current Liabilities" means, at any time of
determination, all amounts which would, in accordance with GAAP, be
included under current liabilities on a consolidated balance sheet of
the Company and its Subsidiaries, but in any event including all
outstanding Loans, at such time.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other
instrument, document or agreement to which such Person is a party or by
which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which, under
Section 2.04, the Company (a) converts a Loan of one Type to a Loan of
another Type, or (b) continues as a Loan of the same Type, but with a
new Interest Period, a Loan having an Interest Period expiring on such
date.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied during such time) constitute an Event of Default.
"Dollars", "dollars" and "$" each mean lawful money of the
United States.
"Environmental Claims" means all claims, however asserted, by
any Governmental Authority or other Person alleging potential liability
or responsibility for violation of any Environmental Law, or for
release or injury to the environment.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
Governmental Authorities, in each case relating to environmental,
health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Company within the meaning
of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of
the Code for purposes of provisions relating to Section 412 of the
Code).
"ERISA Event" means (a) with respect to a Pension Plan, any of
the events set forth in Section 4043(c) of ERISA or the regulations
thereunder, other than any such event for which the 30-day notice
requirement under ERISA has been waived in regulations issued by the
PBGC; (b) a withdrawal by the Company or any ERISA Affiliate from a
Pension Plan subject to Section 4063 of ERISA during a plan year in
which it was a substantial employer (as defined in Section 4001(a)(2)
of ERISA) or a cessation of operations which is treated as such a
withdrawal under Section 4062(e) of ERISA; (c) a complete or partial
withdrawal by the Company or any ERISA Affiliate from a Multiemployer
Plan or notification that a Multiemployer Plan is in reorganization;
(d) the filing of a notice of intent to terminate, the treatment of a
Plan amendment as a termination under Section 4041 or 4041A of ERISA,
or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which might
reasonably be expected to constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Pension Plan or Multiemployer Plan; or (f) the
imposition of any liability under Title IV of ERISA, other than PBGC
premiums due but not delinquent under Section 4007 of ERISA, upon the
Company or any ERISA Affiliate.
"Event of Default" means any of the events or circumstances
specified in Section 8.01.
"FDIC" means the Federal Deposit Insurance Corporation, and
any Governmental Authority succeeding to any of its principal
functions.
"FRB" means the Board of Governors of the Federal Reserve
System, and any Governmental Authority succeeding to any of its
principal functions.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date
of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the
definition of "Contingent Obligation."
"Indebtedness" of any Person means, without duplication, (a)
all indebtedness for borrowed money; (b) all obligations issued,
undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary course
of business on ordinary terms); (c) all non-contingent reimbursement or
payment obligations with respect to Surety Instruments; (d) all
obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (e) all
indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case
with respect to property acquired by the Person (even though the rights
and remedies of the seller or bank under such agreement in the event of
default are limited to repossession or sale of such property); (f) all
obligations with respect to capital leases; (g) all net indebtedness
referred to in clauses (a) through (f) above secured by (or for which
the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including
accounts and contracts rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such
Indebtedness; and (h) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in
clauses (a) through (g) above. Notwithstanding the foregoing, the term
"Indebtedness" shall not include the Company's deferred maintenance
revenue arising in the Company's ordinary course of business and
calculated in accordance with GAAP. For all purposes of this Agreement,
the Indebtedness of any Person shall include all recourse Indebtedness
of any partnership or joint venture or limited liability company in
which such Person is a general partner or a joint venturer or a member.
"Indemnified Liabilities" has the meaning specified in Section
9.05.
"Indemnified Person" has the meaning specified in Section
9.05.
"Independent Auditor" has the meaning specified in subsection
6.01(a).
"Insolvency Proceeding" means, with respect to any person, (a)
any case, action or proceeding with respect to such Person before any
court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for creditors,
or other, similar arrangement in respect of its creditors generally or
any substantial portion of its creditors; undertaken under U.S.
Federal, state or foreign law, including the Federal Bankruptcy Reform
Act of 1978 (11 U.S.C. ss.101, et seq.).
"Interest Payment Date" means, as to any Loan other than a
Base Rate Loan, the last day of each Interest Period applicable to such
Loan and, as to any Base Rate Loan, the last Business Day of each
calendar quarter and each date such Loan is converted into another Type
of Loan, provided, however, that if any Interest Period for an Offshore
Rate Loan exceeds three months, the date that falls three months after
the beginning of such Interest Period and after each Interest Payment
Date thereafter is also an Interest Payment Date.
"Interest Period" means, as to any Offshore Rate Loan, the
period commencing on the Borrowing Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into or
continued as an Offshore Rate Loan, and ending on the date one, two,
three or six months thereafter as selected by the Company in its Notice
of Borrowing or Notice of Conversion/Continuation; provided that:
(i) if any Interest Period would otherwise end on a
day that is not a Business Day, that Interest Period shall be
extended to the following Business Day unless, in the case of an
Offshore Rate Loan, the result of such extension would be to
carry such Interest Period into another calendar month, in which
event such Interest Period shall end on the preceding Business
Day;
(ii) any Interest Period pertaining to an Offshore
Rate Loan that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of the
calendar month at the end of such Interest Period; and
(iii) no Interest Period for any Loan shall extend
beyond the Termination Date as determined by subsection (a) of
the definition of that term.
"Joint Venture" means a single-purpose corporation, partnership,
limited liability company, joint venture or other similar legal
arrangement (whether created by contract or conducted through a separate
legal entity) now or hereafter formed by the Company or any of its
Subsidiaries with another Person in order to conduct a common venture or
enterprise with such Person.
"Leverage Ratio" means, as of any date of determination, the
ratio of (a) total consolidated liabilities of the Company and its
Subsidiaries on such date less deferred revenue of the Company and its
Subsidiaries as of such date, to (b) Consolidated Tangible Net Worth, in
each case as determined in accordance with GAAP.
"Lien" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preferential arrangement of
any kind or nature whatsoever in respect of any property (including
those created by, arising under or evidenced by any conditional sale or
other title retention agreement, the interest of a lessor under a
capital lease, any financing lease having substantially the same
economic effect as any of the foregoing, or the filing of any financing
statement naming the owner of the asset to which such lien relates as
debtor, under the Uniform Commercial Code or any comparable law), but
not including the interest of a lessor under an operating lease.
"Loan" means an extension of credit by the Bank to the Company
under Article II, or any portion thereof remaining after or resulting
from any conversion of a Loan under Section 2.04, and may be a Base Rate
Loan or an Offshore Rate Loan (each, a "Type" of Loan).
"Loan Documents" means this Agreement and all other documents
delivered to the Bank in connection herewith.
"Margin Stock" means "margin stock" as such term is defined in
Regulation G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change
in, or a material adverse effect upon, the operations, business,
properties, condition (financial or otherwise) or prospects of the
Company or the Company and its Subsidiaries taken as a whole; (b) a
material impairment of the ability of the Company to perform under any
Loan Document and to avoid any Event of Default; or (c) a material
adverse effect upon the legality, validity, binding effect or
enforceability against the Company of any Loan Document.
"Multiemployer Plan" means a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which the Company or any
ERISA Affiliate makes, is making, or is obligated to make contributions
or, during the preceding three calendar years, has made, or been
obligated to make, contributions.
"Net Issuance Proceeds" means, as to any issuance of debt or
equity by any Person, cash proceeds and non-cash proceeds received or
receivable by such Person in connection therewith, net of reasonable
out-of-pocket costs and expenses paid or incurred in connection
therewith in favor of any Person not an Affiliate of such Person.
"Notice of Borrowing" means a notice in substantially the form
of Exhibit A.
"Notice of Conversion/Continuation" means a notice in
substantially the form of Exhibit B.
"Obligations" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document owing
by the Company to the Bank or any Indemnified Person, whether direct or
indirect (including those acquired by assignment), absolute or
contingent, due or to become due, now existing or hereafter arising.
"Offshore Rate" means, for any Interest Period, with respect to
an Offshore Rate Loan the rate of interest per annum (rounded upward to
the next 1/16th of 1%) determined by the Bank as follows:
Offshore Rate = IBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
any Interest Period the maximum reserve percentage (expressed as
a decimal, rounded upward to the next 1/100th of 1%) in effect
on such day (whether or not applicable to the Bank) under
regulations issued from time to time by the FRB for determining
the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect
to Eurocurrency funding (currently referred to as "Eurocurrency
liabilities"); and
"IBOR" means the rate of interest per annum determined
by the Bank as the rate at which dollar deposits in the
approximate amount of the Bank's Offshore Rate Loan for such
Interest Period would be offered by the Bank's Grand Cayman
Branch, Grand Cayman B.W.I. (or such other office as may be
designated for such purpose by the Bank), to major banks in the
offshore dollar interbank market at their request at
approximately [11:00 a.m. (New York City time) two Business Days
prior to] the commencement of such Interest Period.
The Offshore Rate shall be adjusted automatically as to
all Offshore Rate Loans then outstanding as of the effective
date of any change in the Eurodollar Reserve Percentage.
"Offshore Rate Loan" means a Loan that bears interest based on
the Offshore Rate.
"Organization Documents" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate of
determination or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement, and
all applicable resolutions of the board of directors (or any committee
thereof) of such corporation.
"Participant" has the meaning specified in subsection 9.08(b).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions
under ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2)
of ERISA) subject to Title IV of ERISA which the Company sponsors,
maintains, or to which it makes, is making, or is obligated to make
contributions, or in the case of a multiple employer plan (as described
in Section 4064(a) of ERISA) has made contributions at any time during
the immediately preceding five (5) plan years.
"Permitted Liens" has the meaning specified in Section 7.01.
"Permitted Swap Obligations" means all obligations (contingent
or otherwise) of the Company or any Subsidiary existing or arising under
Swap Contracts, provided that each of the following criteria is
satisfied: (a) such obligations are (or were) entered into by such
Person in the ordinary course of business for the purpose of directly
mitigating risks associated with liabilities, commitments or assets held
by such Person, or changes in the value of securities issued by such
Person in conjunction with a securities repurchase program not otherwise
prohibited hereunder, and not for purposes of speculation or taking a
"market view;" (b) such Swap Contracts do not contain any provision
("walk-away" provision) exonerating the non-defaulting party from its
obligation to make payments on outstanding transactions to the
defaulting party or any provision creating or permitting the declaration
of an event of default, termination event or similar event upon the
occurrence of an Event of Default hereunder (other than an Event of
Default under subsection 8.01(a).
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section
3(3) of ERISA) which the Company sponsors or maintains or to which the
Company makes, is making, or is obligated to make contributions and
includes any Pension Plan.
"Requirement of Law" means, as to any Person, any law (statutory
or common), treaty, rule or regulation or determination of an arbitrator
or of a Governmental Authority, in each case applicable to or binding
upon the Person or any of its property or to which the Person or any of
its property is subject.
"Responsible Officer" means the chief executive officer or the
president of the Company, or any other officer having substantially the
same authority and responsibility; or, with respect to compliance with
financial covenants, the chief financial officer or the treasurer of the
Company, or any other officer having substantially the same authority
and responsibility.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business
entity of which more than 50% of the voting stock, membership interests
or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the
Person, or one or more of the Subsidiaries of the Person, or a
combination thereof. Unless the context otherwise clearly requires,
references herein to a "Subsidiary" refer to a Subsidiary of the
Company.
"Surety Instruments" means all letters of credit (including
standby and commercial), banker's acceptances, bank guaranties, shipside
bonds, surety bonds and similar instruments.
"Swap Contract" means any agreement, whether or not in writing,
relating to any transaction that is a rate swap, basis swap, forward
rate transaction, commodity swap, commodity option, equity or equity
index swap or option, bond, note or bill option, interest rate option,
forward foreign exchange transaction, cap, collar or floor transaction,
currency swap, cross-currency rate swap, swaption, currency option or
any other, similar transaction (including any option to enter into any
of the foregoing) or any combination of the foregoing, and, unless the
context otherwise clearly requires, any master agreement relating to or
governing any or all of the foregoing.
"Swap Termination Value" means, in respect of any one or more
Swap Contracts, after taking into account the effect of any legally
enforceable netting agreement relating to such Swap Contracts, (a) for
any date on or after the date such Swap Contracts have been closed out
and termination value(s) determined in accordance therewith, such
termination value(s), and (b) for any date prior to the date referenced
in clause (a) the amount(s) determined as the mark-to-market value(s)
for such Swap Contracts, as determined by the Company based upon one or
more mid-market or other readily available quotations provided by any
recognized dealer in such Swap Contracts (which may include any Bank).
"Termination Date" means the earlier to occur of:
(a) the date that is two (2) years after the Closing
Date; provided, that if the Termination Date shall fall on a
date that is not a Business Day, the Termination Date shall be
the immediately preceding Business Day; and
(b) the date on which the Commitment terminates in
accordance with the provisions of this Agreement.
"Type" has the meaning specified in the definition of "Loan."
"Unfunded Pension Liability" means the excess of a Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the current
value of that Plan's assets, determined in accordance with the
assumptions used for funding the Pension Plan pursuant to Section 412 of
the Code for the applicable plan year.
"United States" and "U.S." each means the United States of
America.
"Wholly-Owned Subsidiary" means any corporation in which (other
than directors' qualifying shares required by law) 100% of the capital
stock of each class having ordinary voting power, and 100% of the
capital stock of every other class, in each case, at the time as of
which any determination is being made, is owned, beneficially and of
record, by the Company, or by one or more of the other Wholly-Owned
Subsidiaries at the Company, or both.
1.02 Other Interpretive Provisions. (a) The meanings of defined terms are
equally applicable to the singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words
refer to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified. The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced. The term "including" is not limiting and means
"including without limitation." In the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding", and the
word "through" means "to and including."
(c) Unless otherwise expressly provided herein, (i) references
to agreements (including this Agreement) and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document, and (ii) references to any statute
or regulation are to be construed as including all statutory and regulatory
provisions consolidating, amending, replacing, supplementing or interpreting the
statute or regulation.
(d) The captions and headings of this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement. This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms. Unless otherwise expressly provided,
any reference to any action of the Agent or the Banks by way of consent,
approval or waiver shall be deemed modified by the phrase "in its/their sole
discretion."
(e) This Agreement and the other Loan Documents are the result
of negotiations between and have been reviewed by counsel to the Bank and the
Company, and are the products of both parties. Accordingly, they shall not be
construed against the Bank merely because of the Bank's involvement in their
preparation.
1.03 Accounting Principles . Unless the context otherwise clearly
requires, all accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied. References herein to "fiscal year"
and "fiscal quarter" refer to such fiscal periods of the Company.
ARTICLE II
THE CREDIT
2.01 Amount and Terms of Commitment . The Bank agrees, on the terms and
conditions set forth herein, to make Loans to the Company from time to time on
any Business Day during the period from the Closing Date to the Termination
Date, in an aggregate amount not to exceed at any time outstanding $20,000,000
(such amount, as the same may be reduced under Section 2.05 or as a result of
one or more assignments under Section 9.08, the "Commitment"). Within the limits
of the Commitment, and subject to the other terms and conditions hereof, the
Company may borrow under this Section 2.01, prepay under Section 2.06 and
reborrow under this Section 2.01.
2.02 Loan Accounts . The Loans made by the Bank shall be evidenced by
one or more loan accounts or records maintained by the Bank in the ordinary
course of business. The loan accounts or records maintained by the Bank shall be
conclusive absent manifest error of the amount of the Loans made by the Bank to
the Company and the interest and payments thereon. Any failure so to record or
any error in doing so shall not, however, limit or otherwise affect the
obligation of the Company hereunder to pay any amount owing with respect to the
Loans.
2.03 Procedure for Borrowing . Each Loan shall be made upon the
Company's irrevocable written notice delivered to the Bank in the form of a
Notice of Borrowing, (which notice must be received by the Bank prior to 9:00
a.m. (San Francisco time) (a) three Business Days prior to the requested
Borrowing Date, in the case of an Offshore Rate Loan; and (b) on the requested
Borrowing Date, in the case of a Base Rate Loan, specifying: (i) the amount of
the Loan, which shall be in a minimum amount of $500,000 or any multiple of
$100,000 in excess thereof; (ii) the requested Borrowing Date, which shall be a
Business Day; (iii) the Type of Loan requested; and (iv) the duration of the
Interest Period applicable to such Loan. If the Notice of Borrowing fails to
specify the duration of the Interest Period for an Offshore Rate Loan, such
Interest Period shall be three months. The proceeds of each Loan will be made
available to the Company by the Bank either (i) by crediting the account of the
Company on the books of the Bank, or by wire transfer in accordance with written
instructions provided to the Bank by the Company. After giving effect to any
borrowing of a Loan, there shall not be more than ten different Interest Periods
in effect.
2.04 Conversion and Continuation Elections . (a) The Company may, upon
irrevocable written notice to the Bank in accordance with subsection 2.04(b):
(i) elect, as of any Business Day, in the case of a Base Rate Loan, or as of the
last day of the applicable Interest Period, in the case of an Offshore Rate
Loan, to convert any such Loan (or any part thereof in an amount not less than
$500,000, or that is in an integral multiple of $100,000 in excess thereof) into
a Loan of any other Type; or (ii) elect, as of the last day of the applicable
Interest Period, to continue a Loan having an Interest Period expiring on such
day (or any part thereof in an amount not less than $500,000, or that is in an
integral multiple of $100,000 in excess thereof); provided, that if at any time
the amount of any Offshore Rate Loan is reduced, by payment, prepayment, or
conversion of part thereof to be less than $500,000, such Offshore Rate Loan
shall automatically convert into a Base Rate Loan, and on and after such date
the right of the Company to continue such Loan as, and convert such Loan into,
an Offshore Rate Loan shall terminate.
(b) The Company shall deliver a Notice of
Conversion/Continuation to be received by the Bank not later than 9:00 a.m. (San
Francisco time) at least (i) three Business Days in advance of the
Conversion/Continuation Date, if any Loan is to be converted into or continued
as an Offshore Rate Loan; and (ii) on the Conversion/Continuation Date, if any
Loan is to be converted into a Base Rate Loan, specifying: (A) the proposed
Conversion/Continuation Date; (B) the amount of the Loan to be converted or
continued; (C) the Type of Loan resulting from the proposed conversion or
continuation; and (D) in the case of conversions into Offshore Rate Loans, the
duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to
an Offshore Rate Loan, the Company has failed to select timely a new Interest
Period to be applicable to such Loan, or if any Default or Event of Default then
exists, the Company shall be deemed to have elected to convert such Loan into a
Base Rate Loan effective as of the expiration date of such Interest Period.
(d) Unless the Bank otherwise consents, during the existence of
a Default or Event of Default, the Company may not elect to have a Loan
converted into or continued as an Offshore Rate Loan.
(e) After giving effect to any conversion or continuation of any
Loan, there shall not be more than ten different Interest Periods in effect.
2.05 Voluntary Termination or Reduction of Commitment. The Company may,
upon not less than five Business Days' prior notice to the Bank, terminate the
Commitment, or permanently reduce the Commitment by a minimum amount of
$500,000, or any multiple of $100,000 in excess thereof; unless, after giving
effect thereto and to any prepayments of Loans made on the effective date
thereof, the then-outstanding principal amount of the Loans would exceed the
amount of the Commitment then in effect. Once reduced in accordance with this
Section, the Commitment may not be increased. All accrued commitment fees to,
but not including the effective date of any reduction or termination of the
Commitment, shall be paid on the effective date of such reduction or
termination.
2.06 Optional Prepayments. Subject to the terms and provisions of
Section 3.04, the Company may, at any time or from time to time, upon not less
than one Business Day's irrevocable notice to the Bank received prior to 10:00
a.m. (San Francisco time), prepay without penalty Loans in whole or in part, in
minimum amounts of $500,000, or any multiple of $100,000 in excess thereof. Such
notice of prepayment shall specify the date and amount of such prepayment and
the Type(s) of Loans to be prepaid. If such notice is given by the Company, the
Company shall make such prepayment and the payment amount specified in such
notice shall be due and payable on the date specified therein, together with
accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.04.
2.07 Repayment. The Company shall repay to the Bank on the Termination
Date the aggregate principal amount of all Loans outstanding on such date.
2.08 Interest. (a) Each Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Offshore Rate or the Base Rate, as the case may be (and subject to
the Company's right to convert to other Types of Loans under Section 2.04), plus
the Applicable Margin.
(b) Interest on each Loan shall be paid in arrears on each
Interest Payment Date. Interest shall also be paid on the date of any prepayment
of Loans under Section 2.06 for the portion of the Loans so prepaid and upon
payment (including prepayment) in full thereof and, during the existence of any
Event of Default, interest shall be paid on demand of the Bank.
(c) Notwithstanding subsection (a) of this Section, while any
Event of Default exists or after acceleration, the Company shall pay interest
(after as well as before entry of judgment thereon to the extent permitted by
law) on the principal amount of all outstanding Loans, at a rate per annum which
is determined by adding 2% per annum to the Applicable Margin then in effect for
such Loans; provided, however, that, on and after the expiration of any Interest
Period applicable to any Offshore Rate Loan outstanding on the date of
occurrence of such Event of Default or acceleration, the principal amount of
such Loan shall, during the continuation of such Event of Default or after
acceleration, bear interest at a rate per annum equal to the Base Rate plus 2%.
2.09 Commitment Fee. The Company shall pay to the Bank a commitment fee
on the average daily unused portion of the Commitment, computed on a quarterly
basis in arrears on the last Business Day of each calendar quarter based upon
the daily utilization for that quarter as calculated by the Bank, equal to
one-half of one percent (.50%) per annum. Such commitment fee shall accrue from
the Closing Date to the Termination Date and shall be due and payable quarterly
in arrears on the last Business Day of each quarter commencing on the Closing
Date through the Termination Date, with the final payment to be made on the
Termination Date provided that, in connection with any reduction or termination
of Commitment under Section 2.05, the accrued commitment fee calculated for the
period ending on such date shall also be paid on the date of such reduction or
termination, with the following quarterly payment being calculated on the basis
of the period from such reduction or termination date to such quarterly payment
date. The commitment fee provided in this subsection shall accrue at all times
after the above-mentioned commencement date, including at any time during which
one or more conditions in Article IV are not met.
2.10 Computation of Fees and Interest. All computations of interest for
Base Rate Loans when the Base Rate is determined by the Bank's "reference rate"
shall be made on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed. All other computations of fees and interest shall be made
on the basis of a 360-day year and actual days elapsed (which results in more
interest being paid than if computed on the basis of a 365-day year). Interest
and fees shall accrue during each period during which interest or such fees are
computed from the first day thereof to the last day thereof. Each determination
of an interest rate by the Bank shall be conclusive and binding on the Company
in the absence of manifest error.
2.11 Payments by the Company. All payments to be made by the Company
shall be made without set-off, recoupment or counterclaim. Except as otherwise
expressly provided herein, all payments by the Company shall be made to the Bank
at the address from time to time specified by the Bank for such purpose, and
shall be made in dollars and in immediately available funds, no later than 3:00
p.m. (San Francisco time) on the date specified herein. Any payment received by
the Bank later than 3:00 p.m. (San Francisco time) shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue. Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.01 Taxes. If any payments to the Bank under this Agreement are made
from outside the United States, the Company will not deduct any foreign taxes
from any payments it makes to the Bank. If any such taxes are imposed on any
payments made by the Company (including payments under this Section), the
Company will pay the taxes and will also pay to the Bank, at the time interest
is paid, any additional amount which the Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such taxes had not been
imposed. The Company will confirm that it has paid the taxes by giving the Bank
official tax receipts (or notarized copies) within 30 days after the due date.
3.02 Illegality. (a) If the Bank determines that the introduction of
any Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Governmental Authority has asserted
that it is unlawful, for the Bank or any applicable lending office of the Bank
to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company,
any obligation of the Bank to make Offshore Rate Loans shall be suspended until
the Bank notifies the Company that the circumstances giving rise to such
determination no longer exist.
(b) If the Bank determines that it is unlawful to maintain
Offshore Rate Loans, the Company shall, upon its receipt of notice of such fact
and demand from the Bank, prepay in full all Offshore Rate Loans then
outstanding, together with interest accrued thereon and amounts required under
Section 3.04, either on the last day of the Interest Period thereof, if the Bank
may lawfully continue to maintain Offshore Rate Loans to such day, or
immediately, if the Bank may not lawfully continue to maintain Offshore Rate
Loans. If the Company is required to so prepay any Offshore Rate Loan, then
concurrently with such prepayment, the Company shall borrow from the Bank, in
the amount of such repayment, a Base Rate Loan.
3.03 Increased Costs and Reduction of Return. (a) If the Bank
determines that, due to either (i) the introduction of or any change in or in
the interpretation of any law or regulation or (ii) the compliance by the Bank
with any guideline or request from any central bank or other Governmental
Authority (whether or not having the force of law), there shall be any increase
in the cost to the Bank of agreeing to make or making, funding or maintaining
any Offshore Rate Loan, then the Company shall be liable for, and shall from
time to time, upon written demand, pay to the Bank, additional amounts as are
sufficient to compensate the Bank for such increased costs.
(b) If the Bank shall have determined that (i) the introduction
of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or any applicable lending office of the Bank) or any corporation
controlling the Bank with any Capital Adequacy Regulation, affects or would
affect the amount of capital required or expected to be maintained by the Bank
or any corporation controlling the Bank and (taking into consideration the
Bank's or such corporation's policies with respect to capital adequacy and the
Bank's desired return on capital) determines that the amount of such capital is
increased as a consequence of its Commitment, loans, credits or obligations
under this Agreement, then, upon written demand of the Bank to the Company, the
Company shall pay to the Bank, from time to time as specified by the Bank,
additional amounts sufficient to compensate the Bank for such increase.
3.04 Funding Losses. The Company shall reimburse the Bank and hold the
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of: (a) the failure of the Company to make on a timely basis any
payment of principal of any Offshore Rate Loan; (b) the failure of the Company
to borrow, continue or convert a Loan after the Company has given (or is deemed
to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c)
the failure of the Company to make any prepayment in accordance with any notice
delivered under Section 2.06; (d) the prepayment or other payment (including
after acceleration thereof) of an Offshore Rate Loan on a day that is not the
last day of the relevant Interest Period; or (e) the automatic conversion under
Section 2.04 of any Offshore Rate Loan to a Base Rate Loan on a day that is not
the last day of the relevant Interest Period; including any such loss or expense
arising from the liquidation or reemployment of funds obtained by it to maintain
any Offshore Rate Loans or from fees payable to terminate the deposits from
which such funds were obtained.
3.05 Inability to Determine Rates. If the Bank determines that for any
reason adequate and reasonable means do not exist for determining the Offshore
Rate for any requested Interest Period with respect to a proposed Offshore Rate
Loan, or that the Offshore Rate applicable pursuant to subsection 2.08(a) for
any requested Interest Period with respect to a proposed Offshore Rate Loan does
not adequately and fairly reflect the cost to the Bank of funding such Loan, the
Bank will promptly so notify the Company. Thereafter, the obligation of the Bank
to make or maintain Offshore Rate Loans, as the case may be, hereunder shall be
suspended until the Bank revokes such notice in writing. Upon receipt of such
notice, the Company may revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If the Company does not revoke
such Notice, the Bank shall make, convert or continue the Loan, as proposed by
the Company, in the amount specified in the applicable notice submitted by the
Company, but such Loans shall be made, converted or continued as a Base Rate
Loan instead of an Offshore Rate Loan.
3.06 Survival. The agreements and obligations of the Company in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.01 Conditions of Initial Loan. The obligation of the Bank to make the
initial Loan hereunder is subject to the condition that the Bank has received on
or before the Closing Date all of the following, in form and substance
satisfactory to the Bank:
(a) Credit Agreement. This Agreement executed by the Company;
(b) Resolutions; Incumbency. (i) Copies of the resolutions of
the board of directors of the Company authorizing the transactions contemplated
hereby, certified as of the Closing Date by the Secretary of the Company; and
(ii) a certificate of the Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to execute, deliver and
perform, as applicable, this Agreement, and all other Loan Documents to be
delivered by it hereunder;
(c) Organization Documents; Good Standing. Each of the
following documents: (i) the articles or certificate of incorporation and the
bylaws of the Company as in effect on the Closing Date, certified by the
Secretary of the Company as of the Closing Date; and (ii) a good standing and
tax good standing certificate for the Company from the Secretary of State (or
similar, applicable Governmental Authority) of its state of incorporation and
each state where the Company is qualified to do business as a foreign
corporation as of a recent date, together with a bring-down certificate by
facsimile, dated the Closing Date;
(d) Legal Opinion. A favorable opinion of counsel to the
Company, addressed to the Bank, with respect to such legal matters relating
hereto as the Bank may reasonably request, provided that such opinion shall be
limited to United States legal matters;
(e) Payment of Fees. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the Closing Date, together with Attorney Costs of the Bank to the extent
invoiced prior to or on the Closing Date, plus such additional amounts of
Attorney Costs as shall constitute the Bank's reasonable estimate of Attorney
Costs incurred or to be incurred by it through the closing proceedings (provided
that such estimate shall not thereafter preclude final settling of accounts
between the Company and the Bank); including any such costs, fees and expenses
arising under or referenced in Sections 2.10 and 9.04;
(f) Certificate. A certificate signed by a Responsible Officer,
dated as of the Closing Date, stating that: (i) the representations and
warranties contained in Article V are true and correct on and as of such date,
as though made on and as of such date; (ii) no Default or Event of Default
exists or would result from the execution and delivery of this Agreement; and
(iii) there has occurred since January 31, 1997, no event or circumstance that
has resulted or could reasonably be expected to result in a Material Adverse
Effect; and
(g) Other Documents. Such other approvals, opinions, documents
or materials as the Bank may reasonably request.
4.02 Conditions to All Loans. The obligation of the Bank to make any
Loan (including the initial Loan) or to continue or convert any Loan under
Section 2.04 is subject to the satisfaction of the following conditions
precedent on the relevant Borrowing Date or Conversion/Continuation Date:
(a) Notice of Borrowing or Conversion/Continuation. The Bank
shall have received a Notice of Borrowing or a Notice of
Conversion/Continuation, as applicable;
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date or Conversion/Continuation Date with the same effect as
if made on and as of such Borrowing Date or Conversion/Continuation Date (except
to the extent such representations and warranties expressly refer to an earlier
date, in which case they shall be true and correct as of such earlier date);
(c) No Existing Default. No Default or Event of Default shall
exist or shall result from such Loan or continuation or conversion;
(d) Recapitalization. Completion of the recapitalization
transaction described in the Company's Form S-1 filing with the Securities and
Exchange Commission dated June 3, 1997 (a true and correct copy of which is
attached hereto as Exhibit D), including (i) the sale of common shares to the
public, producing net cash proceeds to the Company in the minimum amount of
$60,000,000, and (ii) the repayment of the indebtedness, the termination of the
credit facilities and the release of the Liens, in each case, identified in
Schedule 4.02(d) hereto, all of which must be demonstrated or otherwise
evidenced to the Bank's reasonable satisfaction on or prior to September 1,
1997; and
(e) Schedules. The Bank shall have received by no later than
August 11, 1997, the Schedules hereto in form and substance satisfactory to the
Bank, in its sole discretion.
Each Notice of Borrowing and Notice of Conversion/Continuation submitted by the
Company hereunder shall constitute a representation and warranty by the Company
hereunder, as of the date of each such notice and as of each Borrowing Date or
Conversion/Continuation Date, as applicable, that the conditions in this Section
4.02 are satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank that:
5.01 Corporate Existence and Power. Each of the Company and its
Subsidiaries: (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; (b) has the
power and authority and all governmental licenses, authorizations, consents and
approvals to own its assets, carry on its business and to execute, deliver, and
perform its obligations under the Loan Documents; (c) is duly qualified as a
foreign corporation and is licensed and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification or license; and (d) is in compliance
with all Requirements of Law; except, in each case referred to in clause (c) or
clause (d), to the extent that the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
5.02 Corporate Authorization; No Contravention. The execution, delivery
and performance by the Company of this Agreement and each other Loan Document to
which the Company is party, have been duly authorized by all necessary corporate
action, and do not and will not: (a) contravene the terms of any of the
Company's Organization Documents; (b) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing any
Contractual Obligation to which the Company is a party or any order, injunction,
writ or decree of any Governmental Authority to which the Company or its
property is subject (other than the documents described in Schedule 4.01(h)
hereto evidencing obligations of the Company to be paid or otherwise satisfied
and released in full on or prior to the Closing Date); or (c) violate any
Requirement of Law.
5.03 Governmental Authorization. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company or
any of its Subsidiaries of the Agreement or any other Loan Document.
5.04 Binding Effect. This Agreement and each other Loan Document to
which the Company is a party constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
5.05 Litigation. There are no actions, suits, proceedings, claims or
disputes pending, or to the best knowledge of the Company, threatened or
contemplated, at law, in equity, in arbitration or before any Governmental
Authority, against the Company, or its Subsidiaries or any of their respective
properties which: (a) purport to affect or pertain to this Agreement or any
other Loan Document, or any of the transactions contemplated hereby or thereby;
or (b) if determined adversely to the Company or its Subsidiaries, would
reasonably be expected to have a Material Adverse Effect. No injunction, writ,
temporary restraining order or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
5.06 No Default. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
neither the Company nor any Subsidiary is in default under or with respect to
any Contractual Obligation in any respect which, individually or together with
all such defaults, could reasonably be expected to have a Material Adverse
Effect, or that would, if such default had occurred after the Closing Date,
create an Event of Default under subsection 8.01(e).
5.07 ERISA Compliance. (a) Each Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law. Each Plan which is intended to qualify under Section 401(a) of the
Code has received a favorable determination letter from the Internal Revenue
Service, and any Governmental Authority succeeding to any of its principal
functions under the Code, and to the best knowledge of the Company, nothing has
occurred which would cause the loss of such qualification. The Company and each
ERISA Affiliate has made all required contributions to any Plan subject to
Section 412 of the Code, and no application for a funding waiver or an extension
of any amortization period pursuant to Section 412 of the Code has been made
with respect to any Plan.
(b) There are no pending or, to the best knowledge of Company,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Plan which
has resulted or could reasonably be expected to result in a Material Adverse
Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither
the Company nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Company nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Company nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
5.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are
to be used solely for the purposes set forth in and permitted by Section 6.12
and Section 7.07. Neither the Company nor any Subsidiary is generally engaged in
the business of purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock.
5.09 Title to Properties. The Company and each Subsidiary have good
record and marketable title in fee simple to, or valid leasehold interests in,
all real property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing Date, the
property of the Company and its Subsidiaries is subject to no Liens, other than
Permitted Liens.
5.10 Taxes. The Company and its Subsidiaries have filed all Federal and
other material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP. There is no proposed tax assessment against the Company or
any Subsidiary that would, if made, have a Material Adverse Effect.
5.11 Financial Condition. The audited consolidated financial statements
of the Company and its Subsidiaries dated January 31, 1997, and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for the fiscal year ended on that date: (i) were prepared in accordance
with GAAP consistently applied throughout the period covered thereby, except as
otherwise expressly noted therein; (ii) fairly present the financial condition
of the Company and its Subsidiaries as of the date thereof and results of
operations for the period covered thereby; and (iii) show all material
indebtedness and other liabilities, direct or contingent, of the Company and its
consolidated Subsidiaries as of the date thereof, including liabilities for
taxes, material commitments and Contingent Obligations. Since January 31, 1997,
there has been no Material Adverse Effect.
5.12 Environmental Matters. The Company conducts in the ordinary course
of business a review of the effect of existing Environmental Laws and existing
Environmental Claims on its business, operations and properties, and as a result
thereof the Company has reasonably concluded that, such Environmental Laws and
Environmental Claims could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
5.13 Regulated Entities. None of the Company, any Person controlling
the Company, or any Subsidiary, is an "Investment Company" within the meaning of
the Investment Company Act of 1940. The Company is not subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, any state public utilities code, or any other Federal
or state statute or regulation limiting its ability to incur Indebtedness.
5.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary
is a party to or bound by any Contractual Obligation, or subject to any
restriction in any Organization Document, or any Requirement of Law, which could
reasonably be expected to have a Material Adverse Effect (other than under the
documents described in Schedule 4.01(h) hereof evidencing obligations of the
Company to be paid or otherwise satisfied and released in full on or prior to
the Closing Date).
5.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company or
its Subsidiaries own or are licensed or otherwise have the right to use all of
the patents, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other rights that are reasonably necessary for
the operation of their respective businesses, without conflict with the rights
of any other Person. To the best knowledge of the Company, no slogan or other
advertising device, product, process, method, substance, part or other material
now employed, or now contemplated to be employed, by the Company or any
Subsidiary infringes upon any rights held by any other Person. No claim or
litigation regarding any of the foregoing is pending or threatened, and no
patent, invention, device, application, principle or any statute, law, rule,
regulation, standard or code is pending or, to the knowledge of the Company,
proposed, which, in either case, could reasonably be expected to have a Material
Adverse Effect.
5.16 Subsidiaries. As of the Closing Date, the Company has no
Subsidiaries other than those specifically disclosed in part (a) of Schedule
5.16 hereto and has no equity investments in any other corporation or entity
other than those specifically disclosed in part (b) of Schedule 5.16.
5.17 Insurance. The properties of the Company and its Subsidiaries are
insured with financially sound and reputable insurance companies not Affiliates
of the Company, in such amounts, with such deductibles and covering such risks
as are customarily carried by companies engaged in similar businesses and owning
similar properties in localities where the Company or such Subsidiary operates.
5.18 Swap Obligations. Neither the Company nor any of its Subsidiaries
has incurred any outstanding obligations under any Swap Contracts, other than
Permitted Swap Obligations. The Company has undertaken its own independent
assessment of its consolidated assets, liabilities and commitments and has
considered appropriate means of mitigating and managing risks associated with
such matters and has not relied on any swap counterparty or any Affiliate of any
swap counterparty in determining whether to enter into any Swap Contract.
5.19 Full Disclosure. None of the representations or warranties made by
the Company in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company in connection with the Loan Documents (including the offering and
disclosure materials delivered by or on behalf of the Company to the Bank prior
to the Closing Date), contains any untrue statement of a material fact or omits
any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they are
made, not misleading as of the time when made or delivered.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as the Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Bank waives
compliance in writing:
6.01 Financial Statements. The Company shall deliver to the Bank, in
form and detail satisfactory to the Bank:
(a) as soon as available, but not later than 95 days after the
end of each fiscal year (commencing with the fiscal year ended January 31,
1998), a copy of the audited consolidated balance sheet of the Company and its
Subsidiaries as at the end of such year and the related consolidated statements
of income or operations, shareholders' equity and cash flows for such year,
setting forth in each case in comparative form the figures for the previous
fiscal year, and accompanied by the opinion of a nationally-recognized
independent public accounting firm ("Independent Auditor") which report shall
state that such consolidated financial statements present fairly the financial
position for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years. Such opinion shall not be qualified or limited
because of a restricted or limited examination by the Independent Auditor of any
material portion of the Company's or any Subsidiary's records; and
(b) as soon as available, but not later than 50 days after the
end of each of the first three fiscal quarters of each fiscal year (commencing
with the fiscal quarter ended July 31, 1997, a copy of the unaudited
consolidated balance sheet of the Company and its Subsidiaries as of the end of
such quarter and the related consolidated statements of income, shareholders'
equity and cash flows for the period commencing on the first day and ending on
the last day of such quarter, and certified by a Responsible Officer as fairly
presenting, in accordance with GAAP (subject to ordinary, good faith year-end
audit adjustments), the financial position and the results of operations of the
Company and the Subsidiaries;
6.02 Certificates; Other Information. The Company shall furnish to the
Bank:
(a) concurrently with the delivery of the financial statements
referred to in subsection 6.01(a), a certificate of the Independent Auditor
stating that in making the examination necessary therefor no knowledge was
obtained of any Default or Event of Default, except as specified in such
certificate;
(b) concurrently with the delivery of the financial statements
referred to in subsections 6.01(a) and (b), a Compliance Certificate executed by
a Responsible Officer;
(c) promptly, copies of all financial statements and reports
that the Company sends to its shareholders, and copies of all financial
statements and regular, periodical or special reports (including Forms 10K, 10Q
and 8K) that the Company or any Subsidiary may make to, or file with, the SEC;
and
(d) promptly, such additional information regarding the
business, financial or corporate affairs of the Company or any Subsidiary as the
Bank may from time to time reasonably request.
6.03 Notices. The Company shall promptly notify the Bank:
(a) of the occurrence of any Default or Event of Default, and of
the occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of any matter that has resulted or may result in a Material
Adverse Effect, including (i) breach or non-performance of, or any default
under, a Contractual Obligation of the Company or any Subsidiary; (ii) any
dispute, litigation, investigation, proceeding or suspension between the Company
or any Subsidiary and any Governmental Authority; or (iii) the commencement of,
or any material development in, any litigation or proceeding affecting the
Company or any Subsidiary; including pursuant to any applicable Environmental
Laws;
(c) of the occurrence of any of the following events affecting
the Company or any ERISA Affiliate (but in no event more than 10 days after such
event), and deliver to the Bank a copy of any notice with respect to such event
that is filed with a Governmental Authority and any notice delivered by a
Governmental Authority to the Company or any ERISA Affiliate with respect to
such event: (i) an ERISA Event; (ii) a material increase in the Unfunded Pension
Liability of any Pension Plan; (iii) the adoption of, or the commencement of
contributions to, any Plan subject to Section 412 of the Code by the Company or
any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to
Section 412 of the Code, if such amendment results in a material increase in
contributions or Unfunded Pension Liability; and
(d) of any material change in accounting policies or financial
reporting practices by the Company or any of its consolidated Subsidiaries.
Each notice under this Section shall be accompanied by a
written statement by a Responsible Officer setting forth details of the
occurrence referred to therein, and stating what action the Company or any
affected Subsidiary proposes to take with respect thereto and at what time. Each
notice under subsection 6.03(a) shall describe with particularity any and all
clauses or provisions of this Agreement or other Loan Document that have been
(or foreseeably will be) breached or violated.
6.04 Preservation of Corporate Existence, Etc. The Company shall, and
shall cause each Subsidiary to: (a) preserve and maintain in full force and
effect its corporate existence and good standing under the laws of its state or
jurisdiction of incorporation; (b) preserve and maintain in full force and
effect all governmental rights, privileges, qualifications, permits, licenses
and franchises necessary or desirable in the normal conduct of its business
except in connection with transactions permitted by Section 7.03 and sales of
assets permitted by Section 7.02; (c) use reasonable efforts, in the ordinary
course of business, to preserve its business organization and goodwill; and (d)
preserve or renew all of its registered patents, trademarks, trade names and
service marks, the non-preservation of which could reasonably be expected to
have a Material Adverse Effect.
6.05 Maintenance of Property. The Company shall maintain, and shall
cause each Subsidiary to maintain, and preserve all its property which is used
or useful in its business in good working order and condition, ordinary wear and
tear excepted and make all necessary repairs thereto and renewals and
replacements thereof except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
6.06 Insurance. The Company shall maintain, and shall cause each
Subsidiary to maintain, with financially sound and reputable independent
insurers, insurance with respect to its properties and business against loss or
damage of the kinds customarily insured against by Persons engaged in the same
or similar business, of such types and in such amounts as are customarily
carried under similar circumstances by such other Persons.
6.07 Payment of Obligations. The Company shall, and shall cause each
Subsidiary to, pay and discharge as the same shall become due and payable, all
their respective obligations and liabilities, including: (a) all tax
liabilities, assessments and governmental charges or levies upon it or its
properties or assets, unless the same are being contested in good faith by
appropriate proceedings and adequate reserves in accordance with GAAP are being
maintained by the Company or such Subsidiary; (b) all lawful claims which, if
unpaid, would by law become a Lien upon its property; and (c) all Indebtedness,
as and when due and payable, but subject to any subordination provisions
contained in any instrument or agreement evidencing such Indebtedness.
6.08 Compliance with Laws. The Company shall comply, and shall cause
each Subsidiary to comply, in all material respects with all Requirements of Law
of any Governmental Authority having jurisdiction over it or its business
(including the Federal Fair Labor Standards Act), except such as may be
contested in good faith or as to which a bona fide dispute may exist.
6.09 Compliance with ERISA. The Company shall, and shall cause each of
its ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; and (c) make all required contributions to
any Plan subject to Section 412 of the Code.
6.10 Inspection of Property and Books and Records. The Company shall
maintain and shall cause each Subsidiary to maintain proper books of record and
account, in which full, true and correct entries in conformity with GAAP
consistently applied shall be made of all financial transactions and matters
involving the assets and business of the Company and such Subsidiary. The
Company shall permit, and shall cause each Subsidiary to permit, representatives
and independent contractors of the Bank to visit and inspect any of their
respective properties, to examine their respective corporate, financial and
operating records, and make copies thereof or abstracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
directors, officers, and independent public accountants, all at the reasonable
expense of the Company and at such reasonable times during normal business hours
and as often as may be reasonably desired, upon reasonable advance notice to the
Company; provided, however, when an Event of Default exists the Bank may do any
of the foregoing at the expense of the Company at any time during normal
business hours and without advance notice.
6.11 Environmental Laws. The Company shall, and shall cause each
Subsidiary to, conduct its operations and keep and maintain its property in
compliance with all Environmental Laws.
6.12 Use of Proceeds. The Company shall use the proceeds of the Loans
for working capital and other general corporate purposes not in contravention of
any Requirement of Law or of any Loan Document.
ARTICLE VII
NEGATIVE COVENANTS
So long as the Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Bank waives
compliance in writing:
7.01 Limitation on Liens. The Company shall not, and shall not suffer
or permit any Subsidiary to, directly or indirectly, make, create, incur, assume
or suffer to exist any Lien upon or with respect to any part of its property,
whether now owned or hereafter acquired, other than the following ("Permitted
Liens"):
(a) any Lien existing on property of the Company or any
Subsidiary on the Closing Date and set forth in Schedule 7.01 securing
Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental
charges which are not delinquent or remain payable without penalty, or to the
extent that non-payment thereof is permitted by Section 6.07, provided that no
notice of lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the ordinary course
of business which are not delinquent or remain payable without penalty or which
are being contested in good faith and by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto;
(e) Liens (other than any Lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other social security
legislation;
(f) Liens on the property of the Company or its Subsidiary
securing (i) the non-delinquent performance of bids, trade contracts (other than
for borrowed money), leases, statutory obligations, (ii) contingent obligations
on surety and appeal bonds, and (iii) other non-delinquent obligations of a like
nature; in each case, incurred in the ordinary course of business, provided all
such Liens in the aggregate would not (even if enforced) cause a Material
Adverse Effect;
(g) Liens consisting of judgment or judicial attachment liens,
provided that the enforcement of such Liens is effectively stayed and all such
Liens in the aggregate at any time outstanding for the Company and its
Subsidiaries do not exceed $1,000,000;
(h) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Company and its Subsidiaries;
(i) Liens on assets of corporations which become Subsidiaries
after the date of this Agreement, provided, however, that such Liens existed at
the time the respective corporations became Subsidiaries and were not created in
anticipation thereof;
(j) purchase money security interests on any property acquired
or held by the Company or its Subsidiaries in the ordinary course of business,
securing Indebtedness incurred or assumed for the purpose of financing all or
any part of the cost of acquiring such property; provided that (i) any such Lien
attaches to such property concurrently with or within 20 days after the
acquisition thereof, (ii) such Lien attaches solely to the property so acquired
in such transaction, (iii) the principal amount of the debt secured thereby does
not exceed 100% of the cost of such property, and (iv) the principal amount of
the Indebtedness secured by any and all such purchase money security interests
(excluding purchase money security interests otherwise permitted under this
subsection (j) securing Indebtedness incurred or assumed for the purpose of
financing all or any part of the cost of acquiring new operating facilities for
the Company or its Subsidiaries) shall not at any time exceed, together with
Indebtedness permitted under subsection 7.05(d), $5,000,000;
(l) Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated by
the FRB, and (ii) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution; and
(m) Liens consisting of pledges of cash collateral or government
securities to secure on a mark-to-market basis obligations under Swap Contracts
entered into in the ordinary course of business as bona fide hedging
transactions, provided that (i) the counterparty to such Swap Contract is under
a similar requirement to deliver similar collateral from time to time to the
Company or the Subsidiary party thereto, and (ii) the aggregate value of such
collateral so pledged by the Company and the Subsidiaries together in favor of
any counterparty does not at any time exceed $1,000,000.
7.02 Disposition of Assets. The Company shall not, and shall not suffer
or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of (whether in one or a series of
transactions) any property (including accounts and notes receivable, with or
without recourse) or enter into any agreement to do any of the foregoing,
except:
(a) dispositions of inventory, or used, worn-out or surplus
equipment, all in the ordinary course of business;
(b) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to the
purchase price of such replacement equipment;
(c) dispositions of inventory, equipment and other property by
the Company or any Subsidiary to the Company or any Subsidiary pursuant to
reasonable business requirements; and
(d) dispositions of assets (other than accounts receivable of
the Company or any Subsidiary) not otherwise permitted hereunder which are made
for fair market value; provided, that (i) at the time of any disposition, no
Event of Default shall exist or shall result from such disposition, (ii) the
aggregate sales price from such disposition shall be paid in cash, and (iii) the
aggregate value of all assets so sold by the Company and its Subsidiaries,
together, shall not exceed in any fiscal year an amount equal to 10% of
Consolidated Tangible Net Worth measured as of the end of the then immediately
preceding fiscal year.
7.03 Consolidations and Mergers. The Company shall not, and shall not
suffer or permit any Subsidiary to, merge, consolidate with or into, or convey,
transfer, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person, except:
(a) any Subsidiary may merge with the Company, provided that the
Company shall be the continuing or surviving corporation, or with any one or
more Subsidiaries, provided that if any transaction shall be between a
Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be
the continuing or surviving corporation; and
(b) any Subsidiary may sell all or substantially all of its
assets (upon voluntary liquidation or otherwise), to the Company or another
Wholly-Owned Subsidiary.
7.04 Loans and Investments. The Company shall not purchase or acquire,
or suffer or permit any Subsidiary to purchase or acquire, or make any
commitment therefor, any capital stock, equity interest, or any obligations or
other securities of, or any interest in, any Person, or make or commit to make
any Acquisitions, or make or commit to make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person
including any Affiliate of the Company, except for:
(a) investments in the form of Cash Equivalents or short term
marketable securities;
(b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business;
(c) extensions of credit by the Company to any of its
Wholly-Owned Subsidiaries or by any of its Wholly-Owned Subsidiaries to another
of its Wholly-Owned Subsidiaries;
(d) investments incurred in order to consummate Acquisitions
otherwise permitted herein, provided that (i) the book value (as to the
purchaser) of any such Acquisition, together with such value of all prior
Acquisitions undertaken by the Company and its Subsidiaries after the Closing
Date, shall not exceed at the time of such investment $10,000,000 in the
aggregate, (ii) such Acquisition is undertaken in accordance with all applicable
Requirements of Law, and (iii) the prior, effective written consent or approval
to such Acquisition of the board of directors or equivalent governing body of
the acquiree is obtained; or
(e) investments constituting Permitted Swap Obligations or
payments or advances under Swap Contracts relating to Permitted Swap
Obligations.
(f) investments in the capital stock of any corporation not
otherwise permitted hereunder provided that such investments, together with
investments made pursuant to clause (d) above, do not exceed $10,000,000 in the
aggregate.
7.05 Limitation on Indebtedness. The Company shall not, and shall not
suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement; (b)
Indebtedness consisting of Contingent Obligations permitted pursuant to Section
7.08; (c) Indebtedness existing on the Closing Date and set forth in Schedule
7.05; (d) Indebtedness secured by Liens permitted by subsection 7.01(i), (j) and
(m) in an aggregate amount outstanding not to exceed $10,000,000; and (e)
Indebtedness incurred in connection with leases permitted pursuant to Section
7.10.
7.06 Transactions with Affiliates. The Company shall not, and shall not
suffer or permit any Subsidiary to, enter into any transaction with any
Affiliate of the Company, except upon fair and reasonable terms no less
favorable to the Company or such Subsidiary than would obtain in a comparable
arm's-length transaction with a Person not an Affiliate of the Company or such
Subsidiary.
7.07 Use of Proceeds. The Company shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise
refinance indebtedness of the Company or others incurred to purchase or carry
Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying
any Margin Stock, or (iv) to acquire any security in any transaction that is
subject to Section 13 or 14 of the Securities and Exchange Act of 1934, and
regulations promulgated thereunder.
7.08 Contingent Obligations. The Company shall not, and shall not
suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any
Contingent Obligations except: (a) endorsements for collection or deposit in the
ordinary course of business; (b) Permitted Swap Obligations; and (c) Contingent
Obligations of the Company and its Subsidiaries existing as of the Closing Date
and listed in Schedule 7.08.
7.09 Joint Ventures. The Company shall not, and shall not suffer or
permit any Subsidiary to enter into any Joint Venture, other than in the
ordinary course of business.
7.10 Lease Obligations. The Company shall not, and shall not suffer or
permit any Subsidiary to, create or suffer to exist any obligations for the
payment of rent for any property under lease or agreement to lease, except for:
(a) leases of the Company and of Subsidiaries in existence on the Closing Date
and any renewal, extension or refinancing thereof; (b) operating leases entered
into by the Company or any Subsidiary after the Closing Date in the ordinary
course of business.
7.11 Restricted Payments. The Company shall not, and shall not suffer
or permit any Subsidiary to, declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or securities on
account of any shares of any class of its capital stock, or purchase, redeem or
otherwise acquire for value any shares of its capital stock or any warrants,
rights or options to acquire such shares, now or hereafter outstanding; except
that the Company and any Wholly-Owned Subsidiary may: (a) declare and make
dividend payments or other distributions payable solely in its common stock; and
(b) purchase, redeem or otherwise acquire shares of its common stock or warrants
or options to acquire any such shares (i) in an aggregate amount not to exceed
$5,000,000 or (ii) with the proceeds received from the substantially concurrent
issue of new shares of its common stock.
7.12 ERISA. The Company shall not, and shall not suffer or permit any
of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan which has
resulted or could reasonably expected to result in a Material Adverse Effect; or
(b) engage in a transaction that could be subject to Section 4069 or 4212(c) of
ERISA.
7.13 Change in Business. The Company shall not, and shall not suffer or
permit any Subsidiary to, engage in any material line of business substantially
different from those lines of business carried on by the Company and its
Subsidiaries on the date hereof (including the development of the On/Q product
described in the Company's Form S-1).
7.14 Accounting Changes. The Company shall not, and shall not suffer or
permit any Subsidiary to, make any significant change in accounting treatment or
reporting practices, except as required by GAAP, or change the fiscal year of
the Company or of any Subsidiary.
7.15 Financial Covenants.
(a) Adjusted Quick Ratio. The Company shall not as of the end
of any fiscal quarter suffer or permit its ratio (determined on a consolidated
basis) of (i) cash plus the value (valued in accordance with GAAP) of all Cash
Equivalents, other than cash and Cash Equivalents subject to a Lien securing
Indebtedness, plus net current accounts receivable (valued in accordance with
GAAP) to (ii) Consolidated Current Liabilities, to be less than (A) 1.15 to 1.00
from the Closing Date through the fiscal quarter ending July 31, 1998 and (B)
1.20 to 1.00 thereafter.
(b) Leverage Ratio. The Company shall not as of the end of any
fiscal quarter suffer or permit its Leverage Ratio to be greater than 0.65 to
1.00.
(c) Profitability. The Company shall not suffer or permit, on a
net or operating basis, (i) a loss in any two fiscal quarters during any period
of four consecutive fiscal quarters beginning after the fourth fiscal quarter
ended after the Closing Date, (ii) a loss in any single fiscal quarter or for
any period of two consecutive fiscal quarters of more than 10% of Consolidated
Tangible Net Worth measured as of the end of the immediately preceding fiscal
quarter, and (iii) a loss for any period of four consecutive fiscal quarters.
(d) Minimum Tangible Net Worth. The Company shall not suffer or
permit Consolidated Tangible Net Worth as of the end of any fiscal quarter to be
less than (i) 85% of Consolidated Tangible Net Worth measured as of July 31,
1997, plus (ii) 75% of net income for the Company and its Subsidiaries earned in
each fiscal quarter ended after the Closing Date, determined on a consolidated
basis and not reduced by any quarterly loss, plus (iii) 100% of the Net Issuance
Proceeds of any sale of capital stock of the Company by or for the account of
the Company occurring on or after the Closing Date.
ARTICLE VIII
EVENTS OF DEFAULT
8.01 Event of Default. Any of the following shall constitute an "Event
of Default":
(a) Non-Payment. The Company fails to pay, (i) when and as
required to be paid herein, any amount of principal of any Loan, or (ii) within
five (5) days after the same becomes due, any interest, fee or any other amount
payable hereunder or under any other Loan Document; or
(b) Representation or Warranty. Any representation or warranty
by the Company made or deemed made herein, in any other Loan Document, or which
is contained in any certificate, document or financial or other statement by the
Company, or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) Specific Defaults. The Company fails to perform or observe
any term, covenant or agreement contained in any of Sections 6.01, 6.02, 6.03 or
6.09 or in Article VII; or
(d) Other Defaults. The Company fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of 20 days after the
earlier of (i) the date upon which a Responsible Officer knew or reasonably
should have known of such failure and (ii) the date upon which written notice
thereof is given to the Company by the Bank; or
(e) Cross-Default. (i) The Company or any Subsidiary (A) fails
to make any payment in respect of any Indebtedness or Contingent Obligation
(other than in respect of Swap Contracts), having an aggregate principal amount
(including undrawn committed or available amounts and including amounts owing to
all creditors under any combined or syndicated credit arrangement) of more than
$2,500,000 when due (whether by scheduled maturity, required prepayment,
acceleration, demand, or otherwise) and such failure continues after the
applicable grace or notice period, if any, specified in the relevant document on
the date of such failure; or (B) fails to perform or observe any other condition
or covenant, or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or Contingent
Obligation, and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such failure
if the effect of such failure, event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be declared to be
due and payable prior to its stated maturity, or such Contingent Obligation to
become payable or cash collateral in respect thereof to be demanded; or (ii)
there occurs under any Swap Contract an Early Termination Date (as defined in
such Swap Contract) resulting from (1) any event of default under such Swap
Contract as to which the Company or any Subsidiary is the Defaulting Party (as
defined in such Swap Contract) or (2) any Termination Event (as so defined) as
to which the Company or any Subsidiary is an Affected Party (as so defined),
and, in either event, the Swap Termination Value owed by the Company or such
Subsidiary as a result thereof is greater than $2,500,000; or
(f) Insolvency; Voluntary Proceedings. The Company or any
Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or
admits in writing its inability to pay, its debts as they become due, subject to
applicable grace periods, if any, whether at stated maturity or otherwise; (ii)
voluntarily ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or (iv) takes any
action to effectuate or authorize any of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any Subsidiary, or any
writ, judgment, warrant of attachment, execution or similar process, is issued
or levied against a substantial part of the Company's or any Subsidiary's
properties, and any such proceeding or petition shall not be dismissed, or such
writ, judgment, warrant of attachment, execution or similar process shall not be
released, vacated or fully bonded within 60 days after commencement, filing or
levy; (ii) the Company or any Subsidiary admits the material allegations of a
petition against it in any Insolvency Proceeding, or an order for relief (or
similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or
(iii) the Company or any Subsidiary acquiesces in the appointment of a receiver,
trustee, custodian, conservator, liquidator, mortgagee in possession (or agent
therefor), or other similar Person for itself or a substantial portion of its
property or business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a
Pension Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of the Company under Title IV of ERISA to the
Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
$1,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all
Pension Plans at any time exceeds $1,000,000; or (iii) the Company or any ERISA
Affiliate shall fail to pay when due, after the expiration of any applicable
grace period, any installment payment with respect to its withdrawal liability
under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in
excess of 1,000,000; or
(i) Monetary Judgments. One or more non-interlocutory
judgments, non-interlocutory orders, decrees or arbitration awards is entered
against the Company or any Subsidiary involving in the aggregate a liability (to
the extent not covered by independent third-party insurance as to which the
insurer does not dispute coverage) as to any single or related series of
transactions, incidents or conditions, of $2,500,000 or more, and the same shall
remain unsatisfied, unvacated and unstayed pending appeal for a period of 10
days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or
decree is entered against the Company or any Subsidiary which does or would
reasonably be expected to have a Material Adverse Effect, and there shall be any
period of 10 consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(l) Loss of Licenses. Any Governmental Authority revokes or
fails to renew any material license, permit or franchise of the Company or any
Subsidiary, or the Company or any Subsidiary for any reason loses any material
license, permit or franchise, or the Company or any Subsidiary suffers the
imposition of any restraining order, escrow, suspension or impound of funds in
connection with any proceeding (judicial or administrative) with respect to any
material license, permit or franchise; or
(m) Adverse Change. There occurs a Material Adverse Effect.
8.02 Remedies. If any Event of Default occurs, the Bank may: (a)
declare the commitment of the Bank to make Loans to be terminated, whereupon
such commitment shall be terminated; (b) declare the unpaid principal amount of
all outstanding Loans, all interest accrued and unpaid thereon, and all other
amounts owing or payable hereunder or under any other Loan Document to be
immediately due and payable, without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by the Company; and
(c) exercise all rights and remedies available to it under the Loan Documents or
applicable law; provided, however, that upon the occurrence of any event
specified in subsection (f) or (g) of Section 8.01 (in the case of clause (i) of
subsection (g) upon the expiration of the 60-day period mentioned therein), the
obligation of the Bank to make Loans shall automatically terminate and the
unpaid principal amount of all outstanding Loans and all interest and other
amounts as aforesaid shall automatically become due and payable without further
act of the Bank.
8.03 Rights Not Exclusive. The rights provided for in this Agreement
and the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
MISCELLANEOUS
9.01 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Bank and the Company, and then any such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
9.02 Notices. (a) All notices, requests, consents, approvals, waivers
and other communications shall be in writing (including, unless the context
expressly otherwise provides, by facsimile transmission, provided that any
matter transmitted by the Company by facsimile (i) shall be immediately
confirmed by a telephone call to the recipient at the number specified on the
signature page hereof with respect to such Person, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, telecopied or
delivered, to the address or facsimile number specified for notices on the
signature page hereof with respect to such Person; or, as directed to the
Company or the Bank, to such other address as shall be designated by such party
in a written notice to the other parties, and as directed to any other party, at
such other address as shall be designated by such party in a written notice to
the Company and the Bank.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II shall not be effective until actually received by
the Bank.
(c) Any agreement of the Bank herein to receive certain notices
by telephone or facsimile is solely for the convenience and at the request of
the Company. The Bank shall be entitled to rely on the authority of any Person
purporting to be a Person authorized by the Company to give such notice and the
Bank shall not have any liability to the Company or other Person on account of
any action taken or not taken by the Bank in reliance upon such telephonic or
facsimile notice. The obligation of the Company to repay the Loans shall not be
affected in any way or to any extent by any failure by the Bank to receive
written confirmation of any telephonic or facsimile notice or the receipt by the
Bank of a confirmation which is at variance with the terms understood by the
Bank to be contained in the telephonic or facsimile notice.
9.03 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
9.04 Costs and Expenses. The Company shall: (a) whether or not the
transactions contemplated hereby are consummated, pay or reimburse the Bank
within five Business Days after demand (subject to subsection 4.01(e)) for all
reasonable costs and expenses incurred by the Bank in connection with the
development, preparation, delivery, administration and execution of, and any
amendment, supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection herewith or therewith, and the consummation of the transactions
contemplated hereby and thereby, including Attorney Costs incurred by the Bank
with respect thereto; and (b) pay or reimburse the Bank within five Business
Days after demand for all reasonable costs and expenses (including Attorney
Costs) incurred by it in connection with the enforcement, attempted enforcement,
or preservation of any rights or remedies under this Agreement or any other Loan
Document during the existence of an Event of Default or after acceleration of
the Loans (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding or appellate proceeding).
9.05 Indemnification. Whether or not the transactions contemplated
hereby are consummated, the Company shall indemnify, defend and hold the Bank
and each of its officers, directors, employees, counsel, agents and
attorneys-in-fact (each, an "Indemnified Person") harmless from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, charges, expenses and disbursements (including Attorney
Costs) of any kind or nature whatsoever which may at any time (including at any
time following repayment of the Loans) be imposed on, incurred by or asserted
against any such Person in any way relating to or arising out of this Agreement
or any document contemplated by or referred to herein, or the transactions
contemplated hereby, or any action taken or omitted by any such Person under or
in connection with any of the foregoing, including with respect to any
investigation, litigation or proceeding (including any Insolvency Proceeding or
appellate proceeding) related to or arising out of this Agreement or the Loans
or the use of the proceeds thereof, whether or not any Indemnified Person is a
party thereto (all the foregoing, collectively, the "Indemnified Liabilities");
provided, that the Company shall have no obligation hereunder to any Indemnified
Person with respect to Indemnified Liabilities resulting solely from the gross
negligence or willful misconduct of such Indemnified Person. The agreements in
this Section shall survive payment of all other Obligations.
9.06 Payments Set Aside. To the extent that the Company makes a payment
to the Bank, or the Bank exercises its right of set-off, and such payment or the
proceeds of such set-off or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required (including
pursuant to any settlement entered into by the Bank in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any
Insolvency Proceeding or otherwise, then to the extent of such recovery the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such set-off had not occurred.
9.07 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Bank.
9.08 Assignments, Participations, etc. (a) The Bank may at any time and
from time to time, with the prior consent of the Company, at all times other
than during the existence of an Event of Default, which consent shall not be
unreasonably withheld (provided, that no consent of the Company shall be
required in connection with any assignment and delegation by the Bank to an
Affiliate of the Bank), assign and delegate to one or more commercial banks
(each an "Assignee") all, or any part of all, of the Loans, the Commitment and
the other rights and obligations of the Bank hereunder; provided, however, that
the Company may continue to deal solely and directly with the Bank in connection
with the interest so assigned to an Assignee until written notice of such
assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the Company
by the Bank and the Assignee.
(b) The Bank may at any time and from time to time, without
notice to or the consent of the Company, sell to one or more commercial banks or
other Persons (a "Participant") participating interests in any Loans, the
Commitment and the other interests of the Bank hereunder and under the other
Loan Documents.
(c) Notwithstanding any other provision in this Agreement, the
Bank may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement in favor of any
Federal Reserve Bank in accordance with Regulation A of the FRB or 31 U.S.
Treasury Regulation CFR ss.203.14, and such Federal Reserve Bank may enforce
such pledge or security interest in any manner permitted under applicable law.
9.09 Confidentiality. The Bank agrees to take normal and reasonable
precautions and exercise due care to maintain the confidentiality of all
information identified as "confidential" or "secret" by the Company and provided
to it by the Company or any Subsidiary, under this Agreement or any other Loan
Document, and the Bank shall not use any such information other than in
connection with or in enforcement of this Agreement and the other Loan Documents
or in connection with other business now or hereafter existing or contemplated
with the Company or any Subsidiary; except to the extent such information (i)
was or becomes generally available to the public other than as a result of
disclosure by the Bank, or (ii) was or becomes available on a non-confidential
basis from a source other than the Company, provided that such source is not
bound by a confidentiality agreement with the Company known to the Bank;
provided, however, that the Bank may disclose such information (A) at the
request or pursuant to any requirement of any Governmental Authority to which
the Bank is subject or in connection with an examination of the Bank by any such
authority; (B) pursuant to subpoena or other court process; (C) when required to
do so in accordance with the provisions of any applicable Requirement of Law;
(D) to the extent reasonably required in connection with any litigation or
proceeding to which the Bank or may be party; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Loan Document; (F) to the Bank's independent auditors and other
professional advisors; (G) to any Participant or Assignee, actual or potential,
provided that such Person agrees in writing to keep such information
confidential to the same extent required of the Bank hereunder; (H) as expressly
permitted under the terms of any other document or agreement regarding
confidentiality to which the Company or any Subsidiary is party or is deemed
party with the Bank; and (I) to its Affiliates.
9.10 Set-off. In addition to any rights and remedies of the Bank
provided by law, if an Event of Default exists or the Loans have been
accelerated, the Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, the Bank to or for the credit or
the account of the Company against any and all Obligations owing to the Bank,
now or hereafter existing, irrespective of whether or not the Bank shall have
made demand under this Agreement or any Loan Document and although such
Obligations may be contingent or unmatured. The Bank agrees promptly to notify
the Company after any such set-off and application made by the Bank; provided,
however, that the failure to give such notice shall not affect the validity of
such set-off and application.
9.11 Automatic Debits of Fees. With respect to any commitment fee or
any other cost or expense (including Attorney Costs) due and payable to the Bank
under the Loan Documents, the Company hereby irrevocably authorizes the Bank to
debit any deposit account of the Company with the Bank in an amount such that
the aggregate amount debited from all such deposit accounts does not exceed such
fee or other reasonable cost or expense. If there are insufficient funds in such
deposit accounts to cover the amount of the fee or other cost or expense then
due, such debits will be reversed (in whole or in part, in the Bank's sole
discretion) and such amount not debited shall be deemed to be unpaid. No such
debit under this Section shall be deemed a set-off.
9.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
9.13 Severability. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
9.14 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company, the Bank and
their permitted successors and assigns, and no other Person shall be a direct or
indirect legal beneficiary of, or have any direct or indirect cause of action or
claim in connection with, this Agreement or any of the other Loan Documents.
9.15 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE BANK
SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
9.16 Arbitration; Reference Proceeding. (a) Any controversy or claim
between or among the parties, including but not limited to those arising out of
or relating to this Agreement or any other Loan Document, and any claim based on
or arising from an alleged tort, shall at the request of any party be determined
by arbitration. The arbitration shall be conducted in accordance with the United
States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law
provision in this Agreement, and under the Commercial Rules of the American
Arbitration Association ("AAA"). The arbitrators shall give effect to statutes
of limitation in determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrators. Judgment upon the
arbitration award may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.
(b) Notwithstanding the provisions of subsection (a), no
controversy or claim shall be submitted to arbitration without the consent of
all parties if, at the time of the proposed submission, such controversy or
claim arises from or relates to an obligation to the Bank which is secured by
real property collateral located in California. If all parties do not consent to
submission of such a controversy or claim to arbitration, the controversy or
claim shall be determined as provided in subsection (c).
(c) A controversy or claim which is not submitted to arbitration
as provided and limited in subsections (a) and (b) shall, at the request of any
party, be determined by a reference in accordance with California Code of Civil
Procedure Sections 638 et seq. If such an election is made, the parties shall
designate to the court a referee or referees selected under the auspices of the
AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings.
The presiding referee of the panel, or the referee if there is a single referee,
shall be an active attorney or retired judge. Judgment upon the award rendered
by such referee or referees shall be entered in the court in which such
proceeding was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
(d) No provision of this Section shall limit the right of any
party to this Agreement to exercise self-help remedies such as set-off, to
foreclose against or sell any real or personal property collateral or security
or to obtain provisional or ancillary remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either party to
resort to arbitration or reference. At the Bank's option, foreclosure under a
deed of trust or mortgage may be accomplished either by exercise of power of
sale under the deed of trust or mortgage or by judicial foreclosure.
9.17 Entire Agreement. This Agreement, together with the other
Loan Documents, embodies the entire agreement and understanding between the
Company and the Bank, and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
[Signature pages follow.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
QAD INC. BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Barbara J. Whatley By: /s/ Douglas Watson
----------------------- ---------------------------
Title: Vice President Title: Assistant Vice President
By: /s/ Kevin McMahon
----------------------------
Title: Managing Director
Notices: Notices (other than Borrowing Notices and
Notices of Conversion/Continuation):
6450 Via Real
Carpinteria, CA 93013 Bank of America National Trust and Savings
Attention: Dennis R. Raney Association
Telephone: (805) 566-4409 555 California St., 41st Floor
Facsimile: (805) 566-5792 San Francisco, California 94104
Attention: Doug Watson
Telephone: (415) 622-8708
Facsimile: (415) 622-2514
Domestic and Offshore Lending Office:
1850 Gateway Boulevard, Unit #5693
Fourth Floor
Concord, California 94520
Attention: Karen Matthews
Telephone: (510) 675-7335
Facsimile: (510) 603-7256
<PAGE>
EXHIBIT A
NOTICE OF BORROWING
Date:____________________, 199__
To: Bank of America National Trust and Savings Association regarding that
certain Credit Agreement dated as of August 4, 1997 (as extended, renewed,
amended or restated from time to time, the "Agreement") between QAD Inc. and
Bank of America National Trust and Savings Association (the "Bank")
Ladies and Gentlemen:
The undersigned, QAD Inc. (the "Company"), refers to the Agreement, the
terms defined therein being used herein as therein defined, and hereby gives you
notice irrevocably, pursuant to Section 2.03 of the Agreement, of the Borrowing
specified below:
1. The Business Day of the proposed Borrowing is ______________________,
19__.
2. The aggregate amount of the proposed Borrowing is
$_______________________.
3. The Borrowing is to be comprised of $________ of [Base Rate] [Offshore
Rate] Loans.
4. The duration of the Interest Period for the Offshore Rate Loans included
in the Borrowing shall be _____ months.
The undersigned hereby certifies that the following statements are true
on the date hereof, and will be true on the date of the proposed Borrowing,
before and after giving effect thereto and to the application of the proceeds
therefrom:
(a) the representations and warranties of the Company
contained in Article V of the Agreement are true and correct as though
made on and as of such date (except to the extent such representations
and warranties relate to an earlier date, in which case they are true
and correct as of such date);
(b) no Default or Event of Default has occurred and is
continuing, or would result from such proposed Borrowing; and
<PAGE>
(c) The proposed Borrowing will not cause the aggregate
principal amount of all outstanding Loans to exceed the Commitment of
the Bank.
QAD INC.
By:_____________________________________
Title:__________________________________
<PAGE>
EXHIBIT B
NOTICE OF CONVERSION/CONTINUATION
Date: ___________________, 199_
To: Bank of America National Trust and Savings Association regarding that
certain Credit Agreement dated as of August 4, 1997 (as extended, renewed,
amended or restated from time to time, the "Agreement") between QAD Inc.
and Bank of America National Trust and Savings Association (the "Bank")
Ladies and Gentlemen:
The undersigned, QAD Inc. (the "Company"), refers to the Agreement, the
terms defined therein being used herein as therein defined, and hereby gives you
notice irrevocably, pursuant to Section 2.04 of the Agreement, of the
[conversion] [continuation] of the Loans specified herein, that:
1. The Conversion/Continuation Date is _______________________, 19__.
2. The aggregate amount of the Loans to be [converted] [continued] is
$______________.
3. The Loans are to be [converted into] [continued as] [Offshore Rate]
[Base Rate] Loans.
4. [If applicable:] The duration of the Interest Period for the Loans
included in the [conversion] [continuation] shall be ____months.
The undersigned hereby certifies that the following statements are true
on the date hereof, and will be true on the proposed Conversion/Continuation
Date, before and after giving effect thereto and to the application of the
proceeds therefrom:
(a) the representations and warranties of the Company
contained in Article V of the Agreement are true and correct as though
made on and as of such date (except to the extent such representations
and warranties relate to an earlier date, in which case they are true
and correct as of such date);
(b) no Default or Event of Default has occurred and is
continuing, or would result from such proposed [conversion]
[continuation]; and
<PAGE>
(c) the proposed [conversion][continuation] will not cause the
aggregate principal amount of all outstanding Loans to exceed the
Commitment of the Bank.
QAD INC.
By:_______________________________
Title:____________________________
<PAGE>
EXHIBIT C
QAD INC.
COMPLIANCE CERTIFICATE
Financial
Statement Date: ______________, 199_
Reference is made to that certain Credit Agreement dated as of August
4, 1997 (as extended, renewed, amended or restated from time to time, the
"Agreement") between QAD Inc., a Delaware corporation (the "Company"), and Bank
of America National Trust and Savings Association (the "Bank"). Unless otherwise
defined herein, capitalized terms used herein have the respective meanings
assigned to them in the Agreement.
The undersigned Responsible Officer of the Company, hereby certifies as
of the date hereof that he/she is the of the Company, and that, as such, he/she
is authorized to execute and deliver this Certificate to the Bank on the behalf
of the Company and its consolidated Subsidiaries, and that:
[Use the following paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 6.01(a) of the Agreement.]
1. Attached as Schedule 1 hereto are (a) a true and correct copy of the
audited consolidated balance sheet of the Company and its consolidated
Subsidiaries as at the end of the fiscal year ended _______________, 199__ and
(b) the related consolidated statements of income or operations, [retained
earnings,] shareholders' equity and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal year,
[reported on without a "going concern" or like qualification or exception, or
qualification arising out of the scope of the audit] and accompanied by the
opinion of _________________ or another nationally-recognized certified
independent public accounting firm (the "Independent Auditor") which report
shall state that such consolidated financial statements are complete and correct
and have been prepared in accordance with GAAP, and fairly present, in all
material respects, the financial position of the Company and its consolidated
Subsidiaries for the periods indicated and on a basis consistent with prior
periods.
or
[Use the following paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 6.01(b) of the Agreement.]
1. Attached as Schedule 1 hereto are (a) a true and correct copy of the
unaudited consolidated balance sheet of the Company and its consolidated
Subsidiaries as of the end of the fiscal quarter ended __________, 199__, and
(b) the related unaudited consolidated statements of income, shareholders'
equity, [retained earnings,] and cash flows for the period commencing on the
first day and ending on the last day of such quarter, [setting forth in each
case in comparative form the figures for the previous year,] and certified by a
Responsible Officer that such financial statements were prepared in accordance
with GAAP (subject only to ordinary, good faith year-end audit adjustments and
the absence of footnotes) and fairly present, in all material respects, the
financial position and the results of operations of the Company and its
consolidated Subsidiaries.
2. The undersigned has reviewed and is familiar with the terms of the
Agreement and has made, or has caused to be made under his/her supervision, a
detailed review of the transactions and conditions (financial or otherwise) of
the Company during the accounting period covered by the attached financial
statements.
3. To the best of the undersigned's knowledge, the Company, during such
period, has observed, performed or satisfied all of its covenants and other
agreements, and satisfied every condition in the Credit Agreement to be
observed, performed or satisfied by the Company, and the undersigned has no
knowledge of any Default or Event of Default.
4. The following financial covenant analyses and information set forth
on Schedule 2 attached hereto are true and accurate on and as of the date of
this Certificate.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
___________________, 199__.
QAD INC.
By:_______________________________
Title:____________________________
<PAGE>
[NOTE: SAMPLE ONLY] Date: ______________, 199__
For the fiscal quarter/year
ended ______________, 199__
SCHEDULE 2
to the Compliance Certificate
($ in 000's)
Actual Required/Permitted
<PAGE>
Schedule 4.02(D)
Grayrock Business Credit, Inc.
Line of Credit 14,055,612.03
Real Estate Note 3,143,485.76
Fixed Asset Financing 1,147,948.87
The CIT Group
Fixed Asset Financing 734,451.60
GE Capital Corp.
Fixed Asset Financing 673,099.13
U.S. Bancorp Leasing & Financial
Fixed Asset Financing 600,997.92
First Capital Corp.
Fixed Asset Financing 479,281.94
<PAGE>
Schedule 5.15
SUBSIDIARIES AND MINORITY INTERESTS
QAD Inc.
QAD AUSTRALIA PTY LIMITED
qad.china inc.
QAD.Eurpoe B.V.
qad france e.u.r.l.
qad. Germany GmbH
QAD HOLDINGS FTY LIMITED
QAD Inc. - Canada Branch
QAD Inc. - Hong Kong Branch
QAD Inc. - Singapore Represntative Office
QAD India. Inc.
QAD Japan K.K.
QAD Brazil, Inc.
QAD MEXICO, S.A. DE C.V.
QAD SOFTWARE E APLICATIVOS LTDA.
qad.Aktiebolag
qad.technology
qad.united kingdom ltd.
qad.USVI Inc.
Integral Software & Services GmbH
Integral Software Betelligunge GmbH
Integral Informationstechnik GmbH (58% owned)
QAD LATIN AMERICA, S.A. DE C.V.
QAD Eastern Europe Sp.2.00
QAD ASIA LIMITED
Enterprise Engines Inc. (minority interest)
<PAGE>
SCHEDULE 7.01
PERMITTED LIENS
QAD Inc.
Notes Payable and Debt as of 8/11/97
<TABLE>
<CAPTION>
Lease Number Terms Item Description Start Marurity Amount
QAD Maker Date Date ST LT
- ------ -------------- ------------- ----------------------- -------- --------- ----------- ---------
Hewlett Packard Leases
<S> <C> <C> <C> <C> <C> <C> <C>
HP95C 2403-01068-5A0 24mo., 11.46% Shanghai Server 9/21/95 8/21/97 2,109.26
HP96 2400-01072-0A0 24mo., 11.46% Shangahi-China Server 9/21/95 8/21/97 1,333.14
HP99 2403-03063-4A0 24mo., 11.00% 712 Worksation 11/30/95 10/31/97 2,504.56
HP100 2403-01699-7A0 24mo., 11.46% Equipment Upgrade 10/7/95 8/7/97 1,251.65
HP101 2403-02284-7A0 24mo., 11.00% Fred Server Project 9/30/95 8/31/97 1,753.10
HP103 4124-03062 24mo., 11.00% (3) servers 12/7/95 11/7/97 5,288.48
HP104 2403-02951-1A0 24mo., 11.22% Netherlands server 12/21/95 11/21/97 5,530.83
HP105 4124-01430 24mo., 11.00% Add-ons to Kitty Hawk 3/31/96 2/28/98 14,786.37
HP106A 2403-04046-BB1 24mo., 13.74% Upgrades for T. Biegen 3/31/96 2/28/98 2,448.92
HP106B 2403-04046-BC1 24mo., 13.74% Add-ons for T. Biegen 2/29/96 1/31/98 1,619.18
HP106C 2403-04046-BA0 24mo., 13.74% 725 for T. Biegen 3/31/96 2/28/98 4,727.98
HP107 4124-18394 24mo., 13.74% CPU for Test DB Server 1/1/97 12/1/98 28,633.27 13,134.32
HP108 4124-52127 24mo., 9.62% QAD University server 5/29/97 4/29/99 98,452.42 80,263.81
</TABLE>
<TABLE>
AT&T Lease
<S> <C> <C> <C> <C> <C> <C> <C>
AT1 564670 36mo., 14.48% Multiprotocol router 8/13/96 5/13/99 6,278.88 5,968.70
</TABLE>
<TABLE>
5464 Carpinteria Avenue Leasehold Improvement
<S> <C> <C> <C> <C> <C> <C>
Matco 24mo., 0.00% Leasehold improvements Apr-94 Feb-98 4,766.55
Total Notes
Payable and Debt 181,484.59 99,386.83
</TABLE>
<PAGE>
SCHEDULE 7.05
PERMITTED INDEBTEDNESS
QAD Inc.
Notes Payable and Debt as of 8/11/97
<TABLE>
<CAPTION>
Lease Number Terms Item Description Start Marurity Amount
QAD Maker Date Date ST LT
- ------ -------------- ------------- ----------------------- -------- --------- ----------- ---------
Hewlett Packard Leases
<S> <C> <C> <C> <C> <C> <C> <C>
HP95C 2403-01068-5A0 24mo., 11.46% Shanghai Server 9/21/95 8/21/97 2,109.26
HP96 2400-01072-0A0 24mo., 11.46% Shangahi-China Server 9/21/95 8/21/97 1,333.14
HP99 2403-03063-4A0 24mo., 11.00% 712 Worksation 11/30/95 10/31/97 2,504.56
HP100 2403-01699-7A0 24mo., 11.46% Equipment Upgrade 10/7/95 8/7/97 1,251.65
HP101 2403-02284-7A0 24mo., 11.00% Fred Server Project 9/30/95 8/31/97 1,753.10
HP103 4124-03062 24mo., 11.00% (3) servers 12/7/95 11/7/97 5,288.48
HP104 2403-02951-1A0 24mo., 11.22% Netherlands server 12/21/95 11/21/97 5,530.83
HP105 4124-01430 24mo., 11.00% Add-ons to Kitty Hawk 3/31/96 2/28/98 14,786.37
HP106A 2403-04046-BB1 24mo., 13.74% Upgrades for T. Biegen 3/31/96 2/28/98 2,448.92
HP106B 2403-04046-BC1 24mo., 13.74% Add-ons for T. Biegen 2/29/96 1/31/98 1,619.18
HP106C 2403-04046-BA0 24mo., 13.74% 725 for T. Biegen 3/31/96 2/28/98 4,727.98
HP107 4124-18394 24mo., 13.74% CPU for Test DB Server 1/1/97 12/1/98 28,633.27 13,134.32
HP108 4124-52127 24mo., 9.62% QAD University server 5/29/97 4/29/99 98,452.42 80,263.81
</TABLE>
<TABLE>
AT&T Lease
<S> <C> <C> <C> <C> <C> <C> <C>
AT1 564670 36mo., 14.48% Multiprotocol router 8/13/96 5/13/99 6,278.88 5,968.70
</TABLE>
<TABLE>
5464 Carpinteria Avenue Leasehold Improvement
<S> <C> <C> <C> <C> <C> <C>
Matco 24mo., 0.00% Leasehold improvements Apr-94 Feb-98 4,766.55
Total Notes
Payable and Debt 181,484.59 99,386.83
</TABLE>
<PAGE>
SCHEDULE 7.08
CONTINGENT OBLIGATIONS
Employee loans guaranteed at Santa Barbara Bank & Trust of approximately
$397,000.
Exhibit 10.42
STANDARD INDUSTRIAL/COMMERCIAL
MULTI-TENANT LEASE-MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
December 29,1997, is made by and between CITO Corp. ("Lessor") and between QAD
Inc. ("Lessee"), (collectively the "Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 201 N. Salsipuedes, 101 & 520 Montecito
Ste. 200, located in the City of Santa Barbara, County of Santa Barbara, State
of California, with zip code 93103, as outlined on Exhibit A attached hereto
("Premises"). The "Building" is that certain building containing the Premises
and generally described as (describe briefly the nature of the Building):
Portions of Buildings "B" and "D" of the Santa Barbara Business Center totaling
13,912 square feet. In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but
shall not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises, the
Building, the Common Areas, the land upon which they are located, along with all
other buildings Rent and improvements thereon, are herein collectively referred
to as the "Industrial Center." (Also see Paragraph 2.)
1.2(b) Parking: zero (0) unreserved vehicle parking spaces ("Unreserved
Parking Spaces"); and thirty-eight (38) reserved vehicle parking spaces
("Reserved Parking Spaces"). (Also see Paragraph 2.6.)
1.3 Term: Five (5) years and zero (0) months ("Original Term") commencing
March 1, 1998 ("Commencement Date") and ending February 28, 2003 ("Expiration
Date"). (Also see Paragraph 3).
1.4 Early Possession: upon lease execution ("Early Possession Date"). (Also
see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $19,323.90 per month ("Base Rent"), payable on the first
(1st) day of each month commencing May 1, 1998 (Also see Paragraph 4.) See
Addendum
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum ___ attached hereto.
1.6(a) Base Rent Paid Upon Execution: $19,323.90 as Base Rent for the
period April 1-30, 1998.
1.6(b) Lessee's Share of Common Area Operating Expenses: fifteen & nine
tenths percent (15.9%) ("Lessee's Share") as determined by [ ] prorata square
footage of the Premises as compared to the total square footage of the Building
or [ ] other criteria as described in Addendum ____.
1.7 Security Deposit: $20,000.00 ("Security Deposit"). (Also see Paragraph
5.)
1.8 Permitted Use: General office and related legal uses. ("Permitted
Use") Also See Paragraph 8.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties Pacifica Commercial Realty
represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s)(or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $____________) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1.5, 6.2(c), 8.7, 12, 34 & 49 through 53, and Exhibits
A through ___, all of which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within one
(1) year after the Commencement Date, correction of that non-compliance shall be
the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within one (1) year following the Commencement
Date and setting forth with specificity the nature and extent of such
non-compliance, take such action, at Lessor's expense, as may be reasonable or
appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
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2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9).
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invites to be loaded, unloaded or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities described
in this Paragraph 2.6, then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove or tow
away the vehicle involved and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation and
provided that such changes do not materially interfere with Lessee's use and
enjoyment of the Premises, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas, walkways and
utility raceways;
(b) To close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial Center
to be a part of the Common Areas;
(d) To use additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in, to or
with respect to the Common Areas and Industrial Center as Lessor may, in the
exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purpose of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good order and
condition of the following:
(aa) The Common Areas, including parking areas, loading and unloading
areas, trash areas, roadways, sidewalks, walkways, parkways, driveways,
landscaped areas, striping, bumpers, irrigation systems, Common Areas
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service the
Common Areas unless separately metered.
(iii) Trash disposal, property management fees and security services and
the costs of any environmental inspections.
(iv) Real Property Taxes (as defined in Paragraph 10.2) to be paid by
Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(v) The cost of the premiums for the insurance policies maintained by
Lessor under Paragraph 8 hereof.
(vi) Any deductible portion of an insured loss concerning the Building or
the Common Areas.
(vii) Any other services to be provided by Lessor that are stated elsewhere
in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building to any other building in the
Industrial Center or to the operation repair or maintenance thereof, shall be
allocated entirely to the Building or to such other Building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center in accordance with prudent property
management standards.
(c) The inclusion of the improvements, facilities and services set forth in
Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to
either have said improvements or facilities or to provide those services unless
the Industrial Center already had the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this Lease to provide the same or
some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable by
Lessee with in ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such
over-
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payment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement. Lessee shall have the
right to audit Lessor's books and records.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply, or
retain all or any portion of said Security Deposit for the payment of any amount
due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefore deposit monies with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Any time the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor as an addition to the Security Deposit so
that the total amount of the Security Deposit shall at all times bear the same
proportion to the then current Base Rent as the initial Security Deposit bears
to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not be
required to keep all or part of the Security Deposit separate from its general
accounts. Lessor shall, at the expiration of earlier termination of the term
hereof and after Lessee has vacated the Premises, return to Lessee (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted Use set
forth in Paragraph 1.8, or any other legal use which is reasonably comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that is unlawful, creates waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its consent
to any written request by Lessee, Lessee's assignees or subtenants, and by
prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the
presence in, on or about the Premises of a Hazardous Substance with respect to
which any Applicable Laws require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Lessee may, without Lessor's prior consent, but upon notice to Lessor and in
compliance with all Applicable Requirements, use any ordinary and customary
materials reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does not expose
the Premises or neighboring properties to any meaningful risk of contamination
or damage or expose Lessor to any liability therefor. In addition, Lessor may
(but without any obligation to do so) condition its consent to any Reportable
Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such
additional assurances as Lessor, in its reasonable discretion, deems necessary
to protect itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to inform Lessor. If Lessee knows, or has reasonable cause to believe,
that a Hazardous Substance has come to be located in, on, under or about the
Premises or the Building, other than as previously consented to by Lessor,
Lessee shall immediately give Lessor written notice thereof, together with a
copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor,
its agents, employees, lenders and ground lessor, if any, and the Premises,
harmless from and against any and all damages, liabilities, judgments, costs,
claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement. See Addendum
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof including, without limiting the generality of the foregoing, all
equipment or facilities specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of interior walls,
ceilings, floors, windows, doors, plate glass, and skylights, but excluding any
items which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in such condition shall exercise and perform
good maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a
contract, with copies to Lessor, in customary form and substance for and with a
contractor specializing and experienced in the inspection, maintenance and
service of the heating, air conditioning and ventilation systems for the
Premises. However, Lessor reserves the right, upon notice to Lessee, to procure
and maintain the contract for the heating, aid conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand,
for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this Paragraph
7.1, Lessor may enter upon the Premises after ten (10) days' prior written
notice to Lessee (except in the case of an emergency, in which case no notice
shall be required), perform such obligations on Lessee's behalf, and put the
Premises in good order, condition and repair, in accordance with Paragraph 13.2
below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or otherwise automatic fire extinguishing system including fire
alarm and/or smoke
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detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving the
Common Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior walls,
nor shall Lessor be obligated to maintain, repair or replace windows, doors or
plate glass of the Premises.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is used
in this Lease to refer to all air lines, power panels, electrical distribution,
security, fire protection systems, communications systems, lighting fixtures,
heating, ventilating and air conditioning equipment, plumbing and fencing in, on
or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery
and equipment which can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the improvements
on the Premises which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations
and/or Utility Installations" are defined as material Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or
Utility Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility Installations
to the interior of the Premises (excluding the roof) without Lessor's consent
but upon notice to Lessor, so long as they are not visible from the outside of
the Premises, do not involve puncturing, relocating or removing the roof or any
existing walls, or changing or interfering with the fire sprinkler system or
fire detection systems and the cumulative cost thereof during the term of this
Lease as extended does not exceed $10,000.00.
(b) Consent. Any alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. All consents given by Lessor,
whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall
be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications thereof. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $10,000.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, or about the Premises, and Lessor shall have the right to post notices
of non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense, defend and protect itself, Lessor and the
Premises against the same and shall pay and satisfy any such adverse judgment
that may be rendered thereon before the enforcement thereof against the Lessor
or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a
surety bond satisfactory to Lessor in an amount equal to one and one-half times
the amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorneys' fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
7.4 Ownership, Removal, Surrender and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and to
cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee-Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the end
of the last day of the lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings , equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of Insurance protecting
Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in
writing (as additional insureds) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "Insured contract"
for the performance of Lessee's Indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and to any Lender(s), insuring against loss or damage to the
Premises. Such insurance shall be for full replacement cost, as the same shall
exist from time to time, or the amount required by any Lender(s), but in no
event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Building required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and any Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the premium for
the property insurance of the Building and for the Common Areas or other
buildings in the Industrial Center if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the insuring Party, Lessor shall
not be required to insure Lessee-Owned Alterations and Utility Installations
unless the item in question has become the property of Lessor under the terms of
this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee- Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide". Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in
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this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7)
days after the earlier of the Early possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be
cancellable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waiver any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect or Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner or any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved herein, and whether
nor not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. See addendum.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise, other property of
Lessee, Lessee's employees, contractors, invitees, customers 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, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damages or injury or the means of repairing the same is accessible or not,
Lessor shall not be liable for any damages arising from any act or neglect of
any other lessee or Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. Damages or Destruction
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises, other
than Lessee-Owned Alterations and Utility Installations and Trade Fixtures,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by, a Hazardous
Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 Premises Partial Damages - Insured Loss. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that by
reason of the unique nature of the improvements in the premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as a commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement form Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which even this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease, Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's commitment to pay for
the repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof within thirty (30) days following such commitment from Lessee.
In such even this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If
at any time during the last six (6) months of the term of this Lease there is
damage for which the cost to repair exceeds one month's Base Rent, whether or
not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease
effective sixty (60) days following the date of occurrence of such damage by
giving written notice to Lessee of Lessor's election to do so within thirty (30)
days after the date of occurrence of such damage. Provided, however, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by (a) exercising such option, and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during such
period and provides Lessor with funds (or adequate assurance thereof) to cover
any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option and provide such funds
or assurance during such period, then this Lease shall terminate as of the date
set forth in the first sentence of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of(i) Premises Partial damage or (ii) Hazardous Substance
Condition for which Lessee is not legally responsible, the Base Rent, Common
Area Operating Expenses and other charges, if any, payable by Lessee hereunder
for the period during which such damage or condition, its repair, remediation or
restoration continues, shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not in excess of proceeds from
insurance required to be carried under Paragraph 8.3(b). Except for abatement of
Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the premises within
thirty (30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used in this Paragraph 9.6 shall mean
either the unconditional authorization of the preparation of the required plans,
or the beginning of the actual work on the Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefore (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements of this Lease shall continue in full force and effect, but subject
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to Lessor's right under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's Intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable
Requi8rements, over (b) an amount equal to twelve (12) times the then monthly
Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with
the funds required of Lessee or satisfactory assurance thereof within thirty
(30) days following said commitment by Lessee. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination - Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and such much of Lessee's Security Deposit as has not been, or
is not then require to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Status. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises and the
Building with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise
provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real Property
Taxes" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than Inheritance, personal income
or estate taxes) imposed upon the Industrial Center by any authority having the
direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage, or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof, Lessor's
right to rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "Real Property Taxes" shall also including any tax, fee,
levy, assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in Applicable Law taking effect, during the term of this
Lease, including but not limited to a change in the ownership of the Industrial
Center or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessees' property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
Premises in the Building, in the manner and within the timer periods set forth
in Paragraph 4.2(d).
12. See Addendum.
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13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
Hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) Paragraph intentionally omitted.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent; Lessee's Share of Common Area Operating
Expenses, or any other monetary payment required to be made by Lessee hereunder
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of five
(5) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this lease, where any such failure continues for a period of thirty (30) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for more than thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably require for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (3) days; provided, however, in the even
that any provision of this Subparagraph 13.1(e) is contrary to any applicable
law, such provision shall be of no force or effect, and shall not affect the
validity of the remaining provisions.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and term hereof shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee: (i) the worth at the time of the aware
of the unpaid rent which had been earned at the time of termination; (ii) the
worth at the time of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that the Lessee proves could have been reasonably avoided; (iii) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that the Lessee proves could be reasonably avoided; and (iiv) any other
amount necessary to compensate Lessor for all the detriment proximately caused
by the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including but
not limited to the cost of recovering possession of the Premises, expenses of
reletting , including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of any leasing commission paid by
Lessor in connection with this Lease applicable to the unexpired term of this
Lease. The worth at the time of award of the amount referred to in provision
(iii) of the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco or
the Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2 . If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any part
thereof in a separate suite for such rent and/or damages. If a notice and grace
period required under Subparagraph 13.1(b), (c) or (d) was not previously given,
a notice to pay rent or quit, or to perform or quit, as the case may be, given
to Lessee under any statute authorizing the forfeiture of leases for unlawful
detainer shall also constitute the applicable notice for grace period purposes
required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace
period under the unlawful detainer statue shall run concurrently after the one
such statutory notice, and the failure of Lessee to cure the Default within the
greater of the two (2) such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lessee's right to possession.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
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(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration therefore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor, and
recoverable by Lessor, as additional rent due under this Lease,. The acceptance
by Lessor of rent or the cure of the Breach which initiated the operation for
this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of
this Paragraph 13.3 unless specifically so stated in writing by Lessor at the
time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The Acceptance of such late charge by Lessor shall in no even constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall be thirty (30) days after receipt by Lessor, and by any Lender(s)
whose name and address shall have been furnished to Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are reasonably required
for its performance, then Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date of condemning authority taxes title or
possession , whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Area designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date of condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears the total rentable floor area of the Premises. NO reduction of Base Rent
shall occur if the condemnation does not apply to any portion for the Premises.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages required to complete such repair.
15. Broker's Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
9e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended thirty party beneficiary of the provisions
of Paragraph 1.100 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fee
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/ro statements as may be reasonably requested by
the Requesting Party.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as herein above defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way effect the validity of any
other provision hereof.
19. Interest on Past Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date on which it was
due, shall bear interest from the date due at the prime rate charged by the
largest state charted bank in the state in which the Premises are located plus
four percent (4%) per annum, but not exceeding the maximum rate allowed by law,
in addition to the potential late charge provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect of any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended thirty party
beneficiary of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specificy a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering such notices to Lessee. A copy
of all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. It sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day
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delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other terms,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to one hundred twenty five
(125%) percent of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein shall
be construed as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
available in law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor, or with respect to event occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitations, a party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alternations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary and upon prior written or telephonic notice to
Lessee. Lessor may at any time place on or about the Premises or Building any
ordinary "For Sale" signs and Lessor may at any time during the last one hundred
eighty (180) days of the term hereof place on or about the Premises any ordinary
"For Lease" signs. All such activities of Lessor shall be without abatement of
rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alternations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs. See Addendum.
35. Termination; Merger. Unless specifically stated otherwise by Lessor, the
voluntary or other surrender of this Lease by Lessee, the mutual termination or
cancellation hereof, or a termination hereof by Lessor for Breach by Lessee,
shall automatically terminate any sublease or lesser estate in the Premises;
provided, however, Lessor shall, in the event of any such surrender, termination
or cancellation, have the option to continue any one or all of any existing
subtenancies. Lessor's failure within ten (10) days following any such event to
make a written election to the contrary by written notice to the holder of any
such lessor interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence of use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent to deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and Information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of persons authorized to sign on its behalf, (b) current financial statements of
Guarantor as may from time to time be requested by Lessor, (c) a Tenancy
Statement, or (d) written confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
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39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable of this Lease or separately or apart therefrom, and no Option may be
separated from this Lease in any manner, by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary; (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service of other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant without
the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part hereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessor or Lessee shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non- monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal finnacing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligation of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
10
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISIONS CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASES SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE
CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE
POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS
OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL
ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL
RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE
LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT
PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY
FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at Santa Barbara on February 4, 1998
By LESSOR: By LESSEE:
CITO CORP QAD, INC.
By: /s/ J. Beaver By: /s/ Barry Anderson
--------------------- -------------------------
Name Printed: J. Beaver Name Printed: Barry Anderson
Title: President Title: V.P. Administration, QAD
Address: 1033 Anacapa Street Address: 6450 Via Real
Santa Barbara, CA Carpinteria, CA 93013
Telephone: (805) 899-2400 Telephone: (805) 684-6614
Facsimile: (805) 899-2424 Facsimile: (805) 684-1890
BROKER: PBROKER: Pacifica Commercial Realty
11
<PAGE>
RENT ADJUSTMENT(S)
STANDARD LEASE ADDENDUM
Dated: December 29, 1997
By and Between (Lessor) CITO Corp.
(Lessee) QAD, Inc.
Address of Premises: 210 N. Salsipuedes, Ste. 101 and 520 E. Montecito Street,
Ste. 200
Paragraph 49
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
I. Cost of Living Adjustment(s) (COLA)
a. On March 1, 1999 and annually thereafter the Base Rent shall be adjusted
by the change, if any, from the Base Month specified below, in the Consumer
Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor
for CPI W (Urban Wage Earners and Clerical Workers): LA/Anaheim/Riverside, all
items (182-1984 =100), herein referred to as "CPI".
b. The monthly rent payable in accordance with paragraph A.I.a. of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the CPI of the calendar month two months prior to the month(s)
specified in paragraph A.I.a. above during which the adjustment is to take
effect, and the denominator of which shall be the CPI of the calendar month
which is two months prior to: the first month of the term of this Lease as set
forth in paragraph 1.3 ("Base Month"). The sum so calculated shall constitute
the new monthly rent hereunder, but in no event, shall any such new monthly rent
be less than the rent payable for the month immediately preceding the rent
adjustment.
c. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department of bureau or agency or shall be
discontinued, then the index most nearly the same as the CPI shall be used to
make such calculation. In the event that the Parties cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
Association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitration shall be paid equally by the Parties.
II. (Paragraph intentionally omitted.)
Page 1 of 2
<PAGE>
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for
each adjustment specified above in accordance with paragraph 15 of the Lease.
Page 2 of 2
<PAGE>
OPTIONS TO EXTEND
STANDARD LEASE ADDENDUM
Dated: December 29, 1997
By and Between (Lessor) CITO Corp.
(Lessee) QAD, Inc.
Address of Premises: 210 N. Salsipuedes, Ste. 101 and 520 E. Montecito Street,
Ste. 200
Paragraph 50
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this Lease for
two (2) additional 36 month period(s) commencing when the prior term expiers
upon each and all of the following terms and conditions:
(i) In order to exercise an option to extend, Lease must give written
notice of such election to Lessor and Lessor must receive the same at least 4
but not more than 12 months prior to the date that the option period would
commence, time being of the essence. If proper notification of the exercise of
an option is not given and/or received, such option shall automatically expire.
Options (if there are more than one) may only be exercised consecutively.
(ii) The provisions of paragraph 39, including those relating to Lessee's
Default set forth in paragraph 39.4 of this Lease, are conditions of this
Option.
(iii) Except for the provisions of this lease granting an option or options
to extend the term, of all of the terms and conditions of this Lease except
where specifically modified by this option shall apply.
(iv) This Option is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and without the intention
of thereafter assigning or subletting.
(v) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
I. Cost of Living Adjustment(s) (COLA)
a. On March 1, 2005, 2006, 2008 & 2009 the Base Rent shall be adjusted by
the change, if any, from the Base Month specified below, in the Consumer Price
Index of the Bureau of Labor Statistics of the U.S. Department of Labor for CPI
W (Urban Wage Earners and Clerical Workers): LA/Anaheim/Riverside, all items
(182-1984 =100), herein referred to as "CPI".
b. The monthly rent payable in accordance with paragraph A.I.a. of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the CPI of the calendar month two months prior to the month(s)
specified in paragraph A.I.a. above during which the adjustment is to take
effect, and the denominator of which shall be the CPI of the calendar month
which is two months prior to: the first month of the term of this Lease as set
forth in paragraph 1.3 ("Base Month"). The sum so calculated shall constitute
the new monthly rent hereunder, but in no event, shall any such new monthly rent
be less than the rent payable for the month immediately preceding the rent
adjustment.
c. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department of bureau or agency or shall be
discontinued, then the index most nearly the same as the CPI shall be used to
make such calculation. In the event that the Parties cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
Association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitration shall be paid equally by the Parties.
II. Market Rental Value Adjustment(s) (MRV)
a. On March 1, 2004 & March 1, 2007 the Base Rent shall be adjusted to the
"Market Rental Value" of the property as follows:
1) Four months prior to each Market Rental Value Adjustment Date described
above, the Parties shall attempt to agree upon what the new MRV will be on the
adjustment date. If agreement cannot be reached, within thirty days, then:
(a) Lessor and Lessee shall immediately appoint a mutually acceptable
appraiser or broker to establish the new MRV within the next thirty days. Any
associated costs will be split equally between the Parties; or
(b) Both Lessor and Lessee shall each immediately make a reasonable
determination of the MRV and submit such determination, in writing, to
arbitration in accordance with the following provisions:
(i) Within fifteen days thereafter, Lessor and Lessee shall each select an
appraiser or broker ("Consultant") of their choice to act as an arbitrator. The
two arbitrators so appointed shall immediately select a third mutually
acceptable Consultant to act as a third arbitrator.
Page 1 of 2
<PAGE>
(ii) The three arbitrators shall within thirty days of the appointment of
the third arbitrator reach a decision as to what the actual MRV for the Premises
is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The
decision of a majority of the arbitrators shall be binding on the Parties. The
submitted MRV which is determined to be the closest to the actual MRV shall
thereafter be used by the Parties.
(iii) If either of the Parties fails to appoint an arbitrator within the
specified fifteen days, the arbitrator timely appointed by one of them shall
reach a decision on his or her own, and said decision shall be binding on the
Parties.
(iv) The entire cost of such arbitration shall be paid by the party whose
submitted MRV is not selected, ie. The one that is NOT the closest to the actual
MRV.
2) Notwithstanding the foregoing, the new MRV shall not be less than the
rent payable for the month immediately preceding the rent adjustment.
b. Upon the establishment of each New Market Rental Value:
1) the new MRV will become the new "Base Rent" for the purpose of
calculating any further Adjustments, and
2) the first month of each Market Rental Value term shall become the new
"Base Month" for the purpose of calculating any further Adjustments.
III. (Paragraph intentionally omitted.)
B. (Paragraph intentionally omitted.)
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for
each adjustment specified above in accordance with paragraph 15 of the Lease.
Page 2 of 2
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL
MULTI TENANT LEASE-MODIFIED NET
BETWEEN CITO CORP &
QAD, INC.
FOR THE PROPERTY KNOWN AS
201 N. SALSIPUEDES STREET, SET. 101 & 520 E. MONTECITO STREET, STE. 200
DATED DECEMBER 29, 1997
6.2(c) INDEMNIFICATION (cont.)
Lessor shall indemnify, protect, defend and hold Lessee, its agents and
employees harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substances located
in, on, under or about the Premises or the Building, prior to the Commencement
Date. Lessor's obligations under this paragraph shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment, and the cost of investigation (including consultants' and
attorneys' fees and testing), removal, remediation, restoration and/or abatement
thereof, or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease.
8.7 INDEMNITY (cont.)
Except for Lessee's negligence and/or breach of express covenants and
warranties, Lessor shall indemnify, protect, defend and hold harmless Lessee,
its agents, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, any act, omission or neglect of Lessor, its agents, contractors, employees
or invitees, and out of any Default or Breach by Lessor in the performance in a
timely manner of any obligation on Lessor's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessee) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessee by reason
of any of the foregoing matters, Lessor upon notice from Lessee shall defend the
same at Lessor's expense by counsel reasonably satisfactory to Lessee and Lessee
shall cooperate with Lessor in such defense. Lessee needs not have first paid
any such claim in order to be so indemnified.
12. ASSIGNMENT & SUBLETTING (cont.)
Lessee shall not mortgage, pledge, or assign this Lease or any interest therein,
and shall not sublet all or any portion of the Premises, without the Lessor's
consent which shall not be unreasonably withheld or delayed. Notwithstanding
anything to the contrary contained in the Lease, Lessor and Lessee agree as
follows: Lessee may assign this Lease or sublet the Premises, or any portion
thereof, without Lessor's consent, to any entity which controls, is controlled
by, or is under common control with Lessee; to any entity which results from a
merger or consolidation with Lessee; to any entity engaged in a joint venture
with Lessee; or to any entity which acquires substantially all of the stock or
assets of Lessee, as a going concern, with respect to the business that is being
conducted in the Premises (hereinafter each a "Permitted Transfer"). A Permitted
Transfer shall also include a sublease or assignment of the Lease to an
affiliate or wholly-owned subsidiary of Lessee, in which case Lessee shall
remain liable for Lessee's obligations under the Lease. In addition, any sale or
transfer of the capital stock of Lessee shall be deemed a Permitted Transfer so
long as Lessee remains a publicly traded corporation. Without limiting the
generality of the foregoing, Lessor shall have no right to terminate the Lease
in connection with, and shall have no right to any sums or other economic
consideration resulting from, any Permitted Transfer.
1
<PAGE>
34. SIGNS.
Lessee shall only place signs upon the Premises with Lessor's prior written
consent. Lessor consents to exterior building signage on 520 E. Montecito Street
(shared with Tri-Counties Regional Center) and a small first floor sign on 201
N. Salsipuedes Street.
51. LESSEE IMPROVEMENTS.
Lessee shall design and build leasehold improvements in substantial conformity
to plans and specifications submitted to Lessor for approval. No work shall
commence unless and until Lessor has approved said plans and specifications,
which approval shall not be unreasonably delayed or withheld. Lessee will
contract with architects, engineers, and contractors for performance of the
work. Lessee will keep the Premises lien free. Lessor shall be entitled to post
a Notice of Non- Responsibility on the Premises prior to commencement of the
work.
Lessor shall provide Lessee with a tenant improvement allowance of $200,000
which shall be used solely for permanent improvements to the Premises. Said
tenant improvement allowance shall be disbursed by Lessor upon the written
request of Lessee, accompanied by copies of itemized bills from contractors or
material men, together with either partial or complete lien releases, as
appropriate.
52. EXPANSION RIGHT.
Lessor grants Lessee a first right of refusal on other lease spaces within the
Santa Barbara Business Center which do not currently carry similar rights by any
other Lessee. Lessee shall have five (5) business days to notify Lessor of
exercise of said rights following notice by Lessor of availability.
53. ADA COMPLIANCE.
In the event that it is determined that an elevator needs to be installed at 520
E. Montecito Street, the Lessor shall bear one-half (1/2) of the expense and
shall amortize the other half as additional rent at a rate of interest of ten
(10%) percent per annum, amortized over 120 months. Said amortization shall
commence the point as such expenditure is incurred in any existing lease for the
premises at 520 E. Montecito Street.
2
<PAGE>
STANDARD LEASE
FLOOR PLAN
[FLOOR PLAN DIAGRAM APPEARS HERE]
Exhibit 23.1
The Board of Directors
QAD, Inc.:
The audits referred to in our report dated March 24, 1998, included the related
financial statement schedule as of January 31, 1998, and for each of the years
in the two year period ended January 31, 1998, the one month ended January 31,
1996, and the year ended December 31, 1995, included in the Annual Report on
Form 10-K of QAD, Inc. for the fiscal year ended January 31, 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audit. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We consent to the incorporation by reference in the registration Statement on
Form S-8 (No. 333-48381) of QAD, Inc. of our reports included herein.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of January 31, 1998 and the Condensed
Consolidated Statement of Income for the Year Ended January 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-END> Jan-31-1998
<CASH> 70,082
<SECURITIES> 0
<RECEIVABLES> 81,193
<ALLOWANCES> 5,510
<INVENTORY> 0
<CURRENT-ASSETS> 156,207
<PP&E> 42,559
<DEPRECIATION> 16,842
<TOTAL-ASSETS> 190,506
<CURRENT-LIABILITIES> 76,949
<BONDS> 39
0
0
<COMMON> 97,238
<OTHER-SE> 15,137
<TOTAL-LIABILITY-AND-EQUITY> 112,375
<SALES> 1,504
<TOTAL-REVENUES> 172,234
<CGS> 618
<TOTAL-COSTS> 41,551
<OTHER-EXPENSES> 115,988
<LOSS-PROVISION> 2,317
<INTEREST-EXPENSE> 1,785
<INCOME-PRETAX> 17,015
<INCOME-TAX> 7,159
<INCOME-CONTINUING> 9,856
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</TABLE>
