FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-15997
FILENET CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3757924
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3565 Harbor Boulevard, Costa Mesa, CA 92626
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(714) 966-3400
- ------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of July 30, 1999, there were 32,252,283 shares of the Registrant's common
stock outstanding.
<PAGE>
FILENET CORPORATION
Index
Page
Number
- -------- ------------------------------------------------------------ ----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
as of June 30, 1999 (unaudited) and December 31, 1998......... 3
Consolidated Statements of Operations (unaudited)
for the three and six month periods ended June 30,
1999 and 1998.................................................. 4
Consolidated Statements of Comprehensive Operations
(unaudited)for the three and six month periods ended
June 30, 1999 and 1998......................................... 5
Consolidated Statements of Cash Flows (unaudited)
for the three and six month periods ended June 30, 1999
and 1998....................................................... 6
Notes to Consolidated Financial Statements (unaudited)......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURE...................................................... 20
INDEX TO EXHIBITS.............................................. 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILENET CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 57,496 $ 55,820
Short-term marketable securities 14,415 15,484
Accounts receivable, net 67,512 61,636
Inventories 3,115 2,419
Prepaid expenses and other current assets 7,731 8,865
------------ ------------
Total current assets 150,269 144,224
Property, net 42,302 44,177
Long-term marketable securities 22,370 10,885
Deferred income taxes 6,433 6,385
Other assets 1,401 1,151
------------ ------------
Total assets $ 222,775 $ 206,822
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,048 $ 21,022
Accrued compensation and benefits 22,456 22,165
Unearned maintenance revenue 21,830 11,238
Federal income tax payable 5,454 3,618
Deferred income taxes 953 942
Other accrued liabilities 22,868 17,517
------------ ------------
Total current liabilities 88,609 76,502
Stockholders' equity:
Preferred stock - $.10 par value;
7,000,000 shares authorized; none
issued and outstanding Common stock -
$.01 par value; 100,000,000 shares
authorized; 33,240,573 and 32,924,950
shares outstanding at June 30, 1999 and
December 31, 1998, respectively 146,581 144,242
Retained earnings 9,246 3,304
Accumulated other comprehensive operations (7,094) (2,659)
------------ -------------
148,733 144,887
Treasury stock, at cost; 1,098,000 shares
at June 30, 1999 and December 31, 1998
respectively (14,567) (14,567)
------------ -------------
Total stockholders' equity 134,166 130,320
------------ -------------
Total liabilities and stockholders'
equity $ 222,775 $ 206,822
============ =============
See accompanying notes to consolidated financial statements.
3
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- --------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software $ 48,651 $ 44,403 $ 90,635 $ 87,650
Service 33,893 29,467 67,320 52,938
Hardware 3,545 6,502 9,576 13,393
----------- ------------ ------------ ------------
Total revenue 86,089 80,372 167,531 153,981
----------- ------------ ------------ ------------
Costs and expenses:
Cost of software revenue 4,663 4,265 8,624 7,951
Cost of service revenue 20,515 16,967 40,819 31,313
Cost of hardware revenue 1,867 3,238 5,033 6,598
Research and development 13,234 11,820 26,336 23,894
Selling, general and
administrative 40,746 38,585 80,191 76,152
----------- ------------ ------------ ------------
Total costs and expenses 81,025 74,875 161,003 145,908
----------- ------------ ------------ ------------
Operating income 5,064 5,497 6,528 8,073
Other income, net 499 1,031 1,960 2,010
----------- ------------ ------------ ------------
Income before income taxes 5,563 6,528 8,488 10,083
Provision for income taxes 1,669 1,893 2,546 2,924
----------- ------------ ------------ ------------
Net income $ 3,894 $ 4,635 $ 5,942 $ 7,159
=========== ============ ============ ============
Earnings per share:
Basic $ 0.12 $ 0.15 $ 0.19 $ 0.23
Diluted $ 0.12 $ 0.14 $ 0.18 $ 0.21
Weighted average shares
outstanding:
Basic 32,066 30,801 31,990 30,501
Diluted 32,563 34,097 32,558 33,530
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income $ 3,894 $ 4,635 $ 5,942 $ 7,159
-------------- --------------- -------------- ---------------
Other comprehensive income(loss):
Foreign currency translation
adjustments-1 (1,702) 1,064 (4,355) (657)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)-2 (64) 7 (80) 12
-------------- --------------- -------------- ---------------
Total other comprehensive income (loss) (1,766) 1,071 (4,435) (645)
-------------- --------------- -------------- ---------------
Comprehensive income $ 2,128 $ 5,706 $ 1,507 $ 6,514
============== =============== ============== ===============
- ---------------------------------------------------------------------------------
1 net of tax effect of $1,135 and $(709) for the three months ended June 30, 1999
and 1998, respectively and net of tax benefit of $2,903 and $438 for the six
months ended June 30, 1999 and 1998, respectively
2 net of tax effect of $43 and $(5) for the three months ended June 30, 1999 and
1998, respectively and net of tax effect of $53 and $(8) for the six months
ended June 30, 1999 and 1998, respectively
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,942 $ 7,159
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 8,688 7,109
Provision for doubtful accounts 202 377
Deferred income taxes 59 575
Changes in operating assets and liabilities:
Accounts receivable (9,263) (9,325)
Inventories (695) 386
Prepaid expenses and other current assets 783 764
Accounts payable (5,687) 1,201
Accrued compensation and benefits 734 2,551
Unearned maintenance revenue 10,682 6,665
Federal income tax payable 1,845 4,782
Other 7,737 (4,552)
------------- -------------
Net cash provided by operating activities 21,027 17,692
------------- -------------
Cash flows from investing activities:
Proceeds from sale of equipment 1,313 422
Capital expenditures (8,898) (13,586)
Purchases of marketable securities (28,048) (21,065)
Proceeds from sales and maturities of marketable securities 15,600 24,113
------------- -------------
Net cash used by investing activities (20,033) (10,116)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,340 9,740
Common stock repurchased - (4,435)
------------- -------------
Net cash provided by financing activities 2,340 5,305
------------- -------------
Effect of exchange rate changes on cash and cash equivalents (1,658) (124)
------------- -------------
Net increase in cash and cash equivalents 1,676 12,757
Cash and cash equivalents, beginning of year 55,820 37,344
------------- --------------
Cash and cash equivalents, end of period $ 57,496 $ 50,101
============= ==============
Supplemental cash flow information:
Interest paid $ 9 $ 60
Income taxes paid $ 46 $ 516
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
FILENET CORPORATION
Notes To Consolidated Financial Statements
(Unaudited)
1. In the opinion of the management of FileNET Corporation ("the Company"),
the accompanying unaudited consolidated financial statements reflect
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of the Company at June 30, 1999 and
the results of its operations, its comprehensive operations and its cash
flows for the three and six month periods ended June 30, 1999 and 1998.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations
of the Securities and Exchange Commission ("SEC"), although the Company
believes that the disclosures in the consolidated financial statements are
adequate to ensure the information presented is not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and the Company's Quarterly Report on form 10-Q for
the quarter ended March 31, 1999. The results of operations for the interim
periods are not necessarily indicative of the operating results for the
year.
2. In May 1998, the Company effected a two-for-one split of its common stock.
All references in the consolidated financial statements to number of shares
and per share amounts of the Company's common stock have been restated to
reflect the split.
3. Certain reclassifications have been made to the prior year's consolidated
financial statements to conform with the current year's presentation.
4. The following table is a reconciliation of the earnings and share amounts
used in the calculation of basic earnings per share and diluted earnings
per share for the three and six month period ended June 30, 1999.
<TABLE>
<CAPTION>
Per Share
(In thousands, except per share Net Income Shares Amount
amounts) ---------------------------------------
<S> <C> <C> <C>
Three months ended June 30, 1999
Basic earning per share $ 3,894 32,066 $ 0.12
Effect of dilutive stock options 497
------------ -----------
Diluted earnings per share $ 3,894 32,563 $ 0.12
============ ===========
Six months ended June 30, 1999
Basic earning per share $ 5,942 31,990 $ 0.19
Effect of dilutive stock options 568
------------ -----------
Diluted earnings per share $ 5,942 32,558 $ 0.18
============ ===========
</TABLE>
5. In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires enterprises to report
comprehensive income and its components in general-purpose financial
statements. SFAS No. 130 was effective for the Company beginning January 1,
1998. Accordingly, the Company has prepared Consolidated Statements of
Comprehensive Operations for the three and six month period ended June 30,
1999 and 1998. Accumulated other comprehensive operations as of June 30,
1999 is comprised of the following:
<TABLE>
<CAPTION>
Accumulated
Foreign Currency Unrealized Other
Translation Holding Comprehensive
(In thousands) Adjustment Gains (Losses) Operations
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (2,667) $ 8 $ (2,659)
Current period changes (4,355) (80) (4,435)
----------------- ----------------- -----------------
Balance, June 30, 1999 $ (7,022) $ (72) $ (7,094)
================= ================= =================
</TABLE>
7
<PAGE>
6. The Company has prepared operating segment information in accordance with
SFAS 131 to report components that are evaluated regularly by the Company's
chief operating decision-makers in deciding how to allocate resources and
in assessing performance. The operating segments are managed separately
because each segment represents a strategic business unit that offers
different products or services. The results of the segments reflect
allocation of certain functional expense categories consistent with its
internal reporting which is not the same as GAAP reporting.
Operating segments data for the three and six month periods ended June 30,
1999 compared to the same periods for 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
In thousands 1999 1998 1999 1998
<S> <C> <C> <C> <C>
--------------------------- -------------------------
Software
Revenue $ 48,651 $ 44,403 $ 90,635 $ 87,650
Operating income (loss) 931 286 (2,759) 321
Customer Support
Revenue $ 20,506 $ 16,999 $ 40,051 $ 32,861
Operating income 3,588 2,839 7,510 4,463
Professional Services and
Education
Revenue $ 11,665 $ 9,555 $ 23,406 $ 15,498
Operating income (loss) (2) 878 185 654
Hardware
Revenue $ 3,545 $ 6,502 $ 9,576 $ 13,393
Operating income 397 959 1,277 1,931
Other
Revenue $ 1,722 $ 2,913 $ 3,863 $ 4,579
Operating income 150 535 315 704
Total
Revenue $ 86,089 $ 80,372 $ 167,531 $ 153,981
Operating income 5,064 5,497 6,528 8,073
</TABLE>
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, is effective
for fiscal years beginning after June 15, 2000 and will require the Company
to record all derivatives on the balance sheet at fair value. For
derivatives that are hedges, changes in the fair value of derivatives will
be offset by the change in fair value of the hedged assets, liabilities, or
firm commitments. The Company believes the impact of adopting this standard
will not be material to its results of operations or equity. The Company
will continue to evaluate the early adoption of this pronouncement.
8. In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the
United States District Court for the District of Massachusetts alleging
that the Company is infringing five patents held by Wang (the FileNET
Case). On June 23, 1995, Wang amended its complaint to include an
additional related patent. On July 2, 1996, Wang filed a complaint in the
same court alleging that Watermark Software Inc., formerly a wholly owned
subsidiary that was merged into the Company, is infringing three of the
same patents asserted in the initial complaint (the Watermark Case). On
October 9, 1996, Wang withdrew its claim in the FileNET Case that one of
the patents it initially asserted is infringed. In March 1997, Eastman
Kodak Company (Kodak) purchased the Wang imaging business unit that has
responsibility for this litigation. On July 30, 1997, the Court permitted
Eastman and Kodak Limited of England to be substituted in the litigation in
place of Wang.
8
<PAGE>
The Company has moved for summary judgement on noninfringement as to each
of the five patents in the suit, and for summary judgment of invalidity as
to one of the patents. Eastman moved for summary judgment as to the
Company's unenforceability defense on one of the patents. In July 1998, the
Magistrate Judge assigned to the case heard oral arguments on the Company's
motion for summary judgement that U.S. Patent 4,918,588 is not infringed
and is invalid. The Magistrate Judge has not yet decided these motions. The
Company believes that after he has ruled on these motions, he will hear
oral arguments in the remaining motions in the sequence in which they were
filed. A trial date has not been set.
If it should be determined that the patents at issue in the litigation are
valid and are infringed by any of the Company's products, including
Watermark products, the Company will, depending on the product, redesign
the infringing products or seek to obtain a license to market the products.
There can be no assurance that the Company will be able to successfully
redesign the infringing products or obtain a license on acceptable terms.
Based on the Company's analysis of these Eastman patents and their
respective file histories, the Company believes that it has meritorious
defenses to Eastman's claims; however, the ultimate outcome or any
resulting potential loss cannot be determined at this time.
On October 27, 1998, plaintiff Thomas P. Nyquist filed a class action
complaint against the Company and certain of its officers and directors in
the United States District Court for the Central District of California
(the Nyquist Action). The action was purportedly filed on behalf of a class
of purchasers of the Company's common stock during the period April 16,
1998 through October 7, 1998. The plaintiff alleges claims under Sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 in connection
with various public statements made by the Company and certain of its
officers and directors during the putative class period. The complaint
seeks unspecified compensatory damages, interest, attorneys' fees, expert
witness fees and costs. The court has appointed the lead plaintiff and lead
plaintiffs' counsel and consolidated all actions. On July 22, 1999,
defendant filed a motion to dismiss the complaint in its entirely. The
Company believes that all of the allegations contained in the Nyquist
Action are without merit and intends to defend the actions vigorously;
however, the ultimate outcome or any resulting potential loss cannot be
determined at this time.
Subsequent to December 31, 1998, the former shareholders of Saros
Corporation filed a demand for mandatory arbitration to release
approximately 0.2 million shares of the Company's stock which were held in
escrow pursuant to the Agreement and Plan of Merger dated January 17, 1996
among FileNET Corporation, FileNET Acquisition Corporation and Saros
Corporation and for damages. In August 1999, the Company and the
Shareholders' Agent agreed to mediate the matter. The date for mediation
has not been set. Nonwithstanding the foregoing, each party has selected an
arbitrator and agreed upon a third neutral arbitrator in connection with
arbitration. A date for arbitration, if needed, willnot be set until the
mediation process is completed. The Company believes that it has
meritorious reasons for not releasing the shares and other defenses to the
claims; however, the ultimate or any resulting potential loss cannot be
presently determined.
The Company, in the normal course of business, is subject to various other
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these other matters will not have a materially adverse effect on the
Company's consolidated results of operations or financial condition.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the unaudited consolidated
financial statements and notes thereto included in Part I--Item 1 and "Factors
That May Affect Future Results" in this item of this Quarterly Report, and with
the audited consolidated financial statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
Results of Operations
Revenue
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
(Dollars in millions) 1999 1998 % Change 1999 1998 % Change
------------ ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Software revenue
Domestic $ 32.9 $ 26.7 23% $ 59.7 $ 56.2 6%
International (11%) (1%)
15.8 17.7 31.0 31.4
------------ ----------- ------------ ----------
Total software revenue $ 48.7 $ 44.4 10% $ 90.7 $ 87.6 4%
------------ ----------- ------------ ----------
Percentage of total revenue 57% 55% 54% 57%
Customer Support
Domestic $ 16.2 $ 13.3 22% $ 31.3 $ 25.7 22%
International 4.3 3.7 16% 8.7 7.2 21%
------------ ----------- ------------ ----------
Total customer support revenue $ 20.5 $ 17.0 21% $ 40.0 $ 32.9 22%
------------ ----------- ------------ ----------
Percentage of total revenue 24% 21% 24% 21%
Professional Services and Education
Domestic $ 8.5 $ 7.6 12% $ 17.0 $ 11.3 50%
International 3.2 1.9 68% 6.4 4.2 52%
------------ ----------- ------------ ----------
Total professional services and
education revenue $ 11.7 $ 9.5 23% $ 23.4 $ 15.5 51%
------------ ----------- ------------ ----------
Percentage of total revenue 13% 12% 14% 10%
Hardware revenue
Domestic $ 2.3 $ 4.6 (50%) $ 7.1 $ 9.6 (26%)
International 1.2 1.9 (37%) 2.4 3.8 (37%)
------------ ----------- ------------ ----------
Total hardware revenue $ 3.5 $ 6.5 (46%) $ 9.5 $ 13.4 (29%)
------------ ----------- ------------ ----------
Percentage of total revenue 4% 8% 6% 9%
Other revenue
Domestic $ 1.3 $ 2.0 (35%) $ 3.1 $ 3.3 (6%)
International 0.4 1.0 (60%) 0.8 1.3 (38%)
------------ ----------- ------------ ----------
Total other revenue $ 1.7 $ 3.0 (43%) $ 3.9 $ 4.6 (15%)
------------ ----------- ------------ ----------
Percentage of total revenue 2% 4% 2% 3%
------------ ----------- ------------ ----------
Total revenue
Domestic $ 61.2 $ 54.2 13% $118.2 $ 106.1 11%
International 24.9 26.2 (5%) 49.3 47.9 3%
------------ ----------- ------------ ----------
Total revenue $ 86.1 $ 80.4 7% $167.5 $ 154.0 9%
============ =========== ============ ==========
</TABLE>
Software revenue from the licensing of the Company's software products increased
10% and 4% for the three and six month periods, respectively, ended June 30,
1999 over the comparable periods of 1998. The increases were primarily
attributable to an increase in the volume of domestic product shipments to new
Panagon customers.
10
<PAGE>
Customer support revenue consists of revenue from maintenance contracts and "fee
for service" revenues. Customer support revenue increased 21% and 22% for the
three and six month period, respectively, ended June 30, 1999 over the
comparable periods of 1998. The increases were attributable to increased
maintenance revenue due to the growth of the Company's installed base.
Professional services and education revenue consists of revenue from consulting
and implementation services provided to end users of the Company's software
products, technical consulting services provided to the Company's resellers and
training services. Consulting services are primarily performed on a time and
material basis. Professional services and education revenue increased 23% and
50% for the three and six month period, respectively, ended June 30, 1999 over
the comparable periods of 1998 due to increased demand for the Company's
expanded professional services and education offerings.
Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval libraries (OSAR). Hardware revenue decreased by 46% and 29% for
the three and six month period, respectively, ended June 30, 1999 over the
comparable periods of 1998. This decrease is the result of a decrease in new
orders experienced both domestically and internationally due to customers'
ordering competitive products. The Company expects hardware revenue to continue
to decline in both absolute dollars and as a percentage of total revenue.
Other revenue is generated from the sale of spare parts, supplies and "third-
party" products. Other revenue decreased 43% and 15% for the three and six month
period, respectively, ended June 30, 1999 compared to the same periods in 1998
due to decreased sales of spare parts.
International revenues were approximately 29% and 33% of total revenues in the
three month periods ended June 30, 1999 and 1998, respectively. For the six
month period ended June 30, 1999 and 1998 international revenues constituted 29%
and 31% of total revenues, respectively. The decreases are attributable to the
softening of non-European markets. Management expects that the Company's
international operations will continue to account for a significant portion of
total revenues. International revenues are subject to certain risks including
but not limited to political and economic instability; and currency
fluctuations. See "Factors That May Affect Future Results" below.
Cost of Revenue
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
(Dollars in millions) 1999 1998 % Change 1999 1998 % Change
-------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of software revenue $ 4.7 $ 4.3 9% $ 8.6 $ 8.0 8%
Percentage of software revenue 10% 10% 9% 9%
Cost of customer support revenue $ 9.2 $ 8.0 15% $ 17.9 $ 16.1 11%
Percentage of customer support
revenue 45% 47% 45% 49%
Cost of professional services and
education revenue $ 9.9 $ 7.0 41% $ 19.7 $ 11.9 66%
Percentage of professional services
and education revenue 85% 74% 85% 77%
Cost of hardware revenue $ 1.8 $ 3.2 (44%) $ 5.0 $ 6.6 (24%)
Percentage of hardware revenue 51% 49% 53% 49%
Cost of other revenue $ 1.4 $ 2.0 (30%) $ 3.2 $ 3.3 (3%)
Percentage of other revenue 82% 67% 82% 72%
Total cost of revenue $ 27.0 $ 24.5 10% $ 54.4 $ 45.9 19%
Percentage of total revenue 31% 30% 32% 30%
</TABLE>
The cost of software revenue includes royalties paid to third parties and the
cost of software distribution. The cost of software revenue as a percentage of
software revenue remained constant at 10% for the three months ended June 30,
1999 and 1998 and 9% for the six months ended June 30, 1999 and 1998.
11
<PAGE>
The cost of customer support revenue includes customer support personnel,
supplies, and the cost of third party hardware maintenance. The cost of customer
support revenue as a percentage of customer support revenue for the three month
period ended June 30, 1999 decreased to 45% from 47% in the same period of 1998.
The cost of customer support revenue for the six month period ended June 30,
1999 decreased to 45% from 49% for the comparable period of 1998. The decrease
is attributable to cost savings realized through the consolidation of the
Company's European operations.
The cost of professional services and education revenue consists primarily of
professional services and training personnel and third party contractors. The
cost of professional services and education revenue as a percentage of
professional services and education revenue for the three month period ended
June 30, 1999 increased to 85% from 74% for the same period of 1998. The cost of
professional services and education revenue for the six month period ended June
30, 1999 increased to 85% from 77% for the comparable period of 1998. The
increase is due to the addition of professional services management personnel to
support the Company's announced strategy of increasing its focus on delivering
new professional services products.
The cost of hardware revenue includes the cost of manufacturing OSARs, and the
cost of hardware integration personnel. The cost of hardware revenue as a
percentage of hardware revenue for the three month period ended June 30, 1999
increased to 51% from 49% for the comparable period of 1998. The cost of
hardware revenue as a percentage of hardware revenue for the six month period
ended June 30, 1999 increased to 53% from 49% for the comparable period of 1998.
The increase is due to lower revenue without a corresponding decrease in fixed
manufacturing costs.
The cost of other revenue includes the cost of supplies, spare parts and "third
party" product. The cost of other revenue as a percentage of other revenue for
the three months ended June 30, 1999 increased to 82% from 67% for the
comparable period of 1998. The cost of other revenue as a percentage of other
revenue for the six month period ended June 30, 1999 increased to 82% from 72%
for the comparable period of 1998. The increase is due to the selling of higher
cost product in 1999 compared to 1998.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
(Dollars in millions) 1999 1998 % Change 1999 1998 % Change
----------------------- ----------- ---------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Research and development $ 13.2 $ 11.8 12% $ 26.3 $ 23.9 10%
Percentage of total revenue 15% 15% 16% 16%
Selling, general and
administrative $ 40.8 $ 38.6 6% $ 80.2 $ 76.1 5%
Percentage of total revenue 47% 48% 48% 49%
</TABLE>
Research and development expenses increased 12% and 10% for the three and six
month periods ended June 30, 1999, respectively, compared to the comparable
periods of 1998. The increases in absolute dollars were due to a general
increase in salaries and recruiting costs necessitated by the intense
competitive environment for software engineers and an increase in the use of
contract developers. As a percentage of total revenue, research and development
expenses were at 15% for the three month period ended June 30, 1999 and 1998,
respectively and 16% for the six month period ended June 30, 1999 and 1998,
respectively.
The Company expects that competition for qualified technical personnel will
remain intense for the foreseeable future and may result in higher levels of
compensation expense for the Company. The Company believes that research and
development expenditures, including compensation of technical personnel, are
essential to maintaining its competitive position and expects these costs to
continue to constitute a significant percentage of revenues.
Selling, general and administrative expenses increased 6% and 5% for the three
and six month periods ended June 30 1999, compared to the comparable periods of
1998. The increase was primarily due to overall increases in salaries, increased
sales development and training costs and consulting related to systems
development projects. As a percentage of total revenue, selling, general and
administrative expenses decreased to 48% for the six months period ended June
30, 1999 from 49% for the comparable period of 1998 primarily due to the higher
revenue levels in 1999.
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<PAGE>
Provision for Income Taxes. The Company's combined federal, state and foreign
annual effective tax rate for the for the three and six months ended June 30,
1999, respectively was 30% compared to 29% for the comparable periods in 1998.
The increase in the rate is attributable to a decrease in taxable income
generated in lower tax jurisdictions outside of North America.
Foreign Currency Fluctuations and Inflation. The Company's performance can be
affected by changes in foreign currency values relative to the U.S. dollar in
relation to the Company's revenue and operating expenses. The impact to net
income from foreign exchange transactions and hedging activities is immaterial
for all periods reported. As of June 30, 1999, the Company had forward exchange
contracts outstanding totaling approximately $1.2 million in 8 currencies. All
of these contracts mature in three months.
Other comprehensive loss reflects an increase of $1.7 for the three months ended
June 30, 1999 and an increase of $4.4 for the six months ended June 30, 1999 in
the unrealized loss due to foreign currency translation. This increase was
primarily attributable to unrealized losses associated with the weakening of the
Euro currency against the U.S. dollar during the periods.
Management believes that inflation has not had a significant impact on the
prices of the Company's products, the cost of its materials, or its operating
results for the three and six months ended June 30, 1999 and 1998.
Other Financial Instruments. The Company enters into forward foreign exchange
contracts as a hedge against effects of fluctuating currency exchange rates on
monetary assets and liabilities denominated in currencies other than the
functional currency of the relevant entity. The Company is exposed to market
risk on the forward exchange contracts as a result of changes in foreign
exchange rates; however, the market risk should be offset by changes in the
valuation of the underlying exposures. Gains and losses on these contracts,
which equal the difference between the forward contract rate and the prevailing
market spot rate at the time of valuation, are recognized in the consolidated
statement of operations. The counterparties to these instruments are major
financial institutions. The Company uses commercial rating agencies to evaluate
the credit quality of the counterparties, and the Company does not anticipate a
loss resulting from any credit risk of these institutions.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As amended, SFAS 133, is effective for
fiscal years beginning after June 15, 2000 and will require the Company to
record all derivatives on the balance sheet at fair value. For derivatives that
are hedges, changes in the fair value of derivatives will be offset by the
change in fair value of the hedged assets, liabilities, or firm commitments. The
Company believes the impact of adopting this standard will not be material to
its results of operations or equity. The Company will continue to evaluate the
early adoption of this pronouncement.
Liquidity and Capital Resources
At June 30 1999, combined cash, cash equivalents and short- and long-term
marketable securities totaled $94.3 million, an increase of $12.1 million from
the end of 1998. Cash provided by operating activities during the six months
ended June 30, 1999 totaled $21.0 million and resulted primarily from net
income; an increase in unearned maintenance revenue related to annual renewal
billings; an increase in other accrued liabilities; and additions to net income
for depreciation and amortization expense offset by decreases in accounts
payable and increase in accounts receivable. Cash used by investing activities
totaled $20.0 million and was a result of capital expenditures and purchases of
marketable securities offset by sales and maturities of marketable securities.
Cash provided by financing activities totaled $2.3 million and was a result of
proceeds received from the exercise of employee stock options.
Accounts receivable increased to $67.5 million at June 30, 1999 from $61.6
million at December 31, 1998. Days sales outstanding increased to 71 days as of
June 30, 1999 from 66 days as of December 31, 1998. Current liabilities
increased to $88.6 million at June 30, 1999 from $76.5 million at December 31,
1998. The increase in current liabilities is primarily a result of increases in
unearned maintenance revenue, accrued royalties and accrued taxes, offset by
decreases in accounts payable.
The Company has a $20 million unsecured line of credit with a commercial bank
that expires in June 2001 and is subject to the maintenance of certain financial
covenants. As of June 30, 1999, there were no borrowings outstanding against the
Company's credit line and the Company was in compliance with all the covenants
of the line.
The Company anticipates that its present cash balances together with internally
generated funds and credit lines will be sufficient to meet its working capital
and capital expenditure needs for at least the next twelve months.
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Other Matters
Year 2000. With the approach of the year 2000, the Company recognized that
significant issues could arise in connection with the computer software products
it licenses and the internal business systems which are essential to its
operations. In 1997, the Company implemented a year 2000 Integrity Program (the
Program) to ensure that the Company's computer software products and internal
business systems will function properly in the year 2000 and thereafter.
The Program, as it relates to the software products licensed to customers,
includes year 2000 compliance testing and certification of all current software
products. All new generations of the Company's software products will be
released as year 2000 compliant. Not all software products of the Company are
year 2000 compliant and the Company does not plan to make them so. Accordingly,
upgraded year 2000 compliant versions of such software products are being made
available to customers and resellers who will then bear the responsibility for
installing the upgraded software product in order to make their systems year
2000 compliant. Some of the Company's customers are running software product
versions that are not year 2000 compliant. The Company has been encouraging such
customers to migrate to current software product versions. It is possible that
the Company may experience increased expenses in addressing migration issues for
such customers. The Company's customer support organization is in the process of
completing its program, Customer Service Profile 2000, to review the status of
each Company product currently installed at a customer location and to schedule
upgrades according to the customer's requirements and support programs. It also
provided the diagnostics used in such program to its resellers for their use at
their customer locations. Customers who have support agreements with the Company
have been directly informed as to whether or not the particular software
products they have installed are year 2000 compliant. All customers are kept
informed of the release of year 2000 compliant updates and upgrades via the
Company's readiness disclosure statement on its Web site. The inability of any
of the Company's software products to properly manage and manipulate data in the
year 2000 could result in increased warranty costs, customer satisfaction
issues, potential lawsuits and other costs and liabilities, as well as customers
being unable to run software licensed from the Company and incurring significant
costs from the resultant business interruption. The Company has implemented a
contingency plan for certain legacy software products which provides an upgrade
path to current year 2000 compliant versions of the Company's software products
with similar functionality. The Company has spent an estimated $1.2 million on
year 2000 product related projects through June 30, 1999. The expense for year
2000 product related projects is estimated to be approximately $.4 million for
the remainder of 1999. The Company is forming a rapid response team as part of
customer support that will respond to problems during the year 2000 date change
period. The Company estimates these expenses at $.1 million.
The Company has communicated with significant third party vendors of computer
software with which the Company's systems interface or upon which the Company's
software products depend. Such third party vendors have delivered year 2000
versions or guaranteed that its current computer software is year 2000
compliant. In the event that customers of the Company have year 2000 related
problems with such third party software, the ompany has been assured that the
third party will remediate their own year 2000 issues. Although the Company's
compliance testing utilizes the embedded third party software as an essential
part of its software being tested, the Program does not include certification of
third party software which is incorporated in the Company's software products or
customer-developed applications which run on the Company's software products.
Customers and third party vendors will remain directly responsible for year 2000
compliance testing of their software.
The Program also includes a review of all internal IT systems for year 2000
compliance. The Company's significant business systems (financial, operational,
marketing, customer support, etc.) have been reviewed and are either currently
year 2000 compliant or will be upgraded and/or replaced so as to be year 2000
tested and compliant by October 31, 1999. All of the hardware and software
deployed in the Company's technical infrastructure is either fully year 2000
tested and compliant or is scheduled to be replaced with year 2000 compliant
components by October 31, 1999. The Company is also evaluating IT related
environmental systems (heating, air conditioning, security, etc.) and intends to
make all such systems year 2000 compliant by October 31, 1999. To the extent
possible, the Company will develop and execute contingency plans designed to
allow continued operation in the event of failure of the Company's or third
parties' systems by October 31, 1999. Contingency plans are being developed in
certain key areas, in particular finance, sales, IT and customer service to
ensure that any potential business interruptions caused by the year 2000 issue
are mitigated. Such contingency plans may include identification of alternative
sources for processing data and managing customer support issues. Business teams
will be monitoring the critical systems, and service centers to react
immediately to facilitate repairs at the end of the year 1999. Data retention
and recovery procedures will be in place for critical business data to provide
back-ups with on-site and off-site data copies. For those business,
14
<PAGE>
infrastructure and environmental systems that are to be upgraded in order to
achieve year 2000 compliance, the majority were already scheduled for upgrade
for other business reasons. The Company's cost to fund solely year 2000
compliance projects has been $0.4 million through June 30, 1999. The expense to
complete these projects is estimated to be approximately $0.7 million for the
remainder of 1999. Although the Company is not aware of any material operational
issues or costs associated with preparing its software products and internal
systems for the year 2000, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the year 2000 issue.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the nature and amount of programming required
to upgrade or replace each of the affected programs, and the success of the
Company's external customers, resellers, and vendors and suppliers in addressing
the year 2000 issue.
Environmental Matters. The Company is not aware of any issues related to
environmental matters that have, or are expected to, materially affect its
business.
Factors That May Affect Future Results
The Company's business, financial condition, operating results and prospects can
be impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause the Company's
actual results to differ materially from recent results or from the Company's
anticipated future results.
Rapid Technological Change; Product Development. The market for the Company's
software and products is characterized by rapid technological developments,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. The Company's continued success will be
dependent upon its ability to continue to enhance its existing software, develop
and introduce, in a timely manner, new software products incorporating
technological advances and respond to customer requirements, including without
limitation enhancements to certain specified Company software products to
achieve year 2000 compliance. There can be no assurance that the Company will be
successful in developing and marketing new software products or enhancements to
its existing software on a timely basis or that any new or enhanced software
will adequately address the changing needs of the marketplace. If the Company is
unable to develop and introduce new software or enhancements to existing
software in a timely manner in response to changing market conditions or
customer requirements, including without limitation enhancements to certain
existing software products to achieve year 2000 compliance, the Company's
business and operating results could be adversely affected. From time to time,
the Company or its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
the Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to delay their
purchasing decisions in anticipation of such products, which could have a
material adverse effect on the Company's business and operating results.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and operating results
should not necessarily be considered indicative of future growth or operating
results. Future operating results will depend upon many factors, including the
demand for the Company's products; the effectiveness of the Company's efforts to
continue to integrate various software it has developed or acquired and to
achieve the desired level of sales from such software integration; the level of
product and price competition; the length of the Company's sales cycle;
improvements in the productivity of the Company's sales force; seasonality of
individual customer buying patterns; the size and timing of individual
transactions; the delay or deferral of customer implementations; the budget
cycles of the Company's customers; the timing of new software introductions and
software enhancements by the Company and its competitors; the mix of sales by
products, software, services and distribution channels; levels of international
sales; acquisitions by competitors; changes in foreign currency exchange rates,
impact of the EURO currency; the ability of the Company to develop and market
new software products and control costs; and general domestic and international
economic and political conditions. Demand for the Company's software products
could be adversely impacted to the extent customers and potential customers are
15
<PAGE>
temporarily distracted by their year 2000 remediation efforts, as such products
compete for information technology (IT) resources that have been diverted for
such remedial efforts which may have higher priority than ordering or
implementing the Company's software products.
As a result of these factors, revenues and operating results for any quarter are
subject to variation and are not predictable with any significant degree of
accuracy. Therefore, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Moreover, such factors could
cause the Company's operating results in a given quarter to be below the
expectations of public market analysts and investors. In either case, the price
of the Company's common stock could be materially adversely affected.
Competition. The integrated document management, imaging, workflow, computer
output to laser disk and electronic document management software markets are
highly competitive, and there are certain competitors of the Company with
substantially greater sales, marketing, development and financial resources. The
Company believes that the competitive factors affecting the market for its
software products and services include vendor and product reputation; product
quality, performance and price; the availability of software products on
multiple platforms; product scalability; product integration with other
enterprise applications; software functionality and features; software ease of
use; and the quality of customer support services and training. The relative
importance of each of these factors depends upon the specific customer involved.
While the Company believes it competes favorably in each of these areas, there
can be no assurance that it will continue to do so. Moreover, the Company's
present or future competitors may be able to develop software products
comparable or superior to those offered by the Company, offer lower price
products or adapt more quickly than the Company to new technologies or evolving
customer requirements. Competition is expected to intensify. In order to be
successful in the future, the Company must respond to technological change,
customer requirements and competitors' current software products and
innovations. There can be no assurance that the Company will be able to continue
to compete effectively in its market or that future competition will not have a
material adverse effect on its business, financial condition or results of
operations. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of the markets
served by the Company. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, financial condition or results of operations.
Intellectual Property and other Proprietary Rights. The Company's success
depends, in part, on its ability to protect its proprietary rights to the
technologies used in its principal products. The Company relies on a combination
of copyrights, trademarks, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights in its software
products. There can be no assurance that the Company's existing or future
copyrights, trademarks, trade secrets or other intellectual property rights will
be of sufficient scope or strength to provide meaningful protection or a
commercial advantage to the Company. The Company has no software patents. Also,
in selling certain of its products, the Company relies on "shrink wrap" licenses
that are not signed by licensees and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that such factors would not
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition, the Company also relies on certain software
that it licenses from third parties, including software that is integrated with
internally developed software used in the Company's products to perform key
functions. There can be no assurance that such third parties will remain in
business, that they will continue to support their software products, that their
products are, or will be, year 2000 compliant, or that their software products
will otherwise continue to be available to the Company on commercially
reasonable terms. The loss or inability to maintain any of theses software
licenses could result in delays or reductions in software shipments until
equivalent software can be developed, identified, licensed and integrated, which
could adversely affect the Company's business, financial condition or results of
operations.
The Company may, from time to time, be notified that it is infringing certain
patent or intellectual property rights of others. Combinations of technology
acquired through past or future acquisitions and the Company's technology will
create new software products and technology that may give rise to claims of
infringement. While no actions other than those discussed below are currently
pending against the Company for infringement of patent or other proprietary
rights of third parties, there can be no assurance that third parties will not
initiate infringement actions against the Company in the future. Infringement
actions can result in substantial cost to, and diversion of, resources of the
Company. If the Company were found to infringe upon the rights of others, no
assurance can be given that the Company could redesign the infringing products
16
<PAGE>
or could obtain licenses on acceptable terms or at all, that significant damages
for past infringement would not be assessed or that further litigation relative
to any such licenses or usage would not occur. The failure to successfully
defend any claims or redesign its products or obtain necessary licenses or other
rights, the ultimate disposition of any claims or the advent of litigation
arising out of any claims of infringement, could have a material adverse effect
on the Company's business, financial condition or results of operations.
In October 1994, Wang Laboratories, Inc. (Wang) filed a complaint in the United
States District Court for the District of Massachusetts alleging that the
Company is infringing five patents held by Wang (the FileNET Case). On June 23,
1995, Wang amended its complaint to include an additional related patent. On
July 2, 1996, Wang filed a complaint in the same court alleging that Watermark
Software Inc., formerly a wholly owned subsidiary that was merged into the
Company, is infringing three of the same patents asserted in the initial
complaint (the Watermark Case). On October 9, 1996, Wang withdrew its claim in
the FileNET Case that one of the patents it initially asserted is infringed. In
March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging business
unit that has responsibility for this litigation. On July 30, 1997, the Court
permitted Eastman and Kodak Limited of England to be substituted in the
litigation in place of Wang.
The Company has moved for summary judgement on noninfringement as to each of the
five patents in the suit, and for summary judgment of invalidity as to one of
the patents. Eastman moved for summary judgment as to the Company's
unenforceability defense on one of the patents. In July 1998, the Magistrate
Judge assigned to the case, heard oral arguments on the Company's motion for
summary judgement that U.S. Patent 4,918,588 is not infringed and is invalid.
The Magistrate Judge has not yet decided these motions. The Company believes
that after he has ruled on these motions, he will hear oral arguments in the
remaining motions in the sequence in which they were filed. A trial date has not
been set.
If it should be determined that the patents at issue in the litigation are valid
and are infringed by any of the Company's products, including Watermark
products, the Company will, depending on the product, redesign the infringing
products or seek to obtain a license to market the products. There can be no
assurance that the Company will be able to redesign the infringing products or
obtain a license on acceptable terms. Based on the Company's analysis of these
Eastman patents and their respective file histories, the Company believes that
it has meritorious defenses to Eastman's claims; however, the ultimate outcome
or any resulting potential loss cannot be determined at this time.
Dependence on Certain Relationships. The Company has entered into a number of
key relationships with other companies such as Microsoft Corporation, IBM Global
Services, SAP AG, Hewlett-Packard Company, and Sun Microsystems, Inc. There can
be no assurance that these companies will not reduce or discontinue their
relationships with, or support of, the Company and its products.
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel. In general, the
Company does not utilize employment agreements for its key employees. The loss
of the services of one or more key employees could have a material adverse
effect on the Company's operating results. The Company also believes its future
success will depend in large part upon its ability to attract and retain
additional highly skilled management, technical, marketing, product development,
consultants and operational personnel. Competition for such personnel,
particularly engineers and other technical personnel, is intense, and pay scales
in the software industry have significantly increased. There can be no assurance
that the Company will be successful in attracting and retaining such personnel.
International Sales. Historically, the Company has derived approximately
one-third of its total revenues from international sales. International business
is subject to certain risks including varying technical standards; tariffs and
trade barriers; political and economic instability; reduced protection for
intellectual property rights in certain countries; difficulties in staffing and
maintaining foreign operations; difficulties in managing foreign distributors;
varying requirements for localized products; potentially adverse tax
consequences; currency exchange fluctuations including those related to the EURO
beginning in 1999; the burden of complying with a wide variety of complex
foreign laws, regulations and treaties; and the possibility of difficulties in
collecting accounts receivable. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
financial condition or results of operations.
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Product Liability. Software and products as complex as those sold by the Company
are susceptible to errors or failures, especially when first introduced or when
new versions are released. The Company's software products are often intended
for use in applications that are critical to a customer's business. As a result,
the Company's customers may rely on the effective performance of the software to
a greater extent than the market for software products generally. The Company
conducts extensive software testing to ensure that its software is free of
significant errors and defects. In addition, the Company has designed and tested
the most current versions of its software products to be year 2000 compliant.
However, some of the Company's customers are running earlier software products
that are not year 2000 compliant. Although the Company has been encouraging such
customers to migrate to current software versions, no assurance can be given
that all of them will do so in a timely fashion, if at all. Moreover, the
Company also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and is
used in the Company's products to perform key functions. There can be no
assurance that such third party software will be free of errors and defects or
be year 2000 compliant in a timely fashion. Although the Company has not
experienced any material product liability claims to date, there can be no
assurance that errors or defects, whether associated with year 2000 functions or
otherwise, will not result in product liability claims against the Company in
the future. A successful product liability claim brought against the Company
could have a material adverse effect upon the Company's business, operating
results and financial condition. The Company's license agreements with customers
typically contain provisions designed to limit its exposure to potential product
liability claims. However, it is possible that such limitation of liability
provisions may not be effective under the laws of certain jurisdictions.
Stock Price Volatility. The Company believes that a variety of factors could
cause the trading price of its common stock to fluctuate, perhaps substantially,
including quarter-to-quarter variations in operating results; announcements of
developments related to its business; fluctuations in its order levels; general
conditions in the technology sector or the worldwide economy; announcements of
technological innovations, new software products or product enhancements by the
Company or its competitors; key management changes; changes in joint marketing
and development programs; developments relating to patents or other intellectual
property rights or disputes; and developments in the Company's relationships
with its customers, resellers and suppliers. In addition, in recent years the
stock market in general, and the market for shares of high-technology stocks in
particular, have experienced extreme price fluctuations that have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the trading price of the Company's common stock.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes to Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1999 Annual Meeting of Stockholders of the Company was held at 9:00
a.m. on May 20, 1999, in Costa Mesa, California.
(b) At the annual meeting, the following seven individuals were elected to the
Company's Board of Directors, constituting all members of the Board of
Directors:
Nominee Affirmative Votes Votes Withheld
----------------------- ------------------------ -------------------------
L. George Klaus 27,678,276 583,248
----------------------- ------------------------ -------------------------
William P. Lyons 27,644,776 616,748
----------------------- ------------------------ -------------------------
Lee D. Roberts 27,628,603 632,921
----------------------- ------------------------ -------------------------
John C. Savage 27,641,703 619,821
----------------------- ------------------------ -------------------------
Roger S. Siboni 27,645,960 615,564
----------------------- ------------------------ -------------------------
Theodore J. Smith 27,632,916 628,608
----------------------- ------------------------ -------------------------
Carolyn M. Ticknor 27,641,403 620,121
----------------------- ------------------------ -------------------------
(c) The Company's stockholders were asked to approve an amendment to the
Company's 1995 Stock Option Plan (the "1995 Plan") to increase the number
of shares of Common Stock issuable under the 1995 Plan by an additional
1,200,000 shares. This proposal was approved in accordance with the
following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
------------------ ------------------- ------------------ -----------------
23,986,483 3,997,198 277,843 0
------------------ ------------------- ------------------ -----------------
(d) The Company's stockholders were asked to approve an amendment to the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") to increase the
number of shares of Common Stock issuable under the 1998 Purchase Plan by
an additional 300,000 shares. This proposal was approved in accordance
with the following vote of stockholders:
Broker
Votes For Votes Against Abstentions Non-Votes
------------------ ------------------- ------------------ -----------------
27,100,893 887,427 273,204 0
------------------ ------------------- ------------------ -----------------
Item 5. Other Information
On May 28, 1999, Carolyn M. Ticknor voluntarily tendered her resignation as
Director of the Company which was accepted by the Board. Her resignation was not
due to any disagreement with the Company relating to the Company's operations,
policies or practices.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The list of exhibits contained in the accompanying Index to
Exhibits is herein incorporated by reference. (b) No reports on Form 8-K were
filed during the second quarter of 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
August 13, 1999 By:______________/s/_____________________________
Date Mark S. St. Clare, Chief Financial Officer and
Sr. Vice President, Finance
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit
No. Description
- ----------- --------------------------------------------------------------------
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibi
3.1 to Form S-4 filed on January 26, 1996; Registration No.
333-00676).
3.1.1* Certificate of Amendment of Restated Certificate of Incorporation
(filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996,
Registration No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration
statement on Form S-1, Registration No. 33-15004 (the "Form S-1")).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1
to the Form S-1, Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNET
Corporation and the First National Bank of Boston, which includes
the form of Rights Certificate as Exhibit A and the Summary of
Rights to Purchase Common Shares as Exhibit B (filed as Exhibit
4.2 to Form S-4 filed on January 26, 1996; Registration No.
333-00676).
4.3* Amendment One dated July 31, 1998 and Amendment Two dated November
9, 1998 to Rights Agreements between FileNET Corporation and
BANKBOSTON N.A. formerly known as The First National Bank of
Boston (filed as Exhibit 4.3 to Form 10-Q for the quarter ended
September 30, 1998).
10.1 Amended and Restated Credit Agreement (Multicurrency) by and
among the Registrant and Bank of America National Trust and Savings
Association dated June 30, 1999, effective June 30,1999 (filed as
Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1999).
10.2* Business Alliance Program Agreement between the Registrant and
Oracle Corporation dated July 1, 1996, as amended by Amendment One
thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended
June 30, 1996).
10.3* Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996; as amended by Amendment One thereto
(filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30,
1996).
10.3.1* Runtime Sublicens Addendum between the Registrant and Oracle
Corporation dated July 1, 1996; as amended by Amendments Two
through Six thereto (filed as Exhibit 10.3.1 to Form 10-Q for
the quarter ended September 30, 1998).
10.4* Full Use and Deployment Sublicense Addendum between the Registrant
and Oracle Corporation dated July 1, 1996, as amended by Amendment
One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter
ended June 30, 1996).
10.5* Lease between the Registrant and C. J. Segerstrom & Sons for the
headquarters f the Company, dated April 30, 1987 (filed as Exhibit
10.19 to the Form S-1).
10.6* Third Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for additional facilities at
the headquarters of the Company, dated October 1, 1992 (filed as
Exhibit 10.7 to Form 10-K filed on April 4, 1997).
10.7* Fifth Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for the extension of the
term of the lease, dated March 28, 1997 (filed as Exhibit 10.8 to
Form 10-Q for the quarter ended March 31, 1997).
10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNET
Corporation, as amended by the First Amendment, Second Amendment,
Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed on
January 26, 1996; Registration No. 333-00676)
10.9* Amended and Restated 1995 Stock Option Plan of FileNET (filed as
Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration No.
333-66997).
- ---------------------------------------------
* Incorporated herein by reference
21
<PAGE>
Exhibit
No. Description
- ----------- --------------------------------------------------------------------
10.10* Second Amended and Restated Stock Option Plan of FileNET
Corporation, together with the forms of Incentive Stock Option
Agreement and Non-Qualified Stock Option Agreements (filed as
Exhibits 4(a), 4(b) and 4(c), respectively, to the Registrant's
Registration Statement on Form S-8, Registration No. 33-48499), and
an Amendment thereto (filed as Exhibit 4(d) to the Registrant's
Registration Statement on Form S-8, Registration No. 33-69920),
and the Second Amendment thereto (filed as Appendix A to the
Registrant's Proxy Statement for the Registrant's 1994 Annual
Meeting of Stockholders, filed on April 29, 1994).
10.11* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Lee Roberts
(filed as Exhibit 99.17 to Form S-8 on August 20, 1997).
10.12* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Ron
Ercanbrack (filed as Exhibit 99.19 to Form S-8 on August 20, 1997).
10.13* Agreement for the Purchase of IBM products dated December 20, 1991
(filed on May 5, 1992 with the Form 8 amending the Company's Form
10-K for the fiscal year ended December 31, 1991).
10.14* Amendment #A1011-941003-01 dated September 30, 1994, to the
Agreement for the Purchase of IBM products dated December 20, 1991
(filed as Exhibit 10.12 to Form 10-K for the fiscal year ended
December 31, 1996).
10.15* Development and Initial Supply Agreement between the Registrant
and Quintar Company dated August 20, 1992 (filed as Exhibit 10.21 to
Form 10-K for the year ended January 3, 1993).
10.16* Amendment dated December 22, 1992 to the Development and Initial
Supply Agreement between the Registrant and Quintar Company dated
August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year
ended January 3, 1993).
10.17* Amendment 2 dated December 18, 1998 to the Product License Agreement
between the Registrant and Novell, Inc. dated May 16, 1995 (filed as
Exhibit 10.17 to Form 10-K/A for the year ended December 31, 1998).
10.18* Agreement and Plan of Merger between the Registrant and Watermark
Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form
10-Q for the quarter ended July 2, 1995).
10.19* Agreement and Plan of Merger between the Registrant and Saros
Corporation, as amended, dated January 17, 1996 (filed as Exhibits
2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996).
10.20* Stock Purchase Agreement by and Among FileNET Corporation, IFS
Acquisition Corporation, Jawaid Khan and Juergen Goersch dated
January 17, 1996 and Amendment 1 to Stock Purchase Agreement dated
January 30, 1996 (filed as Exhibit 10.2 to Form 10-K for the year
ended December 31, 1995).
10.21* Amended and Restated FileNET Corporation 1998 Employee Stock
Purchase Plan (filed as Exhibit 99.15 to Form S-8, filed on
November 9, 1998; Registration No. 333-66997). 10.22* FileNET
Corporation International Employee Stock Purchase Plan. (filed as
Exhibit 99.16 to Form S-8, filed on November 9, 1998; Registration
No. 333-66997).
27 Financial Data Schedule.
- -----------------------------------------------
* Incorporated herein by reference
22
AMENDED AND RESTATED
CREDIT AGREEMENT
(MULTICURRENCY)
Dated as of June 30, 1999
between
FILENET CORPORATION
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
================================================================================
<PAGE>
TABLE OF CONTENTS
Section Page
ARTICLE I Definitions and Financial Requirements.....................1
1.01 Definitions...........................................1
1.02 Financial Requirements................................7
ARTICLE II The Credit Facilities.....................................7
---------------------
2.01 The Revolving Facility................................7
----------------------
2.02 Advances Under the Revolving Facility.................8
-------------------------------------
2.03 Commercial Letters of Credit under the
Revolving Facility..................................9
--------------------
2.04 Standby Letters of Credit Under the
Revolving Facility.................................10
--------------------
2.05 Local Currency Advances..............................11
-----------------------
2.06 Bank Guaranties......................................12
---------------
2.07 Optional Prepayment..................................12
-------------------
2.08 Mandatory Payment....................................13
-----------------
2.09 Commitment Fee.......................................13
--------------
2.10 Default Rate.........................................13
------------
2.11 Early Termination of Commitment......................13
-------------------------------
ARTICLE III Extensions of Credit, Payments and
Interest Calculations..................................14
-----------------------
3.01 Requests for Credit..................................14
-------------------
3.02 Disbursements and Payments...........................14
--------------------------
3.03 Branch Accounts......................................14
---------------
3.04 Evidence of Indebtedness.............................14
-------------------------
3.05 Interest Calculation.................................14
--------------------
3.06 Late Payments; Compounding...........................15
--------------------------
3.07 Business Day.........................................15
-------------
3.08 Taxes and Other Charges..............................15
-----------------------
3.09 Illegality...........................................16
----------
3.10 Increased Costs......................................16
---------------
3.11 Funding Losses.......................................17
--------------
3.12 Inability to Determine Rates.........................17
----------------------------
3.13 Certificate of the Bank..............................17
-----------------------
3.14 Debits to Borrower's Account.........................17
----------------------------
3.15 Survival.............................................17
--------
ARTICLE IV Conditions to Availability of Credit.....................18
------------------------------------
4.01 Conditions to First Extension of Credit..............18
---------------------------------------
4.02 Conditions to Each Extension of Credit...............18
--------------------------------------
ARTICLE V Representations and Warranties...........................19
------------------------------
5.01 Corporate Existence and Power........................19
-----------------------------
5.02 Authorization........................................19
-------------
5.03 Enforceability.......................................19
--------------
5.04 Compliance with Laws.................................19
--------------------
5.05 Permits, Franchises..................................20
-------------------
5.06 Litigation...........................................20
----------
5.07 No Event of Default..................................20
-------------------
5.08 Other Obligations....................................20
-----------------
5.09 Tax Returns..........................................20
-----------
5.10 Information Submitted................................20
---------------------
i
<PAGE>
5.11 No Material Adverse Effect...........................20
--------------------------
5.12 ERISA Compliance.....................................20
----------------
5.13 Environmental Matters................................21
---------------------
ARTICLE VI Affirmative Covenants....................................21
---------------------
6.01 Notices of Certain Events............................22
-------------------------
6.02 Financial and Other Information......................22
-------------------------------
6.03 Books, Records, Audits and Inspections...............23
--------------------------------------
6.04 Use of Facility......................................23
---------------
6.05 Insurance............................................23
---------
6.06 Compliance with Laws.................................23
--------------------
6.07 Change in Name, Structure or Location................23
-------------------------------------
6.08 Existence and Properties.............................23
------------------------
6.09 Additional Acts......................................23
---------------
ARTICLE VII Negative Covenants......................................24
- ----------- ------------------
7.01 Other Indebtedness...................................24
------------------
7.02 Liens................................................24
-----
7.03 Capital Assets.......................................25
--------------
7.04 Dividends............................................25
---------
7.05 Loans................................................25
-----
7.06 Acquisitions, Liquidations and
Mergers............................................25
--------------------------------------
7.07 Sale of Assets.......................................26
--------------
7.08 Business Activities..................................26
-------------------
7.09 Regulations G, T, U, and X...........................26
--------------------------
7.10 Intentionally Omitted................................26
---------------------
7.11 Quick Ratio..........................................26
-----------
7.12 Total Liabilities to Tangible Net Worth..............26
---------------------------------------
7.13 Tangible Net Worth...................................27
------------------
7.14 Consecutive Quarterly Losses; Losses in
One Quarter........................................27
---------------------------------------------------
ARTICLE VIII Events of Default......................................27
-----------------
8.01 Events of Default....................................27
(a) Failure to Pay................................27
--------------
(b) Breach of Representation or
Warranty....................................27
----------
(c) Specific Defaults.............................28
-----------------
(d) Other Defaults................................28
--------------
(e) Trade Suits...................................28
-----------
(f) Judgments.....................................28
---------
(g) Failure to Pay Debts; Voluntary
Bankruptcy..................................28
-------------
(h) Involuntary Bankruptcy........................28
----------------------
(i) Default of Other Financial Obligations........28
--------------------------------------
(j) Default under other Credit Documents..........28
------------------------------------
(k) Default of Other Bank Obligations.............28
---------------------------------
(l) Material Adverse Effect.......................28
-----------------------
(m) ERISA.........................................29
-----
(n) Change of Control.............................29
-----------------
8.02 Remedies.............................................29
--------
ARTICLE IX Miscellaneous............................................30
9.01 Successors and Assigns...............................30
----------------------
9.02 Consents and Waivers.................................30
--------------------
9.03 Governing Law........................................30
-------------
9.04 Costs and Attorneys' Fees............................30
-------------------------
ii
<PAGE>
9.05 Integration; Amendment...............................31
----------------------
9.06 Borrower's Documents.................................31
--------------------
9.07 Participations.......................................31
--------------
9.08 General Indemnification..............................31
-----------------------
9.09 Arbitration; Reference Proceeding....................32
---------------------------------
9.10 Notices..............................................32
-------
9.11 Headings; Interpretation.............................33
------------------------
9.12 Severability.........................................33
------------
9.13 Counterparts.........................................33
------------
9.14 Waiver of Jury Trial.................................33
--------------------
EXHIBITS
Exhibit A Form of Compliance Certificate
iii
<PAGE>
AMENDED AND RESTATED
CREDIT AGREEMENT
(MULTICURRENCY)
THIS AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) (this
"Agreement") is entered into as of June 30, 1999, between FILENET CORPORATION
(the "Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
(the "Bank").
A. The Borrower and the Bank have entered into a Second Amended and
Restated Credit Agreement(Multicurrency)dated as of June 25, 1997,
effective as of June 1, 1997, as amended (as so amended, the "Original
Credit Agreement"), pursuant to which the Bank has agreed, on the
terms and conditions contained therein, to extend credit to the
Borrower and certain of its subsidiaries.
B. The parties hereto desire to amend and restate in its entirety the
Original Credit Agreement upon the terms and conditions set forth in
this Agreement.
In consideration of the mutual covenants and agreements contained herein,
the Borrower and the Bank agree as follows:
ARTICLE I
Definitions and Financial Requirements
1.01 Definitions. The following terms (including plural and singular
versions thereof) have the meanings indicated:
"Acceptable Subsidiary": a Subsidiary of the Borrower acceptable to the
Bank in its sole discretion that (a) is specified as a "Borrower" on a
continuing guaranty executed by the Borrower in form and substance satisfactory
to the Bank, (b) has executed such credit and related documentation with and in
favor of the Bank as the Bank may request, and (c) (i) for extensions of credit
in the form of Dollar Advances, Offshore Currency Advances, or letters of credit
denominated in Dollars, is located in the United States and (ii) for purposes of
extensions of credit in the form of Local Currency Advances, letters of credit
denominated in a Local Currency or Bank Guaranties, is located outside of the
United States.
"Advance": an advance hereunder, which, subject to the terms and conditions
hereof, may be in Dollars, an Offshore Currency, or a Local Currency.
"Availability Period": the period commencing on the date of this Agreement
and ending on the date that is the earlier to occur of (a) June 29, 2001, or (b)
the date on which the Bank's commitment to extend credit hereunder terminates.
1
<PAGE>
"Bank Guaranty": a guaranty issued hereunder by an Offshore Credit Provider
for the Borrower's or an Acceptable Subsidiary's account.
"Bank Guaranty Outstanding Amount": at any time, the amount or Equivalent
Amount guaranteed pursuant to any Bank Guaranty but not disbursed thereunder at
such time, plus all amounts paid under any Bank Guaranty by an Offshore Credit
Provider which have not yet been reimbursed, plus any other obligation or
liability of the Borrower or an Acceptable Subsidiary to any Offshore Credit
Provider with respect to any Bank Guaranty.
"Business Day": any day other than a Saturday, a Sunday, or other day on
which commercial banks in San Francisco, California, are authorized or required
by law to close, and
(a) with respect to disbursements and payments pertaining to any Offshore
Rate Advances denominated in Dollars, a day on which dealings are
carried on in the applicable offshore Dollar interbank market, and
(b) with respect to disbursements and payments pertaining to any Offshore
Currency Advance:
(i) if the applicable Business Day relates to an Offshore Currency
Advance denominated in the euro or a National Currency Unit, a
Target Business Day on which banks are generally open for
business in London, Frankfurt, San Francisco and/or in any other
principal financial center as the Bank shall from time to time
determine for this purpose, and
(ii) with respect to any disbursements and payments in and
calculations pertaining to any Offshore Currency Advance
denominated in any other Offshore Currency, a day on which
commercial banks are open for foreign exchange business in
London, England, and on which dealings in the relevant Offshore
Currency are carried on in the applicable offshore foreign
exchange interbank market in which disbursement of or payment in
such Offshore Currency will be made or received hereunder.
For purposes of this Agreement, "TARGET Business Day" means a day when
TARGET (the Trans-European Automated Real-time Gross settlement Express Transfer
system) is scheduled to be open for business.
"Closing Date": the date on which all conditions to the initial extension
of credit hereunder are satisfied.
"Code": the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder as from time to time in effect.
"Compliance Certificate": a certificate, substantially in the form of
Exhibit A, executed and delivered on behalf of the Borrower by an appropriate
officer of the Borrower.
2
<PAGE>
"Credit Documents": collectively, this Agreement and each other agreement,
documents and instrument now or hereafter delivered to the Bank (including any
Offshore Credit Provider) in connection with the credits established herein and
the transactions contemplated hereby.
"Credit Limit": the amount $20,000,000 or the Equivalent Amount thereof.
"Default": any event or circumstance which, with the giving of notice, the
lapse of time, or both, would (if not cured or otherwise remedied during such
time) constitute an Event of Default.
"Dollars", "dollars" and "$": each, lawful money of the United States.
"Dollar Advances": specified in subsection 2.01(c).
"EMU": Economic and Monetary Union as contemplated in the Treaty of Rome of
March 25, 1957, as amended by the Single European Act 1986 and the Maastricht
Treaty (which was signed at Maastricht on February 1, 1992, and came into force
on November 1, 1993), as amended from time to time.
"EMU legislation": legislative measures of the European Council (including
European Council regulations) for the introduction of, changeover to, or
operation of the euro, being in part the implementation of the third stage of
EMU.
"Environmental Laws": any foreign, federal, state, local, or municipal
laws, rules, orders, regulations, statutes, ordinances, codes, decrees,
requirements of any governmental authority, any and all requirements of law and
any and all common law requirements, rules, and bases of liability regulating,
relating to, or imposing liability or standards of conduct concerning pollution
or protection of human health or the environment or Hazardous Substances or any
activity involving Hazardous Substances, as now or may at any time hereafter may
be in effect.
"Equivalent Amount": whenever this Agreement requires or permits a
determination on any date of the equivalent in dollars of an amount expressed in
a currency other than dollars, the equivalent amount in dollars of any amount
expressed in a currency other than dollars as determined by the Bank on such
date on the basis of the Spot Rate for the purchase of dollars with such other
currency on the relevant date.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations promulgated thereunder as from time to time in
effect.
"ERISA Event": (a) a Reportable Event with respect to a Pension Plan; (b) a
withdrawal by the Borrower 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) 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 subject to Title IV of ERISA; (d) a failure by the
Borrower to make required contributions to a Pension Plan or other Plan subject
to Section 412 of the Code; (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; (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 Borrower; or (g) an
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code with respect to any Pension Plan.
"euro": the single currency of Participating Member States of the European
Union.
"Event of Default": any event listed in Article VIII of this Agreement.
"FDIC": the Federal Deposit Insurance Corporation, or any entity succeeding
to any of its principal functions.
"Final Maturity Date": (a) in respect of any Advances, June 29, 2001; (b)
in respect of any commercial letters of credit, December 28, 2001; (c) in
respect of any standby letters of credit, June 28, 2002; and (d) in respect of
any Bank Guaranties, June 28, 2002.
"FRB": the Board of Governors of the Federal Reserve System, or any entity
succeeding to any of its principal functions.
"Hazardous Substance": any hazardous or toxic substance, material,
pollutant, waste or similar designation, defined, listed, classified, or
regulated as such in or under any Environmental Laws, including asbestos,
petroleum, or petroleum products (including gasoline, crude oil, or any fraction
thereof), polychlorinated biphenyls, and urea-formaldehyde insulation.
"Investment Guidelines": the Borrower's Investment Guidelines submitted to
the Bank and approved by the Bank prior to the Closing Date, and any changes
thereto after the Closing Date to the extent approved by the Bank in writing.
"IRS": the Internal Revenue Service or any entity succeeding to any of its
principal functions under the Code.
"L/C Outstanding Amount": at any time, the undrawn amount (or Equivalent
Amount thereof) at such time of any letter of credit issued hereunder, plus the
amount (or Equivalent Amount thereof) of all drafts or drawings paid or accepted
by the Bank or an Offshore Credit Provider which have not yet been reimbursed to
the Bank or such Offshore Credit Provider, plus any other obligation or
liability of the Borrower or any Acceptable Subsidiary to the Bank or an
Offshore Credit Provider with respect to any letter of credit issued under this
Agreement.
"Local Currency": specified in subsection 2.01(c).
"Local Currency Advance": specified in subsection 2.01(c).
4
<PAGE>
"Material Adverse Effect": (a) a material adverse change in, or a material
adverse effect upon, the operations, business, properties, condition (financial
or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries
taken as a whole; (b) a material impairment of the ability of the Borrower or
any Acceptable Subsidiary to perform under any Credit Document; or (c) a
material adverse effect upon the legality, validity, binding effect or
enforceability of any Credit Document.
"National Currency Unit": the former national currency of a Participating
Member State.
"Offshore Credit Provider": a foreign office, foreign branch or foreign
affiliate of the Bank, acceptable to the Bank.
"Offshore Currency": specified in subsection 2.01(c).
"Offshore Currency Advance": specified in subsection 2.01(c).
"Offshore Rate": for each Offshore Rate Interest Period, the rate of
interest (rounded upward to the next 1/16th of 1%) determined pursuant to the
following formula:
Offshore Rate = Offered Rate
-------------------------------------
1.00 - Eurodollar Reserve Percentage
Where:
"Offered Rate" means the rate of interest at which deposits in
the applicable currency in the approximate amount of the Offshore Rate
Advance to be made and having a maturity comparable to such Offshore
Rate Interest Period would be offered by the Bank's Grand Cayman
Branch, Grand Cayman, British West Indies (or such other office as may
be designated for such purpose by the Bank), to major banks in the
offshore interbank market upon request of such banks at approximately
8:00 a.m. San Francisco time two Business Days prior to the first day
of such Offshore Rate Interest Period; provided, however, that with
respect to any Offshore Currency Advance to be denominated in the euro
or a National Currency Unit of a Participating Member State, it shall
mean the rate displayed on Telerate (also known as Dow Jones Markets)
page 3740 or 3750 (or any replacement page thereof or other applicable
display page designated by Telerate) as appropriate for deposits in
such currency in the approximate amount of the Offshore Currency
Advance to be made and having a comparable maturity to such Offshore
Rate Interest Period at approximately 11:00 a.m. (London time) two
TARGET Business Days prior to the first day of such Offshore Rate
Interest Period.
"Eurodollar Reserve Percentage" means, for any Offshore Rate
Interest Period, the maximum reserve percentage (expressed as a
decimal, rounded upward to the next 1/100th of 1%) in effect on the
first day of such Offshore Rate Interest Period (whether or not
applicable to the Bank) under regulations issued from time to time by
5
<PAGE>
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") having a term comparable to such Offshore
Rate Interest Period.
"Offshore Rate Advance": an Advance for which interest is based on the
Offshore Rate.
"Offshore Rate Interest Period": for each Offshore Rate Advance the period
commencing on the date the Offshore Rate Advance begins to bear interest at a
rate based on the Offshore Rate and ending one, two, three, or six months
thereafter, as requested by the Borrower; provided, however, that the last day
of each Offshore Rate Interest Period shall be determined in accordance with the
practices of the applicable offshore interbank markets as from time to time in
effect, and provided further that no such interest period shall extend beyond
the Final Maturity Date.
"Participating Member State": each country so described in any EMU
Legislation.
"PBGC": the Pension Benefit Guaranty Corporation or any entity succeeding
to any of its principal functions under ERISA.
"Pension Plan": a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA which the Borrower 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 plan years.
"Plan": an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Borrower sponsors or maintains or to which the Borrower makes, is
making, or is obligated to make contributions and includes any Pension Plan.
"Reference Rate": for any day, the rate of interest in effect for such day
as publicly announced from time to time by the Bank as its "reference rate" or
"prime rate." It 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
or prime rate announced by the Bank shall take effect at the opening of business
on the day specified in the public announcement of such change.
"Reference Rate Advance": an Advance that bears interest based on the
Reference Rate.
"Reportable Event": 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.
"Revolving Facility": the line of credit described in Section 2.01.
7
<PAGE>
"Spot Rate": for a currency, the rate quoted by the Bank as the spot rate
for the purchase by the Bank of such currency with another currency through its
Foreign Exchange Trading Center #5193, San Francisco, California, or such other
of the Bank's offices as it may designate from time to time, at approximately
8:00 a.m. (San Francisco time) on the date two Business Days prior to the date
as of which the foreign exchange computation is made.
"Subsidiary": of the Borrower, any corporation, association, partnership,
joint venture, or other business entity of which more than 50% of the voting
stock or other equity interests (in the case of entities other than
corporations), is owned or controlled directly or indirectly by the Borrower or
one or more Subsidiaries of the Borrower or a combination thereof.
"Target Business Day": specified in the definition of "Business Day."
"Unfunded Pension Liability": 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.
1.02 Financial Requirements. Unless otherwise specified in this Agreement,
all accounting terms used in this Agreement shall be interpreted, all financial
computations required under this Agreement shall be made, and all financial
information required under this Agreement shall be prepared, in accordance with
generally accepted accounting principles in effect from time to time in the
United States, consistently applied.
ARTICLE II
The Credit Facilities
2.01 The Revolving Facility. (a) From time to time during the Availability
Period, subject to the terms and provisions hereof, the Bank, on a revolving
basis, will (i) make Advances to the Borrower or an Acceptable Subsidiary, (ii)
create and issue commercial and standby letters of credit for the Borrower's or
an Acceptable Subsidiary's account, and (iii) cause to be issued Bank Guaranties
for the Borrower's or an Acceptable Subsidiary's account.
(b) This amendment and restatement of the Original Credit Agreement
shall not be deemed a repayment, satisfaction, cancellation or novation of
any credit outstanding thereunder or any other obligations of the Borrower
or its Subsidiaries under the Original Credit Agreement or any of documents
or instruments given in connection therewith, which shall instead continue
and constitute obligations hereunder and under the other Credit Documents.
All such documents or instruments given in connection therewith shall be
deemed to be Credit Documents hereunder, and all guaranties issued by the
Borrower with respect to credit extended or which may be extended by the
Bank to its Subsidiaries shall remain in full force and effect and shall be
deemed to be issued hereunder.
(c) Advances hereunder may be made in (i) dollars ("Dollar Advances")
to the Borrower or an Acceptable Subsidiary, (ii) in a lawful currency
other than dollars which is freely transferable and convertible into
dollars and is traded in the offshore interbank currency markets at the
time of the Advance, including the euro, but not including any National
Currency Unit (an "Offshore Currency") ("Offshore Currency Advances") to
the Borrower or an Acceptable Subsidiary, or (iii) in a lawful currency
other than dollars which is available at a branch or affiliate of the Bank
located in a country other than the United States and is the legal tender
of that country where the branch or affiliate is located (a "Local
Currency") ("Local Currency Advances") to an Acceptable Subsidiary.
(d) The aggregate of (i) all Dollar Advances, (ii) the Equivalent
Amount of all Offshore Currency Advances and Local Currency Advances, (iii)
the L/C Outstanding Amount of all letters of credit, and (iv) the Bank
Guaranty Outstanding Amount of all Bank Guaranties may not exceed at one
time the Credit Limit.
2.02 Advances Under the Revolving Facility. (a) Subject to the other
provisions of this Section, Dollar Advances under the Revolving Facility shall
bear interest at a rate per annum equal to the Reference Rate. The Borrower
shall pay or cause the applicable Acceptable Subsidiary to pay interest monthly,
on the last day of each month until the Final Maturity Date, on which date all
accrued and unpaid interest shall be due and payable. The Borrower shall repay
or cause the applicable Acceptable Subsidiary to repay the principal amount of
each Reference Rate Advance on the date such advance is converted into an
Offshore Rate Advance under subsection (b) below, and on the Final Maturity
Date.
(b) In lieu of the interest rate described above, the Borrower or the
applicable Acceptable Subsidiary may elect during the Availability Period
to have all or portions of Advances under the Revolving Facility be in
dollars or an Offshore Currency and bear interest at the Offshore Rate plus
1.00% per annum during an Offshore Rate Interest Period, subject to the
following requirements:
(i) Each Offshore Rate Advance shall be, if in Dollars, for an
amount not less than $500,000, or, if in an Offshore
Currency, in a minimum amount acceptable to the Bank.
(ii) The Borrower shall pay or cause the applicable Acceptable
Subsidiary to pay interest on each Offshore Rate Advance on
the last day of the Offshore Rate Interest Period for such
Advance; provided, however, that if any Interest Period for
a Offshore Rate Advance exceeds one month, interest shall
also be payable on the date which falls one month after the
beginning of such Interest Period and on each date which
falls one month after any such interest payment date. The
Borrower shall repay or cause the applicable Acceptable
Subsidiary to repay the principal balance of each Offshore
Rate Advance on the last day of the Offshore Rate Interest
Period for such Advance, and (if sooner occurring) on the
Final Maturity Date.
(iii) Any payment of an Offshore Rate Advance prior to the last
day of the Offshore Rate Interest Period for such Advance,
whether voluntary, by reason of acceleration or otherwise,
including any mandatory payments required under this
8
<PAGE>
Agreement and applied by the Bank to an Offshore Rate
Advance, shall be accompanied by the amount of accrued
interest on the amount repaid and by the amount (if any)
required by Section 3.11.
(c) Intentionally Omitted.
(d) For purposes of determining the Borrower's and any applicable
Acceptable Subsidiary's compliance with subsection 2.01(d), the Equivalent
Amount of Offshore Currency Advances shall be determined, and redetermined
by the Bank as of the applicable borrowing date in respect of such Advance
(including the date such Advance was converted into an Offshore Currency
Advance under subsection 2.02(b)), and on the last Business Day of each
month.
2.03 Commercial Letters of Credit under the Revolving Facility. (a) Each
commercial letter of credit shall, except as provided in subsection 2.03(b), be
denominated in dollars and issued pursuant to the terms and conditions hereof
and of a Bank standard form Application and Security Agreement for Commercial
Letter of Credit (or such other form as the Bank may require) executed by the
Borrower or an Acceptable Subsidiary.
(b) The Bank or any Offshore Credit Provider may, from time to time
during the Availability Period, in its sole discretion, issue commercial
letters of credit denominated in Local Currencies to Acceptable
Subsidiaries. Neither the Bank nor any Offshore Credit Provider shall have
any obligation to issue any such commercial letters of credit denominated
in Local Currencies unless the Bank and the relevant Acceptable Subsidiary
agree, at the time of such Acceptable Subsidiary's request for such a
letter of credit, on the repayment terms and other material provisions for
such letter of credit and the Borrower or such Acceptable Subsidiary shall
execute such applications, agreements and additional documentation as the
Bank or the Offshore Credit Provider may require relating to such letter of
credit.
(c) Each commercial letter of credit shall:
(i) expire on or before 180 days after the date such letter of
credit is issued, but in no event later than the Final
Maturity Date;
(ii) require drafts payable in dollars (or, in the case of
letters of credit issued under subsection 2.03(b), in the
applicable currency) at sight or up to 180 days after sight;
and
(iii) be otherwise in form and substance and in favor of
beneficiaries and for purposes satisfactory to the Bank.
(d) The Borrower shall pay or cause the applicable Acceptable
Subsidiary to pay to the Bank or the applicable Offshore Credit Provider
issuance fees, negotiation fees, and other fees at the times and in the
amounts the Bank or the Offshore Credit Provider advises the Borrower from
time to time as being applicable to the Borrower's or the Acceptable
Subsidiary's commercial letters of credit.
(e) Each draft paid by the Bank or an Offshore Credit Provider under a
commercial letter of credit issued hereunder shall be reimbursed by the
Borrower or the applicable Acceptable Subsidiary to the Bank or such
Offshore Credit Provider on the date such draft is paid by the Bank or the
Offshore Credit Provider. Any sum owed to the Bank or an Offshore Credit
Provider with respect to a commercial letter of credit issued for the
Borrower's or any Acceptable Subsidiary's account which is not paid when
due shall, at the option of the Bank in each instance, be deemed to be an
Advance to the Borrower outstanding under the Revolving Facility and shall
thereafter bear interest at the Reference Rate.
(f) At the expiration of the Availability Period, the Bank may require
the Borrower to provide or cause the applicable Acceptable Subsidiary to
provide cash collateral in the amount of the L/C Outstanding Amount of any
commercial letters of credit outstanding under this Agreement, and, in
addition to any other rights or remedies which the Bank may have under this
Agreement or otherwise, upon the occurrence of an Event of Default, the
Bank may require the Borrower to provide or cause the applicable Acceptable
Subsidiary to provide cash collateral in the amount of the L/C Outstanding
Amount of any commercial letters of credit outstanding under this
Agreement.
2.04 Standby Letters of Credit Under the Revolving Facility. (a) Each
standby letter of credit shall, except as provided in subsection 2.04(b), be
denominated in dollars and issued pursuant to the terms and conditions hereof
and of a Bank standard form Application and Agreement for Standby Letter of
Credit (or such other form as the Bank may require) executed by the Borrower or
an Acceptable Subsidiary.
(b) The Bank or any Offshore Credit Provider may, from time to time
during the Availability Period, in its sole discretion, issue standby
letters of credit denominated in Local Currencies to Acceptable
Subsidiaries. Neither the Bank nor any Offshore Credit Provider shall have
any obligation to issue any such standby letters of credit denominated in
Local Currencies unless the Bank and the relevant Acceptable Subsidiary
agree, at the time of such Acceptable Subsidiary's request for such a
letter of credit, on the repayment terms and other material provisions for
such letter of credit and the Borrower or such Acceptable Subsidiary shall
execute such applications, agreements and additional documentation as the
Bank or the Offshore Credit Provider may require relating to such letter of
credit.
(c) Each standby letter of credit shall: (i) expire on or before one
year after the date such letter of credit is issued, but in no event later
than the Final Maturity Date; and (ii) be otherwise in form and substance
and in favor of beneficiaries and for purposes satisfactory to the Bank.
(d) The Borrower shall pay or cause the applicable Acceptable
Subsidiary to pay to the Bank a non-refundable fee equal to 1.00% per annum
of the outstanding undrawn amount of each standby letter of credit issued
hereunder for its account or for the account of an Acceptable Subsidiary
(with a minimum fee of $250), payable annually in advance, and calculated
on the basis of the face amount outstanding on the day the fee is
calculated, or, in the case of standby letters of credit issued to an
Acceptable Subsidiary and denominated in a Local Currency, such fees as are
applicable to such letter of credit pursuant to subsection 2.04(b).
However, if an Event of Default exists, at the option of the Bank, the
amount of the fee shall be increased to 3% per annum, commencing on the day
the Bank provides notice of the increase to the Borrower, or such fees as
are applicable to a standby letter of credit denominated in a Local
Currency pursuant to subsection 2.04(b). The Borrower shall also pay or
cause the applicable Acceptable Subsidiary to pay such other fees and
commissions at the times and in the amounts the Bank advises the Borrower
from time to time as being applicable to the Borrower's or Acceptable
Subsidiaries' standby letters of credit.
(e) Each draft paid by the Bank or an Offshore Credit Provider under a
standby letter of credit issued hereunder shall be reimbursed by the
Borrower or the Acceptable Subsidiary to the Bank or such Offshore Credit
Provider on the date such draft is paid by the Bank or the Offshore Credit
Provider. Any sum owed to the Bank or an Offshore Credit Provider with
respect to a standby letter of credit issued for the Borrower's or an
Acceptable Subsidiary's account which is not paid when due shall, at the
option of the Bank in each instance, be deemed to be an Advance to the
Borrower outstanding under the Revolving Facility and shall thereafter bear
interest at the Reference Rate.
(f) At the expiration of the Availability Period, the Bank may require
the Borrower to provide or cause the applicable Acceptable Subsidiary to
provide cash collateral in the amount of the L/C Outstanding Amount of any
standby letters of credit outstanding under this Agreement, and, in
addition to any other rights or remedies which the Bank may have under this
Agreement or otherwise, upon the occurrence of an Event of Default, the
Bank may require the Borrower to provide or cause the applicable Acceptable
Subsidiary to provide cash collateral in the amount of the L/C Outstanding
Amount of any standby letters of credit outstanding under this Agreement.
(g) The aggregate of the L/C Outstanding Amount in respect of standby
letters of credit and the Bank Guaranty Outstanding Amount may not exceed
at any time $10,000,000.
2.05 Local Currency Advances. (a) From time to time during the Availability
Period, the Bank or any Offshore Credit Provider may, in its sole discretion,
make Local Currency Advances to Acceptable Subsidiaries.
(b) Neither the Bank nor any Offshore Credit Provider shall have any
obligation to make any Local Currency Advance unless the following
conditions are satisfied:
(i) the Bank and the relevant Acceptable Subsidiary agree, at
the time of such Acceptable Subsidiary's request for a Local
Currency Advance, on the currency, the amount, the principal
payment date(s), the interest rate and payment date(s), the
prepayment and overdue payment terms, and the reserve, tax
and other material provisions for such Advance; and
(ii) The Borrower and such Acceptable Subsidiary shall execute
such additional documentation as the Bank or such Offshore
Credit Provider may require relating to each Local Currency
Advance.
2.06 Bank Guaranties. (a) From time to time during the Availability Period,
the Bank may, in its sole discretion, issue Bank Guaranties to the Borrower and
to Acceptable Subsidiaries. Each Bank Guaranty shall be issued by an Offshore
Credit Provider and pursuant to the laws of the jurisdiction in which such
Offshore Credit Provider is located and subject to any other applicable law.
Each Bank Guaranty shall be issued pursuant to the terms and conditions hereof
and of a Bank standard form indemnity agreement and any other Bank standard
forms for guaranties executed by the Borrower or the relevant Acceptable
Subsidiary.
(b) Each Bank Guaranty shall:
(i) expire on or before the date which is one year after the
date it is issued, but in any event no later than the Final
Maturity Date; and
(ii) be otherwise in form and substance and in favor of
beneficiaries and for purposes satisfactory to the Bank.
(c) The Borrower or the relevant Acceptable Subsidiary shall pay the
Offshore Credit Provider issuance fees and other fees at the times and in
the amounts the Bank advises the Borrower or the Acceptable Subsidiary from
time to time as being applicable to Bank Guaranties issued for the
Borrower's or the Acceptable Subsidiary's account.
(d) Each payment by the Offshore Credit Provider under a Bank Guaranty
shall be reimbursed by the Borrower or the Acceptable Subsidiary to the
Offshore Credit Provider on the date of such payment. Any sum owed to the
Offshore Credit Provider with respect to a Bank Guaranty issued under this
Section which is not paid when due shall, at the option of the Offshore
Credit Provider in each instance, be deemed to be an Advance to the
Borrower by the Bank outstanding under the Revolving Facility and shall
thereafter bear interest at the Reference Rate.
(e) At the expiration of the Availability Period, the Bank may require
the Borrower to provide or cause the applicable Acceptable Subsidiary to
provide cash collateral in the amount of the Bank Guaranty Outstanding
Amount, and, in addition to any other rights or remedies which the Bank may
have under this Agreement or otherwise, upon the occurrence of an Event of
Default, the Bank may require the Borrower to provide or cause the
applicable Acceptable Subsidiary to provide cash collateral in the amount
of the Bank Guaranty Outstanding Amount.
(f) The aggregate of the Bank Guaranty Outstanding Amount and the L/C
Outstanding Amount in respect of standby letters of credit may not exceed
at any time $10,000,000.
2.07 Optional Prepayment. Subject to Section 3.11, the Borrower or the
applicable Acceptable Subsidiary may, at any time or from time to time, upon not
less than three Business Days' irrevocable notice to the Bank, prepay Advances
in whole or in part. If such notice is given by the Borrower or the applicable
Acceptable Subsidiary, the prepayment amount specified therein shall be due and
payable on the date specified therein, together with accrued interest to the
date of repayment on the amount so prepaid.
2.08 Mandatory Payment. If at any time and for any reason the total amount
of credit outstanding under this Agreement exceeds the limitations set forth
herein, the Borrower shall or shall cause the applicable Acceptable Subsidiary
to, subject to Section 3.11, pay to the Bank, upon demand, the amount of the
excess; provided, that if the foregoing applies due to a change in applicable
rates of exchange between Dollars and Offshore Currencies or Local Currencies,
the Borrower shall be obligated to pay such amount only if the excess is greater
than $500,000 or the Equivalent Amount thereof. Payments under this Section may
be applied to the obligations of the Borrower or the Acceptable Subsidiaries to
the Bank in the order and manner as the Bank in its discretion may determine.
Payments to be applied to outstanding letters of credit and drafts accepted
under letters of credit and Bank Guaranties may, at the Bank's option, be used
to prepay, or held as cash collateral to secure, the Borrower's or any
Acceptable Subsidiary's obligations to the Bank or any Offshore Credit Provider
with respect thereto.
2.09 Commitment Fee. The Borrower shall pay to the Bank a commitment fee at
the rate of 0.20% per annum on the average daily unused portion of the credit
provided under this Agreement. For purposes of computing the unused portion, the
L/C Outstanding Amount and the Bank Guaranty Outstanding Amount shall be deemed
to be usage. The commitment fee shall be computed on a calendar quarter basis,
except for the first period which shall commence on May 1, 1997 and end on June
30, 1997, and the last period which shall end on the last day of the
Availability Period. The commitment fee shall be payable in arrears on June 30,
1997, on the last day of each successive quarter thereafter, and on the last day
of the Availability Period.
2.10 Default Rate. Upon the occurrence and during the continuation of any
Event of Default, and without constituting a waiver of any such Event of
Default, (a) Advances under the Revolving Facility shall at the option of the
Bank bear interest at a rate per annum which is 2.00% per annum higher than the
rate of interest otherwise provided under this Agreement, and (b) Offshore
Currency Advances shall at the option of the Bank be redenominated and converted
into the Equivalent Amount of Reference Rate Advances in Dollars.
2.11 Early Termination of Commitment. The Borrower may at any time
terminate the Bank's (including any Offshore Credit Provider's) commitment to
extend credit hereunder by giving no less than five Business Days' prior notice
to the Bank and paying in full the entire amount of credit outstanding hereunder
(including the L/C Outstanding Amount and Bank Guaranty Outstanding Amount),
together with any sums due under Section 3.11. Payments to be applied to
outstanding letters of credit and drafts accepted under letters of credit and
Bank Guaranties may, at the Bank's option, be used to prepay, or held as cash
collateral to secure, the Borrower's and Acceptable Subsidiaries' obligations to
the Bank with respect thereto. All accrued commitment fees to, but not including
the effective date of any termination of the commitment, shall be paid on the
effective date of such termination.
2.12 Denomination and Payments in the Euro; Additional Changes. Each
obligation under this Agreement of a party hereto which would have been
denominated in a National Currency Unit but for the introduction of the euro,
shall instead be denominated in, or redenominated into, as applicable, the euro;
provided that, if and to the extent that any EMU Legislation allows amounts
denominated in the euro to be paid by crediting an account of the creditor
within a country in either the euro or the National Currency Unit of that
country, such amounts may be paid hereunder in either the euro or such National
Currency Unit. The provisions of this Agreement relating to the euro and
National Currency Units shall be subject to such further changes as the Bank may
from time to time in its reasonable discretion notify to the Borrower to be
necessary or appropriate to reflect the changeover to the euro in Participating
Member States.
ARTICLE III
Extensions of Credit, Payments and Interest Calculations
3.01 Requests for Credit. Each request for an extension of credit shall be
made in writing on a form acceptable to the Bank or in any other manner
acceptable to the Bank.
3.02 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrower or an Acceptable Subsidiary under this Agreement shall
be made in the funds and at such branch of the Bank as the Bank may from time to
time select. All payments by the Borrower or an Acceptable Subsidiary under this
Agreement of amounts denominated in the euro or a National Currency Unit shall
be made in immediately available, freely transferable, cleared funds to the
account of the Bank in the principal financial center in such Participating
Member State, as from time to time designated by the Bank for such purpose. The
Bank shall not be liable to the Borrower or any Acceptable Subsidiary in any way
whatsoever for any delay, or the consequences of any delay, in the crediting to
any account of any amount denominated in the euro or a National Currency Unit.
3.03 Branch Accounts. Each extension of credit under this Agreement shall
be made for the account of such branch, office, or affiliate of the Bank as the
Bank may from time to time select.
3.04 Evidence of Indebtedness. Principal, interest, and all other sums due
to the Bank (or any Offshore Credit Provider) under this Agreement shall be
evidenced by entries in records maintained by the Bank (or such Offshore Credit
Provider), and, if required by the Bank, by a promissory note or notes. Each
payment on and any other credits with respect to principal, interest, and all
other sums due under this Agreement shall be evidenced by entries to records
maintained by the Bank or such Offshore Credit Provider. The loan accounts or
records maintained by the Bank or any Offshore Credit Provider shall be
conclusive absent manifest error of the amount of the credit extended hereunder
and the interest and payments thereon. Any failure to so record or any error in
doing so shall not, however, limit or otherwise affect the obligation of the
Borrower or any Acceptable Subsidiary hereunder to pay any amount owing.
3.05 Interest Calculation. Interest based on the Reference Rate shall be
computed on the basis of a 365/366-day year, actual days elapsed. All other
interest and fees payable under this Agreement shall be computed on the basis of
a 360 day year and actual days elapsed, which results in more interest or a
larger fee than if a 365-366 day year were used; provided, that, the basis of
accrual of interest or fees with respect to the euro shall be consistent with
the convention and practice for the euro in the London interbank market or other
applicable interbank market, as the case may be.
3.06 Late Payments; Compounding. Any sum payable by the Borrower hereunder
(including unpaid interest) if not paid when due shall bear interest (payable on
demand) from its due date until payment in full at a rate per annum equal to the
Reference Rate plus 2.00% per annum. At the option of the Bank, in each
instance, any sum payable hereunder which is not paid when due (including unpaid
interest) may be added to principal of the Revolving Facility and shall
thereafter bear interest at the rate applicable to principal.
3.07 Business Day. Any sum payable by the Borrower or an Acceptable
Subsidiary hereunder which becomes due on a day which is not a Business Day
shall be due on the next Business Day after such due date, unless, in the case
of an Offshore Rate Loan, the result of such extension would be to carry such
Offshore Rate Interest Period into another calendar month, in which event such
Offshore Rate Interest Period shall end on the immediately preceding Business
Day. Any payments received by the Bank or an Offshore Credit Provider on a day
which is not a Business Day shall be deemed to be received on the next Business
Day after such date of receipt.
3.08 Taxes and Other Charges. (a) (i) If any taxes (other than taxes on net
income (A) imposed by the country or any subdivision of the country in which the
Bank's principal office or actual lending office is located and (B) measured by
the United States taxable income the Bank would have received if all payments
under or in respect of this Agreement and any instrument or agreement required
hereunder were exempt from taxes levied by the Borrower's country) are at any
time imposed on any payments under or in respect of this Agreement or any
instrument or agreement required hereunder including, but not limited to,
payments made pursuant to this Section, the Borrower shall pay all such taxes
and shall also pay to the Bank, at the time interest is paid, all additional
amounts which the Bank specifies as necessary to preserve the after-tax yield
the Bank would have received if such taxes had not been imposed.
(ii) The additional amounts necessary to preserve the after-tax
yield the Bank would have received if such taxes had not
been imposed shall be calculated pursuant to the formula:
(w)(t)(i)
y = - - - - - - -
1-w-t
where the terms are defined as follows:
y = additional payment to be made to the Bank
w = withholding tax rate levied by foreign government
t = the Bank's combined Federal and state tax rate
i = amount of interest to be paid on Credit (computed
by using the base rate plus quoted spread)
1 = one
(b) The Borrower will provide the Bank with original tax receipts,
notarized copies of tax receipts, or such other documentation as will prove
payment of tax in a court of law applying the United States Federal Rules
of Evidence, for all taxes paid by the Borrower pursuant to subsection (a)
above. The Borrower will deliver receipts to the Bank within 30 days after
the due date for the related tax.
3.09 Illegality. (a) If the Bank determines that (i) the introduction of
any law, rule, regulation, treaty, or determination of an arbitrator or court or
other governmental authority or any change in or in the interpretation or
administration thereof has made it unlawful, or that any central bank or other
governmental authority has asserted that it is unlawful, for the Bank (directly
or through any Offshore Credit Provider) to make or extend any Advance or other
credit under this Agreement, or (ii) any order, judgment, or decree of any
governmental authority or arbitrator purports by its terms to enjoin or restrain
the Bank (or any Offshore Credit Provider) from making or extending any Advance
or other credit hereunder, then, on notice thereof by the Bank to the Borrower,
the obligation of the Bank to make or extend such Advance or other credit
(directly or through any Offshore Credit Provider) shall be suspended until the
Bank shall have notified the Borrower that the circumstances giving rise to such
determination no longer exist.
(b) If the Bank determines that it is unlawful for it or any
applicable Offshore Credit Provider to maintain any Offshore Rate Advance
or Local Currency Advance hereunder, the Borrower shall prepay or shall
cause the applicable Acceptable Subsidiary to prepay in full all Offshore
Rate Advances or Local Currency Advances, as the case may be then
outstanding, together with interest accrued thereon, either on the last day
of the applicable Offshore Rate Interest Period or the interest period
applicable to the Local Currency Advance if the Bank or such Offshore
Credit Provider may lawfully continue to maintain such Advances to such day
and such loans have an interest period, or immediately, if the Bank may not
lawfully continue to maintain such Advances or such loans have no interest
period, together with any amounts required to be paid in connection
therewith pursuant to Section 3.11.
3.10 Increased Costs. The Borrower shall pay to the Bank, on demand, the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks (but not including any such statute, regulation,
request or requirement which has the effect of changing the reserve requirements
to the extent already included in the calculation of the Offshore Rate). The
costs and losses will be allocated to this facility in a manner determined by
the Bank, using any reasonable method. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and
commitments for credit; and
(c) the introduction of, changeover to or operation of the euro in a
Participating Member State.
3.11 Funding Losses. The Borrower 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 the failure of the Borrower (or any Acceptable Subsidiary) to
make any payment or prepayment of principal of any Advance hereunder made at a
rate of interest related to the Offshore Rate (including payments made after any
acceleration thereof), or to borrow at such a rate, or the prepayment of an
Advance which bears interest at such a rate on a day which is not the last day
of the interest period with respect thereto (including payments made after any
acceleration thereof or because the total amount of credit exceeds the
limitations set forth herein), or the redenomination and conversion, upon the
occurrence of any Event of Default, of an Advance which bears interest at such a
rate; including any such loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its Advances made at a rate
related to the Offshore Rate hereunder or from fees payable to terminate any
deposits from which such funds were obtained or deemed obtained.
3.12 Inability to Determine Rates. The Bank has no obligation to accept an
election for an Offshore Rate Advance if (a) deposits in the applicable currency
in the principal amount, and for the period equal to the interest period, for
such Advance are not available in the applicable funding market; or (b) the
Offshore Rate does not accurately reflect the cost of such Advance; or (c) with
respect to Offshore Currency Advances denominated in the euro, the euro has
ceased to be utilized as the basic accounting unit of the European Community.
Nothing contained herein shall, however, obligate the Bank to obtain the funds
for any Advance in any particular manner.
3.13 Certificate of the Bank. If the Bank claims any reimbursement or
compensation pursuant to Section 3.10 or Section 3.11, then the Bank shall
deliver to the Borrower a certificate setting forth in reasonable detail the
amount payable to the Bank thereunder and such certificate shall be conclusive
and binding on the Borrower in the absence of manifest error.
3.14 Debits to Borrower's Account. The Borrower hereby authorizes the Bank
to debit the Borrower's deposit account number 1233012785 at the Global Payments
Operations, Concord, CA office of the Bank in the amount of principal, interest,
fees, or any other amount due under this Agreement or under any instrument or
agreement required under this Agreement. The Bank may, at its option, debit the
account on the date such amounts become due, or, if such due date is not a
Business Day, on the next Business Day after such due date. If there are
insufficient funds in the account to cover the amount debited to the accounts in
accordance with this Section, such debit may be reversed in whole or in part, at
the option of the Bank in its sole discretion, and the amount not debited shall
be deemed to remain unpaid.
3.15 Survival. The agreements and obligations of the Borrower under
Sections 3.08 through 3.11 shall survive the expiration or termination of the
commitment to extend credit hereunder and the payment of all other obligations
of the Borrower or any Acceptable Subsidiary hereunder or under the other Credit
Documents.
ARTICLE IV
Conditions to Availability of Credit
The Bank's obligation to extend credit under this Agreement is subject to
the Bank's receipt of the following, each in form and substance satisfactory to
the Bank:
4.01 Conditions to First Extension of Credit. Before the first extension of
credit:
(a) This Agreement, executed by the Borrower;
(b) Satisfactory evidence of due authorization of the execution,
delivery, and performance by the Borrower and any Acceptable Subsidiary of
this Agreement and any other Credit Documents, including certified
resolutions, incumbency certificate;
(c) A certificate of an appropriate officer of the Borrower as to the
matters set forth in Section 4.02(a) and (b);
(d) A copy of the Borrower's current Investment Guidelines, which must
be satisfactory to the Bank;
(e) Payment of a non-refundable amendment and restatement fee in the
amount of $_______, which amount the Borrower covenants to pay to the Bank
on demand, and payment of any other fee or expense required hereunder prior
to the first extension of credit;
(f) Such other approvals, opinions, documents or instruments as the
Bank may request.
4.02 Conditions to Each Extension of Credit. Before each extension or
renewal of credit (including pursuant to any election under Section 2.02(b)),
including the first:
(a) The representations and warranties of the Borrower contained in
this Agreement shall be true on and as of the date of each extension of
credit;
(b) Immediately prior to and immediately after giving effect to such
extension of credit, no Default or Event of Default shall exist;
(c) Executed originals of all Credit Documents required under Article
II shall have been delivered to the Bank.
Each request for an extension of credit hereunder shall constitute a
representation and warranty by the Borrower, as of the date of each such request
and as of the date of each extension of credit, that the conditions in this
Section are satisfied.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants that:
5.01 Corporate Existence and Power. The Borrower and each Subsidiary: (a)
is a corporation duly organized and existing under the laws of the jurisdiction
of its organization; (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
Credit Documents to which it is a party ; and (c) is duly qualified and properly
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 license or qualification.
5.02 Authorization. The execution, delivery, and performance by the
Borrower and each Acceptable Subsidiary of this Agreement and any other Credit
Document to which any of them is a party, have been duly authorized by all
necessary corporate action, and do not and will not:
(a) contravene the terms of any organizational or charter documents;
(b) conflict with or result in any breach or contravention of, or
the creation of any lien, security interest, or charge under, any
agreement, contract, indenture, document, or instrument to which the
Borrower or any Subsidiary is a party or by which any property is bound, or
any order, injunction, writ, or decree of any governmental authority to
which the Borrower or any Subsidiary or any of their respective property is
subject; or
(c) violate any law, rule, regulation, or determination of an
arbitrator or of a court or other governmental authority, in each case
applicable to or binding upon the Borrower or any Subsidiary or any of
their respective property.
5.03 Enforceability. This Agreement is a legal, valid, and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and the other Credit Documents and any other instrument or agreement
required under this Agreement, when executed and delivered, will be legal,
valid, binding, and enforceable in accordance with its terms against the
Borrower or the Acceptable Subsidiary, as applicable.
5.04 Compliance with Laws. Each of the Borrower and its Subsidiaries is in
compliance with all foreign, federal, state and local laws, rules, regulations
and determinations of arbitrators, courts and other governmental authorities
materially affecting the business, operations or property of the Borrower and
such Subsidiaries (including Environmental Laws).
5.05 Permits, Franchises. The Borrower or its Subsidiaries possess all
permits, memberships, franchises, contracts, and licenses required and all
trademark rights, trade name rights, patent rights, and fictitious name rights
necessary to enable the Borrower and its Subsidiaries to conduct the businesses
in which they are now engaged.
5.06 Litigation. There is no litigation, tax claim, proceeding,
governmental or administrative action, investigation, arbitration proceeding or
dispute pending, or, to the knowledge of the Borrower, threatened, against or
affecting the Borrower or any of its Subsidiaries or any of their properties,
the adverse determination of which would result in a Material Adverse Effect.
5.07 No Event of Default. There exists no Default or Event of Default.
5.08 Other Obligations. As of the Closing Date, the Borrower or its
Subsidiaries is not in default under any other agreement involving the borrowing
of money, the extension of credit, or the lease of real or personal property, to
which the Borrower or such Subsidiary is a party as borrower, guarantor,
installment purchaser, or lessee, except as disclosed in writing to the Bank
prior to the Closing Date.
5.09 Tax Returns. The Borrower has no knowledge of any material pending
assessments or adjustments with respect to its or its Subsidiaries' income tax
liabilities for any year, except as disclosed in writing to the Bank prior to
the Closing Date.
5.10 Information Submitted. All financial and other information that has
been submitted by the Borrower or a Subsidiary to the Bank, including the
Borrower's financial statement delivered to the Bank most recently prior to the
Closing Date: (a) in the case of financial statements, is prepared in accordance
with generally accepted accounting principles consistently applied; and (b) is
true and correct in all material respects and is complete insofar as may be
necessary to give the Bank true and accurate knowledge of the subject matter
thereof.
5.11 No Material Adverse Effect. Since December 31, 1996, there has been no
Material Adverse Effect.
5.12 ERISA Compliance. Except as specifically disclosed to the Bank in
writing prior to the Closing Date: (a) each Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law; (b) there are no pending, or to the best knowledge of
Borrower, 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; (c) there has been no
prohibited transaction or other violation of the fiduciary responsibility rule
with respect to any Plan which could reasonably result in a Material Adverse
Effect; (d) no ERISA Event has occurred or is reasonably expected to occur with
respect to any Pension Plan; (e) no Pension Plan has any Unfunded Pension
Liability; (f) the Borrower has not incurred, nor does it reasonably expect 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); (g) no
trade or business (whether or not incorporated under common control with the
Borrower within the meaning of Section 414(b), (c), (m) or (o) of the Code)
maintains or contributes to any Pension Plan or other Plan subject to Section
412 of the Code; and (h) neither the Borrower or entity under common control
with the Borrower in the preceding sentence has ever contributed to any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.
5.13 Environmental Matters. (a) (i) The properties of the Borrower and its
Subsidiaries do not contain and have not previously contained (at, under, or
about any such property) any Hazardous Substances or other contamination (A) in
amounts or concentrations that constitute or constituted a violation of, or
could give rise to liability under, any Environmental Laws, (B) which could
interfere with the continued use, occupation or operation of such property, (C)
which could impair the fair market value thereof or (D) in levels or
concentrations requiring cleanup or other management under applicable standards
or guidelines of foreign, federal, state or local environmental agencies; and
(ii) there has been no transportation or disposal of Hazardous Substances from,
nor any release or threatened release of Hazardous Substances at or from, any
property of the Borrower or any of its Subsidiaries in violation of or in any
manner which could give rise to liability under any Environmental Laws.
(b) Neither the Borrower nor any of its Subsidiaries has received or
is aware of any material claim or notice of material violation, alleged
material violation, non-compliance, liability or potential liability
regarding environmental matters, Hazardous Substances or compliance with
Environmental Laws with regard to the properties or operations of the
Borrower or any of its Subsidiaries, nor does the Borrower have knowledge
or reason to believe that any such action is being contemplated,
considered, or threatened.
5.14 Year 2000. On the basis of a comprehensive review and assessment of
the Borrower's and its Subsidiaries' systems and equipment and inquiry made of
the Borrower's and its Subsidiaries' material suppliers and vendors, the
Borrower reasonably believes that the "Year 2000 problem" (that is, the
inability of computers, as well as embedded microchips in non-computing devices,
to perform properly date-sensitive functions with respect to certain dates prior
to and after December 31, 1999), including costs of remediation, will not result
in a Material Adverse Effect. The Borrower and its Subsidiaries will have
developed contingency plans by October 31, 1999 to ensure uninterrupted business
operation of systems and equipment which are essential to Borrower's business
operations in the event of failure of their own or a third party's systems or
equipment due to the Year 2000 problem, including those of vendors and
suppliers.
ARTICLE VI
Affirmative Covenants
So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's and any Acceptable Subsidiaries'
obligations under this Agreement and any other Credit Document:
6.01 Notices of Certain Events. The Borrower shall promptly give written
notice to the Bank of:
(a) all litigation, proceedings or actions affecting the Borrower or
its Subsidiaries where the amount claimed is $1,000,000 or more;
(b) any substantial dispute which may exist between the Borrower or
its Subsidiaries and any governmental regulatory body or law enforcement
authority;
(c) any Default or Event of Default;
(d) any of the representations and warranties in Article V ceases to
be true and correct; and
(e) any other matter which has resulted or could reasonably be
expected to result in a Material Adverse Effect.
6.02 Financial and Other Information. The Borrower shall deliver to the
Bank in form and detail satisfactory to the Bank, and in such number of copies
as the Bank may request:
(a) Within 100 days after the end of each fiscal year, (i) the
Borrower's consolidated financial statements for such year audited by a
certified public accountant together with an unqualified opinion of such
certified public accountant and including, at a minimum, the Borrower's
balance sheet and statements of income, retained earnings, and cashflow;
and (ii) a complete copy of Borrower's Form 10-K Annual Report submitted to
the Securities and Exchange Commission for such year;
(b) Within 50 days after the end of each fiscal quarter, (i) the
Borrower's consolidated financial statements for such period prepared by
the Borrower and including, at a minimum, the Borrower's balance sheet and
statements of income, retained earnings, and cash flow, and (ii) a complete
copy of Borrower's Form 10-Q Quarterly Report submitted to the Securities
and Exchange Commission for such quarter;
(c) Concurrently with the delivery of the financial statements
referred to in subsections 6.02(a) and (b) above, a Compliance Certificate;
(d) Within 10 days after the date of filing with the Securities and
Exchange Commission, copies of the Borrower's Form 8-K Current Reports;
(e) Promptly after any changes thereto, any changes to the Investment
Guidelines; and
(f) Promptly upon request, such other materials and information
relating to the Borrower or its Subsidiaries as the Bank may request.
6.03 Books, Records, Audits and Inspections. The Borrower shall, and shall
cause its Subsidiaries to, maintain adequate books, accounts and records, and
prepare all financial statements required hereunder in accordance with generally
accepted accounting principles consistently applied, and in compliance with the
regulations of any governmental regulatory body having jurisdiction over the
Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses,
and permit employees or agents of the Bank at any reasonable time to inspect the
Borrower's and its Subsidiaries' properties, and to examine or audit the
Borrower's and its Subsidiaries' books, accounts, and records and make copies
and memoranda thereof.
6.04 Use of Facility. The Borrower shall use and shall cause the Acceptable
Subsidiaries to use the credit facility provided herein solely for working
capital and other general corporate purposes not in contravention of any
requirement of law.
6.05 Insurance. The Borrower shall, and shall cause its Subsidiaries to,
maintain and keep in force insurance of the types and in amounts customarily
carried in lines of businesses similar to those of the Borrower and its
Subsidiaries, as applicable, including fire, extended coverage, public liability
(including coverage for contractual liability), property damage (including use
and occupancy), business interruption, and workers' compensation, all carried by
insurers and in amounts satisfactory to the Bank, with loss payable endorsements
on such types of insurance as the Bank may request, and deliver to the Bank from
time to time, at the Bank's request, a copy of each insurance policy, or if
permitted by the Bank, a certificate of insurance setting forth all insurance
then in effect.
6.06 Compliance with Laws. The Borrower shall at all times comply with, and
cause its Subsidiaries to comply with, all laws, statutes (including any
fictitious name statute), rules, regulations, orders, and directions of any
governmental authority having jurisdiction over the Borrower or any of its
Subsidiaries or the business of the Borrower or any of its Subsidiaries
(including all Environmental Laws).
6.07 Change in Name, Structure or Location. The Borrower shall notify the
Bank in writing prior to any change in (a) the Borrower's name or the name of
any Acceptable Subsidiary, (b) the Borrower's or any Acceptable Subsidiary's
business or legal structure, or (c) the Borrower's or any Acceptable
Subsidiary's place of business or chief executive office if the Borrower has
more than one place of business.
6.08 Existence and Properties. The Borrower and each of its Subsidiaries
shall maintain and preserve its existence and all rights, privileges, and
franchises now enjoyed, conduct its business in an orderly, efficient, and
customary manner, keep all the its properties in good working order and
condition, and from time to time make all needed repairs, renewals, or
replacements thereto and thereof so that the efficiency of such property shall
be fully maintained and preserved.
6.09 Additional Acts. The Borrower shall perform, on request of the Bank,
such acts as may be necessary or advisable to perfect any lien or security
interest contemplated hereby or otherwise to carry out the intent of this
Agreement.
ARTICLE VII
Negative Covenants
So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's and any Acceptable Subsidiary's
obligations under this Agreement and any other Credit Document:
7.01 Other Indebtedness. The Borrower and its Subsidiaries shall not
create, incur, assume, or permit to exist any indebtedness or liabilities for or
resulting from borrowed money, loans, or advances, or for the deferred purchase
price of property under capital leases, whether secured or unsecured, matured or
unmatured, liquidated or unliquidated, joint or several, or become liable as a
surety, guarantor, accommodation endorser, or otherwise for or upon the
obligation of any other person, firm, corporation or other entity; provided,
however, that this Section shall not prohibit:
(a) the acquisition of goods, supplies, or merchandise on normal trade
credit;
(b) the execution of bonds or undertakings in the ordinary course of
its business as presently conducted;
(c) the endorsement of negotiable instruments received in the ordinary
course of its business as presently conducted;
(d) indebtedness for borrowed money to banks other than the Bank
incurred by Subsidiaries which does not exceed $5,000,000 in the aggregate
(including commitments and outstandings) outstanding at any time;
(e) indebtedness secured by purchase money liens permitted under
Section 7.02(f), provided that the aggregate of such indebtedness incurred
in any fiscal year does not exceed $10,000,000;
(f) guarantees by the Borrower or its Subsidiaries in favor of the
Bank; or
(g) guarantees by the Borrower of indebtedness incurred by
Subsidiaries which is permitted under subsection (d) of this Section 7.01.
7.02 Liens. The Borrower shall not, and shall not suffer or permit any of
its Subsidiaries to, create, assume, or suffer to exist any security interest,
deed of trust, mortgage, lien (including the lien of an attachment, judgment, or
execution), or encumbrance, securing a charge or obligation, on or of any of its
or their property, real or personal, whether now owned or hereafter acquired,
except: (a) security interests and deeds of trust in favor of the Bank; (b)
liens, security interests, and encumbrances in existence as of the date of this
Agreement and disclosed to the Bank in writing prior to the Closing Date; (c)
liens for current taxes, assessments, or other governmental charges which are
not delinquent or remain payable without any penalty; (d) liens in connection
with workers' compensation, unemployment insurance, or other social security
obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or
other like liens arising in the ordinary and normal course of business with
respect to obligations which are not due; and (f) purchase money security
interests in personal property hereafter acquired when the security interest
does not extend beyond the property purchased, the liability secured does not
exceed 100% of the cost thereof, and the aggregate amount of liabilities secured
by such property do not exceed, at any one time, $10,000,000.
7.03 Capital Assets. The Borrower on a consolidated basis shall not expend
or incur obligations for the acquisition of fixed or capital assets on a
cumulative basis of more than (i) $25,000,000 for the fiscal year ending
December 31, 1997, (ii) $30,000,000 for each of the fiscal years ending December
31, 1998 and December 31, 1999, and (iii) $37,500,000 for each of the fiscal
years ending December 31, 2000 and December 31, 2001.
7.04 Dividends. Neither the Borrower nor any of its Subsidiaries that is
not wholly-owned by the Borrower shall declare or pay any dividends or
distributions on any of its shares now or hereafter existing, or purchase,
redeem or otherwise acquire for value any of its shares, or create any sinking
fund in relation thereto, except for (i) dividends payable solely in its capital
stock and (ii) repurchases of its shares in an aggregate cumulative amount not
to exceed $10,000,000 after March 31, 1997.
7.05 Loans. Neither the Borrower nor any of its Subsidiaries shall make any
loans, advances, or other extensions of credit to any of the Borrower's or such
Subsidiary's executives, officers, or directors or shareholders (or any
relatives of any of the foregoing), or make loans, advances or other extensions
of credit to or invest in any other person, firm, corporation, or other entity,
other than (a) investments in cash equivalents; (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 Borrower 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 or other transactions
otherwise permitted under Section 7.06, provided that such acquisitions or other
transactions are undertaken in accordance with all applicable requirements of
law; and (e) other loans, advances, extensions of credit and investments in an
aggregate amount outstanding at any one time not to exceed $5,000,000.
7.06 Acquisitions, Liquidations and Mergers. The Borrower shall not, and
shall not suffer or permit any Subsidiary to, liquidate or dissolve or enter
into any consolidation, merger, partnership, joint venture, or other
combination, or to purchase control of, or the assets or business of, any other
person, firm, corporation or other entity; provided that this Section shall not
prohibit any such transaction where (i) the consolidated or merged entity or
partnership or joint venture or acquired assets or business involves business
activities and operations substantially the same as or related to the present
business activities and operations of the Borrower, and (ii) in the case of a
consolidation, merger or combination, the Borrower or such Subsidiary shall be
the surviving entity, and provided further that any Subsidiary may merge with
the Borrower, provided that the Borrower 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.
7.07 Sale of Assets. Neither the Borrower nor any of its Subsidiaries shall
(a) sell, lease, or otherwise dispose of its business or assets as a whole or
such as in the opinion of the Bank constitutes a substantial portion of its
business or assets; (b) sell or otherwise dispose of any of its accounts
receivable except in connection with the collection of same in the ordinary
course of business; (c) sell or otherwise dispose of any of its assets except
for full, fair and reasonable consideration; or (d) enter into any sale and
leaseback agreement covering any of its fixed or capital assets if the amount of
financing being extended pursuant to such agreement exceeds $5,000,000.
7.08 Business Activities. The Borrower and its Subsidiaries shall not
engage in any business activities or operations substantially different from or
unrelated to present business activities and operations.
7.09 Regulations G, T, U, and X. The Borrower shall not, and shall not
permit any of its Subsidiaries to, use any portion of the proceeds of any
Advances or extensions of credit hereunder, directly or indirectly, (i) to
purchase or carry margin stock (within the meanings of Regulations G, T, U, and
X of the FRB), (ii) to repay or otherwise refinance indebtedness of the Borrower
or others incurred to purchase or carry any such margin stock, (iii) to extend
credit for the purpose of purchasing or carrying any such margin stock, or (iv)
to acquire any security in any transaction that is subject to Section 13 or 14
of the Securities Exchange Act of 1934, as amended.
7.10 Intentionally Omitted.
7.11 Quick Ratio. The Borrower shall not permit at any time on a
consolidated basis its Quick Ratio to be less than 1.50: 1.00. For purposes of
this Agreement,
(a) "Quick Ratio" shall mean the ratio of (i) the sum of (A)
consolidated cash, (B) accounts receivable net of any reserves or offsets,
(C) short-term cash investments, (D) investment grade marketable securities
not classified as long-term investments, and (E) long-term investments not
to exceed $15,000,000 and in compliance with the Investment Guidelines, to
(ii) Current Liabilities; and
(b) "Current Liabilities" shall include all funded and unfunded
indebtedness under this Agreement and the other Credit Documents (including
undrawn amounts (or the Equivalent Amount thereof) of all letters of credit
and Bank Guaranties and drawn and unreimbursed obligations with respect
thereto).
7.12 Total Liabilities to Tangible Net Worth. The Borrower shall not permit
at any time on a consolidated basis the ratio of the Borrower's Total
Liabilities to Tangible Net Worth to exceed 0.75: 1.00. For purposes of this
Agreement,
(a) "Total Liabilities" shall include all funded and unfunded
indebtedness under this Agreement and the other Credit Documents (including
undrawn amounts (or the Equivalent Amount thereof) of all letters of credit
and Bank Guaranties and drawn and unreimbursed obligations with respect
thereto); and
(b) "Tangible Net Worth" means the gross book value of the assets of
the Borrower and its Subsidiaries (exclusive of goodwill, patents,
trademarks, trade names, organization expense, treasury stock (to the
extent included in gross assets), unamortized debt discount and expense,
deferred charges, capitalized software and other like intangibles and
excluding (i) loans from the Borrower or its Subsidiaries to any of its
employees, officers, or owners, and (ii) any value placed on any leasehold,
provided, however, that leasehold improvements may be included in the value
of the Borrower's consolidated assets) less (A) reserves applicable thereto
and (B) all liabilities including accrued and deferred income taxes.
7.13 Tangible Net Worth. The Borrower shall not permit at any time on a
consolidated basis its Tangible Net Worth to be less than $105,000,000 plus the
sum of (i) 75% of net income after income taxes (without subtracting losses)
earned in each quarterly accounting period commencing after March 31, 1997, plus
(ii) the net proceeds from any equity securities issued after March 31, 1997,
plus (iii) any increase in stockholders' equity resulting from the conversion of
debt securities to equity securities after March 31, 1997, less (iv) the lesser
of (a) $10,000,000 or (b) the amount of repurchases by the Borrower of its
equity securities after March 31, 1997.
7.14 Consecutive Quarterly Losses; Losses in One Quarter. The Borrower on a
consolidated basis shall not incur, (a) any quarterly net (after tax) or
operating loss in excess of $7,500,000 for the quarter ending June 30, 1997, (b)
any quarterly net (after tax) or operating loss in excess of $2,000,000 for the
quarter ending September 30, 1997, and (c) for the quarter ending December 31,
1997 and each quarter thereafter (i) any quarterly net (after tax) or operating
loss in any two consecutive fiscal quarters and (ii) any quarterly net (after
tax) or operating loss in excess of 5% of its consolidated Tangible Net Worth.
For purposes of clarification of clause (c), if there is a net (after tax) or
operating loss in the quarter ending September 30, 1997, the quarter ending
December 31, 1997 must be profitable.
ARTICLE VIII
Events of Default
8.01 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement:
(a) Failure to Pay. The Borrower or any Acceptable Subsidiary fails to
pay, when due, any installment of principal, or any interest, fee or any
other sum due under this Agreement or any other Credit Document in
accordance with the terms hereof or thereof.
(b) Breach of Representation or Warranty. Any representation or
warranty herein or in any other Credit Document proves to have been false
or misleading in any material respect when made or deemed made.
(c) Specific Defaults. The Borrower fails to perform or observe any
term, covenant or agreement contained in Section 6.01, 6.02, or 6.03 or
Article VII.
(d) Other Defaults. The Borrower or any Acceptable Subsidiary fails to
perform or observe any other term or covenant contained in this Agreement
or any Credit Document.
(e) Trade Suits. One or more suits are filed against the Borrower by a
trade creditor or trade creditors of the Borrower in the aggregate amount
of $5,000,000 or more.
(f) Judgments. One or more judgments or arbitration awards are entered
against the Borrower or any of its Subsidiaries or the Borrower or any of
its Subsidiaries enters into any settlement agreement with respect to any
litigation or arbitration, in the aggregate amount of $3,000,000 or more on
a claim or claims not fully covered by insurance.
(g) Failure to Pay Debts; Voluntary Bankruptcy. The Borrower or any
Subsidiary (i) fails to pay the Borrower's or such Subsidiary's debts
generally as they come due, or (ii) files any petition, proceeding, case,
or action for relief under any bankruptcy, reorganization, insolvency, or
moratorium law, or any other law or laws for the relief of, or relating to,
debtors.
(h) Involuntary Bankruptcy. An involuntary petition is filed under any
bankruptcy or similar statute against the Borrower or any Subsidiary, or a
receiver, trustee, liquidator, assignee, custodian, sequestrator, or other
similar official is appointed to take possession of the properties of the
Borrower or any Subsidiary; provided, however, that such Event of Default
shall be deemed cured if such petition or appointment is set aside or
withdrawn or ceases to be in effect within 60 days from the date of said
filing or appointment.
(i) Default of Other Financial Obligations. Any default occurs under
any other agreement involving the borrowing of money or the extension of
credit to which the Borrower or any Subsidiary may be a party as borrower,
guarantor, or installment purchaser, if such default consists of the
failure to pay any obligation when due or if such default gives to the
holder of the obligation concerned the right to accelerate the obligation.
(j) Default under other Credit Documents. Any Credit Document (other
than this Agreement), guaranty, subordination agreement, or other agreement
or instrument required hereunder or executed in connection herewith is
breached or becomes ineffective or any default occurs under any such
agreement or instrument or Borrower disavows its obligations under any such
guaranty.
(k) Default of Other Bank Obligations. Any default occurs under any
other obligation of the Borrower or any Subsidiary to the Bank or to any
subsidiary or affiliate of the Bank.
(l) Material Adverse Effect. There occurs a Material Adverse Effect.
(m) ERISA. (i) An ERISA Event shall occur with respect to a Pension
Plan which has resulted or could reasonably be expected to result in
liability of the Borrower under Title IV of ERISA to the Pension Plan or
PBGC in an aggregate amount in excess of $500,000; (ii) the commencement or
increase of contributions to, or the adoption of or the amendment of a
Pension Plan by the Borrower which has resulted or could reasonably be
expected to result in an increase in Unfunded Pension Liability among all
Pension Plans in an aggregate amount in excess of $500,000; or (iii) any of
the representations and warranties contained in Section 5.12 shall cease to
be true and correct which, individually or in combination, has resulted or
could reasonably be expected to result in a Material Adverse Effect.
(n) Change of Control. (i) any person, firm, corporation or other
entity (a "person") or two or more persons acting in concert shall acquire
beneficial ownership, directly or indirectly, of securities of the Borrower
(or other securities convertible into such securities) representing 30% or
more of the combined voting power of all securities of the Borrower
entitled to vote in the election of directors; or (ii) during any period of
up to 12 consecutive months, commencing after the Closing Date, individuals
who at the beginning of such 12-month period were directors of the Borrower
shall cease for any reason to constitute a majority of the Board of
Directors of the Borrower unless the persons replacing such individuals
were nominated by the Board of Directors of the Borrower; or (iii) any
person or two or more persons acting in concert acquiring by contract or
otherwise, or entering into a contract or arrangement which upon
consummation will result in its or their acquisition of, or control over,
securities of the Borrower (or other securities convertible into such
securities) representing 30% or more of the combined voting power of all
securities of the Borrower entitled to vote in the election of directors.
8.02 Remedies. If any Event of Default occurs,
(a) any indebtedness of the Borrower or of any Acceptable Subsidiary
under any of the Credit Documents, any term thereof to the contrary
notwithstanding, shall at the Bank's option (but automatically upon the
occurrence of an Event of Default described in subsection 8.01(g)(ii) or
subsection 8.01(h)) and without notice become immediately due and payable
without presentment, demand, protest, or notice of dishonor, or any other
notice, all of which are hereby expressly waived by the Borrower to the
full extent permitted by law, and the Bank may declare an amount equal to
the maximum aggregate amount that is or at any time thereafter may become
available for drawing under any then-outstanding letters of credit (whether
or not any beneficiary shall have presented, or be entitled at such time to
present, the drafts or other documents required to draw under such letters
of credit) and the Bank Guaranty Outstanding Amount, to be immediately due
and payable;
(b) the obligation, if any, of the Bank (including through any
Offshore Credit Provider) to make further loans or extensions of credit
hereunder shall immediately cease and terminate, and
(c) the Bank and each Offshore Credit Provider shall have all rights,
powers, and remedies available under each of the Credit Documents, or
accorded by law, including the right to resort to any or all security for
any credit accommodation described herein, and to exercise any or all of
the rights of a beneficiary or secured party pursuant to applicable law.
All rights, powers, and remedies of the Bank and each Offshore Credit Provider
may be exercised at any time by the Bank or such Offshore Credit Provider and
from time to time after the occurrence of an Event of Default. All rights,
powers, and remedies of the Bank and any Offshore Credit Provider in connection
with each of the Credit Documents are cumulative and not exclusive and shall be
in addition to any other rights, powers, or remedies provided by law or equity.
ARTICLE IX
Miscellaneous
9.01 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Borrower shall not assign this Agreement or any
other Credit Document or any of the rights, duties or obligations of the
Borrower hereunder without the prior written consent of the Bank.
9.02 Consents and Waivers. No failure to exercise and no delay in
exercising, on the part of the Bank or any Offshore Credit Provider, 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. No consent or waiver under this
Agreement shall be effective unless in writing. No waiver of any breach or
default shall be deemed a waiver of any breach or default thereafter occurring.
9.03 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of California.
9.04 Costs and Attorneys' Fees. The Borrower shall, whether or not the
transactions contemplated hereby shall be consummated, pay or reimburse the Bank
on demand for all reasonable out-of-pocket 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, this
Agreement and any other Credit Document and the consummation of the transactions
contemplated hereby and thereby, including reasonable attorney fees and
disbursements and the allocated cost of internal counsel and disbursements,
incurred by the Bank with respect thereto; and in connection with the
enforcement, attempted enforcement or preservation of any rights or remedies
hereunder or under any Credit Document, including any "workout" or restructuring
under this Agreement, including attorney fees and disbursements and the
allocated cost of internal counsel and disbursements. As used herein,
"out-of-pocket costs" shall include the allocated cost of internal counsel to
the Bank, and other non-routine Bank resources (such as internal environmental
consultants or asset auditors). The agreements and obligations of the Borrower
under this Section shall survive the expiration or termination of the commitment
to extend credit hereunder and the payment of all other obligations of the
Borrower or any Acceptable Subsidiary hereunder or under the other Credit
Documents.
9.05 Integration; Amendment. This Agreement, together with the other Credit
Documents, embodies the entire agreement and understanding between the Borrower
and the Bank. This Agreement may be amended or modified only in writing, signed
by the Borrower and the Bank.
9.06 Borrower's Documents. The Bank shall be under no obligation to return
any schedules, invoices, statements, budgets, forecasts, reports or other papers
delivered by the Borrower and shall destroy or otherwise dispose of same at such
time as the Bank, in its discretion, deems appropriate.
9.07 Participations. The Bank may at any time sell, assign, grant
participations in, or otherwise transfer to any other person, firm, corporation
or other entity (a "Participant") all or part of the obligations of the Borrower
and any Acceptable Subsidiary under this Agreement and any other Credit
Document. The Borrower authorizes the Bank and each Participant, upon the
occurrence of an Event of Default, to proceed directly by right of setoff,
banker's lien, or otherwise, against any assets of the Borrower and any
Acceptable Subsidiary which may be in the hands of the Bank or such Participant,
respectively. The Borrower authorizes the Bank to disclose to any prospective
Participant and any Participant any and all information in the Bank's possession
concerning the Borrower and its Subsidiaries, this Agreement or any other Credit
Document.
9.08 General Indemnification. The Borrower shall pay and indemnify the
Bank, the Offshore Credit Providers, the Bank's parent company, and each of
their respective officers, directors, employees, counsel, agents and
attorneys-in-fact (each, an "Indemnified Person") and hold harmless from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses, or disbursements (including
reasonable attorneys' fees and disbursements and the allocated costs of internal
counsel) of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance, and administration of this Agreement and any
other Credit Documents, or the transactions contemplated hereby and thereby, and
with respect to any investigation, litigation, or proceeding related to this
Agreement, any violation of any Environmental Law by the Borrower or its
Subsidiaries, any use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence (whether actual or alleged)
of a Hazardous Substance on, under or about the property or operations of or
property leased to the Borrower or any of its Subsidiaries, any transportation
from or other off-site management of any Hazardous Substance generated or used
by the Borrower or any of its Subsidiaries, or the loans and other extensions of
credit hereunder 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 Borrower shall have no obligation
hereunder to any Indemnified Person with respect to Indemnified Liabilities
arising from the gross negligence or willful misconduct of such Indemnified
Person. The agreements and obligations of the Borrower in this Section shall
survive the expiration and termination of the commitment to extend credit
hereunder and the payment of all other obligations of the Borrower or any
Acceptable Subsidiary hereunder or under the other Credit Documents.
9.09 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 Credit Document or other agreements
or instruments relating hereto or delivered in connection herewith 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 arbitrator(s) shall give effect to
statutes of limitation in determining any claim. Any controversy concerning
whether an issue is arbitrable shall be determined by the arbitrator(s).
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) of this Section,
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) of this Section.
(c) A controversy or claim which is not submitted to arbitration as
provided and limited in subsections (a) and (b) of this Section 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 paragraph shall limit the right of any party
to this Agreement to exercise self-help remedies such as setoff, 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.
9.10 Notices. (a) All notices, requests and other communications provided
for hereunder shall be in writing and mailed or delivered to a party at its
address specified on the signature pages hereof, or to such other address as
shall be designated by such party in a written notice to the other parties.
(b) All such notices and communications shall, when transmitted by
overnight delivery, be effective when delivered for overnight delivery, or
if personally delivered, upon such personal delivery, except that notices
pursuant to Article II shall not be effective until actually received by
the Bank.
(c) The Borrower acknowledges and agrees that any agreement of the
Bank pursuant to Article II to receive notices by telephone or facsimile is
solely for the convenience and at the request of the Borrower. Telephone
requests may be made by any individual identified in writing to the Bank on
a form acceptable to the Bank as being authorized to make such requests.
The Bank shall be entitled to rely upon any written or telephone request
from persons it reasonably believes to be authorized by the Borrower to
make such requests without making independent inquiry. The Borrower assumes
the full risk of, and the Bank shall not be responsible for, any delays or
errors in transmission, and the obligation of the Borrower to repay the
loans and other extensions of credit hereunder 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.
9.11 Headings; Interpretation. Article, section, and paragraph headings are
for reference only and shall not affect the interpretation or meaning of any
provisions of this Agreement. The meaning of defined terms shall be equally
applicable to the singular and plural forms of the defined terms. The words
"hereof", "herein", "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement; and article, subsection, section, schedule and
exhibit references are to this Agreement unless otherwise specified. 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."
9.12 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.
9.13 Counterparts. This Agreement may be executed in as many counterparts
as may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
9.14 Waiver of Jury Trial. IF A CONTROVERSY OR CLAIM IS NOT SUBMITTED TO
ARBITRATION AS PROVIDED AND LIMITED IN SUBSECTIONS (a) AND (b) OF SECTION 9.09
OR IS NOT DETERMINED BY A REFERENCE AS PROVIDED IN SUBSECTION (c) OF SUBSECTION
9.09, THEN THE BORROWER AND THE BANK WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY
JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO
THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE
BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR
ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER CREDIT
DOCUMENTS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
FILENET CORPORATION
By: _________________________________________
Typed Name: Mark S. St. Clare
Title: Senior Vice President, Finance and CFO
By: _________________________________________
Typed Name: Brian A. Colbeck
Title: Controller, CAO, Assistant Secretary
Address where notices to
Borrower are to be sent:
3565 Harbor Blvd.
Costa Mesa, CA 92626
Attn:
Telecopier No.:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: _________________________________________
Typed Name: Timothy M. O'Connor
Title: Vice President
Address where notices to
Bank are to be sent:
Nations Bank Plaza
901 Main Street
Dallas, Texas 75202-3714
Attn: Timothy M. O'Connor
Vice President
Telecopier No.:
<PAGE>
EXHIBIT A
FILENET CORPORATION
COMPLIANCE CERTIFICATE
Date: _____________, 199__
Reference is made to that certain Amended and Restated Credit Agreement
(Multicurrency) (the "Credit Agreement") dated as of June 30, 1999, between
FileNet Corporation (the "Borrower") and Bank of America National Trust and
Savings Association, a national banking association (the "Bank"). Unless
otherwise defined herein, capitalized terms used herein have the respective
meanings assigned to them in the Credit Agreement.
The undersigned responsible officer of the Borrower hereby certifies as
of the date hereof that he/she is the ________________ of the Borrower, and
that, as such, he/she is authorized to execute and deliver this Compliance
Certificate (the "Certificate") to the Bank on the behalf of the Borrower and
its consolidated Subsidiaries, and that:
[Use the following paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 6.02(a) of the Credit
Agreement.]
1. Attached as Schedule 1 hereto are (a) a true and correct copy of the
audited consolidated balance sheet of the Borrower as of the end of the fiscal
year ended _________, 199__, (b) the related consolidated statements of income,
retained earnings and cash flows for such fiscal year, setting forth in each
case in comparative form the figures for the previous fiscal year, and
accompanied in each case by the unqualified opinion of ______________ [insert
name of independent certified public accounting firm], and (c) a complete copy
of the Borrower's Form 10K annual report submitted to the Securities and
Exchange Commission for such year.
or
[Use the following paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 6.02(b) of the Credit
Agreement.]
1. Attached as Schedule 1 hereto is (a) a true and correct copy of the
unaudited consolidated balance sheet of the Borrower as of the end of such
quarter ended ____________, 199__, (b) the related consolidated statements of
income, retained earnings and cash flows of the Borrower for the period
commencing on the first day and ending on the last day of such quarter, and (c)
a complete copy of the Borrower's Form 10-Q Quarterly Report submitted to the
Securities and Exchange Commission for such quarter.
2. The undersigned has reviewed and is familiar with the terms of the
Credit 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 Borrower during the accounting period covered by the attached
financial statements.
3. The attached financial statements are complete and correct in all
material respects, and have been prepared in accordance with generally accepted
accounting principles on a basis consistent with prior periods.
4. To the best of the undersigned's knowledge, the Borrower and any
Acceptable Subsidiaries, during such period, have each observed, performed or
satisfied all of their respective covenants and other agreements, and satisfied
every condition in the Credit Agreement and other Credit Documents to be
observed, performed or satisfied by the Borrower or such Acceptable
Subsidiaries, and the undersigned has no knowledge of any Default or Event of
Default.
5. 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__.
FILENET CORPORATION
By: ________________________________________
Title: _____________________________________
<PAGE>
<TABLE>
<CAPTION>
Date: ______________, 199__
For the fiscal quarter/year
ended ______________, 199__
SCHEDULE 2
to Compliance Certificate*
<S> <C> <C>
Actual Required/Permitted
1. Section 7.01(d) Other Bank
Borrowings by Subsidiaries
Indebtedness of Subsidiaries for borrowed money
from other banks ___________________ Not to exceed $5,000,000
2. Section 7.01(e) Purchase Money
Obligations and Section 7.02
Purchase Money Liens
Purchase money obligations and related liens ___________________ Not to exceed $10,000,000
3. Section 7.03 Capital Assets
Obligations for the acquisition of fixed or ___________________ Not to exceed (i) $25,000,000 from 1/1/97
capital assets through 12/31/97, (ii) $30,000,000 from 1/1/98
through 12/31/98, (iii) $30,000,000 from 1/1/99
through 12/31/99, (iv) $37,500,000 from 1/1/00
through 12/31/00, and (v) $37,500,000 from
1/1/01 through 12/31/01.
4. Section 7.04(ii) Stock Repurchases
Stock repurchases ___________________ Not to exceed $10,000,000 after March 31, 1997
5. Section 7.05(e)
Other loans and investments ___________________ Not to exceed $5,000,000
6. Section 7.07(d) Sale and Leaseback
Financing under sale and leaseback agreements of ___________________ Not to exceed $5,000,000
fixed or capital assets
7. Section 7.11 Quick Ratio
A. (i) cash ___________________
(ii) net accounts receivable ___________________
___________________________________
* All amounts determined on a consolidated basis.
S-1
<PAGE>
Actual Required/Permitted
(iii) short-term cash
investments ___________________
(iv) investment grade marketable
securities not classified as
long-term investments ___________________
(v) long-term investments in
compliance with the
Investment Guidelines(not to
exceed $15,000,000) __________________
(i)+(ii)+(iii)+(iv)+(v) = __________________
B. Current liabilities (including all
funded and unfunded obligations under
the Credit Agreement and other Credit
Documents, including undrawn amounts
(or the Equivalent Amount thereof) of
all letters of credit and Bank
Guaranties and drawn and unreimbursed
obligations with respect thereto
A/B = ___________________ Not less than 1.50 to 1.00
8. Section 7.12 Total Liabilities to Total Net Worth
the ratio of
A. Total liabilities (including all funded
and unfunded obligations under the Credit
Agreement and other Credit Documents,
including undrawn amounts (or the
Equivalent Amount thereof) of all letters
of credit and Bank Guaranties and drawn
and unreimbursed obligations with respect
thereto ___________________
B. Tangible Net Worth
the difference of:
(i) gross book value of assets ___________________
less
(ii) goodwill, patents, trademarks,
trade names, organization expense,
capitalized software, treasury
S-2
<PAGE>
stock (to the extent included in
assets), unamortized debt discount
and expense, deferred charges, and
other like intangibles, monies due
from affiliates, officers, directors,
or shareholders of the Borrower or any
of its Subsidiaries, and value placed
on any leasehold (other than
leasehold improvements) ____________________
less
(iii) applicable reserves ____________________
less
(iv) all liabilities (including accrued
and deferred income taxes) ____________________
(i)-(ii)-(iii)-(iv) = ____________________
A/B = ____________________ Not greater than 0.75 to 1.00
9. Section 7.13 Tangible Net Worth
Tangible Net Worth (from 8 above) ____________________ Not less than the sum of:
A. $105,000,000
plus
B. 75% of net income
after taxes (without
subtracting losses)
for each fiscal quarter
commencing after
3/31/97 ________
plus
C. 100% of net proceeds
from the issuance of any
equity securities issued
after 3/31/97 ________
plus
D. 100% of any increase in
shareholders' equity from
conversion of debt to
equity after 3/31/97 ________
less
S-3
<PAGE>
Actual Required/Permitted
E. Stock repurchases from
and after 3/31/97 (not to
exceed $10,000,000) ________
A + B + C + D - E = ________
10. Section 7.14 Consecutive Quarterly Losses;
Losses in One Quarter
A. (i) Net (after tax) income (loss) for
fiscal quarter reported on ____________________ Not in excess of 5% of Tangible Net
Worth (from 8 above).
(ii) Operating income (loss) for fiscal
quarter reported on ____________________ Not in excess of 5% of Tangible Net
Worth (from 8 above).
B. (i) Net (after tax) income (loss)
immediately preceding fiscal quarter ____________________
(ii) Net (after tax) income (loss) for
fiscal quarter reported on ____________________ If (i) is a loss, (ii) shall not
be a loss.
C. (i) Operating income (loss) for the
immediately preceding fiscal quarter ____________________
(ii) Operating income (loss) for fiscal
quarter reported on ____________________ If (i) is a loss, (ii) shall not
be a loss.
</TABLE>
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1999
<CASH> 57,496
<SECURITIES> 14,415
<RECEIVABLES> 67,512
<ALLOWANCES> 0
<INVENTORY> 3,115
<CURRENT-ASSETS> 150,269
<PP&E> 124,324
<DEPRECIATION> (82,022)
<TOTAL-ASSETS> 222,775
<CURRENT-LIABILITIES> 88,609
<BONDS> 0
0
0
<COMMON> 132,014
<OTHER-SE> 2,152
<TOTAL-LIABILITY-AND-EQUITY> 222,775
<SALES> 100,211
<TOTAL-REVENUES> 167,531
<CGS> 13,657
<TOTAL-COSTS> 54,476
<OTHER-EXPENSES> 106,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,488
<INCOME-TAX> 2,546
<INCOME-CONTINUING> 5,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,942
<EPS-BASIC> .19
<EPS-DILUTED> .18
</TABLE>
