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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|q?[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|q? 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 000-14747
XYVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
30 New Crossing Road, Reading, MA 01867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (781) 756-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes ---------- No ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
November 13, 1998.
Common Stock, $.03 par value 14,271,415
(Title of each class) (number of shares)
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Form 10-Q
Table of Contents
Page
Part I. Financial Information
Consolidated Balance Sheets
at September 30, 1998 and March 31, 1998............................. 2
Consolidated Statements of Operations
for the three and six months ended September 30, 1998 and 1997....... 3
Consolidated Statements of Cash Flows
for the six months ended September 30, 1998 and 1997................. 4
Notes to Consolidated Financial Statements............................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Quantitative and Qualitative Disclosures About Market Risk........... 13
Part II. Other Information.................................................14
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. The important factors discussed below under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including risks related to the Company's credit line availability
and debt restructuring efforts, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations.
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XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
at September 30, 1998 and March 31, 1998
<TABLE>
<S> <C> <C>
(Unaudited)
September 30, March 31,
1998 1998
---------- -------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 248 $ 357
Accounts receivable:
Trade, less allowance for doubtful accounts of $683 at September 30, 1998
and $733 at March 31, 1998 ............................................. 1,847 3,630
Inventories ............................................................... 67 337
Other current assets ...................................................... 496 651
---------- -------
Total current assets .................................................. 2,658 4,975
Property and equipment, net ............................................... 640 851
Other assets, net, principally software development costs ................. 682 1,090
---------- -------
Total assets ........................................................ $ 3,980 $ 6,916
========== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder, less unamortized discount of $1,130 at
September 30, 1998 and $1,032 at March 31, 1998........................... $ 11,670 $ 9,168
Current portion of long-term debt ......................................... 2,206 2,206
Accounts payable and accrued expenses ..................................... 2,218 2,277
Other current liabilities ................................................. 2,122 2,112
---------- -------
Total current liabilities ............................................. 18,216 15,763
---------- -------
Total liabilities ................................................... 18,216 15,763
---------- -------
Commitments and contingencies ............................................... - -
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 2,700,000 shares authorized;
no shares issued ....................................................... - -
Series B preferred stock, $1.00 par value; 300,000 shares authorized;
235,299 issued at September 30, 1998 and March 31, 1998 (aggregate
liquidation preference of $3,175 and $3,151, respectively) ............. 235 235
Common stock, $.03 par value; 25,000,000 shares authorized; 2,949,549
issued at September 30, 1998 and March 31, 1998 ........................ 88 88
Additional paid-in capital ................................................ 51,256 50,956
Accumulated deficit ....................................................... (64,647) (58,958)
---------- -------
(13,068) (7,679)
Less:
Treasury stock, at cost; 95,333 shares at September 30, 1998 and
March 31, 1998 ......................................................... 1,168 1,168
---------- -------
Total stockholders' deficit .............................................. (14,236) (8,847)
---------- -------
Total liabilities and stockholders' deficit ......................... $ 3,980 $ 6,916
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three MonthsEnded Six Months Ended
-------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------- ------- ------ ------
(Unaudited) (Unaudited)
Revenues:
Systems .......................................... $ 781 $ 2,052 $1,772 $4,594
Service .......................................... 1,607 2,066 3,287 4,528
------- ------- ------ ------
Total revenues ................................ 2,388 4,118 5,059 9,122
------- ------- ------ ------
Cost of sales:
Systems .......................................... 704 898 923 1,889
Service .......................................... 1,326 1,738 2,603 3,463
------- ------- ------ ------
Total cost of sales ........................... 2,030 2,636 3,526 5,352
------- ------- ------ ------
Gross margin ...................................... 358 1,482 1,533 3,770
------- ------- ------ ------
Expenses:
Research and development ......................... 1,163 818 2,104 1,568
Marketing, general and administrative ............ 2,487 2,324 4,409 4,491
------- ------- ------ ------
Total operating expenses ...................... 3,650 3,142 6,513 6,059
------- ------- ------ ------
Loss from operations .............................. (3,292) (1,660) (4,980) (2,289)
------- ------- ------ ------
Other expense, net:
Interest income .................................. 2 1 2 2
Interest expense - third party ................... (34) (31) (62) (65)
Interest expense - stockholder ................... (366) (211) (614) (400)
------- ------- ------ ------
Total other expense, net .......................... (398) (241) (674) (463)
------- ------- ------ ------
Loss before income taxes .......................... (3,690) (1,901) (5,654) (2,752)
Provision for income taxes ........................ - - - -
------- ------- ------ ------
Net loss .......................................... (3,690) (1,901) (5,654) (2,752)
Series B Preferred Stock dividends ................ 24 24 48 48
------- ------- ------ ------
Net loss allocable to common stockholders ......... $(3,714) $(1,925) (5,702) (2,800)
======= ======= ====== ======
Basic and diluted earnings per share:
Loss allocable to common stockholders ............. (1.30) (0.67) (2.00) (0.98)
------- ------- ------ ------
Net loss per share ................................ (1.30) (0.67) (2.00) (0.98)
======= ======= ====== ======
Weighted average common and common
equivalent shares outstanding .................. 2,854 2,854 2,854 2,853
======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended September 30, 1998 and 1997
(In thousands)
<TABLE>
<S> <C> <C>
Six Months Ended
------------------------------------
September 30, September 30,
1998 1997
------- -------
(Unaudited)
Operations:
Net loss ................................................................... $(5,654) $(2,752)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization .............................................. 1,132 1,161
Provisions for losses on accounts receivable ............................... 379 200
Loss on sale of assets ..................................................... 397 -
Operating assets and liabilities:
Accounts receivable ...................................................... 1,241 378
Inventories .............................................................. 8 36
Accounts payable and accrued expenses .................................... (59) (91)
Other current liabilities ................................................ 11 (141)
Other assets ............................................................. 179 (61)
------- -------
Net cash used for operations ............................................... (2,336) (1,270)
Investments:
Additions to property and equipment ........................................ (119) (239)
Capitalized software ....................................................... (176) (908)
------- -------
Net cash used for investments .............................................. (295) (1,147)
Financing:
Proceeds from line of credit from a stockholder ............................ 2,600 2,600
Repayment of line of credit to a stockholder ............................... - (200)
Dividends on preferred stock ............................................... (48) (48)
------- -------
Net cash provided from financing ........................................... 2,552 2,352
Net decrease in cash and cash equivalents .................................. (109) (65)
Cash and cash equivalents at the beginning of the period ................... 357 261
------- -------
Cash and cash equivalents at the end of the period ......................... $ 248 $ 196
======= =======
Supplemental Information:
Conversion of 6% debentures to equity ..................................... - 20
Conversion of accrued interest on 6% debentures to equity ................. - 7
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying financial statements reflect
all adjustments (including normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of
September 30, 1998 and the results of its consolidated operations and
consolidated cash flows for the interim periods ended September 30, 1998
and 1997. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and would impact future results of operations and cash
flows.
The results of consolidated operations for the interim period ended
Setpember 30, 1998 are not necessarily indicative of the results of
consolidated operations that may be expected for the complete fiscal year.
2. The Company sells its products to a wide variety of customers in a variety
of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and
such losses have been within management's expectations. Trade receivables
do not contain any material amounts collectible over a period in excess of
one year.
3. Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of finished goods.
4. On June 30, 1992, the Company obtained a $2,000,000 line of credit with
Tudor Trust ("Tudor Trust"), the largest stockholder of the Company. Mr.
Jeffrey Neuman, the grantor, sole trustee and sole current beneficiary of
Tudor Trust, also serves as Chairman of the Board of Directors of the
Company. The line, which is payable on demand, is collateralized by
substantially all of the assets of the Company and has been used for
working capital and general business purposes. Interest on the line of
credit is payable monthly. The Company issued 80,000 shares of common
stock and a common stock purchase warrant for 20,000 shares of common
stock at an exercise price of $.50 per share to Tudor Trust for no
additional consideration upon signing of the line of credit. In addition,
as required by the line of credit, from September 30, 1992 through June
30, 1993, the Company granted Tudor Trust four additional common stock
purchase warrants, each covering 20,000 shares of common stock. On
September 28, 1993, the Company and Tudor Trust amended the line of
credit. Under the terms of this amendment: (i) the amount available under
the line of credit was increased from $2,000,000 to $2,500,000; (ii) the
annual interest rate was reduced from 13% to 10%; and (iii) the term of
the line of credit was extended from June 30, 1994 to June 30, 1995. In
consideration of such changes, the Company: (i) reduced the exercise price
of 40,000 and 20,000 common stock purchase warrants exercisable by Tudor
Trust from $2.50 and $1.25 per share, respectively, to $.45 per share (the
fair market value of the common stock on September 28, 1993); (ii) issued
40,000 shares of common stock and a warrant to purchase 60,000 shares of
common stock at an exercise price of $.45 per share to Tudor Trust for no
additional consideration; and (iii) agreed to grant Tudor Trust up to
eight additional warrants, each covering 25,000 shares of common stock at
an exercise price at the lesser of the fair market value of the common
stock on the date of issue or $5.00 per share.
On December 3, 1993, the Company and Tudor Trust entered into an
additional amendment to the line of credit. Under the terms of this
amendment, the amount available under the line of credit was increased to
$3,000,000. In consideration of this change, the Company: (i) issued
20,000 shares of common stock and a warrant to purchase 100,000 shares of
common stock at fair market value of the common stock on December 3, 1993
and (ii) agreed to grant Tudor Trust up to seven additional common stock
purchase warrants between December 31,
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1993 and June 30, 1995, each covering 40,000 shares of common stock at an
exercise price at the lesser of the fair market value of the common stock
on the date of grant or $5.00 per share (these warrants are in lieu of the
last seven of the warrants referred to in clause (iii) of the preceding
paragraph).
On February 29, 1996, the Company and Tudor Trust entered into an
additional amendment to the line of credit. Under the terms of this
amendment, the amount available under the line of credit was increased to
$4,000,000 and the term of the line of credit was extended to December 31,
1997. In consideration of these changes, the Company granted Tudor Trust a
common stock purchase warrant for 40,000 shares of common stock at an
exercise price of $.50 per share (the fair market value of the common
stock on the date of issuance of such warrant) and agreed to continue to
grant Tudor Trust, for each fiscal quarter for which amounts are
outstanding under the credit line, a common stock purchase warrant for
40,000 shares of common stock provided that the number of shares subject
to the warrant shall be 65,000 (rather than 40,000 shares in the event
that the maximum amount of outstanding credit line advances on one or more
dates during the quarter ending on the issue date of such warrant exceeds
$3,000,000. The exercise price of the first five warrants (beginning with
the warrant for the quarter ended September 30, 1995) will be at the
lesser of the fair market value of the common stock on the date of the
grant or $5.00 per share while the exercise price of the final five
warrants will be the fair market value of the common stock on the date of
the grant.
The Company entered into an additional amendment to its line of credit
agreement with Tudor Trust, effective as of May 31, 1996, pursuant to
which (a) Tudor Trust agreed to (i) increase the maximum loan amount to
$5,000,000, (ii) reduce the interest rate on the line of credit from 10%
to 8% per annum, (iii) eliminate any borrowing covenants or conditions
that would prevent the Company from accessing the full $5,000,000 of
available credit, and (iv) eliminate the requirement for the issuance of
additional warrants to Tudor Trust under the line of credit (which were
issuable on a quarterly basis), and (b) in consideration therefor, the
Company issued to Tudor Trust warrants for 2,000,000 shares of common
stock of the Company at an exercise price of $.50 per share (representing
the parties' understanding as to the fair market value of the common stock
of the Company as of the date of warrant issuance). On July 11, 1997, the
Company received an independent third-party calculation of the fair market
value of the common stock of the Company as of the date of warrant
issuance of $.90 per share. On July 15, 1997, the Company and Tudor Trust
agreed to amend the warrants to increase the exercise price to $.90 per
share. In connection with this line of credit amendment, Tudor Trust
exercised previously granted warrants for the purchase of 418,500 shares
of common stock of the Company, for an aggregate purchase price of
$200,000. On July 14, 1997, the Company received an independent
third-party calculation of the value of the common stock purchase warrants
as of the date of warrant issuance of $.30 per warrant. The value of the
warrants is being amortized on a straight-line basis over the two year
term of the credit line and charged to interest expense.
On November 22, 1996, the Company and Tudor Trust entered into an
additional amendment to the line of credit to increase the maximum loan
amount thereunder from $5,000,000 to $6,000,000. Such amendment provided
that Tudor Trust shall have the sole discretion to decide whether or not
to make any and all advances of funds in excess of $5,000,000, and that
Tudor Trust shall have the right to refuse to make any advances of any
such funds in excess of $5,000,000 for any reason or no reason.
On November 10, 1997, the Company and Tudor Trust entered into an
additional amendment to the line of credit to increase the maximum loan
amount thereunder from $6,000,000 to $8,300,000. Such amendment also (i)
reduced the interest rate on the line of credit from 8% to 6%, (ii)
eliminated the provision that Tudor Trust shall have the sole discretion
to decide whether or not to make any advances of funds thereunder in
excess of $5,000,000, (iii) provided for Tudor Trust to cause the issuance
of a letter of credit from a bank in the amount of $444,600 to the
Company's new landlord, and (iv) extended the term of the line of credit
from December 31, 1997 to March 31, 2001. In consideration for such
amendment to the line of credit, the Company issued to Tudor Trust a
warrant for the purchase of 2,000,000 shares of Common Stock of the
Company at an exercise price of $.80, the fair market value of the Common
Stock on the date of warrant issuance. The Company has received an
appraisal from an independent third-party of the value of the common stock
purchase warrants as of the date of warrant issuance of $.55 per warrant.
The value of the warrants is being amortized on a straight-line basis over
the remaining term of the credit line and charged to interest expense.
On July 1, 1998, the Company and Tudor Trust entered into an additional
amendment to the line of credit that, among other things, (i) increased
the maximum loan amount thereunder from $8,300,000 to $13,500,000, (ii)
provided that Tudor Trust shall have the sole discretion to decide whether
or not to make advances of funds
6
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thereunder, (iii) provided Tudor Trust with the option of receiving the
interest payable thereunder in cash or in shares of Common Stock based on
the fair market value of the Common Stock, (iv) provided for the issuance
by the Company to Tudor Trust of a common stock purchase warrant covering
600,000 shares of Common Stock of the Company at an exercise price of
$1.25 (representing the fair market value of the Common Stock on the date
of issuance), and (v) increased the interest rate on the line of credit
from 6% to 8%. As of September 30, 1998, the Company had an outstanding
credit line balance of $12,800,000. As of November 13, 1998, the Company
had an outstanding credit line balance of $13,400,000. The Company's
current outstanding credit line balance is approximately equal to the
maximum loan amount thereunder. The Company is currently in negotiations
with Tudor Trust to facilitate increased borrowings. There can be no
assurance, however, that such negotiations will be successful or that
increased borrowings will be available under the Company's line of credit
or otherwise from Tudor Trust.
5. In May 1987, the Company issued $25,000,000 principal aggregate amount of
6% Convertible Subordinated Debentures due 2002 (the "Debentures")
convertible into common stock at a conversion price of $112.50 per share.
Interest on the Debentures is payable annually (on May 5th) and the
Debentures may be called by the Company under certain conditions. During
fiscal 1992, the Company began a program to restructure its financial
position, specifically, the Debentures.
From March 10, 1992 to September 30, 1996, the Company consummated
restructuring transactions with the holders of a total of $19,035,000
principal aggregate amount of Debentures. Substantially all of these
transactions involved the exchange of outstanding Debentures for (i) an
unsecured, unsubordinated promissory note of the Company in a principal
amount equal to 30% of the principal amount of the Debentures delivered
for exchange, bearing interest (payable at maturity) at 15% per year
(compounded annually) and maturing 30 months from issuance and (ii) 21,419
shares of common stock of the Company per $1,000,000 principal amount of
Debentures. The Company issued 15% Promissory Notes in an aggregate
principal amount of $5,815,000 in connection with such Debenture exchange
transactions with aggregate interest of $2,452,000 payable at maturity.
During the course of its attempts to restructure the Debentures and
negotiate transactions with Debenture-holders, the Company did not make
the interest payment due on the Debentures on May 5 of 1992, 1993, 1994,
1995, 1996, 1997 or 1998. As of November 16, 1998, the cumulative unpaid
interest due on the Debentures totaled $602,065. Under the terms of the
Indenture covering the Debentures, the Trustee or the holders of not less
than 25% of the outstanding principal amount of the Debentures have the
right to accelerate the maturity date of the remaining Debentures. As of
November 13, 1998, no such acceleration had occurred or been threatened.
Between September 30, 1996 and September 30, 1998, the Company completed
transactions with investors holding an additional aggregate amount of
$2,020,000 aggregate principal amount of the Debentures. Under the terms
of the exchange agreements, holders of Debentures exchanged their
Debentures for such number of shares of common stock of the Company as is
equal to the sum of the principal amount of the Debentures exchanged plus
the accrued interest thereon, divided by $3.33. The Company has accounted
for the exchanges as a contribution of capital by significant
stockholders. As of September 30, 1998, a total of $1,355,000 principal
amount of Debentures remained outstanding. Of such Debentures, the Company
has identified the holders of $315,000 aggregate principal amount, leaving
the holders of $1,040,000 aggregate principal amount of Debentures
unidentified.
In order to relieve itself of the payment obligations on the 15%
Promissory Notes, in fiscal 1995 the Company began a program to
restructure the 15% Promissory Notes. As of September 30, 1998, the
Company closed exchange transactions with 15% Promissory Note holders of
an aggregate principal amount of $5,709,000 and accrued interest of
$2,353,000, in which, in exchange for the delivery of a 15% Promissory
Note (including all rights to receive any interest accrued thereon) for
cancellation, the Company issued (i) a new Promissory Note that will
mature 30 months from the date of issuance and bears interest at 4% per
annum, (ii) one share of common stock for each $50.00 of principal amount
of 15% Promissory Note delivered and (iii) one share of Series B Preferred
Stock for each $10.00 of interest due on the 15% Promissory Note
delivered. The Series B Preferred Stock accrues a cumulative dividend in
the amount of $.40 per share per annum, whether or not declared, and has a
liquidation preference of $62.50 per share, plus any dividends declared or
accrued but unpaid. As of November 16, 1998, cumulative accrued but unpaid
dividends on the Series B Preferred Stock
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totaled $257,268 or $1.09 per share. Each share of Series B Preferred
Stock is convertible into two-fifths shares of common stock, subject to
adjustment for certain events. Additionally, holders of outstanding shares
of Series B Preferred Stock are entitled to voting rights equivalent to
the rights attributable to the whole shares of common stock into which the
shares of Series B Preferred Stock are convertible. As of November 16,
1998, 15% Promissory Notes in an aggregate principal amount of $60,000
with accrued interest of $56,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes, but there can be no
assurance that it will do so.
The Company intends to continue to convert its debt to equity,
specifically the 4% Promissory Notes. As of Sepember 30, 1998, the Company
has completed transactions with holders of an aggregate of $4,974,000
principal amount of the outstanding 4% Promissory Notes. Under the terms
of the exchange agreements, the holders of the 4% Promissory Notes
exchanged their 4% Promissory Notes for such number of shares of common
stock of the Company as is equal to the principal amount of the 4%
Promissory Notes exchanged divided by $2.00 (any accrued but unpaid
interest was paid in cash as the time of such exchange). The Company has
accounted for the conversions as a contribution of capital by significant
stockholders. As of November 16, 1998, 4% Promissory Notes in an aggregate
principal amount of $512,000 with accrued interest of $750.00. were
overdue. The Company may seek to restructure the remaining 4% Promissory
Notes, but there can be no assurance that it will do so.
The Company continues to negotiate, in good faith, restructuring
transactions with as many of the remaining holders of Debentures, 15%
Promissory Notes and 4% Promissory Notes as possible. However, despite the
progress that has been made, the Company can still give no assurance about
the outcome of these restructuring efforts and does not expect the matters
to be resolved in the near future. If the Company is unable to enter into
exchange transactions with the remaining holders, and such holders seek to
pursue legal remedies against the Company, the Company may have to seek
protection under applicable laws, including the Bankruptcy Code, while it
develops, analyzes and completes alternative restructuring strategies.
The Company anticipates that its cash requirements for the remainder of
fiscal 1999 will be satisfied mainly from its credit line, as amended, or
otherwise from Tudor Trust, assuming the continued forbearance by the
holders of the Debentures, 15% Promissory Notes and 4% Promissory Notes
and the availability of increased borrowings under the credit line or
otherwise from Tudor Trust. The Company's current outstanding credit line
balance is approximately equal to the maximum loan amount thereunder, and
for the remainder of fiscal 1999, the Company expects to require cash in
excess of the current terms of the credit line. The Company is currently
in negotiations with Tudor Trust to facilitate the fulfillment of the
Company's cash requirements for at least the remainder of fiscal 1999.
There can be no assurance that the forbearance by the debtholders will
continue or that Tudor Trust will continue to advance any required funds
under or above the credit line or otherwise. The above uncertainties raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments relating
to the recovery and classifications of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern.
6. The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. Management has assigned a valuation allowance to fully
offset the future tax benefits of these deferred tax assets. There has
been no change to the valuation allowance during the six months ended
September 30, 1998.
8
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7. Earnings Per Share
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
-------------------------------- ------------------------------------
Sepember 30, September 30, Sepember 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
Basic and diluted EPS Computation:
Net loss ........................................... (3,690) (1,901) (5,654) (2,752)
Series B Preferred Stock Dividends ................. 24 24 48 48
------ ------ ------ ------
Net loss allocable to common stockholders .......... (3,714) (1,925) (5,702) (2,800)
------ ------ ------ ------
Weighted average common shares outstanding ......... 2,854 2,854 2,854 2,853
====== ====== ====== ======
Basic and diluted EPS:
Loss allocable to common stockholders .............. (1.30) (0.67) (2.00) (0.98)
------ ------ ------ ------
Net loss per share ................................. (1.30) (0.67) (2.00) (0.98)
====== ====== ====== ======
</TABLE>
On October 20, 1998, the Company amended its Certificate of Incorporation
to effect a one-for-five reverse split of the Common Stock and to change
the number of authorized shares of Common Stock from 50,000,000 to
25,000,000. All references to number of shares and per share information in
the consolidated financial statements have been adjustd to reflect a
reverse stock split on a retroactive basis.
8. Sale of Assets: On September 18, 1998, the Company sold substantially
all the assets of its Contex division, with the exception of approximately
$300,000 of accounts receivable, for approximately $200,000 pursuant to the
terms of an Asset Purchase Agreement dated September 18, 1998 between the
Company and Barco, Inc. Included in the assets sold were inventory,
equipment, certain accounts receivable, source code and object code for
Contex PackageMaker, Contex Professional, Contex Rip'n'Strip, and Contex
Object Library. In connection with the sale, the Company recorded direct
transaction costs; costs to write-off other assets and other accruals for
costs directly associated with the sale in the amount of approximately
$464,000.
9
<PAGE>
<PAGE>
XYVISION, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the three and six months ended September 30, 1998 and 1997
Results of Operations
Revenues for the second quarter of fiscal 1999 were $2,388,000, a decrease
of $1,730,000, or 42%, from the second quarter of fiscal 1998. Systems revenues
fell $1,271,000, or 62%, from the same quarter of fiscal 1998. Systems revenues
decreased in both the Publishing and Contex business segments in North America
and Europe. Service revenues decreased $459,000 or 22% from $2,066,000 in the
second quarter of fiscal 1998. The decrease in service revenues was a result
primarily of lower systems sales and, consequentially, a lower level of related
customer service requirements.
Revenues for the six months ended September 30, 1998 were $5,059,000, a
decrease of $4,063,000 or 45% from the six months ended September 30, 1997.
Systems revenues dropped $2,822,000, or 61%, from the comparable period ended
September 30, 1997. Sysems revenues decreased in both the Publishing and Contex
business segments in North America and Europe. Service revenues decreased by
$1,241,000 or 27% from $4,528,000 in the first six months of fiscal 1998. The
decrease in service revenue was primarily a result of lower system sales and
consequentially a lower level of customer service and maintenance requirements.
Gross margins in the second quarter of the current fiscal year decreased
to 15% of revenues from 36% in the comparable quarter of fiscal 1998. Systems
margins were 11% of system revenues in the current fiscal quarter as compared
to 56% of system revenues in the second quarter of the previous fiscal year.
The decrease in the percentage of system margins in the second quarter of
fiscal 1999 was primarily a result of a change in estimate of realizability of
previously capitalized software creating accelerated amortization expense of
approximately $286,000. The service margins in the second quarter of fiscal
1999 of 17% were relatively consistent with service revenues of 16% in the
second quarter of the previous fiscal year.
Gross margins for the six months ended September 30, 1998 were 31% of
revenues as compared to 41% of revenues for the six months ended September 30,
1997. Systems margins were 48%, a decrease from 59% for the comparable period
in fiscal 1998. The decrease in the system margins was primarily a result of
the change in estimate of realizability of previously capitalized software
creating a charge of accelerated amortization in the second quarter. Service
margins for the first six months of fiscal 1999 were 21% as compared to 24% for
the first six months of fiscal 1998. The decrease in the service revenue margin
percentage is primarily due to lower customer services as a result of lower
system sales.
Research and development expenses in the second quarter of fiscal 1999,
net of capitalized software development costs, were $1,163,000, an increase of
$345,000, or 42%, from the second quarter of fiscal 1998. The increase is
primarily due to a lower level of capitalization of development costs in the
Contex and Publishing division, partially offset by reduced development
headcount and payroll in the Contex business group. Second quarter capitalized
software costs were $87,000 in fiscal 1999 and $481,000 in fiscal 1998.
Research and development, net of capitalized software development costs,
for the six months ended September 30, 1998 were $2,104,000, an increase of 34%
from the comparable period ended September 30, 1997. The increase is primarily
due to a lower level of capitalization of development costs in the Contex and
Publishing division as well as reduced employee costs in the Contex business
group. Capitalized software costs were $176,000 and $908,000 for the first six
months of fiscal 1999 and 1998, respectively.
Marketing, general and administrative expenses were $2,487,000 for the
second quarter of fiscal 1999, an increase of $163,000, or 7%, from the second
quarter of fiscal 1998. Included in these costs are approximately $464,000
related to the sale of substantially all the assets of the Contex division and
a $241,000 additional provision for bad debt expense. Corporate administrative
expenses reflect savings associated with the relocation of corporate
headquarters.
Marketing, general and administrative expenses were $4,409,000 and
$4,491,000 for the first six months of fiscal 1999 and 1998. The decrease of 2%
is primarily a result of lower employee costs in the Contex sales and support
10
<PAGE>
<PAGE>
groups worldwide and the Publishing sales and marketing group in North America
offset by a charge of $464,000 related to the sale of substantially all the
assets of the Contex division and $241,000 additional provision for bad debt in
the second quarter.
Total other expense, net was $398,000 for the second quarter of fiscal
1999, an increase of $157,000, or 65%, from the second quarter of 1998,
primarily due to an increase in interest expense. The increase in interest
expense for the second quarter of fiscal 1999 was primarily due to a rate
increase on the note payable to Tudor Trust from 6% to 8% as well as higher
average balance of the Company's credit line and the increase in warrant
amortization expense related to additional warrants issued pursuant to the
latest amendment to the Tudor Trust line of credit agreement. See Note 4 to
Consolidated Financial Statements.
Total other expense, net was $674,000 and $463,000 for the first six
months of fiscal 1999 and 1998 respectively. The increase in interest expense
was primarily due to a rate increase on the note payable to Tudor Trust from 6%
to 8% effective July 1, 1998 as well as a higher balance on the credit line and
the increase in warrant amortization expense related to additional warrants
issued pursuant to the latest amendment to the Tudor Trust line of credit
agreement. See Note 4 to Consolidated Financial Statements.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred assets. There has been no change in the
valuation allowance for the second quarter of fiscal 1999 and first six months
of fiscal 1999.
The Company accrued dividends of $24,000 on the Series B Preferred Stock
in each of the first and second quarters of fiscal 1999 and 1998.
The Company recorded a net loss allocable to common stockholders of
$3,714,000 for the second quarter of fiscal 1999 and $5,654,000 for the six
months ending September 30, 1998, compared to a net loss allocable to common
stockholders of $1,925,000 for the second quarter of fiscal 1998 and $2,752,000
for the six months ending September 30, 1997.
On September 18, 1998, the Company sold substantially all the assets of
its Contex division, with the exception of approximately $300,000 of accounts
receivable, for approximately $200,000 pursuant to the terms of an Asset
Purchase Agreement dated September 18, 1998 between the Company and Barco, Inc.
Included in the assets sold were inventory, equipment, certain accounts
receivable, source code and object code for Contex PackageMaker, Contex
Professional, Contex Rip'n'Strip, and Contex Object Library. In connection with
the sale, the Company recorded direct transaction costs; costs to write-off
other assets and other accruals for costs directly associated with the sale in
the amount of approximately $464,000.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash of $248,000, a decrease of
$109,000 from March 31, 1998. During the second quarter of fiscal 1999, the
Company's operating and investment activities used $2,661,000 of cash,
primarily for operations.
The Company has a $13,500,000 amended line of credit with Tudor Trust, the
largest stockholder of the Company. Mr. Jeffrey L. Neuman, the grantor, sole
trustee and sole current beneficiary of Tudor Trust, also serves as Chairman of
the Board of Directors of the Company. This credit line, which is payable on
demand, is secured by substantially all of the assets of the Company and has
been used for working capital and general business purposes. As of September
30, 1998, the Company had an outstanding line of credit balance of $12,800,000.
As of November 13, 1998, the Company had an outstanding credit line balance of
$13,400,000. The Company's current outstanding credit line balane is
approximately equal to the maximum loan amount thereunder. The Company is
currently in negotiations with Tudor Trust to facilitate increased borrowings.
There can be no assurance, however, that such negotiations will be successful
or that increased borrowings will be available under the Company's line of
credit or otherwise from Tudor Trust. See Note 4 to the Consolidated Financial
Statements for a further description of the Company's line of credit, as
amended.
See Note 5 to the Consolidated Financial Statements for a description of
the Company's efforts to restructure its outstanding Debentures, 15% Promissory
Notes and 4% Promissory Notes. Despite the progress that has been made, the
Company can give no assurance about the outcome of these restructuring efforts
and does not expect the matters to be resolved in the near future. If the
Company is unable to enter into exchange transactions with the remaining debt
holders, and such holders seek to pursue legal remedies against the Company,
the Company may have to seek
11
<PAGE>
<PAGE>
protection under applicable laws, including the Bankruptcy Code, while it
develops, analyzes and completes alternative restructuring strategies.
The Company anticipates that its cash requirements for fiscal 1999 will be
satisfied mainly from its credit line, as amended, or otherwise from Tudor
Trust, assuming the continued forbearance by the holders of the Debentures, 15%
Promissory Notes and 4% Promissory Notes and the availability of increased
borrowings under the credit line or otherwise from Tudor Trust. The Company's
current outstanding credit line balance is approximately equal to the maximum
loan amount thereunder, and for the remainder of fiscal 1999, the Company
expects to require cash in excess of the current terms of the credit line. The
Company is currently in negotiations with Tudor Trust to facilitate the
fulfillment of the Company's cash requirements for at least the remainder of
fiscal 1999. There can be no assurance that the forbearance by the debtholders
will continue or that Tudor Trust will continue to advance any required funds
under or above the credit line or otherwise. The above uncertainties raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recovery and classifications of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
FOREIGN CURRENCY - CONVERSION TO EURO
Certain of the member countries of the European Union have agreed to adopt
a new currency, the Euro, as their common legal currency. On January 1, 1999,
the countries will establish fixed conversion rates between their existing
currencies and the Euro. The Company has not yet completed its analysis of the
potential impact the conversion to the Euro may have on its business or results
of operations.
YEAR 2000
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
or generates erroneous results because of the inability of the system or
application to properly read the date data, the results could conceivably have
a material adverse effect on the Company.
Products
Year 2000 problems are characteristic of applications in which sorting by
date is stored in a format that relies solely on the last two digits of the
calendar year. Neither Xyvision Production Publisher (XPP) nor Parlance
Document Manager (PDM) store date information in this type of truncated format.
Date information is stored in full standard UNIX date formats so that all four
digits of the year are available both within the applications and to any
applications built upon them. Both XPP and PDM have been tested internally and
meet the Company's qualifications for Year 2000 compliance. The total cost
relating to compliance by its products is not expected to be material to the
Company's financial position or operations. As a key supplier to the technical
documentation and publishing industries, the Company's major exposure for Year
2000 problems is the effect of shutting down page composition or document
management capabilities production at one of its customer's facilities. The
Company believes its contracts with its customers preclude liability for
consequential damages as a result of such claim.
Third Party Products
The Company has completed its assessment of its exposure to failures of
products obtained from third parties to be Year 2000 compliant. The primary
risk in that regard relates to software applications integrated within its core
applications, and the Company has received assurances that software licensed
for use within products sold are Year 2000 compliant. This assessment program
will be ongoing and the Company's efforts with respect to specific problems
identified will depend in part upon its assessment of the risk that any such
problems may cause. Unfortunately, the Company cannot fully control the conduct
of its suppliers, and there can be no guarantee that Year 2000 problems
originating with a supplier will not occur. The Company has not yet developed
contingency plans in the event of a year 2000 failure caused by a supplier or
third party, but intends to consider developing such plans if a specific
problem is identified through the programs described above. In some cases,
especially with respect to its software vendors, alternative suppliers may not
be available. Despite its efforts to test its own and third party products,
these products may contain undetected problems associated with Year 2000
compliance.
Information Technology and Operating Equipment
The Company is in the process of identifying anticipated costs, problems
and uncertainties associated with making its internal use systems Year 2000
compliant. Costs identified to date approximate $265,000 of which $96,000 has
been expended. The Company expects to resolve the Year 2000 issue with respect
to its computer systems and
12
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<PAGE>
software applications through upgrade, conversion, modification or replacement
of non-compliant systems and applications. The Company's Year 2000 readiness
task force has completed its assessment of the exposure of its internal
information technologies (IT), including operating equipment such as electrical
power systems, heating and cooling, etc. The task currently underway is the
continued assessment of all corporate IT, and the implementation of remediation
of problems discovered.
The Company has determined that the replacement of older personal
computers with non-compliant hardware and software with Year 2000 compliant
technology represents the most extensive task yet to be completed. The
Company's survey of its financial, human resource, customer support, and
payroll applications base has identified subsequent versions of existing
software and hardware which are Year 2000 compliant, and these applications
software vendors have all provided an upgrade path which requires minimal
commitment of resources from the Company's IT group. The Company has budgeted
$350,000 for software upgrade and hardware replacement program of which $96,000
has been spent. The Company is evaluating these upgrades and choosing to
implement them, or at its option replace the entire application with another
similar application, for additional reasons not related to Year 2000
compliance, such as additional features, better interfaces, and tighter
integration.
In the terms of communications infrastructure, the Company's systems were
partially upgraded in conjunction with its corporate relocation in February,
1998, and the replacement of its voicemail system is the only remaining
identifiable Year 2000 compliance task, as its telecomunication systems and
internet connectivity is assured by its current suppliers to be Year 2000
compliant. The budget for the voicemail system is $50,000 for hardware,
software and services.
The Company believes that it has an effective compliance plan in place,
supported by its product planning and support organizations, and its internal
IT support function. The remediation efforts are expected to be substantially
complete by July 1999, with continued testing and remediation efforts through
the following four to five months.
The Company does not use operating equipment beyond systems which support
what is considered to be merely office space. Maintenance of building support
systems is wholly the responsibility of the Company's landlord according to the
current lease agreement, and remediation of failures in this regard would fall
under the landlord's extensive on-site maintenance operation.
Contingency Plans
The Company would expect Year 2000 related problems to be addressed by
reliance upon its backup of its IT related information assets with its physical
hardcopy of customer files containing amounts owed, software and services
previously delivered, and software options currently licensed by its customer
base. There is no formal contingency plan under development, nor is one
expected to be produced. The most likely worst case scenario is that the
Company will have to upgrade applications without enhancing features and
benefits in the financial, human resource and payroll applications. The Company
has centralized the majority of its administrative functions at its corporate
headquarters, and has a minimal reliance on widely geographically dispersed
systems or networks to support its information resource needs.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
13
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<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds:
At the Company's 1998 Annual Meeting of Stockholders, the stockholders
approved an amendment to the Company's Certificate of Incorporation, as
amended, to effect a one-for-five reverse split of the Common Stock and
to change the number of authorized shares of Common Stock from 50,000,000
to 25,000,000. Such amendment and reverse split became effective on
October 20, 1998.
Item 3. Defaults Upon Senior Securities:
For a description of defaults upon the Company's 6% Convertible
Subordinated Debentures, 15% Promissory Notes and 4% Promissory Notes and
arrearage in the payment of dividends on the Company's Series B Preferred
Stock, see Note 5 to the Consolidated Financial Statements, which is
incorporated herein by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
At the 1998 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on September 17, 1998, the following matters were acted
upon by the stockholders of the Company:
1. The election of Leland S. Kollmorgen and James L. McKenney as Class
III Directors for the ensuing three years.
2. The approval of an amendment to the Company's Certificate of
Incorporation to effect a one-for-five reverse split of the Common
Stock and to change the number of authorized shares of Common Stock
from 50,000,000 to 25,000,000.
The other directors of the Company, whose terms of office as directors
continued after the Annual Meeting, are Kevin J. Duffy, Jeffrey L.
Neuman and James S. Saltzman. The results of the voting on each of the
matters presented to stockholders at the Annual Meeting are set forth
below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Votes For Votes Withheld Votes Against Abstentions Broker Non-votes
------------ ---------------- --------------- ------ -----------------
1. Election of Class III
Directors
Leland S. Kollmorgen 11,115,408 75,423 N/A N/A N/A
James L. McKenney 10,799,144 430,581 N/A N/A N/A
2. One-for-Five Reverse Split 10,534,107 N/A 627,048 14,569 54,001
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
<TABLE>
<S> <C> <C>
Exhibit Number Description
------------------ -----------------------------------------------------------
(a) 10.1 Second Amended and Restated Secured
Advance Facility Loan Agreement, dated as of July 1, 1998,
by and between the Registrant and Tudor Trust.
27 Financial Data Schedule
(b) Company filedno current reports on Form 8-K during the quarter for which this
report is filed.
</TABLE>
14
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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.
XYVISION, INC.
------------------------------
(Registrant)
November 16, 1998
/s/ Wendy Darland
------------------------------
Wendy Darland
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
15
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<PAGE>
Exhibit Index
<TABLE>
<S> <C>
Exhibit No. Description
- - --------------- -------------------------------------------------------------------------
10.1 Second Amended and Restated Advance Facility Loan Agreement,
dated as of July 1, 1998, by and between the Registrant and Tudor Trust.
27 Financial Data Schedule
</TABLE>
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 248 248
<SECURITIES> 0 0
<RECEIVABLES> 2,530 2,530
<ALLOWANCES> (683) (683)
<INVENTORY> 67 67
<CURRENT-ASSETS> 496 496
<PP&E> 2,688 2,688
<DEPRECIATION> (2,048) (2,048)
<TOTAL-ASSETS> 3,980 3,980
<CURRENT-LIABILITIES> 18,216 18,216
<BONDS> 0 0
235 235
0 0
<COMMON> (13,303) (13,303)
<OTHER-SE> (1,168) (1,168)
<TOTAL-LIABILITY-AND-EQUITY> 3,980 3,980
<SALES> 5,059 2,388
<TOTAL-REVENUES> 5,059 2,388
<CGS> 3,526 2,030
<TOTAL-COSTS> 3,526 2,030
<OTHER-EXPENSES> 6,513 3,650
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 674 398
<INCOME-PRETAX> (5,654) (3,690)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,654) (3,690)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,654) (3,690)
<EPS-PRIMARY> (2.00) (1.30)
<EPS-DILUTED> (2.00) (1.30)
</TABLE>
<PAGE>
EXHIBIT 10.1
SECOND AMENDED AND RESTATED SECURED
ADVANCE FACILITY LOAN AGREEMENT
This SECOND AMENDED AND RESTATED SECURED ADVANCE FACILITY LOAN AGREEMENT
(the "Agreement") is entered into as of this 1st day of July, 1998, by and
between XYVISION, INC., a Delaware corporation with its principal office at 30
New Crossing Road, Reading, Massachusetts 01867 (the "Borrower"), and Jeffrey
L. Neuman as trustee of the Tudor Trust u/d/t August 11, 1986, with an address
of 450 North Roxbury Drive, 4th Floor, Beverly Hills, California 90210 (the
"Lender"). WHEREAS, the Borrower and the Lender were parties to a Secured
Advance Facility Loan Agreement dated June 30, 1992 (the "Original Agreement");
WHEREAS, the Original Agreement was amended and restated pursuant to an Amended
and Restated Secured Advance Facility Loan Agreement dated September 28, 1993
(the "Amended and Restated Agreement");
WHEREAS, the Amended and Restated Agreement was further amended pursuant
to the First Amendment thereto dated December 3, 1993; the Second Amendment
thereto dated February 29, 1996; the Third Amendment thereto dated May 31,
1996; the Fourth Amendment thereto dated November 22, 1996; and the Fifth
Amendment thereto dated November 10, 1997 (as so amended, the "Current
Agreement");
WHEREAS, the Borrower and the Lender desire to amend and restate the
Current Agreement, including an increase in the loan amount to $13,500,000, all
as hereinafter set forth in this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and with the specific intent to
be bound hereby, the Borrower and the Lender hereby agree to amend and restate
the Current Agreement as follows:
I. DEFINITIONS
Each reference in this Agreement to the following terms shall be deemed to
have the following meanings:
1.1. Accountants. Irving Codran, Curtis Abramson and Larry Levine of the
firm of Braverman, Codran & Co., which has a principal place of business at 233
South Beverly Drive, Beverly Hills, California 90212.
1.2. (Intentionally Deleted).
1.3. Adequate Protection Claim. The Lender's administrative expense claim
under Section 507(b) of the Bankruptcy Code, referred to in Section 5. The
Adequate Protection Claim shall equal the amount, if any, by which
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the value of the Lender's collateral has declined, as a result of the
Borrower's use of cash collateral during any Chapter 11 proceeding under the
Bankruptcy Code, below the outstanding amount of the Liabilities, whether the
Liabilities are Pre-Petition Claims or DIP Loans or otherwise, on the earlier
of the date that the Adequate Protection Claim is allowed under the Bankruptcy
Code or the date that an order is entered confirming a plan of reorganization
for the Borrower.
1.4. Advances. Advances by the Lender made pursuant to Section 2 of this
Agreement.
1.5.
1.6. Bankruptcy Code. Title 11 of the United States Code.
1.7.
1.8. Default. Each of the following events is hereby defined as and is
declared to be and to constitute a "Default" without further notice by the
Lender to the Borrower:
(a) Failure by the Borrower to make payments within ten days of the due
date of any Liability.
(b) Failure to perform or observe the covenants, agreements or
conditions of the Borrower contained (i) in Section 11 of this
Agreement, (ii) in any other section of this Agreement after the
expiration of thirty (30) days from the receipt by the Borrower of
written notice from the Lender that an event giving rise to grounds for
such a Default has occurred, (iii) in the Secured Promissory Note, after
the expiration of any applicable cure period or (iv) in the Security
Agreement, after the expiration of any applicable cure period.
(c) If any representation or warranty of the Borrower herein or in any
certificate delivered hereunder shall prove to have been false in any
material respect upon the date when made.
(d) Default shall be made by the Borrower in the performance of any
other covenant or agreement contained in any agreement or instrument
that results in the acceleration of the maturity of any indebtedness to
others of Borrower under such agreement or instrument.
1.9. DIP Loans. Loans made by the Lender to the Borrower after the
Borrower files a petition under Chapter 11 of the Bankruptcy Code or if the
Borrower is filed involuntarily into a case under Chapter 11 of the Bankruptcy
Code.
1.10. Facility Fee Stock. The Four Hundred Thousand (400,000) fully paid
and non-assessable shares of Common Stock of the Borrower issued to the Lender
under the Original Agreement as a fee for establishing the Loan.
1.11.
2
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<PAGE>
1.12. Financing Statements. Uniform Commercial Code financing statements,
substantially in the form attached hereto as Exhibit 4.1, covering all of the
now-existing or after-acquired property of the Borrower.
1.13. First Advance. The advance of Five Hundred Thousand Dollars
($500,000.00) in United States funds to the Borrower by the Lender on the
Original Closing Date.
1.14. GAAP. Generally accepted accounting principles. 1.15. Indebtedness.
For any party, (a) all indebtedness or other obligations of such party that in
accordance with GAAP would be reflected on the balance sheet of such party as a
liability; (b) all indebtedness or other obligations of any other party, the
payment or collection of which such party has guaranteed (except by reason of
endorsement for collection in the ordinary course of business) or in respect of
which such party is liable, contingently or otherwise, including, without
limitation, liable by way of agreement to purchase, to provide funds for
payment, to supply funds to or otherwise to invest in such other party, or
otherwise to assure a creditor against loss; (c) all indebtedness or other
obligations of any other party for borrowed money or for the deferred purchase
price of property or services secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, or other encumbrance upon or in property (including, without
limitation, accounts and contract rights) owned by such party whether or not
such party has assumed or become liable for the payment of such indebtedness or
obligations; and (d) capitalized lease obligations of such party.
1.16. Insolvency Proceedings. The (i) filing by a party of a petition or
request for liquidation, reorganization, arrangement, adjudication as a
bankrupt, relief as a debtor, or other relief under the bankruptcy, insolvency
or similar laws of the United States of America or any state or territory
thereof or any foreign jurisdiction now or hereafter in effect; (ii) making by
a party of a general assignment for the benefit of creditors; (iii) consent by
a party to the appointment of a receiver or trustee, including, without
limitation, a "custodian" as defined in the Bankruptcy Code for a party or any
of its assets; (iv) execution by a party of a consent to any other type of
insolvency proceeding (under the Bankruptcy Code or otherwise) or any formal or
informal proceeding for the dissolution or liquidation of, or settlement of
claims against or winding up of affairs of a party; (v) the appointment of a
receiver, trustee, custodian or officer performing similar functions,
including, without limitation, a "custodian" as defined in the Bankruptcy Code,
for a party or any of its assets, or (vi) the filing against a party of a
request or petition for liquidation, reorganization, arrangement, adjudication
as a bankrupt or similar laws of the United States of America, any state or
territory thereof, or any foreign jurisdiction now or hereafter in effect, or
of any other type of insolvency proceeding (under the Bankruptcy Code or
otherwise) or any formal or informal proceeding for the dissolution or
liquidation of, settlement of claims against or winding up of affairs of a
party.
3
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<PAGE>
1.17. Liabilities. All amounts advanced and unpaid under this Agreement,
the accrued and unpaid interest on such amounts and any and all other expenses
or charges due from the Borrower to the Lender under this Agreement and the
Secured Promissory Note.
1.18.
1.19. Maximum Loan Amount. Thirteen Million Five Hundred Thousand Dollars
($13,500,000.00).
1.20. Minimum Draw. The minimum amount of any Advance under this Agreement
shall be Fifty Thousand Dollars ($50,000.00).
1.21. Minimum Partial Payment Amount. The minimum amount of any partial
prepayment under this Agreement shall be One Hundred Thousand Dollars
($100,000.00).
1.22. Original Closing Date. The date of consummation of the First Advance
under the Original Agreement.
1.23. Permitted Indebtedness. All of the following:
(a) Indebtedness owing to the Lender;
(b) Indebtedness incurred in favor of trade creditors and in the
ordinary course of business and not outstanding more than 180 days;
and
(c) Indebtedness existing on the date hereof and fully described in
Schedule 1.23 hereto.
1.24. Pre-Petition Claim. All amounts advanced and unpaid under this
Agreement as of the date of the filing of a voluntary or involuntary case in
which the Borrower is named as the debtor under the Bankruptcy Code, together
with the accrued and unpaid interest on such amounts and any and all other
expenses or charges due from the Borrower to the Lender under this Agreement.
1.25. Secured Promissory Note. The amended and restated secured promissory
note in the amount of Thirteen Million Five Hundred Thousand Dollars
($13,500,000.00) executed by the Borrower and delivered to the Lender on or
about the date hereof.
1.26. Security Agreement. The Sixth Amended and Restated Security
Agreement, dated November 10, 1997, executed by the Borrower and delivered to
the Lender as security for the Secured Promissory Note, as it may be further
amended from time to time hereafter.
1.27. Warrants. The warrants described in Section 3.5 of this Agreement.
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1.28. Intellectual Property Assignment. The Fifth Amended Assignment of
Patents and Trademarks, dated November 10, 1997, executed by the Borrower and
delivered to the Lender as security for the Secured Promissory Note, as it may
be further amended from time to time.
II. THE LOAN
2.1. Loan. Subject to the terms and conditions set forth herein and prior
to any Default hereunder and so long as no Insolvency Proceedings have
commenced against the Borrower, the Lender agrees that it may lend to the
Borrower and the Borrower agrees that it may borrow and repay from time to time
amounts not to exceed the Maximum Loan Amount (the "Loan").
2.2. Interest. Amounts advanced to the Borrower by the Lender under this
Agreement shall bear interest, payable as set forth in Section 3.2 of this
Agreement, from the date of each such Advance on the unpaid principal balance
thereof until paid in full at a rate of thirteen percent (13%) per annum;
provided, however, that from and after December 3, 1993, all of the unpaid
principal balance outstanding from time to time shall bear interest at the rate
of ten percent (10%) per annum; provided, further, that from and after May 31,
1996, all of the unpaid principal balance outstanding from time to time shall
bear interest at the rate of eight percent (8%) per annum; provided, further,
that from and after November 10, 1997, all of the unpaid principal balance
outstanding from time to time shall bear interest at six percent (6%) per
annum; and provided, further, that from and after December 1, 1997, all of the
unpaid principal balance outstanding from time to time shall bear interest at
eight percent (8%) per annum.
2.3.
2.4. Advances. The Lender agrees to make Advances to the Borrower upon the
Borrower's request, as set forth herein, provided that lending shall be made at
all times at the Lender's discretion, and provided that the Lender does not
intend to make all or part of any Advance requested by the Borrower which would
cause the aggregate principal balance of unpaid Advances made under this
Agreement to exceed the Maximum Loan Amount. Notwithstanding anything to the
contrary herein, if the Lender lends to the Borrower amounts in excess of the
Maximum Loan Amount, such amounts shall be deemed amounts advanced under this
Agreement and shall constitute a portion of the Loan. 2.5. Requests For
Advances. The Borrower may at any time, and from time to time, request Advances
from the Lender in amounts not less than the Minimum Draw, unless at the time
the Advance is requested the difference between the aggregate principal amount
of unpaid Advances then outstanding and the Maximum Loan Amount is less than
the Minimum Draw, in which event the Borrower may request Advances in
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an aggregate amount which is less than the Minimum Draw. All requests for
Advances shall be made by the Borrower to the Lender or an Accountant in
writing; the Borrower may deliver any such written request for an Advance by
telecopy transmission.
IIA. THE LETTERS OF CREDIT OBLIGATIONS
2A.1. Letter of Credit Issuance. At Borrower's request, as of the
September 18, 1997, the Lender has caused Fleet National Bank (the "Bank") to
issue a letter of credit in the face amount of $444,600 (the "Letter of
Credit") to TASC, Inc. (the "Landlord"). In connection with the issuance of the
Letter of Credit, the Lender has entered into a letter of credit application
and reimbursement agreement with the Bank (the "Reimbursement Agreement") under
which the Lender has agreed to reimburse the Bank for all amounts drawn by the
Landlord under the Letter of Credit.
2A.2. Borrower's Reimbursement Obligations to Lender. Borrower hereby
agrees to pay to Lender, immediately upon demand by Lender, any and all amounts
irrevocably paid by Lender to the Bank under the Reimbursement Agreement
including, without limitation, the amount of any collateral which is, from time
to time, pledged by the Lender to secure its obligations under the
Reimbursement Agreement and which is applied by the Bank to the Lender's
obligations.
2A.3. Payment of Reimbursement Obligations. Amounts payable by the
Borrower to the Lender under Section 2A.2 shall bear interest from the date of
Lender's demand under that Section, until paid in full, at the rate applicable
from time to time to the principal balance of Advances under the Agreement
pursuant to Section 2.2 hereof.
2A.4. Reimbursement Obligations Constitute Liabilities. The Borrower
confirms and agrees that its obligations under Section 2A.2 and Section 2A.3
constitute Liabilities under the Agreement secured by the Security Agreement
and by the Assignment of Patents and Trademarks, dated as of November 10, 1997,
between the Borrower and the Lender.
III. PAYMENTS
3.1. Scheduled Principal Payment. Except as provided in Sections 5.2 and
8, all Liabilities shall be paid in full on March 31, 2001, unless declared due
and payable earlier by the Lender as set forth herein.
3.2. Scheduled Interest Payments. Interest accrued shall be due and
payable annually in arrears on the first day of each calendar year except that
interest for December 1997 shall be payable with interest for calendar year
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1998 on January 1, 1999. For the period from December 1, 1997 to January 1,
1999, interest shall be paid in shares of Common Stock of the Borrower (the
"Common Stock"). For each calendar year thereafter, Lender shall have the
option to receive the interest in cash or in shares of Common Stock provided
that with respect to each year's interest, Lender must elect cash or shares of
Common Stock no later than June 30 of such year. The number of shares issuable
in payment of interest shall be determined by dividing accrued interest for the
applicable period by the fair market value of the Common Stock as of the end of
each period determined based on the average fair market value of the Common
Stock on the last ten business days of each calendar quarter ending during such
calendar year. "Fair market value" shall be deemed to equal the mean between
the low bid and high asked prices of the Common Stock as quoted on the OTC
Bulletin Board display service operated by the National Association of
Securities Dealers, Inc., or the closing market price of the Common Stock on a
national securities exchange or the Nasdaq National Market on each applicable
trading day, whichever is applicable, or if none of these are applicable, as
shall be reasonably determined in good faith by the Board of Directors of the
Borrower. If interest is payable in shares of Common Stock, Borrower shall
deliver such shares to Lender on or before January 15 of the year following its
accrual. Cash interest payments shall be sent by wire transfer to an account
specified by Lender.
3.3. Prepayment. The Borrower may from time to time prepay any amount
outstanding under this Agreement or the Secured Promissory Note, in whole or in
part, without premium or penalty, by wire transfer to the Loan Account;
provided, however, that any such partial prepayment shall be made in an
aggregate amount of not less than the Minimum Partial Payment Amount, and that
payments in excess of the Minimum Partial Payment Amount shall only be an
integral multiple thereof.
3.4. Additional Facility Fee. As inducement for the Lender to enter into
this Agreement, the Borrower shall issue to the Lender, upon execution of this
Agreement, a warrant for the purchase of 3,000,000 shares of Common Stock of
the Borrower at an exercise price equal to $.25 per share for a term of 10
years, substantially in the form attached to this Agreement as Exhibit 3.4.
3.5. Warrants. As further consideration for the Loan, the Borrower has
issued to the Lender certain warrants to purchase Common Stock for the
Borrower. Of the warrants originally issued by the Borrower, the following
Warrants remain unexercised, issued and outstanding:
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<TABLE>
<S> <C> <C> <C>
Issue Date Number of Shares Price Per Share
-------------------- ------------------ -------------------
Warrant December 3, 1993 500,000 $.19 per share
(Unnumbered)
Warrant #8 December 31, 1993 200,000 $.22 per share
Warrant #9 March 31, 1994 200,000 $.19 per share
Warrant #10 June 30, 1994 20,000 $ .20
Warrant #11 September 30, 1994 200,000 $.50 per share
Warrant #12 March 31, 1995 200,000 $.50 per share
Warrant #14 June 30, 1995 200,000 $.53 per share
Warrrant #15 September 30, 1995 200,000 $.47 per share
Warrant #16 December 31, 1995 325,000 $.41 per share
Warrant #21 June 13, 1996 6,725,000 $.18 per share
Warrant #24 February 29, 1996 200,000 $.18 per share
Warrant #26 June 13, 1996 2,32,500 $.18 per share
Warrant #27 November 10, 1997 10,000,000 $.16 per share
</TABLE>
3.6. Investment Representation. The Lender is acquiring the shares of
Common Stock of the Borrower issuable to it under this Agreement for its own
account for investment purposes only and not with a view to, or for sale in
connection with, any distribution thereof. The Lender understands that the
shares of Common Stock of the Borrower issuable to it under this Agreement (i)
will not be registered under the Securities Act of 1933 at the time of their
issuance, (ii) may not be sold or transferred unless they are subsequently
registered under such Act or an exemption from registration is then available,
and (iii) will bear a restrictive legend to this effect.
IV. SECURITY AND GUARANTEE
As security for the full and timely payment of the principal and interest
on the Secured Promissory Note and the Liabilities, whether now existing or
hereafter arising:
4.1. Security Agreement. The Borrower has duly executed and delivered to
Lender the Security Agreement and Financing Statements covering all of the now
existing or after-acquired property of the Borrower, as more fully described
therein.
4.2. Recording. The Borrower shall, at its cost and expense, cause all
instruments and documents given as security pursuant to the Security Agreement,
including the Financing Statements, to be duly recorded and/or filed in all
places necessary, in the opinion of the Lender to perfect and protect the
security interest of the Lender in the property covered thereby.
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V. USE OF PROCEEDS
5.1. Ordinary Course of Business. The Borrower agrees that the Advances
will be used in the ordinary course of the Borrower's business.
5.2. Use of Cash Collateral. The Lender agrees that in the event the
Borrower files a petition under Chapter 11 of the Bankruptcy Code, or in the
event the Borrower is filed involuntarily into a case under Chapter 11 of the
Bankruptcy Code, that the Borrower may continue, after the date that an order
for relief is entered in any such case, to use all proceeds arising from the
Borrower's collection or disposition of property of the Borrower in which the
Lender holds an unavoidable, perfected security interest, including proceeds
thereof and property constituting cash collateral, as defined by Section 363(a)
of the Bankruptcy Code. The Lender's consent to the Borrower's continued use of
such property is conditioned upon (a) absence of a Default under this Agreement
(other than one described in Section 1.7(d)) and (b) the entry by the United
States Bankruptcy Court with jurisdiction over the Chapter 11 case of the
Borrower of a cash collateral order having at least the following provisions
(and no provisions in conflict therewith) providing the Lender with adequate
protection of its interest in the Borrower's property, consisting of (i) the
Adequate Protection Claim; (ii) a post-petition replacement lien under Section
361 of the Bankruptcy Code to secure the Pre-Petition Claim on all property of
the Borrower acquired post-petition; and (iii) timely payment of interest
payments due under Sections 2.2 and 3.2 hereof and the Secured Promissory Note.
The Lender's consent to the Borrower's use of its cash collateral shall
terminate if the cash collateral order is revoked or modified in a way which
causes it not to meet the requirements set forth herein.
VI. CLOSING
6.1. Closing. The execution and delivery of this Agreement and the other
documents to be delivered in connection with this Agreement shall take place at
the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts on June
26, 1998 or at such other place and time as the parties in writing shall agree.
VII. CONDITIONS PRECEDENT
The obligation of the Lender to make the Loan, and each Advance
thereunder, is subject to the satisfaction of the following conditions
precedent.
7.1. Secured Promissory Note. The Lender shall have received a duly
executed and delivered Secured Promissory Note in a form substantially similar
to that attached hereto as Exhibit 7.1(A).
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7.2. Documents. The Lender shall have received all instruments and
documents required to be delivered pursuant to Article IV, and the same shall
be in full force and effect.
7.3. Warrant. The Lender shall have received a warrant to purchase Common
Stock of the Borrower as described in Section 3.4.
7.4. Representations and Warranties. All representations and warranties
of the Borrower contained herein shall be true and correct.
7.5. No Event of Default. There shall exist no Default and no condition,
event or act which, with notice or lapse of time or both, would constitute a
Default.
7.6. Corporate Form. The Lender shall have received:
(a) Corporate Existence. A certificate of corporate existence certified
as of a recent date by the Secretary of State of the State of Delaware.
(b) Incumbency. A certificate of the Secretary of the Borrower as of a
recent date, as to identity, incumbency and signatures of its officers.
(c) Resolution. A certificate of the Secretary of the Borrower, as of a
recent date, as to the corporate resolutions authorizing the borrowing
by the Borrower and the execution and delivery of this Agreement, the
Security Agreement and the Secured Promissory Note.
VIII. POST-PETITION LENDING
If the Borrower files a petition under Chapter 11 of the Bankruptcy Code
or if the Borrower is filed involuntarily into a case under Chapter 11 of the
Bankruptcy Code, the Lender agrees to make DIP Loans to the Borrower from time
to time in amounts that when aggregated with the Advances do not exceed the
Maximum Loan Amount on the same terms set forth in Section 2 provided the
following terms and conditions are met. The Borrower shall not be in Default
under this Agreement (other than one described in Section 1.7(d)); the United
States Bankruptcy Court with jurisdiction over the Chapter 11 case of the
Borrower shall have issued an order under Section 364(c) of the Bankruptcy Code
authorizing the DIP Loans, and providing for (i) a post-petition security
interest to secure the DIP Loans in all of the Borrower's post-petition assets
on the same terms and conditions as the security interest securing the Advances
subject only to the Lender's pre-petition lien and pari passu with the Lender's
adequate protection lien referenced in Article V; (ii) priority over any or all
administrative expenses of the kind specified in Section 503(b) or 507(b) of
the Bankruptcy Code, other than fees owed to the United States Trustee under 28
U.S.C. 1930 and the allowed fees and expense reimbursement of professionals
retained by the Borrower and any official Committees appointed for creditors of
the Borrower in such a Chapter 11 case; and (iii) timely payment of interest
payments on the DIP Loans as provided in Sections 2.2 and 3.2 hereof and the
Secured
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Promissory Note; the conditions to the Lender's consent to the Borrower's use
of its cash collateral under Section 5.2 shall have been met; the Borrower
shall be continuing to operate its business in the ordinary course as a debtor
in possession under Chapter 11 of the Bankruptcy Code; no trustee shall have
been appointed under Chapter 11 of the Bankruptcy Code; and the Borrower shall
not be subject to a case under Chapter 7 of the Bankruptcy Code.
IX. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
9.1. Corporate Authority.
(a) Incorporation; Good Standing. The Borrower (i) is a corporation duly
organized, existing and in good standing under the laws of the State of
its incorporation; (ii) has all requisite corporate power to own its
property and conduct its business as now conducted and as presently
contemplated; and (iii) is in good standing as a foreign corporation
and is duly authorized to do business in each jurisdiction where the
nature of its properties or its business requires such qualification.
(b) Authorization. The execution, delivery and performance of this
Agreement, the Secured Promissory Note, the Security Agreement
(together, the "Loan Documents") and the transactions contemplated
hereby (i) are within the corporate authority of the Borrower, (ii)
have been authorized by proper corporate proceedings and (iii) will not
contravene any provision of law, its Certificate of Incorporation or
By-Laws or any other agreement, instrument or undertaking binding upon
the Borrower. Each of the Loan Documents constitutes the legal, valid
and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms.
9.2. Governmental Approvals. The execution, delivery and performance of
this Agreement, the Secured Promissory Note and the Security Agreement and the
transactions between the parties hereto contemplated hereby and thereby do not
require any approval or consent of, or filing with, any governmental agency or
authority, other than the filing of Financing Statements and any required
assignment of security interest with the applicable governmental offices.
9.3. Title to Properties; Absence of Liens. The Borrower has good and
valid title to all properties, assets and rights of every name and nature now
purported to be owned by it free from all defects, liens, charges and
encumbrances whatsoever, except as set forth in Schedule 9.3 hereof.
9.4. No Default. The Borrower is not in default in any material respect
under any material contract, agreement or obligation, which default could
result in a significant impairment of the ability of the Borrower to fulfill
its obligations hereunder or a significant impairment of its financial position
or business, except as set forth on Schedule 9.4 attached hereto.
9.5. Litigation. There is no litigation, proceeding or governmental
investigation pending, or to the knowledge of its officers, threatened against
the Borrower that will adversely affect the ability of the Borrower to
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perform its obligations hereunder, that is likely to affect the Lender's
security interest in the Collateral (as defined in the Security Agreement), or
that if determined adversely to the Borrower is reasonably likely to have a
material adverse effect on the financial condition or business of the Borrower
or result in any material liability on the part of the Borrower nor is there
any basis in fact therefor known to the Borrower, except as set forth in
Schedule 9.5 attached hereto.
9.6. Financial Condition. The unaudited consolidated balance sheet of the
Borrower dated as of December 31, 1997 and the unaudited statements of
operations, cash flows and stockholders' equity of the Borrower for and as of
the end of the period ending on that date, including any related notes (the
"Financial Statements"), that were heretofore furnished to the Lender, are
true, correct and complete in all material respects and fairly present in all
material respects the financial condition of the Borrower as of the date of
each such statement and have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the period
involved. Other than as reflected in such Financial Statements and except for
liabilities incurred in the ordinary course of business since the date thereof,
the Borrower has no Indebtedness that is or would be material to the financial
condition of the Borrower, nor any material unrealized or unanticipated losses
from any commitments.
9.7. Compliance with Law. The Borrower is not in violation of any
applicable federal, state or local law, rule or regulation or any writ, order
or decree, which violation would have a material adverse effect on the
business, assets or financial condition of the Borrower. The Borrower has not
received notice of any violation of any federal, state or local environmental
law, rule or regulation or assertion that the Borrower has any obligation to
clean up or contribute to the cost of cleaning up any waste or pollutants.
9.8. Payment of Taxes. The Borrower has properly prepared and filed or
caused to be properly prepared and filed all federal, state and local tax
returns that are required to be filed and has paid all taxes shown thereon to
be due and all other taxes, assessments and governmental charges or levies
imposed upon the Borrower and its subsidiaries, their income or profits or any
properties belonging to the Borrower. No extensions of any statute of
limitations are in effect with respect to any tax liability of the Borrower or
any subsidiary of the Borrower. No deficiency assessment or proposed adjustment
of the federal income taxes of the Borrower or any subsidiary of the Borrower
is pending and the Borrower has no knowledge of any proposed liability of a
substantial nature for any tax to be imposed upon any of its properties or
assets. No federal income tax returns of the Borrower or its subsidiaries have
been examined by the Internal Revenue Service.
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9.9. ERISA. The Borrower has never established or maintained an employee
pension benefit plan as defined under Section 3(2)(A) of the Employee
Retirement Income Security Act of 1974, as amended and in effect on the date
hereof, other than its Employee Stock Ownership Plan and Trust and its 401(K)
savings plan. The Borrower is current on all obligations under such plans.
9.10. Insurance. The Borrower maintains in force fire, casualty,
comprehensive liability and other insurance covering its properties and
business that is adequate and customary for the type and scope of its
properties and business.
9.11. Patents, Copyrights, etc. Schedule 9.12 hereof sets forth a true,
correct and complete list and, where appropriate, a description of, all
patents, copyrights, trademarks, trade names and service marks that are
material to the conduct of the Borrower's business as now or as proposed to be
conducted (the "Intellectual Property"). The Borrower owns or has the full
right to use all Intellectual Property. The Borrower has received no notice of,
and has no knowledge of any basis for, a claim against it that any of its
operations, activities, products or publications infringes on any patent,
trademark, trade name, copyright or other property rights of a third party, or
that it is illegally or otherwise using the trade secrets, formulae or any
property rights of others. The Borrower has no disputes with or claims against
any third party for infringement by such third party of any Intellectual
Property.
X. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that from the date hereof and as long as
any indebtedness is outstanding hereunder:
10.1. Notices. It will promptly notify the Lender in writing of the
occurrence of any act, event or condition which constitutes or which after
notice or lapse of time, or both, would constitute a Default hereunder.
10.2. Financial Statements. It will furnish to the Lender:
(a) Within 90 days after the end of each fiscal year, the consolidated balance
sheet of the Borrower, as at the end of, and the related consolidated
statements of earnings and of changes in financial position for, such year
reported upon by independent certified public accountants, together with a
written statement by the accountants certifying such financial statements to
the effect that in the course of the audit upon which their certification of
such financial statements was based (but without any special or additional
audit procedures for the purpose), they obtained knowledge of no condition or
event relating to financial matters which constitutes a Default under this
Agreement, or, if such accountants shall have obtained in the course of such
audit knowledge of any Default, they shall disclose
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in such written statement the nature and period of existence thereof, it being
understood that such accountant shall be under no liability, directly or
indirectly, to the Lender for failure to obtain knowledge of any such Default;
(b) Upon written request of Lender, a quarterly report showing any
variance from the operating budget to actual results of operations and a
monthly statement of profit and loss. Such report shall be accompanied by a
narrative explaining the variances;
(c) Annually, a copy of Borrower's operating budget for the ensuing fiscal
year, and upon request of Lender, the Borrower's cash flow projections set up
on a monthly basis;
(d) From time to time such other financial data and information as the
Lender may reasonably request; and
(e) The financial statements referred to above in this Section 10.2 shall
be prepared in accordance with GAAP.
10.3. Corporate Existence; Maintenance of Properties. It will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and to operate the Borrower's
business in conformity with all applicable laws and regulations. It will cause
all of its properties used or useful in the conduct of its business to be
maintained and kept in good condition, repair and working order and supplied
with all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Borrower may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
Section 10.3 shall prevent the Borrower from discontinuing the operation and
maintenance of any of its properties if such discontinuance is, in the judgment
of the Borrower, desirable in the conduct of its or their business and not
disadvantageous in any material respect to the Lender.
10.4. Insurance. It will maintain, with financially sound and reputable
insurance companies, funds or underwriters insurance of the kinds covering the
risks and in the relative proportionate amounts usually carried by companies
conducting business similar to that of the Borrower.
10.5. Taxes. It will pay or cause to be paid all taxes, assessments or
governmental charges on or against it or its properties prior to the time when
they become delinquent; provided that this covenant shall not apply to any tax,
assessment or charge which is being in good faith contested and with respect to
which adequate reserves have been established and are being maintained in
accordance with generally accepted accounting principles.
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10.6. Expenses. It will reimburse the Lender for all reasonable
out-of-pocket expenses, including but not limited to, the reasonable fees and
costs of special counsel for the Lender and other reasonable attorneys' fees
and costs, incurred or expended in connection with the enforcement of any
obligations of the Borrower under this Agreement, the Secured Promissory Note
or the Security Agreement.
10.7. Certain Taxes. It will pay any documentary stamp taxes or similar
excise taxes which may at any time be determined to be payable by the Lender
with respect to the execution and delivery of this Agreement or the note issued
hereunder and indemnify the Lender against any expense or liability resulting
from any nonpayment or delay in the payment of any such tax.
10.8. Further Assurances. It will execute and deliver to the Lender such
further instruments, provide it with such further data and information and take
such further action as it may reasonably request or as may be necessary or
desirable further to effect the purposes of this Agreement.
10.9. Inspection. It will permit during reasonable business hours any
person designated by the Lender to visit and inspect its properties, corporate
books and financial records and to discuss its affairs, finances and accounts
and those of its Subsidiaries with its officers and employees as often as the
Lender may reasonably request.
10.10. Legal Expenses. It will pay the legal fees and out-of-pocket
expenses of the Lender's counsel incurred in connection with the preparation,
execution and delivery of the Loan Documents.
XI. NEGATIVE COVENANTS
The Borrower covenants and agrees that from the date hereof, and as long
as any Liability is outstanding hereunder, except with the written consent of
the Lender:
11.1. Dividends. The Borrower will pay no dividends either in cash or kind
on any class of its capital stock nor make any distribution (other than in
kind) on account of its stock, nor redeem, repurchase or otherwise acquire
directly or indirectly any of its stock; provided, however, that the Borrower
shall be entitled to pay, to the extent permitted by the applicable provisions
of the Delaware General Corporation Law, the dividends to which the holders of
the outstanding shares of Series B Preferred Stock are entitled in accordance
with the terms of the Borrower's Certificate of Incorporation, as amended to
date.
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11.2. Loans. The Borrower will not make any loans or advances to any
individual, firm or corporation, including without limitation its officers and
employees; provided, however, that it may make advances to its employees,
including its officers, with respect to reasonable business expenses incurred
by such employees which expenses are reimbursable by it.
11.3. Purchase of Securities. The Borrower will not invest in or purchase
any stock or securities of any individual, firm or corporation other than U.S.
Government obligations with a maturity not greater than one (1) year on
certificates of deposits with banks having a principal office within the United
States.
11.4. Merger. The Borrower will not merge or consolidate or be merged or
consolidated with or into any other corporation.
11.5. Sale of Assets. The Borrower will not sell or dispose of any of its
assets except in the ordinary and usual course of its business; provided,
however, that the Borrower may sell or otherwise dispose of assets not in
excess of Two Hundred and Fifty Thousand Dollars ($250,000.00) (cumulatively)
in any fiscal year. Such value is to be determined as the greater of "book" or
"market" value at the time of the asset disposition. Notwithstanding the
foregoing, nothing herein shall prohibit or be applied to limit the Borrower
from exchanging or trading in old equipment toward the purchase of new
equipment.
11.6. Other Security Interests. The Borrower will not grant or suffer to
exist any security interest in, or mortgage of, any of its properties or
assets, except for liens set forth in Schedule 9.3 attached hereto and except
for the granting of a purchase money security interest on specific items of new
equipment acquired by Borrower.
11.7. Not To Engage in Other Business. The Borrower will not engage in
any business other than the business in which it is currently engaged or a
business reasonably allied thereto.
11.8. Capital Expenditures. The Borrower will not in any fiscal year make
or incur any obligation to make any expenditures for the acquisition of or
improvements or addition to any real property, machinery, equipment, fixtures
or furniture, by purchase or by lease purchase agreement or option, the
aggregate cost or annual rental of which is in excess of Six Hundred Thousand
Dollars ($600,000.00), exclusive of such fixed assets to be acquired with the
proceeds of the Loan or any part thereof.
11.9. Indebtedness. The Borrower will not create, incur, assume or suffer
to exist any Indebtedness other than Permitted Indebtedness.
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11.10.
XII. DEFAULTS BY BORROWER AND REMEDIES
12.1 Acceleration. Upon the occurrence of a Default, the Lender may by
notice in writing to the Borrower declare the principal of all Advances then
remaining unpaid and the interest accrued thereon and all other Liabilities of
the Borrower hereunder immediately due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby
expressly waived.
12.2 Suits for Enforcement. In case any one or more Defaults shall occur
and be continuing, the Lender may proceed to protect and enforce its rights or
remedies either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant, agreement or other provision contained
herein, in the Secured Promissory Note or in any document or instrument
delivered in connection with or pursuant to this Agreement, or to enforce the
payment of the Secured Promissory Note or any other legal or equitable right or
remedy.
12.3. Rights and Remedies Cumulative. No right or remedy herein conferred
upon the Lender is intended to be exclusive of any other right or remedy
contained herein, in the Secured Promissory Note or in any instrument or
document delivered in connection with or pursuant to this Agreement, and every
such right or remedy shall be cumulative and shall be in addition to every
other such right or remedy contained herein and therein or now or hereafter
existing at law or in equity or by statute, or otherwise.
12.4. Rights Not Waived. No course of dealing between the Borrower and the
Lender, nor any failure on the part of the Lender to complain of any action or
non-action on the part of the Borrower, no matter how long the same may
continue, shall ever be deemed to be a waiver by the Lender of any of its
rights hereunder. Further, no waiver by the Lender at any time of any of the
provisions hereof shall be construed as a waiver of any of the other provisions
hereunder, or a waiver at any subsequent time of the same provision. The
consent or approval by the Lender to or of any action by the Borrower requiring
the Lender's consent or approval shall not waive or render unnecessary the
Lender's consent or approval to or of any subsequent similar act by the
Borrower.
XIII. DEFAULT BY LENDER
13.1.
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XIV. GENERAL
14.1. Notice. Except as expressly provided herein, all notices required or
permitted to be given hereunder shall be in writing and sent certified mail as
follows:
(a) To the Lender:
Tudor Trust
450 North Roxbury Drive, 4th Floor
Beverly Hills, California 90210
with a copy to:
Arlene Bender, Esq.
Foley, Hoag & Eliot
One Post Office Square
Boston, Massachusetts 02110
and
William D. Simon, Esq.
Simon, Turnbull & Martin
1299 Pennsylvania Avenue
Washington, DC 20004-2400
(b) To the Borrower
Xyvision, Inc.
30 New Crossing Road
Reading, Massachusetts 01867-3254
with a copy to:
Patrick J. Rondeau, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
14.2. Successors and Assigns. The obligations of the Borrower hereunder
shall be binding upon its successors and assigns (but such reference is not
intended as a consent to any assignment not specifically permitted by the
Lender) and shall inure to the benefit of the successors and assigns of the
Lender.
14.3. Term. The term of this Agreement shall be until all of the
Borrower's indebtedness to the Lender, or its assignee, is paid in full.
14.4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts and shall
constitute an agreement under seal.
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14.5. Entire Agreement. This Agreement together with the other Loan
Documents and the Warrants referred to in Section 3.5 constitute the entire
understanding and agreement between the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements and
understandings, whether written or oral, between the parties with respect to
such subject matter.
14.6. Confirmation of Security. The Borrower confirms and agrees that all
of the Liabilities constitute "Obligations" as defined in the Security
Agreement, constitute "Secured Obligations" as defined in the Intellectual
Property Agreement and are secured pursuant to the terms of the Security
Agreement and the Intellectual Property Assignment.
Witnessed: XYVISION, INC.
- - ------------------------------- By: -----------------------------
- - ------------------------------- -------------------------------
Jeffrey Neuman as trustee of
the Tudor Trust u/d/t
August 11, 1986 and not
individually
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