<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended April 2, 1995
Commission File Number 0-18238
SEQUOIA SYSTEMS, INC.
---------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2738973
- -------- ----------
(State or Other Jurisdiction I.R.S. Employer
of Incorporation or Organization) Identification No.)
400 Nickerson Road, Marlborough, Massachusetts 01752
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code (508) 480-0800
--------------
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO__
---
Indicate the number of shares outstanding of each of the registrant's
classes of stock, as of the latest practicable date.
Class Outstanding at April 28, 1995
----- -----------------------------
Common Stock, $.40 par value 15,140,268
<PAGE>
CONSOLIDATED BALANCE SHEETS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ASSETS April 2, June 30,
1995 1994
(unaudited)
---------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 19,394,676 $ 21,024,378
Accounts receivable, net of allowance for doubtful accounts
of $1,692,000 at April 2, 1995 and $1,699,000 at June 30, 1994 17,235,173 11,883,295
Accounts receivable from related parties 0 875,919
Inventories 16,107,046 9,697,903
Other current assets 1,932,882 1,878,170
---------------------------------
Total current assets 54,669,777 45,359,665
---------------------------------
Equipment and Improvements, at cost:
Computer equipment 11,842,935 10,237,475
Machinery and equipment 4,759,330 4,456,288
Equipment under capital lease 2,665,660 2,665,660
Furniture and fixtures 1,308,740 1,189,267
Leasehold improvements 1,575,768 1,536,995
---------------------------------
22,152,433 20,085,685
Less - Accumulated depreciation and amortization 17,281,900 15,275,488
---------------------------------
4,870,533 4,810,197
---------------------------------
Other Assets 915,574 239,428
---------------------------------
Total Assets $ 60,455,884 $ 50,409,290
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings on line of credit 3,785,000 1,705,000
Current maturities of long-term debt 666,667 666,667
Current portion of capital lease obligations 120,528 111,646
Accounts payable 9,301,719 6,382,884
Accrued expenses 10,666,546 9,410,498
Deferred revenue 1,084,102 813,375
---------------------------------
Total current liabilities 25,624,562 19,090,070
---------------------------------
Obligations Under Capital Lease, net of current portion 98,821 190,360
Long-term debt 1,176,145 1,644,945
---------------------------------
Total long-term obligations 1,274,966 1,835,305
---------------------------------
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--11,453,000 shares at April 2, 1995 and June 30, 1994
Issued--none
Common stock, $.40 par value:
Authorized--35,000,000 shares at April 2, 1995 and June 30, 1994
Issued and outstanding 15,139,900 shares at April 2, 1995,
and 14,899,619 shares at June 30, 1994 6,055,960 5,959,848
Additional paid-in capital 79,356,992 79,051,687
Accumulated deficit (51,997,638) (55,564,818)
Cumulative translation adjustment 141,042 37,198
---------------------------------
Total stockholders' equity 33,556,356 29,483,915
---------------------------------
Total Liabilities and Stockholders' Equity $ 60,455,884 $ 50,409,290
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended, For the nine months ended,
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues
Product $26,951,284 $18,865,183 $66,004,379 $56,241,161
Service 3,693,475 3,177,169 11,170,883 10,060,924
Other 0 8,022 11,981 153,573
--------------------------------- --------------------------------
Total revenues 30,644,759 22,050,374 77,187,243 66,455,658
Cost of Revenues
Product 15,033,653 10,437,789 35,532,825 30,616,921
Service and other 1,961,389 1,695,476 5,932,232 4,799,596
--------------------------------- --------------------------------
Total cost of revenues 16,995,042 12,133,265 41,465,057 35,416,517
Gross profit 13,649,717 9,917,109 35,722,186 31,039,141
Research and Development Expenses 3,408,364 2,957,902 9,544,202 8,571,541
Selling, General and Administrative Expenses 9,084,055 5,525,405 21,968,224 15,864,850
--------------------------------- --------------------------------
Total operating expenses 12,492,419 8,483,307 31,512,426 24,436,391
Income from operations 1,157,298 1,433,802 4,209,760 6,602,750
Interest Income 213,793 101,164 604,919 250,174
Interest Expense (127,482) (139,546) (273,974) (560,091)
Other Income (Expense) (109,277) 17,203 (35,254) 38,086
--------------------------------- --------------------------------
Income before provision for
income taxes 1,134,332 1,412,623 4,505,451 6,330,919
Provision for Income Taxes 301,371 104,595 945,350 416,588
--------------------------------- --------------------------------
Net income $832,961 $1,308,028 $3,560,101 $5,914,331
================================= ================================
Net Income Per Common and Common Share Equivalent $0.05 $0.08 $0.23 $0.39
================================= ================================
Weighted Average Number of Common and Common Share
Equivalents Outstanding 15,563,679 15,615,067 15,575,353 15,017,055
================================= ================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS SEQUOIA SYSTEMS, INC.AND
(Unaudited) SUBSIDIARIES
<TABLE>
<CAPTION>
For the nine months ended, April 2, April 3,
1995 1994
------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $3,560,101 $5,914,331
Adjustments to reconcile net income to
net cash provided by (used in ) operating activities--
Depreciation 2,006,412 2,245,135
Amortization (76,928) 180,723
Provision for bad debts 136,049 140,503
Changes in assets and liabilities:
Accounts receivable (5,437,927) (773,166)
Accounts receivable from related parties 875,919 415,931
Accounts receivable, long-term 50,000
Accrued interest included in long-term debt 31,200 27,970
Inventories (6,409,143) 2,111,866
Federal income taxes receivable/prepaid 256,370 (91,836)
Deferred tax assets (378,438)
Other current assets 17,356 107,574
Accounts payable 2,918,835 277,709
Accrued expenses 1,256,048 162,910
Deferred revenue 270,727 94,318
------------------------------
Net cash provided by (used in)
operating activities (973,419) 10,863,968
------------------------------
Cash Flows From Investing Activities:
Purchase of equipment and improvements (2,066,747) (1,038,595)
Decrease (increase) in other assets (599,218) 129,486
------------------------------
Net cash provided by (used in)
investing activities (2,665,965) (909,109)
------------------------------
Cash Flows From Financing Activities:
Repayment of obligations under capital leases (82,657) (164,587)
Short-term debt 2,080,000 (1,240,000)
Long-term debt (500,000) (732,969)
Payment of Cash Dividend (60,569)
Proceeds from issuance of common stock 401,417 283,239
------------------------------
Net cash provided by (used in) financing activities 1,898,760 (1,914,886)
------------------------------
Effect of exchange rates on cash 110,921 (50,669)
Net Increase (Decrease) in Cash and Cash Equivalents (1,629,703) 7,989,304
Cash and Cash Equivalents, beginning of year 21,024,378 10,879,134
------------------------------
Cash and Cash Equivalents, end of year $19,394,675 $18,868,438
==============================
Supplemental Disclosures of Noncash Investing
and Financing Activities:
Issuance of convertible preferred stock in settlement
of class action lawsuit -- $2,875,000
Release of restricted cash for:
Class action settlement -- $1,000,000
Repayment of note payable to bank -- $1,950,000
Repayment of obligations under capital leases -- $1,039,249
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $272,509 $1,054,431
Income taxes paid (refunds received) 1,022,766 462,346
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
NOTE 1 BASIS OF PRESENTATION
- ------
The financial statements included herein have been prepared by Sequoia
Systems, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that the disclosures made are adequate to make the information not misleading.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest audited
financial statements, which are contained in the Company's Annual Report on Form
10-K for the year ended June 30, 1994, filed with the Commission on September 7,
1994, as amended by Amendment No. 1 on Form 10K/A, filed with the Commission on
October 27, 1994, and as further amended by Amendment No. 2 on Form 10-K/A,
filed with the Commission on February 10, 1995.
This information includes all adjustments, (consisting of normal,
recurring adjustments) which the Company considers necessary for a fair
presentation of such information. The results of operations for the three and
nine months ended April 2, 1995, are not necessarily indicative of results to be
expected for the entire year.
NOTE 2 MERGER AND STOCK PURCHASE
- ------
On November 9, 1994, the Company and its acquisition subsidiary entered
into a definitive merger and stock purchase agreement with SPCO, Inc. and
Keystone International, Inc., by which the Company acquired SPCO, Inc., Texas
Microsystems, Inc. and Texas Microelectronics, Inc. and their respective
subsidiaries (the "TMI Group") (collectively the "Transaction"). On March 31,
1995, the Transaction was consummated and the Company issued 5,272,994 shares
of its common stock in exchange for all the common stock and securities to
acquire the common stock of each of the members of the TMI Group.
The Transaction has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements for all comparative periods
have been restated to include the results of operations, the financial position
and cash flows of the TMI Group. The terms of the Transaction are fully
described in the Company's Registration Statement on Form S-4 (file No. 33-
54777) under the Securities Act of 1933, filed with the Securities and Exchange
Commission on February 21, 1995 and amended on February 24, 1995.
5
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidaries
(unaudited)
Total transaction costs of approximately $2,134,000 were expensed as
incurred in the first nine months, of which $1,472,000 were expensed in the
three months ending April 2, 1995. These transaction costs included fees to
financial advisors and legal, accounting, printing and other related expenses
incurred by the Company and the TMI Group.
The following information presents certain income statement data of
Sequoia Systems and the TMI Group for the periods prior to the Transaction. The
consummation of the Transaction was substantially coincident with the fiscal
third quarter 1995 closing.
<TABLE>
<CAPTION>
Sequoia Systems TMI Group Total .
--------------- -------------- ----------
<S> <C> <C> <C>
REVENUES FOR:
Three months ending:
April 2, 1995 $11,001,000 $19,644,000 $30,645,000
April 3, 1994 10,729,000 11,321,000 22,050,000
Nine months ending:
April 2, 1995 32,850,000 44,337,000 77,187,000
April 3, 1994 32,205,000 34,251,000 66,456,000
Year ending June 30:
1994 44,765,000 47,061,000 91,826,000
1993 41,019,000 40,304,000 81,323,000
Sequoia Systems TMI Group Total .
--------------- -------------- ----------
NET INCOME FOR:
Three months ending:
April 2, 1995 $ 304,000 (1) $ 529,000 (1) $ 833,000 (1)
April 3, 1994 1,224,000 84,000 1,308,000
Nine months ending:
April 2, 1995 2,097,000 (2) 1,463,000 (2) 3,560,000 (2)
April 3, 1994 5,073,000 841,000 5,914,000
Year ending June 30:
1994 8,567,000 1,914,000 10,481,000
1993 (31,033,000) 152,000 (30,881,000)
</TABLE>
(1) includes pre-tax expenses related to the Transaction of $779,000 for
Sequoia Systems and $693,000 for the TMI Group for the three months ended
April 2, 1995
(2) includes pre-tax expenses related to the Transaction of $1,236,000 for
Sequoia Systems and $898,000 for the TMI Group for the nine months ended
April 2, 1995
6
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
NOTE 3 INVENTORIES
- ------
Inventories are stated at the lower of cost (first-in, first-out) or
market which requires the periodic assessment of net realizable value. The
difference between cost and market is charged to income in the period the
impairment is determined. Inventory including materials, labor and manufacturing
overhead consists of the following:
<TABLE>
<CAPTION>
April 2, June 30,
1995 1994
-----------------------------
<S> <C> <C>
Raw materials $ 8,078,000 $ 4,837,000
Work-in-process 4,881,000 2,772,000
Finished goods 3,148,000 2,089,000
----------------------------
$16,107,000 $9,698,000
=============================
</TABLE>
NOTE 4 NET INCOME PER SHARE
- ------
For the three and nine month periods ended April 2, 1995, and April 3,
1994, respectively, net income per share was based on the weighted average
number of common and common share equivalents outstanding during the period,
computed in accordance with the treasury stock method. Included in the
calculation for both periods are 5,272,944 common shares issued on March 31,
1995, to consummate the Transaction discussed in note 2. Primary and fully
diluted earnings per share are not separately stated as they are substantially
the same.
NOTE 5 BANK DEBT
- -------
As of March 31, 1995, Sequoia Systems, Inc., State Street Bank and Trust
Company and Texas Commerce Bank, National Association entered into a revolving
credit agreement providing for maximum borrowings of $20,000,000 secured by
substantially all the assets of the Company. At the Company's option, loans may
be drawn down subject to two alternatives: (i) a prime rate option bearing
interest at the then current prime rate and (ii) a LIBOR option bearing interest
at the LIBOR rate plus 2%. The Company is required to meet specific covenants
throughout the duration of this agreement. Available borrowings under this
agreement are subject to a borrowing base formula. The agreement expires on
October 31, 1996. At April 2, 1995, no amount was outstanding under this
agreement.
7
<PAGE>
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
(unaudited)
Sequoia Systems, Inc. through its subsidiary Texas Microsystems, Inc. had
a $2,000,000 term loan, payable in equal monthly installments based on a three-
year amortization with the balance due on June 1, 1997. At April 2, 1995,
$1,444,000 was outstanding under this term loan. Sequoia Systems, Inc. through
its subsidiary Texas Microsystems, Inc. also had a $4,000,000 revolving line of
bank credit. At April 2, 1995, Texas Microsystems, Inc. had borrowed $3,785,000
under this line of credit. There were various financial ratios and other
restrictive covenants governing the borrowing arrangements. The term note and
line of credit were collateralized by substantially all of the assets of TMI and
the personal guarantees of two former shareholders of SPCO, Inc. Subsequent to
the third quarter, 1995, Sequoia Systems, Inc. paid down fully all bank debt of
Texas Microsystems, Inc. totaling $5,229,000 and terminated these agreements.
NOTE 6 LEGAL PROCEEDINGS
- ------
On May 8, 1992, the Commission notified the Company that the Commission's
staff had begun an informal investigation with respect to the Company's revenue
recognition policies. On September 28, 1992, after receiving certain
documentation and information requested from the Company, the Commission
notified the Company that the Commission had entered a formal order of
investigation with respect to these matters.
On February 16, 1995, the Commission and the Company reached a final
settlement pursuant to which no monetary payment was required of the Company.
NOTE 7 SIGNIFICANT CUSTOMERS
- -----
During the three months and nine months ended April 2, 1995, sales to one
customer, DSC Communications Corporation represented 25% and 13% of revenues,
respectively. During the three months ended April 3, 1994, sales to one
customer, CSC Healthcare Systems represented 10% of revenues. During the nine
month period ended April 3, 1994, no sales to one customer represented more than
10% of revenues.
NOTE 8 OTHER EVENTS
- -----
On July 1, 1994, the Company reached agreement with Tricom Group Pty.
Ltd. ("Tricom") and purchased selected assets and the ongoing business
operations of its joint venture with Tricom for cash totaling $1.1 million.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 31, 1995, the Company completed a Transaction pursuant to which the
Company acquired SPCO, Inc., along with its subsidiaries Texas Microsystems,
Inc. and Texas Microelectronics, Inc. (the "TMI Group"). The Transaction has
been accounted for as a pooling of interests and, accordingly, all financial
data contained herein has been restated to include the accounts of the TMI Group
for all periods presented.
Sequoia Systems, Inc. provides Motorola based systems and upgrade products for
the on-line Transaction processing and other interactive applications in which
system availability, fast response times and data integrity are critical. With
the acquisition of the TMI Group, the Company's expanded business lines also
include ruggedized, mission-critical computers, both SPARC and Intel based, for
the industrial market and Bellcore Network Equipment Building Specifications
(NEBS) compliant products specifically designed for the telecommunications
market.
RESULTS OF OPERATIONS
REVENUES
- --------
The Company's revenues increased by 39% to $30,645,000 for the three months
ended April 2, 1995 from $22,050,000 for the three months ended April 3, 1994.
The higher revenue resulted from a 43% increase in product revenues and a 16%
increase in customer service revenues.
The Company's revenues increased by 16% to $77,187,000 for the nine months ended
April 2, 1995, from $66,456,000 for the nine months ended April 3, 1994. This is
attributable to a 17% increase in product revenues and a 11% increase in
customer service revenues.
The growth in product revenues is attributable to the increased sales of NEBS
compliant SPARC and Intel based products specifically designed for the
telecommunications market. For the three months ended April 2, 1995, the growth
in product revenues was caused primarily by significantly higher demand by one
customer, from which such demand is not expected to continue at this level in
the near term. Sales of ruggedized Intel based products for the industrial
market displayed a modest increase and sales of Motorola based systems and
upgrade products for the on-line Transaction processing market increased
slightly from the comparative periods of 1994.
9
<PAGE>
The increase in customer service revenues was largely a result of the service
revenue stream generated from the Company's acquisition on July 1, 1994 of
selected assets and the ongoing business operations of its former Australian
distributor by a newly formed Australian subsidiary.
During the three and nine months ended April 2, 1995, sales to one customer, DSC
Communication Corporation, represented 25% and 13% of total revenues. For the
previous year, during the three months ended April 3, 1994, sales to one
customer, CSC Healthcare Systems, Inc. represented 10% of total revenues. For
the nine months ended April 3, 1994, there were no sales to any customer that
represented over 10% of total revenues.
Sales outside the United States comprised $6,780,000 or 22% of total revenues
for the three months ended April 2, 1995, as compared to $4,869,000 or 22% of
total revenues for the three months ended April 3, 1994. These increases were
primarily attributable to the additional revenues provided from the new
Australian subsidiary and to increased sales volume of ruggedized products to
Western Europe.
The Company believes that certain VAR's in the healthcare market and customers
in the telecommunications market will continue to represent a substantial
portion of overall sales. Changes in the relationship with, performance by or
loss of such customers could have a significant effect on the Company's revenues
and operating results.
Motorola based product revenues consisted of sales of expansion systems, or
upgrades, to existing customers with increased information processing
requirements rather than systems sales to new customers. While sales of such
expansion systems have provided a reliable source of revenues during periods
when sales to new customers have been particularly slow, those revenues will
likely decline if the Company does not develop additional upgrades or features
of these products for existing customers.
The Company's future success will also depend in part on the development of new
products and the ability of current and the willingness of future licensees to
develop products and technology that may be marketed and sold by the Company, or
which provide royalty income for the Company.
The markets for NEBS compliant SPARC and Intel based products and ruggedized
Intel based products are characterized by rapidly changing technology and user
needs, requiring significant investment for product
10
<PAGE>
development. The Company believes that part of its success in the future will
depend upon its ability to develop, manufacture and market products which meet
changing user needs in these markets and which successfully respond to
technological changes in architectural standards on a cost-effective and timely
basis.
GROSS MARGIN
- ------------
The Company's gross margin remained relatively unchanged at 45% for the three
months ended April 2, 1995 and April 3, 1994.
Gross margin declined by 1% to 46% for the nine months ended April 2, 1995, from
47% for the nine months ended April 3, 1994. The decrease in gross margin was
due to decreases in customer service margins, over the first half of fiscal
1995, leading to a 6% decrease in service margins for the comparative nine
months to 47% for the nine months ended April 2, 1995 from 53% for the nine
months ended April 3, 1994. This is caused by both (i) lower service pricing
for higher reliability VME-based products and (ii) increases in staffing within
the product support group and the recently-formed professional service group
which has not contributed substantially to revenues due to its start-up status.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
The Company's research and development expenses increased 15% and 11% to
$3,408,000 and $9,544,000, respectively, for the three and nine months ended
April 2, 1995 from $2,958,000 and $8,572,000 for the three and nine months ended
April 3, 1994. These increases resulted primarily from investments made to
support a joint development program with Novell, Inc., increased spending on
projects to further expand CPU product offerings and the development of products
for the telecommunications market.
Research and development expenses as a percentage of revenues decreased to 11%
for the three months ended April 2, 1995, from 13% for the three months ended
April 3, 1994 primarily as a result of the much higher revenues in the recent
three month period. This spending percentage is expected to return to the
previously higher level in the future.
11
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
- ---------------------------------------------
Selling, general and administrative expenses increased 64% and 39% for the three
and nine months ended April 2, 1995 to $9,084,000 and $21,968,000 from
$5,525,000 and $15,865,000, respectively, for the three and nine months ended
April 3, 1994. These operating expense increases were primarily the result of
four factors: expenses related to the Transaction, increased selling expenses
related to the higher revenue volume, increased advertising and marketing
programs, and additions in personnel.
The Company incurred $1,472,000 and $2,134,000 in the three and nine months
ended April 2, 1995, respectively, for expenses in connection with the completed
acquisition of the TMI Group, related to fees to financial advisors and for
legal, accounting and printing costs. As a result of the increase in sales
volume, related expenses of commissions and external VAR fees increased for the
comparative periods. Corporate advertising increased and marketing promotion
programs were initiated related to new products and the expansion of sales
channels. Personnel increases were focused on expanding distribution channels
in the U.S. telecommunications market and staffing expenses incurred by the
Australian subsidiary which had not yet been formed in fiscal 1994.
OPERATING INCOME
- ----------------
The Company reported operating profits of $833,000 and $3,560,000 during the
three and nine months ended April 2, 1995, as compared to operating profits of
$1,308,000 and $5,914,000 during the three and nine months ended April 3, 1994.
The decreases in operating profit were primarily the result of reduced service
margins, the costs relating to the completion of the Transaction and other
increases in operating expenses.
OTHER INCOME (EXPENSE)
- ----------------------
The Company had interest income of $214,000 and $605,000 for the three and nine
month periods ended April 2, 1995, compared to interest income of $101,000 and
$250,000, respectively, for the same periods ended April 3, 1994. The increase
in interest income resulted from higher cash and short-term investment balances
at higher interest rates and lower capital lease obligations during the three
and nine months ended April 2, 1995.
12
<PAGE>
The Company had interest expense of $127,000 and $274,000 for the three and nine
month periods ended April 2, 1995 compared to interest expense of $140,000 and
$560,000, respectively, for the same periods ended April 3, 1994. The decreases
reflected the restructuring of debt for the TMI Group using proceeds of a three
year term bank note and revolving credit facility to repay a subordinated note
to Keystone International on June 7, 1994, which bore substantially higher cost
funds.
Translation amounts, recorded in accordance from FASB 52 accounted for
substantially all of the other income (expense), as a result of currency
fluctuations in the countries in which the Company conducted business.
INCOME TAXES
- ------------
The Company booked provisions for income taxes of $301,000 and $945,000 in the
three and nine months ended April 2, 1995, respectively and $105,000 and
$417,000 for the three and nine months ended April 3, 1994. These tax
provisions reflect the combination of the pre-merger Sequoia Systems, Inc.'s
provisions for income taxes for federal alternative minimum tax and state tax
liabilities, and the pre-merger tax provisions of the TMI Group. The
consolidated tax rate for subsequent periods is expected to reflect the benefits
of Sequoia Systems, Inc. net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At April 2, 1995, the Company had cash and cash equivalents and working capital
of $19,395,000 and $29,045,000, respectively, compared to cash and cash
equivalents and working capital of $21,024,000 and $26,270,000 at June 30, 1994.
The reduction in cash was largely due to the acquisition of the net assets of
the Company's Australian distributor on July 1, 1994 for $1,100,000. The
increase in working capital was due predominantly to higher levels of
inventories and receivables at April 2, 1995, relating to the higher revenue
levels sustained and the introduction of new system level products.
At April 2, 1995, the Company's net accounts receivable totaled $17,235,000 as
compared to $12,759,000 at June 30, 1994. The Company's days sales outstanding
at April 2, 1995, calculated on net accounts receivable, was 51 days compared to
45 days at June 30, 1994. The increase is directly related to increased revenue
achievement.
13
<PAGE>
Inventories including customer spares have increased to $16,107,000 at April 2,
1995 from $9,698,000 at June 30, 1994, due to the purchase of inventory as part
of the acquisition of the Australia distributor and the procurement of
inventories associated with the introduction of new products, higher revenue
levels and backlog. The Company expects to reduce its inventory during the
fourth quarter, 1995 unless there are significant deviations from planned
revenue levels.
Capital expenditures, totaling $2,067,000 during the nine months ended April 2,
1995, were primarily for computer equipment including the capitalization of
internally manufactured systems and for software licenses.
At April 2, 1995, the Company had remaining obligations of approximately
$221,000 for leases and engineering service contracts related to its
restructuring charge in December 1992. The Company believes that the ultimate
settlement of these remaining obligations related to the restructuring will not
materially impact the Company's liquidity.
The Company terminated its previous credit line with State Street Bank and Trust
Company and in connection with the completion of the Transaction, on March 31,
1995, the Company, State Street Bank and Trust Company and Texas Commerce Bank,
National Association, entered into a new credit agreement that provides for
maximum borrowings of $20,000,000.
At the Company's option, loans may be drawn down subject to two alternatives:
(i) a prime rate option bearing interest at the then current prime rate and (ii)
a LIBOR option bearing interest at the LIBOR rate plus 2%. The Company is
required to meet specific covenants throughout the duration of this agreement.
Available borrowings under this agreement are subject to a borrowing base
formula. The agreement expires on October 31, 1996. At April 2, 1995, no
amount was outstanding under this agreement.
On June 7, 1994, Sequoia Systems, Inc. through its subsidiary Texas
Microsystems, Inc., borrowed $2,000,000 from the Texas Commerce Bank under a
three year term loan. At April 2, 1995, $1,444,000 was outstanding under this
agreement. Sequoia Systems, Inc. through its subsidiary Texas Microsystems,
Inc. also had a $4,000,000 revolving line of credit with Texas Commerce Bank.
At April 2, 1995, $3,785,000 was outstanding under this agreement. Subsequent
to the third quarter, 1995, Sequoia Systems, Inc. paid down fully all bank debt
of Texas Microsystems, Inc. totaling $5,229,000.
14
<PAGE>
The Company believes that the present cash and cash equivalents balances and
cash flows from operations are adequate to meet foreseeable cash requirements
for working capital and capital expenditures.
15
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings.
On May 8, 1992, the Commission notified the Company that the Commission's
staff had begun an informal investigation with respect to the Company's
revenue recognition policies. On September 28, 1992, after receiving
certain documentation and information requested from the Company, the
Commission notified the Company that the Commission had entered a formal
order of investigation with respect to these matters.
On February 16, 1995, the Commission and the Company reached a final
settlement pursuant to which no monetary payment was required of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Special Meeting of Stockholders held on March 29, 1995,
the following proposals were adopted by the vote specified below:
Proposal 1 Approve the Merger & Stock Purchase Agreement dated
November 9, 1994
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
---- ------- ------- -------
<S> <C> <C> <C>
5,570,655 202,067 57,005 2,958,760
</TABLE>
Proposal 2 Approve the Amendment to Sequoia's Restated Certificate
of Incorporation
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
---- ------- ------- -------
<S> <C> <C> <C>
8,230,982 470,895 86,620 0
</TABLE>
16
<PAGE>
Proposal 3 Election of Directors
<TABLE>
<CAPTION>
For Withheld from
Nominee Nominee
-------- -------
<S> <C> <C>
Dean C. Campbell 8,361,652 426,845
John F. Smith 8,429,667 358,830
</TABLE>
Proposal 4 Approve the Amendment to the Company's 1986 Incentive
Stock Option Plan and Supplemental Stock Option Plan
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
---- ------- ------- -------
<S> <C> <C> <C>
3,812,594 1,870,480 153,522 2,951,901
</TABLE>
Proposal 5 Approve the Amendment to the Company's 1993 Employee
Stock Purchase Plan
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
---- ------- ------- -------
<S> <C> <C> <C>
5,064,130 616,813 155,653 2,951,901
</TABLE>
Proposal 6 Adoption of the 1995 Outside Directors' Stock Option Plan
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
---- ------- ------- -------
<S> <C> <C> <C>
4,549,967 1,098,167 188,462 2,951,901
</TABLE>
Proposal 7 Ratification of the appointment of Coopers & Lybrand L.L.P.
as the Company's Independent Accountants
<TABLE>
<CAPTION>
For Against Abstain
---- ------- -------
<S> <C> <C>
8,606,648 75,875 105,974
</TABLE>
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.31 Credit Agreement dated March 31, 1995 by and between State Street
Bank and Trust Company, Texas Commerce Bank, National Association
and Sequoia Systems, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 14, 1995, the Company filed a Current Report on Form 8-K
(the "Form 8-K"), dated March 31, 1995, announcing completion of the
Company's acquisition of the TMI Group
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 16, 1995
Sequoia Systems, Inc.
By: /s/ Richard B. Goldman
-----------------------------------
Richard B. Goldman
Vice President of Finance,
Chief Financial Officer
19
<PAGE>
EXECUTION COPY
--------------
CREDIT AGREEMENT
----------------
STATE STREET BANK AND TRUST COMPANY
(FOR ITSELF AND AS AGENT FOR)
TEXAS COMMERCE BANK, NATIONAL ASSOCIATION
AND
SEQUOIA SYSTEMS, INC.
$20,000,000 REVOLVING CREDIT FACILITY
MARCH 31, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE> Page
<CAPTION> ----
ARTICLE I. THE CREDIT FACILITY
<S> <C> <C>
1.01. The Credit Facility 1
1.02. Interest Rate Options 3
1.03. Interest Periods 4
1.04. Interest After Default 4
1.05. LIBOR Rate Unascertainable 4
1.06. Selection of Interest Rate Options 5
1.07. Payments 6
1.08. Pro Rata Treatment of Banks 6
1.09. Availability 6
1.10. Charges Against Accounts 6
1.11. Payment on Non-Business Days 6
1.12. Security Documents 7
1.13. Additional Compensation in Certain Circumstances 8
1.14. Renewal 9
ARTICLE II. CONDITIONS
2.01. Conditions to Closing 9
2.02. Conditions of Making Loans 12
ARTICLE III. REPRESENTATIONS AND WARRANTIES
3.01. Organization 12
3.02. Authority 13
3.03. Approvals 13
3.04. Valid Obligations 14
3.05. Security Interest 14
3.06. Assets 14
3.07. Agreements 14
3.08. Insurance 15
3.09. Litigation; Claims 15
3.10. Labor Matters 15
3.11. ERISA 16
3.12. Financial Statements 16
3.13. Taxes 16
3.14. Investments 17
3.15. Investment Company 17
3.16. Indebtedness 17
3.17. Patents, Copyrights and Trademarks 17
3.18. Environmental Protection 17
3.19. Margin Stock 18
3.20. Representations Accurate 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IV. COVENANTS
<S> <C> <C>
4.01. Affirmative Covenants Other Than Financial
Covenants and Reporting Requirements 19
4.02. Negative Covenants 21
4.03. Financial Covenants 25
4.04. Reporting Requirements 26
ARTICLE V. EVENTS OF DEFAULT; REMEDIES
5.01. Events of Default 29
5.02. Remedies 30
5.03. Set-off 32
ARTICLE VI. AGENCY
6.01. Authorization of Agent and Relationship 32
6.02. Disclaimer of Agent 33
6.03. Bank's Funding Obligations 33
6.04. Payments by the Borrower 34
6.05. Payments by Agent 35
6.06. Direct Payments 36
6.07. Administration of the Loans 36
6.08. Unanimous Consent of Banks 37
6.09. Reliance by Borrower 37
6.10. Rights of Agent 38
6.11. Acknowledgments, Representations and Covenants
of Banks 38
6.12. Collective Action of the Banks 39
6.13. Successor Agent 40
6.14. Provisions Operative Between Banks and Agent Only 40
ARTICLE VII. MISCELLANEOUS
7.01. Further Assurances 40
7.02. Right to Cure 41
7.03. Environmental Matters 42
7.04. Waivers 42
7.05. Delays 42
7.06. Notices 42
7.07. Jurisdiction 43
7.08. Execution 43
7.09. Governing Law 43
7.10. Fees 43
7.11. Binding Nature 43
7.12. Severability 44
7.13. Under Seal 44
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VIII. DEFINITIONS
<S> <C> <C>
8.01. Definitions 44
8.02. Use of Defined Terms 49
8.03. Accounting Terms 49
EXHIBITS
- --------
Exhibit A Form of Notes
Exhibit B Form of Security Agreement
Exhibit C Form of Landlord's Waiver
Exhibit D Form of Borrowing Base Certificate
Exhibit E Form of Pledge Agreement
Exhibit F Form of Guaranty Agreement
Exhibit G Form of Subsidiary Security Agreement
SCHEDULES
- ---------
Schedule 3.01 Foreign Qualifications
Schedule 3.03 Required Authorizations
Schedule 3.05 Liens
Schedule 3.06 Locations
Schedule 3.07 Agreements with Affiliates
Schedule 3.08 Insurance
Schedule 3.09 Litigation; Claims
Schedule 3.12 Financial Statements
Schedule 3.14 Investments
Schedule 3.16 Indebtedness
Schedule 3.17 Intellectual Property Rights
Schedule 3.18 Environmental Protection
</TABLE>
<PAGE>
This Credit Agreement (the "Agreement") is made as of March 31, 1995 between
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company with its
Principal Office at 225 Franklin Street, Boston, Massachusetts 02110 for itself
and as agent for the Banks (as hereinafter defined), TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, a National Banking Association with its Principal office
at 712 Main Street, Houston, Texas 77002 (each, a "Bank" and collectively, the
"Banks") and SEQUOIA SYSTEMS, INC., a Delaware corporation with its Principal
Office at 400 Nickerson Road, Marlborough, Massachusetts 01752 (the "Borrower").
WHEREAS, the Borrower has requested that the Banks provide, and subject to
the terms and conditions of this Agreement and of the other agreements and
documents referred to herein, the Banks have agreed to provide, to the Borrower
a credit facility (the "Credit Facility") of up to $20,000,000 to provide for
the working capital requirements of the Borrower.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Borrower, in
order to induce the Banks to provide the Credit Facility, and intending to be
legally bound, hereby agrees with the Banks as follows:
ARTICLE I
THE CREDIT FACILITY
1.01. The Credit Facility. The Credit Facility shall consist of a
-------------------
revolving line of credit pursuant to which the Banks may from time to time make
Loans to the Borrower and/or issue Letters of Credit on behalf of the Borrower.
Subject to the terms and conditions hereinafter set forth, the Banks shall make
Loans to the Borrower and/or issue Letters of Credit on behalf of the Borrower
at the Principal Office of the Agent, on any Business Day prior to the
Termination Date, in such amounts as the Borrower may request; provided,
however, that the aggregate of all Loans and all Letters of Credit outstanding
shall at no time exceed the lesser of (i) $20,000,000 or (ii) the Borrowing
Base. Within the foregoing limits, subject to the terms and conditions of this
Agreement, the Borrower may obtain Loans and/or Letters of Credit, repay Loans
in whole or in part and obtain Loans again on one or more occasions. Each Loan
advanced upon the Prime Rate Option shall be in the principal amount of Fifty
Thousand Dollars ($50,000) or an integral multiple thereof. Each Loan advanced
upon the LIBOR Option shall be in the principal amount of One Million Dollars
($1,000,000) or an integral multiple thereof. Each Letter of Credit shall be in
a minimum amount of Twenty Five Thousand Dollars ($25,000). The Loans shall be
evidenced by the Notes of the Borrower, dated as of the date hereof. The
Borrower hereby irrevocably authorizes each Bank to make or cause to be made, on
a schedule attached to the respective Notes or on the books of the Bank, at or
following the time of making each Loan and of receiving any payment of
principal, an appropriate notation reflecting such transaction and the then
aggregate unpaid principal balance of the Loans. The amount so noted shall
constitute prima facie evidence as to the amount owed by the Borrower with
respect to
<PAGE>
principal of the Loans. Failure of any Bank to make any such notation shall not,
however, affect any obligation of the Borrower hereunder or under the Notes.
(a) Request for Loans. The Borrower will give the Agent (i) same day
-----------------
telephonic or written notice for Prime Rate Loans by 10:00 a.m. (Boston time);
and (ii) two (2) Business Days' prior telephonic or written notice for LIBOR
Loans, each such notice specifying the amount, date and Interest Rate Option
(and for a LIBOR Loan, the LIBOR Interest Period) of each Loan requested. Any
telephonic notice given under this Section will be followed by written notice
given not later than the next following Business Day. The Agent may rely in
good faith in the identity and authority of any person providing such telephonic
notice.
(b) Repayment of Principal. The Borrower shall repay in full all
----------------------
Loans and all interest thereon and all other changes incurred in connection
therewith upon the Termination Date. The Borrower may prepay, at any time,
without penalty, the whole or any portion of any Prime Rate Loan; provided that
each such prepayment, if less than the aggregate amount of all Prime Rate Loans
then outstanding, shall be in the amount of Fifty Thousand Dollars ($50,000) or
an integral multiple thereof and on the last day of the applicable LIBOR
Interest Period with respect to Loans to which a LIBOR Option applies. In the
event that at any time the Borrowing Base is in an amount which is less than the
aggregate amount of all Loans and Letters of Credit outstanding, the Borrower
will forthwith prepay so much of the Loans as may be required so that the
aggregate of all Loans and Letters of Credit outstanding will not exceed the
Borrowing Base. The Banks may, at their discretion, renew the revolving line of
credit described in this Agreement by extending the Termination Date. Neither
the inclusion in this Agreement of financial covenants relating to periods after
the Termination Date or any other terms and provisions hereof, however, will be
deemed to create any implication that the Banks are required to renew such
revolving line of credit.
(c) Interest Payments. The Borrower will pay interest on the
-----------------
principal amount of the aggregate Loans outstanding from time to time, from the
date of the initial Loan until payment of all Loans and the Notes in full and
the termination of this Agreement, such interest to be payable monthly in
arrears on each Payment Date, commencing with the first such Payment Date after
the date of this Agreement, and at the end of each LIBOR Interest Period with
regard to LIBOR Loans, and on the date of payment of the Loans in full.
(d) Commitment Fee. The Borrower shall pay to the Agent, in
--------------
connection with the establishment and maintenance of the revolving line of
credit, a commitment fee equal to three-eighths of one percent (0.375%) per
annum of the average daily unused portion of the revolving line of credit during
the preceding calendar quarter (or such shorter period as has elapsed from the
Closing Date to the end of the current calendar quarter). The commitment fee
shall be payable in arrears, on the first day of each of the months of April,
July, October and January in each year, commencing July 1, 1995.
<PAGE>
(e) Use of Loan Proceeds. The proceeds of each Loan will be used by
--------------------
the Borrower solely for its short-term working capital purposes but not to fund
research and development activities, losses or acquisitions absent the prior
consent of the Banks.
(f) Letters of Credit. As part of the Credit Facility, the Agent will
-----------------
issue on behalf of the Borrower, at the request of the Borrower, one or more
commercial letters of credit and/or standby letters of credit; provided,
however, that (a) each such letter of credit issued by the Agent on behalf of
the Borrower (individually a "Letter of Credit" and collectively the "Letters of
Credit") shall by its terms expire no later than the earlier of (i) one year
from the date of issuance thereof or (ii) 30 days prior to the Termination Date,
and (b) the aggregate amount of outstanding Letters of Credit shall not exceed
$5,000,000 at any time. Upon the issuance of any Letter of Credit by the Agent,
the Agent will promptly notify each Bank of the date of issuance, amount and
expiration date of each such Letter of Credit. As a condition of the issuance
of each such Letter of Credit, the Borrower shall (1) execute the Agent's
prevailing letter of credit documentation, as in effect from time to time, and
(2) pay to the Agent the Agent's prevailing letter of credit issuance,
maintenance and negotiation fee(s), as in effect from time to time. Any and all
amounts which the Agent is required to advance pursuant to the Letters of Credit
shall become, at the time the amounts are advanced, Prime Rate Loans from the
Banks. The Agent will notify the Banks of the amount required to be advanced
pursuant to the Letters of Credit. Before 12:00 noon (Boston time) on the date
of any advance that the Agent is required to make pursuant to the Letters of
Credit, each Bank shall make available such Bank's Proportionate Share of such
advance in immediately-available funds to the Agent. The Borrower agrees to be
bound by the terms of the Agent's application and/or agreement for Letters of
Credit and the Agent's written regulations and customary practices relating to
Letters of Credit, though such interpretation may be different from the
Borrower's own, and it is understood and agreed that, except in the case of
gross negligence or willful misconduct, the Agent shall not be liable for any
error, negligence, and/or mistakes, whether of omission or commission, in
following the Borrower's instructions or those contained in the Letters of
Credit or any modifications, amendments, or supplements thereto.
1.02. Interest Rate Options. The Borrower shall pay interest in respect of
---------------------
the outstanding unpaid principal amount of the Loans as selected by it at the
Prime Rate Option or LIBOR Option set forth below applicable to the Loans. The
Agent's determination of a rate of interest and any change therein shall in the
absence of manifest error be conclusive and binding upon all parties hereto. If
at any time the designated rate applicable to any Loan made by any Bank exceeds
such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall
be limited to such Bank's highest lawful rate.
(a) Interest Rate Options. The Borrower shall have the right to
---------------------
select from the following Interest Rate Options applicable to the Loans:
(i) Prime Rate Option: A fluctuating rate per annum (computed
-----------------
on the basis of a year of 360 days, as the case may be, and actual days elapsed)
equal to the Prime Rate, such interest rate to change automatically from time to
time effective as of the effective date of each change in the Prime Rate.
<PAGE>
(ii) LIBOR Option: A rate per annum (computed on the basis of a
year of 360 days and actual days elapsed) equal to LIBOR plus two percentage
points.
(b) Rate Quotations. The Borrower may call the Agent on or before the
---------------
date on which a Loan request is to be delivered to receive an indication of the
rates then in effect, but it is acknowledged that such indication shall not be
binding on the Agent or the Banks nor affect the rate of interest which
thereafter is actually in effect when the election is made.
1.03. Interest Periods. At any time when the Borrower shall select,
----------------
convert to or renew a LIBOR Loan, the Borrower shall notify the Agent thereof at
least two (2) Business Days prior to the effective date of such LIBOR Loan by
delivering a Loan request. The loan request shall specify an interest period
during which such LIBOR Loan Option shall apply, such periods to be one, two or
three months ("LIBOR Interest Period"), provided, that:
(a) any LIBOR Interest Period which would otherwise end on a date
which is not a Business Day shall be extended to the next succeeding Business
Day unless such Business Day falls in the next calendar month, in which case
such LIBOR Interest Period shall end on the next preceding Business Day;
(b) any LIBOR Interest Period which begins on the last day of a
calendar month for which there is no numerically corresponding day in the
subsequent calendar month during which such LIBOR Interest Period is to end
shall end on the last Business Day of such subsequent month;
(c) the Borrower shall not select, convert to or -renew a -LIBOR
Interest Period for any portion of the Loans that--would end after the
Termination Date; and
(d) in the case of the renewal of a LIBOR Loan at the end of a LIBOR
Interest Period, the first day of the new LIBOR Interest Period shall be the
last day of the preceding LIBOR Interest Period, without duplication in payment
of interest for such day.
1.04. Interest After Default. To the extent permitted by applicable law,
----------------------
upon the occurrence and during the continuation of an Event of Default, any
principal, interest, fee or other amount payable hereunder shall bear interest
for each day thereafter until ' paid in full (before and after judgment) at a
rate per annum which shall be equal to five percentage points (5%) above the
rate of interest otherwise applicable with respect to such amount or the Prime
Rate if no rate of interest is otherwise applicable, but in no event in excess
of the highest rate permitted under applicable law. The Borrower acknowledges
that such increased interest rate reflects, among other things, the fact that
such Loans or other amounts have become a substantially greater risk given their
default status and that the Banks are entitled to additional compensation for
such risk.
<PAGE>
1.05. LIBOR Unascertainable.
---------------------
(a) If on any date on which LIBOR would otherwise be determined,
either Bank shall have determined (which determination shall be conclusive
absent manifest error) that:
(i) adequate and reasonable means do not exist for
ascertaining LIBOR, or
(ii) a contingency has occurred which materially and adversely
affects the London interbank market relating to LIBOR, or
(b) if at any time any Bank shall have determined (which determination
shall be conclusive absent manifest error) that:
(i) the making, maintenance or funding of any LIBOR Loan has
been made impracticable or unlawful by compliance by such Bank in good faith
with any law or any interpretation or application thereof by any official body
or with any request or directive of any such official body (whether or not
having the force of law), or
(ii) LIBOR will not adequately and fairly reflect the cost to
such Bank of the establishment or maintenance of any LIBOR Loan, or
(iii) after making all reasonable efforts, deposits of the
relevant amount in U.S. Dollars for the relevant LIBOR Interest Period for a
LIBOR Loan are not available to such Bank with respect to a proposed LIBOR Loan
in the London interbank market,
(iv) then in the case of any event specified in subsection (a)
above, either Bank shall promptly so notify the Agent and the Borrower thereof
and in the case of any event specified in subsection (b) above, such Bank shall
promptly so notify the Agent in writing as to the specific circumstances of such
event, and the Agent shall promptly send copies of such notice to the other
Banks and the Borrower. Upon such date as shall be specified in such notice
(which shall not be earlier than the date such notice is given) the obligation
of (A) the Banks in the case of such notice given by the Agent or (B) such Bank
in the case of such notice given by such Bank the right of the Borrower to
select, convert to or renew a LIBOR Loan shall be suspended until the Agent
shall have later notified the Borrower or such Bank shall have later notified
the Agent, of the Agent's or such Bank's, as the case may be, determination
(which determination shall be conclusive absent manifest error) that the
circumstances giving rise to such previous determination no longer exist. If at
any time the Agent makes a determination under subsection (a) or (b) of this
Section 1.05, and the Borrower has previously notified the Agent of its
selection of, conversion to or renewal of a LIBOR Loan and such LIBOR Loan has
not yet gone into effect, such notification shall be deemed to provide for
selection of, conversion to or renewal of the Prime Rate Option otherwise
available with respect to such Loans. If any Bank notifies the Agent of a
<PAGE>
determination under subsection (b) of this Section 1.05, the Borrower shall,
subject to the Borrower's indemnification obligations under Section 1.13(b), as
to any LIBOR Loan of the Banks on the date specified in such notice either
convert such LIBOR Loan to a Prime Rate Loan otherwise available with respect to
such Loan or prepay such Loan in accordance with the provisions of this
Agreement. Absent due notice from the Borrower of conversion or prepayment such
Loan shall automatically be converted to a Prime Rate Loan upon such specified
date.
1.06. Selection of Interest Rate Options. If the Borrower fails to select a
----------------------------------
LIBOR Interest Period in accordance with the provisions of Section 1.03 in the
case of renewal of a LIBOR Loan, the Borrower shall be deemed to have converted
such Loan or portion thereof to a Prime Rate Loan commencing upon the last day
of that LIBOR Interest Period. If an Event of Default shall occur and be
continuing, the Agent may in its discretion limit the Borrower to the Prime Rate
Option.
1.07. Payments. All payments and prepayments to be made in respect of
--------
principal, interest, commitment fees, closing fee, Letter of Credit fees,
Agent's fees or other fees or amounts due from the Borrower hereunder shall be
payable prior to 12:00 noon (Boston time) on the date when due without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived by the Borrower, and without setoff, counterclaim or other
deduction of any nature, and an action therefor shall immediately accrue. Such
payments shall be made to the Agent at the Principal Office of the Agent for the
ratable accounts of the Banks with respect to the Loans in U.S. dollars and in
immediately available funds, and the Agent shall promptly distribute such
amounts to the Banks in immediately available funds in accordance with Section
6.04 hereunder. All monies received by the Banks hereunder shall be applied (i)
first to reasonable fees, charges, costs and expenses payable to the Banks under
this Agreement, any of the Security Documents or any Letter of Credit documents;
(ii) next to interest then accrued on account of the Loans; and only thereafter
(iii) to principal of the Loans; and finally (iv) to any and all other
obligations and liabilities owing to either Bank by the Borrower, however or
whenever arising. Interest shall be calculated on the basis of the actual number
of days and a year of 360 days.
1.08. Pro Rata Treatment of Banks. Each borrowing, and each selection of,
---------------------------
conversion to or renewal of any Loan or Interest Rate Option and each payment or
prepayment by the Borrower with respect to principal, interest, commitment fees,
closing fee, Letter of Credit fees, or other fees or amounts due from the
Borrower hereunder to the Banks with respect to the Loans, except for the
Agent's fees, shall be made in proportion to the Loans outstanding from each
Bank and if no such Loans are then outstanding, in proportion to the
Proportionate Share of each Bank.
(a) Except as otherwise provided herein, the Borrower shall have the
right at its option from time to time to prepay the Loans in whole or part.
(i) at any time with respect to any Loan to which the Prime
Rate Option applies, provided that such prepayment, if less than the aggregate
of all Prime Rate Loans, shall be in the amount of $50,000 or an integral
multiple thereof;
<PAGE>
(ii) on the last day of the applicable LIBOR Interest Period
with respect to Loans to which a LIBOR Option applies.
1.09. Availability. The proceeds of all Loans shall be credited by the
------------
Agent to a general deposit account of the Borrower with the Agent.
1.10. Charges Against Accounts. The Agent may charge any general deposit
------------------------
account of the Borrower at the Agent with the amount of all payments of
interest, principal and other sums due, from time to time, under this Agreement,
the Notes and/or any Letter of Credit or documents relating thereto and will
thereafter notify the Borrower of the amount so charged. The failure of the
Agent so to charge any account or to give any such notice shall not affect the
obligation of the Borrower to pay interest, principal or other sums as provided
herein, in the Notes and/or any Letter of Credit or documents relating thereto.
1.11. Payment on Non-Business Days. Whenever any payment to be made to the
----------------------------
Agent or any Bank hereunder or under the Notes shall be stated to be due on a
day which is not a Business Day, such payment may be made on the next succeeding
Business Day, and interest payable on each such date shall include the amount
thereof which shall accrue during the period of such extension of time.
1.12. Security Documents. Payment of the principal and interest under the
------------------
Notes and of all other obligations of the Borrower under this Agreement or any
Letter of Credit documents shall be secured by the following:
(a) A security interest in all assets now or hereafter owned by the
Borrower, as more fully set forth in a Security Agreement substantially in the
form of Exhibit B hereto;
---------
(b) A security interest in all assets now or hereafter owned by each
of Sequoia Holdings, Inc. and Texas Microsystems, Inc., as more fully set forth
in the Security Agreements substantially in the form of Exhibit G hereto;
(c) A security interest (or comparable interest under local law) in
all assets now or hereafter owned by each of Sequoia Asia Pacific Pty Ltd and
Sequoia Systems (Australia) Pty Ltd, as more fully set forth in the Agreements
of even date herewith;
(d) A security interest (or comparable interest under local law) in
all assets now or hereafter owned by Sequoia Systems (U.K.) Limited, a limited
liability company incorporated in England, as more fully set forth in the
Debenture of even date herewith;
(e) A guaranty of the Borrower's performance under this Agreement and
the Notes by each of Sequoia Holdings, Inc. and Texas Microsystems, Inc., and
Sequoia Asia Pacific Pty Ltd as more fully set forth in the Guaranty Agreements
substantially in the form of Exhibit F hereto;
<PAGE>
(f) A pledge of the capital stock owned by each of the Borrower;
Sequoia Holdings, Inc.; Texas Microsystems, Inc.; and Sequoia Asia Pacific Pty
Ltd, as more fully set forth in the Pledge Agreements substantially in the form
of Exhibit E hereto;
(g) A landlord's waiver, in substantially the form of Exhibit C hereto
(the "Landlord's Waiver"), which the Borrower shall use its best efforts to
cause the Landlord of the Borrower's Principal Office to execute and deliver to
the Agent within ninety (90) days after the closing date, and such other
consents, UCC financing statements, and other documents as the Banks or their
counsel may reasonably request to permit, secure, and perfect the security
interests provided for hereunder; and
(h) All such other security agreements or assignments, if any, with
respect to patents, copyrights, trademarks, and other intellectual property of
the Borrower and any of its subsidiaries, as the Bank may now or hereafter
reasonably request to create and perfect its security interest therein.
(Collectively, all of the foregoing documents now or hereafter delivered
pursuant to the terms of this Section 1.12, together with the Notes, being
referred to herein as the "Security Documents").
1.13. Additional Compensation in Certain Circumstances.
------------------------------------------------
(a) Increased Costs or Reduced Return Resulting From Taxes, Reserves,
-----------------------------------------------------------------
Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or
- --------------------------------------------
interpretation or any change in any Law, guideline or interpretation or
application thereof by any official body charged with the interpretation or
administration thereof or compliance with any request or directive (whether or
not having the force of Law) of any central bank or other official body:
(i) subjects any Bank to any tax or changes the basis of
taxation with respect to this Agreement, the Notes, the Loans or payments by the
Borrower of principal, interest, commitment fees, or other amounts due from the
Borrower hereunder or under the Notes (except for taxes on the overall net
income of such Bank), imposes, modifies or deems applicable any reserve, special
deposit or similar requirement against credits or commitments to extend credit
extended by, or assets (funded or contingent) of, deposits with or for the
account of, or other acquisitions of funds by, any Bank, or
(ii) imposes, modifies or deems applicable any capital adequacy
or similar requirement (A) against assets (funded or contingent) of, or letters
of credit, other credits or commitments to extend credit extended by, any Bank,
or (B) otherwise applicable to the obligations of any Bank under this Agreement,
and
(iii) the result of any of the foregoing is to increase the cost
to, reduce the income receivable by, or impose any expense (including loss of
margin) upon any Bank with respect to this Agreement, the Notes or the making,
maintenance or funding of any part of the Loans (or, in the case of any capital
adequacy or similar
<PAGE>
requirement, to have the effect of reducing the rate of return on any Bank's
capital, taking into consideration such Bank's customary policies with respect
to capital adequacy) by an amount which such Bank in its reasonable discretion
deems to be material, such Bank shall from time to time notify the Borrower and
the Agent of the amount determined in good faith (using any averaging and
attribution method employed in good faith) by such Bank (which determination
shall be conclusive absent manifest error) to be necessary to compensate such
Bank for such increase in cost, reduction of income or additional expense. Such
notice shall set forth in reasonable detail the basis for such determination.
Such amount shall be due and payable by the Borrower to such Bank ten (10)
Business Days after such notice is given.
(b) Indemnity. In addition to the compensation required by subsection
---------
(a) of this Section 1.13, the Borrower shall indemnify each Bank against all
liabilities, losses or expenses (including loss of margin, any loss or expense
incurred in liquidating or employing deposits from third parties and any loss or
expense incurred in connection with funds acquired by a Bank to fund or maintain
LIBOR Loans subject to the LIBOR Option) which such Bank sustains or incurs as a
consequence of any
(i) payment, prepayment, conversion or renewal of any LIBOR
Loan on a day-other than--the last day of the corresponding LIBOR Interest
Period -(whether or not such payment or prepayment is mandatory, voluntary or
automatic and whether or not such payment or prepayment is then due),
(ii) attempt by the Borrower to revoke (expressly, by later
inconsistent notices or otherwise) in whole or part any notice relating to Loan
requests or prepayments; or
(iii) default by the Borrower in the performance or observance of
any covenant or condition contained in this Agreement or any other Loan
Document, including without limitation any failure of the Borrower to pay when
due (by acceleration or otherwise) any principal, interest, commitment fee or
any other amount due hereunder.
(iv) If any Bank sustains or incurs any such loss or expense it
shall from time to time notify the Borrower and the Agent of the amount
determined in good faith by such Bank (which determination shall be conclusive
absent manifest error and may include such assumptions, allocations of costs and
expenses and averaging or attribution methods as such Bank shall deem
reasonable) to be necessary to indemnify such Bank for such loss or expense.
Such notice shall set forth in reasonable detail the basis for such
determination. Such amount shall be due and payable by the Borrower to such Bank
ten (10) Business Days after such notice is given.
1.14. Renewal. The Banks may, at their discretion, renew the revolving line
-------
of credit described in this Agreement by extending the Termination Date. Neither
the inclusion in this Agreement of financial covenants relating to periods after
the Termination Date or any other terms and provisions hereof, however, will be
deemed to create any implication that the Banks are required to renew such
revolving line of credit.
<PAGE>
ARTICLE II
CONDITIONS
2.01. Conditions to Closing. The obligations of the Banks to perform any of
---------------------
their obligations under this Agreement, any Security Documents or any Letter of
Credit documents is subject to the satisfaction of all of the following
conditions:
(a) Documents. The Agent shall have received this Agreement and all
---------
of the Security Documents, duly executed and delivered by all parties thereto,
and all actions contemplated by the foregoing documents shall have been
accomplished to the reasonable satisfaction of the Agent and its special
counsel.
(b) Warranties, Covenants True. All representations and warranties of
--------------------------
the Borrower and its subsidiaries; Sequoia Holdings, Inc. Texas Microsystems,
Inc.; Sequoia Systems (U.K.) Limited; Sequoia Asia Pacific Pty Ltd; and Sequoia
Systems (Australia) Pty Ltd (the "Subsidiaries"), in this Agreement and the
Security Documents shall be true and accurate on the Closing Date in all
material respects as if then given, and the Borrower and each of the
Subsidiaries and the other parties to the Security Documents shall have
performed or observed all of the terms, covenants, conditions and obligations
under this Agreement and the Security Documents which are required to be
performed or observed by it or them on or prior to the Closing Date.
(c) Closing Certificate. The Agent shall have received a certificate,
-------------------
dated as of the Closing Date and executed by the Chief Financial Officer of the
Borrower, in form and content satisfactory to the Bank, stating the substance of
Section 2.01(b).
(d) Results of Searches. The Agent shall have received written
-------------------
results of searches of the records of filing offices, dated as of a date as
close to the Closing Date as practicable, stating that with respect to each
jurisdiction in which Collateral is kept or maintained and with respect to each
filing office where a filing is required to perfect the Banks' security interest
in the Collateral or where a filing may be made which may affect the priority of
the Banks' security interest in such Collateral, there are no financing
statements, assignments or notices of tax liens on file against or with respect
to any such Collateral, other than financing statements in which the Banks are
named as the secured party, and financing statements as to leased equipment
disclosed on Schedule 3.05 hereto.
-------------
(e) Insurance. The Agent shall have received insurance binders or
---------
certificates of insurance coverage indicating that the Borrower has obtained
insurance as required by Section 4.01(c) of this Agreement.
(f) Financial Statements. Each Bank shall have received copies of
--------------------
the unaudited consolidated balance sheet of the Borrower as at January 1, 1995,
together with the related unaudited consolidated statement of income for the
two-month period then ended and for the portion of the fiscal year of the
Borrower through such date, certified by the Chief Financial Officer of the
Borrower as presenting fairly the financial
<PAGE>
condition and results of operations of the Borrower, in conformity with GAAP
(subject to normal year-end audit adjustments and to the fact that the unaudited
financial statements may be condensed and may not include footnotes).
(g) Merger Documents and Approvals. The Agent shall have received (i)
------------------------------
either approval of the proposed merger between Borrower and Texas Microsystems,
Inc. by the Securities and Exchange Commission or the Shareholders of Borrower
and Texas Microsystems, Inc.; and (ii) documents substantiating the completion
of the merger.
(h) Other Documents. The Agent shall have received all other
---------------
documents and assurances required hereunder or which it may have heretofore
reasonably requested in connection with the transactions contemplated by this
Agreement, and such documents shall be certified, when appropriate, by the
proper authorities or corporate officers, including without limitation the
following, and all such documents and all proceedings to be taken in connection
with such transactions shall be reasonably satisfactory in form and substance to
the Agent and its special counsel:
(i) Certified copies of the resolutions of the Board of
Directors of the Borrower and its Subsidiaries evidencing approval of this
Agreement, the Security Documents and the other matters contemplated hereby and
certified copies of all documents evidencing other necessary corporate action or
approvals, if any, with respect to this Agreement, the Security Documents and
such other matters, including, without limitation, any required approvals of
governmental authorities and other persons or entities.
(ii) A certificate, signed by the Secretary or Assistant
Secretary of the Borrower, setting forth the names of the officers of the
Borrower authorized to sign this Agreement, the Security Documents and any and
all certificates, notices and reports referred to herein; such certificate shall
contain the true signatures of such officers.
(iii) A copy of the By-laws of the Borrower, as amended to date,
as certified by its Secretary; certificates of corporate legal existence and
good standing for the Borrower and each of its Subsidiaries issued as of a
recent date by the appropriate public officials of the State of Delaware, the
Commonwealth of Massachusetts, and other appropriate authorities, as the case
may be.
(iv) Uniform Commercial Code financing statements and any such
other documents as shall be reasonably requested by the Banks to vest in the
Banks a first priority security interest in and to all of the Collateral subject
only to Permitted Liens.
(v) Such documents which, in the reasonable opinion of the
Banks or their special counsel, are required to be obtained in connection with
the Loans under the revolving line of credit by reason of the provisions of any
law or regulation applicable to the Banks (including, without limitation,
executed Forms U-1), and the
<PAGE>
statements made in such documents shall be such as, in the opinion of the Banks,
will permit such Loans in accordance with such laws and regulations.
(vi) A certificate from the Chief Financial Officer of the
Borrower certifying that as of the Closing Date, the Borrower (A) has Tangible
Net Worth is in excess of $25,000,000, and (B) has paid all applicable material
taxes then due and owing or has duly obtained extensions with respect thereto.
(i) No Adverse Change. There shall have occurred no material adverse
-----------------
change in the business, prospects, properties or financial condition of the
Borrower since January 1, 1995.
(j) Closing Fee. At the Closing, the Borrower shall have paid to the
-----------
Banks, or authorized the Agent to charge against its account, (i) a closing fee
in the amount of $50,000 which is to be distributed to the Banks based upon
their Proportionate Share; and (ii) an Agent's fee in the amount of $15,000.
(k) Legal Expenses. At the Closing, the Borrower shall have paid to
--------------
the Banks, or authorized the Agent to charge against its account, all reasonable
costs and expenses (including reasonable legal fees and disbursements of the
Banks' special counsel) of the Banks in connection with the preparation and
execution of this Agreement and the Security Documents.
(l) Legal Opinion. All legal matters incident to this Agreement shall
-------------
be reasonably satisfactory to the Banks' special counsel, and the Bank shall
have received at the Closing the legal opinion of Jeremy F. Swett, Esquire,
General Counsel to the Borrower, in form and substance reasonably satisfactory
to the Banks and their special counsel.
2.02. Conditions of Making Loans. The obligation of the Bank to make any
--------------------------
Loans or issue any Letters of Credit on or subsequent to the Closing Date is
subject to the satisfaction of the following conditions precedent on or before
the date of making each such Loan or issuing each such Letter of Credit (the
"Borrowing Date"):
(a) Representations and Warranties. The representations and
------------------------------
warranties contained in Article III hereof and in the Security Documents and
otherwise made by the Borrower or its Subsidiaries in writing in connection with
the transactions contemplated by this Agreement shall have been correct in all
material respects as of the date on which made and shall also be correct in all
material respects at and as of such Borrowing Date with the same effect as if
made at and as of such time, except as may have been disclosed in writing to the
Banks by the Borrower or its Subsidiaries and to which the Banks have consented
in writing and to the extent that the facts upon which such representations and
warranties are based may in the ordinary course be changed by the transactions
permitted or contemplated hereby.
(b) Performance. The Borrower shall have performed and complied in
-----------
all material respects with all terms and conditions herein required to be
performed or complied with by it prior to or on such Borrowing Date, and on such
Borrowing Date
<PAGE>
there shall exist no Event of Default or condition which would, with either or
both the giving of notice or the lapse of time, result in an Event of Default
upon consummation of the subsequent Loan to be made or Letter of Credit to be
issued on such Borrowing Date.
(c) Certificate. The Agent shall have received a counterpart
-----------
Borrowing Base Certificate in the form attached hereto as Exhibit D executed by
---------
the Chief Financial Officer of the Borrower.
Each request by the Borrower for a Loan or the issuance of a Letter of
Credit subsequent to the Closing Date shall constitute certification by the
Borrower that the conditions specified in this Section 2.02 will be duly
satisfied on the date of the making of such Loan or the issuance of such Letter
of Credit.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower incorporates herein all of the representations and warranties
set forth in the Security Documents. In addition, the Borrower represents and
warrants to the Bank as follows:
3.01. Organization. The Borrower and each of its Subsidiaries is a
------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, the United Kingdom and Australia, as the case may be.
The Borrower: (i) is duly qualified to do business and in good standing in the
Commonwealth of Massachusetts and each other jurisdiction where such
qualification is required, except those jurisdictions where the failure to so
qualify will not have a material adverse effect on the Borrower's business,
prospects or financial condition (a list of the jurisdictions where the Borrower
is so qualified as of the date hereof being set forth on Schedule 3.01 hereto);
-------------
(ii) and each of its Subsidiaries has all requisite corporate power and
authority to conduct its business as presently being conducted and as proposed
to be conducted after the Closing and to own its properties now and after the
Closing; and (iii) and each of its Subsidiaries has all requisite corporate
power and authority to execute and deliver, and to perform all of its
obligations under, this Agreement and the other Loan Documents.
3.02. Authority. The execution, delivery and performance by the Borrower
---------
and each of its Subsidiaries of this Agreement and the other Loan Documents: (i)
have been duly authorized by all necessary corporate action; (ii) do not
contravene any provision of the Borrower's or such Subsidiary's Certificate of
Incorporation or by-laws, each as amended to date; (iii) do not violate any
provision of any law, rule or regulation or any judgment, determination or award
applicable to the Borrower or any Subsidiary; (iv) do not and will not result in
a material breach or constitute a material default (or constitute an event which
with the passage of time or giving of notice or both could constitute an event
of default) under any agreement to which the Borrower or each of its
Subsidiaries is a party or by which any of its properties are bound, including,
without limitation, any loan or credit agreement, lease, indenture, debt
instrument or mortgage;
<PAGE>
and (v) do not and will not result in or require the creation or imposition of
any lien, security interest, mortgage, deed of trust, pledge or other charge or
encumbrance of any nature upon or with respect to any of the properties of the
Borrower, except the security interests and liens granted to the Banks under the
Security Documents. The Borrower and each of its Subsidiaries is not in default
in any material respect under any law, rule or regulation, order, writ,
judgment, injunction, decree, determination or award referred to above, or to
the Borrower's knowledge under any loan or credit agreement, lease, indenture,
debt instrument or mortgage referred to above, and the Borrower and each of its
Subsidiaries will not be in any such default which would have a material adverse
effect on the Borrower's business or financial condition by virtue of the
transactions to be entered into at the Closing.
3.03. Approvals. No authorization, consent, approval, license or exemption
---------
of, or filing a registration with, any court or governmental department or
commission, board, bureau, agency, instrumentality or other person or entity,
domestic or foreign, is or will be necessary for the valid execution, delivery
or performance by the Borrower and each of its Subsidiaries of this Agreement or
any of the other Loan Documents, other than filings which have already been made
and consents or approvals which have already been received, and filings required
to perfect under applicable law the security interests and liens granted to the
Banks pursuant to the Security Documents. Set forth on Schedule 3.03 hereto is a
-------------
list of all material licenses, permits, certificates and other governmental
authorizations required as of the date hereof for the conduct of the business of
the Borrower and each of its Subsidiaries. As of the date hereof, the Borrower
and each of its Subsidiaries is the lawful holder of the licenses, permits,
certificates and governmental authorizations set forth on such Schedule 3.03.
-------------
The Borrower and each of its Subsidiaries has no reason to believe that any such
material license, permit, certificate or other governmental authorization will
be revoked, canceled, rescinded, terminated, modified or lost to the extent such
revocation, cancellation, rescission, termination, modification or loss would
have a material adverse effect on the Borrower's business or financial
condition.
3.04. Valid Obligations. This Agreement and the other Loan Documents have
-----------------
been duly executed and delivered by the Borrower and each of its Subsidiaries
and constitute legal, valid and binding obligations of the Borrower and each of
its Subsidiaries, enforceable in accordance with their respective terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except as enforceability may be subject to
general principles of equity, whether such principles are applied in a court of
equity or at law.
3.05. Security Interest. The Banks' security interest in the Collateral has
been duly perfected to the extent that such security interest may be perfected
by filing (a) UCC-1 financing statements with (i) the Secretary of State of the
Commonwealth of Massachusetts, the Clerk of the City of Marlborough,
Massachusetts and the Secretary of State of Texas and (b) notices of the Banks'
security interest in the intellectual property of the Borrower and each of its
Subsidiaries with (i) the U.S. Patent and Trademark office and (ii) the U.S.
Copyright office. Except as set forth on Schedule 3.05 hereto, no security
interest, lien, mortgage, deed of trust, pledge, levy, attachment, claim or
other
<PAGE>
charge or encumbrance shall exist at the Closing with respect to any of the
assets or properties of the Borrower and each of its Subsidiaries (including,
without limitation, the Collateral), other than the security interests granted
to the Banks under the Security Documents or Permitted Liens.
3.06. Assets. The Borrower and each of its Subsidiaries has good and valid
------
title to all of its assets and properties (including without limitation, the
Collateral), in each case subject to no security interests, lien, mortgage,
pledge, lease, encumbrance, charge, easement, or encroachment except for
Permitted Liens and for defects and claims which, in the aggregate, could not
have a material adverse effect on the business, operations, property or
financial condition of the Borrower and its Subsidiaries taken as a whole. The
Borrower and each of its Subsidiaries enjoys peaceful and undisturbed possession
under all leases under which it is operating, and all said leases are valid and
subsisting and in full force and effect in all material respects. The Borrower's
principal place of business is maintained at its Principal Office at the
location indicated in the preamble to this Agreement. Attached as Schedule 3.06
-------------
is a complete list of all locations at which the Borrower keeps or maintains its
assets, properties, books and/or records other than equipment loaned or
consigned to customers or prospective customers in the ordinary course of the
Borrower's business.
3.07. Agreements.
----------
(a) Attached as Schedule 3.07 hereto is a list of all material
-------------
agreements (including all amendments thereto), oral or written, in effect as of
the date hereof between the Borrower and any director, officer, shareholder or
Affiliated Person of the Borrower, including without limitation, all leases and
management, maintenance, brokerage, supply and service contracts and any
contract, agreement or other arrangement providing for the employment of,
furnishing of services to or by, rental of real or personal property to or from
or otherwise requiring payments to or by the Borrower, any director, officer or
shareholder thereof, or any affiliate of any of the foregoing. True, correct
and complete copies of all of the agreements (including all amendments, exhibits
and schedules thereto) set forth on Schedule 3.07 have previously been made
-------------
available to the Bank and its special counsel.
(b) The Borrower and each of its Subsidiaries is not in violation of
any term of its charter or by-laws, as now in effect, or of any material term of
any mortgage, indenture, judgment, decree, order, instrument, contract or
agreement or, to its knowledge, of any term of any statute, ordinance,
administrative determination, or governmental rule or regulation applicable to
it where such violation would have a material adverse effect on the Borrower's
business or financial condition.
3.08. Insurance. Attached hereto as Schedule 3.08 is a complete and
--------- -------------
accurate list of all insurance policies of the Borrower covering its properties
and assets as of the date hereof. The Borrower has previously made available or
on the Closing Date shall make available to the Agent complete and accurate
copies of all insurance policies (or certificates of insurance) listed on
Schedule 3.08. All insurance policies listed on Schedule 3.08 are in full force
- ------------- -------------
and effect, with the premiums due thereon paid, and the
<PAGE>
Borrower is not in default with respect to any such policy. In addition, all
such policies satisfy the requirements set forth in Section 4.01(c) hereof.
3.09. Litigation; Claims. Except as set forth on Schedule 3.09
------------------ -------------
hereto, as of the date hereof, there are no actions, suits, proceedings or
investigations pending or, to the Borrower's knowledge, threatened against the
Borrower and each of its Subsidiaries before any court or any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which could prevent or hinder the consummation of the transactions
contemplated hereby or purport by its terms to challenge the validity or
enforceability of this Agreement, any of the other Loan Documents or any action
taken or to be taken in connection with the transactions contemplated hereby or
thereby, or which in any single case or in the aggregate is likely to result in
any material adverse change in the business, condition, affairs or operation of
the Borrower or any material impairment of the right or ability of the Borrower
to carry on its operations as now conducted or proposed to be conducted.
3.10. Labor Matters. The Borrower and each of its Subsidiaries is not a
-------------
party to any collective bargaining or similar agreement on the date hereof and
has complied in all material respects with all applicable state and federal laws
respecting employment and employment practices, terms and conditions of
employment, wages and hours and other laws related to employment of employees of
the Borrower, and there are no arrears in the payment of wages, withholding or
social security taxes, unemployment insurance premiums or other similar
obligations of the Borrower other than in the ordinary course of business where
such arrears would have a material adverse effect on the Borrower's and each of
its Subsidiaries' business or financial condition.
3.11. ERISA.
-----
(a) Each "employee pension benefit plan" and "employee welfare benefit
plan" of the Borrower has been maintained and operated in compliance in all
material respects with its terms and with applicable provisions of ERISA, the
Code, all regulations, rulings and other authority issued thereunder, and all
other applicable governmental laws and regulations, including without limitation
bonding requirements and requirements for the filing of applicable reports,
documents, and notices with the Secretary of Labor or the Secretary of the
Treasury and the furnishing of documents to the participants and beneficiaries
of each such plan (as each of the quoted terms is defined or used in ERISA, and
the Code) except where the failure to be in compliance therewith would not have
a material adverse effect on the Borrower's business or financial condition.
(b) No "prohibited transaction" or "accumulated funding deficiency" or
"reportable event" has occurred with respect to any "single employer plan" of
the Borrower which would have a material adverse effect on the Borrower's
business or financial condition. No Borrower, predecessor to the Borrower and
each of its Subsidiaries or "commonly controlled entity" has ever been included
in a "multiemployer plan" as to which the Borrower or any "commonly controlled
entity" would have liability if the Borrower or any "commonly controlled entity"
were to withdraw therefrom (as each of the quoted terms is defined or used in
ERISA and the
<PAGE>
Code) which would have a material adverse effect on the Borrower's business or
financial condition.
3.12. Financial Statements. Attached as Schedule 3.12 hereto are
-------------------- -------------
consolidated financial statements of the Borrower and Texas Microsystems, Inc.,
including consolidated balance sheets, statements of income and retained
earnings and cash flows (collectively, together with the financial statements to
be delivered by the Borrower pursuant to Section 2.01(f) hereof, the "Financial
Statements") for the fiscal year ended June 30, 1994 and the six month period
ended on January 1, 1995 (the "Statement Dates"). The Financial Statements for
the fiscal year ended on June 30, 1994 have been audited by Coopers & Lybrand
L.L.P., certified public accountants as to the Borrower, and Arthur Andersen,
certified public accountants, as to Texas Microsystems, Inc. The Financial
Statements are complete and accurate in all material respects and fairly present
the financial performance and condition of the Borrower and Texas Microsystems,
Inc. through and as of the respective Statement Dates, in accordance with GAAP
consistently applied, provided that the Financial Statements for the six-month
period ended on January 1, 1995 are subject to normal year-end audit
adjustments. The Borrower has no liability, contingent or otherwise, not
disclosed in the Financial Statements or in any notes thereto that could
materially adversely affect the financial condition of the Borrower. Since the
last Statement Date there has not been a material adverse change in the business
or operations of the Borrower.
3.13. Taxes. The Borrower and each of its Subsidiaries has filed all
-----
federal, foreign state, local and other tax returns, reports and estimates which
are required to be filed and has paid all taxes, fees and other governmental
charges shown on such returns, reports and estimates and on all assessments
received by it, to the extent that such taxes have become due, except for any
tax or assessment which is being contested by the Borrower and each of its
Subsidiaries in good faith and by appropriate proceedings and the Borrower has
set aside on its books sufficient reserves with respect thereto or with respect
to which the Borrower and each of its Subsidiaries has duly obtained an
extension. All of such tax returns are accurate and complete in all material
respects. All other taxes and assessments of any nature with respect to which
the Borrower is obligated and which have become due are being paid or adequate
accruals have been set up therefor. The Borrower and each of its Subsidiaries is
not delinquent in the payment of any material tax, assessment or governmental
charge and the Borrower and each of its Subsidiaries has not requested any
extension of time within which to file any tax return, which return has not
since been filed, and no deficiencies for any material tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material liability or basis therefor.
3.14. Investments. Except as set forth on Schedule 3.14, as of the date
----------- -------------
hereof the Borrower and each of its Subsidiaries does not own any securities or
other equity or debt interests in any corporation, partnership or other business
entity. To the best of the Borrower's knowledge, all of the Affiliated Persons
of the Borrower as of the date hereof are set forth on Schedule 3.14.
-------------
<PAGE>
3.15. Investment Company. The Borrower and each of its Subsidiaries is not
------------------
an "investment company" (as defined in the Investment Company Act of 1940, as
amended).
3.16. Indebtedness. Attached as Schedule 3.16 hereto is a list of all
------------ -------------
material Indebtedness of the Borrower as of the Closing Date indicating, as
applicable, the outstanding principal amount of each borrowing or debt, the
current amount due thereon, the terms and schedule for payments in respect
thereof and the security given therefor or in connection therewith.
3.17. Patents, Copyrights and Trademarks. The Borrower and each of its
----------------------------------
Subsidiaries owns or has a valid right to use all material patents, patent
rights or licenses, copyrights, trademarks, trademark applications, trademark
rights and trade names or trade name rights or franchises now being used or
necessary to conduct its business, all of which are listed on Schedule 3.17
-------------
hereto, and the conduct of its business as now operated does not conflict with
valid patents, patent rights or licenses, copyrights, trademarks, trademark
rights and trade names and trade name rights or franchises of others in any
manner that could materially adversely affect the business or assets or
condition, financial or otherwise, of the Borrower.
3.18. Environmental Protection. Except as disclosed in Schedule 3.18,
------------------------ -------------
(a) To its knowledge, the Borrower and each of its Subsidiaries has
not caused or allowed the generation, use, transportation, treatment, storage,
release or disposal of any Hazardous Substances (as defined below) in connection
with the operations of its business or otherwise, at any real property that the
Borrower and each of its Subsidiaries owns, leases, or otherwise occupies or
uses (the "Premises"), nor has the Borrower and each of its Subsidiaries
released, disposed of or transported or contracted with any party for the
disposal or transport of any Hazardous Substances at sites other than the
Premises, in each such case except in compliance with all Environmental Laws (as
defined below), except where the failure to so comply results from a minor
infraction which will not give rise to the assessment of any fine or penalty
against the Borrower and each of its Subsidiaries or the imposition of any lien
against any of the properties or assets of the Borrower and each of its
Subsidiaries, and which could not have a material adverse effect on the
business, operations, property or financial condition of the Borrower.
(b) To its knowledge, the Borrower and each of its Subsidiaries has
not received any citation, directive, letter or other communication, written or
oral, or any notice of any proceedings, claims or lawsuits under any
Environmental Laws (each an "Environmental Complaint"), from any person, entity
or governmental authority arising out of the ownership, occupation, or conduct
of its operations on the Premises, nor is it aware of any basis therefor.
(c) The Borrower and each of its Subsidiaries has obtained and
maintained in full force and effect all necessary permits, licenses and
approvals required by any Environmental Laws applicable to the business
operations conducted on the Premises and is in compliance with all such permits,
licenses and approvals, except
<PAGE>
where the failure to so comply results from a minor infraction which will not
give rise to the assessment of any fine or penalty against the Borrower and each
of its Subsidiaries or the imposition of any lien against any of the properties
or assets of the Borrower and each of its Subsidiaries, and which could not have
a material adverse effect on the business, operations, property or financial
condition of the Borrower.
The term "Environmental Laws" shall mean any federal, foreign, state, local
or other law, ordinance or regulation pertaining to the protection of the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq.,
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001, et
seq., Massachusetts Oil and Hazardous Material Release Prevention and Response
Act, M.G.L. Chapter 21E, and Massachusetts Hazardous Waste Management Act,
M.G.L. Chapter 21C.
The term "Hazardous Substance" includes oil and petroleum products, asbestos,
polychlorinated biphenyls and urea formaldehyde, and any other materials
classified as hazardous or toxic under any Environmental Laws.
3.19. Margin Stock. The Borrower and each of its Subsidiaries is not
------------
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of the
Notes will be used to purchase or carry any margin security or to extend credit
to others for the purpose of purchasing or carrying any margin security or in
any other manner which would involve a violation of any of the regulations of
the Board of Governors of the Federal Reserve System.
3.20. Representations Accurate. No representation or warranty made by the
------------------------
Borrower and each of its Subsidiaries herein or in any other Loan Document
contains any misrepresentation of a material fact or omits to state any material
fact necessary to make such representation or warranty not misleading when made.
The Borrower is not aware of any condition specific to the business of the
Borrower and each of its Subsidiaries which materially adversely affects, or
which is likely in the future to materially adversely affect, the business,
operations, property or financial condition of the Borrower, and which has not
been set forth in this Agreement or in the other Loan Documents or otherwise
disclosed in writing to the Banks on or prior to the date hereof.
<PAGE>
ARTICLE IV
COVENANTS
4.01. Affirmative Covenants Other Than Financial Covenants and Reporting
------------------------------------------------------------------
Requirements. Without limiting any other covenants and provisions hereof, the
- ------------
Borrower covenants and agrees that, so long as the Notes, any Loan or any
obligation of the Borrower to the Banks, in any capacity, remains unpaid or any
Letter of Credit remains outstanding:
(a) Payments; Performance. The Borrower will duly and punctually, and
---------------------
cause each of its Subsidiaries to, make the payments required under this
Agreement, the Notes and the other Loan Documents and will perform and observe
all of its other obligations under the foregoing documents, in each case within
any applicable grace period or cure period provided for in Section 5.01 hereof.
(b) Payment of Taxes and Trade Debt. The Borrower will promptly pay
-------------------------------
and discharge, and cause each of its Subsidiaries to pay and discharge all
material taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profit or upon any property, real, personal or mixed,
belonging to it; provided, however, that the Borrower and each of its
Subsidiaries shall not be required to pay any such tax, assessment, charge or
levy if the same shall not at the time be due and payable or if the same can be
paid thereafter without penalty or if the validity thereof shall currently be
being contested by the Borrower in good faith by appropriate proceedings and if
the Borrower shall have made adequate provision on its books for the payment of
such tax, assessment, charge or levy. The Borrower will fully, faithfully and
punctually perform and fulfill all covenants and agreements under any leases of
real estate, agreements relating to purchase money debt, equipment leases and
other material contracts where the failure so to perform or comply would have a
material adverse effect on the Borrower's business or financial condition.
(c) Property; Insurance. The Borrower will keep and cause each of its
-------------------
Subsidiaries to keep all of its property reasonably necessary for the continued
operation of its business in good working order and condition, ordinary wear and
tear excepted. The Borrower will maintain with financially sound and reputable
insurance companies insurance thereon in at least such amounts and with such
deductibles and against at least such risks (including hazard) as may be
reasonably requested by the Banks from time to time, and the Borrower will
furnish to the Banks, upon its written request, full information with respect to
any insurance carried. All property damage insurance policies maintained by the
Borrower shall name the Agent as loss payee as its interest may appear. No such
policy may be terminated without at least 20 days' prior written notice to the
Agent. In addition, the Borrower will maintain "key man" life insurance in the
amount of at least $1,000,000 with respect to Dr. Jack Stiffler, the proceeds of
which shall be payable to the Borrower.
(d) Maintain Rights. The Borrower will and cause each of its
---------------
Subsidiaries to:
<PAGE>
(i) keep in full force and effect its corporate existence;
(ii) keep in full force and effect all material rights,
licenses, leases and franchises reasonably necessary to the conduct of its
business except for such rights, licenses, leases and franchises the loss of
which would not have a material adverse effect on the Borrower's business or
financial condition; provided that nothing in this Section 4.01(d)(ii) shall
prevent the abandonment or termination of any right, license, lease or
franchise, if the Borrower shall have determined that such abandonment or
termination is in the best interest of the Borrower and not disadvantageous to
the Banks; and
(iii) duly observe and conform to all applicable material laws,
statutes, regulations, decrees, judgments, orders, writs and other requirements
of all governmental authorities in any way relating to it or the conduct of its
business, except where the failure to so comply would not have a material
adverse affect on the business, operations, property or financial condition of
the Borrower.
(e) Books and Records; Inspection. The Borrower will and will cause
-----------------------------
each of its Subsidiaries to (i) keep proper books of record and account in which
entries therein are full, true and correct in all material respects in
conformity with GAAP and all requirements of law, and (ii) permit
representatives of either Bank to visit and inspect any of its properties and to
examine and make abstracts from any of its books of record and account upon
reasonable notice, at any reasonable time during normal business hours and as
often as may reasonably be desired, and to discuss the business, operations,
properties and financial condition of the Borrower and each of its Subsidiaries
with its officers and authorized employees and with its independent certified
public accountants.
(f) Operating Accounts. The Borrower and Texas Microsystems, Inc.
------------------
will maintain the Agent as its principal bank of deposit and account; and
additional accounts will be maintained with Texas Commerce Bank National
Association.
(g) Conduct of Business. The Borrower will conduct and will cause
-------------------
each of its Subsidiaries to conduct in the ordinary course the business in which
it is presently engaged. The Borrower will not enter into any other lines of
business, businesses or ventures which are not related to its existing business.
(h) Financing Statements. The Borrower, at its expense, shall
--------------------
execute, file and record all such further instruments, and perform such other
acts, as the Agent may reasonably determine are necessary or advisable to
maintain the priority of the liens and security interests in favor of the Banks
purported to be created by the Security Documents to which the Borrower is a
party on all property subject thereto.
4.02. Negative Covenants. Without limiting any other covenants and
------------------
provisions hereof, the Borrower covenants and agrees that, so long as any Notes,
Loan, Letter of Credit or any obligation of the Borrower to the Banks, in any
capacity, has not been fully performed:
<PAGE>
(a) Indebtedness. The Borrower will not create, incur, assume, agree
------------
to purchase or repurchase or provide funds in respect of or otherwise become or
be or remain liable with respect to any Indebtedness of any type whatsoever owed
to any person or entity, except:
(i) with respect to any Indebtedness incurred pursuant to the
terms of this Agreement or outstanding on the date hereof and listed on Schedule
3.16 hereto;
(ii) Indebtedness of the Borrower for taxes, assessments and
governmental charges or levies, to the extent payment thereof shall not at the
time be required under this Agreement;
(iii) unsecured Current Liabilities of the Borrower (other than
for money borrowed or for the deferred purchase of property) incurred upon
customary terms in the ordinary course of business;
(iv) Indebtedness for capital leases in a maximum cumulative
aggregate amount not to exceed $4,000,000;
(v) Indebtedness for the purchase price of capital assets
incurred in the ordinary course of business, exclusive of capital assets and
indebtedness associated with capital leases referred to in Section 4.02 (a)(iv)
hereof, and any extensions or renewals thereof, provided that such Indebtedness
is either unsecured or secured only by the capital assets so purchased, and
provided further that the aggregate amount of such Indebtedness outstanding does
not exceed $2,000,000 in any twelve-month period; and
(vi) guaranties permitted under this Agreement.
(b) Liens. The Borrower will not create and will not allow any of its
-----
Subsidiaries to create, incur, assume or suffer to exist any security interest,
lien, mortgage, deed of trust, pledge, levy, attachment, claim or other charge
or encumbrance of any nature whatsoever upon or with respect to any of its
property, assets or revenues, whether now owned or hereafter acquired, or assign
or otherwise convey any right to receive income, except for the following
("Permitted Liens"):
(i) liens in favor of the Banks;
(ii) liens existing on the assets or properties of the Borrower
as of the date hereof and identified on Schedule 3.05 attached hereto;
-------------
(iii) carriers', warehousemen's, mechanics', materialmen's,
repairmen's, landlord's or other like liens arising in the ordinary course of
business in respect of obligations not overdue for a period of more than 60 days
or which are being contested in good faith by appropriate proceedings in a
manner which will not jeopardize or diminish the interest of the Banks in any of
the Collateral subject to the Security Documents;
<PAGE>
(iv) liens arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, social security, retirement benefits
or similar legislation;
(v) liens for taxes or assessments or governmental charges or
levies that are either not due and payable or that are being contested in
accordance with this Agreement, so long as the enforcement of such lien is
effectively stayed within fifteen days of its imposition;
(vi) liens or encumbrances securing capital leases permitted by
Section 4.02(a)(iv) or the purchase price of capital assets to the extent such
purchase is permitted by Section 4.02(a)(v) hereof, provided that (a) each such
lien or encumbrance is given solely to secure the purchase price of such
property, does not extend to any other property, and (b) the Indebtedness
secured thereby does not exceed the cost of such property; and
(vii) attachments, seizures or levies aggregating less than
$200,000 and which remain undischarged for not longer than sixty (60) days after
filing unless the Borrower shall be proceeding diligently and in good faith to
obtain discharges thereof.
(c) Guaranties. The Borrower and each of its Subsidiaries will not
----------
assume, guarantee, endorse or otherwise become directly or contingently liable
(including without limitation, liable by way of agreement, contingent or
otherwise, to purchase, to provide funds for payments, to supply funds to or
otherwise invest in any debtor or otherwise to assure any creditor against loss)
in connection with any Indebtedness of any other person or entity, except
guaranties by endorsement or similar transactions such as bid or performance
bonds in the ordinary course of business.
(d) Transfers. The Borrower will not and will not permit its
---------
Subsidiaries to sell, lease, transfer or otherwise dispose of any material
portion of the Collateral or any other assets necessary for the effective or
efficient operation or proper maintenance of its business, except (i) for sales
of inventory and obsolete, returned, replaced or worn-out equipment in the
ordinary course of the Borrower's business; and (ii) transfers of Collateral by
and between the Borrower and its Subsidiaries. The Borrower will not waste or
destroy or suffer the waste or destruction of the Collateral or any material
portion thereof; and the Borrower will not use any of the Collateral in
violation of any policy of insurance thereon. The Borrower will not sell,
assign (other than an assignment to the Banks), discount or dispose in any way
of any Receivables with or without recourse, except for an assignment for
collection in ordinary course of business.
(e) Mergers. The Borrower will not enter into any transaction of
-------
merger or consolidation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution); nor will the Borrower acquire by purchase or
otherwise, all or substantially all of the business, property or fixed assets
of, or stock or other evidence of beneficial ownership of, any person or entity,
without the prior written consent of the
<PAGE>
Banks, which shall not be unreasonably withheld. Notwithstanding anything in
this Section 4.02(e) to the contrary, the Borrower may, absent the Banks'
approval, acquire a specific product line in an amount not to exceed $1,000,000
in any single acquisition.
(f) Investments. The Borrower will not make or permit to exist any
-----------
investments or loans, directly or indirectly (in the form of any acquisition of
assets other than in the ordinary course of business or in the form of any
acquisition of stock, securities, indebtedness or obligation of, or any loan,
advance, capital contribution or transfer of property to, or any guarantee or
other commitment on behalf of, any person, or otherwise), other than:
(i) marketable direct full faith and credit obligations of,
and marketable obligations guaranteed by, the United States of America, or any
agency or instrumentality thereof, which mature within one year from the date of
acquisition thereof;
(ii) marketable direct full faith and credit obligations of any
state of the United States of America, or any county, city, town, township or
other governmental subdivision of any such state, which mature within one year
from the date of acquisition thereof, provided that such obligations are
accorded a rating within one of the three highest graded by Moody's Investors
Service, Inc. or Standard & Poor's Inc.;
(iii) certificates of deposit, notes, acceptance and repurchase
agreements having a maturity of not more than one year from the date of
acquisition issued by the Banks or by any bank organized in the United States
having capital, surplus and undivided profits of at least $10,000,000,000 and
interest-bearing accounts in the Banks or any such other bank;
(iv) commercial paper which has received one of the three
highest categories of ratings from either Moody's Investors Services, Inc. or
Standard & Poor's, Inc.;
(v) accounts in any "money market" mutual fund having total
assets in excess of $1,000,000,000;
(vi) advances to the officers, employees, and salesman of the
Borrower with respect to reasonable expenses incurred by such officers,
employees and salesmen which expenses are properly reimbursable by the Borrower;
(vii) other loans and advances to the employees of the Borrower
which do not exceed $200,000 in the aggregate outstanding at any one time;
(viii) guarantees permitted by this Agreement;
(ix) contributions to the capital of and loans to subsidiaries
of the Borrower; and
<PAGE>
(x) investments of the Borrower existing on the date hereof
and identified on Schedule 3.14 hereto.
-------------
(g) Removal of Books and Records. The Borrower will not and will not
----------------------------
permit any of its Subsidiaries to permanently remove from the locations listed
on Schedule 3.06 any books or records relating to Receivables until no less than
-------------
ten days after delivery of written notice thereof to the Agent, provided that
the Borrower shall furnish to the Agent all documentation that the Agent
reasonably requests as being necessary or desirable to obtain, maintain, perfect
and confirm the first priority security interest granted herein.
(h) Principal Office. The Borrower will not move its Principal Office
----------------
until no less than ten days after delivery of written notice thereof to the
Agent, provided that the Borrower shall furnish to the Agent all documentation
that the Agent reasonably requests as being necessary or desirable to obtain,
maintain, perfect and confirm the first priority security interests granted
herein.
(i) Write Up of Assets. The Borrower will not write up (by creating
------------------
an appraisal surplus or otherwise) the value of its assets above their cost to
the Borrower less the depreciation regularly allowable thereon, without the
prior written consent of the Agent, which shall not be unreasonably withheld.
(j) Dividends. The Borrower will not and will not permit any of its
---------
Subsidiaries to declare, make or pay any dividend or other distribution on any
shares of capital stock of the Borrower or any of its Subsidiaries (except
dividends payable solely in shares of capital stock or rights to acquire capital
stock of the Borrower or any of its Subsidiaries or any dividends payable by the
Borrower's Subsidiaries to the Borrower), or any payment on account of the
purchase, redemption, retirement or acquisition of any shares of capital stock
of the Borrower or any option or warrant therefor, provided however that the
Borrower may repurchase or redeem shares or options therefor from employees of
the Borrower upon termination of employment as permitted under its 1986 Employee
Stock Option Plans.
(k) Environmental Matters. The Borrower will not store, transport,
---------------------
release or dispose of any Hazardous Materials on the Premises except in
compliance in all material respects with all Environmental Laws. The Borrower
shall promptly after obtaining knowledge thereof provide the Agent with written
notice of each of the following: (i) any potential or known release or threat of
release of any Hazardous Material at or from the Premises, and (ii) any
incurrence of any expense or loss by any governmental authority in connection
with the assessment, containment or removal of any Hazardous Material for which
expense or loss the Borrower may be liable.
(l) ERISA. The Borrower will not establish any new pension or defined
-----
benefit plan or materially modify any such existing plan for employees subject
to ERISA, which plan provides any benefits based on past service, without the
prior written consent of the Banks to the amount of the aggregate past service
liability thereby created.
<PAGE>
(m) Waiver of Rights. The Borrower will not waive any material debt
----------------
or claim, except in the ordinary course of its business.
(n) Sale Leaseback. The Borrower will not enter into any sale
--------------
leaseback transaction without the prior written consent of the Bank, which shall
not be unreasonably withheld.
(o) Subsidiaries. Except as set forth on Schedule 4.02(o) hereto, the
------------
Borrower will not organize or form any new subsidiaries, or become a member of
any new partnership or joint venture without the prior written consent of the
Agent, which shall not be unreasonably withheld.
(p) Agreements with Affiliated Person. The Borrower shall not enter
---------------------------------
into any material agreement of any nature whatsoever with any director, officer,
shareholder or Affiliated Person of the Borrower, including without limitation
any agreement which constitutes or effects a material modification of any
agreement to which the Borrower is a party as of the date hereof, other than in
the ordinary course of its business unless such agreement is on terms and
conditions that are not substantially less favorable than those that the
Borrower could obtain from an unrelated third party at such time.
4.03. Financial Covenants. Without limiting any other covenants and
-------------------
provisions hereof, the Borrower covenants and agrees that, so long as any Loan
or Letter of Credit is outstanding or any obligation of the Borrower to the
Banks, in any capacity, remains unpaid:
(a) Leverage. The Borrower and each of its Subsidiaries, on a
--------
consolidated basis, shall maintain at all times a ratio of Liabilities to
Tangible Net Worth, measured as of the end of each fiscal quarter of the
Borrower, of not more than 0.85;
(b) Quick Ratio. The Borrower and each of its Subsidiaries, on a
-----------
consolidated basis, shall maintain at all times a ratio, measured as of the end
of each fiscal quarter, of (i) the sum of (A) cash plus (B) Cash Equivalents
plus (C) the amount of Receivables due and payable within one year, each
determined in accordance with GAAP, to (ii) Liabilities, including all
outstanding Loans and Letters of Credit of not less than 1.50;
(c) Tangible Net Worth. The Borrower and each of its Subsidiaries, on
------------------
a consolidated basis, shall maintain a Tangible Net Worth, measured as of the
end of each month, of not less than (i) $25,000,000 plus (ii) 75% of the
Borrower's Net Income in each fiscal quarter commencing after April 2, 1995 plus
(iii) 100% of the net proceeds of the sale or issuance of shares of capital
stock by the Borrower except for any issuance of capital stock related to the
merger of the Borrower with Texas Microsystems, Inc. after April 2, 1995;
(d) Cash Balances. The Borrower and each of its Subsidiaries, on a
-------------
consolidated basis, shall maintain at all times aggregate balances of cash and
Cash
<PAGE>
Equivalents, not subject to any pledge or other encumbrance, in an amount of not
less than $6,000,000;
(e) Profitability. The Borrower and each of its Subsidiaries on a
-------------
consolidated basis shall not have a Net Loss (i) of greater than $1,000,000 for
any fiscal quarter or (ii) in any two consecutive fiscal quarters or (iii) an
annual loss in excess of $1,800,000.
(f) Maximum Capital Expenditures. The Borrower and each of its
----------------------------
Subsidiaries, on a consolidated basis, shall not create or incur capital
expenditures in excess of $4,000,000 on rolling four (4) quarter basis.
4.04. Reporting Requirements. So long as any Loan or Letter of Credit shall
----------------------
be outstanding or any other obligation of the Borrower to the Banks, in any
capacity, shall remain unpaid, the Borrower shall furnish to each Bank the
following reports and information:
(a) Financial Reports. The Borrower will furnish to each Bank:
-----------------
(i) as soon as available, but in any event within 90 days after
the end of each fiscal year of the Borrower, a copy of the audited consolidated
and unaudited consolidating balance sheet of the Borrower as at the end of such
fiscal year and the related audited consolidated statements of income,
stockholders' equity and cash flows for such fiscal year, in each case setting
forth in comparative form the figures for the previous year, reported on without
a "going concern" or like qualification or exception or qualification as to the
scope of the audit by Coopers & Lybrand L.L.P. or other independent certified
public accountants of nationally recognized standing or otherwise reasonably
acceptable to the Bank, together with any letter from the management of the
Borrower prepared in connection with the Borrower's annual audit report;
(ii) as soon as available, but in any event within 30 days after
the end of each month, copies of the unaudited consolidated and unaudited
consolidating balance sheet of the Borrower as at the end of such month,
together with the related unaudited consolidated statement of income for such
month and for the portion of the fiscal year of the Borrower through such month,
in each case certified by the Chief Financial Officer of the Borrower as
presenting fairly the financial condition and results of operations of the
Borrower, in conformity with GAAP (subject to normal year-end audit adjustments
and to the fact that such financial statements may be condensed and may not
include footnotes); all such financial statements to be complete and correct in
all material respects and prepared in reasonable detail and in conformity with
GAAP applied consistently throughout the periods reflected therein; and
(iii) as soon as available, but in any event within 45 days after
the beginning of each fiscal year of the Borrower, a budget for such fiscal
year, together with a projected consolidated and unaudited consolidating balance
sheet, projected consolidated cash flow statement and projected consolidated
profit and loss statement
<PAGE>
of the Borrower for the forthcoming fiscal year, in all cases setting forth such
financial information on a month by month basis for such forthcoming fiscal
year.
(b) Other Financial Reports. The Borrower will also furnish to each
-----------------------
Bank :
(i) concurrently with the delivery of each set of the financial
statements referred to above, a certificate of the Chief Financial Officer of
the Borrower stating that, to the best of such person's knowledge, during the
period covered by such set of financial statements the Borrower has observed or
performed in all material respects all of its covenants and agreements contained
in this Agreement and the other Loan Documents to be observed, performed or
satisfied by it, and that such Chief Financial Officer has obtained no knowledge
of any default or Event of Default (except as specified in such certificate);
(ii) concurrently with the delivery of each set of the financial
statements referred to above, a duly executed full accounts aging report;
(iii) a duly executed counterpart of the Borrowing Base
Certificate in the form attached as Exhibit D hereto, to be delivered to the
---------
Agent (A) concurrently with the delivery of each set of the financial statements
referred to above, at any time when no Loan or Letter of Credit is outstanding,
and (B) within three Business Days after the end of every other week, at any
time when any Loan is outstanding;
(iv) promptly after the same are sent and received, copies of
all financial statements, reports and notices which the Borrower sends to
holders of any class of capital stock of the Borrower generally;
(v) promptly, such additional financial and other information
as the Bank may from time to time reasonably request; and
(vi) as soon as available, a copy of each other report submitted
to the Borrower by its certified public accountants in connection with any
annual, interim or special audit made by them of the books of the Borrower.
(c) Notices. The Borrower will give notice to the Agent, within five
-------
days of knowledge thereof, of:
(i) the occurrence of any Event of Default under this
Agreement;
(ii) any default or event of default under any other contractual
obligations of the Borrower which, if not paid or remedied by the Borrower
within 30 days of such default or event of default or waived by the obligee
thereon, could result in liability to the Borrower in excess of $200,000 in any
single instance or $750,000 in the aggregate;
<PAGE>
(iii) any pending or threatened litigation, investigation or
proceeding of which the Borrower has knowledge which may exist at any time
between the Borrower and any other party (including without limitation any
governmental authority) which may have a material adverse effect on the
business, operations, property or financial condition of the Borrower, or any
litigation or proceeding affecting the Borrower which may have a material
adverse effect upon the Borrower;
(iv) the following events, as soon as possible and in any event
within 15 days after the Borrower knows thereof: (x) the occurrence of any
"reportable event" with respect to any "single employer plan" which in the
reasonable judgment of the Borrower could be expected to have a material adverse
effect on the Borrower or its business, (y) the institution of proceedings or
the taking or expected taking of any other action by the Borrower or any
"commonly controlled entity" to terminate any "single employer plan" with
respect to which there exists any vested unfunded pension liabilities at the
time of such termination, or (z) the "reorganization" or "insolvency" of any
"multiemployer plan" which may reasonably be expected to have a material adverse
effect on the business, operations, property or financial condition of the
Borrower (as each of the quoted terms is defined or used in ERISA or the Code);
(v) a material adverse change in the business, operations,
property or financial condition of the Borrower;
(vi) the revocation, expiration or loss of any material license,
permit or other governmental authorization of the Borrower which would have a
material adverse effect on the Borrower's business or financial condition; and
(vii) the issuance, grant or award to or on behalf of the
Borrower of any patent or letters patent, or the registration in the name of or
on behalf of the Borrower of any copyright, trademark trade name or any other
form of intellectual property whatsoever, or the filing, recording or approval
of any application by or on behalf of the Borrower for any of the foregoing;
each notice pursuant to paragraphs (i) through (vi) of this Section 4.04 to be
accompanied by a statement of the Chief Financial Officer of the Borrower
setting forth details of the occurrence referred to therein and stating what
action, if any, the Borrower proposes to take with respect thereto.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
5.01. Events of Default. The occurrence of each of the following shall
-----------------
constitute an Event of Default under this Agreement and under the Security
Documents:
(a) Representations and Warranties. Any representation or warranty
------------------------------
made by the Borrower or any of its Subsidiaries in this Agreement or in any
other Loan Document shall prove to have been incorrect in any material respect
when made, or any information furnished in writing, whether in this Agreement or
in any other Loan
<PAGE>
Document shall prove to be untrue in any material respect on the date on which
it is or was given.
(b) Covenants. The Borrower shall fail to perform or observe any
---------
covenant or condition contained or referred to in this Agreement, including
without limitation the failure to make any payment of principal or interest on
the Notes when due or any payment of the commitment fee hereunder when due;
provided, however, that any failure to perform under any of Sections 4.01(b),
(c), (d)(ii) through (iii), (e), (f), (g) and (h), 4.02 (b) (with respect to
involuntary encumbrances only), 4.02(k) or 4.04 hereof shall not constitute an
Event of Default under this Agreement until such failure shall have continued
uncured for thirty days.
(c) Security Documents. Any default or event of default shall occur
------------------
under any of the Security Documents, which default or event of default is not
otherwise described in this Section 5.01 and is continuing for thirty (30) days.
(d) Other Defaults. Any default shall exist and remain unwaived or
--------------
uncured for a period of thirty days or more with respect to Indebtedness of the
Borrower in excess of $200,000 in the aggregate, or any event occurs which
permits the acceleration of the maturity of any such Indebtedness.
(e) Displacement of Management. There shall occur any seizure,
--------------------------
vesting or intervention by or under the authority of a governmental authority or
other entity by which the management of the Borrower is displaced or its
authority in the conduct of its business is materially curtailed.
(f) Liens. Any involuntary lien, levy or assessment (other than a
-----
Permitted Lien) is filed or recorded with respect to any material portion of the
assets of the Borrower or any of its Subsidiaries and is not released, canceled,
revoked, removed, repealed or otherwise terminated within thirty (30) days after
such filing or recording.
(g) Seizure of Assets. Any material portion of the Collateral becomes
-----------------
the subject of an attachment or comes within the lawful possession of any
receiver, trustee, custodian or assignee for the benefit of creditors.
(h) Judgments. Any judgment, order or writ in excess of $500,000 is
---------
rendered or entered against the Borrower and not paid, satisfied or otherwise
discharged within 90 days of the date such judgment, order or writ becomes final
and non-appealable.
(i) Insolvency. The Borrower or any of its Subsidiaries shall be
----------
generally unable to pay its debts as they become due; the dissolution,
termination of existence, cessation of normal business operations or insolvency
of the Borrower or the insolvency of any of its Subsidiaries; the appointment of
a receiver of any material part of the property of, legal or equitable
assignment, conveyance or transfer of property for the benefit of creditors by,
or the commencement of any proceedings under any bankruptcy or insolvency laws
by or against, the Borrower or any of its subsidiaries, provided that the
Borrower and each of its subsidiaries shall have 45 days after the
<PAGE>
commencement thereof to obtain a dismissal or stay of any involuntary
proceedings against the Borrower or such subsidiary under any bankruptcy laws.
(j) Loss; Material Adverse Change. The Borrower and any of its
-----------------------------
Subsidiaries taken as a whole shall suffer a material adverse change in their
business, prospects, properties, or financial condition since the date of this
Agreement.
(k) ERISA. The Borrower shall fail to meet its minimum funding
-----
requirements under ERISA with respect to any employee benefit plan (or other
class of benefit which the Pension Benefit Guaranty Corporation has elected to
insure) or any such plan shall be the subject of termination proceedings
(whether voluntary of involuntary) and there shall result from such termination
proceedings a liability of the Borrower to the Pension Benefit Guaranty
Corporation which in the reasonable opinion of the Bank has material adverse
effect upon the business, operations or financial condition of the Borrower.
(l) Security Interest. The security interest and lien of the Banks in
-----------------
and on any of the Collateral shall not be in full force and effect as a fully
perfected first priority lien except as otherwise expressly permitted herein or
in the Security Agreement.
(m) Management. Both of the Borrower's Chief Executive Officer and
----------
Chief Financial Officer shall cease to hold such offices or similar executive-
level positions with the Borrower within any 90-day period.
5.02. Remedies. Upon the occurrence of any Event of Default and at any time
--------
thereafter so long as such Event of Default continues uncured or unwaived, in
addition to any other rights and remedies available to the Agent on behalf of
the Banks hereunder or otherwise, the Agent on behalf of the Banks may exercise
any one or more of the following rights and remedies (all of which shall be
cumulative):
(a) Declare the entire unpaid principal amount of the Notes then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this Agreement, and all other Indebtedness of the Borrower to the
Banks, forthwith due and payable, whereupon the same shall become forthwith due
and payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived by the Borrower.
(b) Terminate the revolving line of credit established by Section 1.01
of this Agreement.
(c) Exercise all of the rights and remedies of a secured party under
the Uniform Commercial Code. The Agent may enter upon the Premises or any of
same and may take physical possession of the Collateral or render the Collateral
unusable by process of law or peaceably without process of law. The Borrower
shall peaceably surrender the Collateral and shall upon the request from the
Agent assemble it and make it available to the Agent at a place or places
designated by the Agent which is or are reasonably convenient to the Borrower
and the Agent. To the extent permitted by
<PAGE>
law, the Agent may maintain possession of any Collateral on any property owned,
leased by or licensed to the Borrower, or remove same or any part thereof to
such place or places as the Bank may elect. The Borrower will also deliver to
the Agent upon request all documents of title and other instruments relating to
the Collateral. The Borrower waives all rights which it would otherwise have had
under law to prohibit entry to any premises or to require notice of any replevin
or retaking, all to the extent that the same is permitted by law. The Agent may
with only such demand, advertising or notice as may be required by law, sell and
deliver any and all Collateral held by it for its account at any time or times
in one or more private or public sales, for cash or credit or otherwise, at such
price and upon such terms as the Agent deems advisable in its sole discretion.
Notice of any public sale shall be sufficient if it describes the Collateral to
be sold in general terms, stating the amounts thereof and the location and
nature of the properties covered by the security interests and the prior liens
thereon, and is published, at least once, not less than ten (10) days prior to
the sale in any newspaper of general circulation in the greater Boston,
Massachusetts metropolitan area which the Agent may elect. All requirements of
reasonable notice to the Borrower shall be met if such notice is sent to the
Borrower, in the manner provided in this Agreement below, at least ten (10) days
before the time of such sale or disposition. The Banks may be the purchasers at
any such sale, if it is public, free from any right of redemption. The proceeds
of sale shall be applied first to the costs of retaking, refurbishing, storing
and selling any Collateral hereunder and to other costs of collection, and then
to the payment of obligations of the Borrower to the Banks. The Banks shall be
entitled to apply any collections on account of the Notes first to reasonable
fees, costs and charges accrued to the date of receipt, next to accrued interest
and only thereafter to principal. Any excess shall be returned to the Borrower,
and the Borrower shall remain liable for any deficiency.
(d) Enforce the provisions of this Agreement by appropriate legal
proceedings, and the Banks may recover damages caused by any breach by the
Borrower of the provisions of this Agreement, including court costs, reasonable
attorneys' fees and other reasonable costs and expenses incurred in the
enforcement of the obligations of the Borrower hereunder.
(e) Exercise all rights and remedies hereunder, under each of the
other Loan Documents and under any other agreement with the Banks; and exercise
all other rights and remedies which the Banks may have under applicable law.
(f) Notwithstanding anything to the contrary contained herein, upon
the occurrence of an Event of Default, described in Section 5.01(i) hereof, the
entire unpaid principal amount of the Notes then outstanding, together with all
interest accrued and unpaid on all such amounts, and all other amounts payable
under this Agreement, shall be immediately due and payable without presentment,
demand, protest, or notice of any kind.
5.03. Set-off. In addition to any rights now or hereafter granted under
-------
applicable law and not by way of limitation of any rights, upon the occurrence
and continuance of any Default by the Borrower, the Banks are hereby authorized
at any time or from time to time, without presentment, demand, protest or other
notice of any
<PAGE>
kind to the Borrower or to any other person or entity, all of which are hereby
expressly waived, to set off and to appropriate and apply any and all deposits
and any other Indebtedness at any time held or owing by either Bank to or for
the credit or the account of the Borrower against and on account of the
obligations and liabilities of the Borrower to either Bank under this Agreement
or otherwise, irrespective of whether or not the Bank shall have made any demand
hereunder and although said obligations, liabilities or claims, or any of them,
may then be contingent or unmatured and without regard for the availability or
adequacy of other Collateral. The Borrower also grants to the Banks a security
interest in and to all its deposits and all securities or other property in the
possession of the Banks from time to time, to secure the prompt and full payment
and performance of any and all obligations to the Banks, and, upon the
occurrence of any Event of Default, the Banks may exercise all rights and
remedies of a secured party under the Uniform Commercial Code.
ARTICLE VI
AGENCY
6.01. Authorization of Agent and Relationship. Each Bank hereby appoints
---------------------------------------
State Street Bank and Trust Company as Agent and State Street Bank and Trust
Company hereby accepts such appointment. The appointment may only be terminated
as expressly provided in this Agreement. Each Bank hereby authorizes the Agent
to take all action on its behalf and to exercise such powers and perform such
duties under this Agreement as are expressly delegated to the Agent by its
terms, together with all powers reasonably incidental hereto. The Agent shall
have only those duties and responsibilities which are of a solely mechanical and
administrative nature and which are expressly specified in this Agreement, and
it may perform such duties by or through its agents or employees, but shall not
by reason of this Agreement have a fiduciary duty in respect of any Bank. As to
any matters not expressly provided for by this Agreement, the Agent is not
required to exercise any discretion or to take any action, but is required to
act or to refrain from acting (and is fully protected in so acting or refraining
from acting) upon the instructions of the Banks, as the case may be. Those
instructions shall be binding upon all Banks, but the Agent is not required to
take any action which exposes the Agent to personal liability or which is
contrary to this Agreement or applicable law.
Without limiting the foregoing, each of the Banks hereby grants to the Agent
a power of attorney, and also grants to the Agent the right to delegate its
authority as attorney to any other person, whether or not an officer or employee
of the Agent.
6.02. Disclaimer of Agent. The Agent makes no representation or warranty,
-------------------
and assumes no responsibility with respect to the due execution, legality,
validity, sufficiency, enforceability or collectability of this Agreement or any
other Security Document. The Agent assumes no responsibility for the financial
condition of the Borrower, or for the performance of the obligations of the
Borrower under this Agreement or any other Security Document. The Agent assumes
no responsibility with respect to the accuracy, authenticity, legality,
validity, sufficiency or enforceabilty of any documents, papers, materials or
other information furnished by the Borrower to the
<PAGE>
Agent on behalf of the Banks. The Agent shall not be required to ascertain or
inquire as to the performance or observance of any of the terms, conditions,
provisions, covenants or agreements contained herein or as to the use of the
proceeds of the Loans or (unless the officers or employees of the Agent acting
in their capacity as officers or employees on the Borrower's accounts have
actual knowledge thereof, or have been notified thereof in writing by the
Borrower) of the existence or possible existence of any Event of Default.
Neither the Agent nor any of its directors, officers, agents or employees shall
be liable for any action taken or omitted to be taken by it or them as Agent
under or in connection with the Agreement except for its or their own negligence
or willful misconduct. The Agent shall have the same rights and powers hereunder
as any other Bank, and may exercise the same as though it were not performing
the duties and functions delegated to it as Agent hereunder.
6.03. Bank's Funding Obligations.
--------------------------
(a) Each Bank shall advance to the Agent prior to 12:00 p.m. (Boston
time), in immediately-available funds, such Bank's Proportionate Share in the
portion of the Loan to be advanced by the Agent. If such funds are not received
at such time, but all applicable conditions set forth in Article I hereof have
been satisfied, each Bank authorizes and requests the Agent to advance for the
Bank's account, pursuant to the terms hereof, the Bank's respective
Proportionate Share in such portion of the Loan and agrees to reimburse the
Agent in immediately-available funds for the amount thereof prior to 2:00 p.m.
(Boston time) on the day any portion of the Loan is advanced hereunder;
provided, however, that the Agent is not authorized to make any such advance for
the account of any Bank who has previously notified the Agent in writing that
such Bank will not be performing its obligations to make further advances
hereunder; and provided, further, that the Agent shall be under no obligation to
make any such advance.
(b) Unless the Agent has actual knowledge that a Bank has not made or
will not make available to the Agent the applicable loan amount required from
such Bank, the Agent shall be entitled to assume that such amount has been or
will be received from such Bank when so due and the Agent may (but shall not be
obligated to), in reliance upon such assumption, make available to the Borrower
a corresponding amount. If such amount is not in fact received by the Agent
from such Bank and the Agent has made available a corresponding loan amount to
the Borrower as aforesaid, such Bank shall pay to the Agent on demand an amount
equal to the product of (i) the Prime Rate per annum multiplied by (ii) the
amount that should have been paid to the Agent by such Bank on such Loan Date
and was not, multiplied by (iii) a fraction, the numerator of which is the
number of days that have elapsed from and including such Loan Date to but
excluding the date on which the amount is received by the Agent from such Bank
and the denominator of which is 360. A certificate of the Agent containing
details of the amount owing by a Bank under this Section shall be binding and
conclusive in the absence of manifest error.
(c) Notwithstanding the provisions of Section 6.03(b), if any Bank
fails to make available to the Agent its Proportionate Share of any Loan (such
Bank being herein called the "Defaulting Bank"), the Agent shall forthwith give
notice of such
<PAGE>
failure by the Defaulting Bank to the Borrower and the other Banks. The Agent
shall then forthwith give notice to the other Banks that any Bank may make
available to the Agent all or any portion of the Defaulting Bank's Proportionate
Share of such Loan in the place of the Defaulting Bank, but in no way shall any
other Bank or the Agent be obligated to do so. If more than one Bank gives
notice that it is prepared to make funds available in the place of a Defaulting
Bank in such circumstances and the aggregate of the funds which such Banks
(herein collectively called the "Contributing Banks") and individually called
the "Contributing Bank") are prepared to make available exceeds the amount of
the Loan which the Defaulting Bank failed to make, then each Contributing Bank
shall be deemed to have given notice that it is prepared to make available its
Proportionate Share of such Loan based on the Contributing Banks' relative
commitments to advance in such circumstances. If any Contributing Bank makes
funds available in the place of a Defaulting Bank in such circumstances, then
the Defaulting Bank shall pay to any Contributing Bank making the funds
available in its place, forthwith on demand, any amount advanced on its behalf
together with interest thereon at the rate applicable to such Loan from the date
of advance to the date of payment, against payment by the Contributing Bank
making the funds available of all interest received in respect of the Loan from
the Borrower. The failure of any Bank to make available to the Agent its
Proportionate Share of any Loan as required herein shall not relieve any other
Bank of its obligations to make available to the Agent is Proportionate Share of
any Loan as required herein.
6.04. Payments by the Borrower. All payments (except the Agent's fees) made
------------------------
by or on behalf of the Borrower pursuant to this Agreement shall be made to and
received by the Agent and shall be distributed by the Agent to the Banks as soon
as possible upon receipt by the Agent. Subject to Section 6.05, the Agent shall
distribute:
(a) payments of interest in accordance with each Bank's Proportionate
Share of the Loans;
(b) repayments of principal in accordance with each Bank's
Proportionate Share of the Loans; or
(c) all other payments received by the Agent (except the Agent's fees)
including, without limitation, amounts received upon the realization of
Collateral, in accordance with each Bank's Proportionate Share of the Loans
provided, however, that with respect to proceeds of realization, no Bank shall
receive an amount in excess of the amounts owing to it in respect of the
Obligations.
Subject to Section 6.05, if the Agent does not distribute a Bank's
Proportionate Share of a payment made by the Borrower by 12:00 noon Boston time
to the Agent for value on the same business day following the date that payment
is made or deemed to have been made to the Agent, the Agent shall pay to the
Bank on demand an amount equal to the product of (i) Prime Rate per annum
multiplied by (ii) the Bank's Proportionate Share of the amount received by the
Agent from the Borrower and not so distributed, multiplied by (iii) a fraction,
the numerator of which is the number of days that have elapsed from and
including the date of receipt of the payment by the Agent to
<PAGE>
but excluding the date on which the payment is made by the Agent to such Bank
and the denominator of which is 360, except if such delay is due to a force
majure.
6.05. Payments by Agent. The following provisions shall apply to any and
-----------------
all payments made by the Agent to the Banks hereunder:
(a) the Agent shall be under no obligation to make any payment
(whether in respect of principal, interest, fees or otherwise) to any Bank until
an amount in respect of such payment has been received by the Agent from the
Borrower;
(b) If the Agent receives less than the full amount of any payment of
principal, interest, fees or other amount owing by the Borrower under this
Agreement, the Agent shall have no obligation to remit to each Bank any amount
other than such Bank's Proportionate Share of that amount which is the amount
actually received by the Agent;
(c) if any Bank advances more or less than its Proportionate Share of
the Loans, such Bank's entitlement to such payment shall be increased or
reduced, as the case may be, in proportion to the amount actually advanced by
such Bank;
(d) the Agent acting reasonably in good faith shall, after
consultation with the Banks in the case of any dispute, determine in all cases
the amount of all payments to which each Bank is entitled and such determination
shall, in the absence of manifest effort, be binding and conclusive; and
(e) upon request, the Agent shall deliver a statement detailing any of
the payments to the Banks referred to herein.
Unless the Agent has actual knowledge that the Borrower has not made or will
not make a payment to the Agent for value on the date in respect of which the
Borrower has notified the Agent that the payment will be made, the Agent shall
be entitled to assume that such payment has been or will be received from the
Borrower when due and the Agent may (but shall not be obliged to), in reliance
upon such assumption, pay the Banks corresponding amounts. If the payment by the
Borrower is in fact not received by the Agent on the required date and the Agent
has made available corresponding amounts to the Banks, the Borrower shall,
without limiting its other obligations under this Agreement, indemnify the Agent
against any and liabilities, obligations, losses, damages, penalties, costs,
expenses or disbursements of any kind or nature whatsoever that may be imposed
on or incurred by the Agent as a result. A certificate of the Agent with respect
to any amount owing by the Borrower under this Section shall be prima facie
evidence of the amount owing in the absence of manifest error.
6.06. Direct Payments. The Banks agree among themselves that, except as
---------------
otherwise provided for in this Agreement, all sums received by a Bank relating
to this Agreement by virtue of the Collateral, whether received by voluntary
payment, by the exercise of the right of set-off or compensation or by
counterclaim, cross-action or as proceeds of realization of any Collateral or
otherwise, shall be shared by each Bank in its
<PAGE>
Proportionate Share under the Loans and each Bank undertakes to do all such
things as may be reasonable required to give full effect to this Section,
including without limitation, the purchase from other Banks of such notes or a
portion thereof by the Bank who has received an amount in excess of the
Proportionate Share under the Loans as shall be necessary to cause such
purchasing Bank to share the excess amount ratably in its Proportionate Share
under the Loans with the other Banks. If any such which is so shares is later
recovered from the Banks who originally received it, the Bank shall restore its
Proportionate Share under the Loans of such sum to such Banks, without interest.
If any Bank (a "Receiving Bank") shall obtain any payment of monies due under
this Agreement as referred to above, the Receiving Bank shall forthwith remit
such payment to the Agent and, upon receipt, the Agent shall distribute such
payment in accordance with the provisions of Section 6.05.
6.07. Administration of the Loans. The Agent may take the following actions
---------------------------
upon notice to the Banks, unless otherwise specified in this Agreement:
(a) subject to Section 6.08, exercise any and all rights of approval
conferred upon the Banks by this Agreement;
(b) give prompt and timely written notice to the Borrower in respect
of any amounts due or overdue under the terms of this Agreement and of any other
matter in respect of which notice may be required, permitted, necessary or
desirable in accordance with or pursuant to this Agreement;
(c) amend, modify or waive any of the terms of this Agreement
(including waiver of an Event of Default) if such amendment, modification or
waiver would not have a material adverse effect on the rights of the Banks
thereunder and if such action is not otherwise provided for in Section 6.08.1;
(d) engage a professional as permitted by Section 6.10(a);
(e) decide to accelerate the amounts outstanding under this Agreement
or the Security Documents as permitted thereby; and
(f) pay insurance premiums, taxes and any other sums as may be
reasonably required to protect the interests of the Banks.
6.08. Unanimous Consent of Banks. The Agent may take the following actions
--------------------------
only if the prior unanimous consent of the Banks is obtained, unless otherwise
specified herein:
(a) amend, modify, discharge, terminate or waive any of the terms of
this Agreement or the Security Documents if such amendment, modification,
discharge, termination or waiver would have a material adverse effect on the
Collateral or on the rights of the Banks under this Agreement or the Security
Agreement;
(b) amend, modify, discharge, terminate or waive any of the term of
this Agreement if such amendment, modification, discharge, termination or waiver
<PAGE>
would increase the amount of a Loan, amend the purpose of a Loan, reduce the
interest rate applicable to a Loan, reduce the fees payable with respect to a
Loan, extend any date fixed for payment of principal or interest relating to a
Loan or extend the Maturity Date of the Loan;
(c) amend Section 6.08; and
(d) declare an Event of Default or take action to enforce performance
of the Obligations of the Borrower and to realize upon the Collateral including
the appointment of a receiver, lease or sale given by the Security Agreement or
by law and take foreclosure proceedings and/or pursue any other legal remedy
necessary provided, however, that in the event the Banks are unable to agree
-------- -------
unanimously upon any of the foregoing actions, either Bank, fifteen days
subsequent to such Bank's notification to all other Banks of such Bank's
intention to so act, may, subject to all applicable provisions to this Agreement
or, any of the Security Documents, proceed unilaterally with any of the items
described in this Section 6.08 absent the unanimous consent of the Banks.
6.09. Reliance by Borrower. As between the Borrower, on the one hand, and
--------------------
the Agent and the Banks, on the other hand:
(a) all statements, certificates, consents and other documents which
the Agent purports to deliver on behalf of the Banks shall be binding on each of
the Banks, and the Borrower shall not be required to ascertain or confirm the
authority of the Agent in delivering such documents;
(b) all certificates, statements, notices and other documents which
are delivered by the Borrower to the Agent in accordance with this Agreement
shall be deemed to have been duly delivered to each of the Banks;
(c) all payments which are delivered by the Borrower to the Agent in
accordance with this Agreement shall be deemed to have been duly delivered to
each of the Banks;
(d) unless an Event of Default has occurred and is continuing, the
Borrower's consent to the appointment of any Successor Agent must be obtained,
but the Borrower's consent shall not be unreasonably withheld.
6.10. Rights of Agent.
----------------
(a) In administering the Loans, the Agent may retain, at the expense
of the Banks if such expenses are not recoverable from the Borrower, such
counsel, auditors and other experts and agents as the Agent may select, in its
sole discretion, acting reasonably and in good faith after consultation with the
Banks.
(b) The Agent shall be entitled to rely on any communication,
instrument or document believed by it to be genuine and correct and to have been
signed by the proper individual or individuals, and shall be entitled to rely
and shall be protected in relying as to legal matters upon opinions of
independent legal advisors
<PAGE>
selected by it. The Agent may also assume that any representation made by the
Borrower is true and that no Event of Default has occurred unless the officers
or employees of the Bank acting as Agent, acting in their capacity as officers
or employees responsible for the Borrower's account have actual knowledge to the
contrary or have received notice to the contrary from any other party to this
Agreement.
(c) The Agent may, without any liability to account, accept deposits
from and lend money to and generally engage in any kind of banking, or other
business with the Borrower, as if it were not the Agent.
(d) Except in its own right as a Bank, the Agent shall not be required
to advance its own funds for any purpose, and in particular shall not be
required to pay with its own funds insurance premiums, taxes or public utility
charges or the cost of repairs or maintenance with respect to the assets which
are the subject matter of the Security Agreement, nor shall it be required to
pay with its own funds the fees of counsel, auditors, experts or agents engaged
by it as permitted hereby.
(e) The Agent shall be entitled to receive a fee for acting as Agent,
as agreed between the Agent and the Borrower from time to time.
6.11. Acknowledgments, Representations and Covenants of Banks.
-------------------------------------------------------
(a) It is acknowledged and agreed by each Bank that it has itself
been, and will continue to be, solely responsible for making its own independent
appraisal of and investigations into the financial condition, creditworthiness,
property, affairs, status and nature of the Borrower. Accordingly, each Bank
confirms to the Agent that it has not relied, and will not hereafter rely, on
the Agent (a) to check or inquire on its behalf into the adequacy or
completeness of any information provided by the Borrower under or in connection
with this Agreement or the transactions herein contemplated (whether or not such
information has been or is hereafter distributed to such Bank by the Agent) or
(b) to assess to keep under review on its behalf the financial condition,
creditworthiness, property, affairs, status or nature of the Borrower.
(b) Each Bank represents and warrants that it has the legal capacity
to enter into this Agreement pursuant to its charter and any applicable law and
has not violated its charter, bylaw or other documents or any applicable law by
so doing.
(c) Each Bank agrees to indemnify the Agent (to the extent not
reimbursed by the Borrower), ratably according to its Proportionate Share from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against the
Agent in any way relating to or arising out of this Agreement or related
Documents or the transactions therein contemplated, provided that no Bank shall
be liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Agent's gross negligence or willful misconduct. Without limiting the
generality of the foregoing, each Bank agrees to reimburse the Agent promptly
upon demand for its Proportionate Share of any
<PAGE>
out-of-pocket expenses (including counsel fees) incurred by the Agent in
connection with the preservation of any rights of the Agent or the Banks under,
or the enforcement of, or legal advice in respect of rights or responsibilities
under this Agreement, to the extent that the Agent is not reimbursed for such
expenses by the Borrower. The obligation of the Banks to indemnify the Agent
shall survive the termination of this Agreement.
(d) Each of the Banks acknowledges and confirms that in the event the
Agent does not receive payment in accordance with this Agreement, it shall not
be the obligation of the Agent to maintain the Loans in good standing nor shall
any Bank have recourse to the Agent in respect of any amounts owing to such Bank
under this Agreement.
(e) Each Bank acknowledges and agrees that its obligation to advance
its Proportionate Share of Loans in accordance with the terms of this Agreement
is independent and in no way related to the obligation of any other Bank
hereunder.
(f) Except to the extent recovered by the Agent from the Borrower,
promptly following demand therefor, each Bank shall pay to the Agent an amount
equal to such Bank's Proportionate Share of any and all reasonable costs,
expenses, claims, losses and liabilities incurred by the Agent in connection
with this Agreement and the Security Documents (including, without limitation,
the collection or enforcement thereof), except for those incurred by reason of
the Agent's negligence or willful misconduct.
6.12. Collective Action of the Banks. Except as otherwise provided herein,
------------------------------
each of the Banks hereby acknowledges that to the extent permitted by applicable
law, the Security Agreement and the remedies provided under the Security
Documents to the Banks are for the benefit of the Banks collectively and acting
together and not severally and further acknowledges that its rights hereunder
and under the Security Agreement are to be exercised not severally, but by the
Agent upon the decision of the Banks as required by this Agreement. Accordingly,
notwithstanding any of the provisions contained herein or in the Security
Agreement, each of the Banks hereby covenants and agrees that it shall not be
entitled to take any action hereunder or thereunder including, without
limitation, any declaration of default hereunder or thereunder but that any such
action shall be taken only by the Agent with the prior written agreement of the
Banks. Each of the Banks hereby further covenants and agrees that upon any such
written agreement being given by the Banks, it shall co-operate fully with the
Agent to the extent requested by the Agent. Notwithstanding the foregoing, in
the absence of instructions from the Banks and where in the sole opinion of the
Agent, acting reasonably and in good faith, the exigencies of the situation
warrant such action, the Agent may without notice to or consent of the Banks
take such action on behalf of the Banks as it deems appropriate or desirable in
the interest of the Banks.
6.13. Successor Agent. Subject to the appointment and acceptance of a
---------------
Successor Agent as provided in this Section, and subject to Section 6.07.4, the
Agent may resign at any time by giving 30 days' written notice thereof to the
Banks and the Borrower, and may be removed at any time by the Banks upon 30
days' written notice .
<PAGE>
Upon receipt of notice by the Banks of the resignation of the Agent, or upon
giving notice of termination to the Agent, the Banks may, within 21 days,
appoint a successor from among the Banks or, if no Bank is willing to accept
such an appointment, from among other institutions which each have combined
capital and reserves in excess of $250,000,000. If no Successor Agent has been
so appointed and has accepted such appointment within 21 days after the retiring
Agent's giving of notice of resignation or receiving of notice of termination,
then the retiring Agent may, on behalf of the Banks, appoint a Successor Agent.
Upon the acceptance of any appointment as Agent hereunder by a Successor Agent,
the retiring Agent shall pay the Successor Agent any unearned portion of any fee
paid to the Agent for acting as such, and the Successor Agent shall succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its further
duties and obligations as Agent under this Agreement and the other Security
Documents. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall continue to inure to its benefit and be binding
upon it as to any actions taken or omitted to be taken by it while it was Agent
hereunder.
6.14. Provisions Operative Between Banks and Agent Only. Except as
-------------------------------------------------
otherwise provided herein, the provisions of this Article relating to the rights
and obligations of the Banks and the Agent inter se shall be operative as
between the Banks and the Agent only, and the Borrower shall not have any rights
or obligations under or be entitled to rely for any purpose upon such
provisions.
ARTICLE VII
MISCELLANEOUS
7.01. Further Assurances. The Borrower shall do all things and deliver all
------------------
instruments reasonably requested by the Agent to protect or perfect any security
interest granted or intended to be granted hereunder. If the Borrower fails
promptly to comply with any such request, or if any Event of Default shall have
occurred hereunder, the Borrower authorizes the Agent to execute, in the name or
on behalf of the Borrower, any financing statement or other document or
instrument that the Agent may require to perfect, protect or establish any
security interest or lien interest to which the Bank may be then entitled
hereunder and further authorizes the Agent to sign the Borrower's name on the
same. The Borrower appoints (but only for the purposes of protecting the Banks'
interests in the Collateral or the Banks' rights to receive payments under this
Agreement or the Notes or otherwise exercising any of its rights hereunder or
causing the performance and fulfillment of the obligations and agreements
intended to be performed and fulfilled by the Borrower under this Agreement) the
Agent as the Borrower's attorney-in-fact with the power: at any time when an
Event of Default has occurred and is continuing, to endorse the name of the
Borrower on any checks, notes, drafts, or other forms of payment or security
relating to any Collateral that may come into the possession of the Banks; at
any time when an Event of Default has occurred and is continuing, to sign the
name of the Borrower on invoices or bills of lading, drafts against customers,
notices of assignment, verifications and schedules; at any time when an Event of
Default has occurred and is continuing, to demand, collect, receive payment of,
receipt for, settle, compromise or adjust and give discharges and releases in
respect
<PAGE>
of the Receivables or any of them; at any time when an Event of Default has
occurred and is continuing, to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Receivables or any of them and to enforce any other rights in
respect thereof or in respect of the goods which have given rise thereto; at any
when an Event of Default has occurred and is continuing, to defend any suit,
action or proceeding brought against the Borrower in respect of any Receivables
or the goods which have given rise thereto, to settle, compromise or adjust any
suit, action or proceeding hereinbefore described and, in connection therewith,
to give such discharges or releases as the Agent may deem appropriate; at any
time when an Event of Default has occurred and is continuing, to notify the U.S.
Postal Service authorities to change the address of delivery of mail to an
address designated by the Agent and to open and dispose of mail addressed to the
Borrower; and, generally, to do all things necessary to carry out the intent of
this Agreement. This power, being coupled with an interest, is irrevocable, and
the Borrower approves all such acts of such attorney-in-fact. The powers
conferred on the Agent by this Agreement are solely to protect the interest of
the Bank and shall not impose any duty upon the Agent to exercise any such
power, and neither the Agent nor such attorney-in-fact shall be liable for any
act or omission, error in judgment or mistake of law, except for its gross
negligence, willful misconduct or bad faith. Except as otherwise required by
applicable law with respect to the preservation of Collateral in the possession
of the Banks, the Banks shall have no duty as to the collection or protection of
any Collateral and shall have no duty as to the preservation of rights against
prior parties or any other rights pertaining thereto, except as provided by
applicable law.
7.02. Right to Cure. In the event that the Borrower shall fail to purchase
-------------
or maintain insurance, to pay any tax, assessment, governmental charge or levy,
except as the same may be otherwise permitted hereunder, or in the event that
any lien, encumbrance or security interest prohibited hereby shall not be paid
in full or discharged, or in the event that the Borrower shall fail to pay or
comply with any other obligation hereunder, the Banks may, but shall not be
required to, pay, satisfy, perform, discharge or bond the same for the account
of the Borrower, and all moneys so paid by the Banks shall be payable on demand
and shall bear interest at the lesser of (i) a floating rate per annum equal to
five percent (5%) plus the Prime Rate with a change in such rate of interest to
become effective on the same day on which any change in the Prime Rate is
effective, or (ii) the maximum rate permitted by the applicable law.
7.03. Environmental Matters.
---------------------
(a) The Borrower hereby agrees to indemnify the Banks and hold the
Banks harmless from and against any and all losses, liabilities (including
strict liability), damages, injuries, expenses (including reasonable attorneys'
fees, costs of any settlement or judgment) and claims of any and every kind
whatsoever paid, incurred or suffered by, or asserted or levied against, the
Banks by any person or entity for, with respect to, or in connection with any
Environmental Laws or the use, storage, transportation, release or disposition
of any Hazardous Substances or the clean-up or remediation thereof with respect
to or in connection with the Borrower, its business or operations or the
Premises; provided, however, that notwithstanding anything in this Section 6.03
to the contrary, the Borrower shall not be required to indemnify the Banks
<PAGE>
for any losses, liabilities, damages, injuries, expenses or claims resulting
from the Banks' gross negligence or willful misconduct.
(b) After the occurrence of any Environmental Complaint, the Banks
shall have the right, in its sole discretion, to require the Borrower to perform
(at the Borrower's expense) an environmental audit and, if reasonably deemed
necessary by the Banks, an environmental risk assessment, each reasonably
satisfactory to the Bank, and to implement the recommendations set forth in such
audit and/or risk assessment.
7.04. Waivers. This Agreement and the other Loan Documents may not be
-------
changed, waived, discharged or terminated orally. This Agreement or any Security
Document may be amended and the performance or observance by the Borrower of any
term of this Agreement or any other Loan Document may be waived (either
generally or in a particular instance and either retroactively or prospectively)
with, but only with, the prior written consent of the Banks. The rights and
remedies expressed in this Agreement and in the other Loan Documents are
cumulative and not exclusive of any right or remedy which the Bank may otherwise
have. The Banks may release or surrender, exchange or substitute any real estate
or personal property, or both, or other collateral security now or hereafter
held as security for the payment of the Notes or any other obligations of the
Borrower to the Banks under this Agreement or however arising and may extend the
time for payment or otherwise modify the terms of payment of any part or the
whole of the Notes.
7.05. Delays. No delay on the part of the Banks in exercising any right,
------
power or privilege hereunder or under any other Loan Document shall operate as a
waiver thereof, nor shall any partial exercise or waiver of any privilege or
right hereunder preclude any further exercise of such privilege or right or the
exercise of any other right, power or privilege.
7.06. Notices. Any notices, consents or other communications to be given
-------
under this Agreement or under the other Loan Documents shall be in writing and
shall be deemed given when mailed to the respective parties by overnight courier
or by registered mail addressed as set forth on the first page of this
Agreement, with all such notices, consents and other communications (a) to the
Banks to be sent to the attention of Eileen Orscheln, Vice President, State
Street Bank and Trust Company, and Michael Pickerd, Texas Commerce Bank National
Association, with a copy to Mark D. Smith, Testa, Hurwitz & Thibeault, Exchange
Place, 53 State Street, Boston, MA 02109, and (b) to the Borrower to be sent to
the attention of David A. Butler, Vice President and Treasurer and to Jeremy F.
Swett, Esquire or to such other addresses as either party may from time to time
designate for that purpose. Section headings and defined terms in this Agreement
and the other Loan Documents are included for convenience only and are not
intended to modify or define any term or provision of any such instrument.
7.07. Jurisdiction. The Borrower irrevocably submits to the jurisdiction of
------------
the courts of the Commonwealth of Massachusetts and the United States District
Court for the District of Massachusetts for the purpose of any suit, action or
other proceeding brought by the Banks arising out of or relating to this
Agreement or any other Loan Document, and the Borrower waives and agrees not to
assert by way of motion, as a
<PAGE>
defense or otherwise in any such suit, action or proceeding, any claim that the
Borrower is not personally subject to the jurisdiction of the courts of the
Commonwealth of Massachusetts, that the suit, action or proceeding is brought in
an inconvenient forum or that the venue of the suit, action or proceeding is
improper.
7.08. Execution. This Agreement may be signed in any number of
---------
counterparts, which together will be one and the same instrument. This Agreement
shall become effective whenever each party shall have signed at least one such
counterpart.
7.09. Governing Law. This Agreement shall be governed by the laws of the
-------------
Commonwealth of Massachusetts and for all purposes shall be construed in
accordance with the laws of such Commonwealth.
7.10. Fees. Whether or not any funds are disbursed hereunder, the Borrower
----
shall pay all of the Bank's reasonable costs and expenses in connection with the
preparation, execution, delivery, review, and enforcement of this Agreement and
the other Loan Documents, and in connection with any subsequent amendments
thereto or waivers thereof, including reasonable legal fees and disbursements.
7.11. Binding Nature. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that the rights and obligations under this Agreement
and under any of the other Loan Documents may not be assigned by the Borrower
without the prior written consent of the Bank. Notwithstanding anything to the
contrary herein or in any of the Loan Documents, the Banks may freely assign,
pledge, hypothecate, transfer or convey part or all of their respective
interests hereunder to the Federal Reserve without notification to the Borrower,
or to other financial institutions upon the written consent of the Banks and the
Borrower, which consent will not be unreasonably withheld.
7.12. Severability. In the event that any provision of this Agreement or
------------
the application hereof to any person, entity property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this
Agreement, and the application of such provision to persons, entities,
properties or circumstances other than those as to which it has been held
invalid or enforceable, shall not be affected thereby, and each provision of
this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
7.13. Under Seal. This Agreement shall be deemed to be an instrument under
----------
seal and shall continue in full force and effect so long as any Indebtedness of
the Borrower to the Banks remains unpaid.
This Agreement shall supersede and replace all prior agreements, whether
written or oral, expressed or implied, by and among (i) State Street Bank and
Trust Company and the Borrower and any of its Subsidiaries, or (ii) Texas
Commerce Bank, National Association and the Borrower and any of its
Subsidiaries.
<PAGE>
ARTICLE VIII
DEFINITIONS
8.01. Definitions. All defined terms used in this Agreement which are not
-----------
otherwise defined herein shall have the respective meanings assigned to them in
the other Loan Documents. For purposes of this Agreement and of the other Loan
Documents, the following additional definitions shall apply:
"Affiliated Person" shall mean any person or entity controlling,
controlled by or under common control with the Borrower.
"Agent" in such capacity shall mean State Street Bank & Trust Company.
"Bank," "Banks": in the plural shall mean State Street Bank and Trust
Company and Texas Commerce Bank National Association; in the singular, each a
Bank.
"Borrowing Base" shall mean the sum of 80% of Qualified Receivables
from time to time.
"Business Day" shall mean any day which is not a Saturday, or a Sunday
or a public holiday under the laws of the United States of America or the
Commonwealth of Massachusetts applicable to a national banking association.
"Cash Equivalents" shall mean those investments which, under GAAP, are
treated as equivalent to cash.
"Closing" shall mean a closing held at 11:00 a.m., in the offices of
Testa, Hurwitz & Thibeault, Exchange Place, 53 State Street, Boston,
Massachusetts 02109, on March 31, 1995, or such other date, time and place as
the parties hereto mutually agree.
"Closing Date" shall mean the date on which the Closing shall occur.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations issued pursuant thereto.
"Collateral" shall have the meaning specified in Section 2 of the
Security Agreement.
"Consent" shall mean the written consent of the Agent or the Banks.
"Credit Facility" shall have the meaning specified in the preamble to
this Agreement.
"Current Liabilities" shall mean all liabilities of the Borrower which
would, in accordance with generally accepted accounting principles, be
classified as current liabilities of an entity conducting a business the same as
or similar to that of the Borrower, including, without limitation, all lease
rental payments and other payments under capital leases and fixed prepayments
of, and sinking fund payments with respect
<PAGE>
to, Indebtedness (including Indebtedness evidenced by the Notes) required to be
made within one year from the date of determination.
"Environmental Laws" shall have the meaning specified in Section 3.18
of this Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and the regulations issued pursuant thereto.
"Event of Default" shall have the meaning specified in Section 5.01
hereof.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
"Indebtedness" shall mean with respect to the Borrower (i) all
indebtedness or other obligations of the Borrower for borrowed money or for the
deferred purchase price of property or services, other than for trade accounts
payable incurred in the ordinary course of the Borrower's business, (ii) all
indebtedness or other obligations of any other person for borrowed money or for
the deferred purchase price of property or services, other than for trade
accounts payable incurred in the ordinary course of the Borrower's business, in
respect of which the Borrower is liable, contingently or otherwise, to pay or
advance money or property as guarantor, endorser or otherwise (except as
endorser for collection in the ordinary course of business), or which the
Borrower has agreed to purchase or otherwise acquire, and (iii) all lease
obligations of the Borrower which are required, in accordance with GAAP, to be
capitalized on the books of the lessee.
"Interest Rate Option" shall mean either the LIBOR Option or the Prime
Rate Option.
"Letters of Credit" shall have the meaning specified in Section
1.01(f) of this Agreement.
"Liabilities" shall mean all liabilities of the Borrower, including,
without limitation, all lease rental payments and other payments under capital
leases and fixed prepayments of, and sinking fund payments with respect to,
Indebtedness (including Indebtedness evidenced by the Notes).
"LIBOR" shall mean with respect to the Loans comprising any borrowings
to which the LIBOR Option applies for any LIBOR Interest Period, the rate of
interest at which LIBOR deposits in an amount equal to the Loan in the portion
of the Loan as to which a LIBOR Interest Option has been elected and which have
a term corresponding to the LIBOR Interest Period in question are offered to the
Agent by first-class banks in the London Interbank Office on the first day of
such LIBOR Interest Period as determined by the Agent at approximately 11:00
a.m. (London time) two Banking Days prior to the date upon which the LIBOR
Interest Period in question is to commence, which determination by the Agent
shall, in the absence of manifest error, be conclusive.
<PAGE>
"LIBOR Interest Period" shall have the meaning assigned to that term
in Section 1.03 hereof.
"LIBOR Loans" shall mean Loans subject to the LIBOR Option.
"LIBOR Reserve Percentage" shall mean the maximum percentage
(expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined
by the Agent (which determination shall be conclusive absent manifest error)
which is in effect during any relevant period, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
reserve requirements (including, without limitation, supplemental, marginal, and
emergency reserve requirements) with respect to LIBOR currency funding
(currently referred to as "LIBOR Currency Liabilities") of a member bank in such
System.
"Loan Documents" shall mean this Agreement, the Notes, the Security
Documents and all other agreements, instruments, documents and certificates
executed or delivered in connection with the transactions contemplated therein.
"Loans" shall mean either the Prime Rate Loans and/or the LIBOR Loans
made by the Bank to the Borrower pursuant to Section 1.01 of this Agreement.
"Net Income" or "Net Loss" for any fiscal period shall mean net income
(or net loss, expressed as a negative number), after deduction of or credit for
applicable income taxes, as such net income after taxes or net loss would be set
forth on an income statement for such fiscal period prepared in accordance with
GAAP.
"Nominee" shall mean a business entity, formed or appointed by Agent
to own or manage any Collateral in the possession or control of Lenders.
"Notes" means the Revolving Line of Credit Notes of the Borrower in
the form of Exhibit A attached hereto.
---------
"Payment Date" shall mean the first day of each month on which the
Agent is open for business in the Commonwealth of Massachusetts from and after
the Closing Date.
"Permitted Lien" shall have the meaning given that term in Section
4.02(b) hereof.
"Pledge Agreement" shall mean the Pledge Agreement of the Borrower in
the form of Exhibit E hereto.
"Prime Rate Loans" shall mean Loans subject to the Prime Rate Optio n.
"Prime Rate" shall mean the rate of interest announced by the Agent
from time to time as its "Prime Rate" or "Base Rate"; provided, however, that
such rate is not necessarily the lowest rate charged by the Bank to its
customers.
<PAGE>
"Principal Office" of the Agent or the Borrower shall mean the
respective office located at the address set forth on the first page hereof.
"Proportionate Share" shall mean each Bank's commitment to fund Loans;
in the case of State Street Bank and Trust Company, 62.5%; and in the case of
Texas Commerce Bank, National Association, 37.5%.
"Qualified Receivables" shall mean only those Receivables of the
Borrower which met the following specifications at the time such Receivable came
into existence and continue to meet the same until it is collected in full: (i)
the Receivable is not more than 60 days from the due date thereof, provided that
the Receivable has been generated in accordance with the Borrower's standard 30-
day payment terms; (ii) the Receivable arose from the performance of services or
an outright sale, lease or license of goods by the Borrower, such goods have
been shipped to the account debtor, or the Borrower has been notified that the
goods have been manufactured by an account debtor and the Borrower has
possession of, or has delivered to the Bank, shipping and delivery receipts
evidencing such shipment or manufacture; (iii) the Receivable is not subject to
any prior assignment, claim, lien, or security interest, and the Borrower will
not make any further assignment thereof or create any further security interest
therein, nor permit the Borrower's right therein to be reached by attachment,
levy garnishment or other judicial process; (iv) the Receivable is not subject
to set-off, credit, allowance or adjustment by the account debtor, except
discount allowed for prompt payment, and the account debtor has not complained
as to his or its liability thereunder and has not returned any material portion
of the goods from the sale, lease or license from which the Receivable arose;
(v) the Receivable arose in the ordinary course of the Borrower's business and
did not arise from the performance of services or a sale, lease or license of
goods to a supplier or employee of the Borrower; (vi) no notice of bankruptcy,
insolvency or financial distress of the account debtor has been received by or
is known to the Borrower; (vii) the Bank has not notified the Borrower that the
Bank has reasonably determined that the Receivable or account debtor is
unsatisfactory on the basis of the account debtor's solvency or credit history;
(viii) the aggregate Receivables from such account debtor do not exceed 25% of
the total Qualified Receivables of the Borrower (that portion of the account
over the 25% level will be disqualified), unless such account debtor has
received or is qualified to receive a rating of BBB+ or higher from Standard &
Poor's, Inc.; (ix) the account debtor is not an Affiliated Person, officer or
employee of the Borrower; and (x) either (A) the account debtor is a person or
entity located in the United States or Canada and the account arose out of
services rendered or goods delivered in the United States or Canada or (B)
payment of the Receivable is backed by a letter of credit or guaranteed by the
Export-Import Bank or the Federal Credit Insurance Agency, in each case on terms
and conditions reasonably satisfactory to the Bank.
"Receivables" shall mean all of the present and future accounts,
accounts receivable and notes, drafts, acceptances and other instruments
representing or evidencing a right to payment for goods sold or for services
rendered of the Borrower, including all right, title and interest of the
Borrower in the goods or services which have
<PAGE>
given rise thereto and any right of stoppage in transit, whether the same
are now owned or hereafter acquired or arising.
"Security Agreement" shall mean the Security Agreement in the form of
Exhibit B hereto.
- ---------
"Security Documents" shall have the meaning specified in Section 1.13
of this Agreement.
"Tangible Net Worth" shall mean stockholders' equity (determined in
accordance with GAAP) minus all assets that would be considered intangibles
under GAAP, such intangible assets including, without limitation, such items as
goodwill, trademarks, tradenames, copyrights, patents, licenses and rights in
any thereof, unamortized debt discount, capitalized software development or
acquisition costs, costs or value of purchased software and all write-ups in the
book value of any asset.
"Termination Date" shall mean the earlier of (i) October 31, 1996,
(ii) such earlier date on which the Banks make a declaration in accordance with
the provisions of Section 5.02(a) hereof or (iii) such earlier date (of which
the Borrower shall have given the Agent at least 30 days' prior written notice)
on which the Borrower delivers to the Agent a written termination of this
Agreement, accompanied or preceded by satisfaction in full of all obligations of
the Borrower to the Banks hereunder or in connection herewith. The Bank may, at
its discretion, renew or extend the revolving line of credit by extending the
Termination Date. Neither the inclusion in this Agreement of financial
covenants relating to periods after the Termination Date or any other terms and
provisions hereof shall be deemed to create any implication that the Banks are
required to renew or extend such revolving line of credit.
8.02. Use of Defined Terms. Any defined term used in the plural preceded by
--------------------
the definite article shall be taken to encompass all members of the relevant
class. Any defined term used in the singular preceded by "any" shall be taken to
indicate any number of the members of the relevant class.
<PAGE>
8.03. Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with United States generally accepted
accounting principles consistently applied on the basis used by the concerned
entity in prior years.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Banks have caused this Credit
Agreement to be executed by their duly authorized officers as of the date first
above written.
SEQUOIA SYSTEMS, INC.
By: /s/ David A. Butler
--------------------------------
Name: David A. Butler
------------------------------
Title: Vice President and Treasurer
-----------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ Eileen K. Orscheln
--------------------------------
Name: Eileen K. Orscheln
------------------------------
Title: Assist. Vice President
-----------------------------
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/ Michael D. Pickerd
--------------------------------
Name: Michael D. Pickerd
------------------------------
Title: Senior Vice President
-----------------------------
<PAGE>
EXHIBIT A
---------
REVOLVING LINE OF CREDIT NOTE
-----------------------------
$12,500,000.00 March 31, 1995
For value received, the undersigned, Sequoia Systems, Inc., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of State
Street Bank and Trust Company, a Massachusetts trust company (the "Bank"), at
its principal office at 225 Franklin Street, Boston, Massachusetts 02110 or at
such other place as may be designated from time to time in writing by the Bank,
the principal sum of Twelve Million Five Hundred Thousand Dollars and No Cents
($12,500,000.00), together with interest in arrears from and including the date
hereof on the unpaid principal balance hereunder, computed daily, at a variable
rate of interest to be determined as provided in the Credit Agreement (as
hereinafter defined) and payable as set forth below. At the option of the Bank
and to the extent permitted by applicable law, the rate of interest on any
overdue principal shall be five percent (5%) per annum above the Prime Rate
established from time to time by the Bank. Notwithstanding any other provision
of this Note, the Bank does not intend to charge and the Borrower shall not be
required to pay any interest or other fees or charges in excess of the maximum
permitted by applicable law; any payments in excess of such maximum shall be
refunded to the Borrower or credited to reduce principal hereunder. All payments
received by the Bank hereunder will be applied first to reasonable costs of
collection and fees, if any, then to interest and the balance to principal.
Principal and interest shall be payable in lawful money of the United States of
America.
Principal shall be payable in a single payment on the Termination Date as
defined in the Credit Agreement; interest shall be payable monthly in arrears
commencing on May 1, 1995, and continuing on the first day of each successive
month thereafter with a final payment of all unpaid interest at the time of
payment of the principal.
If any day on which a payment is due pursuant to the terms of this Note is
not a day on which banks in the Commonwealth of Massachusetts are generally open
(a "Business Day"), such payment shall be due on the next Business Day
following.
This Note is secured by and entitled to the benefits of a Credit Agreement
(the "Credit Agreement") and a Security Agreement between the Borrower and the
Bank of even date herewith. Upon the occurrence of any Event of Default, as
defined in the Credit Agreement or the Security Agreement, the Bank may declare
any or all obligations or liabilities of the Borrower to the Bank (including the
unpaid principal hereunder and any interest due thereon), immediately due and
payable without presentment, demand, protest or notice, each of which is hereby
expressly and irrevocably waived by the Borrower.
<PAGE>
Any deposits or other sums at any time credited by or due from the Bank to or
for the Borrower and any securities or other property of the Borrower in the
possession of the Bank shall at all times be held and treated as collateral
security for the payment of this Note and any other liability now existing or
hereafter arising of the Borrower to the Bank and upon the occurrence and
continuance of any Event of Default (as defined in the Credit Agreement), the
Bank may apply or set off any such deposits and sums against said liabilities.
If this Note is not paid in accordance with its terms, the Borrower shall pay
to the Bank, in addition to principal and accrued interest thereon, all
reasonable costs of collection of the principal and accrued interest, including,
but not limited to, reasonable attorneys' fees, court costs and other costs for
the enforcement of payment of this Note.
No waiver of any obligation of the Borrower under this Note shall be
effective unless it is in a writing signed by the Bank. A waiver by the Bank of
any right or remedy under this Note on any occasion shall not be a bar to
exercise of the same right or remedy on any subsequent occasion or of any other
right or remedy at any time.
Any notice required or permitted under this Note shall be in writing and
shall be deemed to have been given on the date of delivery, if delivered in
person or by facsimile transmission to the party to whom notice is to be given,
or on the second business day after mailing, if mailed to the party to whom
notice is to be given, by overnight courier service or by certified mail, return
receipt requested, postage prepaid, and addressed to the addressee at the
address of the addressee set forth in the Credit Agreement, or to the most
recent address, specified by written notice, given to the sender pursuant to
this paragraph.
This Note is delivered in and shall be enforceable in accordance with the
laws of the Commonwealth of Massachusetts, and shall be construed in accordance
therewith, and shall have the effect of a sealed instrument.
The Borrower hereby expressly waives presentment, demand, and protest, notice
of demand, dishonor and nonpayment of this Note, and all other notices or
demands of any kind in connection with the delivery, acceptance, performance,
default or enforcement hereof, and hereby consents to any delays, extensions of
time, renewals, waivers or modifications that may be granted or consented to by
the holder hereof with respect to the time of payment or any other provision
hereof or of the Credit Agreement or Security Agreement.
<PAGE>
In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, in whole or in part or
in any respect, or in the event that any one or more of the provisions of this
Note operate or would prospectively operate to invalidate this Note, then and in
any such event, such provision(s) only shall be deemed null and void and shall
not affect any other provision of this Note and the remaining provisions of this
Note shall remain operative and in full force and effect and in no way shall be
affected, prejudiced, or disturbed thereby.
BORROWER:
[CORPORATE SEAL] SEQUOIA SYSTEMS, INC.
By: ________________________________
Name:
Title:
ATTESTED:
By: __________________________
Name:
Title:
<PAGE>
SECURITY AGREEMENT
------------------
(SEQUOIA SYSTEMS, INC.)
-----------------------
Security Agreement, dated as of March 31, 1995 made by Sequoia Systems, Inc.,
a Delaware corporation (the "Borrower") in favor of State Street Bank and Trust
Company for itself and as agent for Texas Commerce Bank National Association
(the "Banks").
RECITALS
Pursuant to the Credit Agreement of even date herewith (as amended,
supplemented or otherwise modified from time to time (the "Credit Agreement"),
between the Borrower and the Banks, the Banks have agreed to make loans to the
Borrower, upon the terms and subject to the conditions set forth therein, to be
evidenced by the Notes issued by the Borrower thereunder. It is a condition
precedent to the obligation of the Banks to make their loans to the Borrower
under the Credit Agreement that the Borrower shall have executed and delivered
this Security Agreement to the Banks.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and to induce the Banks to make their loans to the Borrower under
the Credit Agreement, the Borrower hereby agrees with the Banks as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined
-------------
in the Credit Agreement and used herein are so used as so defined; the following
terms which are defined in the Uniform Commercial Code in effect in the
Commonwealth of Massachusetts on the date hereof are used herein as therein
defined: Accounts, Chattel Paper, Documents, Equipment, Fixtures, General
Intangibles, Goods, Instruments, Inventory and Proceeds; and the following terms
shall have the following meanings:
"Code" means the Uniform Commercial Code as from time to time in effect
in the Commonwealth of Massachusetts.
"Collateral" shall have the meaning assigned to it in Section 2 of this
Security Agreement.
"Intellectual Property Rights" means all rights of the Borrower in, to or
with respect to any intellectual property now or hereafter owned, possessed or
acquired by or on behalf of the Borrower, including without limitation patents,
letters patent, patent applications, trademarks, service marks, trade names and
copyrights and any applications therefor or registrations, recordings,
divisions, continuations, continuations-in-part, renewals, reissues or
extensions thereof, including those patents, copyrights and/or trademarks, and
applications therefor, set forth on Schedule I hereto.
----------
<PAGE>
"Obligations" means the unpaid principal amount of, and interest on, the
Note and all other obligations and liabilities of the Borrower to the Banks,
whether direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with, the Credit Agreement, the Note, the Guaranty, or this Security Agreement
and any other document executed and delivered in connection therewith or
herewith and each other obligation and liability, whether direct or indirect,
absolute or contingent, due or to become due, or now or hereafter existing, of
the Borrower or Borrower to the Banks, whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses
(including, without limitation, all reasonable fees and disbursements of counsel
to the Banks) or otherwise, but excluding any such obligations of the Borrower
to the Banks arising through the purchase by or assignment to the Banks of the
Borrower's obligations to third parties.
"Security Agreement" means this Security Agreement, as amended,
supplemented or otherwise modified from time to time.
2. Grant of Security Interest. As collateral security for the prompt and
--------------------------
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations, the Borrower hereby grants to the
Banks a security interest in all of the following property now owned or at any
time hereafter acquired by the Borrower or in which the Borrower now has or at
any time in the future may acquire any right, title or interest (collectively,
the "Collateral"): (i) Accounts; (ii) Chattel Paper; (iii) Documents; (iv)
Equipment; (v) Fixtures, (vi) General Intangibles; (vii) Goods; (viii)
Instruments; (ix) Intellectual Property Rights; (x) Inventory; (xi) insurance
claims and proceeds; (xii) books and records, computer programs, databases and
other computer materials of the Borrower pertaining to any and all of the
foregoing; and (xiii) to the extent not otherwise included, Proceeds and
products of any and all of the foregoing. Notwithstanding the foregoing, such
grant of security interest shall not extend to, and the term "Collateral" shall
not include, any of the foregoing which are now or hereafter held by the
Borrower to the extent that (A) the same are not assignable or capable of being
encumbered as a matter of law or under the terms of any agreement applicable
thereto (but solely to the extent that any such restriction shall be enforceable
under applicable law), without the consent of the other applicable party thereto
and (B) such consent has not been obtained; provided, however, that such grant
-----------------
of security interest shall extend to, and the term "Collateral" shall include
(1) any and all proceeds of the foregoing to the extent that the assignment or
encumbering of such proceeds is not so restricted and (2) upon any other
applicable party's consent being obtained with respect to any of the foregoing
that is otherwise excluded, thereafter the same as well as any and all proceeds
thereof that might have theretofore been excluded from such grant of a security
interest shall be included within the term "Collateral".
<PAGE>
3. Rights of Banks; Limitations on Bank's Obligations.
---------------------------------------------------
(a) Borrower Remains Liable under Accounts. Anything herein to the
---------------------------------------
contrary notwithstanding, the Borrower shall remain responsible with respect to
each of the Accounts, to observe and perform all the conditions and obligations
to be observed and performed by it thereunder in accordance with the terms of
any agreement giving rise to each such Account. The Banks shall not have any
obligation or liability under any Account (or any agreement giving rise thereto)
by reason of or arising out of this Security Agreement or the receipt by the
Banks of any payment relating to such Account pursuant hereto, nor shall the
Banks be obligated in any manner to perform any of the obligations of the
Borrower under or pursuant to any Account (or any agreement giving rise
thereto), to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Account (or any agreement giving rise
thereto), to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.
(b) Notice to Account Debtors. Upon the request of the Banks at any time
-------------------------
after the occurrence and during the continuance of an Event of Default, the
Borrower shall notify account debtors on the Accounts that the Accounts have
been collaterally assigned to the Banks and that payments in respect thereof
shall be made directly to the Banks. In accordance with the Bank's customary
practices, the Banks may in their own name or in the name of the Borrower
communicate with account debtors on the Accounts to verify with them to its
satisfaction the existence, amount and terms of any Accounts.
(c) Collections on Accounts. The Borrower shall have the sole right to
-----------------------
collect the Accounts, except that after the occurrence and during the
continuance of an Event of Default, the Banks may curtail or terminate said
right and collect the Accounts as the secured party hereunder. All Proceeds
constituting collections of Accounts shall be applied in the manner set forth in
the Credit Agreement. If required by the Banks at any time after the occurrence
and during the continuance of an Event of Default, any payments of Accounts,
when collected by the Borrower, shall be forthwith (and, in any event, within
two Business Days) deposited by the Borrower in the exact form received, duly
endorsed by the Borrower to the Banks if required, in a special collateral
account maintained by the Banks, subject to withdrawal by the Banks only, as
hereinafter provided, and, until so turned over, shall be held by the Borrower
in trust for the Banks, segregated from other funds of the Borrower. If an
Event of Default shall have occurred and be continuing, at any time at the
Bank's election, the Banks shall apply all or any part of the funds on deposit
in said special collateral account on account of the Obligations as set forth in
the Credit Agreement, and any part of such funds which the Banks elect not so to
apply and deems not required as collateral security for the Obligations shall be
paid over from time to time by the Banks to the Borrower or to whomsoever may be
lawfully entitled to receive the same. Upon the occurrence and during the
continuance of an Event of Default, at the Bank's request, the Borrower shall
deliver to the Banks all original and other documents evidencing, and relating
to, the agreements and transactions which gave rise to the accounts, including,
without
<PAGE>
limitation, all original orders, invoices and shipping receipts, or copies
thereof if such originals are not available.
(d) Title to Collateral. The Borrower represents and warrants to the
-------------------
Banks that it has good title to all of the Collateral, free and clear of all
liens and security interests, in favor of any person or entity other than the
Banks.
4. Covenants. The Borrower covenants and agrees with the Banks that, from
---------
and after the date of this Security Agreement until the Obligations are paid in
full:
(a) Further Documentation; Pledge of Instruments and Chattel Paper. At
--------------------------------------------------------------
any time and from time to time, upon the written request of the Banks, and at
the sole expense of the Borrower, the Borrower will promptly and duly execute
and deliver such further instruments and documents and take such further action
as the Banks may reasonably request for the purpose of obtaining or preserving
the full benefits of this Security Agreement and of the rights and powers herein
granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code in effect in any
jurisdiction with respect to the security interests and liens created hereby.
The Borrower also hereby authorizes the Banks to file any such financing or
continuation statement without the signature of the Borrower to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Security Agreement shall be sufficient as a financing statement for filing
in any jurisdiction. If any amount payable under or in connection with any of
the Collateral shall be or become evidenced by any Instrument or Chattel Paper,
such Instrument or Chattel Paper shall be immediately delivered to the Banks,
duly endorsed in a manner satisfactory to the Banks, to be held as Collateral
pursuant to this Security Agreement.
(b) Indemnification. The Borrower agrees to pay, and to save the Banks
---------------
harmless from, any and all liabilities, reasonable costs and expenses
(including, without limitation, reasonable legal fees and expenses) (i) with
respect to, or resulting from, any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect to any
of the Collateral, (ii) with respect to, or resulting from, any delay in
complying with any law, rule, regulation or order of any court, arbitrator or
governmental entity, jurisdiction or authority applicable to any of the
Collateral or (iii) in connection with any of the transactions contemplated by
this Security Agreement. In any suit, proceeding or action brought by the Banks
under any Account for any sum owing thereunder, or to enforce any provisions of
any Account, the Borrower will save, indemnify and keep the Banks harmless from
and against all loss, damage or reasonable expense suffered by reason of any
defense, setoff, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by the
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from the Borrower. The foregoing
indemnification shall not apply to any liabilities, costs, or expenses resulting
directly from the negligence or willful misconduct or bad faith of the Banks or
the Banks' failure to exercise reasonable care with respect to the Collateral in
their possession as set forth in Section 8 hereof
<PAGE>
(c) Maintenance of Records. The Borrower will keep and maintain at its
----------------------
own cost and expense satisfactory and complete records of the Collateral,
including without limitation, a record of all payments received and all credits
granted with respect to the Accounts. For the Bank's further security, the
Borrower hereby grants to the Banks a security interest in all of the Borrower's
books and records pertaining to the Collateral, and upon the occurrence and
during the continuance of an Event of Default, the Borrower shall turn over any
such books and records to the Banks or to its representatives during normal
business hours at the request of the Banks.
(d) Right of Inspection. The Banks shall at all times have full and free
-------------------
access during normal business hours, and upon reasonable prior notice, to all
the books of record and account of the Borrower, and the Banks or their
representatives may examine the same, take extracts therefrom and make
photocopies thereof. To the extent permitted by law, the Banks and their
representatives shall at all times also have the right during normal business
hours, and upon reasonable prior notice, to enter into and upon any premises
where any of the Inventory or Equipment is located for the purpose of inspecting
the same or otherwise protecting its interests therein.
(e) Compliance with Laws, etc. The Borrower will comply in all material
--------------------------
respects with all laws, rules, regulations and orders of any court, arbitrator
or governmental entity, jurisdiction or authority applicable to the Collateral
or any part thereof or to the operation of the Borrower's business except where
the failure to so comply would not have a material adverse effect on the
Borrower's business or financial condition; provided, however, that the Borrower
may contest any such law, rule, regulation or order in any reasonable manner
which shall not adversely affect the Bank's rights or the priority of its liens
on the Collateral.
(f) Payment of Obligations. The Borrower will pay promptly when due all
----------------------
material taxes, assessments and governmental charges or levies imposed upon the
Collateral or in respect of its income or profits therefrom, as well as all
material claims of any kind (including, without limitation, claims for labor,
materials and supplies) against or with respect to the Collateral, except that
no such charge need be paid if (i) the validity thereof is being contested in
good faith by appropriate proceedings, (ii) such proceedings do not involve any
material danger of the sale, forfeiture or loss of any of the Collateral or any
interest therein and (iii) such charge is adequately reserved against on the
Borrower's books in accordance with GAAP.
(g) Limitation on Liens on Collateral. The Borrower will not create,
---------------------------------
incur or permit to exist, will defend the Collateral against, and will take such
other action as is necessary to remove, any lien, security interest, pledge,
mortgage, deed of trust, levy, attachment, claim or other charge or encumbrance
on or to the Collateral, other than Permitted Liens, and will defend the right,
title and interest of the Banks in and to any of the Collateral against the
claims and demands of all persons or entities whatsoever.
(h) Limitations on Dispositions of Collateral. The Borrower will not
-----------------------------------------
sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt,
offer or
<PAGE>
contract to do so, except for sales or other dispositions of Collateral
permitted by the Credit Agreement.
(i) Limitations on Discounts, Compromises, Extensions of Accounts. Other
-------------------------------------------------------------
than in the ordinary course of business as generally conducted by the Borrower,
the Borrower will not grant any extension of the time of payment of any of the
Accounts, compromise, compound or settle the same for less than the full amount
thereof, release, wholly or partially, any person or entity liable for the
payment thereof, or allow any credit or discount whatsoever thereon.
(j) Maintenance of Equipment. The Borrower will maintain each item of
------------------------
Equipment in good operating condition, ordinary wear and tear and immaterial
impairments of value and damage by the elements excepted, and will provide all
maintenance, service and repairs necessary for such purpose, except as otherwise
expressly permitted by the Credit Agreement.
(k) Maintenance of Insurance. The Borrower will maintain, with
------------------------
financially sound and reputable companies, insurance policies (i) insuring the
Inventory and Equipment against loss by fire, explosion, theft and such other
casualties as may be reasonably satisfactory to the Banks and (ii) insuring the
Borrower and the Banks against liability for personal injury and property damage
relating to such Inventory and Equipment, such policies to be in such form and
amounts and having such coverage as may be reasonably satisfactory to the Banks,
with losses payable to the Borrower and the Banks as their respective interests
may appear. All such insurance shall (i) provide that no termination,
cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at least 20 days after receipt by the Banks of
written notice thereof, (ii) name the Banks as an an additional insured and/or
loss payee as its interests appear and (iii) be reasonably satisfactory in all
other respect to the Banks. From time to time upon the request of the Banks,
the Borrower shall deliver to the Banks copies of insurance policies,
certificates or binders as the Banks may from time to time reasonably request.
(l) Further Identification of Collateral. The Borrower will furnish to
------------------------------------
the Banks from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Banks may reasonably request, all in reasonable detail.
5. Banks's Appointment as Attorney-in-Fact.
---------------------------------------
(a) Powers. The Borrower hereby irrevocably constitutes and appoints the
------
Banks and any officer thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of the Borrower and in the name of the Borrower or in its own name,
from time to time in the Banks's discretion, for the purpose of carrying out the
terms of this Security Agreement, without notice to or assent by the Borrower,
to do the following:
(i) at any time when any Event of Default shall have occurred and
is continuing, in the name of the Borrower or its own
<PAGE>
name, or otherwise, to take possession of and endorse and
collect any checks, drafts, notes, acceptances or other
instruments for the payment of moneys due under any Account,
Instrument or with respect to any other action or proceeding
in any court of law or equity or otherwise deemed appropriate
by the Banks for the purpose of collecting any and all such
moneys due under any Account, Instrument or with respect to
any other Collateral whenever payable;
(ii) at any time when an Event of Default shall have occurred and
is continuing, to pay or discharge taxes and liens levied or
placed on or threatened against the Collateral, to effect any
repairs or any insurance called for the terms of this Security
Agreement and to pay all or any part of the premiums therefor
and the costs thereof;
(iii) Upon the occurrence and during the continuance of any Event of
Default, (A) to direct any party liable for any payment under
any of the Collateral to make payment of any and all moneys
due or to become due thereunder directly to the Banks or as
the Banks shall direct; (B) to ask or demand for, collect,
receive payment of and receipt for, any and all moneys, claims
and other amounts due or to become due at any time in respect
of or arising out of any Collateral; (C) to sign and endorse
any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors,
assignments, verifications, notices and other documents in
connection with any of the collateral; (D) to commence and
prosecute any suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect the
Collateral or any thereof and to enforce any other right in
respect of any Collateral; (E) to defend any suit, action or
proceeding brought against the Borrower with respect to any
Collateral; (F) to settle, compromise or adjust any suit,
action or proceeding described in clause (E) above and, in
connection therewith, to give such discharges or releases as
the Banks may deem appropriate; and (G) generally, to sell,
transfer, pledge and make any agreement with respect to or
otherwise deal with any of the Collateral as fully and
completely as though the Banks were the absolute owner thereof
for all purposes, and to do, at the Bank's option and the
Borrower's expense, at any time, or from time to time, all
acts and things which the Banks deem necessary to protect,
preserve or realize upon the Collateral and the Bank's liens
thereon and to effect the intent of this Security
<PAGE>
Agreement, all as fully and effectively as the Borrower might
do; and
(iv) at any time when an Event of Default shall have occurred and
is continuing, to take any and all appropriate action and to
execute any and all instruments which may be necessary or
desirable to accomplish the purposes of this Security
Agreement.
This power of attorney is a power coupled with an interest and shall be
irrevocable.
(b) Other Powers. The Borrower also authorizes the Banks, at any time
------------
and from time to time, to execute, in connection with the sales provided for in
Section 7 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(c) No Duty on Bank's Part. The powers conferred on the Banks hereunder
----------------------
are solely to protect the Bank's interests in the Collateral and shall not
impose any duty upon it to exercise any such powers. The Banks shall be
accountable only for amounts that they actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its own gross negligence or willful misconduct,
provided that the Banks shall be required to exercise reasonable care at all
times with respect to Collateral in its possession as set forth in Section 8
hereof.
6. Performance by Banks of Borrower's Obligations. If the Borrower fails to
----------------------------------------------
perform or comply with any of its agreements contained herein and the Banks, as
provided for by the terms of this Security Agreement, shall themselves perform
or comply, or otherwise cause performance or compliance, with such agreement,
the reasonable expenses of the Banks incurred in connection with such
performance or compliance, together with interest thereon at a rate per annum
equal to the Prime Rate plus 5%, shall be payable by the Borrower to the Banks
on demand and shall constitute Obligations secured hereby.
7. Remedies. If an Event of Default shall occur and be continuing, the
--------
Banks may exercise, in addition to all other rights and remedies granted to it
in this Security Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, all rights and remedies of a secured
party under the Code. Without limiting the generality of the foregoing, the
Banks, without demand of performance or other demand, presentment, protest, or
notice of any kind (except any notice required by law referred to below) to or
upon the Borrower or any other person or entity (all and each of which are
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase, or otherwise
dispose of and deliver the Collateral or any part thereof (or contract to do any
of the foregoing), in one or more parcels at public or private sale or sales, at
any exchange, broker's board or office of the Banks or elsewhere upon such terms
and
<PAGE>
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit risk.
The Banks shall have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity or
redemption in the Borrower. The Borrower further agrees, at the Bank's request,
to assemble the Collateral and make it available to the Banks at places which
the Banks shall reasonably select, whether at the Borrower's premises or
elsewhere, provided that such place shall be reasonably convenient to the
Borrower. The Banks shall promptly apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Banks hereunder, including,
without limitation, reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Obligations, in such order as set forth in the Credit
Agreement, and the Banks shall account for the surplus, if any, to the Borrower.
To the extent permitted by applicable law, the Borrower waives all claims,
damages and demands it may acquire against the Banks arising out of the exercise
by the Banks of any of its rights hereunder, provided that such release shall
not apply to any claim, damage or demand resulting directly from the gross
negligence, willful misconduct or bad faith of the Banks, or the Bank's
obligation to exercise reasonable care with respect to Collateral in its
possession as set forth in Section 8 hereof. If any notice of a proposed sale or
other disposition of Collateral shall be required by law, such notice shall be
deemed reasonable and proper if given at least ten days before such sale or
other disposition. The Borrower shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay the Obligations and the reasonable fees and disbursements of any attorneys
employed by the Banks to collect such deficiency.
8. Limitation on Duties Regarding Preservation of Collateral. The Bank's
---------------------------------------------------------
sole duty with respect to the custody, safekeeping and physical preservation of
the Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to exercise reasonable care and deal with it in the same manner as the
Banks deal with similar property for its own account. Neither the Banks nor any
of their directors, officers, employees or agents shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
9. Appointment of Agent. Texas Commerce Bank, National Association hereby
--------------------
appoints and authorizes State Street Bank and Trust Company to act as its agent
hereunder and under the Credit Agreement and Secured Guaranty and authorizes the
agent to take such action on behalf of Texas Commerce Bank National Association
to effect and consummate the provisions of this Security Agreement, including,
but not limited to the execution of instruments relating hereto; employment of
attorneys, accountants and other professionals and agents and attorneys-in-fact
necessary to enforce the rights and remedies of State Street Bank and Trust
Company and Texas Commerce Bank National hereunder; and to take all actions
reasonably necessary to
<PAGE>
carry out the rights and obligations of State Street Bank and Trust Company,
Texas Commerce Bank National Association hereunder.
10. Powers Coupled with an Interest. All authorizations and agencies herein
-------------------------------
contained with respect to the Collateral are irrevocable and powers coupled with
an interest.
11. Severability. Any provision of this Security Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12. Paragraph Headings. The paragraph headings used in this Security
------------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
13. No Waiver; Cumulative Remedies. The Banks shall not by any act (except
------------------------------
by a written instrument pursuant to Section 13 hereof), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Banks, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Banks of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Banks would otherwise have
on any future occasion. The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law.
14. Waivers and Amendments; Successors and Assigns. None of the terms or
----------------------------------------------
provisions of this Security Agreement may be waived, amended, supplemented or
otherwise modified except by a written instrument executed by the Borrower and
the Banks, provided that any provision of this Security Agreement may be waived
by the Banks in a written letter or agreement executed by the Banks or by telex
or facsimile transmission from the Banks. This Security Agreement shall be
binding upon the successors and assigns of the Borrower and shall inure to the
benefit of the Banks and their successors and assigns.
15. Governing Law. This Security Agreement shall be governed by, and
-------------
construed and interpreted in accordance with, the laws of the Commonwealth of
Massachusetts.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Security Agreement to be
duly executed and delivered in favor of the Banks as of the date first above
written.
SEQUOIA SYSTEMS, INC.
By: _______________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
By: _______________________________
Name:
Title:
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: _______________________________
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000724621
<NAME> SEQUOIA SYSTEMS, INC.
<MULTIPLIER> 1
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> APR-02-1995
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0
0
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<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
