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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 0-20084
NETFRAME SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 77-0081278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1545 Barber Lane, Milpitas, CA 95035
(Address of principal executive offices and zip code)
(408) 474-1000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing sale price of the Common Stock as reported on
the Nasdaq National Market on March 31, 1997) was approximately $22,699,784. For
purposes of this determination, shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the Registrant's Common
Stock as of the close of business on March 31, 1997 was 13,978,445.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on July 23, 1997 is incorporated by reference in Part
III of the Form 10-K to the extent stated herein.
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NETFRAME SYSTEMS INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
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PART I
Page
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<S> <C>
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 12
Item 3. Legal Proceedings.......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders........................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 13
Item 6. Selected Financial Data.................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 16
Item 8. Financial Statements and Supplementary Data................................ 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 22
Item 11. Executive Compensation..................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 25
Item 13. Certain Relationships and Related Transactions............................. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 26
Signatures ........................................................................... 43
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PART I
ITEM 1. BUSINESS.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This section contains certain trend analyses and forward-looking statements.
Actual results may differ materially from the results described in such trend
analyses and forward looking statements, Factors that might cause such a
difference include, but are not limited to, those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Business Factors."
GENERAL
NetFRAME Systems Incorporated (the "Company" or "NetFRAME") develops,
manufactures, markets and supports a broad line of high-availability, clustered
network servers for local and wide area networks. NetFRAME was one of the first
companies to offer a high-availability open-systems server and began shipping
commercial volumes in December 1989.
NetFRAME servers are characterized by high availability, scalability and
adherence to industry standards. NetFRAME servers, combined with NetFRAME value
added software, provide a high degree of availability which minimizes downtime
resulting from hardware and software failures, system growth and maintenance.
NetFRAME servers are scalable, enabling customers to add network connections as
the number of users and applications on a local area network grows. This
protects customers' investments in their servers and related products, while
enabling them to respond to changing business conditions by adding new users and
new applications. The Company's servers are compatible with industry standard
network operating systems, including Novell's IntraNetware and Microsoft's
Windows NT.
NetFRAME has a worldwide installed base of over 5500 servers. NetFRAME sells
its products through a number of integrators and Value Added Resellers (VARs)
worldwide.
The Company was incorporated in Delaware on March 26, 1992 to succeed the
business of a California corporation named "NetFRAME Systems Incorporated" that
was incorporated in August 1985. In addition, NetFRAME International
Incorporated was incorporated in Delaware in 1995 to support international sales
offices and is a wholly-owned subsidiary of the Company. Unless the context
otherwise requires, the "Company" and "NetFRAME" refer to NetFRAME Systems
Incorporated, a Delaware corporation, its California predecessor, and its
wholly-owned subsidiaries. The Company's executive offices are located at 1545
Barber Lane, Milpitas, California 95035, and its telephone number is (408)
474-1000.
RECENT EVENTS
In March, 1997, the Company obtained an asset based revolving credit facility
with CIT Group/Business Credit, Inc., Los Angeles, CA, to finance eligible
accounts receivable and production inventory up to a maximum of $15.0 million,
subject to certain net worth and other financial covenants. As of March 28,
1997, no amounts were outstanding and the Company's available borrowing base
under this credit facility was approximately $6.0 million.
As a result of continuing product transition and pricing issues, the Company
continued to experience significant operating and net losses and declining cash
balances in the quarter ended March 29, 1997. See additional discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
1996 saw the Company's introduction of the second new server architecture in the
Company's nine year history. The new NF9000 servers utilize industry-standard
I/O boards and peripherals. This transition from the Company's proprietary MPSA
I/O architecture to an I/O system based on the PCI and I2O (pronounced
eye-two-oh) standards provides customers with the traditional NetFRAME benefits
of reliability, availability and scalability, combined with the ability for
lower-cost expansions by purchasing industry-standard I/O boards and peripherals
at competitive pricing.
NetFRAME and the NetFRAME logo are registered trademarks, and MultiSpan, MPSA,
Live-Logic, Live-Drive and Maestro are trademarks of NetFRAME Systems
Incorporated. Other product names mentioned herein may be trademarks and/or
registered trademarks of their respective companies.
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In October 1996, NetFRAME introduced the NF9000. The new Pentium Pro-based
platform delivers NetFRAME's traditional high-throughput, continuous
availability and manageability on a cost-effective, 100% PC-compatible platform.
The NF9000 platform features a number of technical innovations for the
superserver marketplace. Unlike previous NetFRAME servers, which were based on
the Company's proprietary MPSA I/O bus, the NF9000 incorporates industry
standard PCI I/O architecture and DIMM memory. From a software standpoint, the
NF9000 is fully PC-compatible allowing off-the-shelf software , including
Microsoft NT and Novell IntraNetware to run out of the box. In addition,
NetFRAME delivered several more industry firsts in the NF9000, including hot
plug PCI, IntraPulse and Channel Start on PCI, thus continuing to lead the
market in availability technology.
In 1996, NetFRAME introduced an innovative service program, NetFRAME's
Methodology for Accountability through Partnership (NMAP). The program combines
ongoing maintenance and responsibility for the entire server environment to
address customer support problems that are common in client/server environments.
Building on NetFRAME's established principles of providing data center-class
customer service through full accountability to its customers, NMAP delivers
tangible service and support programs to its customers through NetFRAME Service
Providers. TS Web, a secure Internet subscription service designed for on-line
communication between customers, business partners, and the NetFRAME Technical
Support Group, provides for call tracking, case monitoring, and problem
resolution. The result is a complete diagnostic process to solve customer
problems. The full NMAP service was introduced in February 1997, giving NetFRAME
resellers complete online access to NetFRAME's customer support system.
In June 1996, NetFRAME introduced the ClusterStore 9000, a new mass storage
subsystem for NetFRAME servers. The rackmount storage subsystem provides storage
capacity of up to 378GB, while offering the continuous availability and
simplified management that NetFRAME users have come to expect. Storage options
were further enhanced with the introduction, in August 1996, of the ClusterRAID
9000. This storage subsystem provides a RAID 5 hardware implementation designed
to offer industry-leading performance and reliability. By increasing server
storage capacity and reducing storage costs, NetFRAME makes it easy for
corporations to effectively manage increasing volumes of network data.
In October 1996, the Company announced ClusterData, sophisticated clustering
software that supports a range of server and storage redundancy and scalability
options. ClusterData provides server failover among multiple IntraNetware
systems without the need for a hot standby system. ClusterData uses Novell's
industry-leading NetWare Directory Services (NDS) to enable IntraNetware users
to build high-performance, highly reliable network serving environments by
clustering multiple servers on a network. Management expects ClusterData to ship
in 1997.
In August 1996, NetFRAME introduced the NF8560is, an intranet server solution
designed to enable customers to create a structure for an intranet and have it
up and running in less than sixty minutes. The new system is comprised of a
high-capacity NetFRAME server, best-of-breed intranet software tools, NetFRAME's
own Ready, Intranet, Go! software and a comprehensive range of templates,
wizards, tutorials and scripts. Corporate intranets represent an important
trend, as more companies deploy them to improve communications with employees,
remote offices, business partners and customers. This announcement enables
NetFRAME to provide a fully integrated solution to organizations who want to
deploy an intranet for the first time.
In December 1996, NetFRAME introduced the NF9000is, a bundled hardware and
software intranet solution based on the NF9000. Software includes the SamePage
Groupware Suite from WebFlow Corporation, and the Build-IT visual application
assembly environment from Wallop Software, combined with the second generation
of NetFRAME's Ready, Intranet, Go! software, and pre-installed, pre-configured
versions of a number of leading intranet software applications, including the
Microsoft Windows NT Server, Microsoft Internet Information Server (IIS),
Microsoft FrontPage authoring and Web site management software, Adobe Acrobat,
and the Excite search engine. The NF9000is enables corporations to set up an
intranet in less than sixty minutes.
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In January 1996, NetFRAME and other leading enterprise computing vendors
announced the formation of the I(2)O Special Interest Group and the pending
availability of the I(2)O (Intelligent Input/Output) specification. The group's
mission was to define and promote the I(2)O specification as the standard
interface for high-performance I/O systems. The specification is being used by
system, network and peripheral interface card and operating system vendors to
simplify the task of building and maintaining high-performance I/O subsystems.
In addition to NetFRAME, members of the I(2)O steering committee include 3Com
Corporation, Compaq Computer, Hewlett-Packard Company, Intel Corporation,
Microsoft Corporation, Novell, Inc., and Symbios Logic.
In May 1996, two new executives were appointed to the management team. These
were Dan McCammon, Vice President of Finance and Chief Financial Officer and
Bulent Erbilgin, Vice President of Engineering. Both have extensive experience
in the high-technology industry and held senior positions in leading
high-technology companies prior to joining NetFRAME.
PRODUCTS
NetFRAME's recently-introduced servers have been redesigned utilizing industry
standard architecture employing the widely-used PCI bus, and complying with the
I(2)O intelligent I/O standard that the Company was highly instrumental in
establishing in the early part of 1996. The Company believes that its new family
of NF9000 ClusterSystems significantly broadens the range of customers who will
benefit from the traditional NetFRAME benefits of availability, scalability,
reliability, data security, and performance, while requiring access to industry
standard peripherals. The Company continues to provide support for the
industry's leading PC-based networking operating systems.
The Company has also made significant investments in software that enhance the
NF9000 hardware platform. This software includes an intranet server suite
designed to help corporations set up an intranet infrastructure and the
Company's breakthrough ClusterData software. ClusterData enables each
IntraNetware server to act both as the primary server for its own users and as a
backup server for one or more other servers. This approach maximizes the
corporation's investment in computing resources, as each server in the cluster
is responsible for a set of users and workload, while transparently providing
backup for other servers in the cluster.
The NetFRAME server product line currently consists of the ClusterServer 8500,
the newly introduced ClusterSystem 9000, and the NF9000is intranet solution.
These server products support a variety of communications standards, including
Ethernet, Token Ring, FDDI, TCP/IP, and SCSI-II. NetFRAME servers currently
interconnect DOS, Windows, Windows NT, and Macintosh personal computers,
computers supplied by International Business Machines Corporation ("IBM") and
IBM-compatible vendors. Additionally, NetFRAME servers interconnect with
workstations supplied by Sun Microsystems, Inc. and other UNIX workstation
vendors.
NetFRAME servers are scalable to provide expandability within a specific model
and upgradeability between various models in each product line. With the NF9000
product, customers can plug in additional Pentium Pro processor modules and
standard memory modules and can select from a wide range of standard PCI cards
and additional peripherals. With the 8500 family, customers can choose from
products that expand the servers' storage capacity through the use of expansion
cabinets and additional storage devices and expand I/O throughput through
additional I/O Servers. These expansion characteristics allow NetFRAME products
to deliver sustained value over a long period of time and provide organizations
with the flexibility to easily and cost effectively manage changing network
computing needs. This strategy protects a customer's server investment.
NF9000
The ClusterSystem 9000 is based on Intel's Pentium Pro processor. It is designed
to maximize uptime, availability, scalability and manageability on a
cost-effective, PC-compatible platform running Microsoft NT
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and Novell IntraNetware. The NF9000 can scale in place to support a four-way SMP
complex, up to sixteen intelligent PCI I/O cards, 2GB of memory and over a
terabyte of on-line storage.
The NF9000 is based on NetFRAME's unique triple-peer PCI bus design. Using
system architecture experience gained from NetFRAME's MPSA design, the company
has created a high-throughput, scalable PCI-based server, providing an aggregate
I/O bus bandwidth of 400MB/sec. One of the keys to the triple-peer PCI design is
the isolation of slower speed system services from performance-sensitive disk
and network I/O traffic. Known as critical element solution, NetFRAME dedicates
one of the three PCI buses to basic system services, such as BIOS, VGA
controller, keyboard controller, mouse controller, and real-time clock. These
elements are required to provide complete PC compatibility but run at ISA bus
speed, limiting the sustained throughput of its PCI bus to 2MB/sec. Since other
PC servers support only a dual-PCI bus design, the bandwidth of one of the two
buses is typically used for these network services, leaving only a single PCI
bus dedicated to performance-critical network and disk I/O dedicated to high
speed devices. As a result, the NF9000 is able to offer two high-bandwidth PCI
buses, or 266MB/sec, of truly usable I/O throughput -- double that of a typical
PC server. At the same time, because the NF9000 design is based on standard PCI
buses, customers still benefit from the availability of a wide range of
off-the-shelf PCI interface cards.
In addition to offering a triple-peer PCI bus architecture, NetFRAME has
incorporated industry-standard intelligent I/O (I(2)O) technology. The NF9000 is
based on a split driver I/O model that separates the host operating system
portion of the I/O driver from the portion that controls the specific device.
The I(2)O specification was designed to facilitate intelligent I/O subsystems,
with support for message-passing between multiple independent processors. By
relieving the host processor complex of interrupt intensive I/O tasks required
by the various layers of a driver architecture, the NF9000's intelligent I/O
architecture improves I/O performance.
NetFRAME also introduced new Fault Isolation Canister technology with the
NF9000. This enables users to 'hot plug' PCI buses and cards, without shutting
down the system. The NF9000 is one of the world's first platform to offer a hot
pluggable PCI interface. In addition, the NF9000 fully supports hot replaceable
disk drives, power supplies and fans.
The NF9000 also incorporates NetFRAME's IntraPulse technology, a fully
self-contained distributed monitoring and diagnostic system. Previously,
self-monitoring subsystems have only been found in mainframe and minicomputer
systems. Unlike the basic SNMP (Simple Network Management Protocol) system
monitoring software that is available with some Pentium Pro servers, IntraPulse
has its own embedded processors, software, internal network and power system.
Where a system monitoring application that runs on the host operating system
will simply fail when that server begins to experience problems or fails,
IntraPulse will continue to operate and provide the system administrator with
critical system information, regardless of the operational status of the server.
This level of functionality is key for enterprise-class server applications,
where continuous availability and 24-hour access are quickly becoming standard
requirements.
The NF9000 contains nine dedicated IntraPulse processors, each responsible for
monitoring one of the system's primary subsystems. IntraPulse monitors the
NF9000's main processor board, the system interface, the backplane chassis
controller, the Fault Isolation Canister, and the remote interface card.
Additionally, IntraPulse maintains a system recorder, which records all system
traffic in 128KB of NVRAM (Non-Volatile RAM) arranged as a circular queue. With
real-time date and time referencing, the system recorder enables system
administrators to re-construct system activity by accessing the log.
A typical entry level configuration of the NF9000 comprises one Pentium Pro host
processor, one Ultra-Wide SCSI bus, one 10/100 Ethernet interface, 64MB of ECC
memory, 4.3GB of storage, CD-ROM, electronics and storage power supplies,
IntraPulse and NetFRAME's Maestro system management software.
The NF9000is is based on the NF9000 hardware platform combined with the SamePage
Groupware Suite from WebFlow Corporation, and the Build-IT visual application
assembly environment from Wallop Software. The server also includes the second
generation of NetFRAME's Ready, Intranet, Go! software, and pre-installed,
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pre-configured versions of a number of leading Intranet software applications,
including the Microsoft Windows NT Server, Microsoft Internet Information Server
(IIS), Microsoft FrontPage authoring and Web site management software, Adobe
Acrobat, and the Excite search engine.
CLUSTERSERVER 8500 FAMILY
The 8500 family includes the ClusterServer 8570 and 8590. Based on NetFRAME's
proven MPSA architecture, these systems can be easily expanded to support
Symmetric Multiprocessing (SMP) and continuous availability features, including
NetFRAME's unique Gemini mode processor redundancy and processor auditing. The
systems can be expanded to support a twelve processor complex featuring 150MHz
Pentium processors. The 8500 product family was the Company's top-of-the-line
system, providing high availability for business critical computing environments
until the introduction of the NF9000.
PRODUCTS SUMMARY
The Company derives substantially all of its net revenue from the sale of its
servers, related expansion products, and software. These products are expected
to continue to account for substantially all of the Company's net revenue. As a
result, a reduction in demand for these products due to increased competition or
a general decline in the market for network servers would have a material
adverse effect on the Company.
Moreover, the market for network server products is new and developing. Although
the Company believes there has been market acceptance for PC based file servers,
a central feature of the Company's business strategy is to also promote broad
acceptance of PC based servers for enterprise wide client/server, messaging and
intranet applications. While the Company believes that its servers offer
significant advantages for application serving, there can be no assurance that
PC based servers will be widely adopted for this purpose. The adoption of PC
based servers for application serving by organizations, particularly those which
have historically relied upon minicomputers, mainframes, and specialized network
communication devices for these needs, generally requires the acceptance of a
new data processing strategy, which relies more heavily on the use of networks
and distributed processing technologies. Organizations that have already
invested substantial resources in other computer equipment and technologies may
be particularly reluctant to adopt a new data processing strategy that may make
their existing equipment obsolete. The adoption of the Company's servers for
more advanced functions will depend heavily on the development of enabling
technologies by third parties, primarily application software designed to
operate on a server, and on the availability, cost and performance of
alternative technologies. It is therefore difficult to predict with any
assurance the future growth rate and size of this market. There can be no
assurance that the market for PC based servers as application servers will
develop, that necessary enabling technologies will be developed by third
parties, or even that there will be continued market acceptance of the Company's
servers as file servers.
TECHNOLOGY
The Company has developed an architecture which fully supports industry standard
PCI bus and I20, first introduced on the NF9000 platform. This architecture,
which is optimized for high throughput network computing, combines the high
levels of performance and reliability found in minicomputers and mainframes with
the compatibility and cost advantages of personal computers and workstations.
Several features of NetFRAME's new architecture contribute to its performance,
availability, and manageability advantages:
- Multiprocessor Enabling Software. The Company's value added software
allows industry standard network operating systems to run without modification
on NetFRAME servers. The software enables NetFRAME's multiprocessor based
hardware to interface with IntraNetware and Windows NT Server operating system
software.
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- System Availability. Features such as ECC memory, parity checking on
all data paths, and automatic processor restart reduce downtime due to component
failure and transient errors. NetFRAME's unique hot-pluggable PCI technology
allows customers to swap key system components without affecting system
operation and impacting users. System availability is further enhanced through
IntraPulse, a self diagnosis system that monitors all primary subsystems. Where
a system monitoring application that runs on the host operating system will
simply quit when that server begins to experience problems or fails, IntraPulse
will continue to operate and provide the system administrator with critical
system information, regardless of the operational status of the server.
- Scalability. NetFRAME servers can be upgraded with additional
processors, memory, adapters, disk storage and peripherals. This is key in
enabling customers to protect their investment in their systems by making
additional resources available as new users or more demanding applications are
added. Adherence to the PCI bus standard provides customers with a broad range
of options from multiple suppliers.
- Industry Standard Microcomputer Components and Software. NetFRAME
servers use industry standard microprocessor components (such as Intel Pentium
Pro processors) and operate with standard network operating system and
application software. This approach offers the combined advantages of an
advanced architecture and lower cost commodity components and software.
- Manageability and Ease of Maintenance. The NetFRAME server
architecture provides a structured method of internal communications between
various hardware and software elements in the system. This approach has allowed
NetFRAME to develop highly functional software that improves the manageability
and ease of maintenance of the system through error tracking, error reporting
and hardware and software control independent of the operating system. The
Company's Maestro Cluster Management Software allows system administrators to
dynamically manage and configure all resources in a ClusterServer. Maestro
enables customers to reconfigure the system, make changes to the operating
system and add users and storage, without interrupting network users.
- Clustering. ClusterData provides server failover among multiple
systems without the need for a hot standby system. Unlike many current
fault-tolerant technologies, where a second system simply waits in standby mode,
ClusterData enables each system to act both as the primary server for its own
users and as a backup server. This approach maximizes the customer's investment
in computing resources, as each server in the cluster is responsible for a set
of users and workload, while transparently providing backup for other servers in
the cluster.
SALES AND DISTRIBUTION
NetFRAME's products are primarily sold through VARs around the world. These VARs
provide sales, service, support and integration functions on behalf of NetFRAME.
NetFRAME's channel strategy is to develop a world-class VAR channel, capable of
ensuring excellent customer satisfaction with NetFRAME network servers, in
business-critical networking environments. The Company's ongoing objective is to
partner with a limited number of highly qualified network and systems
integrators capable of integrating and supporting NetFRAME systems. In 1996, the
Company developed the NetFRAME Systems Provider (NSP) Program which includes
NetFRAME's best channel partners. The NSPs are the principal sales, service, and
support channel for NetFRAME systems. The NSPs have demonstrated an ongoing
investment in the infrastructure needed to sell and support NetFRAME
installations, through strong sales and technical proficiency throughout the
NetFRAME product line. NSPs are well versed in NetFRAME's architectural
direction and can develop and present complex network solutions to corporate
customers. NSPs have core sales and pre-sales technical capabilities in NetFRAME
systems. They have demonstrated an adequate level of commitment to selling
NetFRAME solutions. In support of its NSPs, NetFRAME maintains a field
organization of over 25 sales managers worldwide and 3 systems engineers
internationally, as well as a North American pre-sales technical engineering
team. International resellers provide spare parts, service and support for the
entire NetFRAME product line. See Note 4 of Notes to Consolidated Financial
Statements.
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In 1996, 1995 and 1994, 9%, 15% and 16%, respectively, of the Company's net
revenue was derived from export sales. This revenue is subject to the risks
associated with international operations, including currency exchange
fluctuations, tariff regulations and requirements for export licenses,
particularly with respect to the export of certain technology, which licenses
may on occasion be delayed or difficult to obtain.
The Company's agreements with its NSPs and VARs (collectively the "Resellers")
do not provide for any right of unsold product returns without prior approval.
However, from time to time, the Company may accept the return of unsold products
from a particular Reseller in order to preserve its relationship with the
Reseller. In connection with the introduction by the Company of the new NF9000
product, the Company may experience a higher level of requests for returns of
the NF8500 products. The Company's agreements with its Resellers also do not
require them to offer the Company's products exclusively and may be terminated
without cause. No assurance can be given that any Reseller will continue to
offer the Company's products. In addition, many of the Company's Resellers are
privately owned firms and some are not well capitalized. The Company is
dependent on the viability and financial stability of its Resellers, which are
in turn substantially dependent upon the growth of the personal computer and
networking industries. The Company could be adversely affected if significant
numbers of such Resellers stopped distributing the Company's products, requested
returns of NF8500 products, or chose to emphasize the products of the Company's
competitors. While the Company has recorded and continues to record allowances
for estimated sales returns, there can be no assurance that such allowances
will be adequate.
The Company is currently negotiating with additional third party distributors
and resellers in order to extend the Company's sales, distribution and
marketing reach of its products. There can be no assurance that the Company's
negotiations will conclude successfully or that, if concluded, will result in
incremental revenue.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support is an important
competitive factor in the computer networking market. Currently, the Company
provides service and support through a combination of VARs, international
resellers and its own support organization. In 1996, the Company introduced the
NetFRAME Methodology for Accountability through Partnership (NMAP), a structured
program for providing the highest levels of customer support through the
reseller channel. NMAP is designed to bring data-center system availability to
the client/server industry. It provides NetFRAME customers with pro-active
server hardware and software management, enabling the company to offer customers
a life-of-the-server maintenance program. The NMAP methodology formalizes
traditional elements of service into specific Service Event Kits. There are NMAP
kits available for planning, installing, maintaining and upgrading NetFRAME
systems. Each kit is specific to a particular hardware/software environment and
is designed to provide a complete, step-by-step procedure to deliver the
service. NetLINK, a new service launched in February 1997, allows NetFRAME
resellers to transparently and interactively access the NetFRAME NetLINK
customer service system using Lotus Notes.
NetFRAME generally warrants its products to be free of defects in materials and
workmanship for a period of one year.
COMPETITION
The Company faces substantial competition from the manufacturers of several
different product types. Manufacturers of personal computers and workstations
promote the high-end of their product lines as network servers. Established
companies in this market include Compaq Computer Corporation, Data General
Corporation, Dell Computers Incorporated, IBM, Sun Microsystems, Inc., and other
manufacturers of personal computers and workstations. Manufacturers such as
Digital Equipment Corporation, Hewlett-Packard Company, IBM, and Sequent promote
some of their minicomputers and mainframes as being appropriate for use as
network servers. As the Company promotes the adoption of its ClusterServers for
more advanced functions, the Company may experience greater competition from
both minicomputer and mainframe manufacturers and manufacturers of specialized
network communication devices than it has in the past. In addition,
manufacturers of personal computers, workstations, minicomputers or mainframes
could develop and introduce server products similar to those of the Company.
Most of the Company's current and potential competitors have substantially
greater name recognition, more financial, technical, and marketing resources,
and a much larger installed base than the Company. There can be no assurance
that the Company will have the financial resources, technical expertise, or
marketing, distribution, and support capabilities to compete
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successfully in the future. Competitive pressures have reduced the average
selling price of some of the Company's products in each of the last three years.
With the introduction of the NF9000, which incorporates more industry standard
components, the Company expects to continue to face competitive pricing
pressures relative to such components which are available from a number of
established manufacturers. In addition, the Company is continuing to lower the
end-user list price of certain of the components the Company sells. The Company
has made these changes to its price list as part of an on-going pricing strategy
intended to increase demand for the Company's products and increase its market
share. Further competitive pressures could reduce market acceptance of the
Company's products and result in additional price reductions and increases in
expenses that could adversely affect the Company's business, operating results
or financial condition.
The principal competitive factors in the market for the Company's products
include compatibility with industry standards, compatibility with other vendors'
networking products, high availability, price/performance, reliability, ease of
use, scalability, and technical support. In 1996, the Company encountered
increased competition with respect to each of these factors. In order to meet
the challenges of technological change and respond to its competitors'
innovations, the Company must continue to promptly and cost-effectively
introduce new products and enhance existing products. There can be no assurance
that the Company will be able to successfully introduce new products or enhance
its existing products.
MANUFACTURING
NetFRAME performs final assembly and testing of its products in its facility in
Milpitas, California. NetFRAME utilizes subcontractors for all major subassembly
manufacturing, including all printed circuit board assemblies. NetFRAME has a
comprehensive testing and qualification program to ensure that all subassemblies
meet the Company's specification standards before going into final assembly and
testing. The Company performs functional testing of all major subassemblies and
tests all systems on operational networks in high temperature (40-C(Degree))
burn-in ovens for 48 hours.
Certain components used in the Company's products, including microprocessors,
particularly Intel's Pentium Pro, certain other integrated circuits, and power
modules, are presently available from single sources, and certain other
components are available from limited sources. In addition, certain of the
Company's subassemblies are manufactured by a single third party vendor and the
Company plans to further subcontract and outsource its major subassemblies. The
inability to develop alternative sources for sole or limited source components
or to obtain sufficient components, or the loss of a key subassembly
manufacturer, could result in delays or reductions in product shipments which
would adversely affect the Company's operating results.
In 1995, NetFRAME received ISO 9002 certification for its Milpitas manufacturing
facility. ISO 9002 is a universally accepted set of standards that define
quality assurance levels and provide quality management guidance for
manufacturing. Certification is granted after extensive reviews of a company's
quality infrastructure by third party auditors.
RESEARCH AND DEVELOPMENT
The computer networking industry is characterized by rapid technological change
and is highly competitive with respect to timely product innovation.
Accordingly, the Company believes that its future success will depend upon its
ability to develop, manufacture and market products which meet changing user
needs, maintain technological leadership, and successfully anticipate and
respond to technological changes in hardware and software standards on a
cost-effective and timely basis. The Company's current research and product
development activities are directed towards the design of a new generation of
servers, cost reductions, and performance and expansion capability improvements
in existing products.
The Company invests considerable resources in research and development. In 1996,
1995, and 1994, research and development expenses were $16.3 million, $12.4
million and $11.2 million, respectively. These are net of capitalized software
development costs. All of the Company's research and development costs related
to
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<PAGE> 11
hardware are expensed as incurred. Software development costs are recorded in
accordance with FAS No. 86. Approximately $170,000, $830,000 and $1.0 million
relating to capitalized software remained in Other Assets as of December 31,
1996, 1995, and 1994, respectively. See Note 2 of Notes to Consolidated
Financial Statements. The Company believes that technical leadership is
essential to its success and expects that it will continue to spend substantial
funds on research and development.
The market for the Company's products is characterized by rapidly changing
technology and user needs that require significant expenditures for product
development. The Company believes that its future success will depend upon its
ability to develop, manufacture, and market products that meet changing user
needs, maintain technological leadership, and successfully anticipate or respond
to technological changes in hardware and software standards on a cost-effective
and timely basis. There can be no assurance that any research and development
efforts will be successfully completed or that future products will be available
on a timely basis or achieve market acceptance. In addition, the Company is
dependent on the development by third parties of enabling technologies, such as
client/server, database, and communication software. The Company's failure to
develop the modifications necessary to allow its servers to run future versions
of industry standard operating systems or to develop new products or
technological improvements, the unavailability of third party enabling
technology or the Company's inability to adopt emerging industry standards would
have a material adverse effect on the Company's business.
PROPRIETARY RIGHTS
The Company regards its servers as proprietary and relies primarily on a
combination of copyright, trademark, trade secret laws, employee and third party
nondisclosure agreements, and other intellectual property protection methods to
protect its products and technology. The Company does not hold any patents or
have any patent applications pending. While the Company's ability to compete is
affected by its ability to protect its proprietary information, the Company is
of the opinion that, in view of the rapid pace of technological change in the
industry, the combination of technical experience and innovative skills of its
engineers is as important to its business as the legal protection of its
proprietary information. However, the failure of the Company to effectively
protect its trade secrets and other proprietary information, including the
absence of patents, could have an adverse affect on the Company's business. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
The Company licenses certain network operating system and application software
from third party developers for sublicense by NetFRAME with its systems. The
Company also licenses certain software programs from third party developers and
incorporates them in the Company's software products. Generally, such agreements
grant to the Company non-exclusive, worldwide licenses with respect to the
subject programs. While it may be necessary or desirable in the future to obtain
licenses relating to sublicensed application software and incorporated
technology from other parties, the Company believes that it could obtain this
technology or similar technology on commercially reasonable terms from a number
of licensors. However, there can be no assurance that the Company will be able
to obtain this technology or similar technology on commercially reasonable
terms. Also, there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products or that any such assertions may not require the Company to enter
into royalty arrangements or result in costly litigation.
EMPLOYEES
As of March 31, 1997, the Company employed 225 individuals, of whom 51 are
employed in research and development, 104 in sales and marketing, 34 in
manufacturing and 36 in administration and finance. The Company believes that
its future success will depend, in part, on its ability to attract and retain
highly skilled technical, marketing and management personnel. This is
particularly important in the areas of product design and development, where
competition for skilled personnel, particularly in the computer and networking
industry is intense. To the extent that the Company is unable to attract and
retain skilled employees as needed, the Company's business, financial condition
and operating results could be materially adversely affected. None of
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<PAGE> 12
the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative, product development, manufacturing and
marketing facilities are located in two buildings, totaling 188,000 square feet,
in Milpitas, California. One of these buildings, which houses the Company's
principal product development and manufacturing facilities, is occupied under a
lease agreement which expires in September 2002. The other building, which
houses the Company's principal administrative, marketing and customer support
facilities, is occupied under a lease which also expires in September 2002. The
Company leases additional sales support offices throughout the United States in
major metropolitan areas. The Company also leases sales support offices
internationally in the metropolitan areas of Beijing, Hong Kong, London, Paris,
Singapore, Sydney, and Toronto. These offices are leased for various terms
ranging from monthly to two-year terms. The Company believes that its existing
facilities should be adequate for its needs in the foreseeable future. See Note
5 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
On June 6, 1996, the Company was named as a defendant in a case brought by one
of its value added resellers, Data Systems Network Corp. (DSN). The complaint
alleges that NetFRAME breached its spare parts agreement as well as other
agreements, interfered with DSN's business, and committed fraud through
misrepresentation relative to such agreements. The complaint requests an
unspecified amount in damages, costs, interest and attorneys' fees. In addition,
the Company has filed a counterclaim against DSN for payment of certain overdue
receivables. The Company believes that it has meritorious defenses, and intends
to vigorously defend itself.
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these
matters, including DSN, will not have a material adverse effect on its
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
The Company's common stock trades on the Nasdaq Stock Market under the symbol
"NETF." The following table sets forth for the periods indicated the high and
low closing prices per share of the common stock as reported by the Nasdaq Stock
Market.
<TABLE>
<CAPTION>
Year ended December 31, 1996 High Low
- ---------------------------- ---- ---
<S> <C> <C>
First quarter $ 5.71 $ 4.58
Second quarter 5.79 5.12
Third quarter 3.79 2.71
Fourth quarter 3.79 2.47
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995 High Low
- ---------------------------- ---- ---
<S> <C> <C>
First quarter $ 7.42 $ 5.46
Second quarter 6.13 4.58
Third quarter 7.08 5.50
Fourth quarter 6.50 5.21
</TABLE>
As of March 31, 1997, there were approximately 350 stockholders of record of the
Company's common stock. The Company has never declared or paid cash dividends on
its capital stock. The Company currently intends to retain earnings for use in
its business and does not anticipate paying cash dividends in the foreseeable
future.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is qualified by reference to
and should be read in conjunction with the consolidated financial statements and
related notes thereto and the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $ 74,349 $ 76,434 $89,135 $66,935 $39,051
Operating income (loss) $(29,034)(4) $ (7,785)(1) $ 4,988 $ 6,680(3) $ 3,106
Net income (loss) $(27,984)(4) $ (8,052)(1,2) $ 5,745 $ 7,223(3) $ 3,249
Net income (loss) per share $ (2.04)(4) $ (0.60)(1,2) $ 0.42 $ 0.53(3) $ 0.29
Number of shares used in
computing per share amounts 13,729 13,498 13,630 13,625 11,182
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $20,226 $47,687 $56,639 $54,271 $47,458
Total assets $50,309 $71,698 $76,971 $69,743 $56,065
Notes payable and capital
lease obligations $ -- $ -- $ 69 $ 354 $ 1,032
Stockholders' equity $31,798 $59,194 $66,381 $59,359 $50,398
</TABLE>
(1) Includes a charge of $1.4 million or $0.10 per share associated with the
write-off of application software and related costs in connection with a
decision to discontinue a management information system upgrade. (See Note
2 of Notes to Consolidated Financial Statements).
(2) Includes a charge of $2.2 million or $0.16 per share resulting from a
settlement of the class action lawsuit.
(3) Includes a charge of $1.6 million or $0.11 per share associated with the
purchase of in-process research and development technology.
(4) Includes a charge of $2.5 million or $0.18 per share for excess and obsolete
inventory associated with the NF8500 products.
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<PAGE> 15
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996
--------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 17,282 $ 18,188 $ 18,810 $ 20,069
Gross profit $ 1,749 (3) $ 5,466 $ 7,495 $ 9,149
Operating loss $(12,859)(3) $ (7,906) $ (5,169) $ (3,101)
Net loss $(12,663)(3) $ (7,684) $ (4,873) $ (2,764)
Net loss per share $ (0.92) $ (0.56) $ (0.36) $ (0.20)
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 21,408 $ 21,969 $ 19,910 $ 13,147
Gross profit $ 10,656 $ 10,471 $ 9,830 $ 5,932
Operating loss $ (348) $ (221) $ (1,367) $ (5,849)(1)
Net income (loss) $ 175 $ (1,948)(2) $ (1,014) $ (5,265)(1)
Net income (loss) per share $ 0.01 $ (0.14)(2) $ (0.08) $ (0.39)(1)
</TABLE>
(1) Includes a net charge of $1.4 million or $0.10 per share associated with the
write-off of application software and related costs in connection with a
decision to discontinue a management information system upgrade.
(2) Includes a charge of $2.2 million or $0.16 per share resulting from a
settlement for the class action lawsuit.
(3) Includes a charge of $2.5 million or $0.18 per share for excess and
obsolete inventory, as well as a charge of $1.0 million or $0.07 per share for
warranty expense, both such charges associated with the NF8500 products.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This section contains certain trend analysis and forward-looking statements.
Actual results may differ materially from the results described in such trend
analysis and forward looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Business
Factors."
OVERVIEW
Fiscal 1996 was a challenging year for the Company. NetFRAME experienced lower
revenues generated from older technology and potentially lost revenues from
late-to-market new products. Also, the Company's continued lowering of end-user
list prices for certain components as part of an ongoing pricing strategy to
increase demand for the Company's products and increase market share resulted in
lower gross margins. The Company also invested substantially in research and
development for its new product, the ClusterSystem 9000, which was introduced in
October 1996 and began shipping units to customers and resellers in late
November 1996. In addition, NetFRAME's gross margin decreased in the third and
fourth quarters of 1996 primarily as a result of increased costs and provisions
related to the transition from the NF8500 product line to the newly introduced
NF9000 product line.
RESULTS OF OPERATIONS
The following table sets forth certain operating data, expressed as a percentage
of net revenue, for each of the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 67.9 51.7 47.4
----- ----- -----
Gross profit 32.1 48.3 52.6
Operating expenses:
Research and development 21.9 16.2 12.6
Selling, general and admin. 49.2 42.3 34.4
----- ----- -----
Total operating expenses 71.1 58.5 47.0
----- ----- -----
Operating income (loss) (39.0) (10.2) 5.6
Interest and other income, net 1.4 (0.7) 1.3
----- ----- -----
Income (loss) before income taxes (37.6) (10.9) 6.9
Provision (benefit) for income taxes -- (0.4) 0.5
----- ----- -----
Net income (loss) (37.6)% (10.5)% 6.4%
===== ===== =====
</TABLE>
NET REVENUE
Net revenue was $74.3 million in 1996, $76.4 million in 1995, and $89.1 million
in 1994, reflecting decreases of 2.7% in 1996 from 1995 and 14.2% in 1995 from
1994. The Company believes that customer expectations of its next-generation
products coupled with more intense price competition on older products were the
primary causes of the decrease in net revenue for 1996, when compared to 1995.
In addition, the Company experienced higher-than-normal turnover in the sales
management staff in 1996 when compared to 1995 and 1994 which the Company
believes caused an adverse effect to net revenue for 1996. In the first quarter
of 1995, the Company adopted a "component based" pricing system and lowered list
prices of certain components as part of an on-going pricing strategy intended to
increase demand for the Company's products and increase its market share. These
changes lowered the average selling prices of the Company's products in 1995.
The Company anticipates that
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<PAGE> 17
some of the factors which negatively impacted operating results in 1996 may
continue to have an adverse impact on the Company's operating results for at
least the first half of fiscal 1997.
Export net revenue decreased to approximately 8.8% of net revenue in 1996, as
compared to approximately 15.0% of net revenue in 1995. Export net revenue
remained relatively constant as a percentage of net revenue in 1995 when
compared to 1994. The decrease in export net revenue in 1996 was due to a
combination of factors including significant turnover of international sales
staff and shipment delays pending secured financing from certain international
customers. The Company does not expect the level of international sales to
increase in 1997 when compared to 1996. See Note 4 of Notes to Consolidated
Financial Statements.
The Company recognizes revenue upon shipment of product and records allowances
for estimated uncollectible accounts and sales returns. In 1996 the Company
recorded an increase in estimated uncollectible accounts and sales return
allowances. While the Company has recorded and continues to record allowances
for estimated sales returns and uncollectible accounts, there can be no
assurance that such allowances will be adequate.
In order for the Company to increase its net revenue it must continue to develop
and introduce new products. Any delay in this process, deferral of purchases by
customers in anticipation of such new products, difficulties encountered in
introducing these new products, or failure of these products to compete
successfully with alternatives offered by other vendors could adversely affect
the Company's business, financial condition or results of operation.
GROSS PROFIT
Gross profit represents net revenue less cost of revenue. Cost of revenue
consists primarily of the costs of material, labor and overhead, warranty
expenses, customer service expenses, provisions for excess and obsolete
inventory, software royalties, and amortization of capitalized software. Gross
margins for 1996 were 32.1% as compared to gross margins of 48.3% for 1995 and
52.6% for 1994. The decreases in gross margins in 1996 and 1995 were primarily
due to the increase in reserves for potential excess or obsolete inventory and
the reduction of end-user list prices of certain of the components it sells as
part of its on-going pricing strategy noted above. In addition, gross margins
for 1996 were negatively impacted by increased provisions for warranty expenses
related to the NF8500 products and continuing price pressure from the Company's
competitors. Customer service expenses included in cost of sales increased
approximately $1.1 million in absolute dollars in 1995 as compared to 1994. The
increase was due primarily to the establishment of domestic parts bank
inventories. The Company expects gross margins may decrease in 1997, when
compared to 1996, as a result of anticipated continuing price competition and
potential additional costs related to its product transition.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 31.7% to $16.3 million in 1996 from
$12.4 million in 1995, and 10.4% in 1995 from $11.2 million in 1994 and
represented 21.9%, 16.2%, and 12.6% of net revenues for 1996, 1995, and 1994,
respectively. The increase in spending in 1996 when compared to 1995 was
primarily due to the development of the Company's new generation 9000 series
server and included increases in product prototype expenses, consulting and
recruiting expenses. The increase in 1995 compared to 1994, was primarily due to
higher depreciation and amortization and consulting expenses which were
partially offset by lower product prototype and seminar expenses.
The Company records software development costs in accordance with Statement of
Financial Accounting Standards No. 86 ("FAS 86"). To the extent that the Company
capitalizes its product development costs, the effect is to defer such costs to
future periods. Product development and support expenses may fluctuate annually
depending in part upon the number and status of internal software development
projects. See Note 2 of Notes to Consolidated Financial Statements.
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<PAGE> 18
The Company operates in a rapidly changing and highly competitive marketplace
and, as a result, believes it is critical to continue to increase its investment
in research and development activities in order to maintain its competitive
position. There can be no assurance that any research or development efforts
will be successfully completed or that future products will be available on a
timely basis or achieve market acceptance.
SELLING, GENERAL AND ADMINISTRATIVE
Sales and marketing expenses increased 19.4% to $30.4 million in 1996 from $25.4
million in 1995 and remained flat in 1995 when compared to $25.5 million in 1994
and represented 40.8% of net revenue in 1996 compared to 33.3% and 28.6% in 1995
and 1994, respectively. The increase in sales and marketing expenses in 1996
when compared to 1995 resulted primarily from increases in headcount at the end
of 1995 and the beginning of 1996, as well as costs related to a reduction in
force, a specific bad debt provision, increased advertising and product
promotions for the Company's introduction of the NF9000. Spending in 1995 was
relatively flat with 1994 and resulted primarily from increases in headcount,
along with associated travel and sales office expenses, and increased spending
for professional services and product promotion. The Company intends to continue
to invest in advertising and channel-development strategies in 1997 as it
continues its transition to its new product platform.
General and administrative expenses decreased 9.1% to $6.3 million in 1996 from
$6.9 million in 1995 and increased 32.5% in 1995 when compared to $5.2 million
in 1994, and represented 8.4%, 9.0%, and 5.8% of net revenues for 1996, 1995,
and 1994, respectively. The decrease in expenses in 1996, when compared to 1995
is primarily due to a one-time charge recorded in 1995 of $1.4 million
associated with the write-off of application software and the related costs in
connection with a decision to discontinue a proprietary management system
software upgrade. Exclusive of the write-off, spending increased 13.5% in 1996
when compared to 1995 primarily due to salaries and salary-related expenses and
legal fees, partially offset by lower consulting expenses. The increase in 1994
was consistent with the increase in net revenue and consisted primarily of
increased headcount and professional service expenses. Additionally, in 1994 the
increase was related to increased fees for the implementation of application
software packages and for retirement benefits for an executive officer.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, increased in 1996 when compared to 1995. The
increase in 1996, when compared to 1995 was due primarily to a charge in 1995 of
$2.2 million resulting from the settlement of a class action lawsuit against the
Company. This was offset slightly by lower interest income earned in 1996 due to
lower cash balances. Interest and other income, net, increased in absolute
dollars in 1995 as compared to 1994 primarily due to higher average interest
rates.
INCOME TAXES
The Company's effective provision (benefit) rate was 0%, (3%) and 6% for 1996,
1995 and 1994, respectively. The rates for 1996 and 1995 were less than the
statutory rate of 34% due to limitations imposed under Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes" for
currently recognizing a financial statement benefit for the year's net operating
loss. The tax rate for 1994 was less than the statutory rate of 34% due to the
utilization of net operating loss and research and development tax credit
carryforwards. At December 31, 1996, the Company had numerous tax loss and tax
credit carryovers which expire in years 2007 through 2011. See Note 6 of Notes
to Consolidated Financial Statements.
BUSINESS FACTORS
In the past, the Company has experienced fluctuations in its operating results
and believes it will continue to experience fluctuations. The Company generally
fills orders shortly after receipt from customers and, therefore, backlog at the
beginning of a fiscal period represents only a small percentage of the product
sales anticipated in that period. Further, a substantial portion of the
Company's net revenue in each quarter generally results from orders received
during the last few weeks of that quarter. The absence of significant backlog
and the
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<PAGE> 19
concentration of sales at the end of the quarter impairs the Company's ability
to forecast and to control expense, production and inventory levels, which are
controlled based on expected revenue. If anticipated shipments in any quarter do
not occur or are delayed, expenditure levels could be disproportionately high,
and the Company's operating results for that quarter would be materially
adversely affected.
As previously noted, first customer shipment of the ClusterSystem 9000 occurred
in the fourth quarter of 1996. While sales of the NF9000 are expected to
represent a majority of revenue in 1997, cumulative sales to date have been
limited due to the short period of time since the introduction of the NF9000,
the continuing effort to sell the older NF8500 product line, and the transition
of the VAR's to selling the newer NF9000 product. The Company does not expect to
achieve significant revenue growth unless the anticipated impact of the product
transition is realized. Even though the Company is optimistic about the
prospects of its newly announced products, unless the NF9000 products are sold
in sufficient volume, including products expected to be developed and released
in 1997, the Company does not anticipate returning to profitability. Management
has developed a program to liquidate inventory of the older products and
believes that it has appropriately valued the inventory. At this time,
management cannot estimate a range of amounts of loss that could occur if the
program is not successful.
Any delay in the introduction or shipment of new products by the Company or the
introduction or shipment of new products by the Company's competitors, could
have a materially adverse effect on the Company's operating results. In
addition, the Company's operating results may fluctuate as a result of a number
of other factors, including variation in the size and timing of individual
transactions, the timing of introduction and the market acceptance of new and
enhanced versions of the Company's products, the mix of products sold, changes
in pricing policies by the Company, variation in the mix of sales by
distribution channel, mix in international and domestic sales, end users'
capital spending cycles, changes in pricing policies by the Company's
competitors or its suppliers, and the availability and cost of key components.
The Company's primary means of distribution is through VARs, system integrators,
and distributors. The Company's business, financial conditions, and operating
results could be adversely affected in the event that the generally weak
financial condition of its VARs and system integrators worsens to the point that
it affects their ability to sell or pay for the Company's products. The Company
recently segregated the number of VARs with which it does business between those
authorized to resell and support all of the Company's products and those limited
to the resell and support of the Company's products prior to the NF9000.
Management is actively working to collect the outstanding balances and believes
no additional reserves are necessary. At this time, management cannot estimate a
range of amounts of loss that could occur if the collections efforts are not
successful. The Company is continuing its evaluation of its distribution
channels. Any changes could result in fluctuations in net revenue, gross
margins, and/or operating expenses. The Company cannot at this time determine
the ultimate effect of these or other future distribution channel modification
efforts on the Company's future operating results. See Note 4 of Notes to
Consolidated Financial Statements.
In 1996, the majority of the products sold by the Company utilized operating
systems provided by Novell and Microsoft. Any problems in the use of these
operating systems by end users could adversely affect the Company's sales. The
Company has a source code license and software distribution agreement with
Novell, which expires by its terms on October 24, 1997, pursuant to which the
Company is entitled to resell IntraNetware. The agreement also provides for
Novell to share certain technical information with the Company concerning
IntraNetware, which has assisted the Company in the development and marketing of
its products. Novell has no obligation to continue to provide similar
information in the future, and if Novell were to stop sharing technical
information with the Company or were to favor competitors, the Company's
business could be materially adversely affected.
The Company's products include certain components that are currently available
only from single sources or limited sources. Any availability limitations,
interruptions in supplies, or price increases relative to these components could
materially adversely affect the Company's business, financial condition and
operating results.
Because of the variety and uncertainty of various factors affecting the
Company's operating results, and the fact that the Company participates in a
highly dynamic industry, there may be significant volatility in the Company's
common stock price.
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LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company used $14.3 million of cash in operating activities which
consisted primarily of a net loss of $28.0 million, offset by $8.2 million in
amortization and depreciation, a decrease in accounts receivable of $2.4
million, an increase of $2.9 million in accounts payable and an increase of $3.1
million in accrued liabilities.
The Company used cash of $3.8 million in 1996 for the purchase of capital
equipment for internal purposes. The Company currently plans purchases of
capital equipment of approximately $2.0 million for 1997, which will either be
purchased or internally-developed equipment, and will be used for research and
development, demonstration purposes and test equipment. Actual capital
expenditures could materially differ from those expressed in the preceding
forward-looking statement, as actual capital expenditures are dependent on many
factors, including, the ability of the Company to achieve its planned revenues
and collections to generate the cash necessary to fund capital expenditures and
the continued use of current capital assets without the need of replacement due
to obsolescence, destruction or technology changes. The Company has no material
commitments for the purchase of capital equipment. See Note 5 of Notes to
Consolidated Financial Statements.
At December 31, 1996, the Company had cash, and cash equivalents of
approximately $14.0 million. See Note 3 of Notes to Consolidated Financial
Statements. In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA, to finance
eligible accounts receivable and production inventory up to a maximum of $15.0
million, subject to certain net worth and other financial covenants. As of March
28, 1997, no amounts were outstanding and the Company's available borrowing base
under this credit facility was approximately $6.0 million. See Note 8 of Notes
to Consolidated Financial Statements.
As a result of further product transition and pricing issues, the Company
continued to experience significant operating and net losses and declining cash
balances in the quarter ended March 29, 1997. As such, management recognizes the
need to take certain actions if remaining cash balances and potential available
borrowings under the revolving credit facility are to be adequate to satisfy the
Company's cash requirements for the next twelve (12) months. These actions
include: timely introduction of products currently under development; expanding
distribution channels to increase revenue; and outsourcing certain business
operations and further streamlining the Company's infrastructure to reduce
product and operating costs. Specifically, the Company is negotiating with third
party distributors and resellers with substantially greater resources to market,
support and distribute its products. In addition, the Company is negotiating to
consolidate certain corporate facilities and has taken measures to reduce its
workforce. In the event the Company is unable to generate sufficient cash from
operations or obtain necessary financing from other sources, management will be
required, and is prepared, to sharply curtail certain of its existing business
operations. See Notes 1 and 5 of Notes to Consolidated Financial Statements.
Actual cash requirements could differ materially from those expressed in the
preceding forward-looking statements, as actual cash requirements are dependent
on many factors, including the ability of the Company to achieve its planned
operating results.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Report.
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................. 28
Consolidated Balance Sheets as of December 31, 1996 and 1995.................. 29
Consolidated Statements of Operations for each of the three fiscal years
in the period ended December 31, 1996......................................... 30
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended December 31, 1996......................................... 31
Consolidated Statement of Stockholders' Equity for each of the three fiscal
years in the period ended December 31, 1996................................... 32
Notes to the Consolidated Financial Statements................................ 33
</TABLE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of NetFRAME Systems Incorporated for
the years ended December 31, 1996, 1995 and 1994 is filed as part of this report
and should be read in conjunction with the Consolidated Financial Statements of
NetFRAME Systems Incorporated.
<TABLE>
<S> <C>
Schedule II - Valuation and Qualifying Accounts 42
</TABLE>
Schedules other than that listed above have been omitted since they are either
not required, not applicable, or the information is otherwise included.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The directors and executive officers of the Company and their ages as of March
31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION/POSITION
---- --- -----------------------------
<S> <C> <C>
Robert L. Puette 55 Chairman of the Board, President and Chief
Executive Officer of the Company
Gordon E. Eubanks, Jr. 50 Director of NetFRAME Systems, Inc.,
President and Chief Executive Officer of
Symantec Corporation
Edward R. Kozel 41 Director of NetFRAME Systems, Inc., Vice
President, Business Development, and Chief
Technical Officer of Cisco Systems, Inc.
Marty DiPietro 52 Vice President, Operations
Dan McCammon 48 Vice President, Chief Financial Officer and
Secretary
Bulent Erbilgin 42 Vice President, Engineering
Terry Hartsfield 53 Vice President, Customer Satisfaction and
Chief Quality Officer
Steve Huey 44 Vice President, Marketing
</TABLE>
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full time
employee of the Company. There is no family relationship between any executive
officer or director of the Company.
Robert Puette was a Director of the Company from June 1992 until
January 1995, when he joined the Company as President and Chief Executive
Officer. In January 1996, he became Chairman of the Board. From November 1993 to
December 1994, Mr. Puette was an independent consultant in the computer and
networking fields. From June 1990 to October 1993, Mr. Puette served as
President, U.S. Sales and Marketing of Apple Computer, Inc., a personal computer
manufacturer. From 1966 to June 1990, he held various positions with
Hewlett-Packard Inc., most recently as General Manager of the Personal Computer
Group, where he was responsible for the worldwide personal computer and terminal
business. Mr. Puette holds a B.S. degree in industrial engineering from
Northwestern University, Evanston, Illinois, and an M.S. degree in operations
research from Stanford University. Mr. Puette currently serves as a director of
Cisco Systems, Inc. and Quality Semiconductor Inc.
Gordon Eubanks has served as Director of the Company since June 1992.
Since 1983, he has served as President, Chief Executive Officer and a member of
the Board of Directors of Symantec Corporation, a personal computer software
company. Prior to founding Symantec in November 1983, Mr. Eubanks, was Vice
President of Digital Research Inc.'s commercial systems division. Mr. Eubanks is
also a director of TrueVision Inc. On February 26, 1993, criminal indictments
were filed against Mr. Eubanks for allegedly violating various California Penal
Code Sections relating to the misappropriation of trade secrets and unauthorized
access to a computer system. On August 23, 1993, the Court recused the District
Attorney's Office from prosecution of the action. On October 5, 1993, the State
Attorney General and the District Attorney's Office filed a Notice of Appeal of
the Order, and that appeal was argued on July 11, 1995. On September 8, 1995,
the Court of Appeals reversed the recusal order. A petition for review of this
decision by the California Supreme Court was granted
22
<PAGE> 23
on December 14, 1995. On November 19, 1996, the criminal indictments were
dismissed at the request of the District Attorney.
Edward Kozel has served as a Director of the Company since April 1996.
Since 1989, he has held various senior management positions with Cisco Systems,
Inc., the world's leading supplier of enterprise internetworking solutions,
and is currently Vice President, Business Development, and Chief Technical
Officer. Mr. Kozel is a director of Cybercash Inc.
Marty DiPietro joined the Company in November 1988 as Vice President,
Operations. From January 1988 to November 1988, he served as Vice President of
Operations for Flextronics, Inc., a printed circuit board assembler. Prior to
joining Flextronics, from 1986 to January 1988, he was Director of Manufacturing
for Scientific Micro Systems, a computer peripherals manufacturer. Mr. DiPietro
holds a B.S. degree in mechanical engineering from Florida Institute of
Technology.
Dan McCammon joined the Company in May 1996 as Vice President and Chief
Financial Officer. From November 1994 to May 1996, Mr. McCammon was a consultant
offering financial and general business services to software developers,
internet service providers and a computer hardware manufacturer. From October
1992 to October 1994, he served as Chief Financial Officer of McAfee Associates,
Inc., a software company. From September 1991 to May 1992, Mr. McCammon was
employed at Authorware, Inc., a multimedia software company, as Chief Financial
Officer. From April 1987 to August 1991, he was employed at Claris Corporation,
a software company, as Chief Financial Officer. Mr. McCammon received a degree
in business administration from North Texas State University, Denton, TX.
Bulent Erbilgin joined the Company in April 1996 as Vice President,
Engineering. Prior to joining the Company, he was employed at MasPar Computer
Corporation, a supercomputer manufacturer, where he held various senior
management positions, most recently as Vice President of Engineering, from June
1990 to February 1996. From February 1985 to May 1990, Dr. Erbilgin was employed
at Zycad Corporation/Silicon Solutions Corporation, a computer manufacturer and
Computer Aided Design (CAD) software development company, where he served in
several senior management positions, most recently as Software Department
Manager. Dr. Erbilgin received a B.S. degree in electrical engineering from
Istanbul Technical University, Istanbul, Turkey, a M.S. degree in computer
science and a Ph.D. in electrical engineering from Stanford University, Palo
Alto, CA.
Terry Hartsfield joined the Company in April 1995 as Vice President of
Customer Satisfaction and Chief Quality Officer. From 1994 to 1995, he was
employed at Nova Controls, a microprocessor based industrial controls firm, as
President and Chief Executive Officer. From 1992 to 1994, Mr. Hartsfield was a
management consultant for small companies and start-ups, offering solutions for
process development and new product introduction. From 1986 to 1992, he held
various director level positions in quality, service and support at Sun
Microsystems. Prior to Sun Microsystems, Mr. Hartsfield held various financial
and operating management positions at Apollo Computers and Digital Equipment
Corporation. Mr. Hartsfield received a B.A. degree in accounting from
Northeastern University, Boston, MA.
Steve Huey joined the Company in January 1996 as Vice President of
Marketing. From 1994 to 1995 he was employed at Zenith Data Systems as Vice
President Marketing. From 1988 to 1994, Mr. Huey held various executive
management positions with Epson America Incorporated. From 1973 to 1987, he held
a variety of sales and marketing positions at IBM Corporation. Mr. Huey received
a B.S. degree in business management from California State University, Long
Beach, CA.
Except as set forth below, each of the nominees has been engaged in his
principal occupation set forth above during the past five years. There is no
family relationship between any of the directors and executive officers of the
Company.
23
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Each non-employee director receives $750 for each Board and committee meeting
attended. Non-employee directors also participate in the 1992 Directors' Stock
Option Plan. The plan provides for the one-time grant of a nonstatutory stock
option to purchase 30,000 shares of Common Stock to each of the Company's
non-employee directors on the date on which such person is first elected as a
director of the Company. The one-time grant vests ratably over three years from
date of grant. The plan also provides for automatic, yearly grants of a
nonstatutory stock option to purchase 5,000 shares of Common Stock to each of
the Company's non-employee directors, with the first such grant to be made on
the third anniversary of the date upon which each such non-employee director
first became a director. The annual options vest 12 months from the date of
grant. The plan provides that the exercise price of the options may not be less
than the fair market value of the Common Stock on the date of grant of the
options.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows, as to the Chief Executive Officer and each of the
four other most highly compensated executive officers whose salary plus bonus
exceeded $100,000 during the last fiscal year, information concerning
compensation paid for services to the Company in all capacities during the last
three fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- --------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert L. Puette 1996 313,750 47,063 90,000 2,375(1)
Chairman, President and Chief 1995 300,000 48,000 320,000 2,310(1)
Executive Officer 1994 0 0 0 0
Marty C. DiPietro 1996 174,000 21,924 40,500 2,194(1)
Vice President, Operations 1995 162,000 30,330 20,000 1,200(1)
1994 153,833 36,024 25,000 2,112(1)
Steve Huey 1996 188,431 23,742 72,000 34,582
Vice President, Marketing 1995 0 0 0 0
1994 0 0 0 0
Terry Hartsfield 1996 163,333 21,266 36,000 1,094(1)
Vice President, Customer Satisfaction 1995 96,564 21,700 60,000 0
and Chief Quality Officer 1994 0 0 0 0
Bulent Erbilgin 1996 131,250 18,008 63,000 1,094(1)
Vice President, Engineering 1995 0 0 0 0
1994 0 0 0 0
</TABLE>
- ----------
(1) These amounts represent the Company's matching contributions under the
Company's 401(k) plan.
24
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock
of the Company as of March 31, 1997 for the following individuals: (i) each
person or entity who is known by the Company to own beneficially more than 5% of
the outstanding shares of its Common Stock ("Principal Stockholders"); (ii) each
of the Company's directors; (iii) each of the officers named in the Summary
Compensation Table ("Named Officers"); and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF
NAME SHARES (1) TOTAL
---- ---------- -------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS(2)
Heartland Advisors Inc. ............................ 1,000,000 7.2%
790 North Milwaukee St
Milwaukee, WI 53202
DIRECTORS
Edward R. Kozel .................................... 10,000 *
Robert L. Puette ................................... 35,000(3) *
Gordon E. Eubanks .................................. 35,000 *
NAMED OFFICERS
Marty C. DiPietro .................................. 1,245(3) *
Steve Huey ......................................... 0(3) *
Terry Hartsfield ................................... 1,020(3) *
Bulent Erbilgin .................................... 0(3) *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(8 persons) ........................................ 82,265(3) 1.0
</TABLE>
- ----------
* Less then one percent.
(1) The number and percentage of shares beneficially owned is determined under
the rules of the Securities and Exchange Commission ("SEC"), and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days of March 31, 1997 through the exercise of any stock option
or other right. Unless otherwise indicated in the footnotes, each person
has sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.
(2) This information was obtained from filings made with the SEC pursuant to
Sections 13(d), 13(f) or 13(g) of the Securities Exchange Act of 1934, as
amended.
(3) Does not include options which were repriced January 15, 1997, and are not
available for exercise until July 16, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements and Financial Statement Schedules -- See Index
to Consolidated Financial Statements and Index to Financial Statement
Schedules at Item 8 on Page 21 of this Report.
2. Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this Report:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Bylaws of Registrant (Exhibit 3.3 in Registration Statement on Form
S-1 Reg. No. 33-47259).
4.1(1) Form of Common Stock Certificate.
4.2(1) Article IV of Amended and Restated Certificate of Incorporation (see
Exhibit 3.1).
4.3(1) Form of Agreement and Plan of Merger between NetFRAME Systems
Incorporated, a California corporation, and NetFRAME Systems
Incorporated, a Delaware corporation.
4.4(1) Form of Amended and Restated Registration Rights Agreement between
Registrant and certain securities holders of Registrant.
4.5(8) Shareholder Rights Agreement.
10.1(1)+ 1987 Stock Option Plan.
10.2(4)+ 1992 Stock Option Plan, as amended.
10.3(7)+ 1992 Directors' Stock Option Plan, as amended.
10.4(4)+ 1992 Employee Stock Purchase Plan, as amended.
10.5(1)+ Form of Indemnification Agreement between Registrant and its officers
and directors.
10.8(3) Form of Authorized Value Added Reseller Agreement, as amended.
10.9(1)* Form of Authorized Distributor Agreement.
10.10(1)* License Agreement between Registrant and Microsoft Corporation dated
January 1, 1991, as amended.
10.11(1)* Source Code License and Software Distribution Agreement between
Registrant and Novell, Inc. dated December 12, 1988, as amended.
10.13(1)* Independent Manufacturer Support Program (IMSP) Agreement between
Registrant and Novell, Inc. dated November 9, 1990.
10.14(1)* License Agreement between Registrant and Texas Instruments
Incorporated dated May 1991.
10.15(1) Software Development and Production License Agreement between
Registrant and Ready Systems Corporation dated December 14, 1988.
10.17(3)* Composite Signature Agreement for Novell Authorized OEMS between
Registrant and Novell, Inc. dated January 28, 1994.
10.18(3) Agreement between Oracle Corporation and Registrant dated May 31,
1992, as amended.
10.19(2) Letter Agreement between Registrant and Network Peripherals,
Incorporated dated March 16, 1992.
10.20(2) Software Agreement, Sublicensing Agreement and Software Service
Agreement between Registrant and Unix System Laboratories, Inc. dated
September 1992, as amended.
10.25(6) Lease agreement between Registrant and Limar Realty Corp. #1, dated
February 20, 1995.
26
<PAGE> 27
10.26(6) Lease agreement between Registrant and 1565 Barber Lane Holding
Company, Inc., dated April 27, 1995.
10.27 CIT Group/Business Credit, Inc. Loan and Security Agreement dated
March 28, 1997.
10.28+ Form of Change of Control Agreements entered into with Registrant,
executive officers and certain key employees.
21.1 Subsidiaries of the Registrant (see page 45).
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 46).
25.1 Power of Attorney (see page 43).
27.1 Financial data schedule.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-47259), which became effective on June 3, 1992.
Except as noted, each exhibit listed in this index is incorporated by
reference to the exhibit of the same number.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-54806), which became effective on December 3, 1992.
Except as noted, each exhibit listed in this index is incorporated by
reference to the exhibit of the same number.
(3) Incorporated by reference from the Registrant's Report on Form 10-K for the
year ended January 1, 1994.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-7075), which became effective on or about June 27,
1996.
(6) Incorporated by reference from the Registrant's Report on Form 10-Q for the
quarter ended April 1, 1995. Exhibits 10.25 and 10.26 were exhibits 10.1
and 10.2, respectively, in the aforementioned Report on Form 10-Q.
(7) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 33-95592), which became effective on or about August 9,
1995.
(8) Incorporated by reference from the Registrant's Report on Form 8-A which
became effective on November 25, 1996.
* Confidential treatment has been previously granted for certain portions of
these exhibits..
+ Indicates management compensatory plan, contract or arrangement.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year ended December 31,
1996.
(c) Exhibits. The Registrant hereby files as part of this Report the
exhibits listed in Item 14(a)(2), as set forth above.
(d) Financial Statement Schedules. See Item 14(a)(1) above.
27
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NetFRAME Systems Incorporated
We have audited the accompanying consolidated balance sheets of NetFRAME Systems
Incorporated as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the index at Item 8. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
NetFRAME Systems Incorporated at December 31, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Company's recurring net losses and negative cash flow raise substantial doubt
about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1 of Notes to Consolidated Financial
Statements. The 1996 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
San Jose, California
January 23, 1997
28
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,011 $ 18,340
Short-term investments - 13,304
Accounts receivable, net of allowance for
doubtful accounts of $2,168 and $1,638 in 1996
and 1995, respectively 14,203 16,623
Inventories 9,741 10,680
Other current assets 782 1,244
- -----------------------------------------------------------------------------------------------------------------
Total current assets 38,737 60,191
Property and equipment, net 9,930 9,823
Other assets, net 1,642 1,684
- -----------------------------------------------------------------------------------------------------------------
$ 50,309 $ 71,698
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,236 $ 6,374
Accrued compensation and benefits 4,461 2,866
Accrued warranty 1,721 1,003
Deferred revenue 2,037 1,532
Other accrued liabilities 1,056 729
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 18,511 12,504
Commitments and contingencies
Stockholders' equity:
Preferred stock, 2,000,000 shares ($.001 par value) authorized,
none issued and outstanding - -
Common stock, 20,000,000 shares ($.001 par value) authorized,
13,835,000 and 13,602,000 issued and outstanding in 1996
and 1995, respectively 14 14
Additional paid-in-capital 73,156 72,568
Accumulated deficit (41,372) (13,388)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 31,798 59,194
- -----------------------------------------------------------------------------------------------------------------
$ 50,309 $ 71,698
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $ 74,349 $ 76,434 $ 89,135
Cost of revenue 50,489 39,545 42,216
- -------------------------------------------------------------------------------------
Gross profit 23,860 36,889 46,919
Operating expenses:
Research and development 16,294 12,368 11,206
Selling, general and administrative 36,600 32,306 30,725
- -------------------------------------------------------------------------------------
Total operating expenses 52,894 44,674 41,931
- -------------------------------------------------------------------------------------
Operating income (loss) (29,034) (7,785) 4,988
Interest and other income 1,215 1,753 1,319
Interest and other expense (165) (2,297) (168)
- -------------------------------------------------------------------------------------
Income (loss) before income taxes (27,984) (8,329) 6,139
Provision (benefit) for income taxes -- (277) 394
- -------------------------------------------------------------------------------------
Net income (loss) $(27,984) $ 8,052) $ 5,745
- -------------------------------------------------------------------------------------
Net income (loss) per share $ (2.04) $ (0.60) $ 0.42
- -------------------------------------------------------------------------------------
Number of shares used in computing
per share amounts 13,729 13,498 13,630
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR) OPERATING ACTIVITIES:
Net income (loss) $(27,984) $ (8,052) $ 5,745
Items not requiring the current use of cash:
Stock compensation expense -- 66 151
Loss on disposal of capital assets 77 1,827 --
Deferred taxes -- 1,367 (720)
Depreciation and amortization 8,249 5,512 4,336
Changes in items affecting operations:
Accounts receivable 2,420 8,235 (6,892)
Inventories (3,547) (3,159) (3,368)
Other current assets 462 (591) (123)
Accounts payable 2,862 1,281 707
Accrued liabilities 3,145 1,748 (1,406)
- ---------------------------------------------------------------------------------------------------------
Cash generated from (required for) operating activities (14,316) 8,234 (1,570)
CASH FLOWS FROM (REQUIRED FOR) INVESTING ACTIVITIES:
Acquisitions of property and equipment (3,805) (6,109) (5,128)
Other assets (100) (1,044) (716)
Purchase of available-for-sale securities (35,500) (149,800) (35,100)
Sale of available-for-sale securities 48,804 148,300 26,100
Purchase of held-to-maturity securities -- (6,241) (24,501)
Maturity of held-to-maturity securities -- 15,600 28,123
- ---------------------------------------------------------------------------------------------------------
Cash generated from (required for) investing activities 9,399 706 (11,222)
CASH FLOWS FROM (REQUIRED FOR) FINANCING ACTIVITIES:
Proceeds from short-term borrowings -- -- 1,048
Repayment of short-term borrowings -- (1,048) --
Payments on capital lease obligations -- (70) (285)
Payments on stockholders' notes receivable -- (14) 1
Issuance of common stock 588 784 1,125
- ---------------------------------------------------------------------------------------------------------
Cash generated from (required for) financing activities 588 (348) 1,889
Net increase (decrease) in cash and cash equivalents (4,329) 8,592 (10,903)
Cash and cash equivalents at the beginning of the period 18,340 9,748 20,651
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 14,011 $ 18,340 $ 9,748
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Other noncash charges:
Capitalization of assets through inventory transfers $ 2,124 $ 2,029 $ 2,799
Reclassification of inventory to other assets $ 2,362 $ -- $ --
Cash paid during the period for:
Interest $ -- $ 4 $ 135
Income taxes $ 25 $ 76 $ 1,771
</TABLE>
See accompanying notes.
31
<PAGE> 32
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON ADDITIONAL STOCKHOLDERS' DEFERRED TOTAL
STOCK PAID-IN ACCUMULATED NOTES STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE COMPENSATION EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 13,069 $13 $70,575 $(11,081) $(15) $(133) $ 59,359
Stock compensation expense related
to vesting of options -- -- 84 -- -- -- 84
Amortization of deferred stock compensation -- -- -- -- -- 67 67
Payments, interest, and forgiveness on notes
receivable from stockholders -- -- -- -- 1 -- 1
Issuance of common stock under stock plans 326 -- 1,125 -- -- -- 1,125
Net income -- -- -- 5,745 -- -- 5,745
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 13,395 13 71,784 (5,336) (14) (66) 66,381
Amortization of deferred stock compensation -- -- -- -- -- 66 66
Payments, interest, and forgiveness on notes
receivable from stockholders -- -- -- -- 14 -- 14
Issuance of common stock under stock plans 207 1 784 -- -- -- 785
Net loss -- -- -- (8,052) -- -- (8,052)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 13,602 14 72,568 (13,388) -- -- 59,194
Issuance of common stock under stock plans 233 -- 588 -- -- -- 588
Net loss -- -- -- (27,984) -- -- (27,984)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 13,835 $14 $73,156 $(41,372) $ -- $ -- $ 31,798
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated (the
Company) for the year ended December 28, 1996, have been prepared on a going
concern basis. The Company has approximately $14.0 million of cash and cash
equivalents at December 31, 1996, and has recently entered into an asset based
revolving credit facility (see Note 8) to provide additional capital. However,
the fiscal 1996 net loss of $28.0 million and the resulting $14.3 million of
cash used in fiscal 1996 to fund operations coupled with the continuing
competitive industry conditions indicates that management must take certain
actions to continue operations with existing capital resources. These actions
include: timely introduction of products currently under development; expanding
distribution channels to increase revenue; and outsourcing certain business
operations and further streamlining the Company's infrastructure to reduce
product and operating costs. Specifically, the Company is negotiating with
third party distributors and resellers with substantially greater resources to
market, support and distribute its products. In addition, the Company is
negotiating to consolidate certain corporate facilities and has taken measures
to reduce its workforce. In the event the Company is unable to generate
sufficient cash from operations or obtain necessary financing from other
sources, management will be required to sharply curtail
certain of its existing business operations.
2. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Consolidation
The Company develops, manufactures, markets and supports a broad line of high
availability, clustered network servers for local and wide area networks. These
network servers are distributed worldwide primarily through value added
resellers (VARs) and systems integrators.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, NetFRAME International Incorporated
and NetFRAME Foreign Sales Corporation. All significant intercompany accounts
and transactions have been eliminated.
Reclassification
Certain reclassifications have been made to prior year amounts to conform with
the 1996 presentation.
Fiscal Year
The Company maintains a fifty-two/fifty-three week fiscal year cycle. Fiscal
years 1996, 1995, and 1994 ended on December 28, 1996, December 30, 1995, and
December 31, 1994, respectively. For convenience, the accompanying consolidated
financial statements have been titled as ending on the last day of the calendar
period.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
Cash Equivalents
The Company considers all highly liquid investments with minimum yield risks and
maturities of less than 90 days at time of purchase to be cash equivalents.
Investments
The Company invests its excess cash in available-for-sale high quality debt and
equity instruments. Available-for-sale securities are stated at fair market
value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity.
33
<PAGE> 34
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in interest
income.
On November 15, 1995, the FASB staff issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report, the
Company chose to reclassify securities from held to maturity to
available-for-sale. At the date of the transfer the amortized cost of those
securities was $18,624,000 and the unrealized loss (gain) was $4,000, which is
included in shareholders' equity (income).
Inventories
Inventories are stated at the lower of standard cost (which approximates first
in, first out) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
(in thousands)
Raw materials $ 2,729 $ 1,954
Work in process 2,673 2,411
Finished goods 4,339 6,315
------- -------
$ 9,741 $10,680
======= =======
</TABLE>
Capitalization of Software Development Costs
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer
Software to Be Sold, Leased, or Otherwise Marketed". At December 31, 1996 and
1995, $171,000 and $828,000, respectively, of capitalized software development
costs, net of accumulated amortization, are included in other assets.
Amortization expense related to capitalized software development costs, which
was included in cost of revenue, was $808,000 and $644,000 for the years ended
December 31, 1996 and 1995, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets (one to five years). Property and
equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------- --------
<S> <C> <C>
(in thousands)
Equipment $ 25,176 $ 20,418
Furniture and fixtures 1,702 1,450
Leasehold improvements 3,171 2,778
-------- --------
30,049 24,646
Less accumulated depreciation and amortization (20,119) (14,823)
-------- --------
$ 9,930 $ 9,823
======== ========
</TABLE>
In the first quarter of 1995, the Company wrote-off $1.4 million of application
software and related costs in connection with a decision to discontinue a
management system upgrade.
34
<PAGE> 35
Revenue Recognition
The Company generally recognizes revenue and accrues related estimated royalty,
warranty and sales returns provisions upon product shipment.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (FAS 109) "Accounting for Income Taxes".
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
(APB 25) "Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Net Income (Loss) Per Share
Net income per share is based upon the weighted average number of outstanding
shares of common stock, and dilutive common stock equivalents from the exercise
of stock options and warrants (using the treasury stock method). Common stock
equivalents from stock options and warrants are excluded from the computation if
their effect is anti-dilutive.
Net loss per share is based upon the weighted average number of outstanding
shares of common stock.
3. FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments. The
amounts reported for cash and cash equivalents approximate the fair value due to
their short maturities Investment securities are reported at their estimated
fair value based on quoted market prices.
At December 31, 1996, available-for-sale securities consisted of commercial
paper with a carrying value and estimated value of $10,600,000. These securities
had a contractual maturity of less than one year and were classified as cash
equivalents.
The following is a summary of available-for-sale securities at December 31,
1995:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Auction preferred stock $ 10,500 $ -- $ -- $ 10,500
Commercial paper 18,624 -- (4) 18,620
-------- -------- -------- --------
$ 29,124 $ -- $ (4) $ 29,120
-------- -------- -------- --------
</TABLE>
35
<PAGE> 36
4. CONCENTRATION OF CREDIT RISK, OTHER CONCENTRATION AND RISKS AND GEOGRAPHIC
DATA
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of investments in cash equivalents, short-term
investments, and trade receivables. The Company invests in cash equivalents and
short-term investments, primarily in money-market securities, auction preferred
stock, commercial paper, and corporate notes. The Company is exposed to credit
risks in the event of default by the issuer to the extent of the amount recorded
on the balance sheet. The Company performs on-going credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
The Company derives a substantial portion of its revenue from sales to VARs and
systems integrators. Trade accounts receivable from VARs and systems integrators
was approximately $13.0 million at December 31, 1996. The concentration of
credit risk with respect to trade accounts receivable from VARs and systems
integrators is limited due to the number and geographic dispersion of such
customers. No single VAR or system integrator accounted for more than 8% of
trade accounts receivable at December 31, 1996.
The Company's products include certain components that are currently available
only from single sources or limited sources. Any availability limitations,
interruptions in supplies, or price increases relative to these components could
adversely affect the Company's financial results.
The Company is currently undergoing a product transition. Management has
developed a program to liquidate inventory of the older products and believes
that it has appropriately valued the inventory. At this time, management cannot
estimate a range of amounts of loss that could occur if the program is not
successful.
The Company recently segregated the number of VARs with which it does business
between those authorized to resell and support all of the Company's products and
those limited to the resell and support of the Company's products prior to the
NF9000. Management is actively working to collect the outstanding balances and
believes no additional reserves are necessary. At this time, management cannot
estimate a range of amounts of loss that could occur if the collections efforts
are not successful.
Export sales represent sales to the Company's customers primarily throughout
Europe and Asia Pacific. Sales by the Company to customers in different
geographic areas, expressed as a percentage of net revenue, for the periods
ended were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Europe 3.7% 7.0% 7.0%
Asia Pacific 5.1% 8.0% 5.9%
Other - % - % 2.7%
--- ---- ----
Total Export Sales 8.8% 15.0% 15.6%
=== ==== ====
</TABLE>
36
<PAGE> 37
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its principal facilities under non-cancellable operating
leases that expire in September 2002. In addition to its principal facilities,
the Company also leases several sales support offices worldwide.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
Operating
Leases
--------
<S> <C>
1997 $ 1,619
1998 1,487
1999 1,553
2000 1,585
2001 1,661
Thereafter 1,263
-------
Total minimum lease payments $ 9,168
-------
</TABLE>
Total rent expense was approximately $1,955,000, $1,936,000, and $1,516,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
Contingencies
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
6. INCOME TAXES
The provision (benefit) for income taxes for years ended December 31, 1996,
1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(in thousands)
Federal:
Current $ -- $(1,010) $ 766
Deferred -- 733 (720)
------- ------- -------
-- (277) 46
State:
Current -- -- 348
------- ------- -------
Total $ -- $ (277) $ 394
======= ======= =======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed by
applying the federal statutory income tax rate to income before taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income tax computed at federal statutory rate $(9,043) (2,915) $ 2,087
State taxes, net of federal benefit -- -- 230
Nonuse (use) of net operating loss 9,043 2,638 (467)
Benefit of R&D credit utilized -- -- (406)
Adjustment to valuation allowance -- -- (971)
Other -- -- (79)
------- ------- -------
$ -- $ (277) $ 394
======= ======= =======
</TABLE>
37
<PAGE> 38
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforward $ 13,709 $ 4,453
Capitalized research and development 1,472 695
Accruals and reserves not currently deductible 1,284 1,134
Research and AMT credit carryforwards 2,826 2,466
Accounts receivable reserve 1,100 834
Inventory valuation differences 580 1,158
Accrued commission 292 93
Depreciation 334 --
-------- --------
Total deferred tax assets $ 21,597 10,833
Valuation allowance (21,236) (9,967)
-------- --------
Total net deferred tax assets 361 866
Deferred tax liabilities:
Depreciation (--) (227)
Capitalized software (70) (348)
-------- --------
Total net deferred taxes $ 291 $ 291
======== ========
</TABLE>
The valuation allowances at December 31, 1996 and 1995 include $2,580,000
attributable to stock option deductions, the benefit of which will be credited
to paid-in capital when realized.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $39,000,000 and $6,000,000, respectively, and
federal and state research and development credit carryforwards of approximately
$2,700,000 expiring in 2008 through 2011. In addition, the Company had federal
alternative minimum tax credit carryforwards of approximately $330,000 that will
not expire. No restriction on the availability to utilize tax credit
carryforwards is currently anticipated.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
7. EMPLOYEE STOCK AND SAVINGS PLANS
Stock Option Plans
The Company has various stock option plans (the "Option Plans") under which
officers, employees, non-employee directors and consultants may be granted
qualified and non-qualified options to purchase shares of the Company's
authorized but unissued Common Stock. Options are generally priced at the fair
market value of the stock on the date of grant and vest ratably over two to five
years from the date of grant. Options currently expire no later than ten years
from date of grant.
38
<PAGE> 39
On January 15, 1997, the Company offered to reprice 1992 stock options granted
to employees using a closing market value on that date of $2.625. Options
totaling 1,813,051 shares were repriced. On February 7, 1995, the Company
offered to reprice 1992 stock options granted to employees using a closing
market value on that date of $5.875. Options totaling 1,252,700 shares were
repriced.
At December 31, 1996 and 1995, 4,609,442 and 4,459,442 shares, respectively,
were reserved for issuance upon exercise of stock options. A summary of activity
under all option plans is as follows (in thousands except weighted average
exercise price amounts):
<TABLE>
<CAPTION>
Number of
Shares Subject Weighted Average
to Exercise Price of
Shares Available Options Options
for Grant Outstanding Outstanding
--------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 199 1,462
Shares authorized for issuance 1,700 --
Options granted (880) 880
Options canceled 195 (195)
Options exercised -- (256)
Plan shares expired (13) --
-------------------------------
Balance at December 31, 1994 1,201 1,768
Shares authorized for issuance 100 --
Options granted (2,172) 2,172
Options canceled 1,596 (1,596)
Options exercised -- (84)
Plan shares expired (9) --
-------------------------------
Balance at December 31, 1995 716 2,384
Shares authorized for issuance 150 --
Options granted (1,504) 1,504 $ 4.41
Options canceled 1,471 (1,471) $ 6.49
Options exercised -- (112) $ 1.13
Plan shares expired (12) --
--------------------------------------------------
Balance at December 31, 1996 821 2,304 $ 5.24
==================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- --------------------------------------
Weighted Average Weighted
Number Remaining Average Number Weighted
Range of Exercise of Shares Contractual Life Exercise of Shares Average
Prices at 12/31/96 (Years) Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.00-10.00 446 7.5 $ 7.54 263 $ 8.53
$5.00-5.99 1,260 8.8 $ 5.30 418 $ 5.58
$2.00-4.99 575 9.5 $ 3.63 57 $ 3.88
$0.20-1.99 41 4.1 $ 1.27 41 $ 1.27
</TABLE>
At December 31, 1996, outstanding options to purchase 780,000 shares were
exercisable (of which 292 shares would be subject to repurchase if such options
were exercised).
39
<PAGE> 40
Stock Purchase Plan
In 1992, the 1992 Employee Stock Purchase Plan ("ESPP") was approved. As of
December 31, 1996, 800,000 shares were reserved for issuance. The ESPP provides
that substantially all employees may purchase stock at 85% of its fair market
value on certain specified dates via payroll deductions. During the years
ended December 31, 1996 and 1995, 120,563 and 123,607 shares, respectively, were
issued under this plan.
Stock-Based Compensation
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by FAS 123 for awards granted by the Company after December 31,
1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expected life 3.5 3.5 0.7 0.6
(years)
Expected volatility 0.75 0.73 0.70 0.65
Risk-free interest rate
(percent) 5.78 - 6.48 5.20 - 7.09 5.50 - 5.60 5.60 - 6.15
</TABLE>
40
<PAGE> 41
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period (for options)
and the six to nine month purchase period (for stock purchases under the
ESPP). The Company's pro forma information follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net loss As reported $(27,984) $ (8,052)
Pro forma $(29,777) $(10,982)
Net loss per share As reported $ (2.04) $ (0.60)
Pro forma $ (2.17) $ (0.81)
</TABLE>
Because FAS 123's pro forma disclosure requirements are applicable only to the
Company's awards granted subsequent to December 31, 1994, its pro forma effect
will not be fully reflected until approximately 1998.
The weighted-average fair value of stock options granted during fiscal 1996 and
1995 was $2.50 and $3.10 per share, respectively. The weighted-average fair
value of the employee stock purchase plans granted during fiscal 1996 and 1995
was $1.60 and $1.80 per share, respectively.
Defined Contribution Plan
The NetFRAME Systems Incorporated Savings and Investment Plan (the "Plan") is a
defined contribution plan that covers all U.S. employees who have at least three
months of service with the Company. Employees can contribute up to 15% of their
eligible compensation through payroll deductions. The Company contributes to the
employee's account by matching the greater of $0.25 for every employee dollar
contributed up to a maximum of 5% of the employee's eligible compensation or a
percentage of the Company's after-tax profit as determined by the Company's
Board of Directors. Total contributions made by the Company to the Plan for the
years ended December 31, 1996, 1995 and 1994 were approximately $120,000,
$150,000 and $170,000 respectively.
8. SUBSEQUENT EVENT (unaudited)
In March 1997, the Company obtained an asset based revolving credit facility
with the CIT Group/Business Credit, Inc., Los Angeles, CA, to finance eligible
accounts receivable and production inventory up to a maximum of $15.0 million,
subject to certain net worth and other financial covenants. The asset based
revolving credit facility, which expires March 26, 2000, also includes interest
in an amount equal to prime plus one-half percent (0.50%). As of March 28, 1997,
no amounts were outstanding and the Company's available borrowing base under
this credit facility was approximately $6.0 million.
41
<PAGE> 42
SCHEDULE II
NetFRAME SYSTEMS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years 1996, 1995, and 1994
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED TO COSTS CHARGED TO AT END
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996 $1,638 $1,162 $ -- $ 632 $2,168
Year ended December 31, 1995 $2,667 $ -- $ -- $1,029 $1,638
Year ended December 31, 1994 $1,032 $1,915 $ -- $ 280 $2,667
Accrued warranty:
Year ended December 31, 1996 $1,003 $2,333 $ -- $1,615 $1,721
Year ended December 31, 1995 $ 714 $ 993 $ -- $ 704 $1,003
Year ended December 31, 1994 $1,469 $1,644 $ -- $2,399 $ 714
</TABLE>
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 14th day of April,
1997.
NETFRAME SYSTEMS INCORPORATED
By: /s/ Dan McCammon
-------------------
Dan McCammon
Vice President, Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert Puette and Dan McCammon and each
of them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- --------------------------------- ---------------
<S> <C> <C>
/s/ Robert Puette Chairman of the Board, President April 14, 1997
- --------------------------- and Chief Executive Officer
Robert Puette (Principal Executive Officer)
/s/ Dan McCammon Vice President, Chief April 14, 1997
- --------------------------- Financial Officer and Secretary
Dan McCammon (Principal Financial and
Accounting Officer)
/s/ Gordon E. Eubanks, Jr. Director April 14, 1997
- --------------------------
Gordon E. Eubanks, Jr.
/s/ Edward R. Kozel Director April 14, 1997
- --------------------------
Edward R. Kozel
</TABLE>
43
<PAGE> 44
CORPORATE DIRECTORY
<TABLE>
<CAPTION>
BOARD OF DIRECTORS STOCKHOLDER INFORMATION DOMESTIC SALES OFFICES
<S> <C> <C>
ROBERT L. PUETTE Corporate Headquarters Phoenix, Arizona
Chairman of the Board, President NetFRAME Systems Incorporated LaCosta, California
and Chief Executive Officer 1545 Barber Lane Denver, Colorado
NetFRAME Systems Incorporated Milpitas, California 95035 Washington, D. C.
408. 474.1000 Miami, Florida
GORDON E. EUBANKS, JR. Atlanta, Georgia
President and Chief Executive Officer Chicago, Illinois
Symantec Corporation Registrar and Transfer Agent Kansas City, Kansas
Boston EquiServe Limited Partnership Boston, Massachusetts
EDWARD R. KOZEL Boston, Massachusetts Detroit, Michigan
Vice President, Business Development New York, New York
Chief Technical Officer Cincinnati, Ohio
Cisco Systems, Inc. Independent Auditors New York, New York
Ernst & Young LLP Dallas, Texas
San Jose, California
EXECUTIVE OFFICERS
ROBERT L. PUETTE General Counsel
Chairman of the Board, President Wilson Sonsini Goodrich & Rosati
and Chief Executive Officer Palo Alto, California INTERNATIONAL SALES OFFICES
DAN MCCAMMON Sydney, Australia
Vice President, Chief Financial Officer Stock Listing Calgary, Canada
and Secretary NetFRAME Systems Incorporated is traded on Toronto, Canada
the Nasdaq Stock Market. The trading symbol Beijing, China
MARTY C. DIPIETRO is NETF. Paris, France
Vice President, Operations Hong Kong
Singapore
TERRY HARTSFIELD SEC Form 10-K United Kingdom
Vice President, Customer Satisfaction Additional copies of this report or other financial
and Chief Quality Officer matter are available upon written request.
Please direct your request to:
BULENT ERBILGIN Investor Relations Department
Vice President, Engineering NetFRAME Systems Incorporated
1545 Barber Lane
STEVE HUEY Milpitas, California 95035
Vice President, Marketing
Annual Meeting
The annual meeting of stockholders
will be held at 12:30 p.m. on
Wednesday, July 23, 1997, at the
Company's headquarters, 1545 Barber
Lane, Milpitas, California 95035.
</TABLE>
44
<PAGE> 45
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. NetFRAME International Incorporated, a wholly-owned subsidiary.
2. NetFRAME Foreign Sales Corporation, a wholly-owned subsidiary.
45
<PAGE> 1
Exhibit 10.27
FINANCING AGREEMENT
THE CIT GROUP/BUSINESS CREDIT, INC.
(AS LENDER)
AND
NETFRAME SYSTEMS INCORPORATED
(AS BORROWER)
DATED: March 27, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3. REVOLVING LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 4. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 6. INTEREST, FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7. POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 8. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 9. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
EXHIBITS AND SCHEDULES
- ----------------------
Exhibit A - Form of Promissory Note (Revolving Loan)
Exhibit B - Form of Guaranty
Exhibit C - Form of Legal Opinion
Exhibit D - Form of Landlord Waiver
Exhibit E - Availability Confirmation Certificate
Exhibit F - Inventory Confirmation Certificate
Exhibit G - Borrowing Base Certificate
Exhibit H - Notice of Security Interest (Manhattan Transportation, Inc.)
</TABLE>
<PAGE> 3
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation
(hereinafter sometimes referred to as "CITBC"), with offices located at 300
South Grand Avenue, Los Angeles, California 90071 (CITBC may be sometimes
referred to herein as a "Lender"), is pleased to confirm the terms and
conditions under which CITBC shall make revolving loans, advances and other
financial accommodations to NETFRAME SYSTEMS INCORPORATED, a Delaware
corporation with its principal place of business at 1545 Barber Lane, Milpitas,
California 95035 (herein "Company").
SECTION 1. DEFINITIONS
ACCOUNTS shall mean all of the Company's now existing and future: (a) accounts
as defined in the UCC and any and all other receivables (whether or not
specifically listed on schedules furnished to CITBC), including, without
limitation, all accounts created by or arising from the Company's sale of goods
or rendition of services to its customers (including without limitation from
the lease or rental of goods), and all accounts arising from sales or rendition
of services made under any of the Company's trade names or styles, or through
any of the Company's divisions; (b) any and all instruments, documents,
contract rights and chattel paper, all as defined in the UCC; (c) unpaid
seller's or lessor's rights (including rescission, replevin, reclamation and
stoppage in transit) relating to the foregoing or arising therefrom; (d) rights
to any goods represented by any of the foregoing, including rights to returned
or repossessed goods; (e) reserves and credit balances arising hereunder; (f)
guarantees or collateral for any of the foregoing; (g) insurance policies or
rights relating to any of the foregoing; (h) general intangibles pertaining to
any and all of the foregoing; (i) proceeds or royalties from any licensing or
similar agreements; and (j) cash and non-cash proceeds of any and all the
foregoing.
ANNIVERSARY DATE shall mean the date occurring three (3) years from the date
hereof and the same date in every year thereafter.
AVAILABILITY shall mean at any time the positive difference between: (a) the
Borrowing Base less (b) the sum of (i) the outstanding aggregate amount of all
Obligations of the Company, (ii) the Availability Reserve, and (iii) all
payments of the Company to CITBC coming due within sixty (60) days from the
date of computation.
AVAILABILITY RESERVE shall mean (a) if applicable, a reserve in the amount of
six (6) months unpaid rental or similar charges for any facility for which the
Company fails to obtain a landlord's waiver, warehouseman's, processors or
mortgagee's waiver, as applicable, in form and substance satisfactory to CITBC
(described in Paragraph 2.1(r) of Section 2 hereof), and (b) any other reserve
which CITBC may require from time to time pursuant to the explicit terms of
this Financing Agreement.
BORROWING BASE shall have the meaning and shall be calculated in accordance
with Paragraph 3.1 of Section 3 of this Financing Agreement.
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BUSINESS DAY shall mean a day on which CITBC is open for business in New York,
New York, and which is not a Saturday, Sunday or other day on which commercial
banks or lending institutions in New York, New York or San Francisco,
California are authorized or required by law to close.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all
expenditures of the Company during such period, that in conformity with GAAP,
are required to be included in or reflected by the property, plant or equipment
or similar fixed asset account reflected in the balance sheet of the Company.
CAPITAL IMPROVEMENTS shall mean operating Equipment and facilities (other than
land) acquired or installed for use in the Company's business operations.
CAPITAL LEASE shall mean any lease of property (whether real, personal or
mixed) which, in conformity with GAAP, is accounted for as a capital lease or a
Capital Expenditure on the balance sheet of the Company.
CHASE BANK RATE shall mean the rate of interest per annum announced by The
Chase Manhattan Bank, N.A. (or any successor thereof) from time to time as its
prime rate in effect at its principal office in the City of New York, New York.
(The prime rate is not intended to be the lowest rate of interest charged by
The Chase Manhattan Bank, N.A. to its borrowers).
CLOSING DATE shall mean the date that this Financing Agreement has been duly
executed by the parties hereto and delivered to and accepted by CITBC.
COLLATERAL shall mean all present and future Accounts, Equipment, Inventory,
Documents of Title, General Intangibles, the pledged stock of the Guarantor,
and Other Collateral of the Company and the proceeds of any and all of the
foregoing.
COLLATERAL MANAGEMENT FEE shall mean the sum of $35,000 per year which shall be
paid to CITBC in accordance with Paragraph 6.5 of Section 6 hereof to offset
the expenses and costs of CITBC in connection with record keeping, periodic
examinations, analyzing and evaluating the Collateral.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the
Company and its consolidated subsidiaries, eliminating all inter-company
transactions and prepared in accordance with GAAP.
CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus
individual balance sheets for the Company and its consolidated subsidiaries,
showing all eliminations of inter-company transactions and prepared in
accordance with GAAP.
CONTRACT RATE shall mean the rate of interest computed as applicable and as set
forth in Paragraph 6.1 of Section 6 of this Financing Agreement.
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<PAGE> 5
CUSTOMARILY PERMITTED LIENS shall mean:
(a) liens of local or state authorities for franchise or other
like taxes not yet due and payable and liens of local or state authorities for
franchise or other like taxes due and payable; provided the aggregate amounts
of such liens for such taxes due and payable shall not exceed $50,000 in the
aggregate for the Company at any one time;
(b) statutory liens of landlords and liens of carriers,
warehousemen, mechanics, materialmen and other like liens imposed by law,
created in the ordinary course of business and for amounts not yet due (or
which are being contested in good faith by appropriate proceedings or other
appropriate actions which are sufficient to prevent imminent foreclosure of
such liens) and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP;
(c) deposits made (and the liens thereon) in the ordinary course
of business (including, without limitation, security deposits for leases;
deposits for utility purposes; indemnity bonds, surety bonds and appeal bonds;
bonds and deposits in connection with workers' compensation, unemployment
insurance and other types of social security benefits; and bonds or deposits to
secure the performance of tenders, bids, contracts (other than for the
repayment or guarantee of borrowed money or purchase money obligations),
statutory obligations and other similar obligations arising as a result of
progress payments under government contracts; and
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), encroachments, minor defects or
irregularities in title, variation and other restrictions, charges or
encumbrances (whether or not recorded) affecting the Real Estate and which do
not impair the Company's peaceful and quiet enjoyment and use thereof in the
ordinary course of the Company's business.
DEFAULT shall mean any event specified in Section 8 hereof, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, event or act, has been satisfied.
DEFAULT RATE OF INTEREST shall mean a rate of interest per annum equal to the
sum of: i) three percent (3%) and ii) the Chase Bank Rate.
DEPOSITORY ACCOUNT shall mean that certain deposit account, Account No.
4491-057337, maintained by the Company in the name of the Company with Wells
Fargo.
DISCLOSURE LETTER shall mean that certain letter of even date herewith from the
Company to CITBC denominated the Disclosure Letter.
DOCUMENTATION FEE shall mean I) as of the Closing Date, the reasonable fees and
expenses of CITBC's legal counsel, Irell & Manella LLP, in documenting, in
whole or in part, the initial transaction solely on behalf of CITBC, and II)
subsequent to the Closing Date, the reasonable fees and expenses of CITBC's
selected outside legal counsel or CITBC's
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<PAGE> 6
standard charges to compensate CITBC for the use of CITBC's in-house Legal
Department and facilities relating to any and all modifications, waivers,
releases, amendments or additional collateral with respect to this Financing
Agreement, the Guaranty, the Collateral and/or the Obligations.
DOCUMENTS OF TITLE shall mean all present and future documents as defined in
the UCC and any and all warehouse receipts, bills of lading, shipping
documents, chattel paper, instruments and similar documents, all whether
negotiable or not and all goods and Inventory relating thereto and all cash and
non-cash proceeds of the foregoing.
EARLY TERMINATION DATE shall mean the date on which the Company terminates this
Financing Agreement or the Line of Credit, which date is prior to the date two
(2) years after the Closing Date.
EARLY TERMINATION FEE shall: a) mean the fee CITBC is entitled to charge the
Company in the event the Company terminates the Line of Credit or this
Financing Agreement on a date prior to the date two (2) years after the Closing
Date; and b) be determined by multiplying $15,000,000 by one-half percent
(0.5%) per annum, for the actual number of days from the Early Termination Date
to the next succeeding Anniversary Date.
EBITDA shall mean, with respect to any period of the Company and its
consolidated subsidiaries for which such calculation is required, the sum of
(i) Consolidated Net Income (as defined in accordance with GAAP, before all
extraordinary items and non-recurring items, in accordance with GAAP); (ii)
Interest Expense; (iii) provision for taxes; (iv) charges for depreciation; (v)
charges for amortization of intangible assets; and (vi) all other non-cash
items deducted in computing Consolidated Net Income, all as determined in
accordance with GAAP consistently applied. For purposes hereof, "intangibles
assets" shall include, but shall not be limited to, organization costs,
securities issuance costs, unamortized debt discount and expense, goodwill,
covenants not to compete, patents, trademarks, franchises and capitalized
research and development expense.
ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of the Company's
Accounts that are subject to a valid, exclusive, first priority and fully
perfected security interest in favor of CITBC less, without duplication, (a)
the gross amount of the Company's Accounts which do not conform to warranties
contained in this Financing Agreement, (b) the gross amount of the Company's
Accounts which do not at all times continue to be acceptable to CITBC in the
exercise of its reasonable business judgment, and (c) the sum (without
duplication) of i) any returns, discounts, claims, credits, rebills and
allowances of any kind or nature (whether issued, owing, granted or
outstanding) and ii) reserves (in one hundred percent (100%) of the amount
thereof) for: A) Accounts arising out of sales, services or leases to the
United States of America or to any agency, department or division thereof,
except for any such sales as to which the Company has complied with the
Assignment of Claims Act of 1940, to CITBC's reasonable satisfaction; B)
Accounts arising out of foreign sales, services or leases, other than sales,
services or leases I) secured by stand-by letters of credit (in form and
substance satisfactory to CITBC) issued or confirmed by, and payable at, banks
having a place of business in the United States of America and payable in
United
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<PAGE> 7
States currency, or II) to customers residing in Canada, provided in each
instance that such Accounts otherwise comply with all of the other criteria for
eligibility hereunder, are payable in United States currency and such Accounts
do not exceed $1,000,000 in the aggregate at any one time; C) Accounts that
remain unpaid more than ninety (90) days from invoice date; D) Accounts arising
out of sales, services or leases to any of the Company's subsidiaries, or to
any company affiliated with the Company in any way; E) Accounts arising out of
bill and hold (deferred shipment) or consignment sales; F) Accounts arising out
of sales, services or leases to any customer which is I) insolvent, II) the
debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership
or similar proceedings under any federal or state law, III) negotiating, or has
called a meeting of its or their creditors for purposes of negotiating, a
compromise of its debts or IV) financially unacceptable to CITBC or has a
credit rating unacceptable to CITBC; G) Accounts arising out of all sales,
services or leases to any customer if fifty percent (50%) or more of either (I)
all outstanding invoices or (II) the aggregate dollar amount of all outstanding
invoices, are unpaid more than ninety (90) days from invoice date; H) any other
reasons deemed necessary by CITBC in its reasonable business judgment and which
are customary either in the commercial finance industry or in the lending
practices of CITBC; I) Accounts arising from the sale, lease or rental of goods
for which a customer shall have objected to the quality or quantity of goods or
services of the Company, or where such customer shall have rejected, returned
or refused to accept such goods or services; J) pre-billed receivables
(including, without limitation, advance billings on service contracts) and
receivables arising from progress billing; K) the amount of any unapplied cash
in advance received by the Company in connection with any sales, services or
leases giving rise to an Account; L) an amount as determined by CITBC in its
reasonable discretion representing future claims by existing account debtors
for any remaining service contract obligations; and M) the greater of (I) the
Company's book reserve for returns, discounts, claims, credits, upgrades and
other allowances and (II) an amount as determined by CITBC in its reasonable
discretion representing, historically, such returns, discounts, claims, credits
and upgrade and other allowances.
ELIGIBLE INVENTORY shall mean, without duplication, the gross amount of the
Company's Inventory that is subject to a valid, exclusive, first priority and
fully perfected security interest in favor of CITBC (including receipt of any
applicable third party waivers with respect thereto) and which conforms to the
warranties contained herein and which at all times continues to be acceptable
to CITBC in the exercise of its reasonable business judgment, less, without
duplication, any (a) work-in-process, (b) supplies (other than raw materials)
and customer service replacement parts, (c) goods not in the actual possession
of (i) the Company at its facilities at 1545-1565 Barber Lane, Milpitas,
California 95035 or (ii) for a period of thirty (30) days from and after the
date of this Financing Agreement, Manhattan Transportation Inc. at its
facilities at 47572 Kato Road, Fremont, CA 94538 (specifically including,
without limitation, all Inventory Off Premises, all Inventory consisting of
service replacement parts in the possession of Sonic AIR or other third party
and all goods located in field service stations), (d) from and after the date
thirty (30) days after the date hereof, goods in the possession of Manhattan
Transportation, Inc. unless on or before such date, the Company shall have
delivered to CITBC (i) documentation, in form and substance reasonably
acceptable to CITBC, that the Company's interest in its goods in
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<PAGE> 8
the possession of Manhattan Transportation, Inc. is senior to any interest
therein of any creditor of Manhattan Transfer, Inc. and (ii) an acknowledgement
copy of a Notice of Security Interest in the form affixed hereto as Exhibit G
executed on behalf of Manhattan Transportation, Inc. in favor of CITBC, (e)
goods returned or rejected by the Company's customers other than goods that are
undamaged and resalable in the normal course of business, (f) goods to be
returned to the Company's suppliers, (g) goods in transit to third parties
(other than goods located in public warehouses, provided that the Company has
title to such Inventory and possession of all delivery and warehouse receipts,
and all insurance, shipping and other documentation relating thereto is
reasonably satisfactory to CITBC; and (h) any reserves required by CITBC in its
reasonable discretion, including reserves for slow moving and obsolete
Inventory, special order goods, market value declines, Inventory associated
with bill-and-hold (deferred shipment) or consignment sales, and any royalty
payments pursuant to any applicable licensing agreements.
EQUIPMENT shall mean all of the Company's present and hereafter acquired
equipment as defined in the UCC and any and all machinery, motor vehicles,
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time and the rules and regulations promulgated thereunder
from time to time.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 8 of this
Financing Agreement.
EXECUTIVE OFFICERS shall mean the Chairman, President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Executive Vice President(s),
Senior Vice President(s), Treasurer, Controller and Secretary of the Company.
FOUR PARTY LOCKBOX AGREEMENT shall have the meaning provided for in Section 2,
Paragraph 2.1(p) hereof.
GAAP shall mean generally accepted accounting principles in the United States
of America as in effect from time to time and for the period as to which such
accounting principles are to apply; provided further that in the event the
Company modifies its accounting procedures as applied as of the Closing Date,
the Company shall provide such statements of reconciliation as shall be in form
and substance acceptable to CITBC.
GENERAL INTANGIBLES shall have the meaning set forth in the UCC and shall
include, without limitation, all present and future right, title and interest
in and to all trade names, trademarks (together with the goodwill associated
therewith), trade secrets, proprietary information, copyrights, patents,
licenses, customer lists, distribution agreements, supply agreements and tax
refunds, together with all monies and claims for monies now or hereafter due
and payable in connection with any of the foregoing or otherwise, and all cash
and non-cash proceeds thereof (including without limitation the proceeds of any
licensing
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<PAGE> 9
agreements between the Company and any licensee of any of the Company's General
Intangibles) and specifically including, without limitation, all trade names
currently used by the Company (all of which are listed on Schedule 2 to the
Disclosure Letter) and all issued and applied-for patents, trademarks and
copyrights currently used by the Company (all of which are listed on Schedule 3
to the Disclosure Letter).
GUARANTOR shall mean NetFRAME International Incorporated, a Delaware
corporation.
GUARANTY shall mean a guaranty of the Company's obligations to CITBC in form
and substance substantially in the form of Exhibit C hereto.
INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or
otherwise, which are any of the following: (a) obligations in respect of money
(borrowed or otherwise due or owing to third parties) or for the deferred
purchase price of property, services or assets, other than Inventory, or (b)
lease obligations which, in accordance with GAAP, have been, or which should
be, capitalized.
INTEREST EXPENSE shall mean total interest obligations (paid or accrued) of the
Company on a consolidated basis determined in accordance with GAAP on a basis
consistent with the latest audited statement of the Company and its
consolidated subsidiaries.
INVENTORY shall mean all of the Company's present and hereafter acquired
inventory as defined in the UCC and any and all merchandise and goods, and all
additions, substitutions and replacements thereof, wherever located, together
with all goods wherever located, and materials used or usable in manufacturing,
processing, packaging or shipping same; in all stages of production - from raw
materials through work-in-process to finished goods - and all proceeds thereof
of whatever sort.
INVENTORY OFF PREMISES shall have the meaning specified in Section 5, Paragraph
5.2 hereof.
INVESTMENTS shall have the meaning specified in Section 5, Paragraph 5.10(h)
hereof.
LINE OF CREDIT shall mean the aggregate commitment of CITBC to make loans and
advances to the Company pursuant to Section 3 of this Financing Agreement in
the aggregate amount of $15,000,000.
LINE OF CREDIT FEE shall mean the fee due CITBC at the end of each month for
the Line of Credit and shall be calculated by: multiplying (A) the difference
between (i) the Line of Credit and (ii) the average daily Revolving Loans for
said month; by (B) three-eighths of one percent (0.375%) per annum for the
number of days in said month based on a 360 day year.
LOAN DOCUMENTS shall mean this Financing Agreement, the Promissory Note, the
Guaranty contemplated by Paragraph 2.1(d) of Section 2 of this Financing
Agreement, the Security Agreement of even date herewith executed by the
Guarantor in favor of CITBC and any
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<PAGE> 10
other documents and the ancillary loan and security agreements executed from
time to time in connection with this Financing Agreement, as the same may be
renewed, amended, extended, increased or supplemented from time to time.
LOAN FACILITY FEE shall mean the fee payable to CITBC in accordance with, and
pursuant to, the provisions of Paragraph 6.4 of Section 6 of this Financing
Agreement.
NET WORTH shall mean, at any date of determination, an amount equal to (a) the
Total Assets of the Company on a consolidated basis minus (b) Total Liabilities
of the Company on a consolidated basis, and shall be determined in accordance
with GAAP, on a consistent basis with the latest audited statements.
OBLIGATIONS shall mean all loans and advances made or to be made by CITBC to
the Company, or to others for the Company's account, arising out of this
Financing Agreement and the other Loan Documents, including, without
limitation, all Revolving Loans and advances pursuant to this Financing
Agreement; any and all indebtedness and obligations which may at any time be
owing by the Company to CITBC arising in connection with the Financing
Agreement and the other Loan Documents, whether now in existence or incurred by
the Company from time to time hereafter, whether secured by pledge, lien upon
or security interest in any of the Company's assets or property or the assets
or property of any other person, firm, entity or corporation, and whether such
indebtedness is absolute or contingent, joint or several, matured or unmatured,
direct or indirect and whether the Company is liable to CITBC for such
indebtedness as principal, surety, endorser, guarantor or otherwise, and
specifically including, without limitation, all interest, fees, Out-of-Pocket
Expenses and indemnifications owing from the Company to CITBC in connection
with the transactions contemplated by this Financing Agreement and the other
Loan Documents; any and all indebtedness or obligations incurred by, or imposed
on, CITBC as a result of environmental claims (other than as a result of the
gross negligence or willful misconduct of CITBC) on the Real Estate arising out
of any of the Company's operations, premises or waste disposal practices or
sites; any of the Company's liability to CITBC as maker or endorser on any
promissory note or other instrument for the payment of money; any and all costs
and expenses (including reasonable attorneys' fees and disbursements) which
CITBC may incur in connection with the exercise by or for CITBC of any of the
rights or powers conferred in this Financing Agreement upon CITBC, or in the
prosecution or defense of any action or proceeding to enforce or protect any
rights of CITBC in connection with this Financing Agreement, the Guaranty, the
other Loan Documents, or the Collateral, or any other Obligations owing to
CITBC by the Company; and the Company's liability to CITBC under any instrument
of guaranty or indemnity, or arising under any guaranty, endorsement or
undertaking which CITBC may make or issue to others for the Company's account,
including CITBC's acceptance of drafts or CITBC's endorsement of notes or other
instruments for the Company's account and benefit.
OTHER COLLATERAL shall mean all now owned and hereafter acquired deposit
accounts maintained with any bank or financial institutions (specifically
including, without limitation, all present deposit accounts of the Company (all
of which are listed on Schedule 4 to the Disclosure Letter)); all now owned and
hereafter acquired money market accounts (whether
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properly classified under the UCC as deposit accounts, certificated or
uncertificated securities, general intangibles, contract rights or otherwise);
all cash and other monies and property in the possession or control of CITBC;
all books, records, ledger cards, disks and related data processing software at
any time evidencing or containing information relating to any of the Collateral
described herein or otherwise necessary or helpful in the collection thereof or
realization thereon, and all cash and non-cash proceeds of the foregoing.
OUT-OF-POCKET EXPENSES shall mean all of CITBC's present and future expenses
incurred relative to this Financing Agreement or any other Loan Documents,
whether incurred heretofore or hereafter, which expenses shall include, without
being limited to, the cost of record searches, all costs and expenses incurred
by CITBC in opening bank accounts, depositing checks, receiving and
transferring funds, and any charges imposed on CITBC due to "insufficient
funds" of deposited checks and CITBC's standard fee relating thereto, any
applicable counsel fees and disbursements constituting a part of the
Obligations (without duplication of Documentation Fees), fees and taxes
relative to the filing of financing statements and all expenses, costs and fees
set forth in Paragraph 8.3 of Section 8 of this Financing Agreement.
PERMITTED ENCUMBRANCES shall mean: i) liens expressly permitted, or consented
to in writing, by CITBC (specifically including, without limitation, the
Permitted Encumbrances set forth on Schedule 5 to the Disclosure Letter); ii)
Purchase Money Liens; iii) Customarily Permitted Liens; iv) liens granted CITBC
by the Company; v) liens of judgment creditors provided such liens do not
exceed, in the aggregate for the Company at any time, $50,000 (other than liens
which have been discharged, bonded or insured to the reasonable satisfaction of
CITBC within the earlier of (a) three (3) Business Days after such lien arises
and (b) the date upon which such judgment lienor commences enforcement of such
judgment lien); vi) liens for taxes not yet due and payable or which are being
diligently contested in good faith by the Company by appropriate proceedings
and which liens are not (a) other than with respect to Real Estate, senior to
the liens of CITBC or (b) for taxes due the United States of America or any
state thereof having similar priority statutes; vii) leases or subleases and
license and sublicenses granted to others in the ordinary course of the
Company's business not interfering in any material respect with the business of
the Company, and any interest or title of a lessor or licensor under any lease
or license in which the Company is lessee or licensee; viii) liens in favor of
customs and revenue authorities arising as a matter of law in the ordinary
course of the Company's business to secure payments of customs duties in
connection with the importation of goods; ix) Bankers' liens or offset rights
to the extent allowed to Wells Fargo under the terms of the Four Party Lockbox
Agreement, and bankers' liens or offset rights with respect to deposit accounts
of the Company maintained by the Company at financial institutions outside of
the United States in the ordinary course of the Company's business; provided,
however, that anything to the contrary in this Financing Agreement
notwithstanding, the aggregate amount on deposit in such non-U.S. deposit
accounts shall not exceed $50,000 at any time; and x) liens incurred in
connection with any extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses i) and ii) which
extension, renewal or refinancing is permitted by the terms of this Financing
Agreement, provided that any such lien shall be limited to the property
encumbered by the existing lien, and the terms of
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the new lien are no more burdensome on the Company than the terms of the lien
being replaced.
PERMITTED INDEBTEDNESS shall mean: i) current Indebtedness maturing in less
than one year and incurred in the ordinary course of business for raw
materials, supplies, equipment, services, taxes or labor; ii) indebtedness
secured by Purchase Money Liens; iii) Indebtedness of the Company which is
subordinated to the prior payment and satisfaction of the Company's Obligations
to CITBC by means of a subordination agreement in form and substance
satisfactory to the CITBC; iv) Indebtedness arising under this Financing
Agreement; v) deferred taxes and other expenses incurred in the ordinary course
of business; vi) other indebtedness existing on the date of execution of this
Financing Agreement and listed in the most recent financial statement delivered
to CITBC or otherwise disclosed to CITBC in writing prior to the Closing Date
(specifically including, without limitation, the Permitted Indebtedness set
forth on Schedule 6 to the Disclosure Letter hereto); vii) Indebtedness of the
Company to its subsidiaries; viii) extensions, refinancings, modifications,
amendments and restatements of any of the items of Permitted Indebtedness set
forth above ("Refinanced Indebtedness"), provided that (a) the principal amount
of such Refinanced Indebtedness is not increased, (b) the terms of such
Refinanced Indebtedness (including, without limitation, interest rate and
maturity) are not modified to impose more burdensome terms on the Company or to
change the relative priority between any holder thereof and CITBC, and (c)
except in the case of a Permitted Encumbrance pursuant to clause (x) of the
definition of Permitted Encumbrance with respect to Refinanced Indebtedness
relating to Permitted Indebtedness of the type described in clause (ii), above,
such Refinanced Indebtedness is both unsecured and not guaranteed by any of the
Company's subsidiaries; and ix) Indebtedness not otherwise permitted hereunder
which is (a) unsecured, (b) not guaranteed by any of the Company's
subsidiaries, and (c) in an aggregate amount outstanding at any one time, which
when aggregated with the guarantees permitted under clause (ii) of Section 5.10
and outstanding at such time, does not exceed $1,000,000.
PROMISSORY NOTE shall mean the note, in the form of Exhibit A attached hereto,
delivered by the Company to CITBC to evidence the Revolving Loans pursuant to
Section 3 of this Financing Agreement.
PURCHASE MONEY LIENS shall mean liens on any item of capital equipment acquired
after the date of this Financing Agreement provided that i) each such lien
shall attach only to the property to be acquired and accessions thereto,
replacements thereof or substitutes therefor and any proceeds (including
insurance proceeds) thereof, ii) a description of the property so acquired is
furnished to CITBC, and iii) the debt incurred in connection with such
acquisitions shall not exceed in the aggregate $3,000,000 in any fiscal year.
REAL ESTATE shall mean the Company's present and future fee and/or leasehold
interests in real property, including such property which, subsequent to the
Closing Date, may be encumbered, mortgaged, pledged or assigned to CITBC or its
designee, and specifically including, without limitation, the leases listed on
Schedule 7 to the Disclosure Letter, which
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constitute all present leases of the Company. Schedule 7 to the Disclosure
Letter also sets forth, for each lease, the monthly rental thereunder.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to
or for the account of the Company by CITBC pursuant to Section 3 of this
Financing Agreement.
REVOLVING LOAN ACCOUNT shall have the meanings specified in Section 3,
Paragraph 3.6 hereof.
SATISFACTORY AVAILABILITY shall have the meaning given thereto in Paragraph 5.8
of Section 5 hereof.
TOTAL ASSETS shall mean the Company's total assets on a consolidated basis
determined in accordance with GAAP, on a basis consistent with the latest
audited statements of the Company.
TOTAL LIABILITIES shall mean total liabilities of the Company on a consolidated
basis determined in accordance with GAAP, on a basis consistent with the latest
audited statements of the Company.
UCC shall mean the Uniform Commercial Code as in effect in the State of
California and as the same maybe amended from time to time.
WELLS FARGO shall mean Wells Fargo Bank, N.A.
SECTION 2. CONDITIONS PRECEDENT
2.1 The obligation of CITBC to make loans hereunder is subject to
the satisfaction of, or waiver of, immediately prior to or concurrently with
the making of such loans, the following conditions precedent:
(A) LIEN SEARCHES - CITBC shall have received tax,
judgment and Uniform Commercial Code searches satisfactory to CITBC for all
locations presently occupied or used by the Company as CITBC shall determine.
(B) UCC FILINGS - Any documents (including without
limitation, financing statements) required to be filed in order to create, in
favor of CITBC, and for the benefit of CITBC, a first and exclusive (other than
Collateral subject to Purchase Money Liens and other Permitted Liens having a
higher priority than the liens granted by this Financing Agreement) perfected
security interest in the Collateral with respect to which a security interest
may be perfected by a filing under the Uniform Commercial Code shall have been
properly filed in each office in each jurisdiction required in order to create
in favor of CITBC a perfected lien on the Collateral. CITBC shall have
received acknowledgment copies of all such filings (or, in lieu thereof, CITBC
shall have received other evidence satisfactory to CITBC that all such filings
have been made); and CITBC shall have received
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evidence that all necessary filing fees and all taxes or other expenses related
to such filings have been paid in full.
(C) EXAMINATION AND VERIFICATION - CITBC shall have
completed to the satisfaction of CITBC an updated examination and verification
of the Accounts, Inventory, Equipment, books and records of the Company and
CITBC shall be satisfied with the Company's financial condition.
(D) GUARANTY - The Guarantor shall have executed and
delivered to CITBC the Guaranty guaranteeing all present and future Obligations
of the Company to CITBC, together with such security agreements and other
documents (including, without limitation, financing statements) required to be
filed in order to create, in favor of CITBC and for the benefit of CITBC a
first and exclusive perfected security interest in the Guarantor's present and
future Accounts, Equipment, Inventory, Documents of Title, General Intangibles
and Other Collateral to secure the Guarantor's obligations to CITBC under the
Guaranty.
(E) OPINIONS - Wilson, Sonsini, Goodrich & Rosati,
counsel for the Company and the Guarantor, shall have delivered to CITBC an
opinion substantially in the form affixed hereto as Exhibit C.
(F) PLEDGE AGREEMENT - The Company shall a) execute and
deliver to CITBC pledge and security agreements and stock powers executed in
blank pledging to CITBC as collateral for the Obligations of the Company (i)
not less than 100% of the issued and outstanding stock of each and every
subsidiary of the Company (including, without limitation, the issued and
outstanding stock of the Guarantor) and (ii) the securities reflected on
Schedule 8 of the Disclosure Letter and, b) deliver to CITBC all such
applicable stock certificates and stock powers and take such other actions as
CITBC may reasonably request in connection therewith.
(G) ADDITIONAL DOCUMENTS - The Company shall have
executed and delivered to CITBC all Loan Documents necessary or reasonably
requested by CITBC to consummate the lending arrangement contemplated between
the Company and CITBC (including, without limitation, the Trademark Security
Agreement of even date executed by the Company, the Irrevocable Power of
Attorney of even date executed by the Company in connection with the Trademark
Security Agreement, and any other documents reasonably deemed necessary by
CITBC to perfect the security interests granted by the Company to CITBC in the
Other Collateral, including, without limitation, the deposit accounts of the
Company (other than the Depository Account) maintained with Wells Fargo).
(H) CITBC COMMITMENT LETTER - The Company shall have
fully complied, to the satisfaction of CITBC, with all of the terms and
conditions of the commitment letter, dated February 27, 1997, issued by CITBC
to, and accepted by, the Company.
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(I) BOARD RESOLUTIONS - CITBC shall have received a copy
of the resolutions of the Boards of Directors of the Company and the Guarantor
(as the case may be) authorizing the execution, delivery and performance of (i)
this Financing Agreement, (ii) the Guaranty, and (iii) any related agreements,
in each case certified by the Secretary or Assistant Secretary of the Company
and the Guarantor (as the case may be) as of the date hereof, together with a
certificate of the Secretary or Assistant Secretary of the Company and the
Guarantor (as the case may be) as to the incumbency and signature of the
officers of the Company and/or the Guarantor executing such agreements and any
certificates or other documents to be delivered by the Company and/or the
Guarantor pursuant to this Financing Agreement or the Guaranty (as the case may
be), together with evidence of the incumbency of each such Secretary or
Assistant Secretary.
(J) CORPORATE ORGANIZATION - CITBC shall have received
(i) a copy of the Certificates of Incorporation of the Company and the
Guarantor certified by the Secretary of State of their respective jurisdictions
of incorporation, and (ii) a copy of the By-Laws (as amended through the date
hereof) of the Company and the Guarantor and certified by the respective
Secretary or Assistant Secretary of the Company and the Guarantor.
(K) OFFICER'S CERTIFICATE - CITBC shall have received an
executed Officer's Certificate of the Company and of the Guarantor,
satisfactory in form and substance to CITBC, certifying that (i) the
representations and warranties contained herein (in the case of the Company)
and in the Guaranty and that certain Security Agreement of even date herewith
executed by the Guarantor in favor of CITBC (in the case of the Guarantor) are
true and correct in all material respects on and as of the date hereof; (ii)
the Company is in compliance with all of the terms and provisions set forth
herein and the Guarantor is in compliance with all of the terms and provisions
set forth in the Guaranty and such Security Agreement; and (iii) no Default or
Event of Default has occurred hereunder (in the case of the Company) or under
the Guaranty and such Security Agreement (in the case of the Guarantor).
(L) ABSENCE OF DEFAULT - No Default or Event of Default
shall have occurred hereunder, under the Guaranty or under that certain
Security Agreement of even date herewith executed by the Guarantor in favor of
CITBC.
(M) APPRAISALS - CITBC shall have received an appraisal
or a valuation report (addressed to CITBC but paid for by the Company), which
appraisal or report shall be by an appraiser or valuation expert acceptable to
CITBC, with respect to the Inventory in form and substance acceptable to CITBC
in its sole discretion.
(N) LEGAL RESTRAINTS/LITIGATION - At the date of
execution of this Financing Agreement, there shall be no x) litigation,
investigation or proceeding (judicial or administrative) pending or threatened
against the Company or the Guarantor or their assets, by any agency, division
or department of any county, city, state or federal government arising out of
this Financing Agreement, y) injunction, writ or restraining order restraining
or prohibiting the consummation of the financing arrangements contemplated
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under this Financing Agreement or z) to the best knowledge of the Company,
suit, action, investigation or proceeding (judicial or administrative) pending
or threatened against the Company or the Guarantor or their assets, which, in
the opinion of CITBC, if adversely determined, could have a material adverse
effect on the business, prospects, operation, assets, financial condition or
Collateral of the Company and/or the Guarantor.
(O) DISBURSEMENT AUTHORIZATION - The Company shall have
delivered to CITBC all information necessary for CITBC to issue wire transfer
instructions on behalf of the Company for the initial and subsequent loans
and/or advances to be made under this Agreement including, but not limited to,
disbursement authorizations in form acceptable to CITBC.
(P) FOUR PARTY LOCKBOX AGREEMENT - As of the Closing
Date, the Company shall enter into that certain Four Party Lockbox Agreement by
and among the Company, CITBC, Wells Fargo, and Cashflex, L.P. ("Cashflex")
wherein the Restricted Account is the Depository Account.
(Q) THIRD PARTY WAIVERS - The Company shall provide
applicable third party documents to CITBC so that CITBC has a first and
exclusive lien on Accounts, Inventory, Chattel Paper and any Equipment at
locations which the Company and/or the Guarantor use, lease or occupy,
substantially in the form affixed hereto as Exhibit D. Inventory located in
any facility which is not owned by the Company, including at any leased
premises or any warehouse issuing documents of title (as defined in the UCC),
for which CITBC has not received a waiver substantially in the form of Exhibit
D as of the Closing Date, shall be deemed ineligible or, at CITBC's option,
CITBC may establish an Availability Reserve for up to six months rent or
warehouse charges for any such premises or for the value of any applicable
Inventory. Notwithstanding anything to the contrary herein, for purposes of
Section 3 and 6 hereof, this condition precedent shall not terminate as of the
Closing Date. Notwithstanding anything to the contrary herein, with respect to
the facilities located at 47572 Kato Road, Fremont, California 94538 only, the
provisions of the definition of Eligible Inventory shall control over the
requirements of this Paragraph 2.1(r).
(R) MINIMUM CLOSING AVAILABILITY - Based upon CITBC's
completion of an updated examination of the Company's Accounts and Inventory
and as evidenced by a certificate executed by an Executive Officer of the
Company and delivered by the Company to CITBC on the Closing Date, after giving
effect to any Revolving Loans made by CITBC on the Closing Date, the Company
shall have a minimum additional aggregate Availability of at least $7,500,000;
provided, however, that for purposes of this Paragraph 2.1(s) only, if no
Revolving Loans are outstanding on the Closing Date, said $7,500,000 minimum
shall be deemed satisfied if the sum of Availability as of the Closing Date
plus the Company's cash on hand on the Closing Date is at least $7,500,000. It
is understood that such requirement contemplates that all of the Company's
debts and obligations are current and that all payables are being handled as in
the normal course of the Company's business and consistent with its past
practice.
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(S) FINANCIAL INFORMATION - Prior to the Closing Date,
the Company shall have prepared and delivered to CITBC (i) a cash budget
projection for the Company for the next consecutive twelve month period
(commencing on the Closing Date) in form and substance satisfactory to CITBC.
(T) INSURANCE - The Company shall have delivered to CITBC
a certificate from its insurance broker in form and substance satisfactory to
CITBC evidencing that the coverage required by Paragraph 5.5 of Section 5
hereof, and the endorsements thereof, in form and substance satisfactory to
CITBC, listing CITBC, as loss payee or mortgagee, as the case may be, are in
full force and effect, all as set forth in Section 5 of this Financing
Agreement.
(U) FEES AND EXPENSES - On the Closing Date, the Company
shall have reimbursed CITBC for all Documentation Fees and Out- of-Pocket
Expenses for which a request for payment shall have been made at or prior to
the Closing Date (it being understood and agreed that a $25,000 deposit
previously received by CITBC from the Company shall first be applied to payment
of such Documentation Fees and Out-of-Pocket Expenses before any remaining
amounts thereof are due from the Company at the Closing) and shall have paid
the Collateral Management Fee due at Closing and the Loan Facility Fee.
(V) ABSENCE OF MATERIAL ADVERSE CHANGE - No material
adverse change shall have occurred in the financial condition, business,
prospects, profitability, assets (including without limitation the Collateral)
or operations of the Company and/or the Guarantor (it being expressly
understood and agreed that any adverse change in the terms, conditions,
assumptions or projections supplied by the Company and on which CITBC based its
decision to issue its commitment letter dated February 27, 1997, may, in
CITBC's reasonable business discretion, be construed by CITBC as a material
adverse change).
(W) INVENTORY CONFIRMATION AND BORROWING BASE
CERTIFICATES - CITBC shall have received (i) an Inventory Confirmation
Certificate in the form of Exhibit F to this Financing Agreement and in
substance satisfactory to CITBC, and (ii) a Borrowing Base Certificate in the
form of Exhibit G to this Financing Agreement and in substance satisfactory to
CITBC, each as of a recent date acceptable to CITBC and each executed by the
Company.
(X) EXECUTION AND DELIVERY OF LOAN DOCUMENTS - CITBC
shall have received the signed Promissory Note and the other executed Loan
Documents.
Upon the execution of this Financing Agreement and the initial disbursement of
loans hereunder, except as otherwise set forth herein, all of the above
conditions precedent shall have been deemed satisfied except as the Company and
CITBC shall otherwise agree herein or in a separate writing.
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2.2 CONDITIONS TO EACH EXTENSION OF CREDIT
Except to the extent expressly set forth in this Financing Agreement,
the agreement of CITBC to make any extension of credit requested to be made by
it to the Company on any date (including without limitation, the initial
extension of credit) is subject to the satisfaction of the following conditions
precedent:
(A) REPRESENTATIONS AND WARRANTIES - Each of the
representations and warranties made by the Company in or pursuant to this
Financing Agreement and by the Guarantor in or pursuant to the Guaranty and
that certain Security Agreement of even date herewith executed by Guarantor in
favor of CITBC shall be true and correct in all material respects on and as of
such date as if made on and as of such date.
(B) NO DEFAULT - No Default or Event of Default shall
have occurred and be continuing on such date or after giving effect to the
extension of credit requested to be made on such date.
(C) BORROWING BASE - Except as may be otherwise agreed to
from time to time by CITBC and the Company in writing, after giving effect to
the extension of credit requested to be made by the Company on such date, the
aggregate outstanding Revolving Loans owing by the Company will not exceed the
lesser of (i) the Line of Credit or (ii) the Borrowing Base then applicable to
the Company.
(D) ADDITIONAL MATTERS - All corporate and other
proceedings, and all documents, instruments and other legal matters in
connection with the transactions contemplated by this Financing Agreement, the
Guaranty and the other Loan Documents shall be reasonably satisfactory in form
and substance to CITBC and (to the extent that such proceedings documents,
instruments and other matters relate to the Collateral or CITBC) CITBC shall
have received such other documents and legal opinions in respect of any aspect
or consequence of the transactions contemplated hereby or thereby, as CITBC
shall reasonably request.
Each borrowing by the Company hereunder shall constitute a representation and
warranty by the Company and the Guarantor as of the date of such loan or
advance that each of the representations, warranties and covenants contained in
the Financing Agreement (in the case of the Company) and in the Guaranty and
related Security Agreement (in the case of the Guarantor) have been satisfied
and are true and correct, except as the Company and CITBC shall otherwise agree
herein or in a separate writing.
SECTION 3. REVOLVING LOANS
3.1 CITBC agrees, subject to the terms and conditions of this
Financing Agreement from time to time, and within x) the Availability and y)
the Line of Credit, but subject to CITBC's right to make "Overadvances," to
make loans and advances to the Company on a revolving basis (i.e., subject to
the limitations set forth herein, the Company may borrow,
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repay and re-borrow Revolving Loans). Such loans and advances to the Company
shall be in amounts up to the sum of A) eighty-five percent (85%) of the
outstanding Eligible Accounts Receivable of the Company, and B) the lesser of
(i) forty percent (40%) of the Company's Eligible Inventory as determined at
the lower of cost or market, (ii) eighty percent (80%) of the orderly
liquidation value percentage of the Company's Inventory, as determined by
reference to the most recent inventory appraisal performed by or for the
benefit of CITBC, and (iii) five million dollars ($5,000,000) (herein the
"Borrowing Base"). All requests for loans and advances must be received by an
officer of CITBC no later than 11:00 a.m. Pacific time of the day on which such
loans and advances are required. Should CITBC for any reason honor requests
for advances in excess of the limitations set forth herein, such advances shall
be considered "Overadvances" and shall be made in CITBC's sole discretion,
subject to any additional terms CITBC deems necessary.
3.2 The obligation of the Company to repay the principal amount of
the Revolving Loans made pursuant to this Section 3 and to pay interest thereon
shall be evidenced in part by the Promissory Note in the form of Exhibit A
attached hereto. The Company's outstanding Obligations applicable thereto may
be set forth in the balance column on the grid page attached to said note or on
separate ledgers maintained by CITBC. All such advances, whether or not so
recorded, shall be due as part of said note. The executed Promissory Note
shall be delivered to CITBC on the Closing Date.
3.3 (A) The Company hereby represents and warrants that:
each Account is based on an actual and bona fide sale and delivery of goods or
rendition of services to customers, made by the Company in the ordinary course
of its business; the goods and Inventory being sold and the Accounts created
are the exclusive property of the Company and are not and shall not be subject
to any lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever, other than Permitted Encumbrances; the invoices
evidencing such Accounts are in the name of the Company; and the customers of
the Company have accepted the goods or services, and owe and are obligated to
pay the full amounts stated in the invoices according to their terms, without
dispute, offset, defense, counterclaim or contra, except for disputes and other
matters arising in the ordinary course of business with respect to which the
Company has complied with the notification requirements of Paragraph 3.5 of
this Section 3. The Company confirms to CITBC that any and all taxes or fees
relating to its business, its sales, the Accounts or goods relating thereto,
are its sole responsibility and that same will be paid by the Company when due
and that none of said taxes or fees represent a lien on or claim against the
Accounts. The Company also warrants and represents that it is a duly and
validly existing corporation and is qualified to do business in all states
where the failure to so qualify would have an adverse effect on the business of
the Company or the ability of the Company to enforce collection of Accounts due
from customers residing in that state. The Company agrees to maintain its
books and records regarding Accounts in accordance with its current business
practices or as CITBC may reasonably require and agrees that the books and
records of the Company will reflect CITBC's interest in the Accounts. All of
the books and records of the Company will be available to CITBC during normal
business hours, including any records handled or maintained for the Company by
any other person or entity.
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(B) In furtherance of the continuing security interest in
the Company's Accounts, the Company will, upon the creation of Accounts,
execute and deliver to CITBC in such form and manner as CITBC may reasonably
require, solely for CITBC's convenience in maintaining records of collateral,
such confirmatory schedules of Accounts and Inventory as CITBC may reasonably
request, and such other appropriate reports designating, identifying and
describing the Accounts and Inventory as CITBC may reasonably require,
including, without limiting the generality of the foregoing, (i) not later than
fifteen (15) days after the end of each month, an aging of the Company's
Accounts in such form and manner as CITBC may reasonably require but consistent
with the current practices of the Company to the extent reasonably possible;
(ii) not later than six (6) Business Days after the end of each week, an
Availability Confirmation Certificate (in form and substance substantially
identical to Exhibit E hereto); (iii) not later than fifteen (15) days after
the end of each month, an Inventory Confirmation Certificate (in form and
substance substantially identical to Exhibit F hereto); and (iv) not later than
fifteen (15) days after the end of each month, a Borrowing Base Certificate in
form and substance substantially identical to Exhibit G hereto. With respect
to all such reports, the Company will provide to CITBC such additional
information and material as CITBC may reasonably request to effectively
evaluate the Company's Accounts and the collectibility thereof, the mix of the
Company's Inventory and such other information as CITBC may reasonably require
in order to evaluate the eligibility of the Company's Accounts and Inventory
(such as returns, claims, credits, allowances) and information identifying and
describing the Accounts. In addition, upon CITBC's request the Company shall
provide CITBC with copies of agreements with, or purchase orders from, the
Company's customers, and copies of invoices to customers, proof of shipment or
delivery and such other documentation and information relating to said Accounts
and other Collateral as CITBC may reasonably require. Failure to provide CITBC
with any of the foregoing shall in no way affect, diminish, modify or otherwise
limit the security interests granted herein. The Company hereby authorizes
CITBC to regard the Company's printed name or rubber stamp signature on
schedules or invoices as the equivalent of a manual signature by one of the
Company's authorized officers or agents.
3.4 Until CITBC has advised the Company to the contrary after the
occurrence of an Event of Default, the Company may and will enforce, collect
and receive all amounts owing on the Accounts for CITBC's benefit and on
CITBC's behalf, but at the Company's expense; such privilege shall terminate
automatically upon the institution by or against the Company of any proceeding
under any bankruptcy or insolvency law or, at the election of CITBC, upon the
occurrence and during the continuance of any other Event of Default. The
Company shall direct all of its and the Guarantor's account debtors to deposit
any and all proceeds of Collateral into the Depository Account, and any checks,
cash, notes, chattel paper or other instruments or property received by the
Company with respect to any Accounts shall be held by the Company in trust for
CITBC for the benefit of CITBC, separate from the Company's other property and
funds, and (i) in the case of proceeds of the Accounts other than cash or
checks, immediately turned over to CITBC with proper assignments or
endorsements by and (ii) in the case of proceeds of the Accounts consisting of
cash and checks, immediately deposited in the Depository Account. All amounts
received by CITBC in payment of Accounts (either directly or upon transfer from
the Depository Account in accordance with the provisions of the Four Party
Lockbox
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Agreement) will be credited to the Company's Revolving Loan Account on the next
succeeding Business Day after CITBC's receipt of "collected funds" at CITBC's
bank account in New York, New York. No checks, drafts or other instrument
received by CITBC shall constitute final payment to CITBC unless and until such
instruments have actually been collected.
3.5 The Company agrees to notify CITBC promptly of any matters
materially affecting the value, enforceability or collectibility of any Account
and of all material customer disputes, offsets, defenses, counterclaims,
returns, rejections and all reclaimed or repossessed merchandise or goods. The
Company agrees to issue credit memoranda promptly (with duplicates to CITBC
upon request after the occurrence of an Event of Default) upon accepting
returns or granting allowances, and may continue to do so until CITBC has
notified the Company that an Event of Default has occurred and that all future
credits or allowances are to be made only after CITBC's prior written approval.
Upon the occurrence of an Event of Default and until such time as such Event of
Default is waived or cured to CITBC's satisfaction and on notice from CITBC,
the Company agrees that all returned, reclaimed or repossessed merchandise or
goods shall be set aside by the Company, marked with CITBC's name (as secured
party) and held by the Company for CITBC's account.
3.6 CITBC shall maintain a separate account on its books in the
Company's name (herein the "Revolving Loan Account") in which the Company will
be charged with loans and advances made by CITBC to it or for its account, and
with any other Obligations, including any and all costs, expenses and
reasonable attorney's fees which CITBC may incur in connection with the
exercise by or for CITBC of any of the rights or powers herein conferred upon
CITBC, or in the prosecution or defense of any action or proceeding to enforce
or protect any rights of CITBC in connection with this Financing Agreement, the
other Loan Documents or the Collateral assigned hereunder, or any Obligations
owing to CITBC by the Company. The Company will be credited with all amounts
received by CITBC from the Company or from others for the Company's account,
including, as above set forth, all amounts received by CITBC in payment of
assigned Accounts and such amounts will be applied to payment of the
Obligations. In no event shall prior recourse to any Accounts or other
security granted to or by the Company be a prerequisite to CITBC's right to
demand payment of any Obligation. Further, it is understood that CITBC shall
have no obligation whatsoever to perform in any respect any of the Company's
contracts, lease agreements or obligations relating to the Accounts.
3.7 After the end of each month, CITBC shall promptly send the
Company a statement showing the accounting for the charges, loans, advances and
other transactions occurring between CITBC and the Company during that month.
The monthly statements shall be deemed correct and binding upon the Company and
shall constitute an account stated between the Company and CITBC unless CITBC
receives a written statement of the exceptions within thirty (30) days of the
date of the monthly statement and except in the event of manifest error.
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3.8 In the event the total balance of Revolving Loans (after
giving effect to all amounts which may be charged to the Company's Revolving
Loan Account hereunder) exceeds the applicable Borrowing Base or the Line of
Credit (herein the amount of any such excess shall be referred to as the
"Excess"), such Excess shall be due and payable to CITBC for the benefit of
CITBC immediately upon CITBC's demand therefor.
SECTION 4. COLLATERAL
4.1 As security for the prompt payment in full of all loans and
advances made and to be made to the Company from time to time by CITBC pursuant
hereto, as well as to secure the payment in full of the other Obligations, the
Company hereby pledges and grants to CITBC a continuing general lien upon and
security interest in all of its:
(A) present and hereafter acquired Inventory;
(B) present and hereafter acquired Equipment;
(C) present and future Accounts;
(D) present and future Documents of Title;
(E) present and future General Intangibles;
(F) now or hereafter issued capital stock of the
Guarantor and any other subsidiaries;
(G) present and future Other Collateral; and
(H) the proceeds and products of any and all of the
foregoing.
4.2 The security interests granted hereunder shall extend and
attach to:
(A) All Collateral, whether presently in existence or
hereafter arising, and which is owned by the Company or in which the Company
has any interest, whether held by the Company or others for its account, and,
if any Collateral is Equipment, whether the Company's interest in such
Equipment is as owner or lessee or conditional vendee;
(B) All Equipment whether the same constitutes personal
property or fixtures, including, but without limiting the generality of the
foregoing, all dies, jigs, tools, benches, tables, accretions, component parts
thereof and additions thereto, as well as all accessories, motors, engines and
auxiliary parts used in connection with or attached to the Equipment; and
(C) All Inventory and any portion thereof which may be
returned, rejected, reclaimed or repossessed by either CITBC or the Company
from the Company's
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customers, as well as to all supplies, goods, incidentals, packaging materials,
labels and any other items which contribute to the finished goods or products
manufactured or processed by the Company, or to the sale, promotion or shipment
thereof.
Notwithstanding the foregoing, the security interests granted
herein shall not extend to, and the term "Collateral" shall not include, any
property, rights or licenses to the extent the granting of a security interest
therein i) would be contrary to applicable law; or ii) is prohibited by or
would constitute a default under any agreement or document governing such
property, rights or licenses (but only to the extent such prohibition is
enforceable under applicable law); provided however, that, notwithstanding
anything to the contrary contained in this clause ii), the term "Collateral"
shall include all property, rights and licenses to the extent necessary, upon
the occurrence and during the continuance of an Event of Default, to allow
CITBC's completion, in its sole and absolute discretion, of all
work-in-process, and CITBC's sale or other disposition, as secured party in
accordance with the provisions of Paragraph 8.3 of Section 8 of this Financing
Agreement, of all Inventory.
4.3 The Company agrees to safeguard, protect and hold all
Inventory for CITBC's account and make no disposition thereof, provided that
the Company may sell and/or lease its Inventory in the ordinary course of the
business of the Company and as further provided herein. Absent the occurrence
and the continuance of an Event of Default and notice from CITBC to the Company
to the contrary, as provided for below, any Inventory may be sold and shipped
by the Company to its customers in the ordinary course of the Company's
business, on open account and on terms currently being extended by the Company
to its customers and to the Guarantor, provided that all proceeds of all sales
(including cash, accounts receivable, checks, notes, instruments for the
payment of money and similar proceeds) are forthwith transferred, endorsed, and
turned over and delivered to CITBC promptly in accordance with the provisions
of Paragraph 3.4 of Section 3 of this Financing Agreement. CITBC shall have
the right to withdraw this permission at any time upon the occurrence of an
Event of Default and until such time as such Event of Default is waived or
cured to CITBC's satisfaction, in which event no further disposition shall be
made of the Inventory by the Company without CITBC's prior written approval.
Cash sales or sales of Inventory in which a lien upon, or security interest in,
Inventory is retained by the Company shall be made by the Company only with the
approval of CITBC, and the proceeds of such sales or sales of inventory for
cash shall not be commingled with the Company's other property, but shall be
segregated, held by the Company in trust for CITBC as CITBC's exclusive
Collateral, and shall be delivered immediately by the Company to CITBC in the
identical form received by the Company by deposit to the Depository Account.
Upon the sale, exchange, or other disposition of Inventory, as herein provided,
the security interest in the Company's Inventory provided for herein shall,
without break in continuity and without further formality or act, continue in,
and attach to, all proceeds, including any instruments for the payment of
money, accounts receivable, contract rights, documents of title, shipping
documents, chattel paper and all other cash and non-cash proceeds of such sale,
exchange or disposition. As to any such sale, exchange or other disposition,
absent the occurrence and the continuance of the Event of Default, CITBC shall
have a security interest in all of the rights of an unpaid seller, including
stoppage in transit, replevin, rescission and reclamation, and upon the
occurrence and during the continuance
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<PAGE> 24
of an Event of Default, CITBC shall have all such rights of an unpaid seller.
Notwithstanding the foregoing the Company may make cash sales of Inventory,
provided that, without CITBC's prior written consent, (i) the aggregate amount
thereof for the Company during any fiscal year does not exceed $50,000 and (ii)
the proceeds of such sales are turned over to CITBC promptly by deposit to the
Depository Account.
4.4 The Company agrees at its own cost and expense to keep the
Equipment in as good and substantial repair and condition as the same is now or
at the time the lien and security interest granted herein shall attach thereto,
reasonable wear and tear excepted, making any and all repairs and replacements
when and where necessary. The Company also agrees to safeguard, protect and
hold all Equipment for CITBC's account and make no disposition thereof unless
the Company first obtains the prior written approval of CITBC. Any sale,
exchange or other disposition of any Equipment shall only be made by the
Company with the prior written approval of CITBC, and the proceeds of any such
sales shall not be commingled with the Company's other property, but shall be
segregated, held by the Company in trust for the benefit of CITBC as CITBC's
exclusive Collateral, and shall be turned over and delivered to CITBC promptly
in accordance with the provisions of Paragraph 3.4 of Section 3 of this
Financing Agreement. Upon the sale, exchange, or other disposition of the
Equipment, as herein provided, the security interest provided for herein shall,
without break in continuity and without further formality or act, continue in,
and attach to, all proceeds, including any instruments for the payment of
money, accounts receivable, contract rights, documents of title, shipping
documents, chattel paper and all other cash and non-cash proceeds of such
sales, exchange or disposition. As to any such sale, exchange or other
disposition, absent the occurrence and continuance of an Event of Default,
CITBC shall have a security interest in all of the rights of an unpaid seller,
including stoppage in transit, replevin, rescission and reclamation, and upon
the occurrence and during the continuance of an Event of Default, CITBC shall
have all such rights of an unpaid seller. Notwithstanding anything hereinabove
contained to the contrary, the Company may sell, exchange or otherwise dispose
of obsolete Equipment or Equipment no longer needed in the Company's
operations, provided, however, that (a) the then book value of the Equipment so
disposed of does not exceed $500,000 in the aggregate for the Company in any
fiscal year and (b) the proceeds of such sales or dispositions are promptly
delivered to CITBC in accordance with the provisions of Paragraph 3.4 of
Section 3 of this Financing Agreement, except that the Company may retain and
use such proceeds to purchase replacement Equipment within 90 days which the
Company determines in its reasonable business judgment to have a collateral
value at least equal to the Equipment so disposed of or sold; provided,
however, that the aforesaid right shall automatically cease upon the occurrence
of an Event of Default which is not cured within any applicable grace period or
waived.
4.5 The rights and security interests granted to CITBC hereunder
are to continue in full force and effect, notwithstanding the termination of
this Financing Agreement or the fact that the Revolving Loan Account maintained
in the Company's name on the books of CITBC may from time to time be
temporarily in a credit position, until the final payment in full to CITBC of
all Obligations and the termination of this Financing Agreement. Any delay, or
omission by CITBC to exercise any right hereunder, shall not be deemed a waiver
22
<PAGE> 25
thereof, or be deemed a waiver of any other right, unless such waiver shall be
in writing and signed by CITBC. A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future occasion.
4.6 To the extent that the Obligations are now or hereafter
secured by any assets or property other than the Collateral or by the
guarantee, endorsement, assets or property of any other person, then CITBC
shall have the right in its sole discretion to determine which rights,
security, liens, security interests or remedies CITBC shall at any time pursue,
foreclose upon, relinquish, subordinate, modify or take any other action with
respect to, without in any way modifying or affecting any of them, or any of
CITBC's rights hereunder.
4.7 Any reserves or balances to the credit of the Company and any
other property or assets of the Company in the possession of CITBC may be held
by CITBC as security for any Obligations and applied in whole or partial
satisfaction of such Obligations when due. The liens and security interests
granted herein and any other lien or security interest CITBC may have in any
other assets of the Company, shall secure payment and performance of all now
existing and future Obligations. CITBC may in its discretion charge any or all
of the Obligations to the Revolving Loan Account of the Company when due.
4.8 The Company shall give to CITBC for the benefit of CITBC,
and/or shall cause the appropriate party to give to CITBC, from time to time
such pledge or security agreements with respect to General Intangibles (now or
hereafter acquired), Other Collateral (now or hereafter acquired), capital
stock (now or hereafter issued) of the Guarantor or any other subsidiary of the
Company and Investments (to the extent contemplated by Section 5, Paragraph
5.10(h) of this Financing Agreement) as CITBC shall require to obtain valid
first liens thereon. In furtherance of the foregoing, the Company shall
provide at least thirty (30) days' prior written notice to CITBC before opening
any deposit accounts or Other Collateral consisting of money market accounts
(to the extent not classified under the UCC as deposit accounts), or applying
for or acquiring United States patents, trademarks, trade names, service marks,
copyrights, brand names, trade names, logos and other trade designations
subsequent to the Closing Date and the Company shall execute such documentation
as CITBC may reasonably require to obtain and perfect its lien thereon.
SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS
5.1 The Company hereby warrants and represents and/or covenants
that: i) the fair value of the Company's assets exceeds the fair value of the
Company's liabilities; ii) the Company is generally able to pay its debts as
they become due and payable; and iii) the Company does not have unreasonably
small capital to carry on its business as it is currently conducted absent
extraordinary and unforeseen circumstances. The Company further warrants and
represents that: a) except for the Permitted Encumbrances, the security
interests granted herein constitute and shall at all times constitute the first
and only liens on the Collateral; b) SCHEDULE 1 to the Disclosure Letter
correctly and completely sets forth the Company's and the Guarantor's full
corporate names, chief executive offices and the
23
<PAGE> 26
location of all Collateral (other than (i) Inventory temporarily in the
possession of subcontractors engaged in subassembly manufacturing for the
Company in the ordinary course of business and other Inventory Off Premises in
the ordinary course of business; and (ii) Equipment such as laptop computers
and other office equipment in the possession of employees, and after filing of
financing statements in the applicable filing clerks office in California and
Illinois, this Financing Agreement, to the best of the Company's knowledge
after due inquiry, creates a valid, perfected, first priority lien on the
Collateral, except for (i) Permitted Encumbrances, (ii) tangible property
located outside of the United States and (iii) Inventory Off Premises and
Equipment located in the United States but outside California and Illinois; c)
except for the Permitted Encumbrances, the Company is or will be at the time
additional Collateral is acquired by it, the absolute owner of the Collateral
with full right to pledge, sell, consign, transfer and create a security
interest therein, free and clear of any and all claims or liens in favor of
others; d) the Company will at its expense forever warrant and, at CITBC's
request, defend the Collateral from any and all claims and demands of any other
person other than the Permitted Encumbrances; e) the Company will not grant,
create or permit to exist, any lien upon or security interest in the
Collateral, or any proceeds thereof, in favor of any other person other than
the holders of the Permitted Encumbrances; f) the representation and warranties
in the Company's Availability Confirmation Certificates, Inventory Confirmation
Certificates and Borrowing Base Certificates (in each case, except only as
updated on an interim basis in accordance with notices given as required by the
provisions of Section 5, Paragraph 5.2, of this Financing Agreement) are true
and correct; and g) the Equipment does not comprise a part of the Inventory of
the Company and the Equipment is and will only be used by the Company in its
business and will not be held for sale or lease, or removed from its premises,
or otherwise disposed of by the Company without the prior written approval of
CITBC except as otherwise permitted in Paragraph 4.4 of Section 4 of this
Financing Agreement. The Company further warrants and represents that (w)
Schedule 2 to the Disclosure Letter contains a true, complete and correct list
of all trade names used by the Company; (x) Schedule 3 to the Disclosure Letter
contains a true, complete and correct list of all issued and applied-for
patents, and all registered and unregistered trademarks and registered
copyrights used by the Company; (y) Schedule 4 to the Disclosure Letter
contains a true, complete and correct list of all of the Company's and the
Guarantor's deposit accounts and Other Collateral consisting of money market
accounts (to the extent not classified under the UCC as deposit accounts) (i)
all of which are maintained at Wells Fargo Bank, except as set forth on such
schedule, and (ii) all of which (except for accounts maintained at Wells Fargo
which are either (i) the Depository Account, (ii) deposit accounts which
contain only amounts deducted from employees' compensation and held in trust by
the Company for such employees pursuant to the Company's cafeteria benefit
plan, or (iii) deposit accounts in which CITBC shall hold a first priority,
perfected security interest pursuant to documentation reasonably acceptable to
CITBC) shall at no time contain more than $50,000 in the aggregate; and (z)
Schedule 7 to the Disclosure Letter contains a true, correct and complete list
of the Company's leased locations and the monthly rent for each such location.
5.2 The Company agrees to maintain books and records pertaining to
the Collateral in accordance with its current business practices or in such
detail, form and scope
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<PAGE> 27
as CITBC shall reasonably require. The Company agrees that CITBC or its agents
may enter upon the Company's premises at any time with reasonable prior notice
during normal business hours, and from time to time, for the purpose of
inspecting the Collateral, and any and all records pertaining thereto. The
Company agrees to afford CITBC thirty (30) days prior written notice of any
change in the location of any Collateral, other than to locations, that as of
the date hereof, are known to CITBC and with respect to which CITBC has filed
financing statements and otherwise fully perfected its liens thereon; provided,
however, that such prior written notice shall not be required with respect to
changes in location of (i) Equipment such as laptop computers and other office
equipment in the possession of employees in the ordinary course of business;
provided, however, that at any time the book value of all such Equipment in the
possession of employees shall not exceed $100,000, (ii) Inventory in the
possession of third parties (other than Sonic AIR and Manhattan Transportation,
Inc.) in the ordinary course of the Company's business, including (A) Inventory
in the possession of subcontractors engaged in subassembly manufacturing for
the Company, (B) Inventory provided to customers or potential customers for the
purpose of demonstrations and evaluations, (C) Inventory provided to software
developers for beta testing of software products, (D) Inventory temporarily
located at trade shows or conventions, and (E) Inventory provided to third
parties for certification purposes (all such Inventory enumerated in subparts
(A) through (E) of this subclause (ii) being herein referred to as "Inventory
Off Premises"); provided, however, that at any time the book value of all
Inventory Off Premises shall not exceed $3,000,000, (iii) Inventory in the
possession of Manhattan Transportation, Inc. at the location therefor set forth
on Schedule 1 to the Disclosure Letter consisting of Eligible Inventory, and
(iv) Inventory consisting of service replacement parts to the extent delivered
to Sonic AIR at the location therefor set forth on Schedule 1 to the Disclosure
Letter; provided, however, that at any time the book value of all such
Inventory in the possession of Sonic AIR shall not exceed $1,500,000.
Notwithstanding anything to the contrary contained in this Financing Agreement,
the Company shall notify CITBC immediately each time the Inventory consisting
of Inventory Off Premises increases by $250,000 (measured by the book value
thereof) in any period between delivery of Availability Confirmation
Certificates, Inventory Confirmation Certificates or Borrowing Base
Certificates by the Company to CITBC pursuant to the provisions of Paragraphs
3.3(b)(ii), (iii) or (iv) of Section 3 of this Financing Agreement. The
Company is also to advise CITBC promptly, in sufficient detail, of any material
adverse change relating to the type, quantity or quality of the Collateral or
to the security interests granted to CITBC therein.
5.3 The Company agrees to: execute and deliver to CITBC, from
time to time, solely for CITBC's convenience in maintaining a record of the
Collateral, such written statements, and schedules as CITBC may reasonably
require, designating, identifying or describing the Collateral pledged to CITBC
hereunder. The Company's failure, however, to promptly give CITBC such
statements, or schedules shall not affect, diminish, modify or otherwise limit
CITBC's security interests in the Collateral.
5.4 The Company agrees to comply with the requirements of all
state and federal laws in order to grant to CITBC valid and perfected first
security interests in the Collateral, subject only to the Permitted
Encumbrances. CITBC is hereby authorized by the Company
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<PAGE> 28
to file any financing statements covering the Collateral whether or not the
Company's signature appears thereon. The Company agrees to do whatever CITBC
may reasonably request, from time to time, by way of: searching records;
filing notices of liens, financing statements, amendments, renewals and
continuations thereof; cooperating with CITBC's custodians; keeping stock
records; transferring proceeds of Collateral to CITBC's possession; and
performing such further acts as CITBC may reasonably require in order to effect
the purposes of this Financing Agreement.
5.5 (A) The Company agrees to maintain insurance on the Real
Estate (with respect to leasehold interests and otherwise to the extent
required by the applicable lease provisions, and also with respect to tenant
improvements installed by the Company), Equipment and Inventory (wherever
located) under such policies of insurance, with such insurance companies, in
such reasonable amounts and covering such insurable risks as are at all times
reasonably satisfactory to CITBC. CITBC acknowledges and accepts the insurance
coverage in effect as of the Closing Date as being satisfactory (solely with
respect to the Closing Date). All policies covering the Equipment and
Inventory are, subject to the rights of any holders of Permitted Encumbrances
holding claims senior to CITBC, to be made payable to CITBC, for the benefit of
CITBC in case of loss, under a standard non-contributory "mortgagee," "lender"
or "secured party" clause and are to contain such other provisions as CITBC may
require to fully protect CITBC's interest in the Inventory and Equipment and to
any payments to be made under such policies. Upon CITBC's request, true,
correct and complete copies of all such policies are to be delivered to CITBC,
premium prepaid, with the loss payable endorsement in CITBC's favor, and shall
provide for not less than thirty (30) days prior written notice to CITBC of the
exercise of any right of cancellation. At the Company's request, or if the
Company fails to maintain such insurance, CITBC may arrange for such insurance,
but at the Company's expense and without any responsibility on CITBC's part
for: obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims. Upon the occurrence of
an Event of Default which is not waived or cured to CITBC's satisfaction, CITBC
shall, subject to the rights of any holders of Permitted Encumbrances holding
claims senior to CITBC, have the sole right, in the name of CITBC or the
Company, to file claims under any insurance policies, to receive, receipt and
give acquittance for any payments that may be payable thereunder, and to
execute any and all endorsements, receipts, releases, assignments,
reassignments or other documents that may be necessary to effect the
collection, compromise or settlement of any claims under any such insurance
policies.
(B) (I) In the event of any loss or damage by fire or
other casualty, insurance proceeds relating to Inventory shall first reduce the
Company's Revolving Loan(s), provided that upon the occurrence and during the
continuance of an Event of Default CITBC may apply such proceeds as it may
reasonably deem appropriate;
(II) In the event any part of any of the Company's
Equipment is damaged by fire or other casualty and the insurance proceeds for
such damage or other casualty (the "Proceeds") is less than or equal to
$100,000, at the Company's option the Company may apply such proceeds to the
restoration or replacement thereof or CITBC shall promptly apply such Proceeds
to reduce such Company's outstanding balances under the
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<PAGE> 29
Revolving Loan Account (if applicable), provided that upon the occurrence and
during the continuance of an Event of Default CITBC may apply such proceeds as
it may reasonably deem appropriate.
(III) So long as an Event of Default has not
occurred (which has not been waived or cured to CITBC's satisfaction), if the
Company has sufficient business interruption insurance to replace the lost
profits resulting from damage to any of the Company's facilities (owned or
leased), and the Proceeds are in excess of $100,000, the Company may elect (by
delivering written notice to CITBC) to replace, repair or restore such
Equipment to substantially the equivalent condition prior to such fire or other
casualty as set forth herein. If the Company does not, or cannot, elect to use
the Proceeds as set forth above, CITBC may, subject to the rights of any
holders of Permitted Encumbrances holding claims senior to CITBC, apply the
Proceeds to the payment of the Obligations in such manner and in such order as
CITBC may reasonably elect.
(IV) If the Company elects to use the Proceeds for
the repair, replacement or restoration of any Equipment, and there is then no
Event of Default, i) proceeds of insurance on Equipment in excess of $100,000
will be applied to the reduction of the Revolving Loans (or held as credit
balance for the Company), and ii) CITBC may set up a reserve against
Availability for an amount equal to the proceeds referred to in clause (i)
hereof. The reserve will be reduced dollar-for-dollar upon receipt of
non-cancelable executed purchase orders, delivery receipts or contracts for the
replacement, repair or restoration of Equipment or the Real Estate and
disbursements in connection therewith.
(V) The Company agrees to pay any reasonable
costs, fees or expenses which CITBC may reasonably incur in connection
herewith.
5.6 The Company agrees to pay, when due, all taxes, assessments,
claims and other charges (herein "taxes") lawfully levied or assessed upon the
Company or any of the Collateral (unless: (i) such taxes are being diligently
contested in good faith by the Company by appropriate proceedings and (ii) the
Company establishes such reserves as may be required by GAAP or, in the
alternative or in addition thereto, CITBC establishes an Availability Reserve
in such amount as CITBC may determined in its reasonable discretion); provided,
however, that if any lien shall be claimed thereunder x) for taxes due the
United States of America or any state thereof having similar tax priority
status, or y) which in CITBC's reasonable opinion would create a valid
obligation having priority over the rights granted to CITBC herein, CITBC may,
on the Company's behalf, pay such taxes, and the amount thereof shall be an
Obligation secured hereby and due to CITBC on demand.
5.7 The Company: (A) agrees to comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body or
official, which the failure to comply with would have a material and adverse
impact on the Collateral, or any material part thereof, or on the operation of
the Company's business; provided that the Company may contest any acts, rules,
regulations, orders and directions of such bodies or officials in any
reasonable manner which will not, in CITBC's reasonable opinion, materially and
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<PAGE> 30
adversely effect CITBC's rights or priority in the Collateral; (B) shall
qualify to do business or shall provide CITBC with reasonable evidence that it
is exempt from any such qualifications and/or filing requirement for any state
requiring the filing of a business activity report or similar document in order
for the Company to file a claim or other judicial remedy with respect to any of
its account debtors in such state, provided that the aggregate amount of such
Accounts in any such state exceed $100,000; and (C) agrees to comply with all
environmental statutes, acts, rules, regulations or orders as presently
existing or as adopted or amended in the future applicable to the ownership
and/or use of its real property and operation of its business which the failure
to comply with would have a material and adverse impact on the Collateral, or
any material part thereof, or on the operation of the business of the Company.
The Company hereby indemnifies CITBC, and agrees to defend and hold CITBC
harmless from and against any and all loss, damage, claim, liability, injury or
expense which CITBC may sustain or incur (other than solely as a result of the
physical actions of CITBC on the Company's premises) in connection with: any
claim or expense asserted against CITBC as a result of any environmental
pollution, hazardous material or environmental clean-up of any of the Company's
Real Estate or any claim or expense which results from any of the Company's
operations (including, but not limited to, any of the Company's off-site
disposal practices) and any claim or expense relating to any of the Company's
Inventory and/or Equipment, and the Company further agrees that this
indemnification shall survive termination of this Financing Agreement as well
as the payment of all Obligations or amounts payable hereunder, provided that
the Company shall have no liability for matters arising out of the gross
negligence or willful misconduct of CITBC. The Company shall not be deemed to
have breached any provision of Paragraph 5.7(c) if (i) the failure to comply
with the requirements of Paragraph 5.7(c) resulted from good faith error or
innocent omission, (ii) the Company promptly commences and diligently pursues a
cure of such breach, (iii) such breach is cured within fifteen (15) business
days following the Company's receipt of notice of such failure, and (iv) such
failure has not resulted in a material adverse effect on the business,
financial condition or operations of the Company or on the Collateral. Upon
receipt by the Company of any notice of non-compliance with any applicable
environmental rules or regulations of any required expenditures for compliance,
any spill or omission or other regulated "event," or any claim resulting from
any of the Company's business or practices or relating to the Collateral, the
Company shall establish such reserves as may be required by GAAP or, in the
alternative or in addition thereto, CITBC may establish an Availability Reserve
in such amount as CITBC may require in its reasonable discretion.
5.8 Until termination of this Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Company agrees that, unless
CITBC shall have otherwise consented in writing, the Company will furnish to
CITBC: (a) within ninety-five (95) days after the end of each fiscal year of
the Company, an audited Consolidated Balance Sheet and Consolidating Balance
Sheets attached thereto and certified by the chief financial officer of the
Company as at the close of such year, and statements of operations, cash flows
and stockholders' equity of the Company and all subsidiaries for such year,
each audited by Ernst & Young LLP or by independent public accountants selected
by the Company and satisfactory to CITBC; (b) within sixty (60) days after the
end of each fiscal year of the Company, preliminary financial statements of the
type required under clause (a)
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<PAGE> 31
immediately preceding; (c) within forty-five (45) days after the end of the
first, second and third fiscal quarters, a Consolidated Balance Sheet and
Consolidating Balance Sheet as at the end of such period and statements of
operations, cash flows and stockholders' equity of the Company and its
subsidiaries, certified by an authorized financial or accounting officer of the
Company; (d) within thirty (30) days after the end of each month a Consolidated
Balance Sheet as at the end of such period, statements of operations, cash
flows and stockholders' equity of the Company and all subsidiaries for such
period, all certified by an authorized financial or accounting officer of the
Company; and (e) from time to time, such further information regarding the
business affairs and financial condition of the Company and all subsidiaries as
CITBC may reasonably request, including without limitation (i) the accountant's
management practice letter and (ii) annual cash flow projections in form
satisfactory to CITBC. Each financial statement which the Company is required
to submit hereunder must be accompanied by an officer's certificate, signed by
the President, Vice President, Controller, or Treasurer, pursuant to which any
one such officer must certify that: (w) the financial statement(s) fairly
represent(s) the Company's financial condition in all material respects at the
end of the particular accounting period, as well as the Company's operating
results during such accounting period, subject to year-end audit adjustments;
(x) during the particular accounting period (i) there has been no Default or
Event of Default under this Financing Agreement, provided however that, if any
such officer has knowledge that any such Default or Event of Default, has
occurred during such period, the existence of and a detailed description of
same shall be set forth in such officer's certificate and (ii) the Company has
not received any notice of cancellation with respect to its property insurance
policies; and either (y) at all times during the period covered by the
accompanying financial statement when there have been Revolving Loans
outstanding, the Company's Availability has been $7,000,000 or more, and at all
times covered by the accompanying financial statement when there have been no
Revolving Loans outstanding, the sum of the Company's Availability and
cash-on-hand has been $7,000,000 or more (in either case, "Satisfactory
Availability"); or (z) If Satisfactory Availability has not been maintained at
all times during the period covered by the accompanying financial statement,
the Company is in compliance with the provisions of Paragraph 5.9 of this
Section 5.
5.9 If the Company has not maintained Satisfactory Availability at
all times, commencing at the month end next preceding the fiscal month in which
Satisfactory Availability has first not been maintained, the Company shall
maintain, at each fiscal month end during the quarterly periods below, a Net
Worth of not less than:
29
<PAGE> 32
<TABLE>
<CAPTION>
Fiscal Months Ending
During Fiscal Quarter Ending: Minimum Net Worth
---------------------------- -----------------
<S> <C>
March 1997 $20,000,000
June 1997 16,000,000
September 1997 14,000,000
December 1997 13,000,000
March 1998 13,000,000
June 1998 14,000,000
September 1998 (and
each fiscal quarter thereafter) 15,000,000
</TABLE>
5.10 Until termination of the Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Company agrees that, without
the prior written consent of CITBC, except as otherwise herein provided, the
Company will not:
(A) Grant, create or permit to exist any lien, mortgage,
pledge, charge, security interest, encumbrance or
judgment (whether as a result of a purchase money or
title retention transaction, or other security
interest, or otherwise) on any of its assets or
goods, whether real, personal or mixed, whether now
owned or hereafter acquired, except for the Permitted
Encumbrances;
(B) Incur or create any Indebtedness other than the
Permitted Indebtedness;
(C) Borrow any money on the security of the Collateral
from sources other than CITBC;
(D) Sell, lease, assign, transfer or otherwise dispose of
i) Collateral, except as otherwise specifically
permitted by this Financing Agreement, or ii) either
all or substantially all of the Company's assets
which do not constitute Collateral;
(E) Merge, consolidate or otherwise alter or modify its
corporate name, trade names, principal place of
business or chief executive office, corporate
structure, status or existence, or become a
subsidiary of any other entity such that such other
entity owns fifty percent or more of the Company's
voting securities or has the power, over time, to
elect one- half or more of the Company's directors or
enter into or engage in any operation or activity
materially different from that presently being
conducted by the Company or acquire all or
substantially all of the stock or assets of any
corporation or entity, except that (i) the Company
may change its corporate name, trade names or
principal place of business and/or chief executive
office, provided that in any instance of a changed
corporate name or principal place of business
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<PAGE> 33
and/or chief executive office, (x) the Company shall
give CITBC thirty (30) days prior written notice
thereof and (y) the Company shall execute and deliver
prior to or simultaneously with any such action any
and all documents and agreements requested by CITBC
(including, without limitation, any and all UCC
financing statements to confirm the continuation and
preservation of all security interests and liens
granted to CITBC hereunder) and (ii) so long as the
Company does not become subject to additional
liabilities (including known contingent liabilities,
valued at the full potential exposure thereof) in
excess of $500,000, any subsidiary of the Company may
merge with and into the Company so long as the
Company is the surviving entity;
(F) Assume, guarantee, endorse, or otherwise become
liable upon the obligations of any person, firm,
entity or corporation, except (i) by the endorsement
of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of
business, and (ii) guarantees which are (a)
unsecured, (b) not themselves guaranteed by any of
the Company's subsidiaries and (c) in an aggregate
amount outstanding at any one time which, when
aggregated with Indebtedness permitted under clause
(ix) of the definition of "Permitted Indebtedness"
outstanding at such time, does not exceed $1,000,000;
(G) Declare or pay any dividend of any kind on, or
purchase, acquire, redeem or retire, any of the
capital stock or equity interest, of any class
whatsoever, whether now or hereafter outstanding, and
the Company shall not make any cash payments pursuant
to any now or hereafter issued warrant agreements and
any "put" or "call" rights thereunder, except that
(I) absent the occurrence of a Default or Event of
Default the Company may redeem capital stock owned by
its retired, deceased or terminated officers and
employees, which the Company is contractually
obligated to redeem, provided that, in no event shall
the aggregate amount of such redemptions exceed
$100,000 in the aggregate in any fiscal year, and
further provided that after any such redemption, (X)
the Company is not then in breach or violation of
this Financing Agreement, (Y) after giving effect to
such payment, no Default or Event of Default has
occurred hereunder, and (Z) the Company has
sufficient working capital to pay its debts as they
come due, (II) the Company may issue dividends on its
common stock payable solely in its common stock, and
(III) the Company may allow to remain outstanding
rights under its existing shareholder's rights plan
as in effect on the date hereof and, absent the
occurrence and continuance of a Default or Event of
Default, the Company may redeem such rights in
accordance with the terms thereof; provided, however,
that anything to the contrary in this clause (iii)
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notwithstanding, the Company's redemption of such
rights shall be for an amount less than or equal to
$200,000;
(H) Make any advance or loan to, or any investment in
(collectively an "Investment"), any firm, entity,
person or corporation, except (I) loans and advances
to employees of the Company in the ordinary course of
business for travel and entertainment, (II)
Investments existing on the Closing Date disclosed on
Schedule 8 to the Disclosure Letter (provided that
such Investments shall constitute Collateral, and
that CITBC shall receive a first priority perfected
security interest in such Investments on the Closing
Date), (III) Investments consisting of the
endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary
course of the Company's business, (IV) Investments
consisting of employee relocation loans in the
ordinary course of the Company's business, (V)
Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of
delinquent obligations of, and disputes with,
customers or suppliers arising in the ordinary course
of business (provided that such Investments shall
constitute Collateral, and that CITBC shall receive a
first priority perfected security interest therein at
such time as such Investments arise), (VI)
Investments pursuant to or arising under currency
arrangements or interest rate arrangements entered
into in the ordinary course of the Company's business
and with CITBC's prior written consent, (VII)
Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions to,
customers and suppliers, in the ordinary course of
the Company's business (provided that such
Investments shall constitute Collateral, and that
CITBC shall receive a first priority perfected
security interest therein at such time as such
Investments arise), (VIII) Investments consisting of
deposit accounts (provided that such Investments
shall constitute Collateral, and that CITBC shall
receive a first priority perfected security interest
(A) on the Closing Date, in all such deposit accounts
in existence as of such date, and (B) in any future
deposit accounts contemporaneously with the Company's
opening thereof), (IX) so long as no Revolving Loans
are outstanding (i.e., it shall be a condition
precedent to the making of any Revolving Loan that
such Investments first be liquidated), Investments
consisting of (A) marketable direct obligations
issued or unconditionally guaranteed by the United
States or any agency or any state thereof maturing
within one (1) year from the date of acquisition
thereof, (B) commercial paper maturing no more than
270 days from the date of creation thereof and having
the highest rating obtainable from either Standard &
Poor's Corporation or Moody's Investors Service,
Inc., (C) certificates of deposit maturing no more
than one (1) year from the date of Investment
therein, and (D) any Investments
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made with the prior written approval of CITBC, and
(X) so long as no Revolving Loans are outstanding
(i.e., it shall be a condition precedent to the
making of any Revolving Loans that such Investments
first be liquidated), other Investments not otherwise
permitted by Section 5.10(h) not exceeding One
Million Dollars ($1,000,000) in the aggregate
outstanding at any time;
(I) Engage in any transactions with the Guarantor except
the sale by the Company to the Guarantor of finished
goods Inventory in the ordinary course of the
Company's business as heretofore conducted on terms
no more favorable to the Guarantor than such terms
pertaining in the ordinary course of business as
heretofore conducted; provided, however, that
notwithstanding the foregoing, the Guarantor may (i)
declare and pay any lawfully available dividend to
the Company and (ii) repay any loans or advances
owing to the Company as of the date of this Financing
Agreement;
(J) Have any subsidiaries other than the Guarantor and
NetFRAME Foreign Sales Corp., a Bahamas corporation
(the "FISC");
(K) Allow possession of tangible Collateral to be other
than by the Company at 1545-1565 Barber Lane,
Milpitas, California 95035 except (I) Collateral not
to exceed $100,000 in book value located outside of
the United States at locations set forth on Schedule
1 to the Disclosure Letter; (II) Equipment consisting
of laptop computers and similar office equipment in
the possession of employees which in the aggregate
has a book value not in excess of $100,000 and
Equipment located in other offices of the Company set
forth on Schedule 7 to the Disclosure Letter; (III)
Inventory consisting of service replacement parts not
to exceed $1,500,000 in book value located in the
ordinary course of the Company's business at the
location of Sonic AIR set forth on Schedule 1 to the
Disclosure Letter; (iv) Inventory consisting of
Eligible Inventory in the possession of Manhattan
Transportation, Inc. at 47572 Kato Road, Fremont,
California 94538; and (v) Inventory consisting of
Inventory Off Premises not to exceed $3,000,000 in
book value;
(L) Maintain or permit the Guarantor to maintain deposit
accounts or Other Collateral consisting of money
market accounts (whether properly classified under
the UCC as deposit accounts, certificated or
uncertificated securities, general intangibles,
contract rights or otherwise), other than the deposit
accounts set forth on Schedule 4 to the Disclosure
Letter; provided, however, that notwithstanding the
foregoing, the Company and/or the Guarantor may
maintain deposit accounts (other than (i) the
Depository Account, (ii) deposit accounts which
contain only amounts deducted from employees'
compensation
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and held in trust by the Company pursuant to the
Company's cafeteria benefit plan, and (iii) deposit
accounts in which CITBC shall have a first priority,
perfected security interest pursuant to documentation
reasonably acceptable to CITBC), so long as the
aggregate amount in such deposit accounts shall not
exceed $50,000 at any time; or
(M) Suffer or allow the FISC to have any assets, incur
any liabilities, or engage in any business whatsoever;
or
(N) Instruct or permit the Guarantor to instruct any of
their respective account debtors to remit payment on
the Accounts other than to the Box (as defined in the
Four Party Lockbox Agreement).
5.11 If the Company has not maintained Satisfactory Availability at
all times, commencing with the fiscal year in which Satisfactory Availability
has first not been maintained, without the prior written consent of CITBC, the
Company will not contract for, purchase, make expenditures for, lease pursuant
to a Capital Lease or otherwise incur obligations with respect to Capital
Expenditures (whether subject to a security interest or otherwise) during any
fiscal year in the aggregate amount in excess of $4,000,000.
5.12 The Company agrees to advise CITBC in writing of: a) all
expenditures (actual or anticipated) in excess of $150,000 for x) environmental
clean-up, y) environmental compliance or z) environmental testing; and b) any
notices the Company receives from any local, state or federal authority
advising the Company of any environmental liability (real or potential)
stemming from any of the Company's operations, its premises, its waste disposal
practices, or waste disposal sites used by the Company and to provide CITBC
with copies of all such notices.
5.13 The Company represents and warrants to CITBC that no statement
or information contained in any certificate or other document or written
information heretofore or hereafter furnished to CITBC by or on behalf of the
Company (i) contains any untrue statement of a material fact, or (ii) omits to
state a material fact necessary in order to make the statements contained
therein not misleading.
5.14 The Company represents and warrants to CITBC that the chief
executive office of NetFRAME International Incorporated is located at 1545
Barber Lane, Milpitas, California 95035 and that the major executive office in
the United States of NetFRAME Foreign Sales Corp. is located at 1545 Barber
Lane, Milpitas, California 95035, and the Company covenants to give thirty (30)
days prior written notice to CITBC of any change in either of the foregoing
locations.
SECTION 6. INTEREST, FEES AND EXPENSES
6.1 (a) Interest on the Revolving Loans shall be payable monthly
as of the end of each month in an amount equal to the Chase Bank Rate plus
one-half percent (0.50%)
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per annum on the average of the net balances owing by the Company to CITBC in
the Company's Revolving Loan Account at the close of each day during such
month. In the event of any change in said Chase Bank Rate, the rate hereunder
shall change, as of the first of the month following any change, so as to
remain one-half percent (0.50%) above the Chase Bank Rate. The rate hereunder
shall be calculated based on a 360-day year. CITBC shall be entitled to charge
the Company's Revolving Loan Account at the rate provided for herein when due
until all Obligations have been paid in full.
(b) Subject to compliance with each of the conditions set
forth below, and for periods ending subsequent to March 31, 1998, the Company
will be entitled to interest rate concessions (each an "Interest Rate
Concession") as outlined below:
(x) if the Company maintains an EBITDA of
$3,500,000 to $5,000,000 for any consecutive twelve
(12) month period tested at the end of each fiscal
quarter, the interest rate applicable in subparagraph
(a) above will be the Chase Bank Rate plus
one-quarter percent (0.25%) per annum as of the
effective date indicated below;
(y) if the Company maintains an EBITDA of more
than $5,000,000 for any consecutive twelve (12) month
period tested at the end of each fiscal quarter, the
interest rate applicable in subparagraph (a) above
will be the Chase Bank Rate per annum as of the
effective date indicated below; and
(z) provided further that in the event that the
Company shall, at any time after the effective date
of any Interest Rate Concession hereunder, fail to
maintain the EBITDA (calculated and tested in
accordance with the provisions hereof) required to
achieve any such Interest Rate Concession, the rate
in subparagraph (a) above (or subparagraph (b)(x), if
the Company still qualifies for such Interest Rate
Concession) shall thereafter apply.
In addition to the foregoing requirements, each
Interest Rate Concession and the continuance thereof
is subject to the Company's compliance with each of
the following conditions:
i) timely receipt of the Company's financial
statements (as more fully provided in Section
5, Paragraph 5.8 hereof) at all times when
any Interest Rate Concession otherwise would
be in effect; and
ii) the absence of any Default or Event of
Default A) on the date of receipt of such
financial statements, B) on the effective
date of any Interest Rate Concession, and C)
during the period that any Interest Rate
Concession otherwise would be in effect.
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The effective date for any Interest Rate Concession
shall be the first day of the first calendar month
following the date upon which all conditions to such
Interest Rate Concession shall have been satisfied.
6.2 The Company shall reimburse or pay CITBC, as the case may be,
promptly upon demand, for any and all: (i) Out-of-Pocket Expenses and (ii)
Documentation Fees.
6.3 Upon the last Business Day of each month, commencing with
March 31, 1997, the Company shall pay CITBC for the benefit of CITBC the Line
of Credit Fee.
6.4 To induce CITBC to enter into this Financing Agreement and to
extend to the Company the Revolving Loans, the Company shall pay to CITBC a
Loan Facility Fee in the amount of $112,500, payable upon execution of this
Financing Agreement, provided that the $50,000 Commitment Fee previously paid
by the Company to CITBC shall be credited against the foregoing Loan Facility
Fee.
6.5 On the Closing Date and each anniversary of the Closing Date
thereafter, the Company shall pay to CITBC the Collateral Management Fee.
6.6 The Company shall pay promptly upon demand CITBC's standard
charges for, and the fees and expenses of, CITBC personnel used by CITBC for
reviewing the books and records of the Company and for verifying, testing,
protecting, safeguarding, preserving or disposing of all or any part of the
Collateral; provided, however, that the foregoing shall not be payable until
the occurrence of an Event of Default if the Company is paying a Collateral
Management Fee.
6.7 The Company hereby (i) confirms that it is liable for any and
all Obligations hereunder, and (ii) authorizes CITBC to charge the Company's
Revolving Loan Account or other such other account maintained with CITBC with
the amount of any and all Obligations and/or payments due hereunder as such
payments become due. The Company confirms that any charges which CITBC may so
make to the Company's Revolving Loan Account as herein provided will be made as
an accommodation to the Company and solely at CITBC's discretion.
6.8 In the event that CITBC shall have determined in the exercise
of its reasonable business judgement subsequent to the Closing Date that any
applicable law, rule, regulation or guideline regarding capital adequacy, or
change therein, or any change in the interpretation or administration thereof,
in each case, which is announced after the date hereof, or compliance by CITBC
or any financial institution which may become a Lender hereunder (for purposes
of this Section 6, the term "Lender" shall include CITBC or any such Lender and
any corporation or bank controlling CITBC or such Lender) with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on CITBC's or any such Lender's capital
as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking
into consideration CITBC's or any such
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Lender's policies with respect to capital adequacy) by an amount reasonably
deemed by the Lender to be material, then, from time to time, the Company shall
pay no later than five (5) days following demand to CITBC such additional
amount or amounts as will compensate CITBC or any such Lender for such
reduction; provided that the Company shall have no liability for payment of
amounts attributable to periods more than 180 days prior to the date of
delivery of the certificate specified below. In determining such amount or
amounts, such Lender may use any reasonable averaging or attribution methods.
The protection of this Paragraph 6.8 shall be available to such Lenders
regardless of any possible contention of invalidity or inapplicability with
respect to the applicable law, regulation or condition. A certificate of CITBC
or any Lender setting forth such amount or amounts as shall be necessary to
compensate CITBC or any such Lender with respect to this Paragraph 6.8 and the
calculation thereof in reasonable detail when delivered to the Company shall be
conclusive on the Company absent manifest error. Notwithstanding anything in
this paragraph to the contrary, in the event any Lender has exercised its
rights pursuant to this paragraph, and subsequent thereto determines that the
additional amounts paid by the Company in whole or in part exceed the amount
which CITBC or any Lender actually required pursuant hereto, the excess, if
any, shall be returned to the Company by such Lender.
6.9 In the event that any applicable law, treaty or governmental
regulation, or any change therein or in the interpretation or application
thereof, in each case, which is announced after the date hereof, or compliance
by CITBC or any Lender with any request or directive (whether or not having the
force of law) from any central bank or other financial, monetary or other
authority, shall:
(A) subject CITBC or any Lender to any tax of any kind
whatsoever with respect to this Financing Agreement or change the basis of
taxation of payments to CITBC or such Lender of principal, fees, interest or
any other amount payable hereunder or under any other documents (except for
changes in the rate of tax on the overall net income of such Lender by the
federal government or the jurisdiction in which it maintains its principal
office);
(B) impose, modify or hold applicable any reserve,
special deposit, assessment or similar requirement against assets held by, or
deposits in or for the account of, advances or loans by, or other credit
extended by, any office CITBC or of such Lender by reason of or in respect to
this Financing Agreement and the Loan Documents, including (without limitation)
pursuant to Regulation D of the Board of Governors of the Federal Reserve
System; or
(C) impose on CITBC or such Lender any other condition
with respect to this Financing Agreement or any other document,
and the result of any of the foregoing is to increase the cost to the Lender of
making, renewing or maintaining its loans hereunder by an amount that such
Lender deems to be material in the exercise of its reasonable business
judgement or to reduce the amount of any payment (whether of principal,
interest or otherwise) in respect of any of the loans by an
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amount that CITBC or such Lender deems to be material in the exercise of its
reasonable business judgement, then, in any case the Company shall pay CITBC or
such Lender, within five (5) days following demand, such additional cost or
such reduction, as the case may be; provided that the Company shall have no
liability for payment of amounts attributable to periods more than 180 days
prior to the date of delivery of the certificate specified below. CITBC or
such Lender shall certify the amount of such additional cost or reduced amount
to the Company and the calculation thereof in reasonable detail and such
certification shall be conclusive upon the Company absent manifest error.
Notwithstanding anything in this paragraph to the contrary, in the event CITBC
or any Lender has exercised its rights pursuant to this paragraph, and
subsequent thereto determines that the additional amounts paid by the Company
in whole or in part exceed the amount which CITBC or the Lender actually
required pursuant hereto, the excess, if any, shall be returned to the Company
by CITBC or such Lender.
SECTION 7. POWERS
The Company hereby constitutes CITBC or any person or agent CITBC may
designate as its attorney-in-fact, at the Company's cost and expense, to
exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Company's Obligations to CITBC have been
paid in full:
(A) To receive, take, endorse, sign, assign and deliver,
all in the name of CITBC or the Company, any and all checks, notes, drafts, and
other documents or instruments relating to the Collateral;
(B) To receive, open and dispose of all mail addressed to
the Company and to notify postal authorities to change the address for delivery
thereof to such address as CITBC may designate;
(C) To request from customers indebted on Accounts at any
time, in the name of CITBC or the Company or that of CITBC's designee,
information concerning the amounts owing on the Accounts;
(D) To transmit to customers indebted on Accounts notice
of CITBC's interest therein and to notify customers indebted on Accounts to
make payment directly to CITBC for the Company's account; and
(E) To take or bring, in the name of CITBC or the
Company, all steps, actions, suits or proceedings deemed by CITBC necessary or
desirable to enforce or effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the
powers set forth in (b), (d) and (e) above may only be exercised after the
occurrence of an Event of Default and until such time as such Event of Default
is waived in writing by CITBC or cured to CITBC's satisfaction. In addition,
absent the occurrence of a Default or Event of Default,
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the powers set forth in (c) above will only be exercised in the name of the
Company or a certified public accountant designed by CITBC.
SECTION 8. EVENTS OF DEFAULT AND REMEDIES
8.1 Notwithstanding anything hereinabove to the contrary, CITBC
may terminate this Financing Agreement immediately upon the occurrence of any
of the following (herein "Events of Default"):
(A) cessation of the business of the Company, or the
calling of a meeting of the creditors of the Company
for purposes of compromising its debts and
obligations;
(B) the failure of the Company to generally meet its
debts as they mature;
(C) the commencement by or against the Company of any
bankruptcy, insolvency, arrangement, reorganization,
receivership or similar proceedings under any federal
or state law (and in the case of such involuntary
proceedings, such proceeding is not dismissed within
60 days);
(D) breach by the Company of any warranty, representation
or covenant contained herein (other than those
referred to in subparagraph (e) below), the Loan
Documents or in any other written agreement between
the Company and CITBC, provided that such breach by
the Company of any of the warranties, representations
or covenants referred in this clause (d) shall not be
deemed to be an Event of Default unless and until
such breach shall remain unremedied to CITBC's
satisfaction for a period of ten (10) days from the
date of notice of such breach;
(E) breach by the Company of any warranty, representation
or covenant of Section 3, Paragraphs 3.3 (other than
the third sentence of Paragraph 3.3(a)) and 3.4;
Section 4, Paragraphs 4.3 and 4.4 (other than the
first sentence of Paragraph 4.4); Section 5,
Paragraphs 5.1, 5.5, 5.6, and 5.9 through 5.12;
(F) failure of the Company to pay any of the Obligations
within five (5) Business Days of the due date
thereof, provided that nothing contained herein shall
prohibit CITBC from charging such amounts to the
Company's Revolving Loan Account on the due date
thereof;
(G) the Company shall i) engage in any "prohibited
transaction" as defined in ERISA, ii) have any
"accumulated funding deficiency" as defined in ERISA,
iii) have any Reportable Event as defined in
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ERISA, iv) terminate any Plan, as defined in ERISA or
v) be engaged in any proceeding in which the Pension
Benefit Guaranty Corporation shall seek appointment,
or is appointed, as trustee or administrator of any
Plan, as defined in ERISA, and with respect to this
subparagraph (h) such event or condition x) remains
uncured for a period of thirty (30) days from date of
occurrence and y) could, in the reasonable opinion of
CITBC, subject the Company to any tax, penalty or
other liability material to the business, operations
or financial condition of the Company;
(H) without the prior written consent of CITBC, the
Company shall fail to deliver or cause to be
delivered to CITBC as Collateral any now or hereafter
issued capital stock of the Guarantor, the FISC or
any other subsidiary;
(I) upon the occurrence of an event of default pursuant
to any document or agreement of the Company
evidencing Indebtedness of the Company in excess of
the amount of $200,000; or
(J) Upon the occurrence of an Event of Default under or
the termination of the Guaranty, or upon the
occurrence of a Default under the Security Agreement
of even date herewith executed and delivered by the
Guarantor to CITBC.
8.2 Upon the occurrence of a Default and/or an Event of Default,
CITBC may, at its option, declare that, all loans, advances and extensions of
credit provided for in Paragraph 3.1 of Section 3 of this Financing Agreement
shall be thereafter in CITBC's sole discretion and the obligation of CITBC to
make Revolving Loans shall cease unless such Default or Event of Default is
waived in writing by CITBC or cured to CITBC's satisfaction, and upon the
occurrence of an Event of Default CITBC may, at its option, declare that: I)
all Obligations shall become immediately due and payable; II) CITBC may charge
the Company the Default Rate of Interest on all then outstanding or thereafter
incurred Obligations in lieu of the interest provided for in Section 6 of this
Financing Agreement; provided that in respect to clause "(ii)" above a) CITBC
has given the Company written notice of the Event of Default, provided,
however, that no notice is required if the Event of Default is the Event listed
in Paragraphs 8.1(a), (b) or (c) of this Section 8 and b) the Company shall
have failed to cure the Event of Default within ten (10) days after x) CITBC's
notice thereof to the Company or y) immediately upon the occurrence of the
Event of Default listed in Paragraph 8.1(a), (b) or (c) of this Section 8; and
III) CITBC may immediately terminate this Financing Agreement upon notice to
the Company, provided, however, that no notice of termination is required if
the Event of Default is the Event listed in Paragraph 8.1(a), (b) or (c) of
this Section 8. The exercise of any option is not exclusive of any other
option which may be exercised at any time by CITBC.
8.3 Immediately upon the occurrence of any Event of Default, CITBC
may, at its option, and to the extent permitted by law: (A) remove from any
premises where same
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may be located any and all documents, instruments, files and records, and any
receptacles or cabinets containing same, relating to the Accounts, or CITBC may
use, at the Company's expense, such of the Company's personnel, supplies or
space at the Company's places of business or otherwise, as may be necessary to
properly administer and control the Accounts or the handling of collections and
realizations thereon; (B) bring suit, in the name of the Company or CITBC, and
generally shall have all other rights respecting said Accounts, including
without limitation the right to: accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Company or CITBC; (C) sell,
assign and deliver the Collateral and any returned, reclaimed or repossessed
merchandise, with or without advertisement, at public or private sale, for
cash, on credit or otherwise, at CITBC's sole option and discretion, and CITBC
may bid or become a purchaser at any such sale, free from any right of
redemption, which right is hereby expressly waived by the Company; (D)
foreclose the security interests created herein by any available judicial
procedure, or to take possession of any or all of the Inventory and Equipment
and/or Other Collateral without judicial process, and to enter any premises
where any Inventory and Equipment and/or Other Collateral may be located for
the purpose of taking possession of or removing the same and (E) exercise any
other rights and remedies provided in law, in equity, by contract or otherwise.
CITBC shall have the right, without notice or advertisement, to sell, lease, or
otherwise dispose of all or any part of the Collateral whether in its then
condition or after further preparation or processing, in the name of any of the
Company or CITBC, or in the name of such other party as CITBC may designate,
either at public or private sale or at any broker's board, in lots or in bulk,
for cash or for credit, with or without warranties or representations, and upon
such other terms and conditions as CITBC in its sole discretion may deem
advisable, and CITBC shall have the right to purchase at any such sale. If any
Inventory and Equipment shall require rebuilding, repairing, maintenance or
preparation, CITBC shall have the right, at its option, to do such of the
aforesaid as is necessary, for the purpose of putting the Inventory and
Equipment in such saleable form as CITBC shall deem appropriate. The Company
agrees, at the request of CITBC, to assemble the Inventory and Equipment and to
make it available to CITBC at premises of the Company or elsewhere and to make
available to CITBC the premises and facilities of the Company for the purpose
of CITBC's taking possession of, removing or putting the Inventory and
Equipment in saleable form. However, if notice of intended disposition of any
Collateral is required by law, it is agreed that ten (10) days notice shall
constitute reasonable notification and full compliance with the law. The net
cash proceeds resulting from CITBC's exercise of any of the foregoing rights
(after deducting all charges, costs and expenses, including reasonable
attorneys' fees) shall be applied by CITBC to the payment of the Company's
Obligations, whether due or to become due, in such order as CITBC may elect,
and the Company shall remain liable to CITBC and CITBC for any deficiencies,
and CITBC in turn agrees to remit to the Company or its successors or assigns,
any surplus resulting therefrom. The enumeration of the foregoing rights is
not intended to be exhaustive and the exercise of any right shall not preclude
the exercise of any other rights, all of which shall be cumulative. Any
mortgage, deed of trust or assignment on the Real Estate shall govern the
rights and remedies of CITBC with respect thereto.
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SECTION 9. TERMINATION
Except as otherwise permitted herein, the Company and CITBC may
terminate this Financing Agreement and the Line of Credit only as of the
initial or any subsequent Anniversary Date and then only by giving the other at
least sixty (60) days prior written notice of termination. Notwithstanding the
foregoing, CITBC may terminate the Financing Agreement immediately upon the
occurrence of an Event of Default, provided, however, that if the Event of
Default is an event listed in Paragraph 8.1(a) (b) (c) of Section 8 of this
Financing Agreement, CITBC may regard the Financing Agreement as terminated and
notice to that effect is not required. This Financing Agreement, unless
terminated as herein provided, shall automatically continue from Anniversary
Date to Anniversary Date. Notwithstanding the foregoing, the Company may
terminate this Financing Agreement and the Line of Credit prior to any
applicable Anniversary Date upon sixty (60) days' prior written notice to CITBC
and payment of any applicable Early Termination Fee. All Obligations shall
become due and payable as of any termination hereunder or under Section 8
hereof and, pending a final accounting, CITBC may withhold any balances in the
Company's Revolving Loan Account (unless supplied with an indemnity
satisfactory to CITBC) to cover all of the Company's Obligations, whether
absolute or contingent. All of CITBC's, liens and security interests shall
continue after any termination until all Obligations have been paid and
satisfied in full.
SECTION 10. MISCELLANEOUS
10.1 The Company hereby waives diligence, demand, presentment and
protest and any notices thereof as well as notice of nonpayment. No delay or
omission of CITBC or the Company to exercise any right or remedy hereunder,
whether before or after the happening of any Event of Default, shall impair any
such right or shall operate as a waiver thereof or as a waiver of any such
Event of Default. No single or partial exercise by CITBC of any right or
remedy precludes any other or further exercise thereof, or precludes any other
right or remedy.
10.2 THIS WRITTEN AGREEMENT, THE LOAN DOCUMENTS AND THE OTHER
DOCUMENTS REFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES, SUPERSEDE ANY PRIOR AGREEMENTS AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES HERETO, CAN ONLY BE MODIFIED IN WRITING SIGNED BY THE
PARTIES HERETO, AND SHALL BIND THE RESPECTIVE PARTIES HERETO AND THEIR
RESPECTIVE SUCCESSORS AND ASSIGNS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
AMONG THE PARTIES.
10.3 In no event shall the Company upon demand by CITBC for
payment of any indebtedness relating hereto, by acceleration of the maturity
thereof, or otherwise, be obligated to pay interest and fees in excess of the
amount permitted by law. Regardless of any provision herein or in any
agreement made in connection herewith, CITBC shall never
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<PAGE> 45
be entitled to receive, charge or apply, as interest on any indebtedness
relating hereto, any amount in excess of the maximum amount of interest
permissible under applicable law. It is the intent of the Company and CITBC to
conform strictly to all applicable state and federal usury laws. All
agreements between the Company and CITBC whether now existing or hereafter
arising and whether written or oral, are hereby expressly limited so that in no
contingency or event whatsoever, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount contracted for, charged or
received by CITBC for the use, forbearance, or detention of the money loaned
hereunder or otherwise, or for the payment or performance of any covenants or
obligation contained herein or in any other document evidencing, securing or
pertaining to the Obligations evidenced hereby which may be legally deemed to
be for the use, forbearance or detention of money, exceed the maximum amount
which the Company is legally entitled to contract for, charge or collect under
applicable state or federal law. If from any circumstance whatsoever
fulfillment of any provision hereof or of such other documents, at the time
performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then the obligation to be fulfilled shall
be automatically reduced to the limit of such validity, and if from any such
circumstance CITBC shall ever receive as interest or otherwise an amount in
excess of the maximum that can be legally collected, then such amount which
would be excessive interest shall be applied to the reduction of the principal
indebtedness hereof and any other amounts due with respect to the Obligations
evidenced hereby, but not to the payment of interest and if such amount which
would be excessive interest exceeds the Obligations and all other non-interest
indebtedness described above, then such additional amount shall be refunded to
the Company. This paragraph shall control every other provision hereof and of
any other agreement made in connection herewith.
10.4 If any provision hereof or of any other agreement made in
connection herewith is held to be illegal or unenforceable, such provision
shall be fully severable, and the remaining provisions of the applicable
agreement shall remain in full force and effect and shall not be affected by
such provision's severance. Furthermore, in lieu of any such provision, there
shall be added automatically as a part of the applicable agreement a legal and
enforceable provision as similar in terms to the severed provision as may be
possible.
10.5 EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. THE
COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO
SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.
10.6 Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed to
have been validly served, given or delivered when hand delivered (by messenger,
overnight delivery service or otherwise) or sent by telegram, telex or telecopy
(facsimile), addressed to the party to be notified as follows:
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<PAGE> 46
(A) if to CITBC, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue, 3rd Floor
Los Angeles, California 90071
Attn: Regional Manager
Telecopy: (213) 613-2588
(B) if to the Company at:
c/o NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, California 95035
Attn: Chief Financial Officer
Telecopy: (408) 474-4013
or to such other address as any party may designate for itself by like notice.
10.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have caused this Financing
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above. This Financing Agreement shall take
effect as of the date set forth above after
44
<PAGE> 47
being accepted below by an officer of CITBC after which, CITBC shall forward to
the Company a fully executed original for its files.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.,
as Lender
By_____________________________________
Vice President
Read and Agreed to:
NETFRAME SYSTEMS INCORPORATED
By_______________________________
Title:
Executed and Accepted at
Los Angeles, CA
THE CIT GROUP/BUSINESS CREDIT, INC.,
as Lender
By_____________________________________
Vice President
45
<PAGE> 48
EXHIBIT A
REVOLVING CREDIT NOTE
$15,000,000 March ____, 1997
FOR VALUE RECEIVED, the undersigned, NETFRAME SYSTEMS INCORPORATED (the
"Company"), hereby absolutely and unconditionally promises to pay to the order
of THE CIT GROUP/BUSINESS CREDIT, INC. (herein "CITBC"), with offices located
in Los Angeles, California, in lawful money of the United States of America and
in immediately available funds, the principal amount of Fifteen Million Dollars
($15,000,000), or such other principal amount advanced pursuant to Section 3,
Paragraph 3.1 of the Financing Agreement (as herein defined). Such Revolving
Loan advances shall be repaid on a daily basis as a result of the application
of the proceeds of collections of the Accounts and the making of additional
Revolving Loans as described in Section 3 of the Financing Agreement. The
Revolving Loans may be borrowed, repaid and reborrowed by the Company. A final
balloon payment in an amount equal to the outstanding aggregate balance of
principal and interest remaining unpaid, if any, under this Note as shown on
the books and records of CITBC shall be due and payable on the termination of
the Financing Agreement, as set forth in Section 9 thereof.
The Company further absolutely and unconditionally promises to pay to the order
of CITBC at said office, interest, in like money, on the unpaid principal
amount owing hereunder from time to time from the date hereof on the dates and
at the rates specified in Section 6, of the Financing Agreement.
If any payment on this Note becomes due and payable on a day other than a
business day, the maturity thereof shall be extended to the next succeeding
business day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
This Note is the Promissory Note referred to in the Financing Agreement, dated
as of the date hereof, as the same may be amended and restated and in effect
from time to time, among the Company and CITBC (the "Financing Agreement"), and
is subject to, and entitled to, all of the terms, provisions and benefits
thereof and is subject to optional and mandatory prepayment, in whole or in
part, as provided therein. All capitalized terms used herein shall have the
meaning provided therefor in the Financing Agreement, unless otherwise defined
herein.
The date and amount of the advance(s) made hereunder may be recorded on the
grid page or pages which are attached hereto and hereby made part of this Note
or the separate ledgers maintained by CITBC. The aggregate unpaid principal
amount of all advances made pursuant hereto may be set forth in the balance
column on said grid page or such ledgers maintained by CITBC. All such
advances, whether or not so recorded, shall be due as part of this Note.
<PAGE> 49
The Company confirms that any amount received by or paid to CITBC in connection
with the Financing Agreement and/or any balances standing to its credit on any
of its accounts on CITBC's books under the Financing Agreement may in
accordance with the terms of the Financing Agreement be applied in reduction of
this Note, but no balance or amounts shall be deemed to effect payment in whole
or in part of this Note unless CITBC shall have actually charged such account
or accounts for the purposes of such reduction or payment of this Note.
Upon the occurrence of any one or more of the Events of Default specified in
the Financing Agreement or upon termination of the Financing Agreement, all
amounts then remaining unpaid on this Note may become, or be declared to be,
immediately due and payable as provided in the Financing Agreement.
NetFRAME Systems Incorporated
By:____________________________________
Title:
<PAGE> 50
Date: March 27, 1997
To: THE CIT GROUP/BUSINESS CREDIT, INC.
Address: 300 South Grand Avenue, 3rd Floor
Los Angeles, California 90071
Attention: Regional Manager
GUARANTY
Re: NetFRAME Systems Incorporated (the "Company")
Address: 1545 Barber Lane
Milpitas, California 95035
Gentlemen:
Reference is made to that certain Financing Agreement dated March 27,
1997, as amended (herein the "Agreement") between you and the above-named
Company. The undersigned (herein the "Guarantor") hereby unconditionally
guarantees and agrees to be liable for the full and indefeasible payment and
performance when due of all now existing and future indebtedness, obligations
or liabilities of the Company to you, whether direct or indirect, absolute or
contingent, secured or unsecured, arising under or in connection with the
Agreement as now written or as amended or supplemented hereafter, including,
without limitation, all Obligations (as defined in the Agreement) of the
Company to you. Further, the Guarantor agrees to pay to you on demand the
amount of all expenses (including reasonable attorneys' fees and such
attorneys' out- of-pocket disbursements) incurred by you in collecting or
attempting to collect any of the Company's obligations to you, whether from the
Company, or from any other obligor, or from the Guarantor, or in realizing upon
any collateral; and agrees to pay any interest at the highest lawful rate on
all amounts payable to you hereunder, even if such amount cannot be collected
from the Company. (All of the aforementioned obligations, liabilities,
expenses and interest are hereinafter collectively called the "Obligations").
To the extent you receive payment on account of Obligations guaranteed hereby,
which payment is thereafter set aside or required to be repaid by you in whole
or in part, then, to the extent of any sum not finally retained by you
(regardless of whether such sum is recovered from you by the Company, its
trustee, or any other party acting for, on behalf of or through the Company or
its representative), the Guarantor's obligation to you under this Guaranty, as
amended, modified or supplemented, shall remain
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<PAGE> 51
in full force and effect (or be reinstated) until the Guarantor has made
payment to you therefor, which payment shall be due upon demand.
This Guaranty is executed as an inducement to you to make loans or
advances to the Company or otherwise to extend credit or financial
accommodations to the Company, or to enter into or continue a financing
arrangement with the Company, and is executed in consideration of your doing or
having done any of the foregoing. The Guarantor agrees that any of the
foregoing shall be done or extended by you in your sole discretion, and shall
be deemed to have been done or extended by you in consideration of and in
reliance upon the execution of this Guaranty, but that nothing herein shall
obligate you to do any of the foregoing. The Guarantor hereby acknowledges
that it is wholly owned by the Company, engages solely in the business of
selling outside of the United States and Canada products manufactured by the
Company, and has a close business and financial relationship with the Company
and that, therefore, the aforesaid accommodation will result in a material and
direct business and economic benefit to the Guarantor.
Notice of acceptance of this Guaranty, the making of loans or
advances, or the extension of credit under the Agreement, the amendment,
execution or termination of the Agreement or any other agreements in connection
therewith, and presentment, demand, protest, notice of protest, notice of
non-payment and all other notices to which the Guarantor may be entitled
(whether under this Guaranty or the Agreement), and your reliance on this
Guaranty are hereby waived. The Guarantor also waives notice of and any right
of prior consent to: changes in terms or extensions of the time of payment,
increases in principal amount, rate of interest or fees, the taking and
releasing of collateral or guarantees (including the release of any other
guarantor) and the settlement, compromise or release of any Obligations, and
agree that, as to the Guarantor, the amount of the Obligations shall not be
diminished by any of the foregoing. The Guarantor also agrees that you need
not attempt to collect any Obligations from the Company or any other guarantor
or any other obligor or to realize upon any collateral, but may require the
Guarantor to make immediate payment of Obligations to you when due or at any
time thereafter. You shall not be liable for failure to collect Obligations
from any party or to realize upon any collateral or security therefor, or any
part thereof, or for any delay in so doing, nor shall you be under any
obligation to take any action whatsoever with regard thereto. Notwithstanding
any modification, discharge, or extension of the Obligations (as defined in the
Agreement) or any amendment, modification or stay of your rights which may
occur in any bankruptcy or reorganization case or proceeding concerning the
Company whether permanent or temporary, and whether assented to by you, the
Guarantor hereby agrees that the Guarantor shall be obligated to pay the
Obligations and discharge the Guarantor's other obligations in accordance with
the terms of this Guaranty in effect on the date hereof. The Guarantor
understands and acknowledges that by virtue of this Guaranty, the Guarantor has
specifically assumed any and all risks of a bankruptcy or reorganization case
or proceeding with respect to the Company.
This Guaranty is absolute, unconditional and continuing, regardless of
the validity, regularity or enforceability of any of the Obligations or the
fact that a security interest or lien in any collateral or security therefor
may not be enforceable by you or may otherwise
2
<PAGE> 52
be subject to equities or defenses or prior claims in favor of others or may be
invalid or defective in any way and for any reason, including any action, or
failure to act, on your part. Payment by the Guarantor shall be made to you at
your office from time to time on demand as Obligations become due, and one or
more successive or concurrent actions may be brought hereon against the
Guarantor, either in the same action or in separate actions. In the event any
claim or action, or action on any judgment, based on this Guaranty, is made or
brought against the Guarantor, the Guarantor agrees not to assert against you
any set-off or counterclaim which the Company may have, and, further, the
Guarantor agrees not to deduct, set-off, or seek to counterclaim for or recoup,
any amounts which are or may be owed by you to the Guarantor, or for any loss
of contribution from any other guarantor. Furthermore, in any litigation based
on the Guaranty in which you and the Guarantor shall be adverse parties, the
GUARANTOR HEREBY WAIVES TRIAL BY JURY and further waives any right to interpose
any defense based upon any statute of limitations or any claim of laches and
waives the performance of each and every condition precedent to which the
Guarantor might otherwise be entitled by law. The Guarantor hereby consents to
the in personam jurisdiction of, and to venue in, the courts of the State of
California for, and of the United States of America located in, the County of
Los Angeles, State of California. In the event that you bring any action or
suit in any court of record of the State of California or of the United States
to enforce any or all liabilities of the Guarantor hereunder, service of
process may be made on the Guarantor by mailing a copy of the summons to the
Guarantor at the address below set forth.
All sums at any time to the credit of the Guarantor and any property
of the Guarantor on which you at any time have a lien or security interest, or
of which you at any time have possession, shall secure payment and performance
of all Obligations, including, without limitation, all property of the
Guarantor constituting Collateral (as defined in that certain Security
Agreement of even date herewith made by the Guarantor in your favor
(hereinafter the "Security Agreement").
The Guarantor hereby represents, warrants and covenants to you that at
all times when any Obligations are outstanding or when the Agreement between
you and the Company remains in effect:
(1) The execution and delivery of this Guaranty are not,
and the performance of this Guaranty will not be, in contravention of or in
conflict with (a) the Guarantor's organizational documents, including articles
of incorporation or by-laws, (b) any agreement, indenture or undertaking to
which the Guarantor is a party or by which any of its property is bound or
affected, or (c) any order, writ, injunction, decree or demand of any court or
other governmental or regulatory authority;
(2) The execution, delivery and performance of this
Guaranty will not cause any security interest, lien or other encumbrance to be
created or imposed upon any of the Guarantor's property (except liens in your
favor pursuant to the Security Agreement);
3
<PAGE> 53
(3) There is no litigation or other proceeding pending
or, to the best of the Guarantor's knowledge, threatened against, or affecting,
the Guarantor or the properties of the Guarantor; and
(4) The Guarantor has copies of and is fully similar with
each and every document executed and delivered to you by the Company.
The Guarantor hereby absolutely subordinates, both in right and time
of payment, any present or future indebtedness of the Company to the Guarantor
to the prior indefeasible payment and discharge in full of all Obligations
owing from the Company to you. If, whether or not at your request, the
Guarantor shall collect, enforce or receive payment from the Company upon any
subordinated indebtedness of the Company to the Guarantor while the Agreement
is in effect or while any Obligations of the Company to you are outstanding,
any such sums shall be received by the Guarantor as trustee for you and shall
be paid over to you on account of or as security for the Obligations of the
Company to you, but without reducing or affecting in any manner the liability
of the Guarantor under the other provisions of this Guaranty. The Guarantor
shall file in any bankruptcy or other proceeding in which the filing of claims
is required by law, all claims which the Guarantor may have against the Company
relating to any indebtedness of the Company to the Guarantor and does hereby
assign to you all rights of the Guarantor thereunder. If the Guarantor does
not file any such claim, you, as attorney-in-fact for the Guarantor, are hereby
authorized to do so in the name of the Guarantor or, in your discretion, to
assign the claim to a nominee and to cause proof of claim to be filed in the
name of your nominee. The foregoing power of attorney is coupled with an
interest and cannot be revoked. You or your nominee shall have the sole right
to accept or reject any plan proposed in any such proceeding and to take any
other action which a party filing a claim is entitled to do. In all such
cases, whether in administration, bankruptcy or otherwise, the person or
persons authorized to pay such claim shall pay, and the Guarantor does hereby
authorize such person or persons to pay, to you the amount payable on any such
claim and, to the full extent necessary for that purpose, the Guarantor hereby
assigns to you all of the Guarantor's rights to any such payments or
distributions to which the Guarantor would otherwise be entitled. Any
instruments now or hereafter evidencing any subordinated indebtedness of the
Company to the Guarantor shall be marked with a legend that the same are
subject to this Guaranty and, if you so request, shall be delivered to you.
Upon the occurrence of any of the following events:
(1) any Event of Default under, or termination of, the
Agreement;
(2) failure of the Guarantor to observe or perform any
agreements, representations, warranties or covenants contained herein or in the
Security Agreement; or
(3) (a) dissolution or cessation of the Guarantor's
business;
(b) calling of a meeting of the creditors of the
Guarantor for the purposes of compromising the debts of the
Guarantor;
4
<PAGE> 54
(c) failure of the Guarantor to meet its debts as
they mature;
(d) commencement by the Guarantor of any
bankruptcy, insolvency, arrangement, reorganization,
receivership or similar proceedings under federal or state law
(herein collectively "Insolvency Proceeding");
(e) commencement of any Insolvency Proceeding
against the Guarantor, which is not dismissed within sixty
(60) days,
then, the liability of the Guarantor for the entire Obligations shall mature.
This Guaranty may be terminated by the Guarantor only as of any
Anniversary Date (as defined in the Agreement) and then only upon actual
receipt at least ninety (90) days prior to such Anniversary Date by one of your
officers of written notice of termination sent by registered or certified mail;
provided, however, that the Guarantor shall remain bound hereunder, and this
Guaranty shall continue in full force and effect, with respect to any and all
Obligations created or arising prior to the effective date of such termination
and with respect to any and all extensions, renewals or modifications of said
preexisting Obligations. Termination by the Guarantor shall not relieve the
Guarantor from liability for any post-termination collection expenses or
interest. This is a continuing agreement and written notice as above provided
shall be the only means of termination, notwithstanding the fact that for
certain periods of time there may be no Obligations owing to you by the
Company.
Your books and records showing the account between you and the Company
shall be admissible in evidence in any action or proceeding as prima facie
proof of the items therein set forth. Your monthly statements rendered to the
Company shall be binding upon the Guarantor (whether or not the Guarantor
received copies thereof) and shall constitute an account stated between you and
the Company unless you shall have received a written statement of the Company's
exceptions within thirty (30) days after the statement was mailed to the
Company. It is not and shall not be necessary for you to inquire into the
power of the Company or its officers, employees or agents purporting to act on
its behalf, and any Obligations made or created in reliance upon the professed
exercise of such powers shall be guaranteed hereunder.
The Guarantor expressly waives any and all rights of subrogation,
reimbursement, indemnity, recourse, exoneration, contribution or any other
claim which it may now or hereafter have against the Company or any other
person directly or contingently liable for the Obligations guaranteed
hereunder, or against or with respect to the Company's property (including,
without limitation, property collateralizing its Obligations to you) arising
from the existence or performance of this Guaranty, or from your actions or
inactions with respect to the Company and the Company's property. Without
limiting the generality of the foregoing, the Guarantor hereby waives all
rights and benefits which might otherwise be available to the Guarantor under
California Civil Code Sections 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899
and 3433.
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<PAGE> 55
This Guaranty embodies the whole agreement of the parties and may not
be modified except in writing, and no course of dealing between you and the
Guarantor shall be effective to change or modify this Guaranty. Your failure
to exercise any right hereunder shall not be construed as a waiver of the right
to exercise the same or any other right at any other time and from time to time
thereafter, and all such rights shall be considered as cumulative rather than
alternative. No knowledge of any breach or other nonobservance by the
Guarantor of the terms and provisions of this Guaranty shall constitute a
waiver thereof, nor a waiver of any obligations to be performed by the
Guarantor hereunder.
This Guaranty may be assigned by you and shall be for your benefit and
for the benefit of any of your assignees or transferees, and shall cover any
Obligations owed to you at the time of assignment or transfer as well as any
and all future Obligations, loans, advances or extensions of credit made to the
Company by, or otherwise owed by the Company to, such assignee or transferee.
This instrument is executed and given in addition to, and not in
substitution, reduction, replacement, or satisfaction of, any other
endorsements or guarantees of the Obligations, now existing or hereafter
executed by others in your favor.
When used in this Guaranty, all pronouns shall, wherever applicable,
be deemed to include the singular and plural as well as the masculine,
feminine, and neuter genders. This agreement shall inure to the benefit of you,
your successors and assigns and any parent, subsidiary or affiliate of yours;
shall be binding upon the Guarantor and upon its heirs, executors,
administrators, successors and assigns; and shall pertain to the Company and
its successors and assigns.
This Guaranty may be executed in any number of counterparts, each of
which when so executed shall be deemed an original and such counterparts shall
together constitute but one and the same document.
This Guaranty shall be governed by and construed in accordance with
the laws of the State of California.
6
<PAGE> 56
IN WITNESS WHEREOF the Guarantor has executed and delivered this
Guaranty effective as of the date above set forth.
NETFRAME INTERNATIONAL INCORPORATED
By_____________________________________
Its____________________________________
Address:_______________________________
_______________________________________
_______________________________________
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<PAGE> 57
EXHIBIT C
March 27, 1997
The CIT Group/Business Credit, Inc.
300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Re: FINANCING AGREEMENT, DATED AS OF MARCH 27, 1997,
BETWEEN NETFRAME SYSTEMS INCORPORATED AND
THE CIT GROUP/BUSINESS CREDIT, INC.
Ladies and Gentlemen:
We have acted as special counsel to (i) NetFRAME Systems Incorporated,
a Delaware corporation ("Company"), in connection with the execution and
delivery of the Financing Agreement dated as of March 27, 1997 (the "Financing
Agreement"), between Company and The CIT Group/Business Credit, Inc.
("Lender"), and (ii) NetFRAME International, Inc., a Delaware corporation
("International") in connection with the execution and delivery of the Guaranty
dated as of March 27, 1997, executed by International in favor of Lender (the
"Guaranty"). Company and International are sometimes referred to herein as the
"Credit Parties." All capitalized terms used but not defined herein shall have
the respective meanings assigned to such terms in the Financing Agreement.
In rendering the opinions expressed below, we have examined executed
originals or copies of the following documents:
(a) the Financing Agreement;
(b) the Revolving Credit Note, dated as of the date hereof, executed
by Company in favor of Lender (the "Note");
(c) the Stock Pledge Agreement, dated as of the date hereof,
executed by Company in favor of Lender (the "Pledge Agreement");
(d) the Guaranty;
(e) the Security Agreement, dated as of the date hereof, executed by
International in favor of Lender (the "Security Agreement");
(f) the Trademark Security Agreement, dated as of the date hereof,
executed by Company in favor of Lender;
(g) (i) a certificate of the Secretary of State of the State of
Delaware, dated March 20, 1997, with respect to the standing of
Company as a corporation incorporated under the laws of the
State of Delaware; and (ii) a Certificate of the Secretary of
State of the State of California dated March 26, 1997, with
respect to the standing of Company as a foreign corporation
qualified to do business in the State of California;
(h) a certificate of the Secretary of State of the State of
Delaware, dated March 20, 1997, with
<PAGE> 58
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 2
respect to the standing of International as a corporation
incorporated under the laws of the State of Delaware;
(i) the certificates of the Secretary and certain officers of each
Credit Party as to certain factual matters;
(j) the copy of the UCC-1 financing statement attached as Annex A
hereto (the "UCC-1 Financing Statement");
(k) each of the documents to be listed as exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
(a copy of which list of exhibits is attached hereto as Annex
B), including therein pursuant to the requirements of clauses
(2), (4), (9) or (10) of Item 601(b) of Regulation S-K (other
than those which have expired, terminated or are otherwise no
longer in effect) (collectively, the "Reviewed Agreements").
In addition, we have examined and relied upon such corporate records of
Company as we have deemed necessary or appropriate for purposes of the opinions
expressed below. We have also relied upon and obtained from public officials
and officers of Company such other certificates and assurances as we consider
necessary for the rendering of this opinion. The documents referred to in
paragraphs (a) through (f) above are sometime referred to herein as the
"Transaction Documents."
With your permission and without any verification by us, we have
assumed the following for purposes of rendering the opinions set forth herein:
(i) The genuineness of all signatures, the legal capacity of all
natural persons to execute and deliver documents, the
authenticity and completeness of documents submitted to us as
originals and the completeness and conformity with authentic
original documents of all documents submitted to us as copies,
and that all documents, books and records made available to us
by Company are accurate and complete.
(ii) That there are no agreements or understandings between or among
Company, Lender or third parties which would expand, modify or
otherwise affect the terms of the Transaction Documents or the
respective rights or obligations of the parties thereunder.
(iii) That all parties to the Transaction Documents (other than
Company) have filed all required franchise tax returns, if any,
under the California Revenue & Taxation Code.
(iv) That the Transaction Documents have been duly authorized,
executed and delivered by Lender to the extent Lender is
contemplated to be a party thereto and that Lender has full
power, authority and legal right to enter into and perform the
terms and conditions of the Transaction Documents to be
performed by Lender and that each Transaction Document to which
Lender is a party constitutes a legal, valid and binding
obligation of Lender, enforceable against it in accordance with
its
<PAGE> 59
The CIT Group/Business Credit Inc.
March 27, 1997
Page 3
terms.
(v) That Lender is exempt from the restrictions of Section 1 of
Article XV of the California Constitution and related statutes
relating to usury.
(vi) That the Financing Agreement constitutes a binding commitment to
extend credit.
(vii) With respect to certain matters of fact, that the
representations and warranties of Company set forth in the
Transaction Documents to which it is a party, the certificates
of certain officers of Company delivered to you in connection
with the transactions contemplated by the Financing Agreement
and the certificates of certain officers of Company referred to
in paragraph (e) above are true and correct.
As used in this opinion, the expression "to our knowledge" or "known to
us" with reference to matters of fact means that during the course of our
representation of Company in connection with the Transaction Documents, no
information has come to the attention of the attorneys of our firm involved in
this engagement which would give them actual knowledge of the existence or
absence of such facts; however, we have made no independent investigation to
determine the existence or absence of such facts, and any limited inquiry
undertaken by us during the preparation of this opinion should not be regarded
as such an investigation. No inference as to our knowledge of the existence or
absence of any facts underlying any opinion given "to our knowledge" should be
drawn from the fact of our representation of Company. Specifically, in
rendering the opinion set forth in paragraph 9 below, we have not made any
independent investigation of court records to determine whether any actions
have been filed.
On the basis of the foregoing and in reliance thereon, and based upon
examination of such questions of law as we have deemed appropriate, and subject
to the assumptions, exceptions, qualifications, and limitations set forth
herein, we advise you that in our opinion:
1. Each of Company and International is a corporation duly
incorporated and validly existing in good standing under the
laws of the State of Delaware and Company is duly qualified to
do business and is in good standing in the state of California.
2. Each of Company and International has the requisite corporate
power and authority to enter into the Transaction Documents to
which it is a party and to carry out the transactions
contemplated thereby.
3. The execution and delivery by each of Company and International
of each Transaction Document to which it is a party, and the
performance by each of Company and International of its
obligations under each of the Transaction Documents to which it
is a party, have been duly authorized by all necessary corporate
action on the part of each of Company and International.
4. Each of the Transaction Documents to which Company is a party
constitutes a valid and binding obligation of Company,
enforceable against Company in accordance with its terms. The
Guaranty and the Security Agreement each constitute a valid and
binding obligation of International, enforceable against
International in
<PAGE> 60
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 4
accordance with its terms.
5. The execution and delivery of each of the Transaction Documents
and the undertaking of the covenants set forth in Transaction
Documents and the borrowing of Loans in accordance with the Loan
Agreement and repayment of any Loans by Company do not (a)
conflict with or violate the Bylaws or Certificate of
Incorporation of Company; (b) to our knowledge, violate or
contravene any United States federal or California state law,
statute, rule or regulation applicable to Company; (c) to our
knowledge, violate or contravene any order, writ, judgment,
decree, determination or award of any United States federal or
California state governmental authority applicable to Company;
or (d) to our knowledge, violate or result in a breach of or
constitute any default under any Reviewed Agreement, or, to our
knowledge, result in or require the creation or imposition of
any lien on any of its properties or revenues pursuant to any
provision of any United States federal or California state law,
rule or regulation or any such contractual obligation, except
for the liens created in favor of Lender.
6. The execution and delivery of each of the Guaranty and the
Security Agreement and the undertaking of the covenants set
forth in the Guaranty and the Security Agreement do not (a)
conflict with or violate the Bylaws or Certificate of
Incorporation of International; (b) to our knowledge, violate or
contravene any United States federal or California state law,
statute, rule or regulation applicable to International; (c) to
our knowledge, violate or contravene any order, writ, judgment,
decree, determination or award of any United States federal or
California state governmental authority applicable to Company;
or (d) to our knowledge, violate or result in a breach of or
constitute any default under any Reviewed Agreement, or, to our
knowledge, result in or require the creation or imposition of
any lien on any of its properties or revenues pursuant to any
provision of any United States federal or California state law,
rule or regulation or any such contractual obligation, except
for the liens created in favor of Lender.
7. No authorization, approval or consent of, and no filing or
registration with, any governmental or regulatory authority or
agency of the United States or the State of California is
required on the part of the Credit Parties for the execution or
delivery by each Credit Party of the Transaction Documents to
which each is a party or for any borrowings by Company of loans
and repayment of such loans in accordance with the terms of the
Financing Agreement or for the performance by International of
the terms of the Guaranty, other than filings related to the
perfection of security interests.
8. Except for the litigation described on Annex C hereto, to our
knowledge, there are no actions or proceedings against any
Credit Party pending before any court, governmental agency or
arbitrator. To our knowledge, there are no actions or
proceedings against any Credit Party pending or overtly
threatened in writing which (a) seek to challenge the
enforceability of any of the Transaction Documents, or (b) we
believe are reasonably likely to have a material adverse effect
on the
<PAGE> 61
The CIT Group/ Business Credit, Inc.
March 27, 1997
Page 5
ability of the Credit Parties to perform their respective
obligations under the Transaction Documents.
9. The provisions of the Financing Agreement are sufficient to
create a security interest in any right, title, and interest of
Company in and to the Collateral described therein to the extent
a security interest in the Collateral may be created therein
under Section 9203 of the California UCC.
10. The UCC-1 Financing Statement is in adequate and legally
sufficient form to perfect a security interest in favor of
Lender in the right, title and interest of Company to the
collateral described in both the UCC-1 Financing Statement and
the Financing Agreement, and for which perfection under Division
9 of the California UCC may occur by the filing of a UCC-1
financing statement with the Secretary of State of the State of
California.
11. The provisions of the Security Agreement are sufficient to
create a security interest in any right, title, and interest of
Company in and to the Collateral described therein to the extent
a security interest in the Collateral may be created therein
under Section 9203 of the California UCC.
12. The UCC-1 Financing Statement is in adequate and legally
sufficient form to perfect a security interest in favor of
Lender in the right, title and interest of Company to the
collateral described in both the UCC-1 Financing Statement and
the Financing Agreement, and for which perfection under Division
9 of the California UCC may occur by the filing of a UCC-1
financing statement with the Secretary of State of the State of
California.
13. Neither Company nor International is a public utility company
within the meaning of the Public Utility Holding Company Act of
1935, as amended, or subject to current regulation thereunder,
or an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment
Company act of 1940, as amended, or subject to current
regulation thereunder.
14. The incurrence of the Company's obligations under the
Transaction Documents, and the application of the proceeds
thereof by Company as provided in the Financing Agreement do not
violate Regulations G, T, U or X of the Board of Governors of
the Federal Reserve System.
The opinions set forth above are subject to the following exceptions,
qualifications, limitations, comments and additional assumptions:
B. We express no opinion as to any matter relating to laws of any
jurisdiction other than the laws of the State of California, the
General Corporation Law of the State of Delaware and the federal
laws of the United States, as such are in effect on the date
hereof, and we have made no inquiry into, and we express no
opinion as to, the statutes, regulations, treaties, common laws
or other laws of any other nation,
<PAGE> 62
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 6
state or jurisdiction. As you know, we are not licensed to
practice law in the State of Delaware and, accordingly, our
opinions as to Delaware General Corporation Law are based solely
on a review of the official statutes of the State of Delaware.
C. We express no opinion as to (i) the effect of any bankruptcy,
insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium or other laws relating to or affecting the rights of
creditors generally, or (ii) the effect of general principles of
equity, including without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance, injunctive relief or
other equitable relief, whether considered in a proceeding in
equity or at law.
D. We express no opinion regarding (i) the rights or remedies
available to any party for violations or breaches of any
provisions which are immaterial or the enforcement of which
would be unreasonable under the then existing circumstances,
(ii) the rights or remedies available to Lender for material
violations or breaches which are the proximate result of actions
taken by Lender, which actions Lender is not entitled to take
pursuant to the Transaction Documents or which otherwise violate
applicable laws, (iii) the rights or remedies available to any
party which takes discretionary action which is arbitrary,
unreasonable or capricious, or is not taken in good faith or in
a commercially reasonable manner, whether or not the Transaction
Documents permit such action, (iv) the effect of the exercise of
judicial discretion, whether in a proceeding in equity or at
law, (v) the enforceability of any provision deemed to be
"unconscionable" within the meaning of Section 1670.5 of the
California Civil Code, (vi) the enforceability of any provision
authorizing the exercise of any remedy without reasonable notice
and opportunity to cure, or (vii) the effect of any provision of
any Transaction Document purporting to give a lender the right
to make any conclusive determination in its sole discretion.
E. We express no opinion as to the legality, validity, binding
nature or enforceability of (i) any provisions in the
Transaction Documents providing for the payment or reimbursement
of costs or expenses or indemnifying a party, to the extent such
provisions may be held unenforceable as contrary to public
policy, (ii) any provision of any Transaction Document insofar
as it provides for the payment or reimbursement of costs and
expenses or indemnification for claims, losses or liabilities in
excess of a reasonable amount determined by any court or other
tribunal, (iii) any provisions regarding a party's ability to
collect attorneys' fees and costs in an action involving the
Transaction Documents, if the party is not the prevailing party
in such action (we call your attention to the effect of Section
1717 of the California Civil Code, which provides that, where a
contract permits one party thereto to recover attorneys' fees,
the prevailing party in any action to enforce any provision of
the contract shall be entitled to recover its reasonable
attorneys' fees), (iv) any provisions of any Transaction
Documents imposing penalties or forfeitures, late payment
charges or any increase in interest rate, upon delinquency in
payment or the occurrence of a default to the extent they
constitute a
<PAGE> 63
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 7
penalty or forfeiture or are otherwise contrary to public
policy, (v) any provision of the Transaction Documents to the
effect that a statement, certificate, determination or record
shall be deemed conclusive absent manifest error (or similar
effect), or (vii) any provision of the Transaction Documents
which provides that notice not actually received may be binding
on any party.
F. We express no opinion with respect to the legality, validity,
binding nature or enforceability of (i) any vague or broadly
stated waiver, (ii) any waivers or consents (whether or not
characterized as a waiver or consent in the Transaction
Documents) relating to the rights of Company or duties owing to
them existing as a matter of law, including, without limitation,
waivers of the benefits of statutory or constitutional
provisions, to the extent such waivers or consents are found by
courts to be against public policy or which are ineffective
pursuant to California statutes and judicial decisions, (iii)
any waivers of any statute of limitations to the extent such
waivers are in excess of four years beyond the statutory period,
or (iv) covenants to the extent they are construed prior to an
Event of Default to be independent requirements as distinguished
from conditions that may trigger an event of default.
G. We express no opinion with respect to the legality, validity,
binding nature or enforceability of any provision of the
Transaction Documents to the effect that rights or remedies are
not exclusive, that every right or remedy is cumulative and may
be exercised in addition to any other right or remedy, that the
election of some particular remedy or remedies does not preclude
recourse to one or more other remedies or that failure to
exercise or delay in exercising rights or remedies will not
operate as a waiver of any such right or remedy.
H. We express no opinion as to any provision of the Transaction
Documents requiring written amendments or waivers of such
documents insofar as it suggests that oral or other
modifications, amendments or waivers could not be effectively
agreed upon by the parties (see Cal. Civil Code Section 1698).
I. We express no opinion as to the applicability or effect of
compliance or non-compliance by Lender with any state, federal
or other laws applicable to Lender or to the transactions
contemplated by the Transaction Documents because of the nature
of its business, including its legal or regulatory status.
J. We express no opinion regarding compliance or non-compliance (or
the effect thereof) of the federal or state securities laws.
K. Our opinions set forth in paragraph 1, as to valid existence,
due qualification and good standing are based solely on the
certificates referenced in paragraph (f) above (copies of which
have been furnished to you).
L. We express no opinion as to the effect of California UCC
Sections 9501 through 9508, which inter alia, impose procedural
limitations on the exercise of remedies
<PAGE> 64
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 8
by a secured creditor.
M. We express no opinion as to the effect on a secured creditor's
ability to realize on collateral of marshaling, substitution of
collateral, or similar doctrines or laws.
N. Except as expressly stated in paragraph 10 and 11 above, we
express no opinion as to the creation, attachment, validity,
enforceability, perfection or priority of a security interest in
any item of collateral or the necessity of making any filings or
taking any other action in connection therewith.
O. We express no opinion as to the enforceability or perfection of
any security interest in collateral consisting of after-acquired
property, except to the extent such property is properly
classified in a category specifically referred to in the
granting clause of the applicable security agreement and on the
relevant financing statements.
P. We express no opinion as to any matter concerning perfection or
continuation of a security interest in, or the ability of Lender
to realize upon, (i) collateral located, or deemed located, in
any jurisdiction other than the State of California and (ii)
collateral moved outside the State of California at any time.
Q. We express no opinion as to the existence of, or the state of
any of Company's rights or interest in or title to, any item of
collateral or the priority of any security interest in any item
of collateral over any other interest in the collateral. In this
regard, we have assumed that Company has "rights" (within the
meaning of Section 9203(1)(b) of the California UCC) in the
collateral in which it purports to grant a security interest
sufficient for the security interests to attach.
R. We express no opinion as to the effect of any provision of any
Transaction Document purporting to give Lender the right to take
control of any of the operations of Company without formal
acceleration, appropriate notice and compliance with the
procedural limitations of Division 9 of the California UCC.
S. We call your attention to the fact that the security interest of
Lender in collateral consisting of proceeds is limited to the
extent set forth in Section 9306 of the California UCC.
T. We express no opinion as to the effect of any provision of any
Transaction Document purporting to relieve a secured party of
any duty it may have to preserve the value of collateral in its
possession (see California UCC Section 9207; see, also,
Citibank, N.A. v. Data Lease Financial Corporation, 828 F.2d 686
(11th Cir. 1987)).
U. We express no opinion as to the effect of any purported grant of
any license to rights in respect of any intellectual property,
to the extent such license rights are (i) not supported by
independent consideration, or (ii) coterminous with the
<PAGE> 65
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 9
Transaction Documents.
V. We express no opinion as to the effect of laws and judicial
decisions (i) which exonerate a surety, if the lender exercises
remedies for default that impair the subrogation rights of the
surety against the principal, or otherwise takes an action which
materially prejudices the surety, without obtaining consent of
the surety, (ii) relating to waivers or subordination by a
surety of its subrogation rights against the principal, its
contribution rights or other common law and statutory protection
of a surety, or (iii) which limit the liability of the surety to
an amount no greater than the liability of the principal.
W. We express no opinion as to the enforceability or legal effect
of any provision of any Transaction Document purporting to
reinstate, as against any obligor or guarantor, obligations or
liabilities of such obligor which have been avoided or which
have arisen from transactions which have been rescinded or the
payment of which has been required to be returned by any court
of competent jurisdiction.
X. Our opinions in clauses (b) and (c) of paragraph 5, 6 and 7
above are intended to express our opinion that the execution,
delivery and performance by Company of the Transaction Documents
are neither prohibited by, nor do they subject Company to a
fine, penalty or similar sanction that would be materially
adverse to Company, under or any law, rule, regulation of the
State of California or United States federal law or any order,
writ, judgment, decree, determination or award of any United
States federal or California state governmental authority that a
lawyer practicing in the State of California exercising
customary professional diligence would reasonably recognize to
be applicable to Company and the transactions contemplated by
the Transaction Documents; accordingly, our opinions set forth
above are limited by the foregoing. We express no opinion as to
the effect of the grants of security interests set forth in the
Transaction Documents on the anti-assignment clauses of any
Reviewed Agreement or whether such grants would result in a
default under or breach of any such Reviewed Agreement.
Y. This opinion speaks only at and as of its date and is based
solely on the facts and circumstances known to us at and as of
such date. We express no opinion as to the effect on Lender's
rights under the Transaction Documents of any statute, rule,
regulation or other law which is enacted or becomes effective
after, or of any court decision which changes the law relevant
to such rights which is rendered after, the date of this opinion
or the conduct of the parties following the closing of the
contemplated transaction. In addition, in rendering this
opinion, we assume no obligation to revise or supplement this
opinion should the present laws of the jurisdictions mentioned
herein be changed by legislative action, judicial decision or
otherwise.
This opinion is made with the knowledge and understanding that you (but
no other person) may rely thereon in entering into the Credit Agreement and is
solely for your benefit, and this opinion may not be disclosed to or relied upon
by any person other than you, except that this opinion may be relied upon by
assignees of or participants in the Revolving Loans if the assignments or
participations relating thereto are permitted under and made in accordance with
<PAGE> 66
The CIT Group/Business Credit, Inc.
March 27, 1997
Page 10
the Financing Agreement; provided that in no event does this opinion extend to
any issue or matter related to any such assignment or participation or arising
from or out of any such assignment or participation (as distinct from the
subject transaction).
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 67
ANNEX A
COMPANY UCC-1 FINANCING STATEMENT
(please see attached)
<PAGE> 68
ANNEX B
REVIEWED AGREEMENTS
1) Amended and Restated Certificate of Incorporation
2) Bylaws of Company
3) Form of Agreement and Plan of Merger between NetFRAME Systems
Incorporated, a California corporation, and NetFRAME Systems
Incorporated, a Delaware corporation
4) Form of Amended and Restated Registration Rights Agreement between
Company and certain securities holders of Company
5) 1987 Stock Option Plan
6) 1992 Stock Option Plan, as amended
7) 1992 Directors' Stock Option Plan, as amended
8) 1992 Employee Stock Purchase Plan, as amended
9) Form of Indemnification Agreement between Company and its officers and
directors
10) Form of Authorized Value Added Reseller Agreement, as amended
11) Form of Authorized Distributor Agreement
12) License Agreement between Company and Microsoft Corporation dated
January 1, 1991, as amended
13) Source Code License and Software Distribution Agreement between Company
and Novell, Inc., dated December 12, 1988, as amended
14) Independent Manufacturer Support Program (IMSP) Agreement between
Company and Novell, Inc. dated November 9, 1990
15) License Agreement between Company and Texas Instruments Incorporated
dated May 1991
16) Software Development and Production License Agreement between Company
and Ready Systems Corporation dated December 14, 1988
17) Composite Signature Agreement for Novell Authorized OEMS between Company
and Novell, Inc. dated January 28, 1994
18) Letter Agreement between Company and Network Peripherals, Incorporated
dated March 16, 1992
19) Software Agreement, Sublicensing Agreement and Software Service
Agreement between Company and Unix System Laboratories, Inc. dated
September 1992, as amended
20) Lease Agreement between Company and Limar Realty Corp. #1, dated
February 20, 1995
21) Lease Agreement between Company and 1565 Barber Lane Holding Company,
Inc. dated April 27, 1995
<PAGE> 69
ANNEX C
LITIGATION
The Company has been named as a defendant in a case brought by one of its value
added resellers, Data Systems Network Corp. ("DSN"), in the Eastern District of
Michigan. Data Systems Network Corp. v. NetFRAME Systems Inc., Case No.
96-4025 (E.D. Mich). The Complaint, filed on June 6, 1996, alleges that
NetFRAME breached its spare parts contract with DSN and an oral contract
allowing for DSN to return certain unidentified products. The Complaint also
alleges that NetFRAME tortiously interfered with certain of DSN's current and
potential customers, and pleads, in the alternative to the breach of contract
claim for the return of products, a claim of misrepresentation or fraud.
In response to the Complaint, NetFRAME agreed to continue to supply DSN
with spare parts pursuant to the spare parts contract and filed an answer
denying all allegations in the Complaint. NetFRAME also filed counterclaims
against DSN for breach of contract and account stated, alleging that DSN was
obligated to return some $468,263.19 in products and pay an additional
$399,619.52 for product DSN purchased. DSN filed an answer denying all
allegations in the counterclaim.
The parties have discussed a resolution of the litigation at various
points, but have failed to reach any agreement. DSN has indicated that it
intends to amend the Complaint to include an allegation concerning a commission
allegedly owed to DSN on a sale by NetFRAME during the quarter ended December
31, 1996.
The management of the Company believes that the Company has defenses to
the allegations contained in the Complaint and management does not expect that
a resolution of the litigation will have an material adverse effect on the
Company's finances.
<PAGE> 70
LANDLORD'S WAIVER
INVENTORY & EQUIPMENT
State of )
)
County of )
WHEREAS, NETFRAME SYSTEMS, INC. (herein the "Company") has pledged and
granted to THE CIT GROUP/BUSINESS CREDIT, INC. (herein "CITBC") with an address
at 300 South Grand Avenue, 3rd Floor, Los Angeles, California 90071 (Attention:
Regional Manager), a continuing general lien upon and security interest in its
present and future (a) merchandise, inventory and goods (herein "Inventory") and
(b) machinery, equipment and fixtures (herein "Equipment" and collectively with
Inventory the "Collateral") pursuant to a certain security agreement between
CITBC and the Company, as amended; and
WHEREAS, said lien and security interest covers all said Collateral
now or hereafter located or to be located at ______________________
________________________ which premises are owned by the undersigned landlord;
now therefore,
THE UNDERSIGNED, in consideration of the foregoing, and for other good
and valuable consideration, receipt of which is hereby acknowledged, does by
these presents, hereby waive and relinquish in favor of CITBC, its successors
and assigns, all right of levy for rent and all claims of every kind against
said Collateral now or hereafter kept or to be kept at said premises, this
waiver to continue until full compliance by the Company with all the terms and
conditions of the security agreement between CITBC and the Company, as amended,
and until payment and satisfaction of all obligations secured thereby; and the
undersigned further agrees that it will not hinder or delay CITBC in enforcing
its rights under said security agreements; that said Collateral may be
repossessed or removed by CITBC at any time and from time to time and the
undersigned will provide access accordingly.
IN WITNESS WHEREOF, the undersigned, owner-landlord, has signed below
this ___ day of March, 1997.
(Seal) _______________________________________
(Owner-Landlord)
By_____________________________________
Title:
_______________________________________
(Address)
_______________________________________
EXHIBIT D
<PAGE> 71
State of )
) INDIVIDUAL ACKNOWLEDGEMENT
County of )
On the ______ day of _____________________________________, 199_____, before me
personally came
to me known to be the person described in and who
executed the foregoing instrument as landlord, and acknowledged that, he
executed the same.
_______________________________________
Notary Public
Commission Expires:
State of )
) CORPORATE ACKNOWLEDGEMENT
County of )
On the __________ day of __________________________________, 199____,
before me personally came to me known, who being
by me duly sworn, did depose and say that is the
of the corporation described in and which executed the above instrument as
landlord; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
_______________________________________
Notary Public
Commission Expires:
EXHIBIT D
<PAGE> 72
________________, 199___
AVAILABILITY CONFIRMATION CERTIFICATE
To: The CIT Group/Business Credit, Inc.
300 South Grand Avenue, 3rd Floor
Los Angeles, California 90071
From: NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, California 95035
Reference is made to that certain Financing Agreement dated March __,
1997 by and between NetFRAME Systems Incorporated as Borrower and The CIT
Group/ Business Credit, Inc. as Lender (as such may be amended, modified or
supplemented from time to time, the "Financing Agreement"). Capitalized terms
used but not defined in this Borrowing Base Certificate shall have the meaning
given thereto in the Financing Agreement.
The undersigned hereby certifies to the Lender on behalf of Borrower
that the attached Availability Confirmation reflecting Availability as of
[date] is true and correct and complete to the best of the knowledge,
information and belief of the undersigned.
IN WITNESS WHEREOF, the undersigned has signed this Borrowing Base
Certificate on behalf of the Borrower on this _____ day of _____________,
199__.
NETFRAME SYSTEMS INCORPORATED
By:____________________________________
Its:___________________________________
<PAGE> 73
THE CIT GROUP/ Date:
BUSINESS CREDIT, INC. ------------------
AVAILABILITY CONFIRMATION # As of:
-------- ------------------
1. ACCOUNTS RECEIVABLE
Outstanding Balance Brought Forward
--------
Plus: Sales
--------
Less: Collections
--------
Credit Memos
--------
Other
--------
Net Outstanding Balance
--------
Less: Ineligibles*
--------
Greater of Dilution or Total Reserves*
--------
Eligible Accounts Receivable
--------
ACCOUNTS RECEIVABLE AVAILABILITY (85%)
--------
2. INVENTORY
Total Inventory (per G/L)
--------
Less: Ineligibles (except inv. off premises)*
--------
Inventory off premises
--------
Eligible Inventory
--------
Valuation Inventory
Milpitas Inventory
--------
Fremont Inventory
--------
Total Valuation Inventory
--------
Greater of Eligible or Valuation Inventory
--------
Lesser of 40% or (Valuation Ratio* x 80%)
--------
TOTAL INVENTORY AVAILABILITY
--------
TOTAL REVOLVER AVAILABILITY
--------
*Based on prior month's Borrowing Base Certificate
<PAGE> 74
INVENTORY CONFIRMATION CERTIFICATE
From: NETFRAME SYSTEMS INCORPORATED Date: __________, 199____
Address: 1545 Barber Lane Confirmation No.: _______
Milpitas, Californ
To: THE CIT GROUP/BUSINESS CREDIT, INC.
Address: 300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Attention: Regional Manager
Pursuant to that certain Financing Agreement between us dated March 27, 1997
(the "Financing Agreement"), we have created in your favor a security interest
in, among other things, all of our Inventory (as defined therein) and upon the
Accounts (as defined therein) and other proceeds resulting from the sale or
other disposition thereof, as security for all our present and future
Obligations (as defined therein) to you, all as more fully provided in said
Financing Agreement.
We hereby warrant and represent that all of said Inventory was, at [date]
at the below listed location(s), had the dollar values listed below, and was
owned by us free and clear of all claims and encumbrances except for your
security interest and Permitted Encumbrances (as defined in the Financing
Agreement). We agree that said Inventory will not be removed therefrom without
your written permission except for delivery to buyers in the ordinary course of
our business or to processors or other third parties who are instructed and
agree to hold same for your or our account, or as otherwise expressly permitted
by the Financing Agreement.
Your security interest attaches to this Inventory through all stages of
manufacture or production and to the finished products, and to any Inventory
returned to us, and to all other Inventory however acquired by us from time to
time in the future, which when acquired, shall, without further act, become
subject to your security interest, and to all proceeds of whatever sort.
<PAGE> 75
INVENTORY LOCATIONS AND DOLLAR VALUES
<TABLE>
<CAPTION>
Address Amount
(Borrowing Base Value of
Eligible Inventory per
Paragraph 3.1 of
Amount Section 3 of Financing
(Book Value) Agreement)
-------------------- -----------------------
<S> <C> <C> <C>
1. 1545 Barber Lane $___________________ $___________________
Milpitas, California 95035
2. 1565 Barber Lane $___________________ $___________________
Milpitas, California 95035
3. Manhattan Transportation, Inc. $___________________ $___________________
47572 Kato Road
Fremont, California 94538
0.00
4. Miscellaneous locations (Inventory Off $___________________ $___________________
Premises (as defined in Paragraph 5.2 of
Section 5 of Financing Agreement) only, not
to exceed $3,000,000 in book value)
Total $___________________ $___________________*
</TABLE>
THIS CONFIRMATION IS THE ___________ IN A SERIES OF CONFIRMATIONS
NetFRAME Systems Incorporated
By:____________________________________
Title:
*Maximum Total Value is $5,000,000 per Paragraph 3.1 of Section 3 of the
Financing Agreement.
2
<PAGE> 76
____________________, 199____
BORROWING BASE CERTIFICATE
To: The CIT Group/Business Credit, Inc.
300 South Grand Avenue, 3rd Floor
Los Angeles, California 90071
From: NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, California 95035
Reference is made to that certain Financing Agreement dated March
__, 1997 by and between NetFRAME Systems Incorporated as Borrower and The CIT
Group/Business Credit, Inc. as Lender (as such may be amended, modified or
supplemented from time to time, the "Financing Agreement"). Capitalized terms
used but not defined in this Borrowing Base Certificate shall have the meaning
given thereto in the Financing Agreement.
The undersigned hereby certifies to the Lender on behalf of
Borrower that the attached NetFRAME Availability Schedule reflecting the
[date]
Borrowing Base as of _____________________ is true, correct and complete to the
best of the knowledge, information and belief of the undersigned.
IN WITNESS WHEREOF, the undersigned has signed this Borrowing Base
Certificate on behalf of the Borrower on this ____ day of ___________, 199___.
NETFRAME SYSTEMS INCORPORATED
By:_____________________________________
Its:____________________________________
<PAGE> 77
March ____, 1997
Notice of Security Interest
Manhattan Transportation, Inc.
47572 Kate Road
Fremont, California 94538
Gentlemen:
You are hereby advised that NetFRAME Systems Incorporated and NetFRAME
International Incorporated (herein collectively the "Company") have granted to
The CIT Group/Business Credit, Inc. of 300 South Grand Avenue, 3rd Floor, Los
Angeles, California 90071 ("CITBC") a security interest in all goods or
inventory owned by the Company, including all such goods or inventory now or at
any time hereafter in your possession or control.
Accordingly, you are directed not to release any such goods or inventory to the
Company or to anyone else except according to written instructions given to you
by CITBC.
As its first instruction to you, CITBC hereby consents to your releasing goods
or inventory according to orders given to you in the ordinary course of
business by the Company, but this permission may be terminated or changed at
any time by further written instructions given to you by CITBC.
<PAGE> 78
Please sign and return to CITBC the enclosed copy of this letter to indicate
you receipt of this letter and your agreement to the terms thereof.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By_____________________________________
Title:
Confirmed:
NetFRAME Systems Incorporated
NetFRAME International Incorporated
By___________________________________
Title:
ACKNOWLEDGMENT AND AGREEMENT
Manhattan Transportation, Inc. hereby acknowledges receipt of the foregoing
Notice of Security Interest and the instructions contained therein and agrees
to abide by all written instructions of CITBC from time to time hereafter given
with respect to goods or inventory of the Company which are at any time in the
possession or control of Manhattan Transportation, Inc., and agrees to release
same to CITBC or to its order, as directed in writing by CITBC. Manhattan
Transportation, Inc. further agrees not to hinder or delay CITBC in enforcing
its rights with respect to such goods or inventory and in furtherance thereof,
and with the knowledge that CITBC will rely on this waiver in extending
financial accommodations to the Company, Manhattan Transportation, Inc. hereby
waives in favor of CITBC and any and all lien rights which Manhattan
Transportation, Inc. may have under applicable law.
Date: March _____, 1997
Manhattan Transportation, Inc.
By___________________________________
Title:
2
<PAGE> 1
EXHIBIT 10.28
[NETFRAME LOGO]SYSTEMS INCORPORATED
CHANGE OF CONTROL AGREEMENT FOR [LastName]
CHANGE OF CONTROL
"Change of Control" shall mean the occurrence of any of the following events:
Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
NetFRAME Systems Incorporated (herein, the Company) representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities; or
A merger or consolidation of the Company with any other corporation
(herein, successor employer), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
In the event of a change of control which results in [LastName]'s
involuntary termination without cause or constructive termination which occurs
within twelve months following a change of control, [LastName] shall be entitled
to the compensation and benefits outlined herein. Termination refers to
termination of employment other than for "cause", retirement, death, disability
or voluntary resignation, unless the voluntary resignation is for "good reason"
(significant reduction in duties, a reduction in annual salary or hours of work,
a change in work location requiring a significantly longer commute [greater than
30 miles more than present commute], or a substantial reduction in the kind and
level of benefits). These compensation and benefits are granted in consideration
for [LastName] agreeing to remain as an employee with the Company, or successor
employer, following a change of control and maintaining satisfactory performance
throughout the timeframe prior to the change of control. The compensation and
benefits detailed below are payable upon [LastName]'s involuntary termination
without cause or constructive termination from the Company or successor
employer, which occurs within twelve months following a change of control,
except as provided below with respect to stock options.
Initials ___________ Date _________
COMPENSATION AND BENEFITS
[LastName] shall receive twelve months severance pay at [Gender] gross
base salary rate plus target bonus, if applicable, as of the legal date of the
change of control,
<PAGE> 2
payable in a lump sum within 3 business days after [LastName]'s involuntary
termination without cause or constructive termination from the Company or
successor employer, which occurs within twelve months following a change of
control, and;
NetFRAME, or successor employer, will continue [LastName]'s medical,
dental and vision care benefits, including the dependent coverage in effect as
of the date of change of control, if applicable, for twelve months after
[LastName]'s involuntary termination without cause or constructive termination,
which occurs within twelve months following a change of control, from the
Company, or successor employer, and;
[LastName] shall be subject to accelerated vesting of exactly one half
(1/2) of [Gender] unvested outstanding stock options under the NetFRAME 1992
Incentive Stock Option Plan effective the legal date of the change of control,
unless:
a) such accelerated vesting would make unavailable pooling of interests
accounting treatment; and
b) the purchase method of accounting for the change of control is not
acceptable to the successor employer.
CONFIDENTIALITY
I, [LastName] agree that the terms and conditions of this agreement remain in
strictest confidence, whether to employees, customers or vendors of NetFRAME or
any other parties. NetFRAME also agrees to hold these terms and conditions in
strictest confidence.
ENTIRE AGREEMENT
This Agreement represents the entire agreement and understanding between
NetFRAME and [LastName] concerning [LastName]'s termination from NetFRAME or
successor corporation relating to a change of control and supersedes and
replaces any and all prior agreements and understanding concerning [LastName]'s
relationship with NetFRAME and [LastName]'s compensation by NetFRAME with
respect to a change of control as defined herein.
_______________________________________ ______
Robert Puette, Chairman/President/CEO Date
_______________________________________ ______
Employee Signature Date
2
<PAGE> 3
EXHIBIT 10.28
[NETFRAME LOGO]Systems Incorporated
CHANGE OF CONTROL AGREEMENT FOR [LastName]
Change of Control
"Change of Control" shall mean the occurrence of any of the following events:
Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
NetFRAME Systems Incorporated (herein, the Company) representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities; or
A merger or consolidation of the Company with any other corporation
(herein, successor employer), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
In the event of a change of control which results in [LastName]'s
involuntary termination without cause or constructive termination which occurs
within twelve months following a change of control, [LastName] shall be entitled
to the compensation and benefits outlined herein. Termination refers to
termination of employment other than for "cause", retirement, death, disability
or voluntary resignation, unless the voluntary resignation is for "good reason"
(significant reduction in duties, a reduction in annual salary or hours of work,
a change in work location requiring a significantly longer commute [greater than
30 miles more than present commute], or a substantial reduction in the kind and
level of benefits). These compensation and benefits are granted in consideration
for [LastName] agreeing to remain as an employee with the Company, or successor
employer, following a change of control and maintaining satisfactory performance
throughout the timeframe prior to the change of control. The compensation and
benefits detailed below are payable upon [LastName]'s involuntary termination
without cause or constructive termination from the Company or successor
employer, which occurs within twelve months following a change of control,
except as provided below with respect to stock options.
Initials __________ Date __________
Compensation and Benefits
[LastName] shall receive six months severance pay at [Gender] gross
base salary rate plus target bonus, if applicable, as of the legal date of the
change of control, payable in
<PAGE> 4
a lump sum within 3 business days after [LastName]'s involuntary termination
without cause or constructive termination from the Company or successor
employer, which occurs within twelve months following a change of control, and;
NetFRAME, or successor employer, will continue [LastName]'s medical,
dental and vision care benefits, including the dependent coverage in effect as
of the date of change of control, if applicable, for six months after
[LastName]'s involuntary termination without cause or constructive termination,
which occurs within twelve months following a change of control, from the
Company, or successor employer, and;
[LastName] shall be subject to accelerated vesting of exactly one half
(1/2) of [Gender] unvested outstanding stock options under the NetFRAME 1992
Incentive Stock Option Plan effective the legal date of the change of control,
unless:
a) such accelerated vesting would make unavailable pooling of interests
accounting treatment; and
b) the purchase method of accounting for the change of control is not
acceptable to the successor employer.
Confidentiality
I, [LastName] agree that the terms and conditions of this agreement remain in
strictest confidence, whether to employees, customers or vendors of NetFRAME or
any other parties. NetFRAME also agrees to hold these terms and conditions in
strictest confidence.
Entire Agreement
This Agreement represents the entire agreement and understanding between
NetFRAME and [LastName] concerning [LastName]'s termination from NetFRAME or
successor corporation relating to a change of control and supersedes and
replaces any and all prior agreements and understanding concerning [LastName]'s
relationship with NetFRAME and [LastName]'s compensation by NetFRAME with
respect to a change of control as defined herein.
_______________________________________ ______
Robert Puette, Chairman/President/CEO Date
_______________________________________ ______
Employee Signature Date
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-48552) pertaining to the 1987 Stock Option Plan, 1992 Stock
Option Plan, 1992 Directors' Stock Option Plan and 1992 Employee Stock Purchase
Plan, the Registration Statements (Form S-8 No. 33-71260, No. 33-80194 and No.
333-7075) pertaining to the 1992 Stock Option Plan and 1992 Employee Stock
Purchase Plan, and the Registration Statement (Form S-8 No. 33-95592)
pertaining to the 1992 Directors' Stock Option Plan at NetFRAME Systems
Incorporated of our report dated January 23, 1997, with respect to the
consolidated financial statements and schedule of NetFRAME Systems Incorporated
included in this Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
San Jose, California
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 14,011
<SECURITIES> 0
<RECEIVABLES> 16,371
<ALLOWANCES> 2,168
<INVENTORY> 9,741
<CURRENT-ASSETS> 38,737
<PP&E> 30,049
<DEPRECIATION> 20,119
<TOTAL-ASSETS> 50,309
<CURRENT-LIABILITIES> 18,511
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 73,156
<TOTAL-LIABILITY-AND-EQUITY> 50,309
<SALES> 74,349
<TOTAL-REVENUES> 74,349
<CGS> 50,489
<TOTAL-COSTS> 50,489
<OTHER-EXPENSES> 52,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,050
<INCOME-PRETAX> (27,984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,984)
<EPS-PRIMARY> (2.04)
<EPS-DILUTED> (2.04)
</TABLE>
