<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the three months ended July 31, 1997 Commission File Number 0-24418
SYSTEMSOFT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3121799
(State or other jurisdiction of Employer Identification No.)
incorporation or organization)
2 VISION DRIVE
NATICK, MASSACHUSETTS 01760
(Address of principal executive offices) (Zip Code)
508-651-0088
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Registrant had 26,535,120 shares of Common Stock, $.01 par value, outstanding at
September 5, 1997.
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SYSTEMSOFT CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED JULY 31, 1997
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheets as of July 31, 1997
(Unaudited) and January 31, 1997 3
b) Consolidated Statements of Operations for the
three and six months ended July 31, 1997 and
1996 (Unaudited) 4
c) Consolidated Statements of Cash Flows for the
six months ended July 31, 1997 and 1996
(Unaudited) 5
d) Notes to Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
six months and Results of Operations 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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SYSTEMSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
-------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,395,518 $ 10,807,691
Restricted cash 1,000,000 1,000,000
Marketable securities 3,052,757 101,507
Accounts receivable, less allowance for doubtful
accounts of $1,731,453 and $917,915 as of July 31,
1997 and January 31, 1997, respectively 14,679,768 12,352,489
Receivable from related party 1,642,216 1,466,015
Prepaid royalties 7,273,480 --
Prepaid and other current assets 3,412,354 2,443,941
Deferred income taxes 2,528,079 2,528,079
------------ ------------
Total current assets 41,984,172 30,699,722
Property and equipment, net 5,960,272 4,935,625
Purchased software, net 5,506,739 3,747,032
Software development costs, net 1,340,098 1,368,359
------------ ------------
Total assets $ 54,791,281 $ 40,750,738
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,636,209 $ 2,148,092
Accrued expenses 2,205,248 2,503,207
Accrued royalties 1,792,924 96,250
Income taxes payable 421,458 348,500
Accrued commissions 138,465 48,238
Accrued compensation and benefits 1,097,642 450,218
------------ ------------
Total current liabilities 7,291,946 5,594,505
Deferred income taxes 1,642,141 1,642,141
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.01 par value; 90,000,000 shares
authorized; 26,531,028 and 25,146,061 shares issued 265,310 251,460
Additional paid-in capital 78,231,551 68,670,675
Less treasury stock, at cost, 159,246 shares (427,187) (427,187)
Warrants 3,770,939 3,770,939
Accumulated deficit (35,983,419) (38,751,795)
------------ ------------
Total stockholders' equity 45,857,194 33,514,092
------------ ------------
Total liabilities and stockholders' equity $ 54,791,281 $ 40,750,738
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 10,413,779 $ 5,454,198 $ 21,073,020 $ 10,809,355
Engineering services 2,100,657 3,155,034 3,346,988 5,390,074
Related party 375,000 681,667 815,000 1,140,000
Other 15,552 -- 146,954 1,500
------------ ------------ ------------ ------------
Total revenues 12,904,988 9,290,899 25,381,962 17,340,929
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees 1,333,286 577,180 2,304,144 980,453
Engineering services 1,109,652 951,333 2,255,783 1,703,589
Related party 362,168 207,648 676,481 422,579
Other 25,659 -- 26,297 --
------------ ------------ ------------ ------------
Total cost of revenues 2,830,765 1,736,161 5,262,705 3,106,621
------------ ------------ ------------ ------------
Gross profit 10,074,223 7,554,738 20,119,257 14,234,308
Operating expenses:
Research and development 3,208,550 1,933,156 6,343,290 3,619,272
Sales and marketing 3,618,922 2,669,506 6,525,419 5,084,324
General and administrative 2,238,120 744,939 3,224,490 1,434,013
------------ ------------ ------------ ------------
Total operating expenses 9,065,592 5,347,601 16,093,199 10,137,609
------------ ------------ ------------ ------------
Income from operations 1,008,631 2,207,137 4,026,058 4,096,699
Interest income 95,577 105,879 148,160 204,137
Interest expense (20,313) (104) (44,237) (260)
Foreign exchange gain (loss) 34,015 (22,795) 2,021 (44,406)
------------ ------------ ------------ ------------
Income before provision for income taxes 1,117,910 2,290,117 4,132,002 4,256,170
Provision for income taxes 368,909 801,541 1,363,626 1,489,659
------------ ------------ ------------ ------------
Net income 749,001 1,488,576 2,768,376 2,766,511
============ ============ ============ ============
Net income per common share $ 0.03 $ 0.06 $ 0.10 $ 0.11
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 27,149,326 25,035,457 27,002,673 24,097,968
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
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SYSTEMSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,768,376 $ 2,766,511
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,574,208 1,276,727
Provision for doubtful accounts 900,375 225,547
Tax benefit of disqualifying dispositions of stock options 270,403 679,850
Changes in operating assets and liabilities:
Accounts receivable (5,152,367) (4,455,601)
Receivable from related party (849,468) (669,800)
Prepaid royalties (6,023,480) --
Prepaid and other current assets (781,319) (983,591)
Accounts payable (511,883) 918,036
Accrued expenses (297,959) 668,673
Income taxes payable 72,958 666,382
Accrued commissions 162,847 591,642
Accrued compensation and benefits 647,424 115,196
Accrued royalties 2,369,941 --
------------ -----------
Net cash provided by (used in) operating activities (3,849,994) 1,799,572
------------ -----------
Cash flows from investing activities:
Purchase of marketable securities, net (2,951,250) (1,846,161)
Purchases of property and equipment (2,225,692) (1,434,153)
Purchased software costs (2,349,502) (1,308,642)
Software development costs (340,110) (1,202,982)
------------ -----------
Net cash used in investing activities (7,866,554) (5,791,938)
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,379,062 2,103,385
Net proceeds from common stock private placement 7,982,500 --
------------ -----------
Net cash provided by financing activities 9,361,562 2,103,385
------------ -----------
Net decrease in cash and cash equivalents (2,354,963) (1,888,981)
Effect of foreign currency on cash (57,237) --
Cash and cash equivalents at beginning of period 11,807,691 7,406,039
------------ -----------
Cash and cash equivalents at end of period $ 9,395,518 $ 5,517,058
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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SYSTEMSOFT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements of SystemSoft
Corporation ("the Company") as of July 31, 1997 and for the three and six months
ended July 31, 1997 and 1996 are unaudited. All adjustments (consisting only of
normal recurring adjustments) have been made which, in the opinion of
management, are necessary for a fair presentation thereof. These financial
statements should be read in conjunction with the Company's financial statements
and notes thereto contained in the Company's Form 10-K, SEC File No. 0-24418,
filed on May 1, 1997. The results of operations for the three and six month
period ended July 31, 1997 are not necessarily indicative of the results that
may be expected for the full year or for any future period. Certain prior year
amounts in the financial statements have been reclassified to conform to the
1998 presentation.
2. INCOME TAXES
The components of the provision for income taxes include federal and
state income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax basis of assets and
liabilities. The major difference between the actual provision for income taxes
and the statutory federal income tax rates for the three and six months ended
July 31, 1997 and 1996 is the utilization of certain tax credits.
3. STOCK DIVIDEND
The Company issued a 2:1 stock split in the form of a stock dividend on
July 17, 1996. All amounts and per share data has been retroactively adjusted
for the earliest period presented.
4. PRIVATE PLACEMENT OF COMMON STOCK
In May 1997, the Company completed a private placement (the "Placement")
of 1,066,666 shares (the "Shares") of its Common Stock, $.01 par value per
share, to Sykes Enterprises, Incorporated ("Sykes"), for gross proceeds to the
Company of approximately $8,000,000.
5. SUBSEQUENT EVENT
In August, 1997, the Company entered into a one-year revolving line of
credit with a bank under which the Company may borrow the lesser of $7,000,000
or 85% of eligible accounts receivable. In order to access the line, the
Company is required to maintain certain financial covenants and interest is
payable on any outstanding advances at the then current Prime Rate.
6
<PAGE> 7
SYSTEMSOFT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three and six months ended July 31, 1997 and
1996. The Company designs, develops, markets, licenses and supports to the
personal computer industry call-avoidance software and system-level software
designed to be the communication path between the personal computer hardware and
its operating system software. The principal markets for the Company's products
are U.S. and Asia Pacific based manufacturers of personal computers and related
devices.
On December 19, 1996 the Company acquired Radish Communications Systems, Inc.
("Radish"), a developer of advanced telecommunications software by means of a
merger of a wholly-owned subsidiary of the Company with and into Radish with
Radish as the surviving corporation ("the Radish Merger"). The acquisition was
accounted for as a purchase and accordingly the results of Radish are included
in the consolidated financial statements since the date of acquisition.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues (except cost of revenues items,
which are set forth as a percentage of the corresponding revenue items):
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Software license fees 80.7% 58.7% 83.0% 62.3
Engineering services 16.3 34.0 13.2 31.1
Related party 2.9 7.3 3.2 6.6
Other 0.1 0.0 0.6 0.0
------------------- -------------------
Total revenues 100.0 100.0 100.0 100.0
------------------- -------------------
Cost of revenues:
Software license fees 12.8 10.6 10.9 9.1
Engineering services 52.8 30.2 67.4 31.6
Related party 96.6 30.5 83.0 37.1
Other 165.0 0.0 17.9 0.0
------------------- -------------------
Total cost of revenues 21.9 18.7 20.7 17.9
------------------- -------------------
Gross margin 78.1 81.3 79.3 82.1
Operating expenses:
Research and development 24.9 20.8 25.0 20.9
Sales and marketing 28.0 28.7 25.7 29.3
General and administrative 17.3 8.0 12.7 8.2
------------------- -------------------
Total operating expenses 70.2 57.6 63.4 58.4
------------------- -------------------
Income from operations 7.8 23.7 15.9 23.7
Other income 0.9 0.8 0.7 0.9
------------------- -------------------
Income before provision for income taxes 8.7 24.6 16.3 24.6
Provision for income taxes 2.9 8.6 5.4 8.6
------------------- -------------------
Net income 5.8% 16.0% 10.9% 16.0%
=================== ===================
</TABLE>
7
<PAGE> 8
Comparison of Three Months Ended July 31, 1997 and 1996
Revenues. Revenues were $12,905,000 and $9,291,000 in the three months
ended July 31, 1997 and 1996, respectively, an increase of approximately 39%.
Software license fees increased to $10,414,000 from $5,454,000 or approximately
91%. This increase was primarily due to growth in software license fees for the
Company's call avoidance product, System Wizard, as well as growth in
software license fees in the Company's platform products group, most notably its
BIOS and power management products. Certain contracts include fixed royalty fees
for various time periods in lieu of royalties on a per unit basis. Revenues
attributable to such fees, which are included in software license fees, were
$3,082,000 and $250,000 in the three months ended July 31, 1997 and 1996,
respectively. Although such contracts provide for fixed payments to be made at
specified time periods, the timing or amount of such payments may be
renegotiated as a matter of business practice. Included in the fixed royalties
recognized in the three months ended July 31, 1997 and 1996 were $260,000 and
$52,000, respectively, which resulted from renegotiated contract terms. Such
revenue would have otherwise been recorded in the quarters ended October 31,
1997 and 1996.
Engineering services decreased to $2,101,000 from $3,155,000, or
approximately 33% due to the cancellation, in the fourth quarter of fiscal 1997,
of the System Wizard development agreement with Digital Equipment Corporation.
Related party revenues decreased to $375,000 from $682,000, or approximately
45%. Revenues generated under the Development and License Agreement, as amended,
with Intel Corporation (The "Intel Agreement") were $375,000 for both the three
months ended July 31, 1997 and 1996, respectively. For the quarter ended July
31, 1997 the Company recorded no other revenues from Intel Corporation resulting
in the decrease in related party revenue. At July 31, 1997, all of the revenue
associated with this original Intel Agreement has been recognized and there is
no additional revenue to be recorded from this agreement.
Cost of Revenues. Cost of revenues was $2,831,000 and $1,736,000 in the
three months ended July 31, 1997 and 1996, respectively. These numbers
represent a year over year increase of $1,095,000 or 63%. Cost of revenues
consists primarily of amortization of software development costs and purchased
software, royalties due third parties and engineering costs, principally direct
engineering compensation expenses, associated with engineering services
revenue. Cost of revenues as a percentage of revenues increased to 22% from 19%
in the three months ended July 31, 1997 and 1996, respectively. Cost of
software license fees as a percentage of software license fees revenues
increased to 13% from 11%, respectively primarily due to increases in royalties
and amortization of purchased software and software development costs. The
increase in amortization expense in both absolute dollars and percentage of
revenues was due to increases in purchased software and capitalized development
costs. The increase in royalties is due to the increased volume of System
Wizard revenue. System Wizard revenue is subject to varying royalties payable
to certain vendors for licensed technology on different product offerings
within the System Wizard family. These royalties may effect the total gross
margin realized by the Company in any particular reporting period depending
upon the mix of the individual System Wizard products sold as well as the
percentage of System Wizard revenue when compared to the Company's total
revenue.
8
<PAGE> 9
Cost of engineering services increased as a percentage of engineering
service revenues to 53% from 30% in the three months ended July 31, 1997 and
1996, respectively primarily due to increased staffing levels in the
engineering department as well as the increased engineering effort required in
the delivery of System Wizard technology. Cost of related party revenues as a
percentage of related party revenues increased to 97% from 31%, due to a
tapering out off the revenue associated with the Intel Agreement while the
royalties due the related party has increased due to additional sales of System
Wizard.
Research and Development. Research and development expenses, consisting
primarily of payroll and related expenses, were $3,209,000 and $1,933,000, net
of capitalized development costs of $160,000 and $652,000 in the three months
ended July 31, 1997 and 1996, respectively. These results represent a year over
year increase of $1,276,000 or 66%. As a percent of revenue, research and
development expenses increased to 25% from 21%. The increase in expenses
resulted primarily from staff additions to support the Company's new product
development efforts and as a result of the purchase of Radish.
Sales and Marketing. Sales and marketing expenses, consisting primarily
of payroll and related expenses, costs of marketing programs and events, sales
commissions to internal sales personnel and independent manufacturers'
representatives and travel costs, were $3,619,000 and $2,670,000 in the three
months ended July 31, 1997 and 1996, respectively, an increase of approximately
36%. The increase was primarily due to staff additions and increased commissions
due independent manufacturers' representatives. As a percent of revenue, sales
and marketing expenses decreased to 28% from 29% due to the overall growth in
revenue as compared to the growth in these expenses.
General and Administrative. General and administrative expenses,
consisting primarily of payroll and related expenses, provision for doubtful
accounts and professional fees, were $2,238,000 and $745,000 in the three months
ended July 31, 1997 and 1996, respectively, an increase of approximately 200%.
The increase was primarily due to a $663,000 increase in the provision for
doubtful accounts over the same period last year as well as increased
professional fees and additional staff hires. Due to these increases general and
administrative expenses as a percentage of revenues increased to 17% from 8%.
Provision for Income Taxes. Provision for income taxes was $369,000 and
$802,000 in the three months ended July 31, 1997 and 1996, respectively. The
provision for the three months ended July 31, 1997 represents 33% of pre-tax
income as compared to 35% of pre-tax income for the three months ended July 31,
1996. This effective tax rate decrease is the result of the utilization of
certain tax credits including the credit for research and experimentation costs.
Comparison of Six Months Ended July 31, 1997 and 1996
Revenues. Revenues were $25,382,000 and $17,341,000 in the six months
ended July 31, 1997 and 1996, respectively, an increase of approximately 46%.
Software license fees increased to $21,073,000 from $10,809,000 or approximately
95%. This increase was primarily due to growth in software license fees for the
Company's call avoidance product, System Wizard,
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as well as growth in the software license fees for the Company's BIOS, power
management and PC Card products. Certain contracts include fixed royalty fees
for various time periods in lieu of royalties on a per unit basis. Revenues
attributable to such fees, which are included in software license fees, were
$3,297,000 and $1,050,000 in the six months ended July 31, 1997 and 1996,
respectively. Although such contracts provide for fixed payments to be made at
specified time periods, the timing or amount of such payments may be
renegotiated as a matter of business practice. The fixed royalties recognized in
the six months ended July 31, 1997 and 1996, respectively, included $260,000 and
$652,000 which resulted from renegotiated contract terms. Such revenue would
have otherwise been recorded in the subsequent three fiscal quarters.
Engineering services revenue decreased to $3,347,000 from $5,390,000 or
approximately 38%. This decrease was due to a drop in engineering services
revenue for all products; however the largest decrease was in System Wizard due
to the cancellation in fiscal 1997 of the development agreement with Digital
Equipment Corporation. Related party revenues decreased to $815,000 from
$1,140,000 or approximately 29%. Revenues generated under the Intel Agreement
were $750,000 for both the six months ended July 31, 1997 and 1996,
respectively.
Cost of Revenues. Cost of revenues was $5,263,000 and $3,107,000 in the
six months ended July 31, 1997 and 1996, respectively. These numbers represent a
year over year increase of $2,156,000 or 69%. Cost of revenues as a percentage
of revenues increased to 21% from 18% in the six months ended July 31, 1997 and
1996, respectively. Cost of software license fees as a percentage of software
license fees revenues increased to 11% from 9% primarily due to increases in
amortization of purchased software and software development costs and royalty
expenses associated with System Wizard revenue. The increase in amortization
expense in both absolute dollars and percentage of revenues was due to the
increased asset balance in purchased software and software development costs
and the commencement of amortization with new product releases. System Wizard
revenue is subject to varying royalties payable to certain vendors for licensed
technology on different product offerings within the System Wizard family.
These royalties may effect the total gross margin realized by the Company in
any particular reporting period depending upon the mix of the individual System
Wizard products sold as well as the percentage of System Wizard revenue when
compared to the Company's total revenue.
Cost of engineering services increased as a percentage of engineering
service revenues to 67% from 32% in the six months ended July 31, 1997 and 1996,
respectively. This increase was primarily the result of increased staffing
levels and the additional engineering costs associated with the delivery of
System Wizard. Cost of related party revenues as a percentage of related party
revenues increased to 83% from 37%, due to a decrease in the related party
revenue while the costs of related party revenue actually increased. This
increase in related party costs is due to increased royalties due the related
party for sales of System Wizard.
Research and Development. Research and development expenses were
$6,343,000 and $3,619,000, net of capitalized development costs of $340,000 and
$1,203,000, in the six months ended July 31, 1997 and 1996, respectively, an
increase of approximately 75%. As a percent of revenue, research and development
expenses increased to 25% from 21%. The increase in expenses resulted primarily
from staff additions to support the Company's new product development efforts
and additions as a result of the purchase of Radish.
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<PAGE> 11
Sales and Marketing. Sales and marketing expenses were $6,525,000 and
$5,084,000 in the six months ended July 31, 1997 and 1996, respectively, an
increase of approximately 28%. The percentage increase was primarily due to
staff additions, increased costs of marketing programs and events, sales
commissions resulting from the increased level of revenue and commissions due
independent manufacturers' representatives. Sales and marketing expenses as a
percentage of revenues decreased to 26% from 29% due to the substantial relative
growth in revenues.
General and Administrative. General and administrative expenses were
$3,224,000 and $1,434,000 in the six months ended July 31, 1997 and 1996,
respectively, an increase of approximately 125%. The increase was primarily due
to a $655,000 increase in the provision for doubtful accounts over the same
period last year as well as increased professional fees and additional staff
hires. Due to these increases general and administrative expenses as a
percentage of revenues increased to 13% from 8%.
Provision for Income Taxes. Provision for income taxes was $1,363,000 and
$1,490,000 for the six months ended July 31, 1997 and 1996, respectively. The
provision for the six months ended July 31, 1997 represents 33% of pre-tax
income as compared to 35% of pre-tax income for the six months ended July 31,
1996. This effective tax rate decrease is the result of the utilization of
certain tax credits including the credit for research and experimentation costs.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1997, the Company funded its
operations primarily through its operating profits and through a private sale
of its common stock. As of July 31, 1997, the Company had cash and cash
equivalents and marketable securities of $12,449,000 and working capital of
$34,692,000. The Company had a net increase of cash and cash equivalents and
marketable securities of $540,000 for the six months ended July 31, 1997. The
principal uses of cash for the six months ended July 31, 1997 were a $4,000,000
cash payment for a royalty agreement termination (see below), purchases of
property and equipment of $2,226,000 and purchases of software of $2,350,000.
In February 1997, the Company terminated its Software Development and
License Agreement (the "Original Agreement") with Digital Equipment Corporation
("DEC)" whereby the Company provides DEC certain license privileges and
guarantee payments of $6,750,000 in lieu of future royalties which would have
been paid over the life of the System Wizard software products. The guaranteed
payments include cash payments of $2,000,000 each in the first and second
quarters of fiscal 1998 and $1,500,000 in the third fiscal quarter of 1998 for a
total payment of $5,500,000. In addition a $1,250,000 receivable due the Company
from DEC was offset in the first quarter. The Company has begun expensing these
amounts based upon the royalty rates negotiated in the Original Agreement and
expects the amounts to be substantially expensed by the end of fiscal 1999.
During the six months ended July 31, 1997, the Company's financing
activities have provided cash of $1,379,000 due to the exercise of stock
options. In May 1997, the Company completed a private placement of its common
stock whereby in exchange for 1,066,666 shares of
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<PAGE> 12
stock the Company received gross proceeds of $8,000,000. Additionally, in August
1997, the Company finalized a revolving line of credit with a bank under which
the Company may borrow up to the lesser of $7,000,000 or 85% of eligible
accounts receivable, conditioned upon maintaining certain financial covenants,
including specified levels of quarterly earnings, tangible net worth, working
capital and liquidity. The line of credit also limits the Company's ability to
pay dividends. The Company believes that its current cash balances and cash flow
from operations will be sufficient to meet its working capital and capital
expenditure requirements through the next twelve months. To date, inflation has
not had a material impact on the Company's financial results.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company or statements made by its employees
may contain "forward-looking" information which involves risk and uncertainties.
In particular, statements contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning sufficiency of funds for
the Company's working capital) are "forward-looking statements." The Company's
actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below as well as the accuracy of the
Company's internal estimates of revenue and operating expense levels. Each of
these factors, and others, are discussed from time to time in the Company's
Securities and Exchange Commission filings.
The Company's future results are subject to substantial risks and
uncertainties. Revenue growth rates experienced by the Company to date may not
be indicative of future growth rates and there can be no assurance that the
Company will remain profitable in the future. The market for the Company's
system-level and call-avoidance software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The Company's future success will depend upon its ability to enhance its current
software and to develop and introduce new software which keeps pace with
technological developments and evolving industry standards as well as to respond
to changes in customer requirements. The Company may confront new competitors as
it introduces new products and expands into new markets. Certain current and
potential competitors of the Company are more established, benefit from greater
market recognition and have substantially greater financial, development and
marketing resources than the Company. Competitive pressures or other factors,
including entry into new markets, may result in unit royalty erosion that could
have a material adverse effect on the Company's results of operations. The
Company believes that its success to date has been largely dependent on the
adoption of its software by key participants in the PC industry the loss of
which could adversely affect the Company's product development efforts. In
addition, the inability of the Company to replace revenues provided by a key
customer could have a material adverse effect on the Company's business and
financial condition. The Company's success to date has depended to a significant
extent upon a number of key management and technical employees. The loss of
services of one or more of these key employees could have a material adverse
effect on the Company's business and financial condition.
12
<PAGE> 13
The Company believes that future results of operations may fluctuate
significantly based upon several factors including the timing of new product
introductions, product mix, activities of competitors and the ability of the
Company to penetrate new markets. The volume, timing and nature of new contracts
could have a significant impact on operating results for a particular quarter
and may result in unanticipated quarterly earnings, shortfalls or losses. In
such an event, the price of the Company's Common Stock would likely be
materially adversely affected.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 2. - Changes in Securities
On May 7, 1997, the Company completed a private placement (the
"Placement") of 1,066,666 shares (the "Shares") of its Common Stock, $.01
par value per share, to Sykes Enterprises, Incorporated ("Sykes"), for
gross proceeds to the Company of approximately $8,000,000. The offer and
sale of the shares were exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act") pursuant to Section 4(2) and
Rule 506 of Regulation D under the Securities Act in reliance upon
information available to the Company as of May 7, 1997, including certain
representations and warranties of the purchase of the Shares. The Shares
were offered only to Sykes, an "accredited investor" as such term is
defined in Rule 501(a)(3) of Regulation D.
Item 4. - Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held June 25,
1997, the Company's stockholders took the following actions:
(1) The Company's stockholders reelected Robert F. Angelo, Robert N.
Goldman, W. Frank King, Ph.D. and David J. McNeff as directors of
the Company to serve until the next annual meeting of stockholders
and until their successors shall have been duly elected and
qualified or until their earlier resignation or removal. Election
of the directors was determined by a plurality of the votes cast
at the 1997 annual meeting. No other persons were nominated, or
received votes, for election as directors of the Company at the
1996 Annual Meeting of stockholders. The following table sets
forth each director elected at the Annual Meeting (with vote
results):
<TABLE>
<CAPTION>
BROKER NON-
NAME FOR WITHHELD ABSTENTIONS VOTES
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert F. Angelo 19,537,601 816,935 0 0
Robert N. Goldman 19,447,805 906,731 0 0
W. Frank King 19,487,992 866,544 0 0
David J. McNeff 19,504,523 850,013 0 0
</TABLE>
(2) The Company's stockholders approved and adopted an amendment to
the Company's 1994 Omnibus Stock Plan (the "1994 Plan") to
increase by 1,200,000 shares the number of shares available for
issuance under the 1994 Plan from 4,000,000 to 5,200,000, by vote
of 17,320,319 shares of common stock in favor, 1,273,407 shares
opposed, 519,944 shares abstaining and 1,240,866 shares
represented by broker non-votes.
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<PAGE> 15
ITEM 6. -- Exhibits and Reports on Form 8-K
(a) EXHIBITS.
10.1 Loan Agreement dated August 27, 1997 by and between
Silicon Valley Bank and the Company.
(b) REPORTS ON FORM 8-K:
The Company filed a current report on Form 8-K dated May 7,
1997 reporting the issuance of 1,066,666 shares of its
common stock to Sykes Enterprises, Incorporated.
The Company filed a current report on Form 8-K dated
August 21, 1997 reporting the issuance of the Company's
press release announcing second quarter fiscal 1998
earnings results.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SYSTEMSOFT CORPORATION
September 15, 1997 By: /s/ Robert F. Angelo
--------------------------------------
Robert F. Angelo
President, Chief Executive Officer
and Chairman of the Board
September 15, 1997 By: /s/ Paul J. Pedevillano
--------------------------------------
Paul J. Pedevillano
Sr. Vice President, Finance and
Chief Financial Officer
16
<PAGE> 1
LOAN AGREEMENT
--------------
This LOAN AGREEMENT is entered into as of August 27, 1997, by and
between SILICON VALLEY BANK , a California-chartered bank ("Bank"), with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
and with a loan production office located at Wellesley Office Park, 40 William
Street, Suite 350, Wellesley, Massachusetts 02181, doing business under the
name "Silicon Valley East" and SYSTEMSOFT CORPORATION, a Delaware corporation,
with its chief executive offices at Two Vision Drive, Natick, Massachusetts
01760 ("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
1
<PAGE> 2
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to eighty-five percent
(85.0%) of Eligible Accounts with reference to the most recent Borrowing Base
Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the Massachusetts Uniform Commercial Code.
"Committed Revolving Line" means a credit extension of up to
Seven Million Dollars ($7,000,000.00).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of
2
<PAGE> 3
determination thereof unless such Indebtedness is renewable or extendable at the
option of Borrower or any Subsidiary to a date more than one year from the date
of determination, but excluding Subordinated Debt.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 4.4. Unless
otherwise agreed to by Bank in writing, Eligible Accounts shall not include the
following:
(a) Accounts that the account debtor has failed to pay within
thirty (30) days of due date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within thirty (30)
days of due date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%)
of all Accounts, to the extent such obligations exceed the aforementioned
percentage, except as approved in writing by Bank;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States except for Eligible
Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof, except for those Accounts of the United States or any
department, agency or instrumentality thereof as to which the payee has assigned
its rights to payment thereof to Bank and the assignment has been acknowledged,
pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. 3727);
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the account
debtor (sometimes referred to as "contra" accounts, e.g. accounts payable,
customer deposits, credit accounts etc.);
(g) Accounts generated by demonstration or promotional equipment,
or with respect to which goods are placed on consignment, guaranteed sale, sale
or return, sale on approval, bill and hold, or other terms by reason of which
the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its reasonable discretion, that there may be a basis for dispute (but only to
the extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its
3
<PAGE> 4
reasonable discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States and that are: (1) covered by credit insurance in form and amount, and by
an insurer satisfactory to Bank less the amount of any deductible(s) which may
be or become owing thereon; or (2) supported by one or more letters of credit
either advised or negotiated through Bank or in favor of Bank as beneficiary, in
an amount and of a tenor, and issued by a financial institution, acceptable to
Bank; or (3) that Bank approves on a case-by-case basis. The following Accounts
shall be deemed Eligible Foreign Accounts, provided that such are also Eligible
Accounts, as defined herein:
TOSHIBA, NEC, CANON, CASIO, ACER, SANYO, SEIKO, SHARP, TDK,
ASE, CHICONY ELECTRONICS, CLEVO CO., COMPAL ELECTRONICS, MOTOROLA, OMNI
TECHNOLOGIES, PRIMAX ELECTRONICS, AND TWIN HEAD INTERNATIONAL.
Upon the request of the Borrower, the Bank shall review any foreign accounts of
the Borrower which were not in existence as of the date hereof, and shall notify
the Borrower in writing to the extent that the Bank shall deem any such accounts
as Eligible Foreign Accounts.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Guarantor" means any present or future guarantor of the
Obligations.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
4
<PAGE> 5
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Letter of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in
Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the Revolving Maturity Date.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, including the Committed Revolving Line, whether absolute or
contingent, due or to become due, now existing or hereafter arising, including
any interest that accrues after the commencement of an Insolvency Proceeding and
including any debt, liability, or obligation owing from Borrower to others that
Bank may have obtained by assignment or otherwise.
"Patents means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
5
<PAGE> 6
"Payment Date" means the first calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Revolving Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank; and
(c) investment in the common stock of related entities up to the
amount of $2,000,000.00, in each instance, and $4,000,000.00, in the aggregate,
which investments shall be treated as intangible assets for purposes of this
Agreement.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, PROVIDED the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that
6
<PAGE> 7
the Lien is confined solely to the property so acquired and improvements
thereon, and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license provided that such leases, subleases, licenses and sublicenses do not
prohibit the grant of the security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with maturities of
fewer than 120 days and treasury bills with maturities of fewer than twelve
months of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means __________, 1998. The Bank may,
in its sole discretion, renew the Committed Revolving Line, and extend the
Revolving Maturity Date for an additional one year period, provided that there
is no continuing Event of Default, and that the Borrower is in compliance with
all terms and conditions of this Agreement.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries MINUS, without
duplication, (i) the
7
<PAGE> 8
sum of any amounts attributable to (a) goodwill, (b) intangible items such as
unamortized debt discount and expense, patents, trade and service marks and
names, copyrights and research and development expenses except prepaid expenses,
and (c) all reserves not already deducted from assets, and (ii) Total
Liabilities.
"Total Liabilities" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Assignor connected
with and symbolized by such trademarks.
1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 ADVANCES. Borrower promises to pay to the order of Bank, in lawful
money of the United States of America, the aggregate unpaid principal amount of
all Advances made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Advances at rates in accordance
with the terms hereof.
2.1.1 (a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding
amount not to exceed (I) the Committed Revolving Line or the Borrowing Base,
whichever is less, minus (ii) the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit). Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term of this
Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific
time, on the Business Day that the Advance is to be made. Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of EXHIBIT A hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this Section 2.1 and other
amounts due
8
<PAGE> 9
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.1.2 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of
the Committed Revolving Line or the Borrowing Base, whichever is less, minus
(ii) the then outstanding principal balance of the Advances. Each Letter of
Credit shall have an expiry date no later than one hundred eighty (180) days
after the Revolving Maturity Date, provided that Borrower's Letter of Credit
reimbursement obligation shall be secured by cash on terms acceptable to Bank at
any time after the Revolving Maturity Date if the term of this Agreement is not
extended by Bank. All Letters of Credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of standard Application and Letter of Credit
Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(d) Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
2.1.3. Foreign Exchange Contract; Foreign Exchange Settlements.
-------------------------------------------------------
(a) Subject to the terms of this Agreement, Borrower may enter
into foreign exchange contracts (the "Exchange Contracts") not to exceed an
aggregate amount of $7,000,000.00 (the "Contract Limit"), pursuant to which Bank
shall sell to or purchase from Borrower foreign currency on a spot or future
basis. Borrower shall not request any Exchange Contracts at any time it is out
of compliance with any of the provisions of this Agreement. All Exchange
Contracts must provide for delivery of settlement on or before ________, 1999.
The amount available under the Committed Revolving Line at any time shall be
reduced by the following amounts (the "Foreign Exchange Reserve") on any given
day (the "Determination Date"): (i) on all outstanding
9
<PAGE> 10
Exchange Contracts on which delivery is to be effected or settlement allowed
more than two business days after the Determination Date, 10% of the gross
amount of the Exchange Contracts; plus (ii) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement allowed within two
business days after the Determination Date, 100% of the gross amount of the
Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange Contracts
at any time (a) that an Event of Default occurs or (b) that there is no
sufficient availability under the Committed Revolving Line and Borrower does not
have available funds in its bank account to satisfy the Foreign Exchange
Reserve. If Bank terminates the Exchange Contracts, and without limitation of
any applicable indemnities, Borrower agrees to reimburse Bank for any and all
fees, costs and expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and settlement allowed in
any two business day period to be more than $15,000,000.00 (the "Settlement
Limit") nor shall Borrower permit the total gross amount of all Exchange
Contracts to which Borrower is a party, outstanding at any one time, to exceed
the Contract Limit. Notwithstanding the above, however, the amount which may be
settled in any two (2) business day period may be increased above the Settlement
Limit up to, but in no event to exceed, the amount of the Contract Limit under
either of the following circumstances:
(i) if there is sufficient availability under the Committed
Revolving Line in the amount of the Foreign Exchange Reserve as of each
Determination Date, provided that Bank in advance shall reserve the full amount
of the Foreign Exchange Reserve against the Committed Revolving Line; or
(ii) if there is insufficient availability under the
Committed Revolving Line, as to settlements within any two (2) business day
period, provided that Bank, in its sole discretion, may: (A) verify good funds
overseas prior to crediting Borrower's deposit account with Bank (in the case of
Borrower's sale of foreign currency); or (B) debit Borrower's deposit account
with Bank prior to delivering foreign currency overseas (in the case of
Borrower's purchase of foreign currency).
(d) In the case of Borrower's purchase of foreign currency,
Borrower in advance shall instruct Bank upon settlement either to treat the
settlement amount as an advance under the Committed Revolving Line, or to debit
Borrower's account for the amount settled.
(e) Borrower shall execute all standard from applications and
agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.
(f) Without limiting any of the other terms of this Agreement or
any such standard form applications and agreement of Bank, Borrower agrees to
indemnify Bank and hold it harmless, from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and expenses (including,
without limitation, attorneys' fees of counsel of Bank's choice), of every
nature and description which it may sustain or incur, based upon, arising out
of, or in any way relating to any of the Exchange Contracts or any transactions
relating thereto or contemplated thereby.
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2.2 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to this Agreement is greater than
the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) INTEREST RATE. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average daily balance thereof, at a per
annum rate equal to the PRIME Rate.
(b) DEFAULT RATE. All Obligations shall bear interest, from and
after the occurrence of an Event of Default (with respect to a default under
Section 7.2, only violations of Sections 5.8 through 5.13, inclusive), at a rate
equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on each
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number 700540770 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any such debits against Borrower's accounts in no
way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from time
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by
an amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 3:00 p.m.
Pacific time shall be deemed to have been received by Bank as of the opening of
business on the immediately following Business Day. Whenever any payment to Bank
under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
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2.5 Fees. Borrower shall pay to Bank the following:
----
(a) FACILITY FEE. As compensation for the Bank's maintenance of
sufficient funds available for such purpose, the Bank shall have earned a
Facility Fee (so referred to herein), which fee shall be paid quarterly, on a
calendar year basis, in arrears, in an amount equal to one quarter of one
percent (0.25%) of the average unused portion of the Committed Revolving Line,
as determined by the Bank. The Borrower shall not be entitled to any credit,
rebate or repayment of any Facility Fee previously earned by the Bank pursuant
to this Section notwithstanding any termination of the within Agreement, or
suspension or termination of the Bank's obligation to make loans and advances
hereunder;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of the Borrower's assets and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) BANK EXPENSES. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due.
2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement, and the result of any of the foregoing is to
increase the cost to Bank, reduce the income receivable by Bank or impose any
expense upon Bank with respect to any loans, Bank shall notify Borrower thereof.
Borrower agrees to pay to Bank the amount of such increase in cost, reduction in
income or additional expense directly related to the foregoing law, regulation,
treaty or official directive, as and when such cost, reduction or expense is
incurred or determined, upon presentation by Bank of a statement of the amount
and setting forth Bank's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error.
2.7 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 11.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
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3. CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) insurance certificate;
(d) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(e) Certificate of Legal Existence/Foreign Corporation
Qualification; and
(f) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to
make each Advance including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 4
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
4.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
4.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which
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Borrower is bound. Borrower is not in default under any agreement to which it is
a party or by which it is bound, which default could have a Material Adverse
Effect.
4.3 NO ENCUMBRANCES. Borrower has good and indefeasible title to the
assets shown on the Borrower's balance sheet, free and clear of Liens, except
for Permitted Liens.
4.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
4.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects
of good and marketable quality, free from all material defects.
4.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business and will notify the Bank within
thirty (30) days if the Borrower is conducting business under any name other
than that specified on the signature page hereof. If the Borrower grants the
Bank a security interest in all or any portion of its assets, the Borrower shall
provide the Bank with 30 days prior notice of any name change. The chief
executive office of Borrower is located at the address indicated in Section 9
hereof.
4.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's assets.
4.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
4.9 SOLVENCY. The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
4.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor
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Standards Act. Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
4.11 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
4.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein,
except those being contested in good faith by proper proceedings with adequate
reserves under GAAP.
4.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
4.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
4.15 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
5. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
5.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
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5.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Borrower's assets.
5.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within ninety (90)
days after the end of Borrower's fiscal year, audited consolidated financial
statements of Borrower prepared in accordance with GAAP, consistently applied,
together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (b)
within five (5) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (c) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (d) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within thirty (30) days after the last day of each quarter, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT B hereto, together with aged listings of
accounts receivable.
Borrower shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT C hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
5.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
5.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws,
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including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Bank with proof satisfactory to Bank indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is (I) contested in good faith by appropriate proceedings , (ii) is reserved
against (to the extent required by GAAP) by Borrower and (iii) no lien other
than a Permitted Lien results.
5.6 Insurance.
---------
(a) Borrower, at its expense, shall keep its assets insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of its assets in amounts and of a type
that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Bank.
5.7 PRINCIPAL DEPOSITORY. Borrower shall maintain an operating
account with Bank.
5.8 QUICK RATIO. Borrower shall maintain as of the last day of each
quarter beginning July 31, 1997, a ratio of Quick Assets to Current Liabilities
of at least 2.0 to 1.0.
5.9 TANGIBLE NET WORTH. Borrower shall maintain as of the last day of
the quarter ending July 31, 1997, a Tangible Net Worth of at least
$24,000,000.00. The required Tangible Net Worth for each successive quarter
shall increase by an amount equal to twenty-five percent (25.0%) of the
cumulative retained earnings of the Borrower from and after August 1, 1997.
5.10 PROFITABILITY. Beginning with the quarter ending July 31, 1997,
and thereafter, Borrower shall not have a operating loss for two (2) consecutive
quarters, and shall be profitable for each fiscal year.
5.11 DEBT-NET WORTH RATIO. Borrower shall maintain, as of the last day
of each quarter beginning with the quarter ending July 31, 1997, a ratio of
Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated
Debt of not more than 1.2 to 1.0.
5.12 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower shall (i)
protect, defend and maintain the validity and enforceability of the Trademarks,
Patents, Copyrights, (ii) use its best efforts to detect infringements of the
Trademarks, Patents, Copyrights and promptly advise Bank in writing of material
infringements detected and (iii) not allow any Trademarks, Patents, or
Copyrights to be abandoned, forfeited or dedicated to the public without the
written consent of Bank, which shall not be unreasonably withheld, unless Bank
determines that reasonable business practices suggest that abandonment is
appropriate.
5.13 ANNUAL CLEAN-UP PERIOD. The outstanding principal balance of the
Committed Revolving Line shall be reduced on an annual basis to zero dollars
($0.00), for their (30) or more consecutive days.
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5.14 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
6. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any Advance hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following, without the prior written consent of the Bank,
which consent shall not be unreasonably withheld or delayed:
6.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than Transfers: (i) of
inventory in the ordinary course of business, (ii) of licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; (iii) that constitute payment of normal and usual
operating expenses in the ordinary course of business;; or (iii) of worn-out or
obsolete Equipment.
6.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS LOCATIONS.
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto),
including, but not limited to software developments, and limited hardware
development in support of such software development. Unrelated lines of business
may be added with the written consent of the Bank, which consent shall not be
unreasonably withheld or delayed. Borrower will not, without at least thirty
(30) days prior written notification to Bank, relocate its chief executive
office.
6.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
6.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
6.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
6.6 DISTRIBUTIONS. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
6.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
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6.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
6.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
6.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 9
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
6.11 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum funding requirements of ERISA; permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Borrower's assets; or permit any of its Subsidiaries to do
any of the foregoing.
7. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
7.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.
7.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation hereunder, or
violates any of the covenants contained in this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after NOTIFICATION BY THE BANK;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period (for example, financial covenants) or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and
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<PAGE> 20
such default is likely to be cured within a reasonable time, then Borrower shall
have an additional reasonable period (which shall not in any case exceed thirty
(30) days) to attempt to cure such default, and within such reasonable time
period the failure to have cured such default shall not be deemed an Event of
Default (provided that no Advances will be required to be made during such cure
period). With respect to defaults resulting from the Borrower's failure to
deliver the financial information requested in Section 5.3(b), or 5.3(c) in a
timely manner, the Borrower shall not be in default hereunder unless the
Borrower fails to deliver such information within five (5) days after the Bank
notifies the Borrower of such failure;
7.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value of the
Borrower's assets;
7.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
7.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
7.6 OTHER AGREEMENTS. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of Two Hundred Thousand Dollars
($200,000) or that could have a Material Adverse Effect;
7.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
7.8 JUDGMENTS. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
20
<PAGE> 21
7.9 MISREPRESENTATIONS. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
7.10 GUARANTY. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any Guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank in
connection with such guaranty, or any of the circumstances described in Sections
7.4, 7.5 or 7.8 occur with respect to any Guarantor.
8. BANK'S RIGHTS AND REMEDIES
--------------------------
8.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
7.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Without notice to Borrower, set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank.
8.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to send requests for verification of Accounts to account
debtors.
8.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 5.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided.
21
<PAGE> 22
8.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
8.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
9. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: UP TO OCTOBER 1, 1997:
SystemSoft Corporation
Two Vision Drive
Natick, Massachusetts 01760
Attn: Chief Financial Officer
Fax: (508) 651-8188
AFTER OCTOBER 1, 1997:
Apple Hill
Natick, Massachusetts 01760
Attn: Chief Financial Officer
Fax: (508) 651-8188
If to Bank Silicon Valley East
40 William Street - Suite 350
Wellesley, Massachusetts
Attn: Mr. Douglas W. Marshall
Fax: (617) 431-9906
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
10. CHOICE OF LAW AND VENUE
-----------------------
The laws of the Commonwealth of Massachusetts shall apply to this
Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
22
<PAGE> 23
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK
EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
11. GENERAL PROVISIONS
------------------
11.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
11.2 INDEMNIFICATION. Borrower shall , indemnify ,defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the LOAN DOCUMENTS;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the LOAN DOCUMENTS, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
11.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
11.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
11.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when
23
<PAGE> 24
executed and delivered, shall be deemed to be an original, and all of which,
when taken together, shall constitute but one and the same Agreement.
11.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 11.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
11.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
11.9 COUNTERSIGNATURE. This Agreement shall become effective only when
it shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
24
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SYSTEMSOFT CORPORATION
By: Paul [illegible]
-----------------------------------------
Title: CFO
--------------------------------------
SILICON VALLEY BANK, d/b/a
SILICON VALLEY EAST
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
SILICON VALLEY BANK
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
(Signed in Santa Clara County, California)
25
<PAGE> 26
EXHIBIT A
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
-------------------------
FAX#: TIME:
---------------------------------------- ------------------------
FROM:
---------------------------------------------------------------------------
BORROWER'S NAME
FROM:
---------------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
PHONE:
--------------------------------------------------------------------------
FROM ACCOUNT # TO
----------------------------
ACCOUNT#
-------------------------
================================================================================
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
O T H E R I N S T R U C T I O N S :
================================================================================
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Advance Request; provided,
however, that those representations and warranties expressly referring to
another date shall be true, correct and complete in all material respects as of
such date.
================================================================================
BANK USE ONLY:
================================================================================
<PAGE> 27
================================================================================
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------------
Authorized Requester
------------------------------------
Authorized Signature (Bank)
Phone #
----------------------------
================================================================================
<PAGE> 28
EXHIBIT B
---------
BORROWING BASE CERTIFICATE
Borrower: SystemSoft Corporation Bank: Silicon Valley Bank
Commitment Amount: $ 7,000,000.00
ACCOUNTS RECEIVABLE
i. Accounts Receivable Book Value as of $
--------- -----------
ii. Additions (please explain on reverse) $
----------------
iii. TOTAL ACCOUNTS RECEIVABLE $
----------------
a)
b)ACCOUNTS
RECEIVABLE
DEDUCTIONS (without
duplication)
iv. Amounts over 30 days due $
----------------
v. Balance of 50% over 30 day accounts $
----------------
vi. Concentration Limits $
----------------
vii. Foreign Accounts $
----------------
viii. Governmental Accounts $
----------------
ix. Contra Accounts $
----------------
x. Promotion or Demo Accounts $
----------------
xi. Intercompany/Employee Accounts $
----------------
xii. Other (please explain on reverse) $
----------------
xiii. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------------
xiv. Eligible Accounts (#3 minus #13) $
----------------
15. Eligible Foreign Accounts $
----------------
16. LOAN VALUE OF ACCOUNTS (85.0% of #14) plus
(85.0 % of #15) $
----------------
a)
b)$
c)
d)BALANCES
xv. Maximum Loan Amount $
----------------
xvi. Total Funds Available $
----------------
xvii. Present balance owing on Line of
Credit $
----------------
xviii. Outstanding under Sublimits ( ) $
----------------
xix. RESERVE POSITION $
----------------
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan Agreement
between the undersigned and Silicon Valley Bank.
COMMENTS:
=====================================================
BANK USE ONLY
RECEIVED BY:
-----------------------------------------
DATE:
------------------------------------------------
REVIEWED BY:
-----------------------------------------
COMPLIANCE STATUS: YES / NO
=====================================================
<PAGE> 29
By:
--------------------------------------------------
Authorized Signer
EXHIBIT C
---------
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SystemSoft Corporation
----------------------
The undersigned authorized officer of SystemSoft Corporation hereby
certifies that in accordance with the terms and conditions of the Loan Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ______________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
<TABLE>
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing with the SEC Yes No
A/R Aging & Borrowing Base Certificate Quarterly within 30 days Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 2.0:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $24,000,000.00 * $________ Yes No
Maximum Debt/Tangible Net Worth 1.2:1.0 _____:1.0 Yes No
Profitability: Quarterly See Loan Agreement $________ Yes No
Annually $ no loss $________ Yes No
</TABLE>
* (July 31, 1997) The required Tangible Net Worth for each successive quarter
shall increase by an amount equal to twenty-five percent (25.0%) of the
cumulative retained earnings of the Borrower from and after August 1, 1997.
<PAGE> 30
=====================================================
BANK USE ONLY
RECEIVED BY:
-----------------------------------------
DATE:
------------------------------------------------
REVIEWED BY:
-----------------------------------------
COMPLIANCE STATUS: YES / NO
=====================================================
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
Date:
- ------------------------------------- ---------------------
SIGNATURE
- --------------------------------------
Title
<PAGE> 31
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: SystemSoft Corporation Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $7,000,000.00.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is for working capital
purposes.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $
-------------
Undisbursed Funds $
-------------
Principal $
-------------
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $
-------------
$ Loan Fee
--------
$ Accounts Receivables Audit
--------
Other Charges Paid in Cash: $
-------------
$
--------
Total Charges Paid in Cash $
-------------
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered ____________ the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF __________________, 19___.
BORROWER: SystemSoft Corporation
- ------------------------------------
Authorized Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<EXCHANGE-RATE> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 9,395,518
<SECURITIES> 3,052,757
<RECEIVABLES> 18,053,437
<ALLOWANCES> 1,731,453
<INVENTORY> 0
<CURRENT-ASSETS> 41,984,172
<PP&E> 11,160,972
<DEPRECIATION> 5,200,700
<TOTAL-ASSETS> 54,791,281
<CURRENT-LIABILITIES> 7,291,946
<BONDS> 0
0
0
<COMMON> 265,310
<OTHER-SE> 45,591,984
<TOTAL-LIABILITY-AND-EQUITY> 54,791,281
<SALES> 24,420,008
<TOTAL-REVENUES> 25,381,962
<CGS> 5,262,705
<TOTAL-COSTS> 21,355,904
<OTHER-EXPENSES> (2,021)
<LOSS-PROVISION> 825,375
<INTEREST-EXPENSE> 44,237
<INCOME-PRETAX> 4,132,002
<INCOME-TAX> 1,363,626
<INCOME-CONTINUING> 2,768,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,768,376
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
