<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number
0-24418
-------
SYSTEMSOFT CORPORATION
----------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3121799
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE INNOVATION DRIVE
NATICK, MASSACHUSETTS 01760
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 508-651-0088
------------
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
At April 27, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant was $106,777,228.
At April 27, 1998, 26,856,301 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) SPECIFICALLY IDENTIFIED PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR
THE FISCAL YEAR ENDED JANUARY 31, 1998 ARE INCORPORATED BY REFERENCE INTO PARTS
I, II AND IV OF THIS FORM 10-K AND ARE FILED AS AN EXHIBIT HERETO.
(2) SPECIFICALLY IDENTIFIED PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT
IN CONNECTION WITH THE COMPANY'S 1998 ANNUAL MEETING OF STOCKHOLDERS, WHICH IS
CURRENTLY EXPECTED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WITHIN 120 DAYS OF JANUARY 31, 1998, ARE INCORPORATED BY REFERENCE INTO PART III
OF THIS FORM 10-K.
<PAGE> 2
PART 1
ITEM 1. BUSINESS
CAUTIONARY STATEMENT
When used anywhere in this Form 10-K and in future filings by
SystemSoft Corporation ("SystemSoft," the "Company," or "the Registrant") with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "it is believed," "estimated," "projected," or
"outlook" or similar expressions (including confirmations by an authorized
executive officer of the Company of any such expressions made by a third party
with respect to the Company) are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company advises readers that the various risk factors
described under the caption "Risk Factors" of this Item 1 could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to such future periods.
GENERAL
The Company designs, develops, markets, and supports a variety of
system-level software technologies and automated problem
resolution/troubleshooting and technical support applications for personal
computers ("PCs"), including desktop computers and mobile computers (comprised
of laptop, notebook and subnotebook computers). The Company is a Delaware
Corporation incorporated in 1990.
System-level software is the enabling layer of software in the PC
architecture between the PC's hardware and the operating system. The Company's
major products in this market segment include a family of Basic Input/Output
System ("BIOS") firmware and software, Advanced Configuration and Power
Interface ("ACPI") firmware and software, and power-management software that are
primarily marketed to manufacturers of mobile computers.
Automated problem-resolution/troubleshooting and technical support
applications provide PC users with faster, simpler solutions to common technical
support problems associated with PC usage and lower the total cost of ownership
while simultaneously easing the manufacturer's burden of providing telephone
assistance to the user. The Company actively markets these solutions to PC
manufacturers and software and peripheral makers.
PRODUCTS
SystemSoft, CardSoft and CardWizard are registered trademarks and
SystemWizard, PowerProfiler, ACPI Builder are trademarks of SystemSoft
Corporation. Microsoft and Windows are registered trademarks of Microsoft
Corporation. All other trademarks, registered trademarks or tradenames are the
property of their respective holders.
MARKET BACKGROUND: SYSTEM-LEVEL SOFTWARE
Since their introduction in 1981, personal computers based on Intel
Corporation ("Intel") processor hardware and Microsoft Corporation ("Microsoft")
operating systems have grown to dominate the market. There are four basic
technologies in the architecture of these PCs: application software, operating
system software, system-level software and hardware.
o APPLICATION SOFTWARE is the software that performs end-user
tasks, such as word processing and data analysis. Microsoft Word,
Lotus Notes, and Intuit Quicken are examples of widely used
application programs.
o OPERATING SYSTEM SOFTWARE allows PC hardware to control the
sequencing and processing of applications and respond to a PC
user's commands, such as storing data, displaying data, and
running an application program. Microsoft's Windows 95/98 and
Windows NT are the dominant operating systems in the market for
Intel-based PCs.
o SYSTEM-LEVEL SOFTWARE is a necessary component in every PC. It
enables the PC's operating system to recognize, configure, and
communicate with the hardware and peripherals (such as printers or
scanners).
2
<PAGE> 3
o PC HARDWARE consists of microprocessors, also known as central
processing units ("CPUs"), CPU-support chipsets, memory,
input-output devices (such as monitors and keyboards) and various
other peripheral devices (such as printers, modems and CD-ROM
drives). Intel's family of Pentium processors are the leading CPUs
in the PC market.
Mobile computers have given end users additional flexibility in how,
where, and when they work. Greater numbers of business professionals are using
mobile PCs. Mobile computers, however, have historically had limitations in
functionality because size and weight considerations have constrained memory
capacity and restricted use of peripherals. Mobile computers had been
functionally restricted to whatever Original Equipment Manufacturers ("OEMs")
could fit on their main circuit board or "motherboard." The number and variety
of peripherals, including faxes, modems, CD-ROM drives and printers, have grown
with the overall PC market. However, mobile computers have a limited number of
external adapters or "ports" to add on peripheral devices. Moreover, even
sophisticated users of mobile and desktop PCs have difficulty installing and
using these enhancements since the computer operating system must be
reconfigured to eliminate internal conflicts.
Another limitation for mobile computers is battery life. Each new
generation of CPUs typically consumes more power, and the use of peripherals
demands additional power as well, taxing battery capacity. Accordingly,
sophisticated power management has become critical to the design of all mobile
devices to permit longer use between battery charging.
Over the life of the PC market, several technologies and initiatives
have emerged that address some of these limitations by enhancing the
functionality and flexibility of both desktop and mobile PCs. These technologies
include:
o BIOS SOFTWARE - BIOS software enables PC hardware components to
accept commands from and deliver commands to the computer's
operating system software. The Company's BIOS software enables
OEMs to support the Intel and Intel-compatible standard and helps
PC OEMs achieve compatibility with Microsoft operating systems.
o ADVANCED CONFIGURATION AND POWER INTERFACE (ACPI) - ACPI is a new
layer in the system-software level that enables the operating
system to directly control configuration of devices and manage
power consumption directly, raising certain functions that were
previously controlled by the BIOS to the operating system level.
The ACPI specification, developed by Intel, Microsoft and Toshiba
America Information Systems Inc., allows the PC operating system
to monitor and control system configuration and power management.
ACPI is a requirement for Microsoft's PC97 and PC98 designs, and
is a key element of Microsoft's OnNow and Simply Interactive PC
(SIPC) Initiatives.
o HOT DOCKING - Users are increasingly seeking to use their mobile
computers as a single, complete replacement for the desktop
computer, enabling them to use a single machine for office or
traveling use. This has led to a growing requirement for users to
insert and remove their powered-up notebook from a "docking
station" that resides on the desktop. Through a single slide-in
docking port, a docking station provides instant connection to all
of the conveniences of desktop computing, including larger
keyboard, full-size monitor, network connection, and a mouse,
among others.
o POWER MANAGEMENT - Early mobile computers derived their power
solely by plugging into an AC power source. Today, mobile
computers can also run on battery-only power as well, improving
their versatility and ease-of-use. The power requirements of these
computers, however, have increased with the use of more powerful
CPUs and a larger number of power-consumptive peripheral devices.
Accordingly, sophisticated power management has become critical to
the design of mobile computers and other computerized devices to
permit longer use between battery charging. Power management
software reduces power consumption by monitoring a computer's
operating system and hardware for idle states, stopping or slowing
a CPU's clock after a predetermined period of inactivity,
suspending or powering down system components, and turning off all
unnecessary system components and operations while saving all
system information to appropriate memory. Power management systems
have been particularly important for mobile systems to extend
battery life and to reduce heat generation by powerful CPUs.
COMPANY PRODUCTS: SYSTEM-LEVEL SOFTWARE
o MOBILEPRO BIOS - The Company markets MobilePro BIOS, a modular Basic
Input/Output System software/firmware suite that supports the latest
desktop and mobile computing standards and platforms. Leading PC
vendors that shipped SystemSoft's BIOS software in fiscal 1998 include
Acer Inc., Canon Inc., Compaq Computer Corporation, Digital Equipment
Corporation, Hitachi Ltd., Hewlett-Packard Company and NEC
Corporation. MobilePro is the foundation of SystemSoft's system-level
software suite, which extends to value added firmware layers for
Peripheral Component Interconnect (PCI), Plug and Play, Hot Docking,
Power Management, DMI, USB and ACPI support, as well as easily
customizable system control utilities to enable more technically
advanced designs. SystemSoft's BIOS products are designed around a
modular core with customizable source code that allows system
engineers to easily implement OEM-specific features into the software.
The
3
<PAGE> 4
modularity of the Company's BIOS software enables the Company to
quickly respond to changes in the hardware design provided by each PC
manufacturer because typically these changes, such as adding a new
CPU, may only require modifications to a particular module of the
Company's BIOS software.
o ACPI ROM AND ACPI BUILDER - The Company has developed a
BIOS-independent ACPI firmware solution that provides OEMs with fully
compliant ACPI 1.0 support for their PCs. ACPI support is part of the
PC97 specification and is now a requirement for PCs that wish to carry
Microsoft logo certification. In addition, the Company has also
created ACPI Builder which simplifies and speeds the development of
OEM customizations of their ACPI firmware implementation.
o KEYPRO KEYBOARD FIRMWARE - SystemSoft's KeyPro family of keyboard
controller and scanner firmware is compatible with the
industry-standard 8042 interface and enables PC manufacturers to
implement keyboard designs based on popular controllers.
o POWERPROFILER - PowerProfiler is SystemSoft's solution for managing
mobile computer power consumption. It includes system-level software
and an end-user application for configuring various power management
options and displaying battery-power status, and a Windows NT Advanced
Power Management (APM) compliant 1.2 kernel that adds power management
to Windows NT. The Company's power management software for mobile
computers supports Intel and Intel-compatible CPUs and provides
support for DOS, Windows, OS/2, and Windows NT operating systems. The
Company believes that its PowerProfiler software is well positioned to
add value in the Windows NT 4.0 market, since NT does not offer a high
level of power management for mobile PC users. In the past fiscal
year, the Company began licensing PowerProfiler from its Web site
directly to mobile PC users who have upgraded to Windows NT 4.0 and
are seeking a greater level of power management.
MARKET BACKGROUND: PC CARD SOFTWARE
The PC Card standard is an industry standard set by the Personal
Computer Memory Card International Association (PCMCIA) that enables PCs and
other electronic devices to automatically recognize, install and configure
peripherals (i.e., modems, flash memory and network cards) incorporated in
credit card-sized PC Cards. PC Card software provides both a connectivity layer
that facilitates the addition, configuration and use of peripheral devices, and
a hardware adaptation layer that comprises the communication link between a PC's
operating system software and hardware. Each new version of hardware or
operating system software generally requires new system-level software.
The purpose of PC Cards was to create a standard for sockets and credit
card-sized cards containing memory and peripheral devices that take up less room
and are easily inserted by a user into a mobile computer or electronic device
without the traditional complexities and frustrations of installation. PC Card
technology provides expanded memory and increased flexibility and functionality,
not by changing the computer's motherboard or by installing separate peripheral
circuit boards internally, but rather by inserting credit card-sized PC Cards
into sockets built into the mobile computer. PCMCIA has issued standards for
buses, connectors, silicon chips and software to make PC Cards easy to use in
IBM and IBM-compatible computers. PC Card sockets are currently being offered as
standard equipment by most mobile computer manufacturers.
Newer versions of Windows 95 and the forthcoming release of Windows 98
have incorporated larger portions of system-level software to facilitate the use
of PC Cards. However, usability and functionality gaps still exist in operating
system support for Flash memory, SRAM and network PC Cards. In addition, Windows
NT 4.0 offers very limited support for PC Card usage.
COMPANY PRODUCTS: PC CARD SOFTWARE
o CARDWIZARD - SystemSoft's CardWizard family of PC Card software for
Microsoft Windows 95/98 and Windows NT 4.0 consists of both
system-level software that provides card and socket services for
implementing PC Cards in PCs and an end-user application that
simplifies the installation, configuration, and usage of PC Cards.
SystemSoft is the worldwide leader for PC Card Software, licensing
software to 17 of the top 20 notebook PC vendors worldwide. The
CardWizard end-user application enables users to automatically
diagnose and troubleshoot PC Card configuration problems, resolve
resource conflicts, receive notification of PC Card activities and
launch applications upon card insertion. In particular, the Company
believes that it is well positioned to capitalize on the Windows NT
4.0 market opportunity. CardWizard for Windows NT 4.0 supports more
than 470 PC Cards - many of which are unsupported solely by Windows NT
4.0. CardWizard for Windows NT 4.0 is certified under Microsoft's
Designed for Windows logo program. In the most recent fiscal year, the
Company began selling CardWizard NT 4.0 from its Web site directly to
PC users who have notebook PCs that they are upgrading to Windows NT
4.0 and who need the added PC Card support to which they've been
accustomed. The product is currently licensed by more than 25 notebook
PC OEMs including Toshiba, NEC, and IBM and is shipping on 35 new
systems.
4
<PAGE> 5
MARKET BACKGROUND: AUTOMATED SOLUTIONS FOR TECHNICAL SUPPORT PROBLEM RESOLUTION
Computer and peripheral manufacturers continue to face significant
costs associated with providing telephone technical support to their customers.
Increasing complexity in all areas of the PC architecture - from applications
and operating systems to power-management and peripheral usage - and an
increasingly novice base of customers have combined to drive up both the volume
and length of technical support calls, as well as its associated costs.
According to Dataquest 1996, estimates for providing this assistance approximate
$4 billion annually.
Automated problem-resolution technologies provide a series of automated
and computer-assisted techniques for resolving technical support problems
through expert diagnosis engines, knowledge bases and automated instrumentation.
The goal of these technologies is to reduce the number of calls to support
manufacturers, or - at minimum - reduce the length of such calls.
In the consumer PC market, PC price levels continue to drop
dramatically. The Company believes that this dynamic increases the potential
need for technology such as SystemWizard. So-called "Sub-$1,000" PCs are a
fast-growing segment of the market, opening up PC purchases to an increasing
number of less-experienced users. This decrease in PC price has also negatively
impacted profit margins. This is further motivating OEMs to find automated
support solutions.
Among mobile PC users, the emphasis is on ensuring usability and smooth
operation regardless of where in the world the user may be. Mobile professionals
require top-quality support since downtime is costly to them. The Company
believes that sophisticated product offerings that increase PC usability for
mobile professionals will be an important factor in this market.
In the larger corporate PC market - for desktops and mobile PCs,
corporate IT managers face renewed concerns regarding stringent management of
the so-called "total cost of ownership" or TCO. The Company believes that
solutions that reduce burdens on corporate support centers and MIS help desks
will be an important market factor.
COMPANY PRODUCTS: AUTOMATED SOLUTIONS FOR TECHNICAL SUPPORT PROBLEM RESOLUTION
o SYSTEMWIZARD - SystemWizard is the Company's end-to-end solution that
automatically detects, diagnoses, and resolves many problems with PCs
and peripherals by: resolving problems immediately on the PC;
integrating with remote up-to-date Knowledge Bases; and providing
support engineers with tools to reduce call lengths and rapidly
distribute new solutions. The Company has invested heavily to address
the entire problem-resolution cycle through Internet-based
extensibility, improved call-processing efficiency, and a dynamic
architecture for gathering and publishing support knowledge. The key
components include:
o SYSTEMWIZARD CLIENT FOR CALL AVOIDANCE - SystemWizard
Client solves problems on-the-spot through a diagnosis
engine and local Knowledge Base on the user's PC.
SystemWizard Client targets to solve as many as 20 percent
of common problems without a call. In the last fiscal
year, SystemSoft released a version of SystemWizard Client
for mobile PC platforms.
o SYSTEMWIZARD SERVER FOR CALL DEFLECTION - SystemWizard
can connect to remote SystemWizard Servers to obtain newer
Knowledge Bases. This is an automated process requiring no
live OEM support intervention. This typically targets an
additional 10 percent of problems.
o SYSTEMWIZARD TECHNICIAN FOR CALL EFFICIENCY - In the
event a solution is not contained on the SystemWizard
Server, SystemWizard can connect the user to a support
technician and provide that technician with a "trouble
ticket" of system information that speeds the resolution
process. SystemWizard Technician also enables the support
representative - on the same call and on the same phone
line - to examine the user's PC online, check
configurations and make appropriate changes. This step
typically reduces the duration of simple calls by 10-15
percent.
o SYSTEMWIZARD BUILDER FOR CALL RESOLUTION - SystemWizard
Builder enables support technicians to create automated
solutions for new problems and publish them on
SystemWizard Servers for future automated resolution
without intervention from the technician.
o SYSTEMALERT - In the last year, SystemSoft released SystemAlert, a
new OEM application, under license from a third party, for protecting
the OEM configuration of critical system files, settings and
configurations from damage or accidental corruption.
5
<PAGE> 6
o SYSTEMTRAINER - SystemSoft also released a new series of online
multimedia tutorials for novice users under license from the same
third party. OEMs can choose from more than 40 animated lessons that
are targeted at helping users through the first several weeks of PC
ownership, when learning curves are steepest.
MARKET BACKGROUND: UNIVERSAL SERIAL BUS
The Universal Serial Bus ("USB") standard is designed to bring new
levels of usability for desktop computer users. Through identical connectors
consolidated into a single port, intrinsic power management and
hot-swappability, USB brings "plug-and-play" ease to desktop peripherals that
connect to the outside of the PC-monitors, scanners, keyboards, mice, modems and
PBX interfaces, among others. This new standard supports up to 127 distinct
devices that roll-up through hub devices to consolidate into a single port on
the PC through standard, small connectors (flat, 4-pin) and thin cables for each
device - no more unwieldy, thick cables with large, difficult connectors. USB
lets users plug and unplug devices without powering down, and its low cost
profile is ideally suited for medium- and low-speed peripherals.
In the past 18 months, the Company initiated engineering efforts to
develop a suite of USB-supporting firmware, drivers and applets targeted at
makers of PC peripheral devices. The market for USB firmware and software,
however, has grown slower than expected by the Company. PC peripheral
manufacturers are awaiting support for USB in Windows 98 which has been delayed.
As a result of this delay in market adoption, expected royalties on SystemSoft's
USB technology did not keep up with development investments. As a result, at the
close of the fiscal year, SystemSoft licensed its USB technology to a new,
independent corporation led by the former chief technology officer of the
Company. In return for this license, the Company received a 15 percent ownership
in this new venture.
SERVICES
OEMs frequently engage the Company to provide engineering services to
assist in customizing the Company's software to the unique specifications,
feature sets and requirements of new PC versions. These services are generally
quoted for projects based on estimated time to complete the project. The payment
of fees for such services depends on the achievement of negotiated milestones.
The Company is committed to providing strong technical support to its customers.
The Company generally provides updates, corrections and enhancements to licensed
software at no additional charge for one year following the grant of the
license.
PRIMARY MARKETS
The Company primarily markets its system-level software products to the
manufacturers of mobile personal computers based on the Intel/Microsoft
standard. The Company is currently focusing on opportunities associated with
Windows 95, Windows 98, Windows NT 4.0 and Windows NT 5.0 deployed on Intel's
family of Pentium and Pentium II as well as compatible processors.
The Company primarily markets its PC Card software products to
manufacturers of mobile PCs based on the Intel/Microsoft standard.
In the past year, the Company has successfully marketed its Windows NT
4.0-based PC Card and power management software from its Web site. The move is
in response to corporate users who have upgraded their mobile PCs to Windows NT
4.0 and wish to enjoy the same PC Card and power-management functionality they
enjoyed on Windows 3.1 or Windows 95.
The Company's automated solutions for technical support problem
resolution are primarily marketed to manufacturers of desktop and mobile PCs in
a variety of segments, depending upon the model of the PC. These include
consumer, small office/home office, corporate desktops, and corporate mobile
PCs. In addition, the Company has begun to directly target the corporate market
(post-PC purchase) through partnered offerings that address the needs of
corporate support organizations in larger enterprises.
6
<PAGE> 7
LICENSING
The Company licenses the source code for its software for a fixed fee.
The Company also grants object code licenses entitling its OEM, PC Card and
peripheral manufacturer customers to include the Company's software in their
products. For this license grant, the Company is generally paid a royalty based
on unit volumes and minimum licensing commitments. In addition, the Company also
charges fixed fees for a specific period of time in lieu of per unit royalties.
These manufacturers are authorized to reproduce the software, provided that the
Company's proprietary rights are clearly noted and protected. Accordingly, the
Company does not engage in any significant manufacturing operations.
Licensees of SystemSoft's software may license subsets of the Company's
technologies as separate modules. This modularity accommodates specific customer
needs and generally permits favorable pricing for customers who license multiple
modules.
RELATIONSHIP WITH INTEL
As of April 15, 1998, Intel held 1,994,847 shares of the Company's
Common Stock.
In December 1993, the Company entered into a Development and License
Agreement with Intel (the "Intel Agreement") pursuant to which Intel licenses
certain technologies to the Company. The Company develops, markets and supports
the software developed from Intel's technology. The final payment under the
Intel Agreement was received in September 1995.
In consideration of Intel's technology provided and licensed to the
Company under the Intel Agreement, the Company is obligated to pay Intel
royalties based on a percentage of revenues generated on all licensed works
developed under the Intel Agreement. Royalties are based upon a percentage of
revenues generated on PC Card software from February 1, 1994 through January 31,
1999 or beyond such dates if the Company's PC Card software contains Intel's
licensed technology. The royalties paid to Intel are included in cost of
revenues. Intel has the right on sixty days notice to convert any exclusive
license to a non-exclusive license, however such conversion would reduce the
royalty payments by fifty percent.
In October 1995 the Intel Agreement was amended to include engineering
services on additional products. The agreement provides the Company with
engineering service payments up to $3,600,000, which included an initial payment
of $600,000 and subsequent quarterly payments of $375,000 commencing on January
1, 1996, through October 1, 1997. Revenue is recognized as work is performed and
milestones are met. Payments to the Company can be made by offsetting amounts
from royalties due to Intel under the Intel Agreement, to the extent, if any,
that such earned royalties are less than the amounts payable to the Company.
Royalties earned by Intel of $1,164,080, $951,507 and $452,278 were used to
offset amounts owed to the Company in fiscal 1998, 1997 and 1996, respectively.
Included in accounts receivable are amounts due from Intel amounting to $40,570
and $1,466,015 at January 31, 1998 and 1997, respectively.
In December 1997, the Company entered into an agreement with Intel
which requires the Company to make guaranteed payments of $4,263,000 in lieu of
future royalties which would have been paid over the life of certain of the
Company's call avoidance software products. The guaranteed payments are
comprised of $1,022,000 of cash payments made in fiscal 1998 and $3,241,000 of
cash payments to be paid at various dates during fiscal 1999 and 2000.
SALES AND MARKETING
SystemSoft uses a direct sales force and consultative sales approach to
provide current and prospective customers information about its products and new
technologies that are offered by providers of CPUs, CPU-support chipsets, and
operating system software. The Company's goal is to become an engineering
partner, working with its customers' engineering teams to assist in their
adoption of the Company's software. The Company has instituted a strategic
account management program to assist key customers in their use of the Company's
software. These key strategic accounts represent a loyal customer base, help
provide strategic product direction and serve as a foundation for future
revenues.
The Company's sales and marketing organization, consisting of 59
persons as of January 31, 1998, operates from the Company's headquarters in
Natick, Massachusetts and its field sales offices in Santa Clara, California,
Yokohama, Japan and Taipei, Taiwan. The Company's sales and marketing
organization is complemented by two independent manufacturers' representatives
in Asia Pacific and Europe. Representatives generally are compensated by
7
<PAGE> 8
commissions and are paid only when payments are received from customers. The
Company utilizes this supplemental sales channel to improve worldwide sales
coverage without increasing fixed payroll expense. For sales in territories
covered by both representatives and the Company's direct sales force, the
Company pays commissions to each. The Company may also provide end users with
upgrades and enhancements to the Company's PC Card software through indirect
distribution channels.
In support of its sales efforts, the Company conducts comprehensive
marketing programs aimed at current and prospective customers, including
industry trade shows, seminars, public relations efforts, and participation in
industry committees and communications programs.
CUSTOMERS
The Company's customers include OEMs, including PC manufacturers and PC
Card manufacturers, hardware component manufacturers, operating system software
companies, and technical support services companies. As of January 31, 1998,
SystemSoft had licensed its software to more than 150 PC manufacturers or
component vendors and its PC Card software or services have been licensed by a
majority of the top 20 notebook PC vendors.
The Company strives to maintain and develop key customer relationships
with leaders in the PC market, such as Intel, Microsoft, IBM, Packard Bell NEC
and Sykes. For example, the Company's first commercial product was a joint
development project with Intel to develop a low-power device for the portable
computing market. See "Business -- Relationship with Intel." In July 1993,
Microsoft licensed the Company's base-level PC Card software and engaged the
Company to assist in the implementation of the Company's software for the
Windows 95 operating system. See "Business -- SystemSoft Strategy."
In fiscal 1998, Sykes and Toshiba each accounted for more than 10% of
the Company's revenues; in fiscal 1997 no single customer accounted for more
than 10% of the Company's revenues; and in fiscal 1996 Compaq Computer Corp. and
Intel each accounted for more than 10% of the Company's revenues. In fiscal year
1998, 70% of the Company's revenues were derived from customers in the United
States, 29% from customers in the Asia Pacific Region and 1% from customers in
Europe. Sales to customers in Taiwan are generally denominated in U.S. dollars.
Sales to customers in Japan are denominated in Japanese yen or U.S dollars.
Revenues attributable to PC Card were $16,425,000, $16,540,000 and
$14,767,000 in fiscal 1998, 1997 and 1996 respectively; revenues attributable to
Platform products were $12,555,000, $9,001,000 and $6,013,000 in fiscal 1998,
1997 and 1996 respectively; revenues attributable to SystemWizard were
$14,767,000 and $6,013,000 in fiscal 1998 and 1997, respectively. SystemWizard
revenues were less than 15% of total revenues in fiscal 1996.
PRODUCT DEVELOPMENT
The Company's engineering efforts are divided between new product
development and product implementations for particular customers. Because the
needs and priorities of its customers vary, it has been and remains a priority
within the Company's Product Architecture Group to develop modular software
which makes customization efforts faster and easier. Software modularity also
facilitates the continuous upgrade and improvements of the Company's software
required by the rapid evolution of standards and technologies in the PC market.
New product development efforts usually begin as research and
development projects headed by a member of the Company's Product Architecture
Group. Through active participation in several industry associations, the
members of this group acquire insights into industry trends and requirements.
The Company believes their participation in these committees often allows the
Company's views to be better expressed in the industry standards adopted.
In addition to industry associations, the Product Architecture Group
maintains close working relationships with similar groups within semiconductor
companies and with product design teams of several of the Company's key
customers. One particularly important relationship, formalized under the Intel
Agreement, is the Company's technology sharing arrangement with the Intel
Architecture Laboratory. When cost-effective and advantageous as a means of
achieving its strategy of being the first to introduce new technologies, the
Company has from time to time purchased certain technologies.
Over half of the Company's employees are engineering or technical
personnel. Since inception, the Company has made substantial investments in
research and product development. In fiscal years 1998, 1997 and 1996, research
and development expenses were approximately $12,860,000, $8,392,000 and
$5,112,000, respectively net of capitalized software development expenses of
$511,000, $2,116,000 and $1,206,000, respectively, in those years.
8
<PAGE> 9
COMPETITION
The markets for the Company's software are highly competitive. The
Company faces competition primarily from other system-level software companies
and in-house software development staff of current and prospective customers.
For Automated Technical Support products, the Company's competitors also include
providers of retail applications that provide assistance with some PC problems.
Certain of the companies with which the Company competes or may in the future
compete have substantially greater financial, marketing, sales and support
resources and may have more "brand-name" recognition than the Company. There can
be no assurance that the Company will be able either to develop software
comparable or superior to software offered by its competitors or to adapt to new
technologies, evolving industry standards and changes in customer requirements.
The Company believes that interdependencies may develop between
system-level software companies and their customers, leading to a "switching"
cost factor which competing system-level software companies must overcome in
order to replace an entrenched competitor. While SystemSoft believes this cost
factor may benefit it in its existing relationships with key participants in the
PC market, switching costs may make it more difficult for the Company to
displace or take market share from competitors, particularly in the desktop
market, where competitors may have strong relationships with certain PC
manufacturers.
The Company believes that, in the future, operating systems software
vendors could choose to enter the Company's primary markets as direct
competitors or incorporate enough features into their products so as to decrease
revenues from OEMs.
The Company previously licensed its PC Card software to Microsoft.
Microsoft released this PC Card software in the first release of Windows 95.
Microsoft has continued to provide enhanced functionality in its version of PC
Card software. While SystemSoft's current product provides features and
functions not currently found in Windows95, SystemSoft's ability to grow PC Card
revenues could be impacted by customers deciding that Microsoft's solution meets
their needs and therefore choose not to relicense our software or reduces the
Company's perceived value of its solution resulting in accelerated price
degradation.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards its
software as proprietary and attempts to protect it with a combination of patent,
copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements and other methods of protection. The Company has
applied for several U.S. patents and has filed several international patent
applications to protect its proprietary technology. The Company may apply for
additional patents in the future. However, there is no assurance that any of
these applications will issue as enforceable patents, or that the scope of any
patent granted will be sufficient to prevent third-parties from producing
competitive products. Moreover, despite these precautions, it may be possible
for unauthorized third-parties to copy the Company's software or to reverse
engineer or obtain and use information that the Company regards as proprietary.
The Company licenses its object and source code under written license
agreements. Certain provisions of such licenses, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licensed
programs, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the protections put in place by the Company will be
adequate.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement.
Moreover, although the Company is not currently involved in any litigation with
respect to intellectual property rights, there can be no assurance that third
party claims alleging infringement will not be asserted against the Company in
the future. Such assertions could require the Company to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially reasonable or acceptable
to the Company.
The Company's products are licensed to its personal computer
manufacturing customers on a "right to relicense" basis pursuant to the
Company's Master License Agreement or other appropriate contracts or documents.
Certain provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed
9
<PAGE> 10
software, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
From time to time the Company is notified of claims by a third party
that a Company product, or the products of others which contain a Company
product, infringe the intellectual property rights of the third party.
EMPLOYEES
As of January 31, 1998, the Company had 239 full-time employees,
including 155 in engineering and technical positions, 59 in sales and marketing
and 25 in finance and administration. The Company's employees are not
represented by any collective bargaining organization and the Company has never
experienced a work stoppage. The Company believes that its relationship with its
employees is good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial Information about Foreign and Domestic Operations and Export
Sales may be found in Note 12 to the Notes to Consolidated Financial Statements
section of the Annual Report to Stockholders for the Fiscal year ended January
31, 1998. Such information is incorporated herein by reference.
RISK FACTORS
The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. These
risks include:
Variations in Operating Results. The 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.
Future results of operations may fluctuate significantly based upon numerous
factors including the timing of new product introductions, product mix, levels
of international sales, activities of competitors and the ability of the Company
to penetrate new markets. In addition, the volume and timing of new contracts
and delays in the achievement of milestones could have a significant impact on
operating results for a particular quarter. Moreover, because many of the
Company's customers do not typically report royalties earned by the Company
until the last month of the calendar quarter, quarterly revenues are difficult
to predict.
Fluctuations In Quarterly Operating Results. The Company has
experienced and expects to continue to experience fluctuations in its quarterly
results of operations. The Company's revenues are affected by a number of
factors, including the demand for PCs and embedded devices, timing of new
product introductions, product mix, volume and timing of customer orders,
activities of competitors and the ability of the Company to penetrate new
markets. Quarterly revenues and results of operations therefore depend on the
volume and timing of design wins received during the quarter, which are
difficult to forecast. Because the Company's staffing and other operating
expenses are based on anticipated revenues, delays in the receipt of orders can
cause significant variations in results of operations from quarter to quarter.
The Company also may choose to reduce prices, increase spending in response to
competition or pursue new market opportunities, each of which decisions may
adversely affect the Company's business, financial condition and results of
operations. Therefore, the Company believes that period-to-period comparisons of
its revenues and operating results are not necessarily meaningful and should not
be relied upon as indicators of future performance.
Due to all of the foregoing factors, it is likely that in some future
quarters the Company's operating results will be below the expectations of
public market analysts and investors. Regardless of the general outlook for the
Company's business, the announcement of quarterly results of operations below
analyst and investor expectations is likely to result in a decline in the
trading price of the Company's Common Stock.
Ability to Respond to Rapid Technological Change. The market for
system-level and call avoidance software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The trend in the PC market in general is toward shorter product life cycles and
rapid product and technology obsolescence. The life cycle of the Company's
products is highly dependent on the life cycles of the products sold by its
customers. For the Company's core products, such as PC Card, Plug and Play,
Power Management and BIOS products, the life cycle may be as long as five years.
However, for specific adaptations of the Company's core products, the Company
generally expects a life cycle of one year or less. The Company's future success
will depend upon its ability to enhance its current products and to develop and
introduce new products which keep pace with technological developments and
evolving industry standards as well as to respond to changes in customer
requirements. There can be no assurance that the Company will successfully
10
<PAGE> 11
complete the development, or will not experience delays in the introduction, of
new products or enhancements to its existing products. Any delay or failure of
the Company's products to achieve market acceptance would adversely affect the
Company's business and financial condition. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's products or technologies non-competitive or obsolete.
Management of Growth. The Company has in the past, experienced periods
of rapid growth which have placed, and could continue to place, a strain on the
Company's financial and other resources. The Company's ability to manage its
staff and facilities growth effectively will require it to continue to improve
its operational, financial, and other internal systems, and to train, motivate
and manage its employees. If the Company's management is unable to manage growth
effectively and new employees are unable to achieve anticipated performance
levels, the Company's results of operations could be adversely affected.
Dependence on Strategic Business and Customer Relationships. The
Company believes that its success to date has been largely dependent on the
adoption of its software and products by key participants in the PC industry,
including Intel, IBM, Compaq, NEC, Packard Bell NEC, Digital, Toshiba, and
Microsoft. These relationships have enabled the Company to learn about new
technological developments prior to their general release to the computer
industry. The loss of any of these strategic business and customer relationships
could adversely affect the Company's product development efforts and its
business and financial condition.
Dependence on Key Customers; Concentration of Credit Risk. The loss of
any key customer and 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 customer base consists principally of
large OEMs in the PC market and as a result the Company maintains individually
significant receivable balances from major OEMs. If these OEMs fail to meet
their guaranteed minimum royalty payments and other payment obligations, the
Company's operating results could be adversely affected. As of January 31, 1998,
the three largest receivable balances collectively represented approximately
$2,345,000, or 27% of total accounts receivable. In fiscal 1998, Sykes and
Toshiba each accounted for approximately 13% of the Company's revenues; in
fiscal 1997 no single customer accounted for more than 10% of the Company's
revenues; and in fiscal 1996 Compaq Computer Corp. and Intel accounted for
approximately 13% and 10% of the Company's revenues, respectively.
Securities Class Action Litigation. The Company has been named in
several purported securities law class action lawsuits. See "Item 3. Legal
Proceedings." Although the Company denies all material allegations set forth in
the complaints in those lawsuits and intends to vigorously defend against all
claims brought against it, the ultimate outcome, including amount of possible
loss, if any, of these lawsuits cannot be determined at this time. No provision
for any liability that may result from these lawsuits has been made in the
accompanying Consolidated Financial Statements. While the Company does not
believe that these lawsuits will have a material adverse effect on the Company's
business and results of operations, given the preliminary stages of these
lawsuits there can be no assurance as to the ultimate outcome of these matters.
Attraction and Retention of Skilled Employees. The Company's success
will depend in large part upon its ability to attract, retain and motivate
highly skilled employees. Competition for qualified sales, technical and other
qualified personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified
employees in the future. There can be no assurance that the Company will be able
to continue to attract sufficient numbers of highly qualified employees and the
failure to do so may have a material adverse effect on the Company's business
and financial condition.
Competition. The markets for the Company's products are highly
competitive. The Company's core products: such as PC Card, Plug & Play, Power
Management and BIOS products face competition primarily from other system-level
software companies and in-house software development staff of current and
prospective customers. The Company's call avoidance software faces competition
primarily from CyberMedia, Inc. and from companies that provide an internal
customer support function. Certain of the companies with which the Company
competes or may in the future compete have substantially greater financial,
marketing, sales and support resources and may have more "brand-name"
recognition than the Company. There can be no assurance that the Company will be
able either to develop products comparable or superior to products offered by
its competitors or to adapt to new technologies, evolving industry standards and
changes in customer requirements.
The Company believes that interdependencies may develop between
system-level software companies and their customers, leading to a "switching"
cost factor which competing system-level software companies must overcome in
order to replace an entrenched competitor. While SystemSoft believes this cost
factor may benefit it in its existing relationships with key participants in the
PC market, switching costs may make it more difficult for the Company to
displace or take market share from competitors, particularly in the desktop
market, where competitors may have strong relationships with certain PC
manufacturers.
11
<PAGE> 12
The Company believes that, in the future, operating systems software
vendors could choose to enter the Company's primary markets as direct
competitors or incorporate enough features into their products so as to decrease
revenues from OEMs.
The Company's software to date has been primarily based on Intel and
Intel-compatible CPUs and Microsoft operating system software. If the market for
Intel and Intel-compatible CPUs is materially diminished, demand for the
Company's current software could be reduced. In addition, most of the Company's
software has been installed on computers using Microsoft's MS/DOS or Windows
operating systems. If Microsoft's operating systems cease to be the dominant
operating system for the PC industry, the Company could experience increased
costs for engineering and/or diminished revenues.
The Company previously licensed it PC Card software to Microsoft.
Microsoft released this PC Card software in the first release of Windows 95.
Microsoft has continued to provide enhanced functionality in its version of PC
Card software. While SystemSoft's current product provides features and
functions not currently found in Windows95, SystemSoft's ability to grow PC Card
revenues could be impacted by customers deciding that Microsoft's solution meets
their needs and therefore choose not to relicense our software or reduces the
Company's perceived value of its solution resulting in accelerated price
degradation.
International Revenues. International revenues are subject to a number
of risks, including the following: agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries could impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs or adopt other restrictions on foreign trade; fluctuations in
exchange rates could affect product demand and net realizable value of foreign
receivables; U.S. export licenses may be difficult to obtain; and the protection
of intellectual property in foreign countries may be more difficult to enforce.
The Company opened its first international subsidiary in Taiwan on
March 1, 1995. The Company now licenses software to its customers in Taiwan in
U.S. dollars. The Company opened its first office in Japan in July of 1996 and
now licenses software to its customers in Japan in the local currency and in
U.S. dollars and, as such, the results of some of its operations in Japan are
subject to currency value fluctuations.
Dependence on Asia Pacific Region. 29% and 28% of the Company's revenue
in Fiscal 1998 and 1997, respectively, were to customers in the Asia Pacific
Region. The Company's business, financial condition or results of operations
could be adversely affected by factors associated with operations in the Asia
Pacific Region such as changes in foreign currency exchange rates, uncertainties
relative to regional economic circumstances, political instability in emerging
markets, and difficulties in staffing and managing foreign operations, as well
as by other risks associated with international activities. In particular, the
recent currency devaluations in the Asia Pacific Region and the general downturn
of the economies in the Asia Pacific Region, including Japan, have had and
could, in the future, have a material adverse effect on the Company's business,
financial condition or results of operations. Any reduction in demand for PCs
would adversely affect the Company's business, financial condition or results of
operation.
Intellectual Property and Proprietary Rights. The Company's success
depends in significant part on the development, maintenance and protection of
its intellectual property. The Company regards its software as proprietary and
attempts to protect it with a combination of patent, copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements and other
methods of protection. The Company has applied for several U.S. patents and has
filed several international patent applications to protect its proprietary
technology. The Company may apply for additional patents in the future. However,
there is no assurance that any of these applications will issue as enforceable
patents, or that the scope of any patent granted will be sufficient to prevent
third-parties from producing competitive products. Moreover, despite these
precautions, it may be possible for unauthorized third-parties to copy the
Company's software or to reverse engineer or obtain and use information that the
Company regards as proprietary. The Company licenses its object and source code
under written license agreements. Certain provisions of such licenses, including
provisions protecting against unauthorized use, copying, transfer and disclosure
of the licensed programs, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the protections put in place by the
Company will be adequate.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement.
Moreover, although the Company is not currently involved in any litigation with
respect to intellectual property rights, there can be no assurance that third-
party claims alleging infringement will not be asserted against the Company in
the future. Such assertions could require the Company to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially reasonable or acceptable
to the Company.
12
<PAGE> 13
The Company's products are licensed to its personal computer
manufacturing customers on a "right to relicense" basis pursuant to the
Company's Master License Agreement or other appropriate contracts or documents.
Certain provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed software, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
From time to time the Company is notified of claims by a third party
that a Company product, or the products of others which contain a Company
product, infringe the intellectual property rights of the third party. The
Company reviews such notices of claims to determine the appropriate response, if
any. There can be no assurances that a third party claim alleging infringement
will not be asserted against the Company in the future.
Volatility of Stock Price. The trading price of the Company's Common
Stock has been and could continue to be subject to fluctuations in response to
quarterly variations in results of operations, announcements of technological
innovations or new products and services by the Company or its competitors,
changes in financial estimates by securities analysts, changes in management and
other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and often that has been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
The Company has entered into a fifteen year lease agreement for its new
corporate headquarters in Natick, Massachusetts with an option to build on
adjacent land. The Company moved into its new Corporate headquarters in October,
1997 and has leased approximately 125,000 square feet, of which approximately
48,000 square feet is being subleased. The Company's also leases two facilities
totaling approximately 64,000 square under leases expiring through September
2002; these facilities were previously used as corporate headquarters and are
currently being subleased to third parties. The Company also leases additional
space, approximately 32,000 square feet in the aggregate, for sales, support and
development in Santa Clara, California, Boulder, Colorado, Yokohama, Japan and
Taipei, Taiwan under leases expiring through 2000.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 1998, a purported securities class action lawsuit entitled
Thomas Gorman, Barrett Herriott, Lori Lyman, Albert Halegoua, Ronald Offner and
Fred Cohen, on behalf of themselves and all others similarly situated v.
SystemSoft Corporation, et al., Civil Action No. 98-10367-EFH, was filed in the
United States District Court for the District of Massachusetts (the "Gorman
Action"). Named as defendants are the Company, certain of the Company's officers
and directors, and the Company's outside auditors. Plaintiffs purport to
represent a class of all persons who purchased the Company's common stock
between January 25, 1996 and March 3, 1997. The complaint alleges violations of
United States federal securities law through material misrepresentations and
omissions and seeks an unspecified award of damages. The Company believes that
the allegations in the complaint are without merit and intends to contest them
vigorously.
On March 27, 1998, a similar lawsuit entitled L.B. Partners, L.P., on
behalf of itself and all others similarly situated v. SystemSoft Corporation, et
al., Civil Action No. 98-10545-EFH, was filed in the United States District
Court for the District of Massachusetts. Named as defendants are the Company and
certain of the Company's officers and directors. Plaintiff purports to represent
the same class of persons that is alleged in the Gorman Action. The complaint
alleges violations of United States federal securities law through material
misrepresentations and omissions and seeks an unspecified award of damages. The
Company believes that the allegations in the complaint are without merit and
intends to contest them vigorously.
On April 1, 1998, a similar lawsuit entitled Aron I. Glasman v.
SystemSoft Corporation, et al., Civil Action No. 98-10579-EFH, was filed in the
United States District Court for the District of Massachusetts (the "Glasman
Action"). Named as defendants are the Company and certain of the Company's
officers and directors. Plaintiff purports to represent a class of all persons
who purchased the Company's common stock between January 25, 1996 and February
5, 1998. The complaint alleges violations of United States federal securities
law through material misrepresentations and omissions and seeks an unspecified
award of damages. The Company believes that the allegations in the complaint are
without merit and intends to contest them vigorously.
13
<PAGE> 14
On April 2, 1998, a similar lawsuit entitled Maryann Dean, on behalf of
herself and all others similarly situated v. SystemSoft Corporation, et al.,
Civil Action No. 98-10588-EFH, was filed in the United States District Court for
the District of Massachusetts. Named as defendants are the Company and certain
of the Company's officers and directors. Plaintiff purports to represent the
same class of persons that is alleged in the Gorman Action. On April 17,1998,
Plaintiff filed an amended complaint against the same defendants, but seeking to
represent the same class of persons that is alleged in the Glassman action. Like
the initial complaint, the complaint alleges violations of United States federal
securities law through material misrepresentations and omissions and seeks an
unspecified award of damages. The Company believes that the allegations in the
amended complaint are without merit and intends to contest them vigorously.
On April 13, 1998, a similar lawsuit entitled Donald R. Villa v.
SystemSoft Corporation, et al., Civil Action No. 98-10639-EFH, was filed in the
United States District Court for the District of Massachusetts. Named as
defendants are the Company and certain of the Company's officers and directors.
Plaintiff purports to represent the same class of persons that is alleged in the
Glasman Action. The complaint alleges violations of United States federal
securities law through material misrepresentations and omissions and seeks an
unspecified award of damages. The Company believes that the allegations in the
complaint are without merit and intends to contest them vigorously.
On April 15, 1998, a similar lawsuit entitled Randy J. Myshock, on
behalf of himself and all others similarly situated v. SystemSoft Corporation,
et al., Civil Action No. 98-10652-EFH, was filed in the United States District
Court for the District of Massachusetts. Named as defendants are the Company,
certain of the Company's officers and directors and the Company's outside
auditors. Plaintiff purports to represent the same class of persons that is
alleged in the Glasman Action. The complaint alleges violations of United States
federal securities law through material misrepresentations and omissions and
seeks an unspecified award of damages. The Company believes that the allegations
in the complaint are without merit and intends to contest them vigorously.
On April 21, 1998, a similar lawsuit entitled Echendu Nwanodi v.
SystemSoft Corporation, et al., Civil Action No. 98-10688-EFH, was filed in the
United States District Court for the District of Massachusetts. Named as
defendants are the Company and certain of the Company's officers and directors.
Plaintiff purports to represent the same class of persons that is alleged in the
Glasman Action. The complaint alleges violations of United States federal
securities law through material misrepresentations and omissions and seeks an
unspecified award of damages. The Company believes that the allegations in the
complaint are without merit and intends to contest them vigorously.
On April 24, 1998, a similar lawsuit entitled John Salemme v.
SystemSoft Corporation, et al., Civil Action No. 98-10707-EFH, was filed in the
United States District Court for the District of Massachusetts. Named as
defendants are the Company and certain of the Company's officers and directors.
Plaintiff purports to represent the same class of persons that is alleged in the
Glasman Action. The complaint alleges violations of United States federal
securities law through material misrepresentations and omissions and seeks an
unspecified award of damages. The Company believes that the allegations in the
complaint are without merit and intends to contest them vigorously.
On April 27, 1998, a similar lawsuit entitled Donald E. Wallace,
individually and on behalf of all others similarly situated v. SystemSoft
Corporation, et al., Civil Action No. 98-10728-EFH, was filed in the United
States District Court for the District of Massachusetts. Named as defendants are
the Company and certain of the Company's officers and directors. Plaintiff
purports to represent the same class of persons that is alleged in the Glasman
Action. The complaint alleges violations of United States federal securities law
through material misrepresentations and omissions and seeks an unspecified award
of damages. The Company believes that the allegations in the complaint are
without merit and intends to contest them vigorously.
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10K with respect to executive officers
of the Company is set forth below. All of the executive officers are elected by
the Board of Directors on an annual basis and serve until their successors have
been duly elected and qualified, or until their earlier resignation or removal.
There are no family relationships among any of the executive officers or
directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert F. Angelo...................... 51 Chief Executive Officer and Chairman of the Board of Directors
Deborah M. Besemer.................... 43 President, Chief Operating Officer and Director
Jonathan L. Joseph.................... 40 Executive Vice President, Marketing
Paul J. Pedevillano................... 40 Executive Vice President and Chief Financial Officer
</TABLE>
ROBERT F. ANGELO, a co-founder of the Company, has been Chief Executive
Officer and Chairman of the Board of Directors since November 1997 after having
served as President, Chief Executive Officer and a director of the Company since
its inception in 1990 and Chairman of the Board of Directors since February
1996. From 1986 to 1989, he held various executive positions at Phoenix
Technologies Ltd., a developer of system-level software, including Chief
Operating Officer, Vice President of OEM Operations, Vice President of Product
Engineering and Vice President of Marketing. Prior to 1986, he was Director of
Marketing at Cullinet Software, Inc. and Vice President of Marketing,
Engineering and Sales at Acorn Products, Inc.
DEBORAH M. BESEMER, has been President, Chief Operating Officer and
Director since joining the Company in November 1997. From 1996 to 1997, Ms.
Besemer was Executive Vice President of Worldwide Field Operations of Lotus
Development Corp. From 1995 to 1996, Ms. Besemer was Senior Vice President of
Worldwide Sales and from 1990 to 1995, Vice President, The Americas at Lotus
Development Corp.
JONATHAN L. JOSEPH, a co-founder of the Company, has been Executive
Vice President, Marketing since July 1997 after having served as Senior Vice
President, PC Software Division since June 1995, and as Senior Vice President,
Product Engineering and Marketing from May 1990 to June 1995. From 1986 to 1990,
he was employed by Phoenix Technologies Ltd. in the following positions: from
1989 to 1990, he was General Manager of the Compatibility Software Group and
from 1988 to 1989, he was Director of Product Marketing for the Phoenix ROM
BIOS. Prior to 1986, he was a Product Manager at NEC Information Systems and an
Assistant to the President at Harvest Computer.
PAUL J. PEDEVILLANO has been Executive Vice President and Chief
Financial Officer since July 1997,Vice President, Business Development from
February 1996 through June 1997 and as Vice President, Finance, Secretary and
Chief Financial Officer from April 1993 to January 1996. From September 1990 to
April 1993, he was Chief Financial Officer of Star Semiconductor Corporation.
From September 1981 to April 1990, he served in various positions at Alloy
Computer Products including Chief Financial Officer, Chief Operating Officer and
Acting President.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information with respect to stock price information may be found in the
table captioned "Selected Consolidated Quarterly Financial Data" of the Annual
Report to Stockholders for the fiscal year ended January 31, 1998. Information
with respect to the rest of this Item may be found in the section captioned
"Stock Profile" of the Annual Report to Stockholders for the fiscal year ended
January 31, 1998. Such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information with respect to this Item may be found in the table
captioned "Selected Consolidated Five-Year Financial Data" of the Annual Report
to Stockholders for the fiscal year ended January 31, 1998. Such information is
incorporated herein by reference.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information with respect to this Item may be found in the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Annual Report to Stockholders for the fiscal year
ended January 31, 1998. Such information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item may be found in the Report of
Independent Accountants, Consolidated Financial Statements, Notes to the
Consolidated Financial Statements and Selected Consolidated Quarterly Financial
Data sections of the Annual Report to Stockholders for the fiscal year ended
January 31, 1998 and in the consolidated financial statements and schedule set
forth in Item 14 of this 10-K. Such information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth under the
Captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement which is
currently expected to be filed with the Securities and Exchange Commission
within 120 days of January 31, 1998 and is incorporated herein by reference
thereto. Information regarding the Company's executive officers is set forth in
Item 4A of Part I hereof, above, under the caption "Executive Officers of the
Registrant" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be set forth under the
Captions "Director's Compensation" and "Executive Compensation" in the Company's
definitive proxy statement which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of January 31, 1998 and is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be set forth under the
Caption "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement which is currently expected to be filed
with the Securities and Exchange Commission within 120 days of January 31, 1998
and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be set forth under the
Captions "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" in the Company's definitive proxy statement which is
currently expected to be filed with the Securities and Exchange Commission
within 120 days of January 31, 1998 and is incorporated herein by reference
thereto.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of or are incorporated by
reference into this Annual Report on Form 10K:
1. The following audited consolidated financial statements of
SystemSoft and its subsidiaries, and the accountant's report relating thereto,
are incorporated by reference in Item 8 of this Report from the Company's 1998
Annual Report to Stockholders:
Report of Independent Accountants
Consolidated Balance Sheets as of January 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended January
31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
January 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended January
31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements.
2. The following Consolidated Financial Statement Schedule filed with
this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II: Valuation and Qualifying Accounts.................. 20
</TABLE>
All other schedules are omitted because they are either not required, not
applicable or the information is shown in the Consolidated Financial Statements
or the Notes thereto.
3. The exhibits listed in the Exhibit Index filed with this Annual
Report on Form 10-K.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
January 31, 1998.
(c) Exhibits: See Index to Exhibits.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYSTEMSOFT CORPORATION
By: /s/ Robert F. Angelo
-----------------------------------
Robert F. Angelo
Date: May 1, 1998 Chief Executive Officer and
Chairman of the Board of Directors
We, the undersigned officers and directors of SystemSoft Corporation, hereby
severally constitute and appoint Robert F. Angelo, Deborah M. Besemer and Paul
J. Pedevillano, and each of them singly, our true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in the
capacities indicated below, amendments to this Report on Form 10-K and to file
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Robert F. Angelo Chief Executive Officer and May 1, 1998
- ---------------------------------- Chairman of the Board of Directors
Robert F. Angelo (Principal Executive Officer)
/s/ Deborah M. Besemer President, Chief Operating Officer May 1, 1998
- ---------------------------------- and Director
Deborah M. Besemer
/s/ Paul J. Pedevillano Executive Vice President May 1, 1998
- ---------------------------------- and Chief Financial Officer (Principal
Paul J. Pedevillano Financial and Accounting Officer)
/s/ Robert N. Goldman Director May 1, 1998
- ----------------------------------
Robert N. Goldman
/s/ William Frank King Director May 1, 1998
- ----------------------------------
William Frank King
/s/ David J. McNeff Director May 1, 1998
- ----------------------------------
David J. McNeff
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of SystemSoft Corporation
has been incorporated by reference in this Form 10-K from the 1998 Annual Report
to Stockholders of SystemSoft Corporation. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule in Item 14(a)2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/S/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 4, 1998, except as to the information presented
in Note 15 for which the date is April 29, 1998
19
<PAGE> 20
SCHEDULE II
SYSTEMSOFT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 1996, 1997, and 1998
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Costs and from End of
Description of Year Expenses Reserves Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1996:
Reserve for doubtful accounts 571,644 255,744 336,350 491,038
YEAR ENDED JANUARY 31, 1997:
Reserve for doubtful accounts 491,038 1,312,592 885,715 917,915
YEAR ENDED JANUARY 31, 1998:
Reserve for doubtful accounts 917,915 1,970,374 1,321,584 1,566,705
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
=2.1 Agreement and Plan of Merger and Reorganization, dated as of
December 12, 1996, by and among SystemSoft, Black Acquisition
Corporation and Radish Communications Systems, Inc. ("Radish" and
now known as SystemSoft Colorado Corporation) (filed as exhibit to
Form 8-K dated December 19, 1996).
=2.2 Registration Rights Agreement dated as of December 12, 1996, by
and among SystemSoft and the stockholders listed on the signature
block thereto (filed as exhibit to Form 8-K dated December 19,
1996).
=2.3 Participation Agreement dated as of December 12, 1996, by and
among SystemSoft, Black Acquisition Corporation, Radish and
certain security holders of Radish listed on the signature pages
thereto (filed as exhibit to Form 8-K dated December 19, 1996).
=2.4 Escrow Agreement dated as of December 12, 1996 among SystemSoft,
James Cowie and State Street Bank and Trust Company as escrow
agent only (filed as exhibit to Form 8-K dated December 19, 1996).
=3.1 Second Restated Certificate of Incorporation of the Registrant
(filed as exhibit to Form 10-Q for the quarterly period ended July
31, 1996).
=3.2 Certificate of Amendment of Second Restated Certificate of
Incorporation of the Registrant (filed as exhibit to Form 10-Q for
quarterly period ended July 31, 1996).
*3.3 Restated By-laws of the Registrant.
*4.1 Specimen Stock Certificate.
=4.2 Common Stock Purchase Agreement dated May 7, 1997 (filed as
exhibit to Form 8-K dated May 20, 1997). #*10.1 Intel-SystemSoft
Development and License Agreement dated December 20, 1993 between
the Registrant and Intel Corporation, as amended.
#*10.2 Agreement dated March 31, 1993 between the Registrant and Compaq
Computer Corporation.
*10.3 Form of Master License Agreement.
-*10.4 1992 Stock Option Plan.
-*10.5 Form of Incentive Stock Option.
-*10.6 1992 Directors' Stock Option Plan.
-*10.7 Form of Nonqualified Stock Option.
-*10.8 1993 California Stock Option Plan.
-*10.9 Form of Incentive Stock Option granted under the 1993 California
Stock Option Plan.
-**10.10 1994 Omnibus Stock Plan, as amended.
-*10.11 1994 Non-Employee Director Stock Option Plan.
-**10.12 1994 Employee Stock Purchase Plan, as amended.
-*10.13 Employment Agreement dated June 28, 1991 between the Registrant
and Robert F. Angelo.
*10.14 Agreement dated June 10, 1994 between the Registrant and Intel
Corporation.
-*10.15 Amendment No. 1 dated January 31, 1995 to Agreement dated March
31, 1993 between the Registrant and Compaq Computer Corporation
(filed as exhibit to Form 10-K for the fiscal year ended January
31, 1995).
#=10.16 Amendment No. 2 dated April 27, 1995 to Agreement dated March 31,
1993 between the Registrant and Compaq Computer Corporation (filed
as exhibit to Form 10-Q for the three month period ended April 30,
1995).
=10.17 Lease agreement dated July 19, 1995 between the Registrant and
Vision Drive, Inc. (filed as exhibit to Form 10-Q for the three
month period ended July 31, 1995).
=10.18 Amendment dated September 11, 1995 to lease agreement dated July
19, 1995 between the Registrant and Vision Drive, Inc. (filed as
exhibit to Form 10-Q for the three month period ended October 31,
1995).
#=10.19 Amendment No.1 dated October 30, 1995 to the Development and
License Agreement dated December 20, 1993 between the Registrant
and Intel Corporation (filed as exhibit to Form 10-Q for the three
month period ended October 31, 1995).
-**10.20 Employment Agreement dated January 8, 1998 between the Registrant
and Deborah M. Besemer.
=-10.21 Employment Agreement between the Registrant and Thomas W. Higgins
dated September 20, 1995 (filed as exhibit to Form 10-K for the
fiscal year ended January 31, 1996).
=-10.22 Radish 1992 Stock Option Plan (filed as exhibit to Registrant's
Registration Statement on Form S-8 (File No. 333-18657)).
=-10.23 Amended and Restated Non-Qualified Stock Option Agreement dated
September 1, 1993 between Radish and Robert Baden (filed as
exhibit to Registrant's Registration Statement on Form S-8 (File
No. 333-18657)).
=-10.24 Amendment to Amended and Restated Non-Qualified Stock Option
Agreement dated December 16, 1996 between Radish and Robert Baden
(filed as exhibit to Registrant's Registration Statement on Form
S-8 (File No. 333-18657)).
=10.25 Lease agreement dated December 20, 1996 between the Registrant and
DIV Natick, LLC (filed as exhibit to Form 10-K for the fiscal year
ended January 31, 1997).
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
=10.26 Agreement dated December 20, 1996 between the Registrant and DIV
Natick, LLC (filed as exhibit to Form 10-K for the fiscal year
ended January 31, 1997).
-*10.27 Employment agreement dated June 28, 1991 between the Registrant
and Paul J. Pedevillano.
**10.28 Agreement dated December 24, 1997 between the Registrant and Intel
Corporation.
=10.29 Loan Agreement dated August 27, 1997 between the Registrant and
Silicon Valley Bank (filed as exhibit to the Form 10-Q dated
September 15, 1997).
**10.30 Amended and Restated Loan and Security Agreement dated April 10,
1998 between the Registrant and Silicon Valley Bank.
=10.31 Executed lease dated December 20, 1996 between the Registrant and
DIV Natick, LLC (filed as exhibit to the Form 10-Q dated December
10, 1997).
-**10.32 Severance and Release Agreement dated July 16, 1997 between the
Registrant and David P. Sommers.
-**10.33 Employment Agreement dated December 28, 1997 between the
Registrant and William J. O'Connell.
-**10.34 Amendment dated February 26, 1998 to Employment Agreement between
the Registrant and William O'Connell.
-**10.35 Employment agreement dated January 8, 1998 between the Registrant
and Jonathan L. Joseph.
**13.1 Portions of the 1998 Annual Report to Stockholders for the fiscal
year ended January 31, 1998 expressly incorporated by reference
herein.
**21.1 Subsidiaries of Registrant.
**23.1 Consent of Coopers and Lybrand L.L.P.
=24.1 Power of Attorney (included as part of signature page to this
Report).
27.1 Financial Data Schedule (EDGAR Version Only).
</TABLE>
- -------------------
* Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-80620) or an amendment thereto
and incorporated herein by reference.
# Confidential treatment requested as to certain portions.
- Management contract or compensatory plan or arrangement.
= Filed with the report or Form indicated and incorporated herein
by reference.
** Filed herewith
22
<PAGE> 1
EXHIBIT 10.10
SYSTEMSOFT CORPORATION
1994 OMNIBUS STOCK PLAN
-----------------------
1. Purpose. This 1994 Omnibus Stock Plan (the "Plan") of
SystemSoft Corporation (the "Company") is intended to provide incentives (a) to
the officers and other employees of the Company, its parent (if any) and any
present or future subsidiaries of the Company (collectively, "Related
Corporations") by providing them with opportunities to purchase stock in the
Company pursuant to options which qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
granted hereunder ("ISO" or "ISOs"); (b) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISOs ("Non-Qualified Option" or
"Non-Qualified Options"); and (c) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to make direct purchases of restricted stock in the Company
("Restricted Stock"). Both ISOs and Non-Qualified Options are referred to
hereafter individually as an "Option" and collectively as "Options." As used
herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation" as those terms are defined in Section 424 of the Code.
2. Administration of the Plan. (a) The Plan shall be
administered by the Board of Directors of the Company (the "Board"). The Board
may appoint a Compensation Committee (the "Committee") of two or more of its
members to administer this Plan. In the event the Company registers any class
of any equity security pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), each member of the Committee shall be a
"disinterested person" as defined in Rule 16b-3 under the Exchange Act and each
shall be an "outside director" within the meaning of Section 162(m) of the
Code. Subject to ratification of the grant of each Option or Restricted Stock
by the Board (if so required by applicable state law), and subject to the terms
of the Plan, the Committee, if so appointed, shall have the authority to (i)
determine the employees of the Company and Related Corporations (from among the
class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may
be granted and to determine (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Restricted
Stock) to whom Non-Qualified Options or Restricted Stock may be granted; (ii)
determine the time or times at which Options or Restricted Stock may be
granted; (iii) determine the option price of shares subject to each Option,
which price with respect to ISOs shall not be less than the minimum specified
in paragraph 7, and the purchase price of Restricted Stock; (iv) determine
whether each Option granted shall be an ISO or a Non-Qualified Option; (v)
determine (subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi) determine
whether restrictions such as repurchase options are to be imposed on shares
subject to Options and to Restricted Stock, and the nature of such
restrictions, if any; (vii) establish, amend and waive the terms and conditions
of individual options and purchase authorizations granted hereunder, including,
without limitation, terms and conditions relating to vesting, exercisability
and effect of
<PAGE> 2
-2-
termination of employment by the Company; and (viii) interpret the Plan and
prescribe and rescind rules and regulations relating to it. If the Committee
determines to issue a Non-Qualified Option, it shall take whatever actions it
deems necessary, under Section 422 of the Code and the regulations promulgated
thereunder, to ensure that such Option is not treated as an ISO. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Option or authorization or agreement for Restricted Stock granted
under it shall be final unless otherwise determined by the Board. The
Committee may from time to time adopt such rules and regulations for carrying
out the Plan as it may deem best. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option or Restricted Stock granted under it.
(b) The Committee may select one of its members as its chairman,
and shall hold meetings at such time and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. All references in this Plan to the Committee shall mean the Board
if there is no Committee so appointed. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused or remove all members of the Committee
and thereafter directly administer the Plan.
3. Eligible Employees and Others. ISOs may be granted to any
officer or other employee of the Company or any Related Corporation. Those
directors of the Company who are not employees may not be granted ISOs under
the Plan. Non-Qualified Options and Restricted Stock may be granted to any
director (whether or not an employee), officer, employee or consultant of the
Company or any Related Corporation. The Committee may take into consideration
an optionee's individual circumstances in determining whether to grant an ISO
or a Non-Qualified Option or Restricted Stock. Granting of any Option or
Restricted Stock to any individual or entity shall neither entitle that
individual or entity to, nor disqualify him from, participation in any other
grant of Options or Restricted Stock.
4. Stock. The stock subject to Options and Restricted Stock
shall be authorized but unissued shares of Common Stock of the Company, par
value $.01 per share (the "Common Stock"), or shares of Common Stock
re-acquired by the Company in any manner. The aggregate number of shares which
may be issued pursuant to the Plan is 5,200,000 plus such additional number of
shares as may become available due to the forfeiture of options granted under
the 1992 Stock Option Plan and 1993 California Stock Option Plan, subject to
adjustment as provided in paragraph 14. Any such shares may be issued as ISOs,
Non-Qualified Options or Restricted Stock so long as the aggregate number of
shares so issued does not exceed such number, as adjusted. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part, or if any Restricted Stock shall be reacquired by the Company by
exercise of its repurchase option, the shares subject to such expired or
terminated Option and reacquired shares of Restricted Stock shall again be
available for grants of Options or Restricted Stock under the Plan.
<PAGE> 3
-3-
5. Individual Participant Limitation. Any other provision of
this Plan notwithstanding, the number of shares of Common Stock for which
options or purchase authorizations may be granted in any single fiscal year of
the Company to any participant shall not exceed 500,000 shares (the "Individual
Limit"). For purposes of the foregoing limitation, if any option or purchase
authorization is cancelled, the cancelled option or purchase authorization
shall continue to be counted against the Individual Limit; if after grant the
exercise price of an option or purchase authorization is modified, the
transaction shall be treated as the cancellation of the option or purchase
authorization and the grant of anew option or purchase authorization. In any
such case, both the option or purchase authorization that is cancelled and the
option or purchase authorization deemed to be granted shall be counted against
the Individual Limit.
6. Grants Under the Plan. Options or Restricted Stock may be
granted under the Plan at any time on or after June 8, 1994 and prior to June
8, 2004. Any such grants shall be subject to the receipt, within 12 months of
June 8,1994, of the approval of stockholders as provided in paragraph 18. The
date of grant of an Option under the Plan will be the date specified by the
Committee at the time it awards the Option; provided, however, that such date
shall not be prior to the date of award. The Committee shall have the right,
with the consent of the optionee, to convert an ISO granted under the Plan to a
Non-Qualified Option pursuant to paragraph 16.
7. Minimum Option Price: ISO Limitations. (a) The price per
share specified in the agreement relating to each Option granted under the Plan
shall not be less than the fair market value per share of Common Stock on the
date of such grant. In the case of an ISO to be granted to an employee owning
stock possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or any Related Corporation, the price per
share specified in the agreement relating to such ISO shall not be less than
110 percent of the fair market value of Common Stock on the date of grant.
(b) In no event shall the aggregate fair market value (determined
at the time the option is granted) of Common Stock for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any Related
Corporation) exceed $100,000.
(c) If, at the time an Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such Option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if such stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on
a national securities exchange; or (iii) the closing bid price (or average of
bid prices) last quoted(on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market or on a national securities exchange. However, if the Common
Stock is not publicly traded at the time an Option is granted under the Plan,
"fair market value" shall be deemed to be the fair value of the
<PAGE> 4
-4-
Common Stock as determined by the Committee after taking into consideration all
factors which it deems appropriate, including, without limitation, recent sale
and offer prices of the Common Stock in private transactions negotiated at
arm's length.
8. Option Duration. Subject to earlier termination as provided
in paragraphs 10 and 11, each Option shall expire on the date specified by the
Committee, but not more than ten years from the date of grant and in the case
of ISOs granted to an employee owning stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company or any
Related Corporation, not more than five years from date of grant. Subject to
earlier termination as provided in paragraphs 10 and 11, the term of each ISO
shall be the term set forth in the original instrument granting such ISO,
except with respect to any part of such ISO that is converted into a Non-
Qualified Option pursuant to paragraph 16.
9. Exercise of Option. Subject to the provisions of paragraphs
10 through 13, each Option granted under the Plan shall be exercisable as
follows:
(a) The Option shall either be fully exercisable on the date of
grant or shall become exercisable thereafter in such installments as the
Committee may specify.
(b) Once an installment becomes exercisable it shall remain
exercisable until expiration or termination of the Option, unless otherwise
specified by the Committee.
(c) Each Option or installment may be exercised at any time or
from time to time, in whole or in part, for up to the total number of shares
with respect to which it is then exercisable.
(d) The Committee shall have the right to accelerate the date of
exercise of any installment; provided that the Committee shall not accelerate
the exercise date of any installment of any Option granted to any employee as
an ISO (and not previously converted into a Non-Qualified Option pursuant to
paragraph 16) if such acceleration would violate the annual vesting limitation
contained in Section 422(d) of the Code, which provides generally that the
aggregate fair market value (determined at the time the option is granted) of
the stock with respect to which ISOs granted to any employee are exercisable
for the first time by such employee during any calendar year (under all plans
of the Company and any Related Corporation) shall not exceed $100,000.
10. Termination of Employment. If an ISO optionee ceases to be
employed by the Company or any Related Corporation other than by reason of
death or disability as provided in paragraph 11, no further installments of his
ISOs shall become exercisable, and his ISOs shall terminate after the passage
of 90 days from the date of termination of his employment, but in no event
later than on their specified expiration dates except to the extent that such
ISOs (or unexercised installments thereof) have been converted into
Non-Qualified Options pursuant to paragraph 16. Leave of absence with the
written approval of the Committee shall not be considered an interruption of
employment under the Plan, provided that such written approval contractually
obligates the Company or any Related Corporation to continue the employment of
the employee after the approved period of absence. Employment shall also be
considered as
<PAGE> 5
-5-
continuing uninterrupted during any other bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. Nothing in the Plan shall be deemed to give any grantee of any Option
or Restricted Stock the right to be retained in employment or other service by
the Company or any Related Corporation for any period of time. ISOs granted
under the Plan shall not be affected by any change of employment within or
among the Company and Related Corporations, so long as the optionee continues
to be an employee of the Company or any Related Corporation. In granting any
Non-Qualified Option, the Committee may specify that such Non-Qualified Option
shall be subject to the restrictions set forth herein with respect to ISOs, or
to such other termination or cancellation provisions as the Committee may
determine. Notwithstanding the provisions in this paragraph 10, the Committee
may, in its sole discretion, establish different terms and conditions
pertaining to the effect of a participant's termination of employment by the
Company.
11. Death; Disability; Dissolution. If an optionee ceases to be
employed by the Company and all Related Corporations by reason of his death,
any Option of his may be exercised, to the extent of the number of shares with
respect to which he could have exercised it on the date of his death, by his
estate, personal representative or beneficiary who has acquired the Option by
will or by the laws of descent and distribution, at any time prior to the
earlier of the Option's specified expiration date or one year from the date of
the optionee's death.
If an optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any Option held by him on the date of termination of employment, to the extent
of the number of shares with respect to which he could have exercised it on
that date, at any time prior to the earlier of the Option's specified
expiration date or one year from the date of the termination of the optionee's
employment. For the purposes of the Plan, the term "disability" shall have the
meaning assigned to it in Section 22(e)(3) of the Code or any successor
statute.
In the case of a partnership, corporation or other entity holding a
Non-Qualified Option, if such entity is dissolved, liquidated, becomes
insolvent or enters into a merger or acquisition with respect to which such
optionee is not the surviving entity, such Option shall terminate immediately.
12. Assignability. No Option shall be assignable or transferable
by the optionee except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, and during the lifetime of
the Optionee each Option shall be exercisable only by him.
13. Terms and Conditions of Options. Options shall be evidenced
by instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 12 hereof and may contain such
other provisions as the Committee deems advisable that are not inconsistent
with the Plan, including transfer and repurchase restrictions applicable to
shares of
<PAGE> 6
-6-
Common Stock issuable upon exercise of Options. The Committee may from time to
time confer authority and responsibility on one or more of its own members
and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
14. Adjustments. Upon the happening of any of the following
described events, an optionee's rights with respect to Options granted to him
hereunder shall be adjusted as hereinafter provided:
(a) In the event the Company is merged into or consolidated with
another corporation under circumstances where the Company is not the surviving
corporation or if the Company is liquidated or sells or otherwise disposes of
all or substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) subject to the provisions of
clauses (iii), (iv) and (v) below, after the effective date of such merger,
consolidation or sale, as the case may be, each holder of an outstanding option
shall be entitled, upon exercise of such option, to receive in lieu of shares
of Common Stock, shares of such stock or other securities as the holders of
shares of Common Stock received pursuant to the terms of the merger,
consolidation or sale; or (ii) the Board may waive any discretionary
limitations imposed with respect to the exercise of the option so that all
options from and after a date prior to the effective date of such merger,
consolidation, liquidation or sale, as the case may be, specified by the Board,
shall be exercisable in full; or (iii) all outstanding options may be cancelled
by the Board as of the effective date of any such merger, consolidation,
liquidation or sale, provided that notice of such cancellation shall be given
to each holder of an option, and each such holder thereof shall have the right
to exercise such option in full(without regard to any discretionary limitations
imposed with respect to the option) during a 30-day period preceding the
effective date of such merger, consolidation, liquidation or sale; or (iv) all
outstanding options may be cancelled by the Board as of the date of any such
merger, consolidation, liquidation or sale, provided that notice of such
cancellation shall be given to each holder of an option and each such holder
thereof shall have the right to exercise such option but only to the extent
exercisable in accordance with any discretionary limitations imposed with
respect to the option prior to the effective date of such merger,
consolidation, liquidation or sale; or (v) the Board may provide for the
cancellation of all outstanding options and for the payment to the holders
thereof of some part or all of the amount by which the value thereof exceeds
the payment, if any, which the holder would have been required to make to
exercise such option.
(b) In the event the Company shall issue any of its shares as a
stock dividend upon or with respect to the shares of stock of the class which
shall at the time be subject to option hereunder, each optionee upon exercising
an Option shall be entitled to receive (for the purchase price paid upon such
exercise) the shares as to which he is exercising his Option and, in addition
thereto (at no additional cost), such number of shares of the class or classes
in which such stock dividend or dividends were declared or paid, and such
amount of cash in lieu of fractional shares, as he would have received if he
had been the holder of the shares as to which he is exercising his Option at
all times between the date of grant of such Option and the date of its
exercise.
<PAGE> 7
-7-
(c) Notwithstanding the foregoing, any adjustments made pursuant
to subparagraph (a) or (b) shall be made only after the Committee, after
consulting with counsel for the Company, determines whether such adjustments
with respect to ISOs will constitute a "modification" of such ISOs as that term
is defined in Section 424 of the Code, or cause any adverse tax consequences
for the holders of such ISOs. No adjustments shall be made for dividends paid
in cash or in property other than securities of the Company.
(d) No fractional shares shall actually be issued under the Plan.
Any fractional shares which, but for this subparagraph (d), would have been
issued to an optionee pursuant to an Option, shall be deemed to have been
issued and immediately sold to the Company for their fair market value, and the
optionee shall receive from the Company cash in lieu of such fractional shares.
(e) Upon the happening of any of the foregoing events described in
subparagraphs (a) or (b) above, the class and aggregate number of shares set
forth in paragraph 4 hereof which are subject to Options which previously have
been or subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events specified in such subparagraphs. The Committee
shall determine the specific adjustments to be made under this paragraph 14,
and subject to paragraph 2, its determination shall be conclusive.
15. Means of Exercising Options. An Option (or any part or
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Option being
exercised and specify the number of shares as to which such Option is being
exercised, accompanied by full payment of the purchase price therefor (i) in
United States dollars in cash or by check, (ii) at the discretion of the
Committee, through delivery of shares of Common Stock having fair market value
equal as of the date of the exercise to the cash exercise price of the Option,
(iii) at the discretion of the Committee, by delivery of the optionee's
personal recourse note bearing interest payable not less than annually at no
less than 100% of the lowest applicable Federal rate, as defined in Section
1274(d) of the Code, (iv) at the discretion of the Committee, by delivery to
the Company of irrevocable instructions to a broker to(a) either sell the
shares subject to the option or purchase authorization being exercised or hold
such shares as collateral for a margin loan and (b) promptly deliver to the
Company the amount of the sale or loan proceeds required to pay the exercise
price or purchase price, as the case may be, or (v) at the discretion of the
Committee, by any combination of (i), (ii), (iii) and (iv)above. If the
Committee exercises its discretion to permit payment of the exercise price of
an ISO by means of the methods set forth in clauses (ii),(iii) or (iv) of the
preceding sentence, such discretion shall be exercised in writing at the time
of the grant of the ISO in question. The holder of an Option shall not have the
rights of a shareholder with respect to the shares covered by his Option until
the date of issuance of a stock certificate to him for such shares. Except as
expressly provided above in paragraph 14 with respect to change in
capitalization and stock dividends, no adjustment shall be made for dividends
or similar rights for which the record date is before the date such stock
certificate is issued.
16. Conversion of ISOs into Non-Qualified Options: Termination of
ISOs. The Committee, at the written request of any optionee, may in its
discretion take such actions as may
<PAGE> 8
-8-
be necessary to convert such optionee's ISOs (or any installments or portions
of installments thereof) that have not been exercised on the date of conversion
into Non-Qualified Options at any time prior to the expiration of such ISOs,
regardless of whether the optionee is an employee of the Company or a Related
Corporation at the time of such conversion. Such actions may include, but not
be limited to, extending the exercise period or reducing the exercise price of
the appropriate installments of such Options. At the time of such conversion,
the Committee (with the consent of the optionee) may impose such conditions on
the exercise of the resulting Non-Qualified Options as the Committee in its
discretion may determine, provided that such conditions shall not be
inconsistent with this Plan. Nothing in the Plan shall be deemed to give any
optionee the right to have such optionee's ISOs converted into Non-Qualified
Options and no such conversion shall occur until and unless the Committee takes
appropriate action. The Committee, with the consent of the optionee, may also
terminate any portion of any ISO that has not been exercised at the time of
such termination.
17. Restricted Stock. Each grant of Restricted Stock under the
Plan shall be evidenced by an instrument (a "Restricted Stock Agreement") in
such form as the Committee shall prescribe from time to time in accordance with
the Plan and shall comply with the following terms and conditions, and with
such other terms and conditions as the Committee, in its discretion, shall
establish:
(a) The Committee shall determine the number of shares of Common
Stock to be issued to an eligible person pursuant to the grant of Restricted
Stock, and the extent, if any, to which they shall be issued in exchange for
cash, other consideration, or both.
(b) Shares issued pursuant to a grant of Restricted Stock may not
be sold, assigned, transferred, pledged or otherwise disposed of, except by
will or the laws of descent and distribution or as otherwise determined by the
Committee in the Restricted Stock Agreement, for such period as the Committee
shall determine, from the date on which the Restricted Stock is granted (the
"Restricted Period"). The Company will have the option to repurchase the
Common Stock at such price as the Committee shall have fixed in the Restricted
Stock Agreement, which option will be exercisable (i) if the Participant's
continuous employment or performance of services for the Company and the
Related Corporations shall terminate prior to the expiration of the Restricted
Period, (ii) if, on or prior to the expiration of the Restricted Period or the
earlier lapse of such repurchase option, the Participant has not paid to the
Company an amount equal to any federal, state, local or foreign income or other
taxes which the Company determines is required to be withheld in respect of
such Restricted Stock or (iii) under such other circumstances as determined by
the Committee in its discretion. Such repurchase option shall be exercisable on
such terms, in such manner and during such period as shall be determined by the
Committee in the Restricted Stock Agreement. Each certificate for shares issued
as Restricted Stock shall bear an appropriate legend referring to the foregoing
repurchase option and other restrictions; shall be deposited by the stockholder
with the Company, together with a stock power endorsed in blank; or shall be
evidenced in such other manner permitted by applicable law as determined by the
Committee in its discretion. Any attempt to dispose of any such shares in
contravention of the foregoing repurchase option and other restrictions shall
be null and void and without effect. If shares issued as Restricted Stock shall
be repurchased pursuant to the
<PAGE> 9
-9-
repurchase option described above, the stockholder, or in the event of his
death, his personal representative, shall forthwith deliver to the Secretary of
the Company the certificates for the shares, accompanied by such instrument of
transfer, if any, as may reasonably be required by the Secretary of the
Company. If the repurchase option described above is not exercised by the
Company, such repurchase option and the restrictions imposed pursuant to the
first sentence of this subparagraph (b) shall terminate and be of no further
force and effect.
(c) If a person who has been in continuous employment or
performance of services for the Company or a Related Corporation since the date
on which Restricted Stock was granted to him shall, while in such employment or
performance of services, die, or terminate such employment or performance of
services by reason of disability or by reason of early, normal or deferred
retirement under an approved retirement program of the Company or a Related
Corporation (or such other plan or arrangement as may be approved by the
Committee in its discretion, for this purpose) and any of such events shall
occur after the date on which the Restricted Stock was granted to him and prior
to the end of the Restricted Period, the Committee may determine to cancel the
repurchase option (and any and all other restrictions) on any or all of the
shares of Restricted Stock; and the repurchase option shall become exercisable
at such time as to the remaining shares, if any.
18. Term and Amendment of Plan. This Plan was adopted by the
Board on June 8, 1994, subject to approval by the stockholders of the Company.
The Plan shall expire on June 7, 2004 (except as to Options and Restricted
Stock outstanding on that date). Subject to the provisions of paragraph 6
above, Options and Restricted Stock may be granted under the Plan by the
Committee prior to the date of stockholder approval of the Plan. If the
approval of stockholders is not obtained by June 8, 1995, any grants of Options
or Restricted Stock under the Plan made prior to that date will be rescinded.
The Board may terminate or amend the Plan in any respect at any time, except
that any amendment that (a) increases the total number of shares that may be
issued under the Plan (except by adjustment pursuant to paragraph 14); (b)
changes the class of persons eligible to participate in the Plan, or (c)
materially increases the benefits to participants under the Plan, shall be
subject to approval by stockholders obtained within 12 months before or after
the Board adopts a resolution authorizing any of the foregoing amendments, and
shall be null and void if such approval is not obtained. Termination or any
modification or amendment of the Plan shall not, without consent of a
participant, affect his rights under any Option or Restricted Stock previously
granted to him.
19. Application of Funds. The proceeds received by the Company
from the sale of shares pursuant to Options and Restricted Stock authorized
under the Plan shall be used for general corporate purposes.
20. Governmental Regulation. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval
of any governmental authority required in connection with the authorization,
issuance or sale of such shares.
21. (a) Withholding Taxes; Delivery of Shares. The Company's
obligation to deliver shares of Common Stock upon exercise of an option or
purchase authorization, in whole or in
<PAGE> 10
-10-
part, shall be subject to the participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations. The
participant may satisfy the obligation, in whole or in part, by electing to (1)
have the Company withhold shares of Common Stock or (2) deliver to the Company
already-owned shares of Common Stock having a value equal to the amount
required to be withheld; provided, however, that participants who are subject
to the requirements of Section 16 of the Exchange Act ("Section 16 Persons")
shall not have the benefit of the foregoing election but rather the Company
shall, in all cases where tax withholding is required with respect to such
participants, withhold shares of Common Stock having a value equal to such
withholding obligations. The value of shares to be withheld or delivered shall
be based on the fair market value of the shares on the date the amount of tax
to be withheld is to be determined (the "Tax Date"). The election by a
participant who is not a Section 16 Person to have shares withheld for this
purpose will be subject to the following restrictions: (1) the election must be
made prior to the Tax Date, (2) the election must be irrevocable and (3) the
election will be subject to the disapproval of the Committee.
(b) Withholding of Additional Income Taxes. The Company may, in
accordance with the Code, upon exercise of a Non-Qualified Option or the
purchase of Common Stock for less than its fair market value or the lapse of
restrictions on Restricted Stock or the making of a Disqualifying
Disposition(as defined in paragraph 22), require the employee to pay additional
withholding taxes in respect of the amount that is considered compensation
includable in such person's gross income.
22. Notice to Company of Disqualifying Disposition. Each employee
who receives ISOs shall agree to notify the Company in writing immediately
after the employee makes a disqualifying disposition of any Common Stock
received pursuant to the exercise of an ISO (a "Disqualifying Disposition").
Disqualifying Disposition means any disposition (including any sale) of such
stock before the later of (a) two years after the employee was granted the ISO
under which he acquired such stock or (b) one year after the employee acquired
such stock by exercising such ISO. If the employee has died before such stock
is sold, these holding period requirements do not apply and no Disqualifying
Disposition will thereafter occur.
23. Governing Laws; Construction. The validity and construction
of the Plan and the instruments evidencing Options and Restricted Stock shall
be governed by the laws of the Commonwealth of Massachusetts. In construing
this Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
=================
Adopted by the Board of Directors on June 8, 1994, with the approval
of the stockholders on July 22, 1994. Amended by the Board of Directors on May
23,1995, with the approval of the stockholders on June 29, 1995. Amended by the
Board of Directors on February 28, 1996, with the approval of the stockholders
on June 19, 1996. Amended by the Board of Directors on May 13, 1997, with the
approval of the stockholders on June 25, 1997. The share numbers set forth in
the Plan reflect the effect of the Company's two for one stock split, in the
form of 100% stock dividend, that was effective on July 3, 1996.
<PAGE> 1
EXHIBIT 10.12
SYSTEMSOFT CORPORATION
1994 EMPLOYEE STOCK PURCHASE PLAN
Effective as of June 8, 1994
1. PURPOSE. The purpose of this Employee Stock Purchase Plan (the
"Plan") is to provide employees of SystemSoft Corporation, a Delaware
corporation (the "Company"), and its subsidiaries, an opportunity to
purchase Common Stock, $.01 par value, of the Company (the "Shares").
The Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended (the "Code").
2. ADMINISTRATION OF THE PLAN. The Board of Directors (the "Board") or
any committee or persons to whom it delegates its authority (the
"Administrator") shall administer, interpret and apply all provisions
of the Plan. The Administrator may waive such provisions of the Plan
as it deems necessary to meet special circumstances not anticipated or
covered expressly by the Plan. Nothing contained in this Section shall
be deemed to authorize the Administrator to alter or administer the
provisions of the Plan in a manner inconsistent with the provisions of
Section 423 of the Code. No member of the Administrator shall be
liable for any action or determination made in good faith with respect
to the Plan or any right granted under it.
3. ELIGIBLE EMPLOYEES. Subject to the provisions of paragraphs 8, 9 and
10 below, any individual who is in the full-time employment (as
defined below) of the Company or any of its subsidiaries (as defined
in Section 424(f) of the Code), the employees of which are designated
by the Board as eligible to participate in the Plan, is eligible to
participate in any Offering of Shares (as defined in paragraph 4
below) made by the Company hereunder. Full-time employment shall
include all employees whose customary employment is:
(a) at least 20 hours per week; and
(b) more than five months in the relevant calendar year.
4. OFFERING DATES. From time to time the Company, by action of the
Board, will grant rights to purchase Shares to employees eligible to
participate in the Plan pursuant to one or more offerings (each of
which is an "Offering") on a date or series of dates (each of which is
an "Offering Date") designated for this purpose by the Board.
<PAGE> 2
5. PRICES. The price per share for each grant of rights hereunder shall
be the lesser of:
(a) eighty-five percent (85%) of the fair market value of a Share
on the Offering Date on which such right was granted; or
(b) eighty-five percent (85%) of the fair market value of a Share
on the date such right is exercised. At its discretion, the
Board may determine a higher price for a grant of rights.
For purposes of this Plan, the term "fair market value" on any date
means (i) the average (on that date) of the high and low prices for
shares of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common Stock is
then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq
National Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service
for over-the-counter securities, if the Common Stock is not listed on
the Nasdaq National Market or on a national securities exchange. If
the Common Stock is not publicly traded at the time a right is granted
under this Plan, "fair market value" shall mean the fair market value
of the Common Stock as determined by the Administrator after taking
into consideration all factors which it deems appropriate, including,
without limitation, recent sale and offer prices of shares of the
Common Stock in private transactions negotiated at arm's length.
6. EXERCISE OF RIGHTS AND METHOD OF PAYMENT.
(a) Rights granted under the Plan will be exercisable periodically
on specified dates as determined by the Board.
(b) The method of payment for Shares purchased upon exercise or
rights granted hereunder shall be through regular payroll
deductions or by lump sum cash payment, or both, as determined
by the Board. No interest shall be paid upon payroll
deductions unless specifically provided for by the Board.
(c) Any payments received by the Company from a participating
employee and not utilized for the purchase of Shares upon
exercise of a right granted hereunder shall be promptly
returned to such employee by the Company after termination of
the right to which the payment relates.
7. TERM OF RIGHTS. Rights granted on any Offering Date shall be
exercisable upon the expiration of such period ("Offering Period"), as
shall be determined by
- 2 -
<PAGE> 3
the Board when it authorizes the Offering, provided that such Offering
Period shall in no event be longer than twenty-seven (27) months.
8. SHARES SUBJECT TO THE PLAN. No more than 700,000 Shares may be sold
pursuant to rights granted under the Plan; provided, however, that
appropriate adjustment shall be made in such number, in the number of
Shares covered by outstanding rights granted hereunder, in the
exercise price of the rights and in the maximum number of Shares which
an employee may purchase (pursuant to paragraph 9 below) to give
effect to any mergers, consolidations, reorganizations,
recapitalizations, stock splits, stock dividends or other relevant
changes in the capitalization of the Company occurring after the
effective date of the Plan, provided that no fractional Shares shall
be subject to a right and each right shall be adjusted downward to the
nearest full Share. Any agreement of merger or consolidation will
include provisions for protection of the then existing rights of
participating employees under the Plan. Either authorized and unissued
Shares or issued Shares heretofore or hereafter reacquired by the
Company may be made subject to rights under the Plan. If for any
reason any right under the Plan terminates in whole or in part, Shares
subject to such terminated right may again be subjected to a right
under the Plan.
9. LIMITATIONS ON GRANTS.
(a) No employee shall be granted a right hereunder if such
employee, immediately after the right is granted, would own
stock or rights to purchase stock possessing five percent (5%)
or more of the total combined voting power or value of all
classes of stock of the Company, or of any subsidiary,
computed in accordance with Sections 423(b)(3) and 424(d) of
the Code.
(b) No employee shall be granted a right which permits his right
to purchase shares under all employee stock purchase plans of
the Company and its subsidiaries to accrue at a rate which
exceeds twenty-five thousand dollars ($25,000) (or such other
maximum as may be prescribed from time to time by the Code) of
the fair market value of such Shares (determined at the time
such right is granted) for each calendar year in which such
right is outstanding at any time in accordance with the
provisions of Section 423(b)(8) of the Code.
(c) No rights granted to participating employees under a single
Offering shall cover more shares than may be purchased at an
exercise price equal to 10% of the compensation payable to the
employees during the Offering not taking into consideration
any changes in the employee's rate of compensation after the
date the employee elects to participate in the Offering, or
such other maximum percentage of employees' compensation as
determined by the Board from time to time.
- 3 -
<PAGE> 4
10. LIMIT ON PARTICIPATION. Participation in an Offering shall be limited
to eligible employees who elect to participate in such Offering in the
manner and within the time limitation established by the Board when it
authorizes the offering.
11. CANCELLATION OF ELECTION TO PARTICIPATE. An employee who has elected
to participate in an Offering may, unless the employee has waived this
cancellation right at the time of such election in a manner
established by the Board, cancel such election as to all (but not
part) of the rights granted under such Offering by giving written
notice of such cancellation to the Company before the expiration of
the Offering Period. Any amounts paid by the employee for the Shares
or withheld for the purchase of Shares from the employee's
compensation through payroll deductions shall be paid to the employee,
without interest, upon such cancellation.
12. TERMINATION OF EMPLOYMENT. Upon termination of employment for any
reason, including the death of the employee, before the date on which
any rights granted under the Plan are exercisable, all such rights
shall immediately terminate and amounts paid by the employee for the
Shares or withheld for the purchase of Shares from the employee's
compensation through payroll deductions shall be paid to the employee
or to the employee's estate, without interest.
13. EMPLOYEE'S RIGHTS AS STOCKHOLDER. No participating employee shall
have any rights as a stockholder in the Shares covered by a right
granted hereunder until such right has been exercised, full payment
has been made for the corresponding Shares and a certificate
representing such Shares has been issued.
14. RIGHTS NOT TRANSFERABLE. Rights under the Plan are not assignable or
transferable by a participating employee and are exercisable only by
the employee.
15. LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. The Plan is
intended to provide shares of Common Stock for investment and not for
resale. The Company does not, however, intend to restrict or influence
any employee in the conduct of his/her own affairs. An employee may,
therefore, sell Shares purchased under the Plan at any time the
employee chooses, subject to compliance with any applicable Federal or
state securities laws; provided, however, that because of certain
Federal tax requirements, each employee agrees, by entering the Plan,
to promptly give the Company notice of any Shares disposed of within
two years after the date of grant of the applicable right, indicating
the number of such Shares disposed of. THE EMPLOYEE ASSUMES THE RISK
OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
- 4 -
<PAGE> 5
16. AMENDMENTS TO OR DISCONTINUANCE OF THE PLAN. The Board may at any time
terminate or amend this Plan without notice and without further action
on the part of stockholders of the Company, provided:
(a) that no such termination or amendment shall adversely affect
the then existing rights of any participating employee;
(b) that any such amendment which:
(i) increases the number of Shares subject to the Plan
(subject to the provisions of paragraph 7);
(ii) changes the class of persons eligible to participate
under the Plan; or
(iii) materially increases the benefits accruing to
participants under the Plan
shall be subject to approval of the stockholders of the Company.
17. EFFECTIVE DATE AND APPROVALS. The Plan is being adopted by the Board
on June 8, 1994 to become effective as of said date. The Company's
obligation to offer, sell and deliver its Shares under the Plan is
subject to the approval of its stockholders not later than June 7,
1995 and of any governmental authority required in connection with the
authorized issuance or sale of such Shares and is further subject to
the Company receiving the opinion of its counsel that all applicable
securities laws have been complied with.
18. TERM OF PLAN. No rights shall be granted under the Plan after June 7,
2004.
=================
Adopted by the Board of Directors on June 8, 1994, with the approval
of the stockholders on July 22, 1994. Amended by the Board of Directors on
February 28, 1996, with the approval of the stockholders on June 19, 1996. The
share numbers set forth in the Plan reflect the effect of the Company's two for
one stock split, in the form of 100% stock dividend, that was effective on July
3, 1996.
- 5 -
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
This Agreement, dated as of the 8th day of January, 1998, is between
SystemSoft Corporation, a Delaware Corporation having its principal place of
business at One Innovation Drive, Natick, Massachusetts 01760 (the
"Corporation"), and Deborah Besemer, (the "Employee").
The Corporation desires to employ the Employee, and the Employee desires
to be so employed, upon the terms and conditions of this Agreement. Therefore,
the Corporation and the Employee agree as follows:
1. Term: Duties. The Corporation hereby employs the Employee and the
Employee thereby accepts employment with the Corporation, upon the terms and
subject to the conditions set forth in this Agreement. During the term of such
employment, the Employee shall (a) devote substantially all of her business time
and energy to performing her duties pursuant to this Agreement, (b) perform all
duties as the board of directors or any officer of the Corporation shall from
time to time direct, (c) perform such duties in a faithful manner and to the
best of her ability and (d) use her best efforts to promote the interests of the
Corporation. The corporation recognizes that the employee may be invited to
serve on boards of companies and/or industry associations and supports this
activity insofar as it does not represent a conflict of interest to the
Corporation.
2. Salary; Fringe Benefits. The Corporation shall pay to the Employee a
base salary of $250,000 per year ("Base Salary", which may be increased from
time to time in writing), payable in at least equal monthly payments during the
term of her employment by the Corporation, the specific payment terms of which
shall be determined by the Corporation. The Corporation may deduct from the
Employee's Base Salary all amounts which are required or permitted to be so
deducted under applicable law (including, but not limited to, Social Security
contributions and income tax withholdings). The Employee shall be entitled to a
Guaranteed Bonus of $100,000 annually during the term of her employment. Such
Guaranteed Bonus shall be paid over the year at the same frequency as your Base
Salary.
The Employee shall be entitled to vacations and any other fringe
benefits during the term of her employment per corporate policy. The Employee
may only take vacations at times mutually agreed upon by the Corporation and the
Employee. Normal vacation planning and scheduling will not be unreasonably
withheld.
The Employee may be entitled to receive bonuses based on fifty percent
(50%) of her Base Salary and Guaranteed Bonus if 100% of goal attainment is
achieved. The Employee may be entitled to increases in her Base Salary. The
determination of the amount of such increases
<PAGE> 2
in Base Salary, if any, and the time and method of payment of such increases
shall be at the sole discretion of the board of directors of the Corporation.
The Employee may exercise any stock options granted to the employee at
any time regardless of whether the options have vested. Until such options have
vested in accordance with the terms of the stock option grant, SystemSoft shall
have the right to purchase the shares of stock issued pursuant to the exercise
of the grant at the price paid by the Employee.
3. Reimbursement for Expenses. The Corporation shall reimburse the
Employee for expenses which the Employee may from time to time reasonably incur
on behalf of or at the request of the Corporation in the performance of her
duties pursuant to this Agreement, provided that the Employee shall be required
to account to the Corporation for such expenses in the manner prescribed by the
Corporation.
4. Termination / Change of Control / Reduction in Job Function.
(a) Voluntary Termination. The Employee may terminate this Agreement
at any time upon notice to the Corporation.
(b) Involuntary Termination. The Corporation shall have the authority
to terminate this Agreement immediately (i) for Cause (as defined below) or (ii)
without Cause.
"Cause" shall mean the Employee's: (i) material failure or refusal to
perform and discharge her duties and responsibilities of her employment, or
willful action that is materially inconsistent with the terms of her employment;
(ii) material breach of her fiduciary duties as an officer or member of the
board of directors of the Corporation or any subsidiary or affiliate; (iii)
commission of an act that would constitute a felony; (iv) commission of any
other act involving the personal dishonesty or moral turpitude of the Employee;
or (v) material breach of any provision of this Agreement.
(c) Severance Payments. In the event of an involuntary termination of
the Employee's employment without Cause pursuant to subsection (b)(ii) above,
the Employee shall receive, for a period of twelve (12) months immediately
following her involuntary termination, (a) payments at the rate of 100% of her
Base Salary, 100% of her Guaranteed Bonus plus incentive bonus payments, (as
though 100% of goals were attained) and all such payments to be made in the same
manner as Base Salary Guaranteed Bonus and bonus payments during her employment.
The severance payments pursuant to Section 4(c) shall continue during such one
year period even if the Employee accepts employment with another employer.
However, notwithstanding anything to the contrary contained in Section 4(c), all
such severance payments shall immediately cease if the Employee violates any of
the restrictive covenants set forth in her Agreement, including, but not limited
to, the provisions of Sections 5, 6, 7, 8 or 9.
(d) During the period of severance payments, the Company will
continue to pay the employee's health insurance under the standard policies
maintained by the company.
<PAGE> 3
(e) During the period of severance payments, the stock options
granted to you shall continue to vest over that period and any repricing of
options by the Company will be applicable to you.
(f) Change in Control. In the event of a change in control of the
Corporation, all options granted to the Employee pursuant to the Corporation's
Employee Stock Option Plan shall immediately vest. "Change of Control" of the
Corporation is deemed to have occurred if more than 20% of the voting shares
outstanding are held by any one individual or corporation.
(g) Reduction in Job Function. In the event that the Employee's job
function is significantly reduced or her salary plus bonus is reduced, it will
be deemed that she has been involuntarily terminated without cause. She will be
entitled to severance payments and health insurance as outlined in paragraphs 4
(c) and (d), and all options granted to the Employee under the Corporation's
Employee Stock Option Plan shall immediately vest.
5. Confidentiality. The Employee shall take all reasonable precautions
to safeguard the confidential nature of all Confidential Information (as
thereinafter defined) and shall take any other precautions with respect thereto
which the Corporation, in its sole discretion, may request. Without limiting the
generality of the foregoing, the Employee shall not at any time, directly or
indirectly, for her own account or on behalf of any individual, corporation,
partnership, governmental body or other entity (a "Person"), whether before or
after the termination of her employment with the Corporation, (a) sell, license,
transfer, disclose or otherwise make available any Confidential Information to
any other Person, (b) publish, market, license or otherwise use any Confidential
Information other than for the precise purpose for which its use has been
authorized by the Corporation or (c) reproduce or otherwise copy any
Confidential Information other than as required in performing her duties as an
employee of the Corporation; provided, however, that the Employee may do any of
the foregoing with respect to any Confidential Information (a) that is or
becomes publicly known through no action of the Employee or any other Person
having a duty of confidentiality with respect to such Confidential Information
or (b) pursuant to an order of any governmental authority, so long as prompt
notice is given to the Corporation.
For purposes of this Agreement, Confidential Information shall mean
any information relating to the business, assets, products or services of the
Corporation that is not generally available to the public, including, without
limitation, technology, inventions, research, technical know-how and data,
discoveries, production information, methods and processes, financial
information and cost data, trade secrets, business strategies, marketing and
sales techniques and information including information as to customers, customer
lists and suppliers, and all documents, drawings, plans, proposals, records,
blueprints, computer hardware designs, specifications, schematics, models,
computer software programs, program source codes or algorithms, computer
diskettes or other magnetic media, memoranda, manuals, articles, advertisements
or any other tangible item (each a "Tangible Item") containing or relating to
such information. "Confidential Information" shall also include all "Work
Product" of the Employee, as defined in Section 9 of this Agreement.
<PAGE> 4
6. Personal Property. All Confidential Information disclosed by the
Corporation to the Employee, learned by the Employee at any time, or created by
the Employee, shall at all times remain the personal property of the
Corporation, and each Tangible Item supplied to the Employee which constitutes
Confidential Information shall, together with all copies thereof, be returned to
the Corporation immediately upon the earlier of a demand by the Corporation or
termination of the Employee's employment pursuant to Section 4 of this
Agreement.
7. No Competition. During the term of the Employee's employment by the
Corporation, and for a period of one (1) year following the termination of such
employment, the Employee shall not, directly or indirectly, for her own account
or on behalf of any other Person, anywhere in the world, engage in substantially
the same present or reasonably anticipated future business as the company
(except that the Employee may own non-voting shares, and not more than 10% of
the voting shares, of any publicly-traded corporation engaged in such business
activity). The Employee expressly acknowledges that because of the nature of the
Corporation's business and the locations of the Corporation's customers, placing
a more limited geographic scope on the Employee's obligations under Section 7
would render those obligations effectively meaningless, and that the worldwide
scope of those obligations is therefore reasonable.
A violation by the Employee of the non-competition covenant set forth in
her Section shall entitle the Corporation to terminate any remaining severance
payments pursuant to Section 4(c) of this Agreement and seek any other remedy
pursuant to her Agreement or applicable law.
8. No Solicitation.
(a) During the term of the Employee's employment by the Corporation,
and for a period of one (1) year following the termination of such employment,
the Employee shall not, directly or indirectly, for her own account or on behalf
of any other Person, (a) employ or solicit the employment of any Person who is,
or during the 120 days immediately preceding the termination of such employment
was, an employee of the Corporation or any affiliate of the Corporation, (b)
influence or seek to influence any employee of the Corporation to leave the
Corporation's employment or (c) contact (except pursuant to the Employee's
duties on behalf of the Corporation during her employment) any employee of the
Corporation with respect to any business matter of the Corporation. The
Corporation will not hold the Employee accountable for inadvertant hires; those
that may be done by someone in another part of her new employer's company with
no involvement or knowledge on her part.
(b) During the term of the Employee's employment by the Corporation,
and for a period of one (1) year following the termination of such employment,
the Employee shall not, directly or indirectly, for her own account or on behalf
of any other Person, (a) sell or attempt to sell any products or services
competitive with the Corporation's products or services to any customer to whom
the Corporation sold products or services at any time during the last one (1)
year of the Employee's employment with the Corporation or (b) suggest, advise or
attempt to persuade any such customer to limit or discontinue its business with
the Corporation. The foregoing restrictions shall apply to (a) all such
customers of the Corporation located in any defined territory or territories to
which the Employee was assigned at any time during the
<PAGE> 5
last one (1) year of her employment with the Corporation and (b) any of the
Corporation's customers with which or with whom the Employee dealt or whose
account or business she managed, supervised, or conducted, alone or with any
other Person, on behalf of the Corporation at any time during the last one (1)
year of her employment.
9. Work Product. Each discovery, idea, invention, formula, process,
program and other work product (including, but not limited to, any such
discovery, idea, invention, formula, process, program and work product that is
protectable as a copyright, patent or trademark) developed by the Employee,
either alone or in conjunction with any other Person, during the term of her
employment by the Corporation (a) which results from, relates to or is suggested
by the actual or demonstrably anticipated business or research and development
of the Corporation, regardless of where performed or conceived, or (b) for which
the Corporation's equipment, supplies, facilities or other information or
materials are or were used, and each Tangible Item relating to such discovery,
idea, invention, formula, process, program or other work product (collectively
"Work Product") shall be (a) promptly disclosed by the Employee to the
Corporation and (b) the exclusive property of the Corporation. To the extent
applicable law provides that any Work Product belongs to the Employee rather
than the Corporation notwithstanding the preceding sentence, the Employee grants
to the Corporation a non-exclusive and perpetual license to use such Work
Product for no consideration other than that which is given in connection with
this Agreement. The Employee shall execute each document, instrument and other
writing, and shall take each other action, requested by the Corporation
(including, but not limited to, preparing or assisting in the preparation of any
patent, copyright or trademark application) in order to assist the Corporation
in securing or protecting its interest in any such Work Product.
10. Equitable Remedies. The Employee (a) acknowledges that her failure
to comply with any provision of Sections 5, 6, 7, 8 or 9 of will cause the
Corporation irreparable harm and that a remedy at law for such a failure would
be an inadequate remedy for the Corporation and (b) consents to the
Corporation's obtaining from a court having jurisdiction specific performance,
an injunction, a restraining order or any other equitable relief appropriate to
enforce such compliance. The Corporation's right to obtain such equitable relief
shall be in addition to, and not in lieu of, any other remedy to which the
Corporation is entitled under applicable law (including, but not limited to,
monetary damages).
11. Failure, Delay or Waiver. No failure of the Corporation to require,
and no delay by the Corporation in requiring, the Employee to comply with any
provision of her Agreement shall constitute a waiver of the right to require
such compliance. No failure of the Corporation to exercise, and no delay by the
Corporation in exercising, any right or remedy under her Agreement shall
constitute a waiver of such right or remedy. No waiver by the Corporation of any
right or remedy under her Agreement shall be effective unless made in writing.
Any waiver by the Corporation of any right or remedy under her Agreement shall
be limited to the specific instance and shall not constitute a waiver of such
right or remedy in the future.
12. Severability. The Employee understands and acknowledges that her
Agreement is not intended to prevent her, after the termination of her
employment with the Corporation, from engaging in any business or accepting any
other employment, so long as, in connection
<PAGE> 6
therewith, the Employee does not breach any of her obligations under her
Agreement, and that the covenants and the territorial, time and other
limitations contained in her Agreement are necessary for the growth and
stability of the Corporation and for the protection of its legitimate business
interests and are reasonable in scope and content. In the event that any such
covenant or territorial, time or other limitation is found to be unreasonable by
a court of competent jurisdiction, the Employee agrees (a) that such court may
modify the unreasonable covenant or limitation so as to make it reasonable and,
as so modified, such covenant or limitation shall be binding upon her, and (b)
that all of the other provisions of this Agreement shall remain binding upon
her. Subject to the foregoing sentence, in the event that any provision of her
Agreement shall be deemed to be invalid or unenforceable under applicable law by
a court of competent jurisdiction, such invalidity or unenforceability shall
only apply to such provision and shall not affect any other provision of this
Agreement.
13. Notices. All notices and other communications given pursuant to this
Agreement shall be deemed to have been properly given if hand delivered or if
mailed by certified mail, postage prepaid, addressed to the appropriate party,
at the address for such party set forth therein. Any party may from time to time
designate by written notice given pursuant to her Article 13 any other address
or party to which any such notice or communication or copies thereof shall be
sent.
14. Miscellaneous. This Agreement (a) may not be amended orally or by
any course of conduct pursued by the Corporation or the Employee, but may be
amended only by a written agreement duly executed by the Corporation and the
Employee, (b) is binding upon the Employee and each of her successors and
assignees and inures to the benefit of the Corporation and each of its
successors and assignees, except that the Employee may not assign any of her
rights or obligations pursuant to their Agreement without first obtaining the
written consent of the Corporation, (c) constitutes the entire agreement between
the Corporation and the employee with respect to the subject matter of their
Agreement, and supersedes all oral and written proposals, representations,
understandings and agreements previously made or existing with respect to such
subject matter and (d) shall be governed by, and interpreted and construed in
accordance with, the laws of The Commonwealth of Massachusetts, without regard
to principles of conflicts of law.
(Remainder of the Page Left Intentionally Blank)
<PAGE> 7
As conclusive evidence of her acceptance of the terms and conditions of
her Agreement, the Corporation and the Employee have executed this Agreement on
the day and year indicated above.
SYSTEMSOFT CORPORATION
By: /s/ Robert F. Angelo
----------------------------
Robert F. Angelo
CEO and Chairman of the Board
EMPLOYEE:
/s/ Deborah Besemer
- --------------------------------
Signature
/s/ Deborah Besemer
----------------------------
Name (please print)
- --------------------------------
Address
<PAGE> 1
EXHIBIT 10.28
AGREEMENT
This Agreement is entered into and made effective as of the 24th day of
December, 1997 (the "Effective Date"), by and between SystemSoft Corporation, a
Delaware corporation having its principal place of business at One Innovation
Drive, Natick, MA 01760 ("SystemSoft") and Intel Corporation, a Delaware
corporation having its principal place of business at 2200 Mission College
Blvd., Santa Clara, CA 95052 ("Intel"). Intel and SystemSoft may be sometimes
hereinafter be referred to as, the "Parties".
RECITALS
WHEREAS, Intel and SystemSoft entered into a Development and License
Agreement having an effective date of December 20th, 1993 and amendments thereto
dated March 30, 1994 and October 30, 1995 (collectively, the "Prior Agreement")
whereby Intel agreed to and did disclose certain technologies to SystemSoft
which were or were anticipated to be developed at Intel and which the parties
agreed that SystemSoft had the technical and market capability to proliferate in
a manner consistent with Intel's business goals, and
WHEREAS, the Parties agreed to memorialize each separate technology
license transaction by identifying the licensed technology, its specific source
and binary files, a specification for a licensed work that SystemSoft might
prepare, specific license terms and conditions applying to such licensed work,
development milestones, market penetration goals, financial terms relating to
development work and any such other terms as the Parties might deem appropriate,
and
WHEREAS, in consideration of SystemSoft's promises to develop,
distribute, pay royalties on and license to Intel certain works under the Prior
Agreement, Intel agreed to and did provide SystemSoft with NRE payments and
royalty credits amounting to Seven Million Six Hundred Thousand Dollars
($7,600,000), and
WHEREAS, SystemSoft and Intel agree and stipulate that the Prior
Agreement was subsequently amended by the parties by the execution of Eight (8)
separate license/development statements which comprise all such amendments to
the Prior Agreement as of the Effective Date of this Agreement and shall be
referred to hereinafter as the "Subsequent Amendments", and
WHEREAS, SystemSoft and Intel would now like to reach an accord with
regard to existing past due royalties amounts and future royalty obligations
owed Intel by SystemSoft under the Prior Agreement and its Subsequent Amendments
and provide satisfaction of such accord through payment to Intel of such
royalties as set forth herein.
NOW, THEREFORE, in consideration of the mutual representations,
covenants, and agreements of the parties hereinafter set forth, the parties do
hereby enter into the following accord, the complete and full satisfaction of
which shall relieve SystemSoft of any further royalty obligations to Intel with
respect to any and all royalties payable to Intel under the Prior Agreement and
its Subsequent Amendments. The Parties expressly agree that this Agreement of
accord and satisfaction shall not apply to any royalty bearing future amendment
entered into between the Parties under the terms and conditions of the Prior
Agreement.
Page 1 of 5
<PAGE> 2
1. Stipulated Royalty. The Parties agree and stipulate that the total amount of
all royalties due Intel from SystemSoft under the Prior Agreement and Subsequent
Amendments shall be Four Million, Two Hundred Sixty Two Thousand, Eight Hundred
Sixteen Dollars ($4,262,816) in U.S. currency (the "Stipulated Royalty"). Upon
full and complete payment of the entire Stipulated Royalty SystemSoft shall have
no further royalty obligations to Intel of any nature under the Prior Agreement
and Subsequent Amendments, except to the extent that the Parties may enter into
any additional royalty bearing amendment under terms of the Prior Agreement
following the Effective Date of this Agreement.
2. Payment of Stipulated Royalty. SystemSoft agrees to pay Intel the Stipulated
Royalty by making the following installment payments:
<TABLE>
<S> <C> <C>
On or before December 24, 1997 SystemSoft shall pay Intel $ 1,022,400.*
On or before June 1, 1998 SystemSoft shall pay Intel $ 500,000.
On or before September 1, 1998 SystemSoft shall pay Intel $ 500,000.
On or before December 1, 1998 SystemSoft shall pay Intel $ 500,000.
On or before March 1, 1999 SystemSoft shall pay Intel $ 500,000.
On or before June 1, 1999 SystemSoft shall pay Intel $ 500,000.
On or before September 1, 1999 SystemSoft shall pay Intel $ 500,000.
On or before December 1, 1999 SystemSoft shall pay Intel $ 262,816
-------------
$ 4,262,816.
=============
</TABLE>
* $22,400 of this amount represents all royalties due for the period
November 1, 1997 through December 31, 1997 on products licensed under the
Prior Agreement and the Subsequent Amendments.
In the event that SystemSoft is more than 60 calendar days late on any of the
installment payments stipulated above Intel will have the option, at its sole
discretion and upon written notice to SystemSoft, to immediately terminate this
Agreement for cause. Upon any such termination, all payments received by Intel
hereunder shall be credited as royalty payments against SystemSoft's actual
royalties due Intel pursuant to the terms and conditions of the Prior Agreement
and the Subsequent Amendments had this Agreement never been executed and the
Parties shall thenceforth abide by the terms and conditions of the Prior
Agreement and Subsequent Amendments for the remaining term thereof. To give
effect to this potential remedy, SystemSoft shall continue to provide Intel with
quarterly royalty reports (within five business days following the end of the
quarter) as set forth under Section 5.5 of the Prior Agreement until such time
that the Stipulated Royalty has been fully paid to Intel.
All payments and reports shall be sent to:
Intel Corporation
2111 NE 25th Ave
Hillsboro, OR 97124
Mailstop: JF3-149
Attn: Post Contracts Management, Sheryl White
3. Release of Claims upon Satisfaction.
Page 2 of 5
<PAGE> 3
3.1 Upon full and complete payment to Intel of the Stipulated Royalty,
SystemSoft with the intention of binding its legal representatives,
successors and assigns, expressly releases and discharges Intel,
together with their present or former directors, shareholders,
partners, principals, representatives, officers, employees, agents,
trustees, attorneys, wholly- or partially-owned subsidiary
corporations, joint venturers, partnerships, trusts, affiliates,
divisions, assigns, and predecessor or successor partnerships, trusts,
or corporations, or any person who may be deemed a controlling person
or any of the above or who may be deemed to be controlled by any of the
above (the "Releasees") from all claims, demands, or causes of action
(whether class, derivative, or individual in nature), known or unknown,
foreseen or unforeseen, accrued or unaccrued, which have been, could
have been, or might in the future be asserted by SystemSoft or anyone
claiming through SystemSoft, may have or claim to have, against
Releasees in connection with, arising out of, or in any way relating to
the provision of the Licensed Technology under the Prior Agreement and
Subsequent Amendments through the Effective Date.
3.2 Upon full and complete payment to Intel of the Stipulated Royalty,
Intel with the intention of binding its legal representatives,
successors and assigns, expressly releases and discharges SystemSoft,
together with their present or former directors, shareholders,
partners, principals, representatives, officers, employees, agents,
trustees, attorneys, wholly- or partially-owned subsidiary
corporations, joint venturers, partnerships, trusts, affiliates,
divisions, assigns, and predecessor or successor partnerships, trusts,
or corporations, or any person who may be deemed a controlling person
or any of the above or who may be deemed to be controlled by any of the
above (the "Releasees") from all claims, demands, or causes of action
(whether class, derivative, or individual in nature), known or unknown,
foreseen or unforeseen, accrued or unaccrued, which have been, could
have been, or might in the future be asserted by Intel or anyone
claiming through SystemSoft, may have or claim to have, against
Releasees in connection with, arising out of, or in any way relating to
payment of royalties under the Prior Agreement and Subsequent
Amendments through the Effective Date.
3.3 Until such time as SystemSoft has paid to Intel the entire
Stipulated Royalty amount, thus rendering effective the mutual release
of claims as set forth in Sections 3.1 and 3.2 above, the remedies set
forth in this Agreement are in addition to those available to either
party at law or in equity. All such rights and remedies, legal or
equitable, whether conferred hereunder, or by any other instrument or
law will be cumulative and may be exercised singularly or concurrently.
5. Notices. All notices to a party hereunder shall be in writing and shall be
deemed to have been adequately given if delivered in person, upon facsimile
transmission with receipt acknowledged or by delivery by a recognized courier
for overnight delivery, or three days after having been mailed, certified mail,
return receipt requested, to such party at its address set forth below (or such
other address as it may from time to time designate in writing to the other
parties hereto).
SystemSoft: SystemSoft Corporation
One Innovation Drive
Natick, MA 01760
Attn: Paul Pedevillano, Chief Financial Officer
Intel Corp: Intel Corporation
Page 3 of 5
<PAGE> 4
2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: General Counsel
6. Waiver. Failure by either Party to enforce any term of this Agreement shall
not be deemed a waiver of future enforcement of that or any other term in this
Agreement or any other agreement that may be in place between the parties.
7. Dispute Resolution. All disputes arising directly under the express terms of
this Agreement or the grounds for termination thereof shall be resolved as
follows:
The senior management of both parties shall meet to attempt to resolve such
disputes. If the disputes cannot be resolved by the senior management, either
party may make a written demand for formal dispute resolution and specify
therein the scope of the dispute. Within thirty days after such written
notification, the parties agree to meet for one day with an impartial mediator
and consider dispute resolution alternatives other than litigation. If an
alternative method of dispute resolution is not agreed upon within thirty days
after the one day mediation, either party may begin litigation proceedings.
8. Governing Law. Any claim arising under or relating to this Agreement shall be
governed by the internal substantive laws of the State of Delaware or federal
courts located in Delaware, without regard to principles of conflict of laws.
9. Jurisdiction. Each party hereby agrees to jurisdiction and venue in the
courts of the State of Delaware for all disputes and litigation arising under or
relating to this Agreement. This provision is meant to comply with 6 Del. C.
Section 2708(a).
10. Assignment. Other than Intel's right to assign its right to receive payments
due from SystemSoft hereunder, neither party may assign its rights or delegate
its obligations, or any part thereof under this Agreement without the prior
written consent of the other party. Any attempt by either party to assign or
delegate any other rights, duties or obligations set forth in this Agreement
without the other Party's prior written consent shall be deemed a material
breach of this Agreement and shall be null and void. Except as provided above,
the terms and conditions of this Agreement shall bind and enure to each party's
successors and assigns.
11. Entire Agreement. The terms and conditions of this Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof,
and merges and supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions with respect thereto. Neither of
the parties shall be bound by any conditions, definitions, warranties,
understandings, or representations with respect to the subject matter hereof
other than as expressly provided herein. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. No oral explanation or oral
information by either party hereto shall alter the meaning or interpretation of
this Agreement. No amendments or modifications shall be effective unless in a
writing signed by authorized representatives of both parties. These terms and
conditions will prevail notwithstanding any different, conflicting or additional
terms and conditions which may appear on any writing not expressly incorporated
into this Agreement. This Agreement may be executed in two (2) or more
counterparts, all of which, taken together, shall be regarded as one and the
same instrument.
Page 4 of 5
<PAGE> 5
12. No Expansion of License or Ownership Rights. The parties expressly agree
that nothing in this Agreement shall be read or otherwise implied or construed
to grant or otherwise provide any license or additional intellectual property
rights other than those set forth in the Prior Agreement and Subsequent
Amendments and ownership of the Parties' respective intellectual property shall
remain as set forth therein.
13. Non-applicability to Radish Agreement. It is expressly agreed by the Parties
that full and complete satisfaction of the accord set forth in this Agreement
does not include any royalties or other payments due Intel from SystemSoft under
the Radish agreement dated 4/1/96. All payments under the aforementioned Radish
agreement shall continue to be due and payable per the respective terms and
conditions set forth therein.
Agreed:
INTEL CORPORATION SYSTEMSOFT CORPORATION
/s/ David R. Eichenberger /s/ Paul J. Pedevillano
- --------------------------- ---------------------------
Signature Signature
/s/ David R. Eichenberger /s/ Paul J. Pedevillano
- --------------------------- ---------------------------
Printed Name Printed Name
SMD - Business Unit Manager CFO
- --------------------------- ---------------------------
Title Title
12/22/97 12/23/97
- --------------------------- ---------------------------
Date Date
Page 5 of 5
<PAGE> 1
EXHIBIT 10.30
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into
as of April 10 , 1998, 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 One
Innovation Drive, Natick, Massachusetts 01760 ("Borrower"), which amendes and
restates a certain Loan Agreement dated as of August 27, 1997 between Borrower
and Bank.
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.
"Agreement" means this Loan and Security Agreement.
"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
1
<PAGE> 2
Loan Documents, (including fees and expenses of appeal or review, or those
incurred in any Insolvency Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, 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 seventy-five percent
(75.0%) 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.
"Collateral" means the property described on Exhibit D attached
hereto.
"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.
2
<PAGE> 3
"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 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 5.4. 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
3
<PAGE> 4
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 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
4
<PAGE> 5
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.
"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" shall mean August 26, 1998. The Bank may, in
its sole discretion, renew the Committed Revolving Line, and extend the 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.
"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
5
<PAGE> 6
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.
"Payment Date" means the first calendar day of each month
commencing on the first such date after the Closing Date and ending on the
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
6
<PAGE> 7
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 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.
"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.
7
<PAGE> 8
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the 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), and minus (iii) the
Foreign Exchange Reserve. 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.
8
<PAGE> 9
(c) The Committed Revolving Line shall terminate on the
Maturity Date, at which time all Advances under this Section 2.1 and other
amounts due 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 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 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 the Maturity
Date. The amount available under the Committed
9
<PAGE> 10
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 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 form 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,
10
<PAGE> 11
based upon, arising out of, or in any way relating to any of the Exchange
Contracts or any transactions relating thereto or contemplated thereby.
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 8.2, only violations of Sections 6.8 through 6.13, 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.
11
<PAGE> 12
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 Collateral 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 12.7, 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
12
<PAGE> 13
Event of Default. Notwithstanding termination of this Agreement, Bank's lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
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) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(f) Certificate of Good Standing and Foreign Qualification; and
(g) 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 5
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. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a
13
<PAGE> 14
valid, first priority security interest in Collateral acquired after the date
hereof. Notwithstanding termination of this Agreement, Bank's Lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 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.
5.2 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 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.
5.3 No Encumbrances. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 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.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 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 10
hereof.
14
<PAGE> 15
5.7 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 interest or Bank's security interest in the
Collateral.
5.8 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.
5.9 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.
5.10 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 Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 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.
5.12 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.
15
<PAGE> 16
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 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.
5.15 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.
6. 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:
6.1 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.
6.2 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
Collateral or the priority of Bank's Lien on the Collateral.
6.3 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.
16
<PAGE> 17
Within thirty (30) days after the last day of each quarter, Borrower
shall deliver to Bank 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.
6.4 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).
6.5 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, 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
(i) the amount or validity of such payment is contested in good faith by
appropriate proceedings, (ii) Borrower or Subsidiary, as the case may be, has
established proper reserves (to the extent required by GAAP) and (iii) no lien
other than a Permitted Lien results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral 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 the Collateral 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.
6.7 Principal Depository. Borrower shall maintain an operating account
with Bank.
6.8 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.
6.9 Tangible Net Worth. Borrower shall maintain as of the last day of
each fiscal quarter, commencing with the fiscal quarter ending January 31, 1998,
a
17
<PAGE> 18
Tangible Net Worth of at least $17,000,000.00. The required Tangible Net Worth
for each successive quarter shall increase (but not decrease) by an amount equal
to twenty-five percent (25.0%) of the cumulative retained earnings of the
Borrower from and after October 31, 1998.
6.10 Profitability. Beginning with the third quarter of Borrower's
fiscal year 1999 (ending October 31, 1998), and for each fiscal quarter
thereafter, Borrower shall not have an operating loss for two (2) consecutive
quarters. Borrower shall be profitable for each fiscal year of Borrower.
6.11 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.
6.12 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.
6.13 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 thirty (30) or more consecutive days.
6.14 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.
7. 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:
7.1 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 (iv) of worn-out or
obsolete Equipment.
7.2 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
18
<PAGE> 19
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.
7.3 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.
7.4 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.
7.5 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.
7.6 Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 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.
7.8 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.
7.9 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.
7.10 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 10
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.
7.11 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
19
<PAGE> 20
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
Collateral or the priority of Bank's Lien on the Collateral; or permit any of
its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of
the Obligations.
8.2 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 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
6.3(b), or 6.3(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;
8.3 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 or priority of Bank's security interests in the Collateral;
8.4 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,
20
<PAGE> 21
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);
8.5 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);
8.6 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;
8.7 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;
8.8 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
8.9 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.
8.10 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
8.4, 8.5 or 8.8 occur with respect to any Guarantor.
9. BANK'S RIGHTS AND REMEDIES
9.1 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
21
<PAGE> 22
(provided that upon the occurrence of an Event of Default described in Section
8.5 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) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letters of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit;
(d) Liquidate any Exchange Contracts not yet settled and demand that
Borrower immediately deposit cash with Bank in an amount sufficient to cover any
losses incurred by Bank due to liquidation of the Exchange Contracts at the then
prevailing market price;
(e) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(f) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the Collateral
if Bank so requires, and to make the Collateral available to Bank as Bank may
designate. Borrower authorizes Bank to enter the premises where the Collateral
is located, to take and maintain possession of the Collateral, or any part of
it, and to pay, purchase, contest, or compromise any encumbrance, charge, or
lien which in Bank's determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's premises, Borrower hereby grants Bank a license to
enter such premises and to occupy the same, without charge;
(g) 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;
(h) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Bank determines is
commercially reasonable, and apply the proceeds thereof to the Obligations in
whatever manner or order it deems appropriate;
(i) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(j) Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrower.
9.2 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
22
<PAGE> 23
Bank's designated officers, or employees) as Borrower's true and lawful attorney
to: (a) send requests for verification of Accounts or notify account debtors of
Bank's security interest in the Accounts; (b) endorse Borrower's name on any
checks or other forms of payment or security that may come into Bank's
possession; (c) sign Borrower's name on any invoice or bill of lading relating
to any Account, drafts against account debtors, schedules and assignments of
Accounts, verifications of Accounts, and notices to account debtors; (d) make,
settle, and adjust all claims under and decisions with respect to Borrower's
policies of insurance; (e) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which Bank
determines to be reasonable; (f) file, in its sole discretion, one or more
financing or continuation statements and amendments thereto, relative to any of
the Collateral without the signature of Borrower where permitted by law; and (g)
provided Bank may exercise such power of attorney to sign the name of Borrower
on any of the documents described in Section 5.2 after the occurrence of an
Event of Default. The appointment of Bank as Borrower's attorney in fact, and
each and every one of Bank's rights and powers, being coupled with an interest,
is irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance
of an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 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 6.6 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, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 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
23
<PAGE> 24
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.
9.7 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.
10. 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
One Innovation Drive
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: (781) 431-9906
with a copy to: Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
FAX: (617) 723-6831
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.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
24
<PAGE> 25
The laws of the Commonwealth of Massachusetts shall apply to
this Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, 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.
12. GENERAL PROVISIONS
12.1 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.
12.2 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.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 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.
12.5 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.
25
<PAGE> 26
12.6 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 taken together, shall constitute but one and the same
Agreement.
12.7 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 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run;
provided that so long as the obligations referred to in the first sentence of
this Section 12.7 have been satisfied, and Bank has no commitment to make any
Credit Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 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.
12.9 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).
26
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SYSTEMSOFT CORPORATION
By: /s/ Jeffrey R. Wakey
----------------------------------------
Name: /s/ Jeffrey R. Wakey
---------------------------------------
Title: Corporate Controller
-------------------------------------
SILICON VALLEY BANK, d/b/a
SILICON VALLEY EAST
By: /s/ Douglas W. Marshall
-----------------------------------------
Name: /s/ Douglas W. Marshall
---------------------------------------
Title: AVP
--------------------------------------
SILICON VALLEY BANK
By: /s/ Michelle Giannini
-----------------------------------------
Name: /s/ Michelle Giannini
---------------------------------------
Title: AVP
--------------------------------------
(Signed in Santa Clara County, California)
27
<PAGE> 28
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: SystemSoft Corporation
________________________________________________________________________________
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) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security 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:
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 #____________________
1
<PAGE> 29
EXHIBIT B
BORROWING BASE CERTIFICATE
Borrower: SystemSoft Corporation Bank: Silicon Valley Bank
Commitment Amount: $ 7,000,000.00
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
<S> <C> <C>
1. Accounts Receivable Book Value as of $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 30 days due $
5. Balance of 50% over 30 day accounts $
6. Concentration Limits $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. Eligible Foreign Accounts $
16. LOAN VALUE OF ACCOUNTS (75.0% of #14) plus (75.0% of #15) $
$
BALANCES
15. Maximum Loan Amount $
16. Total Funds Available $
17. Present balance owing on Line of Credit $
18. Outstanding under Sublimits ( ) $
19. RESERVE POSITION $
</TABLE>
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 and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
___________________________
By: _______________________
Authorized Signer
2
<PAGE> 30
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 and
Security 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 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.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <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 & BBC & CC Quarterly within 30 days Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 2.0 :1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $17,000,000.00 * $________ 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>
* (October 31, 1998) 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 _______________,
1998.
BANK USE ONLY
RECEIVED BY:___________________
DATE:________________
REVIEWED BY:___________________
COMPLIANCE STATUS: YES / NO
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
Title
3
<PAGE> 31
EXHIBIT D
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
All now existing and hereafter arising accounts, and accounts
receivable, contract rights, royalties, license rights and all other forms of
obligations owing to Borrower arising out of the sale or lease of goods, the
licensing of 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; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
4
<PAGE> 1
EXHIBIT 10.32
SEVERANCE AND RELEASE AGREEMENT
This SEVERANCE AND RELEASE AGREEMENT (the "Agreement") is entered into
between SystemSoft Corporation, on its own behalf and on behalf of its officers,
agents, directors, employees, subsidiaries, affiliates, assigns and successors
(collectively, "SystemSoft" or the "Company") and David P. Sommers (on your own
behalf and on behalf of your heirs, executors, administrators, and assigns)
regarding the termination of your employment with SystemSoft.
In consideration of the mutual covenants and undertakings set forth
herein, you and SystemSoft hereby agree as follows:
1. Your employment with SystemSoft will end as of July 31, 1997 (the
"Termination Date"). You will continue to provide services to
SystemSoft in your current capacity as Senior Vice President, Treasurer
and Chief Financial officer until the Termination Date.
2. You will notify SystemSoft within one week of accepting new employment
of the name and address thereof, provided that the beginning date of
such employment is within 12 months from the Termination Date.
3. You will not disclose or use any of SystemSoft's confidential
information or confidential information entrusted to SystemSoft by
others to any non-SystemSoft person, corporation, or other entity.
SystemSoft's confidential information includes matters not generally
known outside of SystemSoft, such as experimentation, research and
developments relating to existing and future products and services
marketed or used by SystemSoft, and also any information relating to
the general business operations of SystemSoft (i.e., sales, products,
market opportunities, costs, profits, organizations, customer lists,
pricing methods, etc.). In the event you hear of SystemSoft
confidential information from a third party, you agree not to disclose
such confidential information.
4. You will settle all expense accounts and advances made by SystemSoft to
you and complete all other procedures required of terminating employees
by July 31, 1997. SystemSoft shall pay all reasonable and documented
expenses incurred by you prior to July 31, 1997. You will return to
SystemSoft all property provided by SystemSoft to you including all
credit, identification, and entry cards and all documents, records,
papers, notebooks, and other materials and copies thereof (regardless
of the medium on which the copy is made) related to or including any
information which is confidential to SystemSoft. As the sole exception
to the foregoing, SystemSoft will, as of the Effective Date of this
Agreement, transfer title to you of a Compaq desktop PC, NEC Versa
notebook PC, mobile phone and pager all of which you acknowledge are in
your possession. You shall delete all SystemSoft confidential computer
files residing on the two personal computers which will be transferred
to you as provided for herein.
5. SystemSoft, while expressly denying the commission of any wrongful act,
including but not limited to any violations of any federal, state or
local fair employment practice law, or other employment practice law,
or other employer duty or other employment-related obligation (all of
1
<PAGE> 2
which are hereinafter referred to as "employment relations laws") or
other equity, will provide the following:
a. Commencing on the Effective Date, with the first payment on August
15, 1997, semi-monthly payments of $6250 for the first twelve
months after the Termination Date. Your entitlement to these
separation payments will terminate if you breach your obligations
to the Company pursuant to Sections 3, 4 and 11 of this Agreement.
Such a breach by you will, among other things, relieve SystemSoft
of its obligations to you under this Agreement regardless of when
said breach occurs. You agree to seek comparable alternative
employment within 30 days of the Effective Date of this Agreement.
If you secure and begin other employment as a senior executive (VP
level or CFO), then during the second six month period during the
twelve months following the Termination Date, all payments payable
to you hereunder will cease. Each payment made shall be less any
amount required of SystemSoft by law to be withheld or elected to
be withheld by you on a voluntary basis. For purposes of
Paragraphs 2 and 5(a) of the Agreement, being "employed" or
"employment" means having a common law employment relationship
with another entity or engaging in any other comparable position
such as independent contractor for, owner of, consultant to, or
partner with or of another entity. Notwithstanding anything to the
contrary in this Agreement, your failure to attempt to find other
employment will not entitle SystemSoft to discontinue payment
under Paragraph 5 (a) or to cease to provide continuation of
benefits as described in Paragraphs 5(b) and 5( c).
b. The Termination Date will be the date of the "qualifying event"
under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"), and you will receive COBRA information under separate
cover. However, commencing on the Effective Date, and for the
period during which you receive the above-referenced semi-monthly
payments from the Company, the Company will continue to make its
contribution to your dental insurance coverage on the same terms
and conditions available to active Company employees. Group
universal life insurance and disability insurance coverage in
effect at the Termination Date may be continued for a maximum of
twelve (12) months thereafter in accordance with the terms of
those policies. SystemSoft agrees to pay your Officers Life
Insurance and Disability Policies for a 12 month period from the
Termination Date.
c. Continuation of your participation in the SystemSoft Corporation
401(k) Plan for as long as payments continue to you under this
Agreement. Thereafter, your rights in the Plans shall be
determined under the terms of the Plan.
d. As of the Effective Date, a payment of $64,000 in aggregate over
six months, in semi-monthly payments of $5,333 beginning August
15, 1997, subject to all applicable taxes, in exchange for
cancellation of 7500 options (option grant 635) on July 24, 1996
and any other compensation that may have been due you.
2
<PAGE> 3
e. You acknowledge that you have been granted the following options:
<TABLE>
<CAPTION>
Grant # Grant Date Type Granted Vested at May 31, 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
510 2/27/96 ISO 39,584 22,266
511 2/27/96 NQ* 50,000 50,000
513 2/27/96 NQ 10,416 5,859
557 4/15/96 NQ* 12,834 6,418
559 4/15/96 NQ 13,698 6,850
560 4/15/96 NQ 10,738 5,370
561 4/15/96 NQ 2,500 1,250
562 4/15/96 ISO 230 116
</TABLE>
The Option Grant Number 511 shall be immediately vested on the
Effective Date. You will be able to exercise Option Grants 510, 513,
557, 559, 560, 561 and 562 in accordance with their original vesting
schedules until August 31, 1998.
* Originally incorrectly issued as ISO. They are correctly classified
as Non-Qualified options.
You shall be appointed to the SystemSoft Corporation Advisory
Committee for not less that 10 months after the Termination Date,
during which time any options granted to you shall not be canceled
and the vesting thereof shall continue. In your capacity as a
member of the SystemSoft Advisory Committee, you will provide
assistance to the Company on an as needed basis. Such assistance
shall be limited to reasonable amounts of your time and shall take
place at mutually convenient schedules.
f. Commencing on the Effective Date and ending three months
thereafter, you may direct SystemSoft in writing to make a payment
not in excess of $16,500 to an out-placement service firm. This
payment will be made upon receipt of a proper invoice and shall be
for out-placement counseling services at prevailing industry
rates. If you make this election, you authorize SystemSoft to
deduct this payment from the final two gross payments due you
under Section 5 (d) until that amount is repaid.
g. SystemSoft will permit you to maintain access to your existing US
mail. SystemSoft will hold your personal mail for you at
SystemSoft's reception desk or mail it to you once per week at
your option. SystemSoft will also maintain your voice account for
a period of three months after the Termination Date.
6. In exchange for the consideration set forth above and for other good
and valuable consideration receipt and sufficiency of which is hereby
acknowledged:
a. You and your agents, insurers, representatives, assigns, heirs,
estates, executors, administrators, successors and attorneys
hereby accept the foregoing, in full and complete waiver, release,
and satisfaction of any and all claims of any kind or description
that you have or may have had or may have through the date you
execute the Agreement against SystemSoft
3
<PAGE> 4
and/or its officers, benefit plans (including benefit plan
fiduciaries, trustees, administrators and sponsors), attorneys,
trustees, insurers, directors or employees including but not
limited to claims arising from any employment relations laws,
contract or tort law, public policy, law or equity or claims for
expenses or other monetary or equitable relief including any right
to or claim arising out of a right, to re-employment. You also
hereby release SystemSoft from liability for such claims and waive
any other rights relating to your employment, or your termination
from employment, with SystemSoft.
b. You represent that you have not filed any complaints,
administrative charges and/or lawsuits or proceedings against
SystemSoft based upon claims released in Paragraph 6(a), with any
local, state or federal court or agency and further that you have
not assigned or transferred to any person any portion of any claim
which is released or waived by this Agreement; and
c. We agree to issue on a press release regarding your separation
from the Company. A copy of the release is attached hereto as
Exhibit A.
d. A personal reference statement to be provided future employers
and others upon authorization by you will be consistent with the
press release. SystemSoft will instruct its officers and directors
that this is the only statement to be made about your employment
by the Company.
7. SystemSoft hereby acknowledges that the foregoing is in full and
complete waiver, release and satisfaction of any and all claims of any
kind or description that SystemSoft has or may have had or may have
against you through the date you execute the Agreement, including but
not limited to claims arising from any employment relations laws,
contract or tort law, public policy, law or equity or claims for other
monetary or equitable relief, and SystemSoft hereby expressly releases
you from liability from such claims. However, this release shall have
no force or effect as to claims, if any, by SystemSoft that you
violated any of the provisions of this Agreement. The Company will
provide you with indemnification rights in accordance with the
Company's Certificate of Incorporation and by-laws in effect on the
date hereof, to the same extent available to the Company's officers and
directors.. In the event that the applicable indemnity in the
Certificate of Incorporation and by-laws are amended by the Company's
Board of Directors, such amendments shall apply to you as well. In all
policies of liability insurance for directors and officers, you will be
covered for acts occurring during your period of employment with the
Company.
8. You accept the payments and benefits set forth in Paragraphs 4 and 5 as
full and complete payment, settlement, consideration, accord and/or
satisfaction of any and all obligations of the Company arising out of
your employment, including, but not limited to, any and all claims for
vacation time and all other compensation and benefits such as stock,
stock options, severance pay, commissions, bonuses, car allowance
payments, deferred compensation payments, expenses (including, without
limitation, travel, moving and/or housing-related expenses),
contractual obligations and all other payments, compensation or
reimbursements of any kind.
9. a. You acknowledge that you have been informed that since you are forty
(40) years of age or older, you have or may have specific rights and/or
claims under the Age Discrimination in Employment Act of 1967, 29 U.S.
C. Section 621 et seq., as amended. In consideration of the amounts
4
<PAGE> 5
and benefits described in Paragraphs 5 and 7 of this Agreement, which
are in addition to anything of value to which you are already entitled,
you specifically waive such rights and/or claims to the extent that
such rights and/or claims arose prior to the date this Agreement was
executed.
b. You were advised by the Company of your right to consult with an
attorney prior to executing this Agreement and you consulted with an
attorney prior to July 1, 1997.
c. You were advised when presented by the Company with the initial
draft of this Agreement prior to July 1, 1997, that you had at least
twenty-one (21) days within which to consider its terms and to consult
with or seek advice from an attorney or any other person of your
choosing, until the close of business on July 22, 1997.
d. The parties hereby agree that the twenty-one (21) day period
referenced in subsection (c) of this Paragraph will not be affected or
extended by any revisions which might be made to the initial draft of
this Agreement.
10. It is further agreed by you and SystemSoft that the consideration paid
by SystemSoft hereunder is in return for specific performance by you of
each and every one of your obligations under this Agreement, and that
SystemSoft will seek and is entitled to specific performance by you in
the event of a violation of any such obligation by you, in addition to
all other remedies available to SystemSoft.
11. Neither you nor SystemSoft shall release, reveal, publish, cause to be
published, publicize, discuss, or otherwise disclose the terms of the
Agreement except as provided for herein and in Paragraph 12 of the
Agreement and to your family, accountants, and attorneys and except as
you or SystemSoft may be obligated to disclose on account of statutory,
regulatory, or other legal requirements. Both SystemSoft and you agree
not to publicly criticize or discuss, except as mutually agreed, nor
make any derogatory comments regarding, the facts and circumstances
leading to your departure from SystemSoft, but you may state that your
departure was voluntary. You further agree not to disparage in any way
the Company and/or its officers, directors, employees, shareholders,
operations, finances, business and/or products in any way. SystemSoft
further agrees not to disparage you in any way. Notwithstanding
anything to the contrary in this Agreement, nothing herein will prevent
you from answering questions from a duly authorized government agent
acting in his or her official capacity.
12. The terms of the Agreement including all facts, circumstances,
statements or documents relating thereto, shall not be admissible for
any purpose in any litigation in any forum other than to secure
enforcement of the terms and conditions of the Agreement.
13. The Agreement has been reached by mutual accord of the parties hereto,
and the parties by their signatures indicate their full agreement and
understanding of its terms.
14. The Agreement includes all of the agreements of the parties relative to
your termination, and supersedes any prior agreements or
representations between the parties as to the subjects covered.. This
Agreement has no precedential effect, value, or impact whatsoever as to
any person not a party to it.
5
<PAGE> 6
15. Should any provision or part of any provision of this Agreement be
found by a duly authorized court or forum to be legally unenforceable
and/or against public policy, such unenforceability shall not prevent
enforcement of the remaining provisions or parts of this Agreement.
16. The Agreement shall be interpreted under the laws of the Commonwealth
of Massachusetts. Any action to bring and try any dispute concerning
the enforcement or interpretation of this Agreement shall be done in an
appropriate court located in the Commonwealth of Massachusetts, and the
parties hereby consent to the jurisdiction of any such court for that
purpose.
17. You may revoke this Agreement for a period of seven (7) days following
its execution and this Agreement will not become effective or
enforceable until this revocation period has expired (the "Effective
Date").
IN WITNESS WHEREOF, all parties have set their hand and seal to this
Agreement as of the date written below.
SYSTEMSOFT CORPORATION DAVID P. SOMMERS
/s/ Paul J. Pedevillano /s/ David P. Sommers
------------------------- -------------------------
By: David P. Sommers
Paul J. Pedevillano
----------------------
Print Name:
7-16-97 7-16-97
---------------------- --------------------------
Date Date
6
<PAGE> 7
David P. Sommers acknowledges that he was informed and understands that he has
at least 21 days within which to consider the attached Agreement/Waiver, has
consulted with an attorney regarding such Agreement and has considered carefully
every provision of the Agreement, and that after having engaged in those
actions, prefers to and has requested that he enter into the Agreement/Waiver
prior to the expiration of the 21-day period.
Dated: 7/16/97 David P. Sommers
_____________________________ ___________________________
David P. Sommers
Dated: 7/16/97 Paul J. Pedevillano
_____________________________ ___________________________
Witness
<PAGE> 1
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), dated as of the 28 day of
December, 1997, is between SystemSoft Corporation, a Delaware corporation having
its principal place of business at One Innovation Drive, Natick, Massachusetts
01760 (the "Company"), and William J. O'Connell ("Employee or you").
In consideration of the mutual covenants and undertakings set forth
herein, the Company and you agree as follows:
1. The Company shall continue to employ you and you accept continued employment
with the Company, upon the terms and subject to the conditions set forth in this
Agreement. The Corporation recognizes that the employee may be invited to serve
on boards of Companies and/or industry associations and supports this activity
insofar as it does not represent a conflict of interest to the Corporation.
a. During the term of such employment, you shall: (a) devote substantially
all of your business time and energy to performing your duties pursuant
to this Agreement, (b) perform all duties as the board of directors or
any officer of the Company shall from time to time direct, (c) perform
such duties in a faithful manner and to the best of your ability and (d)
use your best efforts to promote the interests of the Company. The
Company shall continue to pay you your present base salary ("Base
Salary", which may be adjusted from time to time in writing), payable in
at least equal monthly payments during the term of your employment by
the Company, the specific payment terms of which shall be determined by
the Company.
b. You may be entitled to receive bonuses based on fifty percent (50%) of
your Base Salary. You may be entitled to increases in your Base Salary.
The determination of the amount of such increases in Base Salary, if
any, and the time and method of payment of such increases shall be at
the sole discretion of the board of directors of the Company.
c. You may exercise any stock options granted to you at any time regardless
of whether the options have vested. Until such options have vested in
accordance with the terms of the stock option grant, the Company shall
have the right to purchase the shares of stock issued pursuant to the
exercise of the grant at the price paid by you.
d. You may request the Company to finance the acquisition cost of the stock
option shares. If the Company elects, in its sole discretion, to provide
such financing, you shall execute a promissory note acceptable to the
Company. Interest shall accrue at the prime rate.
2. During the term of your employment by the Company, and for a period of one
(1) year following the termination of such employment, you shall not, directly
or indirectly, for your own account or on behalf of any other Person, anywhere
in the world, engage in any business activity
-1-
<PAGE> 2
which is the same as, substantially similar to or otherwise competitive with any
business activity now or thereafter undertaken by the Company or by any
affiliate of the Company (except that you may own non-voting shares, and not
more than 10% of the voting shares, of any publicly-traded Company engaged in
such business activity). You expressly acknowledges that because of the nature
of the Company's business and the locations of the Company's customers, placing
a more limited geographic scope on your obligations under this Section would
render those obligations effectively meaningless, and that the worldwide scope
of those obligations is therefore reasonable.
A violation by you of the non-competition covenant set forth in this
Section shall entitle the Company to terminate any remaining severance payments
pursuant to Section 7 of this Agreement and seek any other remedy pursuant to
this Agreement or applicable law.
3. a. During the term of your employment by the Company, and for a period of
one (1) year following the termination of such employment, you shall
not, directly or indirectly, for your own account or on behalf of any
other Person, (a) employ or solicit the employment of any Person who is,
or during the 120 days immediately preceding the termination of such
employment was, an employee of the Company or any affiliate of the
Company, (b) influence or seek to influence any employee of the Company
to leave the Company's employment or (c) contact (except pursuant to
your duties on behalf of the Company during your employment) any
employee of the Company with respect to any business matter of the
Company. The Corporation will not hold the Employee accountable for
inadvertant hires: those that may be done by someone in another part of
the Company with no involvement or knowledge on the Employee's part.
b. During the term of your employment by the Company, and for a period of
one (1) year following the termination of such employment, you shall
not, directly or indirectly, for your own account or on behalf of any
other Person, (a) sell or attempt to sell any products or services
competitive with the Company's products or services to any customer to
whom the Company sold products or services at any time during the last
one (1) year of your employment with the Company or (b) suggest, advise
or attempt to persuade any such customer to limit or discontinue its
business with the Company. The foregoing restrictions shall apply to (a)
all such customers of the Company located in any defined territory or
territories to which you was assigned at any time during the last one
(1) year of your employment with the Company and (b) any of the
Company's customers with which or with whom you dealt or whose account
or business he managed, supervised, or conducted, alone or with any
other Person, on behalf of the Company at any time during the last one
(1) year of your employment.
4. At your sole option, you may terminate your employment with the Company as of
February 28, 1998 (the "Termination Date"). If you make this election, as
further provided in Section 7, you shall receive your Base Salary and all
bonuses received by the Management Team which may include stock grants through
the Termination Date. At your option, this Section of the Agreement may be
amended or rescinded by mutual agreement of the Company and yourself on or
before March 1, 1998. Consistent with the provisions of Section 2 of this
Agreement, you are free to seek alternate employment beginning January 31, 1998;
however you may not commence new employment prior to February 28, 1998. If you
have not secured another position by February 28, 1998 and
-2-
<PAGE> 3
agree to a six month Sales Consulting arrangement with the Company, then the
Company shall pay you at your full current Base Salary for a period of Six
months (through August 31, 1998) and then for an additional twelve month period
following this (through August 31, 1999). Additionally, you will continue to
vest your stock options through August 31, 1999. If however, you do secure other
employment following the Termination Date and/or a consulting arrangement does
not commence, then you will receive 12 months salary through February 28, 1999
and twelve months stock vesting through February 28, 1999.
5. If you elect to terminate your employment with the Company, you will not
disclose or use any of the Company's confidential information or confidential
information entrusted to the Company by others to any non-Company person,
company, or other entity. The Company's confidential information includes
matters not generally known outside of the Company, such as experimentation,
research and developments relating to existing and future products and services
marketed or used by the Company, and also any information relating to the
general business operations of the Company (i.e., sales, products, market
opportunities, costs, profits, organizations, customer lists, pricing methods,
etc.). In the event you hear of the Company confidential information from a
third party, you agree not to disclose such confidential information.
6. If you elect to terminate your employment with the Company, you will settle
all expense accounts and advances made by the Company to you and complete all
other procedures required of terminating employees by February 28, 1998. The
Company shall pay all reasonable and documented expenses incurred by you prior
to February 28, 1998. You will return to the Company all property provided by
the Company to you including all credit, identification, and entry cards and all
documents, records, papers, notebooks, and other materials and copies thereof
(regardless of the medium on which the copy is made) related to or including any
information which is confidential to the Company.
7. If you elect to terminate your employment with the Company, the Company,
while expressly denying the commission of any wrongful act, including but not
limited to any violations of any federal, state or local fair employment
practice law, or other employment practice law, or other employer duty or other
employment-related obligation (all of which are hereinafter referred to as
"employment relations laws") or other equity, will provide the following:
a. Commencing on March 1, 1998, with the first payment on March 15,
1998, you will receive semi-monthly payments of $7,292 for the first
twelve months after the Termination Date. Your entitlement to these
separation payments will terminate if you breach your obligations to
the Company pursuant to Sections 2, 3, 5 and 14 of this Agreement.
Such a breach by you will, among other things, relieve the Company
of its obligations to you under this Agreement regardless of when
said breach occurs. If you secure and begin other employment, then
during the twelve month period following the Termination Date, all
medical and dental benefits payable to you hereunder will cease once
you are eligible for such coverage from your new employer. Each
payment made shall be less any amount required of the Company by law
to be withheld or elected to be withheld by you on a voluntary
basis. For purposes of this Agreement, being "employed" or
"employment" means having a common law employment relationship with
another entity or engaging in any other comparable
-3-
<PAGE> 4
position such as independent contractor for, owner of, consultant
to, or partner with or of another entity. Notwithstanding anything
to the contrary in this Agreement, your failure to attempt to find
other employment will not entitle the Company to discontinue payment
under Section 7 (a) or to cease to provide continuation of benefits
as described in Sections 7(b) and 7(c).
b. The Termination Date will be the date of the "qualifying event"
under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"), and you will receive COBRA information under separate
cover. However, commencing on the Effective Date, and for the period
during which you receive the above-referenced semi-monthly payments
from the Company, the Company will continue to make its contribution
to your medical and dental insurance coverage on the same terms and
conditions available to active Company employees. Group universal
life insurance and disability insurance coverage in effect at the
Termination Date will be continued for a maximum of twelve (12)
months thereafter in accordance with the terms of those policies.
The Company agrees to pay your Officers Life Insurance and
Disability Policies for a twelve month period from the Termination
Date.
c. Continuation of your participation in the Company 401(k) Plan for as
long as payments continue to you under this Agreement. Thereafter,
your rights in the Plans shall be determined under the terms of the
Plan.
d. For a period of 12 months, (or 18 months if the Consulting
Agreement described in paragraph 4(d) is in effect) after the
Termination Date, you may exercise any stock options granted to you
at any time regardless of whether the options have vested. Until
such options have vested in accordance with the terms of the stock
option grant, the Company shall have the right to purchase the
shares of stock issued pursuant to the exercise of the grant at the
price paid by you.
e. You shall be appointed to the Company Advisory Committee for not
less that 12 months, (or 18 months if the Consulting Agreement
described in paragraph 4(d) is in effect) months after the
Termination Date, during which time any options granted to you shall
not be canceled and the vesting thereof shall continue. In your
capacity as a member of the Company Advisory Committee, you will
provide assistance to the Company on an as needed basis. Such
assistance shall be limited to reasonable amounts of your time and
shall take place at mutually convenient schedules.
f. The Company will permit you to maintain access to your existing US
mail. The Company will hold your personal mail for you at the
Company's reception desk or mail it to you once per week at your
option. the Company will also maintain your email account for a
period of six months after the Termination Date. You acknowledge and
agree both that you will not directly access this account and that
the Company will monitor all of your email traffic and pass on to
you only your personal email messages.
8. If you elect to terminate your employment with the Company, then in exchange
for the consideration set forth above and for other good and valuable
consideration receipt and sufficiency of which is hereby acknowledged:
-4-
<PAGE> 5
a. You and your agents, insurers, representatives, assigns, heirs,
estates, executors, administrators, successors and attorneys hereby
accept the foregoing, in full and complete waiver, release, and
satisfaction of any and all claims of any kind or description that
you have or may have had or may have through the date you execute
the Agreement against the Company and/or its officers, benefit plans
(including benefit plan fiduciaries, trustees, administrators and
sponsors), attorneys, trustees, insurers, directors or employees
including but not limited to claims arising from any employment
relations laws, contract or tort law, public policy, law or equity
or claims for expenses or other monetary or equitable relief
including any right to or claim arising out of a right, to
re-employment. You also hereby release the Company from liability
for such claims and waive any other rights relating to your
employment, or your termination from employment, with the Company.
b. You represent that you have not filed any complaints, administrative
charges and/or lawsuits or proceedings against the Company based
upon claims released in Section 8(a), with any local, state or
federal court or agency and further that you have not assigned or
transferred to any person any portion of any claim which is released
or waived by this Agreement; and
c. The Company agrees to issue on a press release regarding your
separation from the Company.
d. A personal reference statement to be provided future employers and
others upon authorization by you will be consistent with the press
release. The Company will instruct its officers and directors that
this is the only statement to be made about your employment by the
Company.
9. The Company hereby acknowledges that the foregoing is in full and complete
waiver, release and satisfaction of any and all claims of any kind or
description that the Company has or may have had or may have against you through
the date you execute the Agreement, including but not limited to claims arising
from any employment relations laws, contract or tort law, public policy, law or
equity or claims for other monetary or equitable relief, and the Company hereby
expressly releases you from liability from such claims. However, this release
shall have no force or effect as to claims, if any, by the Company that you
violated any of the provisions of this Agreement. The Company will provide you
with indemnification rights in accordance with the Company's Certificate of
Incorporation and by-laws in effect on the date hereof, to the same extent
available to the Company's officers and directors.. In the event that the
applicable indemnity in the Certificate of Incorporation and by-laws are amended
by the Company's board of directors, such amendments shall apply to you as well.
In all policies of liability insurance for directors and officers, you will be
covered for acts occurring during your period of employment with the Company.
10. If you elect to terminate your employment with the Company, you accept the
payments and benefits set forth in Section 7 as full and complete payment,
settlement, consideration, accord and/or satisfaction of any and all obligations
of the Company arising out of your employment, including, but not limited to,
any and all claims for vacation time and all other compensation and benefits
such as stock, stock options, severance pay, commissions, bonuses,
-5-
<PAGE> 6
car allowance payments, deferred compensation payments, expenses (including,
without limitation, travel, moving and/or housing-related expenses), contractual
obligations and all other payments, compensation or reimbursements of any kind.
11. a. If you elect to terminate your employment with the Company, you
acknowledge that you were advised by the Company of your right to
consult with an attorney prior to executing this Agreement and you
consulted with an attorney prior to December 21, 1997.
b. You were advised when presented by the Company with the initial
draft of this Agreement prior to December 1, 1997, that you had at
least twenty-one (21) days within which to consider its terms and to
consult with or seek advice from an attorney or any other person of
your choosing, until the close of business on December 21, 1997.
c. The parties hereby agree that the twenty-one (21) day period
referenced in subsection (b) of this Section will not be affected or
extended by any revisions which might be made to the initial draft
of this Agreement.
12. It is further agreed by you and the Company that the consideration paid by
the Company hereunder is in return for specific performance by you of each and
every one of your obligations under this Agreement, and that the Company will
seek and is entitled to specific performance by you in the event of a violation
of any such obligation by you, in addition to all other remedies available to
the Company.
13. a. The Company shall have the authority to terminate your employment
under this Agreement immediately (i) for Cause (as defined below) or (ii)
without Cause.
b. "Cause" shall mean your (i) material failure or refusal to perform
and discharge your duties and responsibilities of your employment,
or willful action that is materially inconsistent with the terms of
your employment; (ii) material breach of your fiduciary duties as an
officer of the Company or any subsidiary or affiliate; (iii)
commission of an act that would constitute a felony; (iv) commission
of any other act involving personal dishonesty or moral turpitude on
your part; or (v) material breach of any provision of this
Agreement.
c. In the event of an involuntary termination of your employment
without Cause pursuant to subsection (b) (ii) above, you shall
receive, for a period of twelve (12) months immediately following
your involuntary termination, (a) payments at the rate of 100% of
your Base Salary, including incentive bonus payments as of the date
of your termination and all such payments to be made in the same
manner as Base Salary payments during your employment. The severance
payments pursuant to Section 13 (c) shall continue during such one
year period even if you accept employment with another employer.
However, notwithstanding anything to the contrary contained in
Section 13 (c), all such severance payments shall immediately cease
if you violate any of the restrictive covenants set forth in your
Agreement, including, but not limited to, the provisions of Sections
2,3 and 14.
-6-
<PAGE> 7
d. During the period of severance payments, the Company will continue
to pay your health insurance under the standard policies maintained
by the company.
e. During the period of severance payments, the stock options granted
to you shall continue to vest over that period and any repricing of
options by the Company will be applicable to you.
f. In the event of a change in control of the Company, all options
granted to you pursuant to the Company's Employee Stock Option Plan
shall immediately vest including during any severance period,
(including the consulting condition whereby you would vest options
for an eighteen month period). "Change of Control" of the
Corporation is deemed to have occurred if more than 20% of the
voting shares outstanding are held by any one individual or
corporation. In the event of a change of control between now and the
end of the severance period, and you have not selected your options
in paragraph 4(Consulting Period), you will be entitled to the
additional benefit in paragraph 4(d) automatically extending your
total severance to eighteen months.
g. In the event that your job function is significantly reduced or
your salary plus bonus is reduced, it will be deemed that you have
been involuntarily terminated without cause. In this situation, all
options granted to you under the Company's Employee Stock Option
Plan shall immediately vest, as outlined in (f) above. Additionally,
you will be entitled to severance payments and health insurance as
outlined in paragraphs 7(a) and 7(b).
14. If you elect to terminate your employment with the Company, neither you nor
the Company shall release, reveal, publish, cause to be published, publicize,
discuss, or otherwise disclose the terms of the Agreement except as provided for
herein and in Section 8 of the Agreement and to your family, accountants, and
attorneys and except as you or the Company may be obligated to disclose on
account of statutory, regulatory, or other legal requirements. Both the Company
and you agree not to publicly criticize or discuss, except as mutually agreed,
nor make any derogatory comments regarding, the facts and circumstances leading
to your departure from the Company, but you may state that your departure was
voluntary. You further agree not to disparage in any way the Company and/or its
officers, directors, employees, shareholders, operations, finances, business
and/or products in any way. Notwithstanding anything to the contrary in this
Agreement, nothing herein will prevent you from answering questions from a duly
authorized government agent acting in his or her official capacity.
15. The terms of the Agreement including all facts, circumstances, statements or
documents relating thereto, shall not be admissible for any purpose in any
litigation in any forum other than to secure enforcement of the terms and
conditions of the Agreement.
16. The Agreement has been reached by mutual accord of the parties hereto, and
the parties by their signatures indicate their full agreement and understanding
of its terms.
17. The Agreement includes all of the agreements of the parties relative to your
possible election to seek termination, and supersedes any prior agreements or
representations between the parties as to the subjects covered.. This Agreement
has no precedential effect, value, or impact
-7-
<PAGE> 8
whatsoever as to any person not a party to it.
18. Should any provision or part of any provision of this Agreement be found by
a duly authorized court or forum to be legally unenforceable and/or against
public policy, such unenforceability shall not prevent enforcement of the
remaining provisions or parts of this Agreement.
19. The Agreement shall be interpreted under the laws of the Commonwealth of
Massachusetts. Any action to bring and try any dispute concerning the
enforcement or interpretation of this Agreement shall be done in an appropriate
court located in the Commonwealth of Massachusetts, and the parties hereby
consent to the jurisdiction of any such court for that purpose.
20. You may revoke this Agreement for a period of seven (7) days following its
execution and this Agreement will not become effective or enforceable until this
revocation period has expired (the "Effective Date").
IN WITNESS WHEREOF, all parties have set their hand and seal to this
Agreement as of the date written below.
SYSTEMSOFT CORPORATION WILLIAM J. O'CONNELL
/s/ R. F. Angelo /s/ William J. O'Connell
- ---------------------- -------------------------
By: William J. O'Connell
R. F. Angelo
- ----------------------
Print Name:
Chairman & CEO
- ----------------------
Title:
12-18-97 12-18-97
- ---------------------- --------------------------
Date Date
-8-
<PAGE> 1
EXHIBIT 10.34
[LOGO]
February 26, 1998
Mr. William J. O'Connell
18 Cole Drive
Medfield, MA 02052
Dear Bill:
We have reached the following agreement as an amendment to the terms of your
status with SystemSoft Corporation.
- Your permanent employment will cease with the company effective
February 28, 1998 and you will be paid your salary through that
date.
- You will be a consultant to the company for a fourteen week period
commencing March 2, 1998 and ending June 15, 1998. You will be
expected to work with the company four days per week. In return for
your services you will be paid $5,000 per week for the duration of
the fourteen weeks. This equates to a total consulting fee of
$70,000. SystemSoft has already exchanged the following options to
your ownership as shares. The granted options exchanged for shares
were as follows:
<TABLE>
<CAPTION>
GRANT # VALUE SHARES
------- ----- ------
<S> <C> <C>
000119 $41,015 21,875
000206 $ 9,375 5,000
------- ------
$50,380 26,875
</TABLE>
- You are responsible for $3,000,000 in revenue from 3Com, Fountain,
Micron, Sykes, CA or any other technology license deal. The
following stock grants will be transferred ownership to you as
shares on May 8, 1998, provided you achieve the $3M in revenue.
<TABLE>
<CAPTION>
GRANT# VALUE SHARES
------ ---------- -------
<S> <C> <C>
000313 $51,258.38 11,886
000327 $40,377.94 9,363
---------- ------
$91,636.32 21,249
</TABLE>
It is understood that there will be time dedicated to work with Convergent
Corporation in Atlanta during this fourteen week period.
<PAGE> 2
This letter supersedes the previous letter you received on February 3, 1998
insofar as your time commitment, cash compensation and additional vesting of
shares of stock as outlined above. This agreement does not supersede your
Employment Agreement dated December 28, 1997 and is put in place in addition to
that agreement. The terms of your Employment Agreement, as described in that
document will remain in force from March 1, 1998 - March 1, 1999.
Please acknowledge acceptance of this agreement by signing below.
Sincerely,
/s/ Robert F. Angelo
- --------------------
Robert F. Angelo
Agreed to and accepted by"
/s/ William J. O'Connell
- ---------------------------
William J. O'Connell
Cc: Robert Angelo
<PAGE> 1
EXHIBIT 10.35
EMPLOYMENT AGREEMENT
This Agreement, dated as of the 8th day of January, 1998, is between
SystemSoft Corporation, a Delaware Corporation having its principal place of
business at One Innovation Drive, Natick, Massachusetts 01760 (the
"Corporation"), and Jonathan Joseph, (the "Employee").
The Corporation desires to employ the Employee, and the Employee desires
to be so employed, upon the terms and conditions of this Agreement. Therefore,
the Corporation and the Employee agree as follows:
1. Term: Duties. The Corporation hereby employs the Employee and the
Employee thereby accepts employment with the Corporation, upon the terms and
subject to the conditions set forth in this Agreement. During the term of such
employment, the Employee shall (a) devote substantially all of his business time
and energy to performing his duties pursuant to this Agreement, (b) perform all
duties as the board of directors or any officer of the Corporation shall from
time to time direct, (c) perform such duties in a faithful manner and to the
best of his ability and (d) use his best efforts to promote the interests of the
Corporation. The corporation recognizes that the employee may be invited to
serve on boards of companies and/or industry associations and supports this
activity insofar as it does not represent a conflict of interest to the
Corporation.
2. Salary; Fringe Benefits. The Corporation shall pay to the Employee a
base salary of $175,000 per year ("Base Salary", which may be increased from
time to time in writing), payable in at least equal monthly payments during the
term of his employment by the Corporation, the specific payment terms of which
shall be determined by the Corporation. The Corporation may deduct from the
Employee's Base Salary all amounts which are required or permitted to be so
deducted under applicable law (including, but not limited to, Social Security
contributions and income tax withholdings).
The Employee shall be entitled to vacations and any other fringe
benefits during the term of his employment per corporate policy. The Employee
may only take vacations at times mutually agreed upon by the Corporation and the
Employee. Normal vacation planning and scheduling will not be unreasonably
withheld.
The Employee may be entitled to receive bonuses based on fifty percent
(50%) of his Base Salary if 100% goal attainment is achieved. The Employee may
be entitled to increases in his Base Salary. The determination of the amount of
such increases in Base Salary, if any, and the time and method of payment of
such increases shall be at the sole discretion of the board of directors of the
Corporation.
<PAGE> 2
The Employee may exercise any stock options granted to the employee at
any time regardless of whether the options have vested. Until such options have
vested in accordance with the terms of the stock option grant, SystemSoft shall
have the right to purchase the shares of stock issued pursuant to the exercise
of the grant at the price paid by the Employee.
3. Reimbursement for Expenses. The Corporation shall reimburse the
Employee for expenses which the Employee may from time to time reasonably incur
on behalf of or at the request of the Corporation in the performance of his
duties pursuant to this Agreement, provided that the Employee shall be required
to account to the Corporation for such expenses in the manner prescribed by the
Corporation.
4. Termination / Change of Control / Reduction in Job Function.
(a) Voluntary Termination. The Employee may terminate this Agreement
at any time upon notice to the Corporation.
(b) Involuntary Termination. The Corporation shall have the authority
to terminate this Agreement immediately (i) for Cause (as defined below) or (ii)
without Cause.
"Cause" shall mean the Employee's: (i) material failure or refusal to
perform and discharge his duties and responsibilities of his employment, or
willful action that is materially inconsistent with the terms of his employment;
(ii) material breach of his fiduciary duties as an officer or member of the
board of directors of the Corporation or any subsidiary or affiliate; (iii)
commission of an act that would constitute a felony; (iv) commission of any
other act involving the personal dishonesty or moral turpitude of the Employee;
or (v) material breach of any provision of this Agreement.
(c) Severance Payments. In the event of an involuntary termination of
the Employee's employment without Cause pursuant to subsection (b)(ii) above,
the Employee shall receive, for a period of twelve (12) months immediately
following his involuntary termination, (a) payments at the rate of 100% of his
Base Salary, plus incentive bonus payments, (as though 100% of goals were
attained) and all such payments to be made in the same manner as Base Salary and
bonus payments during his employment. The severance payments pursuant to Section
4(c) shall continue during such one year period even if the Employee accepts
employment with another employer. However, notwithstanding anything to the
contrary contained in Section 4(c), all such severance payments shall
immediately cease if the Employee violates any of the restrictive covenants set
forth in his Agreement, including, but not limited to, the provisions of
Sections 5, 6, 7, 8 or 9.
(d) During the period of severance payments, the Company will
continue to pay the employee's health insurance under the
standard policies maintained by the company.
<PAGE> 3
(e) During the period of severance payments, the stock options
granted to you shall continue to vest over that period and
any repricing of options by the Company will be applicable
to you.
(f) Change in Control. In the event of a change in control of the
Corporation, all options granted to the Employee pursuant to the Corporation's
Employee Stock Option Plan shall immediately vest. "Change of Control" of the
Corporation is deemed to have occurred if more than 20% of the voting shares
outstanding are held by any one individual or corporation.
(g) Reduction in Job Function. In the event that the Employee's job
function is significantly reduced or his salary plus bonus is reduced, it will
be deemed that he has been involuntarily terminated without cause. He will be
entitled to severance payments and health insurance as outlined in paragraphs 4
(c) and (d), and all options granted to the Employee under the Corporation's
Employee Stock Option Plan shall immediately vest.
5. Confidentiality. The Employee shall take all reasonable precautions to
safeguard the confidential nature of all Confidential Information (as
thereinafter defined) and shall take any other precautions with respect thereto
which the Corporation, in its sole discretion, may request. Without limiting the
generality of the foregoing, the Employee shall not at any time, directly or
indirectly, for his own account or on behalf of any individual, corporation,
partnership, governmental body or other entity (a "Person"), whether before or
after the termination of his employment with the Corporation, (a) sell, license,
transfer, disclose or otherwise make available any Confidential Information to
any other Person, (b) publish, market, license or otherwise use any Confidential
Information other than for the precise purpose for which its use has been
authorized by the Corporation or (c) reproduce or otherwise copy any
Confidential Information other than as required in performing his duties as an
employee of the Corporation; provided, however, that the Employee may do any of
the foregoing with respect to any Confidential Information (a) that is or
becomes publicly known through no action of the Employee or any other Person
having a duty of confidentiality with respect to such Confidential Information
or (b) pursuant to an order of any governmental authority, so long as prompt
notice is given to the Corporation.
For purposes of this Agreement, Confidential Information shall mean any
information relating to the business, assets, products or services of the
Corporation that is not generally available to the public, including, without
limitation, technology, inventions, research, technical know-how and data,
discoveries, production information, methods and processes, financial
information and cost data, trade secrets, business strategies, marketing and
sales techniques and information including information as to customers, customer
lists and suppliers, and all documents, drawings, plans, proposals, records,
blueprints, computer hardware designs, specifications, schematics, models,
computer software programs, program source codes or algorithms, computer
diskettes or other magnetic media, memoranda, manuals, articles, advertisements
or any other tangible item (each a "Tangible Item") containing or relating to
such information. "Confidential Information" shall also include all "Work
Product" of the Employee, as defined in Section 9 of this Agreement.
6. Personal Property. All Confidential Information disclosed by the
Corporation to the Employee, learned by the Employee at any time, or created by
the Employee, shall at all
<PAGE> 4
times remain the personal property of the Corporation, and each Tangible Item
supplied to the Employee which constitutes Confidential Information shall,
together with all copies thereof, be returned to the Corporation immediately
upon the earlier of a demand by the Corporation or termination of the Employee's
employment pursuant to Section 4 of this Agreement.
7. No Competition. During the term of the Employee's employment by the
Corporation, and for a period of one (1) year following the termination of such
employment, the Employee shall not, directly or indirectly, for his own account
or on behalf of any other Person, anywhere in the world, engage in substantially
the same present or reasonably anticipated future business as the company
(except that the Employee may own non-voting shares, and not more than 10% of
the voting shares, of any publicly-traded corporation engaged in such business
activity). The Employee expressly acknowledges that because of the nature of the
Corporation's business and the locations of the Corporation's customers, placing
a more limited geographic scope on the Employee's obligations under Section 7
would render those obligations effectively meaningless, and that the worldwide
scope of those obligations is therefore reasonable.
A violation by the Employee of the non-competition covenant set forth in
this Section shall entitle the Corporation to terminate any remaining severance
payments pursuant to Section 4(c) of this Agreement and seek any other remedy
pursuant to his Agreement or applicable law.
8. No Solicitation.
(a) During the term of the Employee's employment by the Corporation, and
for a period of one (1) year following the termination of such employment, the
Employee shall not, directly or indirectly, for his own account or on behalf of
any other Person, (a) employ or solicit the employment of any Person who is, or
during the 120 days immediately preceding the termination of such employment
was, an employee of the Corporation or any affiliate of the Corporation, (b)
influence or seek to influence any employee of the Corporation to leave the
Corporation's employment or (c) contact (except pursuant to the Employee's
duties on behalf of the Corporation during his employment) any employee of the
Corporation with respect to any business matter of the Corporation. The
Corporation will not hold the Employee accountable for inadvertant hires; those
that may be done by someone in another part of his new employer's company with
no involvement or knowledge on his part.
(b) During the term of the Employee's employment by the Corporation, and
for a period of one (1) year following the termination of such employment, the
Employee shall not, directly or indirectly, for his own account or on behalf of
any other Person, (a) sell or attempt to sell any products or services
competitive with the Corporation's products or services to any customer to whom
the Corporation sold products or services at any time during the last one (1)
year of the Employee's employment with the Corporation or (b) suggest, advise or
attempt to persuade any such customer to limit or discontinue its business with
the Corporation. The foregoing restrictions shall apply to (a) all such
customers of the Corporation located in any defined territory or territories to
which the Employee was assigned at any time during the last one (1) year of his
employment with the Corporation and (b) any of the Corporation's customers with
which or with whom the Employee dealt or whose account or business he
<PAGE> 5
managed, supervised, or conducted, alone or with any other Person, on behalf of
the Corporation at any time during the last one (1) year of his employment.
9. Work Product. Each discovery, idea, invention, formula, process, program
and other work product (including, but not limited to, any such discovery, idea,
invention, formula, process, program and work product that is protectable as a
copyright, patent or trademark) developed by the Employee, either alone or in
conjunction with any other Person, during the term of his employment by the
Corporation (a) which results from, relates to or is suggested by the actual or
demonstrably anticipated business or research and development of the
Corporation, regardless of where performed or conceived, or (b) for which the
Corporation's equipment, supplies, facilities or other information or materials
are or were used, and each Tangible Item relating to such discovery, idea,
invention, formula, process, program or other work product (collectively "Work
Product") shall be (a) promptly disclosed by the Employee to the Corporation and
(b) the exclusive property of the Corporation. To the extent applicable law
provides that any Work Product belongs to the Employee rather than the
Corporation notwithstanding the preceding sentence, the Employee grants to the
Corporation a non-exclusive and perpetual license to use such Work Product for
no consideration other than that which is given in connection with this
Agreement. The Employee shall execute each document, instrument and other
writing, and shall take each other action, requested by the Corporation
(including, but not limited to, preparing or assisting in the preparation of any
patent, copyright or trademark application) in order to assist the Corporation
in securing or protecting its interest in any such Work Product.
10. Equitable Remedies. The Employee (a) acknowledges that his failure to
comply with any provision of Sections 5, 6, 7, 8 or 9 of will cause the
Corporation irreparable harm and that a remedy at law for such a failure would
be an inadequate remedy for the Corporation and (b) consents to the
Corporation's obtaining from a court having jurisdiction specific performance,
an injunction, a restraining order or any other equitable relief appropriate to
enforce such compliance. The Corporation's right to obtain such equitable relief
shall be in addition to, and not in lieu of, any other remedy to which the
Corporation is entitled under applicable law (including, but not limited to,
monetary damages).
11. Failure, Delay or Waiver. No failure of the Corporation to require, and
no delay by the Corporation in requiring, the Employee to comply with any
provision of his Agreement shall constitute a waiver of the right to require
such compliance. No failure of the Corporation to exercise, and no delay by the
Corporation in exercising, any right or remedy under his Agreement shall
constitute a waiver of such right or remedy. No waiver by the Corporation of any
right or remedy under his Agreement shall be effective unless made in writing.
Any waiver by the Corporation of any right or remedy under his Agreement shall
be limited to the specific instance and shall not constitute a waiver of such
right or remedy in the future.
12. Severability. The Employee understands and acknowledges that his
Agreement is not intended to prevent him, after the termination of his
employment with the Corporation, from engaging in any business or accepting any
other employment, so long as, in connection therewith, the Employee does not
breach any of his obligations under his Agreement, and that the covenants and
the territorial, time and other limitations contained in his Agreement are
<PAGE> 6
necessary for the growth and stability of the Corporation and for the protection
of its legitimate business interests and are reasonable in scope and content. In
the event that any such covenant or territorial, time or other limitation is
found to be unreasonable by a court of competent jurisdiction, the Employee
agrees (a) that such court may modify the unreasonable covenant or limitation so
as to make it reasonable and, as so modified, such covenant or limitation shall
be binding upon his, and (b) that all of the other provisions of this Agreement
shall remain binding upon him. Subject to the foregoing sentence, in the event
that any provision of his Agreement shall be deemed to be invalid or
unenforceable under applicable law by a court of competent jurisdiction, such
invalidity or unenforceability shall only apply to such provision and shall not
affect any other provision of this Agreement.
13. Notices. All notices and other communications given pursuant to this
Agreement shall be deemed to have been properly given if hand delivered or if
mailed by certified mail, postage prepaid, addressed to the appropriate party,
at the address for such party set forth therein. Any party may from time to time
designate by written notice given pursuant to his Article 13 any other address
or party to which any such notice or communication or copies thereof shall be
sent.
14. Miscellaneous. This Agreement (a) may not be amended orally or by any
course of conduct pursued by the Corporation or the Employee, but may be amended
only by a written agreement duly executed by the Corporation and the Employee,
(b) is binding upon the Employee and each of his successors and assignees and
inures to the benefit of the Corporation and each of its successors and
assignees, except that the Employee may not assign any of his rights or
obligations pursuant to this Agreement without first obtaining the written
consent of the Corporation, (c) constitutes the entire agreement between the
Corporation and the employee with respect to the subject matter of this
Agreement, and supersedes all oral and written proposals, representations,
understandings and agreements previously made or existing with respect to such
subject matter and (d) shall be governed by, and interpreted and construed in
accordance with, the laws of The Commonwealth of Massachusetts, without regard
to principles of conflicts of law.
(Remainder of the Page Left Intentionally Blank)
<PAGE> 7
As conclusive evidence of his acceptance of the terms and conditions of her
Agreement, the Corporation and the Employee have executed this Agreement on the
day and year indicated above.
SYSTEMSOFT CORPORATION
By:/s/ Robert F. Angelo
--------------------------------
Robert F. Angelo
CEO and Chairman of the Board
EMPLOYEE:
/s/ Jonathan Joseph
- ------------------------------
Signature
Jonathan Joseph
- ------------------------------
Name (please print)
Newton, Mass
- -------------------------------
Address
<PAGE> 1
EXHIBIT 13.1
SYSTEMSOFT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains
certain safe harbors regarding forward-looking statements. From time to time,
information provided by the Company or statements made by its directors,
officers or employees may contain "forward-looking" information that involves
risks and uncertainties. Actual results may differ materially.
Statements indicating that the Company "expects," "estimates,"
"believes," "is planning," or "plans to," are forward-looking, as are other
statements concerning future financial results, product offerings or other
events that have not yet occurred. There are several important factors,
including those identified under the heading "Factors That May Affect Future
Results" as well as factors discussed elsewhere in this report and in the
Company's other reports filed with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K for fiscal 1998, which could
cause actual results or events to differ materially from those anticipated by
the forward-looking statements. Although the Company has sought to identify the
most significant risks to its business, the Company cannot predict whether, or
to what extent, any of such risks may be realized nor can there be any assurance
that the Company has identified all possible issues and risks that the Company
might face.
OVERVIEW
The Company derives its revenues primarily from software license
fees and engineering services. Software license fees include fees paid by
Original Equipment Manufacturers ("OEMs") for source code rights, typically a
one-time fee, and royalty fees paid by OEMs for reproduction and distribution of
the Company's object code. Engineering services are fees paid for customization
of the Company's software to the unique specifications, features sets and
requirements of customers. Gross profits will vary in any period depending on
factors such as the timing of new product introductions, significant new license
agreements, market acceptance of new and existing products, product revenue mix
and the percentage of domestic versus international revenues.
For the fiscal year ended January 31, 1998, the Company recorded a
net loss of $19,729,000. The net loss included an operating loss, excluding
restructuring and other charges, of $6,822,000. The Company's revenue for the
quarter ended January 31, 1998 was less than management had expected. The
principal factors contributing to the revenue shortfall were reduced purchasing
commitments by Asia-Pacific based OEMs fueled by recent regional economic
issues, significant turnover in the Company's U.S. sales force and the continued
long implementation cycles associated with the sales of SystemWizard products.
Expenditures during the fourth quarter of 1998 had been based upon
expected revenues. The revenue shortfall in the fourth quarter, combined with
the relatively fixed nature of expenses over the short term and the reduction of
previously recorded deferred tax assets, resulted in a loss for the fourth
quarter of $10,500,000 excluding restructuring and other charges.
As a result of the fourth quarter revenue shortfall and reduced
expectations for certain products, the Company recorded restructuring and other
charges of $12,907,000. The charge was primarily related to the impaired
realizability of certain prepaid royalties and previously capitalized intangible
assets.
The Company has been named as a defendant in a number of
securities class action lawsuits filed in the United States District Court for
the District of Massachusetts. The complaints allege, among other things, that
the defendants made misstatements to the investing public. The Company believes
the allegations in the complaints are without merit and intends to vigorously
contest them.
10
<PAGE> 2
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>
Years ended January 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 87.0% 72.8% 67.4%
Engineering services 13.0 27.2 32.6
- -------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
- -------------------------------------------------------------------------------------
Cost of revenues:
Software license fees 18.1 8.8 5.9
Engineering services 102.5 42.0 42.7
- -------------------------------------------------------------------------------------
Total cost of revenues 29.1 17.8 17.9
- -------------------------------------------------------------------------------------
Gross Profit 70.9 82.2 82.1
Operating expenses:
Research and development 30.2 21.2 20.8
Sales and marketing 35.0 28.9 31.1
General and administrative 17.3 8.8 11.1
Restructuring and other charges 30.3 -- --
Acquired in-process R&D and other charges -- 117.1 --
- -------------------------------------------------------------------------------------
Total operating expenses 112.8 176.0 63.0
- -------------------------------------------------------------------------------------
Income (loss) from operations (41.9) (93.8) 19.1
Interest income 0.7 1.0 2.3
Interest expense (0.3) -- --
Foreign exchange loss -- (0.3) (0.4)
- -------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (41.5) (93.1) 21.0
Provision for income taxes 4.8 1.8 6.4
- -------------------------------------------------------------------------------------
Net (loss) income (46.3)% (94.9)% 14.6%
- -------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998 AND 1997
REVENUES. Revenues were $42,623,000 and $39,668,000 for fiscal
1998 and 1997, respectively, an increase of approximately 7%. Software license
fees increased to $37,072,000 from $28,894,000 or approximately 28%. This
increase was primarily due to software license fees on the Company's new
call-avoidance product, SystemWizard, and an increase in the software license
fees for the Company's BIOS and PC Card products that was partially offset by a
decrease in revenues recognized from the Intel Development and License Agreement
(the "Intel Agreement"). 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
$5,991,000 and $2,150,000 for fiscal 1998 and 1997, 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 as a result of renegotiated contract
terms were not material in fiscal 1998 and 1997. Engineering services decreased
to $5,550,000 from $10,774,000 or approximately 48% primarily due to the
termination, in the first quarter of fiscal 1998, of the development agreement
with Digital Equipment Corporation and a decrease in revenue from the Intel
Agreement.
11
<PAGE> 3
COST OF REVENUES. Cost of revenues was $12,414,000 and $7,073,000 for
fiscal 1998 and 1997, respectively, an increase of approximately 76%. Cost of
revenues consists primarily of amortization of software development costs and
purchased software, product royalties and engineering costs associated with
engineering services revenues. Cost of revenues as a percentage of revenues
increased to 29% from 18% for the fiscal years ended January 31, 1998 and 1997,
respectively. Cost of software license fees as a percentage of software license
fees revenues increased to 18% from 9% primarily due to increases in
amortization of purchased software and product royalty expenses associated with
SystemWizard revenue. The increase in amortization expense in both absolute
dollars and percentage of revenues was due to increased purchased software and
the commencement of amortization associated with new product releases.
SystemWizard revenue is subject to varying royalties payable to certain vendors
for licensed technology on different product offerings within the SystemWizard
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 SystemWizard products sold as well as the percentage of SystemWizard
revenue when compared to the Company's total revenue.
Cost of engineering services increased as a percentage of engineering
service revenues to 103% from 42%, due primarily to the cost of increased
staffing levels, increased operating costs, primarily facility expenses and
costs related to the Intel Agreement.
RESEARCH AND DEVELOPMENT. Research and development expenses, consisting
primarily of payroll and related expenses, were $12,860,000 and $8,392,000, net
of capitalized development costs of $511,000 and $2,116,000 for fiscal 1998 and
1997, respectively, an increase of approximately 53%. The increase in expenses
resulted primarily from staff additions and related personnel costs resulting
from the acquisition of Radish Communications, Inc. in the fourth quarter of
fiscal 1997. Research and development expenses as a percentage of revenues
increased to 30% from 21% for the fiscal years ended January 31, 1998 and 1997,
respectively.
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 $14,908,000 and $11,462,000 for fiscal
1998 and 1997, respectively, an increase of approximately 30%. The increase was
primarily due to staff additions and increased costs of marketing programs,
including cooperative advertising with customers. Sales and marketing expenses
as a percentage of revenues increased to 35% from 29% for the fiscal years ended
January 31, 1998 and 1997, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses,
consisting primarily of payroll and related expenses, provision for doubtful
accounts and professional fees, were $7,355,000 and $3,499,000 for fiscal 1998
and 1997, respectively, an increase of approximately 110%. The increase was
primarily due to staff additions and an increase in the provision for doubtful
accounts. General and administrative expenses as a percentage of revenues
increased to 17% from 9% for the fiscal years ended January 31, 1998 and 1997,
respectively.
RESTRUCTURING AND OTHER CHARGES. In January 1998, the Company recorded
restructuring and other charges of $12,907,000. The other charges were composed
primarily of $9,473,000 for the write-down of prepaid royalty obligations,
$2,470,000 for the write-off of certain purchased technology, $727,000 for the
write-off of certain capitalized software development costs and $322,000 of
other costs. These charges were reduced by the reversal of $500,000 of the
December 1996 charge related to the acquisition of Radish Communications, Inc.
("Radish") as a result of lower employee relocation and other costs
12
<PAGE> 4
relating to this transaction. These charges were the result of management's
review of operations following the significant fourth quarter revenue shortfall
and reduced revenue expectations for certain products. Based upon its review,
management concluded that these factors impaired the realizability of prepaid
financial obligations and previously capitalized intangible assets.
In addition, in an effort to reposition the Company's business lines
and to better attain the Company's overall business goals, management decided to
license the Company's USB technology to a third party and undertake general cost
reductions including employee severance and certain facility abandonment costs
of $415,000. The actions related to these charges were substantially completed
by January 31, 1998.
ACQUIRED IN-PROCESS R&D AND OTHER CHARGES. On December 19, 1996, the
Company acquired Radish, a developer of advanced telecommunications software, by
means of a merger of a wholly owned subsidiary of the Company with and into
Radish. The Company issued approximately 2,038,000 shares of common stock and
cash in exchange for all the outstanding shares of Radish. The purchase price of
$41,317,000 was comprised of common stock and options valued at $37,862,000;
cash paid of $367,000, liabilities assumed of $951,000 and transaction costs of
$2,137,000. The acquisition was accounted for under the purchase method
resulting in purchase price allocation of $5,198,000 to assets acquired
(primarily cash and equipment) and $36,119,000 to in-process technology. In
connection with this acquisition the Company performed an assessment of the
value of the acquired technology and made a determination that the requirements
for capitalization had not been met resulting in the charge. In addition, the
Company reassessed its existing purchased and capitalized technology based upon
its revised technology and product strategies resulting from the Radish
acquisition. This evaluation resulted in a write off of $2,398,000 of previously
capitalized and purchased software costs. In connection with the acquisition,
the Company also issued warrants valued at $3,771,000 to a strategic partner of
Radish. The results of Radish are included in the consolidated financial
statements from the date of acquisition.
PROVISION FOR INCOME TAXES. Provision for income taxes were $2,034,000
and $692,000 for the fiscal years ended January 31, 1998 and 1997, respectively.
The Company's tax provision for fiscal 1998 was principally affected by the
establishment of a valuation allowance for previously recorded deferred tax
assets and the recording of foreign withholding taxes. Additionally, losses in
fiscal 1998 were not benefited. Management has considered recent operating
results and has concluded that it is more likely than not that the deferred tax
assets will not be realizable.
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
REVENUES. Revenues were $39,668,000 and $24,589,000 for fiscal 1997 and
1996, respectively, an increase of approximately 61%. Software license fees
increased to $28,894,000 from $16,583,000 or approximately 74%. This increase
was primarily due to software license fees on SystemWizard as well as an
increase in the software license fees for BIOS, PC Card and USB 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 $2,150,000 and $2,714,000 for fiscal
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
as a result of renegotiated contract terms were not material in fiscal 1997 and
1996. Engineering services increased to $10,774,000 from $8,006,000 or
approximately 35% due to engineering services related to a contract to develop
call-avoidance software products, as well as growth in the mobile computing
market engineering services.
13
<PAGE> 5
COST OF REVENUES. Cost of revenues was $7,073,000 and $4,403,000 for
fiscal 1997 and 1996, respectively. Cost of revenues as a percentage of revenues
remained constant at 18% for the fiscal years ended January 31, 1997 and 1996.
Cost of software license fees as a percentage of software license fees revenues
increased to 9% from 6% primarily due to increases in royalties resulting from
an increase in revenue subject to royalties and amortization of purchased
software and software development costs. Cost of engineering services decreased
as a percentage of engineering service revenues to 42% from 43%.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$8,392,000 and $5,112,000, net of capitalized development costs of $2,116,000
and $1,206,000, for fiscal 1997 and 1996, respectively, an increase of
approximately 64%. The increase in expenses resulted primarily from staff
additions. Research and development expenses as a percentage of revenues were
21% in both periods. Included in research and development are costs associated
with certain work performed under the Intel Agreement.
SALES AND MARKETING. Sales and marketing expenses were $11,462,000 and
$7,647,000 for fiscal 1997 and 1996, respectively, an increase of approximately
50%. The increase was primarily due to staff additions, increased costs of
marketing programs and events and additional travel costs. Sales and marketing
expenses as a percentage of revenues decreased to 29% from 31% due to the
substantial relative increase in revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3,499,000 and $2,719,000 for fiscal 1997 and 1996, respectively, an increase of
approximately 29%. The increase was primarily due to staff additions and an
increase in the provision for doubtful accounts. General and administrative
expenses as a percentage of revenues decreased to 9% from 11% due to the
substantial relative increase in revenues.
PROVISION FOR INCOME TAXES. Provision for income taxes was $692,000 and
$1,585,000 for fiscal 1997 and 1996, respectively. The Company recorded a tax
provision in fiscal 1997 while incurring a net loss due to expenses incurred in
connection with the Radish acquisition that were recorded for financial
statement purposes but not for tax purposes. In fiscal 1997 and 1996, the
Company was able to reduce its federal tax liability through the utilization of
certain tax credits. The provision for income taxes in both periods includes
foreign tax withheld on customers' payments to the Company for revenues
originating in Taiwan and Japan. In connection with the acquisition of Radish,
the Company acquired $12,100,000 of net operating loss carryforwards that will
expire on various dates beginning in fiscal 2007. The Company has placed a full
valuation allowance against the acquired net operating loss carryforwards based
on management's judgment that it is more likely than not that the net operating
loss carryforwards will not be utilized based on the limitations on their use
and recent operating results.
LIQUIDITY AND CAPITAL RESOURCES
To date, SystemSoft has financed its operations primarily from cash
provided by operations and proceeds from stock issuances. As of January 31,
1998, the Company had cash and cash equivalents of $10,764,000 and working
capital of $14,238,000. The Company's operating activities used cash of
$2,790,000 for fiscal 1998 resulting mainly from the Company's fiscal 1998
operating loss. The Company's investing activities used cash of $7,446,000 in
fiscal 1998. The principal uses of cash for investing activities in fiscal 1998
were the purchase of property and equipment of $3,846,000 and purchased software
of $4,190,000. During fiscal 1998, the Company's financing activities have
provided cash of $10,903,000. Specifically, the Company received proceeds of
$1,592,000 from the exercise of stock options and $1,329,000 as proceeds from
the purchase of the Company's stock in the employee stock purchase plan.
Additionally, in May 1997, the Company completed a private placement of its
common stock whereby the Company sold 1,066,666 shares of stock and the Company
received gross proceeds of approximately $8,000,000.
14
<PAGE> 6
In September 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
75% 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. At January 31, 1998, the Company had no
borrowings under the line of credit and had credit availability of approximately
$3,142,000. In April 1998, the Company and its bank amended the original line of
credit to adjust the financial covenants as of January 31, 1998 to align better
the covenants with the financial performance of the Company.
As of January 31, 1998, the Company's commitments consisted primarily
of office leases for its facilities. These leases, which are under
non-cancelable operating lease agreements, expire on various dates through
fiscal year 2012. The minimum annual rental commitment under these leases (net
of subleases) for fiscal 1999 is $1,350,000. In December 1997, the Company
entered into an agreement with Intel which requires the Company to pay
$4,263,000 in lieu of future royalties which would have been paid over the life
of certain of the Company's SystemWizard software products. At January 31, 1998
$1,022,000 had been paid and the remaining $3,241,000 is to be paid at various
dates during fiscal 1999 and 2000.
In January 1998, the Company recorded restructuring and other charges
of $12,907,000. The cash payments required relating to these charges are
approximately $737,000 which is expected to be expended during fiscal 1999.
The Company believes that its current cash balances combined with cash
flow from operations and availability under its revolving line of credit will be
sufficient to meet its working capital and capital expenditure requirements
through at least the next twelve months. This operating cash flow expectation
assumes a return to profitability by the Company during the second half of
fiscal 1999. Without a return to profitability in fiscal 1999, the Company may
be required to seek additional external financing or reduce current operating
costs in order to meet its current cash requirements over the next twelve
months. In the event that the Company requires additional financing, the Company
believes that it would be able to do so; however, there can be no assurance that
it would be successful in procuring such financing, or that it could do so on
terms favorable to the Company.
To date, inflation has not had a material impact on the Company's
financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which is effective for fiscal years beginning after December 15,
1997, including interim periods. SFAS 130 requires the presentation of
comprehensive income and its components. Comprehensive income presents a
measure of all changes in equity that result from recognized transactions and
economic events during the period other than transactions with stockholders.
SFAS 130 requires restatement of all prior-period statements presented after the
effective date. The Company will adopt SFAS 130 in the first quarter of fiscal
1999 and expects the impact of such adoption to be related primarily to the
inclusion of foreign currency translation adjustments in comprehensive income.
15
<PAGE> 7
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. SFAS 131 changes current practice under
SFAS 14 by establishing a new framework on which to base segment reporting. The
Company will adopt SFAS 131 in its fiscal year ended January 31, 1999 and has
not yet determined the impact of such adoption on its reporting as currently
presented.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition",
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes SOP 91-1, "Software
Revenue Recognition". The Company will adopt SOP 97-2 as of February 1, 1998 and
expects that it will result in the deferral of certain revenues from certain
future contracts. The adoption of SOP 97-2 may affect the comparability of
results of operations, although the impact is not yet determinable.
YEAR 2000
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue. The Company
presently believes, with modification to the existing software, the "Year 2000"
issue will not pose significant operational problems and costs to complete this
process are not anticipated to be material to its financial position or results
of operations in any given year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. From time to time,
information provided by the Company or statements made by its directors,
officers or employees may contain "forward-looking" information that involves
risks and uncertainties. Actual results may differ materially.
Statements indicating that the Company "expects," "estimates,"
"believes," "is planning," or "plans to," are forward-looking, as are other
statements concerning future financial results, product offerings or other
events that have not yet occurred. There are several important factors,
including those identified under the heading "Factors That May Affect Future
Results" as well as factors discussed elsewhere in this report and in the
Company's other reports filed with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K for fiscal 1998, which could
cause actual results or events to differ materially from those anticipated by
the forward-looking statements. Although the Company has sought to identify the
most significant risks to its business, the Company cannot predict whether, or
to what extent, any of such risks may be realized nor can there be any assurance
that the Company has identified all possible issues or risks that the Company
might face.
The Company's future operating and financial 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 be profitable in the future. Rapidly changing
technology, evolving industry standards and frequent new product introductions
characterize the market for the Company's system-level and call-avoidance
software. The Company's future success will depend upon its ability to enhance
its current software and to develop and introduce new software which
16
<PAGE> 8
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 performance to date has
been largely dependent upon the adoption of its software by key participants in
the PC industry; the loss of which or the failure to add new OEM participants
could adversely effect the Company's product development efforts. In addition,
the inability of the Company to replace revenues provided by these key customers
or participants could have a material adverse effect on the Company's business
and financial condition. The Company 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.
The Company believes that future results of operations, both annually
and quarterly, may fluctuate significantly based upon several factors including
the timing of new product introductions, product mix, utilization of pilot
programs of SystemWizard, changes in level of operating expenses, gain or loss
of significant customers, personnel changes, activities of competitors, the
ability of the Company to penetrate new markets and changes in economic
conditions in general and in the Company's industry both nationally and
internationally. The Company currently operates in the Asia-Pacific region
through two wholly owned subsidiaries. The Asia-Pacific region suffered
substantial economic turmoil during fiscal 1998 and this event negatively
impacted the financial results of the Company. The Asia-Pacific economy
continues to be in unrest and the success, or lack thereof, of a rebound in the
Asia-Pacific regions' economies will have a direct impact on the future
operating and financial results of the Company. SystemWizard revenue is subject
to varying royalties payable to certain vendors for licensed technology on
different product offerings within the SystemWizard 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 SystemWizard product
sold as well as the percentage of SystemWizard revenue when compared to the
Company's total revenue. 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.
The Company has international revenues that are subject to a number of
risks including the enforcement of agreements, difficulty in collecting
receivables, payment of withholding taxes, changes in product demand due to
fluctuations in exchange rates and currency value fluctuations due to revenues
generated in the local currency in Japan. The Company regards its software as
proprietary and attempts to protect it with a combination of patent, copyright,
trademark and trade secret laws and employee and third-party nondisclosure
agreements. There can be no assurance that the protections put in place by the
Company will be adequate.
17
<PAGE> 9
SELECTED CONSOLIDATED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended January 31 In thousands, except per share data (6) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 42,623 $ 39,668 $ 24,589 $ 15,691 $ 9,154
Gross profit 30,209 32,595 20,186 11,481 6,185
Acquired in process R&D and other charges -- 46,456 -- -- --
Restructuring and other charges 12,907 -- -- -- --
Net income (loss) (1) (3) (19,729) (37,641) 3,591 2,026 230
Net income (loss) per common share-basic (1) (2) (3) (4) (7) (0.76) (1.70) 0.17 0.12 0.02
Net income (loss) per common share-diluted (1) (2) (3) (4) (7) (0.76) (1.70) 0.16 0.11 0.01
Weighted average number of common
shares, basic (1) (2) (4) (7) 26,035 22,207 20,561 16,732 14,135
Weighted average number of common and common
equivalent shares-diluted (1) (2) (4) (7) 26,035 22,207 22,742 18,783 15,505
Total assets $ 33,559 $ 40,751 $ 26,952 $ 21,211 $ 7,394
Notes payable -- -- -- -- 60
Redeemable convertible preferred stock -- -- -- -- 12,581
</TABLE>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended April 30, July 31, October 31, January 31, Year Ended
- -----------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data 1997 1997 1997 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 12,477 $ 12,905 $ 13,233 $ 4,008 $ 42,623
Gross profit 10,045 10,074 9,470 620 30,209
Income (loss) from operations 3,017 1,009 1,046 (22,894) (17,822)
Income (loss) before income taxes 3,014 1,118 1,181 (23,008) (17,695)
Provision for income taxes 995 359 236 434 2,034
Net income (loss) (1) (3) 2,019 749 945 (23,442) (19,729)
Net income (loss) per common share-basic (1) (2) (3) (4) $ 0.08 $ 0.03 $ 0.04 $ (0.88) $ (0.76)
Net income (loss) per common share-diluted (1) (2) (3) (4) $ 0.08 $ 0.03 $ 0.04 $ (0.88) $ (0.76)
Common stock price per share (5)
High $ 18.00 $ 14.50 $ 14.13 $ 8.38 $ 18.00
Low $ 7.50 $ 7.38 $ 6.00 $ 4.06 $ 4.06
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended April 30, July 31, October 31, January 31, Year Ended
- --------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data 1996 1996 1996 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,050 $ 9,291 $ 10,308 $ 12,019 $ 39,668
Gross profit 6,680 7,555 8,213 10,147 32,595
Income (loss) from operations 1,890 2,207 2,523 (43,834) (37,214)
Income (loss) before income taxes 1,966 2,290 2,619 (43,824) (36,949)
Provision (benefit) for income taxes 688 801 917 (1,714) 692
Net income (loss) (3) 1,278 1,489 1,702 (42,110) (37,641)
Net income (loss) per common share-basic (2) (3) (4) $ 0.06 $ 0.07 $ 0.08 $ (1.78) $ (1.70)
Net income (loss) per common share-diluted (2) (3) (4) $ 0.06 $ 0.06 $ 0.07 $ (1.78) $ (1.70)
Common stock price per share (5)
High $ 14.25 $ 30.38 $ 36.50 $ 29.75 $ 36.50
Low $ 5.38 $ 12.00 $ 17.50 $ 10.25 $ 5.38
</TABLE>
(1) For fiscal 1998, net loss and net loss per common share reflects a
charge for restructuring and other charges in the amount of $12,907 or
$.50 per common share.
(2) Net income (loss) per share data has been restated for all periods
presented to reflect the adoption of SFAS 128.
(3) For fiscal 1997, net loss and net loss per common share reflects a
charge for acquired in-process R&D and other charges in the amount of
$45,456 or $1.96 per common share.
(4) On June 19, 1996, the Board of Directors authorized and approved a 2
for 1 stock split in the form of a stock dividend. All share and per
share data have been restated for all periods presented to reflect this
stock split.
(5) The Company's common stock has been traded on the Nasdaq National
Market under the symbol "SYSF" since August 4, 1994, the effective date
of the Company's initial public offering. No cash dividends have been
paid to date. The Company does not intend to declare or pay cash
dividends in the near future and is restricted from doing so under the
terms of its line of credit agreement. It is the Company's intention to
retain earnings to finance the expansion of its business. The prices
have been restated to reflect the 2 for 1 stock split. The price is
based on the high and low closing sales price as quoted on the Nasdaq
National Market.
(6) Fiscal 1996 and 1995 adjusted to reflect the acquisition of Ventura
Micro, Inc. in June 1995 accounted for as a pooling of interests.
(7) Net income (loss) per common share and weighted average number of
common and common equivalent shares for the years 1995 and 1994 have
been presented on a pro forma basis which reflects the conversion of
all outstanding shares of redeemable convertible preferred stock on the
date of original issuance.
18
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,763,795 $ 10,807,691
Restricted cash -- 1,000,000
Marketable securities -- 101,507
Accounts receivable, less allowance for doubtful
accounts of $1,566,705 in 1998 and $917,915 in 1997 6,328,056 13,818,504
Prepaid royalties 2,553,704 100,000
Prepaid and other current assets 2,727,184 2,343,941
Deferred income taxes -- 2,528,079
- -----------------------------------------------------------------------------------------------------
Total current assets 22,372,739 30,699,722
Property and equipment, net 6,807,337 4,935,625
Purchased software, net 3,012,463 3,747,032
Software development costs, net 546,936 1,368,359
Prepaid royalties, long-term portion 819,450 --
- -----------------------------------------------------------------------------------------------------
Total assets $ 33,558,925 $ 40,750,738
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,086,991 $ 2,148,092
Accrued expenses 1,965,995 2,503,207
Income taxes payable 118,875 348,500
Accrued compensation and benefits 2,037,380 498,456
Accrued royalties 2,296,500 96,250
Deferred revenue 628,613 --
- -----------------------------------------------------------------------------------------------------
Total current liabilities 8,134,354 5,594,505
Other long-term liabilities 1,480,143 --
Deferred income taxes -- 1,642,141
Commitments and contingencies (Notes 8 and 15)
Stockholders' Equity
Preferred Stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding
Common Stock, $.01 par value; 90,000,000 and 30,000,000
shares authorized; 26,807,443 and 25,146,061 shares issued 268,074 251,460
Additional paid-in capital 83,328,220 72,441,614
Cumulative translation adjustment (744,100) --
Less treasury stock, at cost, 159,246 shares (427,187) (427,187)
Accumulated deficit (58,480,579) (38,751,795)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 23,944,428 33,514,092
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 33,558,925 $ 40,750,738
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 11
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Software license fees $ 37,072,095 $ 28,894,318 $ 16,582,970
Engineering services 5,550,537 10,773,527 8,005,617
- -----------------------------------------------------------------------------------------------------------------
Total revenues 42,622,632 39,667,845 24,588,587
Cost of Revenues
Software license fees 6,726,808 2,548,960 984,735
Engineering services 5,686,963 4,524,285 3,418,003
- -----------------------------------------------------------------------------------------------------------------
Total cost of revenues 12,413,771 7,073,245 4,402,738
- -----------------------------------------------------------------------------------------------------------------
Gross profit 31,568,429 32,594,600 20,185,849
Operating Expenses
Research and development 12,860,282 8,391,732 5,111,759
Sales and marketing 14,908,068 11,462,366 7,646,792
General and administrative 7,354,999 3,498,749 2,719,032
Restructuring and other charges 12,907,337 -- --
Acquired in-process R&D and other charges -- 46,455,622 --
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 48,030,686 69,808,469 15,477,583
- -----------------------------------------------------------------------------------------------------------------
(Loss) income from operations (17,821,825) (37,213,869) 4,708,266
Interest income 288,536 397,148 575,868
Interest expense (141,686) (6,808) (1,081)
Foreign exchange loss (19,657) (125,100) (106,977)
- -----------------------------------------------------------------------------------------------------------------
(Loss) income before provision for income taxes (17,694,632) (36,948,629) 5,176,076
Provision for income taxes 2,034,152 692,253 1,584,787
- -----------------------------------------------------------------------------------------------------------------
Net (loss) income $(19,728,784) $(37,640,882) $ 3,591,289
- -----------------------------------------------------------------------------------------------------------------
Per share net (loss) income
Basic $ (0.76) $ (1.70) $ 0.17
Diluted $ (0.76) $ (1.70) $ 0.16
Weighted average shares outstanding
Basic 26,034,716 22,206,952 20,560,574
Diluted 26,034,716 22,206,952 22,742,292
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid-In Translation
Shares Amount Capital Adjustment
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 31, 1995 19,909,898 $ 199,098 $ 22,356,075 --
Stock options exercised 1,061,274 10,612 1,077,732
Treasury stock
Issuance of common stock
under employee stock
purchase plan 134,866 1,350 457,195
Tax benefit from exercise
of stock options 976,554
Net income
- -------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 21,106,038 211,060 24,867,556 --
Stock options exercised 1,770,247 17,702 4,419,506
Issuance of common stock
under employee stock
purchase plan 231,974 2,320 1,303,694
Tax benefit from exercise
of stock options 238,584
Issuance of common stock
to acquire Radish
Communications 2,037,802 20,378 37,841,335
Issuance of stock
purchase warrants 3,770,939
Net loss
- -------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 25,146,061 251,460 72,441,614 --
Stock options exercised 377,150 3,771 1,587,838
Issuance of common stock
under employee stock
purchase plan 217,566 2,176 1,326,935
Foreign currency translation
adjustment $ (744,100)
Net proceeds from
issuance and sale
of common stock,
net of issuance
costs of $17,500 1,066,666 10,667 7,971,833
Net loss
- -------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 26,807,443 $ 268,074 $ 83,328,220 $ (744,100)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Accumulated Stockholders'
Shares Amount Deficit Equity
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 31, 1995 (112,900) $(128,696) $(4,702,202) $ 17,724,275
Stock options exercised 1,088,344
Treasury stock (46,346) (298,491) (298,491)
Issuance of common stock
under employee stock
purchase plan 458,545
Tax benefit from exercise
of stock options 976,554
Net income 3,591,289 3,591,289
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1996 (159,246) (427,187) (1,110,913) 23,540,516
Stock options exercised 4,437,208
Issuance of common stock
under employee stock
purchase plan 1,306,014
Tax benefit from exercise
of stock options 238,584
Issuance of common stock
to acquire Radish
Communications 37,861,713
Issuance of stock
purchase warrants 3,770,939
Net loss (37,640,882) (37,640,882)
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1997 (159,246) (427,187) (38,751,795) 33,514,092
Stock options exercised 1,591,609
Issuance of common stock
under employee stock
purchase plan 1,329,111
Foreign currency translation
adjustment (744,100)
Net proceeds from
issuance and sale
of common stock,
net of issuance
costs of $17,500 7,982,500
Net loss (19,728,784) (19,728,784)
- ----------------------------------------------------------------------------------------------------
Balance, January 31, 1998 (159,246) $ (427,187) $ 58,480,579 $ 23,944,428
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(19,728,784) $(37,640,882) $ 3,591,289
Adjustments to reconcile net (loss) income to cash (used in) provided by
operating activities:
Restructuring and other charges, non-cash portion 12,170,146 -- --
Depreciation and amortization 6,432,406 3,122,814 1,495,953
Deferred income taxes 885,938 (47,572) 103,846
Provision for doubtful accounts 1,970,374 1,312,592 255,743
Tax benefit from exercise of stock options -- 238,584 976,554
Non-cash charge for acquired in-process
R&D and other charges -- 42,288,123 --
Changes in operating assets and liabilities:
Accounts receivable 2,822,211 (10,456,081) (4,771,352)
Prepaid and other current assets (377,514) (1,270,052) (384,646)
Prepaid royalties (12,746,571) -- --
Accounts payable (1,061,101) 1,266,103 63,574
Accrued expenses (54,666) (704,344) 54,561
Other long-term liabilities 1,480,143 -- --
Income taxes payable (229,625) (175,758) 133,115
Accrued commissions -- -- (31,257)
Accrued compensation and benefits 1,653,959 (69,596) (39,628)
Accrued royalties 3,364,330 1,335,928 214,571
Deferred revenue 628,613 -- (260,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (2,790,141) (800,141) 1,402,323
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cash acquired in acquisition of
Radish Communications -- 4,247,921 --
Purchases of property and equipment (3,846,441) (3,263,345) (2,321,965)
Purchased software costs (4,190,060) (3,218,761) (497,474)
Software development costs (510,666) (2,116,227) (1,206,208)
Sale of marketable securities 101,507 3,858,983 924,579
Decrease (increase) in restricted cash 1,000,000 (1,000,000) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,445,660) (1,491,429) (3,101,068)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from exercise of stock options and
common stock warrants 1,591,609 4,437,208 1,088,344
Proceeds from employee stock purchase plan 1,329,111 1,306,014 458,544
Purchase of treasury stock -- -- (298,491)
Minority interest in subsidiary -- (50,000) 50,000
Proceeds from issuance of common stock,
net of issuance costs of $17,500 7,982,500 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,903,220 5,693,222 1,298,397
- -----------------------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on
cash and cash equivalents (711,315) -- --
Net (decrease) increase in cash and cash equivalents (43,896) 3,401,652 (400,348)
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 10,807,691 7,406,039 7,806,387
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,763,795 $ 10,807,691 $ 7,406,039
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 10 for supplemental cash flow disclosures
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. SystemSoft Corporation (the "Company") designs,
develops, markets, licenses and supports call avoidance, PC Card and advanced
system-level software products for manufacturers of mobile and desktop personal
computers and peripherals. The Company delivers enabling technologies which
increase PC functionality and simplify usage while allowing manufacturers to
differentiate their products through highly expandable system design. The
principal markets for the Company's products are U.S. and Asia-Pacific based
manufacturers of personal computers and related devices.
BASIS OF PRESENTATION. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
intercompany transactions and accounts have been eliminated in consolidation.
Certain amounts in the prior year financial statements have been reclassified to
conform with the current year presentation.
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates included in the financial statements are the
valuation of accounts receivable, deferred tax assets, purchased software and
software development costs.
CASH EQUIVALENTS AND MARKETABLE SECURITIES. Cash equivalents
include highly liquid investments purchased with an original maturity of three
months or less. Marketable securities consist primarily of U.S. Treasury
obligations classified as "held to maturity" and are stated at amortized cost
which approximates fair market value. Restricted cash represented security on a
letter of credit issued to the lessor of the Company's new corporate office
space which was released upon the Company's occupying the office space in fiscal
1998.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the assets (generally three to five years). Leasehold
improvements are amortized over the lesser of the lease term or the life of the
asset. Upon retirement or other disposition of property and equipment, the cost
and related depreciation are removed from the accounts and the resulting gain or
loss is reflected in net income.
PURCHASED SOFTWARE. Purchased software costs consist of purchased
technologies, costs of translating the Company's products into various languages
and costs to build knowledge bases for the call-avoidance software products.
Capitalized costs are amortized commencing upon the general release of the
product on a straight-line basis over the estimated economic lives of the
related products (generally one to three years). The Company reviews purchased
software development costs each period and, if necessary, reduces the carrying
value of each product to its net realizable value. As more fully discussed in
Note 3, in fiscal 1998, the Company wrote off $2,470,022 of net purchased
software costs based on management's evaluation of net realizable value of the
purchased software costs. Accumulated amortization was $1,561,824 and $328,327
at January 31, 1998 and 1997, respectively. Related amortization expense was
$2,856,716, $679,533 and $233,550 for fiscal 1998, 1997 and 1996, respectively.
23
<PAGE> 15
INCOME TAXES. The Company provides for deferred income taxes
resulting from temporary differences between financial and taxable income. Such
differences arise primarily from operating loss carryforwards, U.S. and foreign
tax credits, accruals, capitalized software costs, and provisions for doubtful
accounts. Valuation allowances are provided if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
PREPAID ROYALTIES. The Company licenses certain technologies owned
by other software development companies to supplement the Company's core
products. The Company also entered into several contracts with certain third
parties to deliver customized versions of its products. The Company in turn pays
the third parties a royalty based on sales of the related product(s). Payments
made under technology licensing agreements are recorded as prepaid expenses and
are amortized to expense as related product revenues are recorded. Royalties
expected to be amortized to expense beyond the next fiscal year are recorded as
a long term asset.
SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
internally generated software development costs after technological feasibility
has been established. Capitalized costs are amortized commencing upon the
general release of the product on a straight-line basis over the products
estimated economic lives (generally one to three years). The Company reviews
capitalized software development costs each period and, if necessary, reduces
the carrying value of each product to its net realizable value.
As more fully discussed in Note 3, in fiscal 1998, the Company
wrote off $726,707 of net software development costs based on management's
evaluation of net realizable value of the software development costs.
Accumulated amortization was $2,116,688 and $1,973,745 at January 31, 1998 and
1997, respectively. Related amortization expense was $605,382, $792,672 and
$439,698 for fiscal 1998, 1997 and 1996, respectively.
REVENUE RECOGNITION. Revenue from software license fees is
recognized when the software has been delivered, providing that no significant
vendor obligations remain outstanding, customer acceptance is reasonably assured
and collectibility is deemed probable. Revenue recognized from software licenses
with minimum guaranteed payments is limited to amounts due within the next
fiscal quarter. Additional software license fees are recognized as per unit
royalties exceed the minimum guaranteed payments. Insignificant vendor
obligations, if any, remaining after contract execution and shipment are
accounted for by accruing the costs related to the remaining obligations.
Revenue from engineering services consists of fees charged for
customization of software and is recognized as related services are performed
and contractual milestones are met.
NONMONETARY TRANSACTIONS. The Company occasionally enters into
nonmonetary transactions in which the Company's software licenses are exchanged
for products or services. These transactions are recorded at the estimated fair
market value of the product or service received and/or software license value.
FOREIGN CURRENCY TRANSLATION. The Company considers the local
currency of each subsidiary as the respective functional currency. Assets and
liabilities are translated into U.S. dollars at the year end exchange rate.
Income and expense items are translated at average rates of exchange prevailing
during each period. The resulting foreign currency translation adjustments are
reflected as a separate component of stockholders' equity. Prior to fiscal 1998,
translation adjustments were immaterial and were recognized as a component of
foreign currency gain or loss.
COOPERATIVE MARKETING. In fiscal 1998 and 1997 the Company entered
into arrangements with customers to cooperatively advertise its call-avoidance
software in order to enhance market awareness of the products with end users.
24
<PAGE> 16
Marketing expenses related to these programs are deducted directly from the
customer accounts receivable balances and charged to sales and marketing expense
in the period in which the advertisement appears.
2. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
Estimated Life January 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer equipment 3 years $ 9,238,337 $ 6,039,427
Furniture and fixtures 5 years 1,766,650 1,605,552
Office equipment 3-5 years 442,739 358,813
Leasehold improvements 2-5 years 2,283,465 931,487
- ------------------------------------------------------------------------------------------------------------
13,731,191 8,935,279
Less accumulated depreciation (6,923,854) (3,999,654)
- ------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 6,807,337 $ 4,935,625
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense on property and equipment was $2,924,200,
$1,650,609 and $829,438 for fiscal 1998, 1997 and 1996, respectively.
3. RESTRUCTURING AND OTHER CHARGES
In January 1998, the Company recorded total restructuring and other
charges of $12,907,000. The other charges were composed primarily of $9,473,000
for the write-down of prepaid royalty obligations and $3,197,000 for the
write-off of certain capitalized software development and purchased software
costs. The charges were reduced by the reversal of $500,000 of the December 1996
charge related to the acquisition of Radish Communications, Inc. as a result of
better than expected experience for certain relocation accruals and other costs.
The charge was the result of management's review of operations following the
significant fourth quarter revenue shortfall and reduced revenue expectations
for certain products. Based on its review, management concluded that these
factors impaired the realizablility of certain prepaid royalties and previously
capitalized intangible assets. In addition, in an effort to reposition the
Company's business lines to better attain the Company's overall business goals,
management decided to license the Company's USB technology and undertake general
cost reductions. The actions related to these charges were substantially
completed by January 31, 1998 and resulted in a restructuring charge of $415,000
composed primarily of employee severance and facility abandonment costs.
Approximately $737,000 of the charge is expected to result in cash
expenditures in fiscal 1999 and was accrued as of January 31, 1998. Management
believes that the accrual will be adequate to cover future expenditures
associated with the actions.
Under the terms of the USB Licensing, management of the USB business
line was granted exclusive rights to the USB technology and formed Global
Technology Development, Inc. (GTD), an unaffiliated company. The Company was
granted a 15% equity interest in GTD. Due to the uncertainties surrounding the
future operations of GTD and GTD's ability to successfully leverage the USB
technology, the Company did not recognize any benefit related to this
transaction due to the uncertainty related to the realizability of amounts due
to the Company. The USB license agreement requires the Company to pay GTD
$240,000 for completion of certain engineering services and provides for GTD to
pay the Company $480,000 in fiscal 1999.
25
<PAGE> 17
4. STOCKHOLDERS EQUITY
PREFERRED STOCK. In June 1994, the stockholders of the Company approved
the creation of a new class of undesignated preferred stock and authorized
1,000,000 shares of $.01 par value, in one or more series, with voting rights
and preferences to be determined by the Board of Directors. There were no shares
issued or outstanding as of January 31, 1998.
COMMON STOCK. On July 30, 1996, a majority of the stockholders of the
Company voted to increase the number of authorized shares of common stock to
90,000,000 shares.
STOCK SPLIT. On June 19, 1996, the Company's Board of Directors
declared a two-for-one stock split, payable in the form of a 100% stock dividend
that was distributed on July 17, 1996 to holders of record on July 3, 1996. The
par value of the additional 10,783,848 shares of common stock issued in
connection with the stock split was transferred to common stock from additional
paid-in capital. All references to number of shares (except shares authorized),
per share data and stock option plan data have been restated for all periods
presented to reflect the stock split.
WARRANTS. In December 1996, in conjunction with the Radish acquisition,
the Company issued a common stock purchase warrant which entitles the holder to
purchase 750,000 shares of common stock at an exercise price of $23.00. The
right to purchase 500,000 shares expires in December 1998 and the right to
purchase the remaining 250,000 shares expires in December 1999. The estimated
fair value of the warrants at the date of issuance, $3,771,000, was recorded as
an increase to additional paid-in capital in fiscal 1997.
EARNINGS PER SHARE DISCLOSURES. The Company computes basic and diluted
earnings per share in accordance with SFAS 128, "Earnings per Share," which the
Company adopted as of January 31, 1998. Basic earnings per share is based upon
the weighted-average number of common shares outstanding during the period.
Common equivalent shares have been excluded from the computation of diluted loss
per share for fiscal 1998 and 1997, as their effect would have been
anti-dilutive. Common equivalent shares result from the assumed exercise of
stock options and warrants, the proceeds of which are then assumed to have been
used to repurchase outstanding common stock using the treasury stock method.
Options to purchase 5,547,459 and 4,388,826 shares of common stock
outstanding during the years ended January 31, 1998 and 1997, respectively, were
excluded from the year to date calculation of diluted net loss per share as the
effect of their inclusion would have been anti-dilutive. Warrants to purchase
750,000 shares of common stock outstanding during the years ended January 31,
1998 and 1997 were excluded from the year to date calculation of diluted net
loss per share as the effect of their inclusion would have been anti-dilutive.
26
<PAGE> 18
The following is a reconciliation of the numerator and denominator of the basic
and diluted per-share computations:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Numerator:
Net income (loss) $(19,728,784) $(37,640,882) $ 3,591,289
Denominator:
Common shares outstanding 26,034,716 22,206,952 20,560,574
Basic EPS (.76) (1.70) .17
- ----------------------------------------------------------------------------------------
DILUTED EPS
Numerator:
Net income (loss) (19,728,784) (37,640,882) 3,591,289
Denominator:
Common shares outstanding 26,034,716 22,206,952 20,560,574
Common stock equivalents -- -- 2,181,718
- ----------------------------------------------------------------------------------------
26,034,716 22,206,952 22,742,292
Diluted EPS $ (.76) $ (1.70) $ .16
- ----------------------------------------------------------------------------------------
</TABLE>
PRIVATE PLACEMENT OF COMMON STOCK. On May 7, 1997, the Company
completed a private placement of its common stock whereby a strategic partner
invested $8,000,000 in the Company and received 1,066,666 shares of common
stock, representing a per share price of $7.50 and constituting approximately 4%
of the Company's outstanding voting stock at that date. The shares sold as part
of the private placement have certain restrictions on transferability but
otherwise carry substantially the same rights as other outstanding common
shares.
STOCK-BASED COMPENSATION PLANS. The Company adopted the disclosure
provisions of SFAS 123 in 1997 and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates as calculated in accordance with SFAS 123, pro forma
information would have been:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income - as reported $ (19,728,784) $ (37,640,882) $ 3,591,289
Net (loss) income - pro forma (25,390,588) (40,941,446) 2,947,302
Net (loss) income per share - as reported, basic (.76) (1.70) .17
Net (loss) income per share - as reported, diluted (.76) (1.70) .16
Net (loss) income per share - pro forma, basic (.98) (1.84) .14
Net (loss) income per share - pro forma, diluted (.98) (1.84) .13
</TABLE>
27
<PAGE> 19
The fair value of each stock option and each common share issued under
the Company's employee stock purchase plan is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Expected life, in years 4.5 4.5 4.5
Expected volatility 75.0% 62.5% 62.5%
Risk free interest rate 5.5% 6.0% 6.0%
Expected dividends -- -- --
</TABLE>
The effects of applying SFAS 123 for the purposes of providing pro
forma disclosure may not be indicative of the effects on reported net income
(loss) for future years, as the pro forma disclosures include the effects of
only those awards granted after February 1, 1995.
In January 1992, the Company adopted the 1992 Stock Option Plan (the
"Employee Plan") and the 1992 Directors' Stock Option Plan (the "Directors'
Plan"). The Employee Plan provided for the granting of incentive stock options
to employees and nonqualified stock options to employees, consultants and
advisors of the Company. The Directors' Plan provided for the granting of
nonqualified stock options to Directors. In February 1993, the Company adopted
the 1993 California Stock Option Plan (the "California Plan"), which provided
for the issuance of incentive stock options for employees located in California.
The Employee Plan, the Directors' Plan and the California Plan all expired in
June 1994, except as to options then outstanding.
In June 1994, the Company adopted the 1994 Omnibus Stock Plan (the
"1994 Plan") and the 1994 Non-Employee Director Stock Option Plan (the "1994
Directors' Plan"). The 1994 Plan provided for the granting of up to 700,000
incentive stock options to employees and nonqualified stock options or
restricted stock to employees, consultants, directors and officers of the
Company. The 1994 Directors' Plan provided for the granting of up to 200,000
nonqualified stock options to directors. On March 23, 1995, the Company's Board
of Directors approved an amendment to the 1994 Plan, reserving an additional
800,000 shares plus such additional number of shares as become available due to
the forfeiture of options previously granted pursuant to the Employee Plan and
the California Plan. On February 28, 1996, the Company's Board of Directors
approved an amendment to the 1994 Plan, reserving an additional 2,500,000
shares. On April 30, 1997, the Company's Board of Directors approved an
amendment to the 1994 Plan, reserving an additional 1,200,000 shares. These
amendments were all approved by a majority vote of the Company's stockholders.
The exercise price of incentive stock options must be at least equal to
the fair market value of the stock on the date of the grant. The exercise price
of nonqualified stock options is determined by the Board of Directors. To date,
all nonqualified stock options have been granted at a price equal to the fair
market value of the stock on the date of the grant. Accordingly, the granting of
incentive and nonqualified options has not resulted in a compensation charge.
The stock options generally vest over a four year period and expire ten years
from the date of grant.
As a result of the acquisition of Radish Communications Systems, Inc.
("Radish") (see Note 14), the Company acquired the 1992 Stock Option Plan and
related option agreement ("Radish Plan"). The options granted under the Radish
Plan converted to options to purchase 188,708 shares of the Company's common
stock. The Radish Plan for incentive stock options vest over a four year period
and expire eight years after the date of grant and non-qualified stock options
are generally fully vested when granted.
28
<PAGE> 20
The following table summarizes the status of the Company's stock option
plans at January 31, 1998, 1997 and 1996, and changes during the years then
ended:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 4,388,826 $ 6.54 4,167,550 $ 3.39 3,639,028 $ 1.50
Granted 2,326,900 7.18 2,067,700 9.80 2,094,652 5.30
Acquired option pool -- -- 188,708 1.19 -- --
Exercised (377,150) 4.23 (1,770,247) 2.51 (1,061,274) 1.03
Canceled (791,117) 9.75 (264,885) 5.49 (504,856) 2.43
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 5,547,459 6.48 4,388,826 6.54 4,167,550 3.39
====================================================================================================================================
Options exercisable at year end 2,072,408 $ 5.49 928,366 $ 4.03 994,359 $ 1.56
Weighted-average grate-date fair value
of options granted during the year $ 4.61 $ 5.57 $ 2.96
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- -----------------------------------
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ .43 - $ 1.88 751,164 5.82 $ 1.73 694,501 $ 1.72
1.90 - 4.69 749,791 7.50 4.26 382,768 4.18
5.22 - 7.25 1,737,252 9.10 6.50 250,106 6.34
7.38 - 8.00 1,759,689 8.63 7.60 576,375 7.69
8.63 - 23.63 549,563 9.05 12.35 168,658 15.23
- --------------------------------------------------------------------------------------------------------------
$ .43 - $23.63 5,547,459 8.29 $ 6.48 2,072,408 $ 5.49
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In June 1994, the Company adopted the
1994 Employee Stock Purchase Plan and has reserved 700,000 shares of common
stock for issuance under the plan, including 500,000 shares approved by the
stockholders in fiscal 1996. Subject to certain limitations, SystemSoft
employees may purchase shares of common stock at a price per share that is the
lesser of 85% of the fair value as of the beginning or end of the annual
offering period. Shares issued under the Employee Stock Purchase Plan were
217,566 and 231,974 in fiscal 1998 and 1997, respectively. The pro forma expense
impact under SFAS 123 for common shares issued under the Employee Plan
was$590,364, $212,593 and $32,154 for fiscal 1998, 1997 and 1996, respectively.
STOCK OPTION REPRICING. The Company's Board of Directors approved
an option exchange program effective March 2, 1998. Under the program, all
employees except Officers and Directors having more than one year of service,
were given the choice of having all or some of their outstanding stock options
repriced to the closing price of the Company's common stock as of March 9, 1998.
For those employees that elected to have options repriced, a replacement option
with an exercise price of $4.50 per share was granted and the original option
was canceled. For employees at the Director level and below, vested options that
were repriced will vest at the rate of 25% per quarter; for Vice Presidents and
Assistant Vice Presidents, vested options that were replaced will vest at the
rate of 12.5% per quarter. For all employee levels, all options that were
non-vested as of March 2, 1998 will continue to vest on their previous vesting
schedule.
29
<PAGE> 21
5. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal -- $ 202,798 $ 1,084,000
State -- 35,788 76,660
Foreign taxes $ 1,148,214 501,241 320,281
- -------------------------------------------------------------------------------------------
1,148,214 739,827 1,480,941
- -------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
- -------------------------------------------------------------------------------------------
Federal 885,938 (116,208) 93,385
State -- 68,634 10,461
- -------------------------------------------------------------------------------------------
885,938 (47,574) 103,846
- -------------------------------------------------------------------------------------------
Total $ 2,034,152 $ 692,253 $ 1,584,787
===========================================================================================
</TABLE>
A reconciliation of the U.S. federal statutory rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate (35)% (35)% 35%
Current year loss not benefited 35 -- --
Increase of valuation allowance 5 -- --
Foreign taxes 6 -- --
Acquired in-process R&D -- 34 --
Stock purchase warrant -- 4 --
Other -- (1) --
State income taxes, net -- -- 3
Benefit for foreign tax credits -- -- (7)
- ------------------------------------------------------------------------
Total 11% 2% 31%
========================================================================
</TABLE>
The components of the deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
January 31, 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Purchased software $ (958,257) $ (1,171,903)
Software capitalization (185,958) (465,241)
Depreciation -- (4,997)
- ------------------------------------------------------------------------------------------
Gross deferred tax liabilities (1,144,215) (1,642,141)
Deferred tax assets:
Foreign tax credits 1,925,186 950,409
Depreciation 559,727 --
Allowance for doubtful accounts 532,680 216,892
Net operating loss carryforwards 16,269,410 10,284,150
Acquired net operating loss carryforwards 4,235,000 4,235,000
R&D credits 1,668,870 261,000
Acquisition costs -- 510,628
Other 107,100 --
- ------------------------------------------------------------------------------------------
Gross deferred tax assets 25,297,973 16,458,079
- ------------------------------------------------------------------------------------------
Valuation allowance $(24,153,758) (13,930,000)
- ------------------------------------------------------------------------------------------
Net deferred tax assets -- $ 885,938
- ------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 22
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and other matters in making this assessment. At January 31, 1998 management
increased the valuation allowance to $24,153,758 and reversed the January 31,
1997 net deferred tax asset of $885,938 through the recognition of income tax
expense.
The sale of stock acquired through the exercise of incentive stock
options prior to the expiration of the required holding period and the exercise
of nonqualified stock options result in state and federal income tax benefits to
the Company equal to the difference between the market price at the date of
exercise and the option exercise price times the Company's tax rate. No amounts
were credited to additional paid-in capital during fiscal 1998 as the Company
had a net tax loss in fiscal 1998. During fiscal 1997 and 1996, $238,584 and
$976,554, respectively, was credited to additional paid-in capital to recognize
this benefit. The Company had $29,000,000 of tax deductions related to the sale
of stock acquired through the exercise of incentive stock options prior to the
expiration of the required holding period and the exercise of non-qualified
stock options at January 31, 1998. The recognition of the tax benefit related to
these tax deductions will result in an increase to additional paid-in capital in
the year realized.
As of January 31, 1998, the Company had net operating loss
carryforwards of $18,000,000 available to offset future taxable income. The net
operating loss carryforwards will expire on various dates beginning in fiscal
2007. In addition, the Company has approximately $12,100,000 of Radish net
operating losses, incurred prior to the December 19, 1996 acquisition, which are
subject to certain change of control limitations under the Internal Revenue
Code. These Radish net operating losses will expire on various dates beginning
in fiscal 2007.
6. STRATEGIC RELATIONSHIPS
Intel held approximately seven, eight and nine percent of the
outstanding shares of the Company's common stock as of January 31, 1998, 1997
and 1996, respectively.
In December 1993, the Company entered into a Development and License
Agreement with Intel (the "Intel Agreement") pursuant to which Intel licenses
certain technologies to the Company. The Company develops, markets and supports
the software developed from Intel's technology. Under the terms of the Intel
Agreement, Intel paid the Company $4,000,000 for the Company's engineering,
sales and marketing and support services. The final payment under the Intel
Agreement was received in September 1995.
In consideration of Intel's technology provided and licensed to the
Company under the Intel Agreement, the Company is obligated to pay Intel
royalties based on a percentage of revenues generated on all licensed works
developed under the Intel Agreement. Royalties are based upon a percentage of
revenues generated on PC Card software from February 1, 1994 through January 31,
1999 or beyond such dates if the Company's PC Card software contains Intel's
licensed technology. Intel has the right on sixty days notice to convert any
exclusive license to a non-exclusive license, however such conversion would
reduce the royalty payments by fifty percent.
31
<PAGE> 23
In October 1995 the Intel Agreement was amended to include engineering
services on additional products. The agreement provides the Company with
engineering service payments up to $3,600,000, which included an initial payment
of $600,000 and subsequent quarterly payments of $375,000 commencing on January
1, 1996, through October 1, 1997. Revenue is recognized as work is performed and
milestones are met. Payments to the Company can be made by offsetting amounts
from royalties due to Intel under the Intel Agreement, to the extent, if any,
that such earned royalties are less than the amounts payable to the Company.
Royalties earned by Intel of $1,164,080, $951,507 and $452,278 were used to
offset amounts owed to the Company in fiscal 1998, 1997 and 1996, respectively.
Included in accounts receivable are amounts due from Intel amounting to $40,570
and $1,466,015 at January 31, 1998 and 1997, respectively.
In December 1997, the Company entered into an agreement with Intel
which requires the Company to make guaranteed payments of $4,263,000 in lieu of
future royalties which would have been paid over the life of certain of the
Company's call-avoidance software products. The guaranteed payments are
comprised of $1,022,000 of cash payments made in fiscal 1998 and $3,241,000 of
cash payments to be paid at various dates during fiscal 1999 and 2000.
During fiscal 1996, 1997 and 1998, the Company had revenues from the
Intel agreement of $2,235,000, $1,875,000 and $750,000, respectively. Total
revenues from Intel during fiscal 1996, 1997 and 1998 were $2,483,111,
$2,525,000 and $922,762, respectively.
In connection with the February 28, 1997 termination of the Software
Development and License Agreement with Digital Equipment Corporation ("DEC"),
the Company agreed to provide 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 certain call-avoidance software products. All amounts owed to
DEC under the termination agreement have been paid as of January 31, 1998.
As discussed in Note 4, the Company completed an $8 million private
placement of its common stock with a strategic partner. The same strategic
partner entered into license agreements with the Company during fiscal 1998 and
was a greater than 10% customer in fiscal 1998.
7. LINE OF CREDIT
At January 31, 1998 the Company had a Revolving Line of Credit
agreement ("the Agreement") with a bank whereby the Bank has committed to lend
75% of eligible accounts receivable up to $7 million through August 27, 1998. At
January 31, 1998, the Company's borrowing availability under the line of credit
was approximately $3,400,000. The line is subject to extension at the Bank's
discretion. Under the Agreement borrowings under the credit facility bear
interest at the Bank's prime rate. The Company is required to pay a commitment
fee of one quarter percent on the unused commitment. The Bank may withdraw its
commitment and declare any balances outstanding under the Agreement due and
payable if an Event of Default, as defined in the Agreement, occurs.
32
<PAGE> 24
The Agreement contains certain provisions and restrictive covenants
which, among other things, prohibit the payment of dividends, require minimum
quick assets to current liabilities, minimum tangible net worth, minimum
profitability, and minimum debt to net worth. Subsequent to January 31, 1998,
the Company amended the Agreement to adjust certain financial covenants
prospectively based upon a review of expected future operating performance.
8. COMMITMENTS
The Company leases facilities under non-cancelable operating leases expiring at
various dates through 2012. Minimum annual rental commitments (net of
non-cancelable subleases) as of January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
- -----------------------------------------------------------
<S> <C>
1999 $ 1,350,000
2000 1,279,000
2001 1,668,000
2002 1,489,000
2003 1,685,000
Thereafter 21,970,000
- -----------------------------------------------------------
Total $29,441,000
===========================================================
</TABLE>
Rent expense under all operating leases was $2,339,510, $1,223,406 and
$740,878 for fiscal 1998, 1997 and 1996, respectively.
9. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents, marketable
securities and accounts receivable. The Company maintains excess cash in money
market investments and U.S. Government securities with major financial
institutions. These investments typically mature within 90 days. Marketable
securities consist of U.S. Government debt securities generally maturing within
one year. Historically, the Company has not recorded any losses related to these
investments.
The Company extends credit on open accounts to its customers and does
not require collateral. The Company performs ongoing credit evaluations of all
customers and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
As of January 31, 1998 and 1997, the three largest receivable balances
including receivable from related party collectively represented approximately
$2,345,000 or 27% and $4,573,000 or 31%, respectively, of total accounts
receivable. As of January 31, 1998 and 1997, receivables from foreign customers
were $3,363,000 and $6,537,000, respectively, or 53% and 44%, respectively, of
total accounts receivable.
33
<PAGE> 25
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest $ 141,686 $ 6,808 $ 1,081
Income taxes -- 31,691 22,833
NON-CASH ACTIVITIES
Receivable exchanged for accrued royalties 1,164,080 951,507 452,278
Assets received for software license fees 1,035,663 1,933,958 289,999
Receivable exchanged for cooperative
marketing and other -- 1,835,290 --
Receivable exchanged for purchased
software costs 415,000 -- --
Receivable exchanged for accrued
commissions 83,120 -- --
Non-cash activities associated with
Radish Communications acquisition
Issuance of common stock -- 37,861,713 --
Acquired in-process R&D -- 36,119,181 --
Capitalized software development costs -- 1,518,499 --
Purchased license fees -- 879,504 --
Stock purchase warrants -- 3,770,939 --
</TABLE>
11. EMPLOYEE BENEFITS
The Company maintains a defined contribution plan covering all U.S.
employees, which was established under Section 401(a) of the Internal Revenue
Code. Eligible employees may voluntarily contribute a percentage of their annual
pretax compensation. The Company is not required and has not contributed to the
Plan since inception.
12. GEOGRAPHIC DATA AND MAJOR CUSTOMERS
The Company operates in one industry segment: the development,
marketing and support of call avoidance and system-level software. In fiscal
1998 two customers each accounted for approximately 13% of total revenue. In
fiscal 1997 no customer accounted for more than 10% of total revenue. In fiscal
1996 two customers accounted for approximately 13% and 10% of total revenues.
The customers included in these percentages vary from year to year.
Export sales were $12,605,000, $12,387,000 and $6,990,000 for fiscal
years 1998, 1997 and 1996, respectively.
Summarized information related to international operations is as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $ 30,017,432 $ 27,281,169 $ 17,598,395
Asia-Pacific 12,520,327 10,895,813 6,707,222
Other 84,873 1,490,863 282,970
- ----------------------------------------------------------------------------------------------------
Total sales to unaffiliated customers $ 42,622,632 $ 39,667,845 $ 24,588,587
- ----------------------------------------------------------------------------------------------------
Operating (loss) income:
United States $(19,762,521) $(38,222,621) $ 4,494,432
Asia-Pacific 1,940,696 1,008,752 213,834
- ----------------------------------------------------------------------------------------------------
Total operating (loss) income $(17,821,825) $(37,213,869) $ 4,708,266
- ----------------------------------------------------------------------------------------------------
Identifiable assets:
United States $ 23,495,157 $ 36,442,260 $ 25,272,420
Asia-Pacific 10,063,768 4,308,478 1,679,502
- ----------------------------------------------------------------------------------------------------
Total identifiable assets $ 33,558,925 $ 40,750,738 $ 26,951,922
- ----------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 26
13. ACQUIRED IN-PROCESS R&D AND OTHER CHARGES
In fiscal 1997, the Company recorded a charge for acquired in-process
R&D and other charges of approximately $46,456,000 which included $42,288,000 of
costs associated with the acquisition of Radish and $4,168,000 of costs incurred
to terminate certain foreign representative relationships and a minority
interest participation agreement. See Note 14.
14. ACQUISITIONS
On December 19, 1996, the Company acquired Radish, a developer of
advanced telecommunications software, by means of a merger of a wholly owned
subsidiary of the Company and Radish. The Company issued approximately 2,038,000
shares of common stock and cash in exchange for all the outstanding shares of
Radish. The purchase price of $41,317,000 was comprised of common stock and
options valued at $37,862,000, cash paid of $367,000, liabilities assumed of
$951,000 and transaction costs of $2,137,000. The acquisition was accounted for
under the purchase method resulting in purchase price allocation of $5,198,000
to assets acquired (primarily cash and equipment) and $36,119,000 to in-process
technology. In connection with this acquisition the Company performed an
assessment of the value of the acquired technology and made a determination that
the requirements for capitalization had not been met resulting in the charge. In
addition, the Company reassessed its existing purchased and capitalized
technology based upon its revised technology and product strategies resulting
from the Radish acquisition. This evaluation resulted in a write off of
$2,398,000 of previously capitalized and purchased software costs. In connection
with the acquisition, the Company issued warrants valued at $3,771,000 to a
strategic partner of Radish. The results of Radish are included in the
consolidated financial statements from the date of acquisition.
In June 1995, the Company issued approximately 188,000 shares of its
common stock in exchange for all of the issued and outstanding stock of VMI, a
system software and consulting company specializing in PC Card technology. The
merger has been accounted for under the pooling of interest method and,
accordingly, the Company's consolidated financial statements for 1995 have been
restated to include the accounts and operations of VMI. In connection with the
merger, $61,210 of merger costs and expenses were incurred and have been charged
to general and administrative expenses.
15. LITIGATION
On March 3, 1998, a purported securities class action lawsuit was filed
in the United States District Court for the District of Massachusetts against
the Company and others, including certain officers and directors of the Company.
The lawsuit alleges, among other things, that the Company, during a purported
class period of January 25, 1996 through March 3, 1997, made misrepresentations
and omissions to the investing public regarding its revenue, product development
and business prospects in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Several additional complaints have been filed
against the Company and others in subsequent weeks in the same federal court
alleging similar claims. Seven of the complaints allege a longer class period
ending February 5, 1998. The plaintiffs in these actions seek unspecified
damages against the Company and other defendants. The Company believes that the
allegations of the several complaints are without merit and it intends to defend
these actions vigorously.
35
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SystemSoft Corporation:
We have audited the accompanying consolidated balance sheets of
SystemSoft Corporation and its Subsidiaries as of January 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended January 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SystemSoft Corporation and its Subsidiaries as of January 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 4, 1998, except as to the information presented
in Note 15 for which the date is April 29, 1998
36
<PAGE> 28
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS DIRECTORS
<S> <C>
ROBERT F. ANGELO ROBERT N. GOLDMAN
Chief Executive Officer and President, Chief Executive Officer,
Chairman of the Board of Directors Chairman - Object Design, Inc.
DEBORAH M. BESEMER W. FRANK KING, PH.D.
President, Chief Operating Officer and Director President - PSW Technologies
PAUL J. PEDEVILLANO DAVID J. MCNEFF
Executive Vice President and President - Boston Corporate Advisors
Chief Financial Officer
JONATHAN L. JOSEPH
Executive Vice President, Marketing
</TABLE>
MARKET FOR COMMON STOCK
SystemSoft common stock is traded on NASDAQ under the symbol SYSF.
SEC FORM 10-K
A copy of the Company's annual report Form 10-K, as filed with the Securities
and Exchange Commission, is available without charge upon written request to:
Investor Relations, SystemSoft Corporation, One Innovation Drive, Natick, MA
01760 508/651-0088
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on July 1, 1998. A Notice of the
meeting, together with a form of proxy and a proxy statement, will be mailed to
all stockholders on or about May 22, 1998, at which time proxies will be
solicited by the Board of Directors.
TRADEMARKS
SystemSoft, CardSoft and CardWizard are registered trademarks and SystemWizard,
PowerProfiler, ACPI Builder are trademarks of SystemSoft Corporation. Microsoft
and Windows are registered trademarks of Microsoft Corporation. All other
trademarks, registered trademarks, or tradenames are the property of their
respective holders.
STOCK PROFILE
As of January 31, 1998, there were approximately 395 stockholders of record of
the Company's common stock with 26,807,443 shares outstanding. No dividends have
been paid on the common stock since the Company's inception.
<TABLE>
<CAPTION>
AUDITORS LEGAL COUNSEL WRITING
<S> <C> <C>
Coopers & Lybrand L.L.P. Testa, Hurwitz & Thibeault, LLP Wordscape Communications, Inc.
Boston, Massachusetts Boston, Massachusetts Millis, Massachusetts
TRANSFER AGENT DESIGN/PHOTOILLUSTRATION PHOTOGRAPHY
Boston EquiServe Limited Partnership Polese Clancy John Earle
Canton, Massachusetts Boston, Massachusetts Somerville, Massachusetts
</TABLE>
Any statements that are not historical facts contained in this annual report are
forward-looking statements that involve risks and uncertainties, including but
not limited to, those relating to variances between actual and estimated costs
and expenses, product demand, pricing, market acceptance, the effect of economic
conditions, intellectual property rights and litigation and the outcome of
governmental proceedings, competitive products, risks in product and technology
development, the results of financing efforts, the ability to complete
transactions, and other risks identified in the Company's Securities and
Exchange Commission filings.
(C) 1998 SystemSoft Corporation. All rights reserved. Printed in the United
States of America. Printed on recycled paper.
<PAGE> 1
EXHIBIT 21.1
SYSTEMSOFT CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION OWNERSHIP
- ------------------ ----------------------------- ---------
<S> <C> <C>
SystemSoft Japan Corporation Delaware 100% owned by SystemSoft Corporation
SystemSoft Taiwan Corporation Massachusetts 100% owned by SystemSoft Corporation
SystemSoft Colorado Corporation Delaware 100% owned by SystemSoft Corporation
Yellow Rose Corporation Delaware 100% owned by SystemSoft Corporation
SystemSoft K.K. Japan 80.02% owned by SystemSoft Japan
Corporation
Pacific SystemSoft K.K. Japan 100% owned by SystemSoft Corporation
</TABLE>
23
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
SystemSoft Corporation on Form S-8 (File Nos. 33-85968, 33-80843, 333-13019 and
333-18657) and on Form S-3 (File Nos. 33-96116 and 333-19211) of our reports
dated March 4, 1998, except as to the information presented in Note 15 for which
the date is April 29, 1998, on our audits of the consolidated financial
statements and financial statement schedule of SystemSoft Corporation as of
January 31, 1998 and 1997, and for each of the three years in the period ended
January 31, 1998, which reports are included or incorporated by reference into
this Annual Report on Form 10-K.
/S/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 1, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 10,763,795
<SECURITIES> 0
<RECEIVABLES> 6,328,056
<ALLOWANCES> 1,566,705
<INVENTORY> 0
<CURRENT-ASSETS> 22,372,739
<PP&E> 13,731,191
<DEPRECIATION> 6,923,854
<TOTAL-ASSETS> 33,558,925
<CURRENT-LIABILITIES> 8,134,354
<BONDS> 0
0
0
<COMMON> 268,074
<OTHER-SE> 23,676,354
<TOTAL-LIABILITY-AND-EQUITY> 33,558,925
<SALES> 37,072,095
<TOTAL-REVENUES> 42,622,632
<CGS> 5,367,240
<TOTAL-COSTS> 11,054,203
<OTHER-EXPENSES> 49,390,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,686
<INCOME-PRETAX> (17,694,632)
<INCOME-TAX> 2,034,152
<INCOME-CONTINUING> (19,728,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,728,784)
<EPS-PRIMARY> ($0.76)
<EPS-DILUTED> ($0.76)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 10,807,691
<SECURITIES> 101,507
<RECEIVABLES> 13,818,504
<ALLOWANCES> 917,915
<INVENTORY> 0
<CURRENT-ASSETS> 30,699,722
<PP&E> 8,935,279
<DEPRECIATION> 3,999,654
<TOTAL-ASSETS> 40,750,738
<CURRENT-LIABILITIES> 5,594,505
<BONDS> 0
0
0
<COMMON> 251,460
<OTHER-SE> 33,262,632
<TOTAL-LIABILITY-AND-EQUITY> 40,750,738
<SALES> 28,894,318
<TOTAL-REVENUES> 39,667,845
<CGS> 2,548,960
<TOTAL-COSTS> 7,073,245
<OTHER-EXPENSES> 69,808,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,808
<INCOME-PRETAX> (36,948,629)
<INCOME-TAX> 692,253
<INCOME-CONTINUING> (37,640,882)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,640,882)
<EPS-PRIMARY> ($1.70)
<EPS-DILUTED> ($1.70)
<FN>
<F1>The Company issued a 2:1 stock split in the form
of a stock dividend on July 17, 1996. All amounts have
been retroactively adjusted for the earliest period
presented.
</FN>
</TABLE>
