<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1999
Commission File Number 0-23282
Natural MicroSystems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-2814586
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Crossing Boulevard, Framingham, Massachusetts 01702
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(Address of principal executive offices) (Zip Code)
(508) 620-9300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,115,292 shares of Common
Stock, $.01 par value, outstanding at July 30, 1999.
The Index to Exhibits appears on Page 16 Total Number of Pages with Exhibits: 27
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
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<S> <C>
Item 1. Financial Statements and Notes
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flow 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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Natural MicroSystems Corporation
Condensed Consolidated Balance Sheets
(In $000's)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
ASSETS (unaudited)
- ------ ------------------ -----------------
<S> <C> <C>
Current assets:
Cash and marketable securities $ 18,025 $ 17,922
Accounts receivable, net of allowance for uncollectable
accounts of $1,349 and $779, respectively 12,830 17,224
Inventories 8,674 9,773
Prepaid expenses and other current assets 6,512 6,599
---------------- ---------------
Total current assets 46,041 51,518
Property and equipment, net of accumulated 14,106 13,981
depreciation of $10,657 and $8,376, respectively
Other long-term assets 8,660 9,214
Goodwill, net 3,950 3,925
---------------- ---------------
Total Assets $ 72,757 $ 78,638
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable 4,729 5,662
Accrued expenses and others liabilities 9,084 7,592
Current portion of long-term obligations 95 73
---------------- ---------------
Total current liabilities 13,908 13,327
Long-term obligations, less current portion 37 158
Stockholders' equity 58,812 65,153
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Total Liabilities and Stockholders' equity $ 72,757 $ 78,638
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
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Natural MicroSystems Corporation
Condensed Consolidated Statements of Operations
(In $000's except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 17,565 $ 18,436 $ 34,186 $ 38,443
Cost of revenues 6,953 6,629 13,578 12,695
----------- ---------- ---------- ----------
Gross profit 10,612 11,807 20,608 25,748
Operating expenses:
Selling, general and administrative 9,584 7,164 19,174 13,469
Research and development 5,757 4,612 11,311 9,195
Provision for uncollectable receivable - 2,500
----------- ---------- ---------- ----------
Total operating expenses 15,341 11,776 30,485 25,164
----------- ---------- ---------- ----------
Operating income (loss) (4,729) 31 (9,877) 584
Other income, net 214 231 53 454
----------- ---------- ---------- ----------
Income (loss) before income taxes (4,515) 262 (9,824) 1,038
----------- ---------- ---------- ----------
Income tax expense (benefit) (1,580) 92 (3,438) 364
----------- ---------- ---------- ----------
Net income (loss) (2,935) $ 170 $ (6,386) $ 674
=========== ========== ========== ==========
Basic net income (loss) per common share $ (0.26) $ 0.02 $ (0.58) $ 0.06
=========== ========== ========== ==========
Weighted average shares outstanding 11,090 10,903 11,057 10,863
=========== ========== ========== ==========
Diluted net income (loss) per common share $ (0.26) $ 0.01 $ (0.58) $ 0.06
=========== ========== ========== ==========
Weighted average shares outstanding 11,090 11,372 11,057 11,260
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
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Natural MicroSystems Corporation
Condensed Consolidated Statements of Cash Flow
(In $000's)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1999
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (6,386) $ 674
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,152 2,355
Provision for bad debts 887 75
Deferred tax asset 413
Gain (loss) on sale of marketable securities (2)
Changes in assets and liabilities:
Accounts receivable 3,085 1,699
Inventories 948 (640)
Prepaid expenses and other assets (193) (1,426)
Income tax receivable 130
Accounts payable (823) 1,168
Accrued restructuring charges (1,023)
Accrued expenses and other liabilities 2,738 (3,938)
-------------- --------------
Cash provided by operating activities 2,798 95
-------------- --------------
Cash flow from investing activities:
Additions to property and equipment (2,757) (4,117)
Additions to goodwill (515)
Additions to license agreements (26) (2,040)
Purchases of marketable securities (6,571) (3,813)
Proceeds from the maturity of marketable securities 6,371 6,316
Other investing activities (6) 23
-------------- --------------
Cash used in investing activities (3,504) (3,631)
-------------- ---------------
Cash flow from financing activities:
Payments on capital lease oblicagions (9)
Payments of refundable advances (101) (79)
Proceeds from issuance of common stock, net of
Issuance costs 298 1,844
Non-statutory stock options 3
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Cash provided by financing activities 188 1,768
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Effect of exchange rate changes on cash 427 43
Net decrease in cash and cash equivalents (91) (1,725)
Cash and cash equivalents, beginning of period 12,024 6,318
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Cash and cash equivalents, end of period $ 11,933 $ 4,593
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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Natural MicroSystems Corporation
Notes to Condensed Consolidated Financial Statements
A. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999 and the condensed
consolidated statements of income, operations and cash flow for the three month
and six month periods ending June 30, 1999 and 1998 include the accounts of
Natural MicroSystems Corporation and its wholly owned subsidiaries (the
"Company").
In the opinion of management, all adjustments, which are of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates. The operating results for the
three month and six month periods ended June 30, 1999 are not necessarily
indicative of the operating results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements of the Company as of and
for the year ended December 31, 1998.
B. STOCKHOLDERS' EQUITY: (In $000's)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive
---------------------------
Shares Amount Capital Deficit Income (loss) Total
--------------------------- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 11,018 $ 110 $ 67,585 $ (2,494) $ (48) $ 65,153
Exercise of common 36 42 42
stock options
Employee Stock Purchase Plan 54 1 236 237
Net loss (6,386) (6,386)
Foreign currency (234) (234)
Translation adjustment
--------------------------- ------------- -------------- ---------------- -------------
Balance at June 30, 1999 11,108 $ 111 $ 67,863 $ (8,880) $ (282) $ 58,812
=========================== ============= ============== ================ =============
</TABLE>
C. INDEBTEDNESS
The Company established a new $7.5 million bank line of credit for working
capital purposes effective May 14, 1999. Borrowings under the line of credit
bear interest at the bank's floating rate of prime plus one percent. The Company
is subject to covenants requiring maintenance of certain profitability, equity
and liquidity ratios. As of June 30, 1999 the Company is currently compliant
with all covenants under the line, and there are no amounts currently
outstanding. This agreement is subject to renewal on May 13, 2000.
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D. EARNINGS PER SHARE
The following is a reconciliation of basic to the diluted earning per share
(EPS) computations for net income (loss). The shares outstanding calculation for
the three months and six months ended June 30, 1999 do not include 2,946,185
anti-dilutive shares:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
----------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (loss) Amount
- --------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $ (2,935) 11,090 $ (0.26)
Effect of dilutive securities (stock options)
- --------------------------------------------------------- ----------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $ (2,935) 11,090 $ (0.26)
==========================================================
Three months ended June 30, 1998
----------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (loss) Amount
- --------------------------------------------------------- ----------------------------------------------------------
Basic EPS (income available to all shareholders) $ 170 10,903 $ 0.02
Effect of dilutive securities (stock options) 469
- --------------------------------------------------------- ----------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $ 170 11,372 $ 0.01
==========================================================
Six months ended June 30, 1999
----------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (loss) Amount
- --------------------------------------------------------- ----------------------------------------------------------
Basic EPS (income available to all shareholders) $ (6,386) 11,057 $ (0.58)
Effect of dilutive securities (stock options)
- --------------------------------------------------------- ----------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $ (6,386) $ 11,057 $ (0.58)
==========================================================
Six months ended June 30, 1998
----------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (loss) Amount
- --------------------------------------------------------- ----------------------------------------------------------
Basic EPS (income available to all shareholders) $ 674 10,863 $ 0.06
Effect of dilutive securities (stock options) 397
- --------------------------------------------------------- ----------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $ 674 11,260 $ 0.06
==========================================================
</TABLE>
7
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E. INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out) or
market. Inventories, as of June 30, 1999 and December 31, 1998 were comprised
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In $000's) 1999 1998
---------- --------------
<S> <C> <C>
Raw materials $ 617 $ 967
Work in Process 4,174 5,747
Finished goods 3,883 3,059
---------- --------------
$ 8,674 $ 9,773
========== ==============
</TABLE>
F. SEGMENT INFORMATION
The following table presents the Company's revenues and operating income by
geographic segment:
<TABLE>
<CAPTION>
(In $000's)
Three Months ended Six Months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
North America $12,634 $12,888 $24,171 $28,038
Europe 3,525 3,105 6,952 5,386
Other 1,406 2,443 3,063 5,019
------- ------- ------- -------
Total revenues $17,565 $18,436 $34,186 $38,443
======= ======= ======= =======
Operating Income (loss)
North America $(4,420) $ (702) $(9,158) $(1,197)
Europe (281) (332) (726) (730)
Other (28) 1,065 7 2,511
------- ------- ------- -------
Total operating income (loss) $(4,729) $ 31 $(9,877) $ 584
======= ======= ======= =======
</TABLE>
8
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G. COMPREHENSIVE INCOME
The following table represents the Company's comprehensive income for the stated
periods.
<TABLE>
<CAPTION>
(In $000's) Three Months ended Six Months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(2,935) $ 170 $(6,386) $ 674
Other comprehensive income (loss) Items:
Foreign currency translation adjustment (45) (1) (234) (63)
------- ------- ------- -------
Comprehensive income (loss) $(2,980) $ 169 $(6,620) $ 611
======= ======= ======= =======
</TABLE>
9
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Natural MicroSystems Corporation designs, manufactures and markets integrated
hardware and software products which enable its customers to develop and
implement high-value telecommunications solutions that operate globally. The
Company's state-of-the-art technologies are based on open, standards-based, PC
platforms, collectively referred to as Open Telecommunications. Use of these
state-of-the-art hardware and software products, combined with the Company's
consulting and support services, enable customers to shorten time to market for
computer telephony systems including Internet/IP voice and fax systems, web-
enabled call centers, network-based enhanced services, integrated voice response
(IVR), speech recognition, wireless, SS7, and CompactPCI. Specific examples of
these applications include long distance least-cost routing and bypass, cellular
and other wireless switching services, telephone banking, medical alert and
prescription services, hotel and hospital information systems, transaction card
authorization, telemarketing, help desks, school bulletin boards, security
monitoring, and automated operator services.
Results of Operations
Revenues
Revenues of $17.6 million for the three months ended June 30, 1999, decreased
4.7% percent from $18.4 million for the three months ended June 30, 1998.
Revenues of $34.2 million for the six months ending June 30, 1999 decreased
11.1% from $38.4 million for the six months ended June 30, 1998. The decreases
from 1998 to 1999 were the result of lower sales volume in North America, Asia
and Latin America partially offset by higher European and service contract
revenues.
Revenues from customers located outside of North America of $4.9 million for the
three months ended June 30 ,1999 decreased 11.1% from $5.5 million for the three
months ended June 30, 1998 and represented 28.1% and 30.1% of total revenues,
respectively. The dollar and percentage decrease in revenues for 1999 over 1998
was due to significant decreases of sales in Asia and Latin America partially
offset by increased sales in Europe. Revenues from customers located outside of
North America of $10.0 million for the six months ended June 30, 1999 were
relatively unchanged from $10.4 million for the six months ended June 30, 1998,
and represented 29.3% and 27.1% of total revenues, respectively.
Cost of Revenues
Cost of revenues of $7.0 million for the three months ended June 30, 1999
increased 4.9% from $6.6 million for the three months ended June 30, 1998, and
represented 39.6% and 36.0% of total revenues, respectively. The increase is
directly related to expenses incurred for investment in the services and
manufacturing departments. Cost of revenues of $13.6 million for the six months
ended June 30, 1999 increased 7.0% from $12.7 million for the six months ended
June 30,1998 and represented 39.7% and 33.0% of total revenues, respectively.
Selling, General and Administrative
Selling, general and administrative expenses of $9.6 million for the three
months ended June 30, 1999 increased 33.8% from $7.2 million for the three
months ended June 30, 1998 and represented 54.6% and 38.9% of total revenues,
respectively. These increases were due to costs associated with increased
selling activities in Japan, China, Brazil, Spain and Italy, as well as
increased expenditures for international marketing, service administration and
marketing programs. The Company expects that its selling, general and
administrative expenditures will vary as a percentage of product revenues in
future periods.
Selling, general and administrative expenses of $19.2 million for the six months
ended June 30,1999 increased 42.4% from $13.5 million for the six months ended
June 30, 1998 and represented 56.1% and 35.0% of revenues, respectively. These
increases were due to an
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increase in both the sales and development support personnel in the European and
Asian markets.
Research and Development
Research and development expenditures of $5.8 million for the three months ended
June 30, 1999 increased 24.8% from $4.6 million for the three months ended June
30,1998, and represented 32.8% and 25.0% of total revenues, respectively. The
increases were due to increased personnel and development project related cost
related to IP Telephony functionality and software tools. Research and
development expenditures of $11.3 million for the six months ended June 30, 1999
increased 23.0% from $9.2 million for the six months ended June 30,1998, and
were 33.1% and 23.9% of total revenues, respectively. The Company expects that
its research and development expenditures will continue to increase, but may
vary as a percentage of product revenues in future periods.
Provision for Uncollectable Receivable
The Company recorded a provision against a trade receivable in 1998 from a
customer that abruptly ceased operations in April of that same year.
Restructuring Charges
During the last quarter of the Company's fiscal year, in an effort to create
efficiencies and manage its business more effectively a restructuring was
implemented. The balance of accrued restructuring charges at of the beginning of
the quarter amounted to $3.0 million. The Company has paid $351,000 during the
current quarter and $1.0 million in 1999, leaving approximately $2.0 million in
accrued charges outstanding. The Company experienced more favorable terms than
anticipated in the termination of existing lease commitments pertaining to its
new corporate office space. These savings, however, were offset by reduction in
force of certain executives also occurring in the second quarter ended June 30,
1999.
Operating and Net Income (Loss)
As a result of the foregoing, operating income (loss), for the three months
ended June 30, was ($4.7) million and $31,000 for 1999 and 1998, respectively.
Net income (loss) was ($2.9) million and $170,000 for the same periods,
respectively. Operating income (loss) for the first six months ended June 30,
was ($9.9) million and $584,000 for 1999 and 1998, respectively. Net income
(loss) for the six months ended June 30, was ($6.4) million and $674,000 for
1999 and 1998, respectively.
Income Tax Expense (Benefit)
Income tax expense (benefit), for the three months ended June 30, was ($1.6)
million and $92,000 for 1999 and 1998, respectively. Income tax expense
(benefit), for the six months ended June 30, was ($3.4) million and $364,000 for
1999 and 1998, respectively. Income tax expense is based on an effective tax
rate which differed from the U. S. Federal statutory rate primarily due to state
and foreign income taxes and income tax credits. The Company's current effective
tax rate is 35.0%, on a worldwide basis. For U.S. federal income tax purposes
the Company has net operating loss carryforwards available to reduce income of
approximately $3.5 million at December 31, 1998. These carryforwards will begin
to expire in 2004. Utilization of net operating loss carryforwards are subject
to an annual limitation of approximately $1.0 million under Internal Revenue
Code Section 382. In addition, ViaDSP, a wholly owned subsidiary, has net
operating loss carryforwards available to reduce future income of approximately
$1.6 million at December 31, 1998. These carryforwards are subject to annual
limitations of approximately $402,000 under Internal Revenue Code Section 382
and will be available to reduce future taxable income of ViaDSP only. The
Company continuously re-evaluates the recoverability of its deferred tax asset.
The amount of the deferred tax asset considered realizable could be
significantly or completely reduced if income is not generated in the near term
periods. Although realization is not assured, management believes it is more
likely than not the net deferred tax asset will be realized. The Company will
continue to assess the valuation of the deferred tax asset each quarter.
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Other Income (Expense), Net
Other income, net the for the three months ended June 30, 1999 and 1998 was
$214,000 and $231,000, respectively. Other income, net for the six months ended
June 30, 1999 and 1998 was $53,000 and $454,000 respectively. The decrease in
both periods was due to a combination of both foreign exchange losses and lower
cash balances.
Liquidity and Capital Resources
Cash provided by operations for the six months ended June 30 ,1999 and 1998 was
$2.8 million and $95,000 respectively. Cash provided by operations in 1999 was
largely due to reductions in inventory and accounts receivable generated through
better collection rates, improved inventory management and increases in accrued
expenses. Cash was provided by operations in 1998 by a reduction in accounts
receivable and an increase in accounts payable, offset by increases in
inventory, prepaid expenses and other assets and a decrease in accrued expenses
and other liabilities.
Cash used in investing activities for the six months ended June 30, 1999 and
1998 was $3.5 million and $3.6 million, respectively. During 1999, $2.8 million
was utilized to purchase property and equipment. An additional $515,000 was used
for additions to goodwill associated with the acquisition of Teknique, Inc. In
1998, cash of $4.1 million was used for purchases of property and equipment and
$2.0 million was invested in license agreements to support new product
offerings.
Cash provided by financing activities for the six months ended June 30, 1999 and
1998 was $188,000 and $1.8 million, respectively. In both years cash proceeds
were from the issuance of common stock upon the exercise of common stock options
as well as the employee stock purchase plan.
Current assets at June 30, 1999, were $46.0 million, 10.6% less than current
assets of $51.5 million at December 31, 1998. Current liabilities at June 30,
1999 were $13.9 million, 4.4% more than current liabilities of $13.3 million at
December 31, 1998. Higher accrued expenses and other liabilities partially
offset by a decrease in accounts payable accounted for the increase in
liabilities in 1999.
The Company established a new $7.5 million bank line of credit for working
capital purposes effective May 14,1999. Borrowings under the line of credit bear
interest at the bank's floating rate of prime plus one percent. The Company is
subject to covenants requiring maintenance of certain profitability, equity and
liquidity ratios. As of June 30,1999 the Company is currently compliant with all
covenants under the line, and there are no amounts currently outstanding. This
agreement is subject to renewal on May 13, 2000.
Year 2000 Readiness Disclosure
The Year 2000 issue encompasses the inability of certain computer programs and
equipment that utilize embedded chips to perform accurately after the year 2000.
Concerns relating to the Year 2000 issue generally arise out of the potential
that this issue will affect business operations on an ongoing basis, as well as
the costs to correct possible system failures.
The Company has been implementing a Year 2000 compliance program to address the
Year 2000 issue. This program is designed to ensure that the Company's current
product offerings are Year 2000 compliant, that Year 2000 disruptions of vendors
and other third party relationships will not materially affect the Company's
operations, and that the Company's internal systems will continue to function
properly. As part of this implementation, since February 1998, the Company has
been publishing on its external web site Year 2000 information concerning the
Company's product offerings and other information relating to the Company's Year
2000 compliance program. Furthermore, an external consulting firm has completed
its report on the Company's Year 2000 readiness and has provided assistance for
the Company to comply with the Year 2000 requirements.
The Company is pursuing its Year 2000 compliance program in accordance with the
following five phases: (1) conduct an inventory to determine all potential Year
2000 problem areas having a material impact on the Company; (2) prioritize the
identified Year 2000 problem areas; (3) formally
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test or assess material items for Year 2000 readiness; (4) repair or replace
material items determined not to be Year 2000 compliant; and (5) design and
implement a contingency and business continuation plan for items not to be
repaired or replaced.
Phases 1 through 3 for all functions of the Company's program have been
completed. Phase 4 for product testing, information technology and vendor
compliance is as follows:
The Company has tested 100% of its major product offerings and 80% of its legacy
products. The Company does not plan to test any additional products. All current
major Company product offerings are already Year 2000 compliant. Certain older
legacy products, which the Company no longer sells, may not be Year 2000
compliant. The Company will address this issue by publishing on the Company's
external web site that these products may not be Year 2000 compliant, and that
each customer who purchased these products should test, repair and/or replace
any of these products if they are still in use.
The Company's enterprise-wide business system is the Company's primary internal
management information system. This system is warranted to be Year 2000
compliant by the vendor. The Company believes that its internal systems and
equipment will not pose a significant operational problem from a Year 2000
standpoint. All information technology production servers have been upgraded to
date. Internal desktop computers are 90% compliant, with a target date of
October, 1999 for full compliance.
The Company is verifying the readiness of its suppliers by issuing
questionnaires relating to Year 2000 issues. The Company is auditing the
responses of top tier suppliers and any other supplier who could have a material
impact on the Company's operations. Where the Company believes that a particular
supplier poses an unacceptable risk, the Company will identify an alternative
source. The mailing of questionnaires to suppliers has been completed, and the
Company is reviewing the responses as they are submitted. Approximately 70% of
suppliers have responded to date, of which, 92% have been evaluated that they
are Year 2000 compliant. This process will be ongoing as new vendors are added
as suppliers to the Company's operations.
The Company is addressing the Year 2000 readiness of significant customers. On
an on-going basis, the Company is reviewing their publicly available published
information relating to their Year 2000 status. The Company has not encountered
any material concerns with its significant customers to date.
Costs incurred in the Company's Year 2000 effort will be expensed as incurred.
The Company's final evaluation of total costs has been determined to be
approximately $1 million for external services, upgrades and other compliance
related expenditures. Should these estimates prove to be correct, it is believed
that the expense will not have a material impact on its business, operating
results or ongoing operations resulting from Year 2000 issues.
The Company is addressing concerns relating to its products, internal facilities
and material relationships with third parties. At this time, the Company cannot
assure that there will not be any material effect on the Company's business,
results of operations or financial condition as a result of (i) products from
third parties that have not become Year 2000 compliant or (ii) currently unknown
information. However, the Company is reducing its risks relating to the Year
2000 issue by implementing its Year 2000 program, and will develop contingency
plans to any reasonably likely worst case scenario that it may become aware of.
Readers should be cautioned that forward-looking statements contained in the
Year 2000 update should be read in conjunction with the Company's disclosure
under the heading "Cautionary Statement" for the purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act.
European Union Currency Conversion
On January 1, 1999, eleven member nations of European Economic and Monetary
Union began using a common currency, the Euro. For a three-year transition
period ending June 30, 2002, both
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the Euro and each of the currencies for such member nations will remain in
circulation. After June 30, 2002, the Euro will be the sole legal tender for
those countries. The adoption of the Euro will affect many financial systems and
business applications as the commerce of those countries will be transacted in
the Euro and the existing national currency during the transition period. Of the
eleven currently using the Euro, the Company has subsidiary operations in
France, Germany and Italy, and branch operations in Spain. The Company has
assessed the potential impact of the Euro conversion in a number of areas,
particularly including the potential impact upon pricing and other marketing
strategies, and upon product development. Although the Company does not
currently expect that the conversion, either during or after the transition
period, will adversely affect its operations of financial condition, the
conversion has only recently been implemented and there can be no assurance that
it will not have some unexpected adverse impact.
A significant portion of the Company's revenues are subject to the risks
associated with international sales. Although most of the Company's product
prices are denominated in United States currency, customers in other geographic
regions generally evaluate purchases of products, such as those sold by the
Company, based on the purchase price expressed in the customer's currency.
Therefore, changes in foreign currency exchange rates may adversely affect the
demand for the Company's products.
The Company believes that its revenues and results of operations have not been
significantly impacted by inflation during the past three fiscal years.
Cautionary Statement
When used anywhere in this Form 10-Q and in future filings by the Company 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", "the company expects", "will
continue", "is anticipated", "estimated", "project", 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. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. 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. Such risk factors are set forth in Part I of the Company's annual
report on Form 10-K for the year ended December 31, 1998. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
14
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1-5 Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits
No. 10.23 Loan and Security Agreement
No. 27.1 - Financial Data Schedule
B. Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Natural MicroSystems Corporation
Dated: August 11, 1999 By: /S/ Robert P. Schechter
--------------------------------
Robert P. Schechter
President and Chief Executive Officer
And Chairman of the Board of Directors
Dated: August 11, 1999 By: /S/ Robert E. Hult
--------------------------------
Robert E. Hult
Senior Vice President of Finance and
Operations, Chief Financial Officer
and Treasurer
15
<PAGE>
Natural MicroSystems Corporation
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Title Page
<S> <C> <C>
10.23 Loan and security agreement between Silicon Valley Bank and 17
Natural Microsystems Corporation dated May 14, 1999.
27.1 Financial Data Schedule 43
</TABLE>
16
<PAGE>
Exhibit 10.23
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of May 14, 1999, by and
between SILICON VALLEY BANK, a California-chartered 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 02481, doing business under the name
"Silicon Valley East" ("Bank") and NATURAL MICROSYSTEMS CORPORATION, a Delaware
corporation with its chief executive office located at 100 Crossing Boulevard,
Framingham, Massachusetts ("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the
rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor,
as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person
that is a limited liability company, such Person's 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 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.
17
<PAGE>
"Borrowing Base" means an amount equal to seventy-five percent (75.0%)
of Eligible Accounts, as determined by Bank 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 States of California or Massachusetts 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 A attached
---------
hereto.
"Committed Revolving Line" means a credit extension of up to Seven
Million Five Hundred Thousand Dollars ($7,500,000.00).
"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.
"Credit Extension" means each Advance, or any other extension of
credit by Bank for the benefit of Borrower hereunder.
"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
Credit Extensions 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 54; provided,
that standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon notification thereof to
Borrower in accordance with the provisions hereof. 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
ninety (90) days of invoice date;
-18-
<PAGE>
(b) Accounts with respect to an account debtor, fifty percent
(50%) or more of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice 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;
(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 for goods sold or services rendered by the account
debtor to Borrower, 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.) against
amounts owed to Borrower;
(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 sole discretion, that there may be a basis for
dispute (but only to the extent of the amount subject to such dispute
or claim), or is subject to any Insolvency Proceeding, or becomes
insolvent, or goes out of business; and
(j) Accounts the collection of which Bank reasonably determines
after reasonable inquiry and reasonable consultation with Borrower to
be doubtful by reason of the account debtor's financial condition.
"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 Employee 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,
including, without limitation, Natural MicroSystems Security Corporation.
-19-
<PAGE>
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"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.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to
time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means one day prior to one year from the Closing Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, and any notes, drafts,
instruments, securities, documents of title, or chattel paper, owned by or
payable to Borrower.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after
the commencement of an Insolvency Proceeding and including any debt,
liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Other Assets" means any asset represented by shares of stock in
another Person, including, without limitation, in the Borrower's
Subsidiaries or Affiliates, or any instrument evidencing any indebtedness
owing by any Person to the Borrower (other than trade payables to the
Borrower).
-20-
<PAGE>
"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; and
(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.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the
--------
same have no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such Equipment, or (ii) existing on such
Equipment at the time of its acquisition, provided that 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, sublicensor or under any lease or license or sublicense
provided that such leases, subleases, licenses and sublicenses do not
prohibit the grant of the security interest granted hereunder; and
-21-
<PAGE>
(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 90 days 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.
"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; and (iii) Other Assets.
--- ---
"Total Liabilities" means as of any applicable date, 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.
"Unused Committed Revolving Line Facility Fee" is defined in Section
2.5(a).
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" or "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
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<PAGE>
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions. 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 Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such Credit Extensions
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 the Committed Revolving Line or the Borrowing Base, whichever is less.
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. Eastern 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 B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the Maturity
Date, at which time all Advances under this Section 21 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of 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 aggregate of the Bank's Prime Rate plus one percent
(1.0%) per annum.
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default, 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 _____________________ 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
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<PAGE>
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 12:00 noon Eastern
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.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fees. (1) A Facility Fee equal to Thirty-Seven Thousand
-------------
Five Hundred Dollars ($37,500.00), which fee shall be due on the Closing
Date and shall be fully earned and non-refundable; and
(2) In addition to the foregoing, as compensation for the Bank's
maintenance of sufficient funds available for such purpose, the Bank shall
have earned a Unused Committed Revolving Line Facility Fee (so referred to
herein), which fee shall be paid quarterly, in arrears, on a calendar year
basis, 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);
-24-
<PAGE>
(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
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 Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an 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 Credit Extension. The obligation of
------------------------------------------------
Bank to make the initial Credit Extension 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) a negative pledge agreement covering intellectual property;
(d) an opinion of Borrower's counsel;
(e) guaranty and security agreement by the Guarantor;
(f) financing statements (Forms UCC-1);
(g) insurance certificate;
(h) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(i) Certificates of Good Standing and Foreign Qualification (if
applicable); and
(j) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
---------------------------------------------
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
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<PAGE>
(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 Credit Extension 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 Credit Extension.
The making of each Credit Extension shall be deemed to be a representation
and warranty by Borrower on the date of such Credit Extension 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 valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. 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 and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
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 Prior Encumbrances. Borrower has good and indefeasible title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
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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 Name; Location of Chief Executive Office. Except as disclosed in the
----------------------------------------
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.6 Litigation. 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.
5.7 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.
5.8 Solvency. Borrower is able to pay its debts (including trade debts)
--------
as they mature.
5.9 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 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.
5.10 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.
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<PAGE>
5.11 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.
5.12 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.13 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.
5.14 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
a Credit Extension 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 thirty (30) days
after the end of each month, a company prepared consolidated balance sheet and
income statement covering Borrower's consolidated operations during such period,
in a form and certified by an officer of Borrower reasonably acceptable to Bank;
(b) 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; (c) 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; (d) 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; (e) within thirty (30) days of the approval
thereof, any budgets or forecasts or revisions thereto; and (f) such budgets,
sales projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within fifteen (15) days after the last day of each month during which
Credit Extensions are requested or outstanding, and in connection with any
Advance (unless a Borrowing Base Certificate has been provided within the
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<PAGE>
last thirty (30) days), Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
-------
C hereto, together with an aged listing of accounts receivable.
- -
Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit D 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 twelve (12) 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. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar month, a ratio of Quick Assets to Current Liabilities of at least 2.0
to 1.0.
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<PAGE>
6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of
------------------
each calendar quarter, a Tangible Net Worth of not less than Forty-Five Million
Dollars ($45,000,000.00).
6.10 Profitability. Borrower shall have a minimum net profit/maximum net
-------------
loss of the following amounts for the corresponding periods:
Second Quarter of 1999 ($ 3,500,000.00)
Third Quarter of 1999 ($ 2,500,000.00)
Fourth Quarter of 1999 ($ 1,000,000.00)
First Quarter of 2000 ($ 500,000.00)
Second Quarter of 2000,
and each quarter thereafter $1.00
6.11 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 Credit Extension
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:
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 non-exclusive 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), or
suffer a material change in Borrower's ownership or management. Borrower will
not, without at least thirty (30) days prior written notification to Bank,
relocate its chief executive office or add any new offices or business
locations.
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.
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<PAGE>
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 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 under Sections 6.3,
6.6, 6.7, 6.8, 6.9, or 6.10 or violates any of the covenants contained in
Article 7 of 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 the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period 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);
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<PAGE>
8.3 Material Adverse Change. If there (i) occurs a Material Adverse
-----------------------
Effect, 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 thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
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 Credit Extensions 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 One Hundred Thousand Dollars
($100,000) 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 Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of thirty (30) days (provided that no Credit Extensions
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:
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<PAGE>
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 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) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) 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 in order to exercise any of Bank's
rights or remedies provided herein, at law, in equity, or otherwise;
(e) 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;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section
9.1, to use, without charge, Borrower's labels, patents, copyrights, mask
works, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature,
as it pertains to the Collateral, in completing production of, advertising
for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section 9.1, Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit;
(g) 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;
(h) Bank may credit bid and purchase any Collateral at any public
sale, or at any private sale as permitted by law; and
(i) 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 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
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<PAGE>
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; and (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; and
(f) to 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, provided Bank may exercise such
power of attorney to sign the name of Borrower on any of the documents described
in Section 4.2 regardless of whether an Event of Default has occurred. 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 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.
-34-
<PAGE>
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 Natural MicroSystems Corporation
100 Crossing Boulevard
Framingham, Massachusetts 01702
Attn: Mr. Robert E. Hult, Chief Financial Officer
FAX: (508) 271-1351
If to Bank Silicon Valley Bank
40 William Street - Suite 350
Wellesley, Massachusetts 02481
Attn: Ms. Jane A. Braun, Senior Vice President
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
------------------------------------
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.
-35-
<PAGE>
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.
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
-36-
<PAGE>
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).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument under the laws of the Commonwealth of
Massachusetts as of the date first above written.
NATURAL MICROSYSTEMS CORPORATION
By: /s/ (illegible name)
________________________________________
Title: CFO & Treasurer
________________________________________
By:
________________________________________
Title:
________________________________________
SILICON VALLEY BANK, d/b/a SILICON VALLEY
EAST
By:_________________________________________
Name:_______________________________________
Title:______________________________________
SILICON VALLEY BANK
By:_________________________________________
Name:_______________________________________
Title:______________________________________
(Signed in Santa Clara County, California)
-37-
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's 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,
and Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, claims, literature, reports, catalogs, income
tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, 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, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to include any
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing.
-38-
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________________
FAX#: (781) 431-0755 TIME: _______________________
FROM:___________________________________________________________________________
BORROWER'S NAME
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT #___________________________ TO ACCOUNT#___________________________
________________________________________________________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
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 #____________________________
________________________________________________________________________________
-39-
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Natural MicroSystems Corporation Bank: Silicon Valley Bank
Commitment Amount: $7,500,000.00
ACCOUNTS RECEIVABLE
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 90 days due $______________
5. Balance of 50% over 90 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. LOAN VALUE OF ACCOUNTS (75.0% of #14) $______________
BALANCES
16. Maximum Loan Amount $______________
17. Total Funds Available [Lesser of #16 or #15] $______________
18. Present balance owing on Line of Credit $______________
19. RESERVE POSITION (#16 minus #18) $______________
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
====================================
NATURAL MICROSYSTEMS CORPORATION
By: _____________________________________
Authorized Signer
-40-
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: NATURAL MICROSYSTEMS CORPORATION
The undersigned authorized officer of NATURAL MICROSYSTEMS 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>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing with the SEC Yes No
BBC and A/R Agings Monthly within 15 days Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio 2:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $ 45,000,000.00 $________ Yes No
Profitability: Quarterly Q2 99 ($3,500,000.00) $________ Yes No
Q3 99 ($2,500,000.00) $________ Yes No
Q4 99 ($1,000,000.00) $________ Yes No
Q1 00 ($500,000.00) $________ Yes No
Q2 00 $1.00 $________ Yes No
and thereafter
</TABLE>
COMMENTS REGARDING EXCEPTIONS:
===================================
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
===================================
Sincerely,
NATURAL MICROSYSTEMS CORPORATION
_______________________ Date:_______________
Signature
________________________
Title
-41-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument under the laws of the Commonwealth of
Massachusetts as of the date first above written.
NATURAL MICROSYSTEMS CORPORATION
By:
________________________________________
Title:
________________________________________
By:
________________________________________
Title:
________________________________________
SILICON VALLEY BANK, d/b/a SILICON VALLEY
EAST
By: /s/ (illegible name)
_________________________________________
Name: (illegible name)
_______________________________________
Title: A.V.P.
______________________________________
SILICON VALLEY BANK
By: /s/ Michelle Giannini
_________________________________________
Name: Michelle Giannini
_______________________________________
Title: AVP
______________________________________
(Signed in Santa Clara County, California)
-42-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRELY BE
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 0 11,933
<SECURITIES> 0 6,092
<RECEIVABLES> 0 14,179
<ALLOWANCES> 0 1,349
<INVENTORY> 0 8,674
<CURRENT-ASSETS> 0 46,041
<PP&E> 0 24,763
<DEPRECIATION> 0 10,657
<TOTAL-ASSETS> 0 72,757
<CURRENT-LIABILITIES> 0 13,908
<BONDS> 0 0
0 0
0 0
<COMMON> 0 111
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 72,757
<SALES> 17,565 34,186
<TOTAL-REVENUES> 17,565 34,186
<CGS> 6,953 13,578
<TOTAL-COSTS> 6,953 13,578
<OTHER-EXPENSES> 15,341 30,485
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,515) (9,824)
<INCOME-TAX> (1,580) (3,438)
<INCOME-CONTINUING> (2,935) (6,386)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,935) (6,386)
<EPS-BASIC> (0.26) (0.58)
<EPS-DILUTED> (0.26) (0.58)
</TABLE>
