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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
COMMISSION FILE NUMBER: 0-23132
OBJECTSHARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0143293
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
16811 HALE AVENUE, SUITE A, IRVINE, CALIFORNIA 92606-5020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(949) 833-1122
(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 periods 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 __
As of January 31, 1999, the registrant had outstanding 12,339,240 shares of
Common Stock.
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OBJECTSHARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets as of December 31,
1998 (Unaudited) and March 31, 1998......................... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended December 31, 1998 and
1997........................................................ 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) (Unaudited) for the three and nine months ended
December 31, 1998 and 1997.................................. 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended December 31, 1998 and 1997........ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURE............................................................. 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,638 $ 5,134
Marketable securities..................................... -- 600
Accounts receivable, net of allowance of $272 at December
31 and $622 at March 31................................ 3,164 5,166
Inventories............................................... 65 164
Prepaid expenses and other current assets................. 352 819
-------- -------
Total current assets.............................. 5,219 11,883
Property and equipment:
Property and equipment.................................... 6,145 6,051
Less accumulated depreciation............................. (5,268) (4,853)
-------- -------
Net property and equipment............................. 877 1,198
Other assets................................................ 884 174
-------- -------
Total assets...................................... $ 6,980 $13,255
======== =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 778 $ 1,134
Accrued compensation and related expenses................. 769 1,088
Other accrued liabilities................................. 713 2,492
Deferred revenue.......................................... 2,096 3,215
Accrued restructuring costs............................... 21 534
-------- -------
Total current liabilities......................... 4,377 8,463
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares -- 30,000
Issued and outstanding shares --
12,339 at December 31 and 12,199 at March 31......... 12 12
Additional paid-in capital................................ 50,113 49,992
Accumulated deficit....................................... (47,372) (44,998)
Accumulated other comprehensive loss...................... (150) (214)
-------- -------
Total stockholders' equity........................ 2,603 4,792
-------- -------
Total liabilities and stockholders' equity........ $ 6,980 $13,255
======== =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Service........................................... $ 2,899 $ 2,903 $ 7,958 $ 9,284
License........................................... 1,083 2,031 3,630 5,524
------- ------- ------- -------
Total net revenues.................................. 3,982 4,934 11,588 14,808
Cost of net revenues:
Service........................................... 1,813 1,887 4,180 5,740
License........................................... 317 403 762 1,271
------- ------- ------- -------
Total cost of net revenues.......................... 2,130 2,290 4,942 7,011
------- ------- ------- -------
Gross profit........................................ 1,852 2,644 6,646 7,797
Operating expenses:
Sales and marketing............................... 1,429 1,399 4,592 6,064
Research and development.......................... 857 965 2,881 3,808
General and administrative........................ 767 988 1,998 3,482
Restructuring costs............................... -- (175) (166) 2,622
------- ------- ------- -------
Total operating expenses............................ 3,053 3,177 9,305 15,976
------- ------- ------- -------
Loss from operations................................ (1,201) (533) (2,659) (8,179)
Interest and other income, net...................... 115 129 256 308
------- ------- ------- -------
Loss before provision/(benefit) for income taxes.... (1,086) (404) (2,403) (7,871)
Provision/(benefit) for income taxes................ 20 13 (29) 38
------- ------- ------- -------
Net loss............................................ $(1,106) $ (417) $(2,374) $(7,909)
======= ======= ======= =======
Basic and diluted net loss per share................ $ (0.09) $ (0.03) $ (0.19) $ (0.66)
======= ======= ======= =======
Shares used in computing basic and diluted net loss
per share......................................... 12,331 12,075 12,289 11,990
======= ======= ======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------- --------------------
1998 1997 1998 1997
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss............................................ $(1,106) $(417) $(2,374) $(7,909)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment........ (4) 133 64 124
------- ----- ------- -------
Comprehensive loss.................................. $(1,110) $(284) $(2,310) $(7,785)
======= ===== ======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................... $(2,374) $(7,909)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 477 1,207
Changes in operating assets and liabilities:
Accounts receivable.................................... 2,002 (261)
Inventories............................................ 99 84
Prepaid expenses and other current assets.............. 467 468
Accounts payable and accrued liabilities............... (2,454) (1,132)
Accrued restructuring costs............................ (513) 118
Deferred revenue....................................... (1,119) (146)
------- -------
Net cash used in operating activities....................... (3,415) (7,571)
Investment activities:
Capitalized software........................................ (767) --
(Purchases) disposition of property and equipment........... (94) 108
Decrease (increase) in other assets......................... (5) 57
Maturities of marketable securities......................... 600 6,438
------- -------
Net cash (used in) provided by investing activities......... (266) 6,603
Financing activities:
Proceeds from issuance of common stock...................... 121 18
------- -------
Net cash provided by financing activities................... 121 18
Effect of exchange rate changes on cash and cash
equivalents............................................... 64 124
------- -------
Net decrease in cash and cash equivalents................... (3,496) (826)
Cash and cash equivalents at beginning of period............ 5,134 7,418
------- -------
Cash and cash equivalents at end of period.................. $ 1,638 $ 6,592
======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the United
States Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all recurring adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of the operations for interim
periods presented. The operating results for the nine months ended December 31,
1998 are not necessarily indicative of the results for any future period.
2. RESTATEMENTS
As reported in the form 10-Q/As filed herewith, the Company restated its
financial statements for fiscal quarters ended June 30, 1998 and September 30,
1998. The accompanying unaudited condensed consolidated financial statements
incorporate the effects of such restatements.
3. LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings Per Share," and applied this
pronouncement to all periods presented. This statement requires the presentation
of both basic and diluted net loss per share for financial statement purposes.
Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding.
Diluted net loss per share includes the effect of the potential shares
outstanding, including dilutive stock options and warrants using the treasury
stock method.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
marketable securities consist principally of debt instruments with maturities
between three and twelve months.
5. RESTRUCTURING COSTS
The Company recorded restructuring costs in prior years and the reserve
balance at the beginning of the fiscal 1999 was $534,000. During the first and
second quarters of fiscal 1999, the Company made payments of $267,000 and
recorded a return to operations of reserves of $166,000 provided in prior years
for events that were completed in such periods. In the third quarter of fiscal
1999, the Company made payments of $80,000 related to severance costs and
reduced its reserve by such amount. The Company expects to utilize the remaining
reserve in the fourth quarter of fiscal 1999.
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Capitalized software, net of accumulated amortization of
$62,000................................................... $705,000 $ --
Deposits.................................................... 85,000 150,000
Other....................................................... 94,000 24,000
-------- --------
Total............................................. $884,000 $174,000
======== ========
</TABLE>
The Company's policy is to capitalize software development costs incurred
subsequent to the time the products reach technological feasibility. Based on
the Company's product development process, technological feasibility is
generally established upon completion of a working model. Amortization of
capitalized software development costs commences when products are available for
general release to customers and is determined using the straight-line method
over the expected useful life of the related products.
7. SOFTWARE REVENUE RECOGNITION
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued SOP 97-2, Software Revenue Recognition, which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is intended to reduce the diversity in
accounting for software revenue recognition and changes certain of the specific
criteria for recognizing revenue related to software licensing arrangements.
Specifically, the new SOP contains more restrictive revenue recognition
provisions for software arrangements containing multiple elements (i.e.
upgrades, enhancements, implementation and other services) similar to the
arrangements entered into by the Company. Effective April 1998, the Company
implemented the provisions of the new SOP.
8. COMPREHENSIVE INCOME
In April 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments by and distributions to stockholders.
9. SEGMENT INFORMATION
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information, which requires publicly-held companies
to report financial and descriptive information about its operating segments in
financial statements issued to stockholders for interim and annual periods. The
statement also requires additional disclosures with respect to products and
services, geographical areas of operations and major customers. The Company will
adopt Statement No. 131 at the end of fiscal 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ObjectShare, Inc. develops and supports object-oriented software
development solutions that allow customers to create distributed, customized
business applications. The Company's range of services includes customer
support, training and consulting as integral components of a complete solution,
as well as a family of products known as application development environments
("ADEs") including VisualWorks Smalltalk and PARTS for Java, a visual
programming environment based on the Java programming language.
Included in the range of services that the Company provides are:
- - Technical and program management consulting services assisting or providing
turn-key solutions in a wide range of industries, including
telecommunications, banking, insurance, manufacturing, distribution, energy
and others, utilizing object-oriented development technology.
- - Training customer's personnel in object-oriented application software
development and methods utilizing computer-based training tools, curriculum
management and in-depth subject and teaching expertise.
- - ADEs that provide visual programming environments that enable programmers to
develop, deploy and maintain applications ranging from workgroup and
departmental applications to complex enterprise-wide mission-critical
client/server and Web-enabled applications.
RESULTS OF OPERATIONS
Net Losses
Net losses for the third quarter and nine months ended December 31, 1998,
were $1,106,000 and $2,374,000, respectively, while the losses for comparable
periods from the Company's prior fiscal year were $417,000 and $7,909,000,
respectively.
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The following table sets forth for the periods indicated (I) the percentage
of net revenues represented by certain line items in the Company's Condensed
Consolidated Statements of Operations, (II) the gross margins on service and
license revenues and (III) the percentage changes from the preceding periods.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET PERCENT CHANGE
REVENUES FOR THE OF DOLLAR AMOUNTS
---------------------------- 1998 COMPARED TO
THREE MONTHS NINE MONTHS 1997
ENDED ENDED ------------------
DECEMBER 31, DECEMBER 31, THREE NINE
------------ ------------- MONTH MONTH
1998 1997 1998 1997 PERIOD PERIOD
---- ---- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Service....................................... 73% 59% 69% 63% --% (14%)
License....................................... 27 41 31 37 (47) (34)
--- --- --- ---
Total net revenues.............................. 100 100 100 100 (19) (22)
Cost of net revenues:
Service....................................... 46 38 36 39 (4) (27)
License....................................... 8 8 7 9 (21) (40)
--- --- --- ---
Total cost of net revenues...................... 54 46 43 48 (7) (30)
--- --- --- ---
Gross margin.................................... 46 54 57 52 (30) (15)
Operating expenses:
Sales and marketing........................... 36 29 39 41 2 (24)
Research and development...................... 21 20 25 25 (11) (24)
General and administrative.................... 19 20 17 23 (22) (43)
Restructuring costs........................... -- (4) (1) 18 100 (106)
--- --- --- ---
Total operating expenses........................ 76 65 80 107 (4) (42)
--- --- --- ---
Loss from operations............................ (30) (11) (23) (55) 125 (67)
Interest and other income, net.................. 3 3 2 2 (11) (17)
--- --- --- ---
Loss before income taxes........................ (27) (8) (21) (53) 169 (69)
Provision/(benefit) for income taxes............ 1 -- -- -- 54 (176)
--- --- --- ---
Net loss........................................ (28%) (8%) (21%) (53%) 165 (70)
=== === === ===
Gross margin:
Service....................................... 37% 35% 47% 38% 7 7
License....................................... 71% 80% 79% 77% (53) (33)
</TABLE>
Net revenues
Total net revenues for the third quarter and nine months ended December 31,
1998 were $4 million and $11.6 million, respectively, a decrease of 19% and 22%,
respectively, from the comparable periods of fiscal 1998.
Service revenues for the third quarter and first nine months of fiscal 1999
remained consistent for the quarter and decreased 14% for the first nine months,
respectively, from the comparable periods of fiscal 1998. Service revenues are
comprised of (i) training and consulting revenue and (ii) maintenance revenues.
Training and consulting revenue increased 14% during the quarter ended December
31, 1998 due largely to consulting projects with BMW, UBS and Bell Atlantic.
Maintenance revenues, which correlate directly to license sales in previous
periods, dropped 23% during the quarter ended December 31, 1998 versus the
comparable period last year, as the prior year's maintenance revenues reflected
the higher licensing revenues of fiscal 1997 compared to fiscal 1998. Deferred
revenue at the end of the quarter remained consistent with the end of the second
quarter as new maintenance bookings approximated revenues during the third
quarter.
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License revenues for the third quarter and first nine months of fiscal 1999
decreased 47% and 34%, respectively, from the comparable periods of fiscal 1998.
The decline in revenue reflects a continued weakness in the overall software
development tools market, as well as a continued weakness in demand for
Smalltalk products. Also, the present environment for selling software tools for
custom application development is very difficult and is expected to remain
difficult until at least 2000, as many customers have shifted their IT
(Information Technology) focus to ensuring Y2K (Year 2000) compliance, thus
delaying other development projects until Y2K implementations have been
successfully completed. License sales may also have been adversely impacted by
the pending releases of two new products, the web enabled version of
VisualWorks, VW5i, and the Linux operating system version of VW 3.0 both of
which are expected to be released in March 1999. Linux is the rapidly growing
version of the UNIX operating system that has been endorsed by IBM, HP and SGI.
International license revenues in the third quarter and the first nine months of
fiscal 1999 were $344,000 and $882,000, respectively, or 32% and 24%,
respectively, of license revenue.
Cost of revenues
Cost of service revenues consists primarily of salaries, facility expenses
and travel-related expenses. Costs of service revenues for the third quarter and
first nine months of fiscal 1999 decreased by 4% and 27%, respectively, from the
comparable periods of fiscal 1998 because consultant and training overhead
expenses have been reduced as a result of the prior year's restructuring. This
cost as a percentage of service revenues in the third quarter and first nine
months of fiscal 1999 were 63% and 53%, respectively, compared to 65% and 62%,
respectively in the comparable periods of fiscal 1998.
Cost of license revenues consists primarily of the cost of production of
the Company's products and related royalties. Cost associated with license
revenues for the third quarter and first nine months of fiscal 1999 decreased
21% and 40% from the comparable periods of fiscal year 1998, due primarily to
the reduction of license revenues. These costs as a percentage of license
revenues in the third quarter and first nine months of fiscal 1999 were 29% and
21%, respectively, compared to 20% and 23%, respectively in the comparable
periods of fiscal 1998. The gross margin was lower in the third quarter of
fiscal 1999 due to increased royalty expenses in the quarter reflecting the ramp
up of Rational Rose sales which carry significant royalty costs. Rational Rose
is a third party analysis and design modeling tool which is sold as an add on to
the Company's VisualWorks products. Year to date license revenue gross margin
continues to be higher than the prior year due primarily to lower packaging
costs.
Operating expenses
Operating expenses for the third quarter and first nine months of fiscal
1999, excluding restructuring costs, declined 9% and 29%, respectively, from the
comparable periods of fiscal year 1998.
Sales and marketing expenses consist primarily of salaries, commissions,
facility expenses, travel-related expenses, and advertising. These expenses for
the third quarter and first nine months of fiscal 1999 were $1.4 million and
$4.6 million, respectively, representing an increase of 2% and a decrease of
24%, respectively, over the comparable periods of fiscal 1998. During the third
quarter, the Company incurred expenses related to the upcoming launches of
Company's flagship VisualWorks Smalltalk product, VW5i and the launch of a Linux
version for VisualWorks 3.0. The Company also incurred in the third quarter
marketing expenses in Europe in pursuit of major training and consulting
opportunities with several large customers and costs associated with the
start-up of consulting operations in Switzerland during the quarter. The
year-to-date decrease is largely due to the reduction of personnel and reduction
in overall marketing expenditures.
Research and development expenses for the third quarter and first nine
months of fiscal 1999 were $857,000 and $2.9 million, respectively, representing
a decrease of 11% and 24%, respectively, over the comparable periods of fiscal
1998. The decrease was due to manpower reductions and the capitalization of
software development expenditures for products that reached technological
feasibility. During the third quarter, the Company capitalized $278,000 of costs
associated with development of the internet capable version of the Company's
VisualWorks Smalltalk product, VW5i and $90,000 associated with the
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Company's new middleware product, VEOS. With the Company's VisualWorks 5i and
new Linux product expected to be released in March 1999, the Company incurred
additional substantial cash software development expenditures in the quarter.
The Company expects to incur substantial cash software development expenditures
during the fourth quarter and after the launch of the Company's Linux product
software development expenditures are expected to decrease.
General and administrative expenses for the third quarter and first nine
months of fiscal 1999 were $767,000 and $2 million, respectively, representing a
decrease of 22% and 43%, respectively, over the comparable periods of fiscal
1998. These decreases were largely due to the reduction in workforce, which was
achieved, in part, through improved cross training of personnel to handle
different operational areas.
Cost controls continue to play an important part in the Company's strategy.
Overall personnel declined from 112 at September 30, 1998 to 103 at December 31,
1998, with growth in domestic consulting headcounts being offset with additional
reductions of administrative and back-office personnel. At December 31, 1998,
approximately 60% of all personnel were in direct technology development,
services or customer support, 29% in direct sales and marketing, and 11% in
administration.
Restructuring costs
The Company has recorded restructuring costs in prior years. The reserve
balance at the beginning of fiscal 1999 was $534,000. During the first and
second quarters of fiscal 1999, the Company made payments of $267,000 and
recorded a return to operations of reserve of $166,000 provided in prior years
for events that were completed in the current year. In the third quarter of
fiscal 1999, the Company made payments of $80,000, thereby further reducing the
reserve. The Company expects to utilize the remaining reserve in the fourth
quarter of fiscal 1999.
Interest and other income, net
Interest and other income, which includes foreign exchange gains of
$68,000, was $115,000 in the third quarter of fiscal 1999 compared to $129,000
in the third quarter of the prior year. For the first nine months of fiscal
1999, interest and other income totaled $256,000, which includes net foreign
exchange gains of $108,000, compared to $308,000 during the same period last
year. These decreases reflect lower interest income from reduced cash and
marketable securities balances.
Provision for income taxes
As the Company recorded a net loss for the quarter and first nine months of
fiscal 1999 and 1998, it did not incur any federal income tax expense. The
Company recorded a benefit of $29,000 in the first nine months of fiscal 1999
for foreign taxes paid in prior periods as compared to an expense for such taxes
of $38,000 in the comparable period in fiscal 1998.
FACTORS AFFECTING FUTURE RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company's results
in recent quarters are not necessarily indicative of future results and the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indicator of future performance.
During the third quarter, the Company derived 73% of its revenue from
services. Service revenues tend to fluctuate as consulting projects, which may
continue over several quarters, are completed. Overall backlog decreased from
$6.8 million at September 30, 1998 to $5.8 million at December 31, 1998.
Smalltalk technology is widely used in many mission critical applications
in a wide range of industries by Fortune 100 companies. However, the Company has
not been acquiring new Smalltalk license customers, and has experienced declines
in existing customers' project developments utilizing Smalltalk. The Company
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anticipates that this trend will continue in future quarters. It is too early to
predict demand for the Company's upcoming releases, VW5i and the VisualWorks
Linux.
License revenues in any quarter depend on orders shipped. The Company
generally ships orders as received and, as a result, typically has little or no
license revenue backlog. Quarterly revenues and operating results therefore
depend on the volume and timing of orders received during the quarter, which are
difficult to forecast. Historically, the Company has received a substantial
portion of its product orders in the last month of the quarter, with a
concentration of such orders in the last week. Delays in the receipt of orders
can therefore cause significant variations in quarterly license revenues.
With respect to its VEOS and VisualWorks 5i products, the Company has
capitalized approximately $705,000, net of amortization, at December 31, 1998 in
software development costs in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed. The Company evaluates recoverability of its
capitalized software development costs at each reporting period based upon its
estimates of related product sales to be realized in future periods. If actual
sales of the VEOS or VisualWorks 5i products are substantially less than the
Company's current estimates of future sales, the Company may be required to
accelerate the amortization of the related capitalized software development
costs and/or write off amounts deemed not recoverable. No assurance can be given
that the Company will be able to generate sales of these products sufficient to
recover amounts capitalized for software development as of December 31, 1998.
Intense competition for qualified technical personnel continues to be a
threat, in particular given the reduced size of the technical staff. The Company
does not appear to have significant direct exposure to Asian market fluctuation
as less than 5% of sales are to the region. Indirect impact on the Company as
caused by the economic difficulties in Asia on the Company's customers is harder
to predict.
Year 2000 Compliance
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. Others do not correctly
process "leap year" dates. As a result, such systems and applications could fail
or create erroneous results unless corrected to process data related to the year
2000 and beyond. The problems are expected to increase in frequency and severity
as the year 2000 approaches, and are commonly referred to as the "Year 2000
Problem". The Company relies on its systems, applications and devices in
operating and monitoring all major aspects of its business, including internal
business, infrastructure, networks and telecommunications equipment. The Company
also relies, directly and indirectly, on external systems of business
enterprises such as customers, suppliers, creditors, financial organizations and
governmental entities, both domestic and international, for accurate exchange of
data.
The Company is continuing to assess the impact that the Year 2000 Problem
may have on its operations and has identified the following four key areas of
its business that may be affected:
Products -- The Company has completed Year 2000 compliance testing on its
currently supported products. Based upon the evaluation and testing completed,
the Company believes that its currently supported products are Year 2000
compliant. The Company's testing did not assess compliance of products no longer
supported, products modified by customers or third parties nor did it assess
compliance of products connected to individual customer work environments.
Internal Business Systems -- The Year 2000 Problem could affect the
systems, transaction processing computer applications and devices used by the
Company to operate and monitor all major aspects of its business, including
financial systems, infrastructure, networks and telecommunications systems. The
Company has completed its remediation phase and believes that as of the end of
the third quarter all of the major systems, software applications and related
equipment used in connection with its internal operations are now Year 2000
compliant.
Third-Party Suppliers -- The Company relies, directly and indirectly, on
external systems utilized by its suppliers. The Company is in the process of
requesting confirmation from its suppliers of their Year 2000 compliance;
however, there can be no assurance that these suppliers will resolve any or all
Year 2000
12
<PAGE> 14
Problems with their systems in a timely manner. Any failure of these third
parties to resolve their Year 2000 Problems in a timely manner could result in
the material disruption of the business of the Company. Any such disruption
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Facility Systems -- Systems such as heating, sprinklers, test equipment and
security systems at the Company's facilities may also be affected by the Year
2000 Problem. The Company has contacted its facility owners seeking assurances
of Year 2000 compliance.
The Company has incurred $60,000 as of December 31, 1998 to address its
Year 2000 issues. The Company presently estimates that the total cost of
addressing its Year 2000 issues will be approximately $75,000. This estimate was
derived utilizing numerous assumptions, including the assumption that the
Company has already identified its most significant Year 2000 issues and that
the plans of its third party suppliers will be fulfilled in a timely manner
without cost to the Company. However, there can be no guarantee that these
assumptions are accurate, and actual results could differ materially from those
anticipated.
The Company recognizes the need for developing contingency plans to address
the Year 2000 issues that may pose a significant risk to its on going
operations. Such plans could include the implementation of manual procedures to
compensate for system deficiencies. However, there can be no assurance that any
contingency plans evaluated and potentially implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's results
of operations would not be materially and adversely affected by the delays and
inefficiencies inherent in conducting operations in an alternative manner.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash for operations of $3.4 million in the first nine
months of fiscal 1999, which was comprised largely of: cash used to fund
operating losses; decreases in accounts payable and accrued liabilities of $2.5
million, accrued restructuring costs of $513,000 and deferred revenue of $1.1
million; offset by a decrease in accounts receivable of $2.0 million. Cash used
for investing was $266,000, consisting of $94,000 of capital expenditures and
capitalized software of $767,000, which was offset by the maturity of $600,000
of short term investments. Net cash provided by financing activities was
$121,000, which was generated from the issuance of common stock under the
Company's Employee Stock Purchase Plan. The Company has no significant
unfulfilled capital commitments for fiscal 1999.
As of December 31, 1998, the Company had cash and cash equivalents of $1.6
million and working capital of $842,000 compared to $5.7 million and $3.4
million, respectively, as of March 31, 1998. Days sales outstanding increased
slightly to 78 days at the end of December 1998 from 75 days at September 30,
1998 due to year-end cash balance management by a number of customers.
During December 1998, the Company entered into a $5 million line of credit
with a commercial bank that expires in December 1999. Borrowings under the line
are secured by the Company's accounts receivable and intellectual property, are
limited to 70% of eligible accounts receivable and bear interest at the bank
prime rate plus 3/4%. At December 31, 1998, the Company was not in compliance
with a covenant in the line of credit that requires the Company to maintain a
certain level of tangible net worth. As a result, the bank may demand repayment
of $1 million borrowed in January 1999 and has the right to terminate the credit
facility. There is no assurance that the Company will be able to cure the
covenant violation or that it will be able to obtain alternative financing in
the event that the credit agreement is terminated.
Management of the Company anticipates implementing certain cost cutting
measures in early March 1999 to attempt to reduce the Company's cost structure
to be commensurate with estimated revenues. Such cost cutting measures could
have the initial effect of increasing expenses for the period during which such
actions are taken. Although management's goal is to reduce losses and,
ultimately, return the Company to profitability, there can be no assurance that
these actions will allow the Company to achieve profitability. After giving
effect to the planned cost cutting measures, management believes that the
Company will have
13
<PAGE> 15
sufficient sources of financing to continue its operations throughout fiscal
1999 and fiscal 2000. However, due to the uncertainties inherent in management's
plan, there can be no assurance that the Company will have sufficient sources of
financing to attain planned levels of operations. Ultimately, the Company's
long-term success is dependent upon its ability to successfully execute its
strategic plan and achieve sustained profitable operations.
As of December 31, 1998, and Company's total shareholders' equity was below
the minimum level required to maintain its listing on the NASDAQ National Market
(NASDAQ) and, as a result of the Company reporting that it would restate its
financial statements for the interim periods ended June 30 and September 30,
1998, on February 17, 1999, NASDAQ halted trading of the Company's common stock
pending the receipt and review of certain requested information. Management of
the Company is attempting to resolve these issues; however, there is no
assurance that the Company's common stock will be able to maintain its listing
and/or trade on NASDAQ.
The matters discussed herein could adversely impact employee morale and
customer relations. In the event the Company were to lose employees and/or
customers as a result of such matters, the Company's performance could be
materially adversely affected.
FORWARD-LOOKING STATEMENTS/FUTURE PROSPECTS
This Form 10-Q includes a number of forward-looking statements that are
subject to certain risks and uncertainties that could cause the Company's actual
results and financial position to be affected negatively as events unfold in the
market for the Company's products. These events include, but are not limited to,
the risks inherent in the development and marketing of relatively new
technologies, the size and timing of customer orders, and the Company's ability
to deliver competitive products, retain key employees and maintain sufficient
sales revenue to fund ongoing research and development, as well as the other
risks discussed above under "Factors Affecting Future Results". The Company
assumes no obligation to update or revise any such forward-looking statements to
reflect events or circumstances that may arise after this report is filed, and
that may have an effect on the Company's overall performance. The Company
intends that its forward-looking statements be protected by the safe harbors
provided in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) The exhibit listed below is filed herewith as part of this report.
Exhibit No. 10.1 -- Loan and Security Agreement between Silicon Valley
Bank and ObjectShare, Inc. dated December 10, 1998
Exhibit No. 10.2 -- Collateral Assignment, Patent Mortgage and Security
Agreement between Silicon Valley Bank and
ObjectShare, Inc.
Exhibit No. 27 -- Financial Data Schedule
B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended December
31, 1998.
14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: February 22, 1999
OBJECTSHARE, INC. a
Delaware Corporation
By: /s/ EUGENE L. GODA
------------------------------------
Eugene L. Goda
President and Chief
Executive Officer
By: /s/ GLENN J. BROWN
------------------------------------
Glenn J. Brown
Vice President and Chief Financial
Officer
(on behalf of the Registrant and
as principal financial officer)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
Ex-10.1 Loan and Security Agreement between Silicon Valley Bank and
ObjectShare, Inc. dated December 10, 1998
Ex-10.2 Collateral Assignment, Patent Mortgage and Security
Agreement between Silicon Valley Bank and ObjectShare, Inc.
dated December 10, 1998
Ex-27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 10.1
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
by and between
SILICON VALLEY BANK
as Lender
and
OBJECTSHARE, INC.
as Borrower
Dated: December 10, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. DEFINITIONS AND CONSTRUCTION..................................................................... 1
1.1 Definitions............................................................................. 1
1.2 Accounting and Other Terms.............................................................. 7
2. LOAN AND TERMS OF PAYMENT........................................................................ 7
2.1 Credit Extensions....................................................................... 7
2.2 Overadvances............................................................................ 9
2.3 Interest Rates, Payments, and Calculations.............................................. 9
2.4 Crediting Payments......................................................................10
2.5 Fees....................................................................................10
2.6 Additional Costs........................................................................11
2.7 Term....................................................................................11
3. CONDITIONS OF LOANS..............................................................................11
3.1 Conditions Precedent to Initial Credit Extension........................................11
3.2 Conditions Precedent to all Credit Extensions...........................................12
4. CREATION OF SECURITY INTEREST....................................................................12
4.1 Grant of Security Interest..............................................................12
4.2 Delivery of Additional Documentation Required...........................................12
4.3 Right to Inspect........................................................................12
5. REPRESENTATIONS AND WARRANTIES...................................................................13
5.1 Due Organization and Qualification......................................................13
5.2 Due Authorization; No Conflict..........................................................13
5.3 No Prior Encumbrances...................................................................13
5.4 Bona Fide Eligible Accounts.............................................................13
5.5 Merchantable Inventory..................................................................13
5.6 [Inapplicable]..........................................................................13
5.7 Name; Location of Chief Executive Office................................................13
5.8 Litigation..............................................................................13
5.9 No Material Adverse Change in Financial Statements......................................13
5.10 Solvency................................................................................13
5.11 Regulatory Compliance...................................................................14
5.12 Environmental Condition.................................................................14
5.13 Taxes...................................................................................14
5.14 Subsidiaries............................................................................14
5.15 Government Consents.....................................................................14
5.16 Full Disclosure.........................................................................14
6. AFFIRMATIVE COVENANTS............................................................................14
6.1 Good Standing...........................................................................15
6.2 Government Compliance...................................................................15
6.3 Financial Statements, Reports, Certificates.............................................15
6.4 Inventory; Returns......................................................................15
6.5 Taxes...................................................................................15
6.6 Insurance...............................................................................16
6.7 Principal Depository....................................................................16
6.8 Quick Ratio.............................................................................16
6.11 Tangible Net Worth......................................................................16
6.15 Further Assurances......................................................................16
7. NEGATIVE COVENANTS...............................................................................16
7.1 Dispositions............................................................................16
7.2 Changes in Business, Ownership, or Management, Business Locations.......................17
7.3 Mergers or Acquisitions.................................................................17
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS (contd)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
7.4 Indebtedness............................................................................17
7.5 Encumbrances............................................................................17
7.6 Distributions...........................................................................17
7.7 Investments; Loans; Guarantees..........................................................17
7.8 Transactions with Affiliates............................................................17
7.9 [Inapplicable].........................................................................17
7.10 Subordinated Debt.......................................................................17
7.11 Inventory...............................................................................17
7.12 Compliance..............................................................................18
8. EVENTS OF DEFAULT................................................................................18
8.1 Payment Default.........................................................................18
8.2 Covenant Default........................................................................18
8.3 Material Adverse Change.................................................................18
8.4 Attachment..............................................................................18
8.5 Insolvency..............................................................................19
8.6 Other Agreements........................................................................19
8.7 Subordinated Debt.......................................................................19
8.8 Judgments...............................................................................19
8.9 Misrepresentations......................................................................19
8.10 Guaranty................................................................................19
9. BANK'S RIGHTS AND REMEDIES.......................................................................19
9.1 Rights and Remedies.....................................................................19
9.2 Power of Attorney.......................................................................20
9.3 Accounts Collection.....................................................................21
9.4 Bank Expenses...........................................................................21
9.5 Bank's Liability for Collateral.........................................................21
9.6 Remedies Cumulative.....................................................................21
9.7 Demand; Protest.........................................................................21
10. NOTICES..........................................................................................21
11. CHOICE OF LAW AND VENUE; JURY WAIVER.............................................................22
12. GENERAL PROVISIONS...............................................................................22
12.1 Successors and Assigns..................................................................22
12.2 Indemnification.........................................................................22
12.3 Time of Essence.........................................................................23
12.4 Severability of Provisions..............................................................23
12.5 Amendments in Writing, Integration......................................................23
12.6 Counterparts............................................................................23
12.7 Survival................................................................................23
</TABLE>
-ii-
<PAGE> 4
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of December 10, 1998 by and
between SILICON VALLEY BANK ("Bank") and OBJECTSHARE, INC., a Delaware
corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" means an amount equal to 70% of Eligible
Accounts, as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower, provided that it is understood and agreed
that the foregoing advance percentage of 70% is subject to adjustment and
modification based on the results of the collateral audits of the Borrower that
the Bank performs from time to time.
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<PAGE> 5
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a Credit Extension of up to
$5,000,000.
"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, Letter of Credit, Exchange
Contract or any other extension of credit by Bank for the benefit of Borrower
hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding 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 5.4; 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;
-2-
<PAGE> 6
(b) Accounts with respect to an account debtor, fifty percent
(50%) 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 except for
Eligible Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency,
or instrumentality thereof, except for those Accounts of the United
States or any department, agency or instrumentality thereof as to which
the payee has assigned its rights to payment thereof to Bank and the
assignment has been acknowledged, pursuant to the Assignment of Claims
Act of 1940, as amended (31 U.S.C. 3727);
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g.
accounts payable, customer deposits, credit accounts etc.);
(g) Accounts generated by demonstration or promotional
equipment, or with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or
other terms by reason of which the payment by the account debtor may be
conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank
believes, in its 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
to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the United
States and that are: (1) covered by credit insurance in form and amount, and by
an insurer satisfactory to Bank less the amount of any deductible(s) which may
be or become owing thereon; or (2) supported by one or more letters of credit
either advised or negotiated through Bank or in favor of Bank as beneficiary, in
an amount and of a tenor, and issued by a financial institution, acceptable to
Bank; or (3) that Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
-3-
<PAGE> 7
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Exchange Contract" has the meaning set forth in Section 2.1.3.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"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.
"Letter of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in Section
2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
-4-
<PAGE> 8
"Maturity Date" means the Revolving Maturity Date.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, 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.
"Payment Date" means the first calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Revolving Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
and
(e) Indebtedness secured by Permitted Liens, provided that such
Indebtedness incurred in the future for the purchase price of or lease
of equipment shall not exceed, in the aggregate a total of $250,000 at
any time outstanding.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State
thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from
the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., and (iii) certificates of deposit maturing no
more than one (1) year from the date of investment therein issued by
Bank; and
(c) Investments in Subsidiaries in an aggregate amount not to
exceed $750,000 at any time.
"Permitted Liens" means the following:
-5-
<PAGE> 9
(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) 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.
"Revolving Maturity Date" means the date that is one day prior to
the first anniversary of the date of this Agreement.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to Borrower, any 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 Borrower or one or
more Affiliates of Borrower.
"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,
-6-
<PAGE> 10
patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
1.2 Accounting and Other Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 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 all Credit Extensions
at rates in accordance with the terms hereof.
2.1.1 Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed (i) the Committed Revolving Line or the
Borrowing Base, whichever is less, minus (ii) the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit) and minus (iii) the Foreign Exchange Reserve. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to
this Section 2.1 may be repaid and reborrowed at any time during the
term of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific time, on the Business Day that the Advance is to be made. Each
such notification shall be promptly confirmed by a Payment/Advance Form
in substantially the form of Exhibit 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, other than for
damages or loss arising from the Bank's gross negligence or willful
misconduct. Bank will credit the amount of Advances made under this
Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this Section
2.1 and other amounts due under this Agreement (except as otherwise
expressly specified herein) shall be immediately due and payable.
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2.1.2 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account
of Borrower in an aggregate outstanding face amount not to exceed (i)
the lesser of the Committed Revolving Line or the Borrowing Base,
whichever is less, minus (ii) the then outstanding principal balance of
the Advances; provided that the aggregate face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit
and any Letter of Credit Reserve) shall not in any case exceed $500,000.
Each Letter of Credit shall have an expiry date no later than the
Revolving Maturity Date. All Letters of Credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of standard
Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the
terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Borrower shall indemnify, defend, protect, and
hold Bank harmless from any loss, cost, expense or liability, including,
without limitation, reasonable attorneys' fees, arising out of or in
connection with any Letters of Credit, other than for damages or loss
arising from the Bank's gross negligence or willful misconduct.
(c) Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such
demand as an Advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing
rate of exchange in San Francisco, California, for sales of that other
currency for cable transfer to the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve
under the Committed Revolving Line for Letters of Credit against
fluctuations in currency exchange rates, in an amount equal to ten
percent (10%) of the face amount of such letter of credit (such reserve
in the aggregate for all applicable Letters of Credit being the "Letter
of Credit Reserve"). The amount of such reserve may be amended by Bank
from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Revolving Line shall be
reduced by the amount of such reserve for so long as such Letter of
Credit remains outstanding.
2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements.
(a) Subject to the terms of this Agreement, Borrower may enter
into foreign exchange contracts (the "Exchange Contracts") not to exceed
an aggregate amount of $500,000 (the "Contract Limit"), pursuant to
which Bank shall sell to or purchase from Borrower foreign currency on a
spot or future basis. Borrower shall not request any Exchange Contracts
at any time it is out of compliance with any of the provisions of this
Agreement. All Exchange Contracts must provide for delivery of
settlement on or before the Maturity Date. The amount available under
the Committed Revolving Line at any time shall be reduced by the
following amounts (the "Foreign Exchange Reserve") on any given day (the
"Determination Date"): (i) on all outstanding Exchange Contracts on
which delivery is to be effected or settlement allowed more than two
business days after the Determination Date, 10% of the gross amount of
the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts
on which delivery is
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to be effected or settlement allowed within two business days after the
Determination Date, 100% of the gross amount of the Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or (b) that
there is no sufficient availability under the Committed Revolving Line
and Borrower does not have available funds in its bank account to
satisfy the Foreign Exchange Reserve. If Bank terminates the Exchange
Contracts, and without limitation of any applicable indemnities,
Borrower agrees to reimburse Bank for any and all fees, costs and
expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and settlement
allowed in any two business day period to be more than $250,000 (the
"Settlement Limit") nor shall Borrower permit the total gross amount of
all Exchange Contracts to which Borrower is a party, outstanding at any
one time, to exceed the Contract Limit. Notwithstanding the above,
however, the amount which may be settled in any two (2) business day
period may be increased above the Settlement Limit up to, but in no
event to exceed, the amount of the Contract Limit under either of the
following circumstances:
(i) if there is sufficient availability under the Committed
Revolving Line in the amount of the Foreign Exchange Reserve
as of each Determination Date, provided that Bank in advance
shall reserve the full amount of the Foreign Exchange Reserve
against the Committed Revolving Line; or
(ii) if there is insufficient availability under the Committed
Revolving Line, as to settlements within any two (2) business
day period, provided that Bank, in its sole discretion, may:
(A) verify good funds overseas prior to crediting Borrower's
deposit account with Bank (in the case of Borrower's sale of
foreign currency); or (B) debit Borrower's deposit account
with Bank prior to delivering foreign currency overseas (in
the case of Borrower's purchase of foreign currency).
(d) In the case of Borrower's purchase of foreign currency,
Borrower in advance shall instruct Bank upon settlement either to treat
the settlement amount as an advance under the Committed Revolving Line,
or to debit Borrower's account for the amount settled.
(e) Borrower shall execute all standard from applications and
agreements of Bank in connection with the Exchange Contracts and,
without limiting any of the terms of such applications and agreements,
Borrower will pay all standard fees and charges of Bank in connection
with the Exchange Contracts.
(f) Without limiting any of the other terms of this Agreement or
any such standard form applications and agreement of Bank, Borrower
agrees to indemnify Bank and hold it harmless, from and against any and
all claims, debts, liabilities, demands, obligations, actions, costs and
expenses (including, without limitation, attorneys' fees of counsel of
Bank's choice), of every nature and description which it may sustain or
incur, based upon, arising out of, or in any way relating to any of the
Exchange Contracts or any transactions relating thereto or contemplated
thereby, other than for damages or loss arising from the Bank's gross
negligence or willful misconduct.
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, 2.1.2 and 2.1.3
of this Agreement is greater than
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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), Advances
shall bear interest, on the average daily balance thereof, at a per annum rate
equal to .75% percentage points above the Prime Rate.
(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 330814670 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 as reasonably promptly as possible in accordance
with Bank notification procedures. Any such debits against Borrower's accounts
in no way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to $25,000, which fee shall
be due on the Closing Date and shall be fully earned and non-refundable; the
Bank hereby acknowledges receipt of such fee.
(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, provided that the Bank agrees
to limit the frequency of the foregoing audits to
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<PAGE> 14
no more than two times per calendar year and agrees to limit the cost of each
such audit to $5,000 prior to the occurrence and continuance of an Event of
Default, provided, further, such frequency limitation and cost limitation shall
be of no force and effect on and after the occurrence and continuance of an
Event of Default.
(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. Bank hereby agrees that the legal fees and costs for
the preparation of the initial loan documentation shall not exceed $5,000.
2.6 Additional Costs. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
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;
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(c) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(f) certificate of foreign qualification (if applicable); and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided
in Section 2.1; and
(b) the representations and warranties contained in Section 5 shall
be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each 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. In accordance
with the lawful exercise by the Bank of depositary functions and otherwise on
and after the occurrence and during the continuance of an Event of Default,
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.
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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
all the property and assets of the Borrower, including the Collateral, free and
clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects of
good and marketable quality, free from all material defects.
5.6 [Inapplicable]
5.7 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.
5.8 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral.
5.9 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.
5.10 Solvency. The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with
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unreasonably small capital after the transactions contemplated by this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, or has obtained proper
extensions relating thereto, and has paid, or has made adequate provision for
the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.15 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.
5.16 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:
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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 quarter, 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) [reserved]; (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; and (e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Within TWENTY (20) days after the last day of each MONTH, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable.
Within THIRTY (30) days after the last day of each QUARTER, Borrower
shall deliver to Bank with the QUARTERLY 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 six (6) months unless an Event of Default has occurred and
is continuing, provided that Borrower may request such audits to be conducted
every 90 days to determine if an increased percentage advance rate should apply
to Advances hereunder.
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
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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 the amount or validity of such payment is (I) contested in
good faith by appropriate proceedings , (ii) is reserved against (to the extent
required by GAAP) by Borrower and (iii) no lien other than a Permitted Lien
results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral and all
other property of the Borrower 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 all the property and assets of the Borrower, including 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, with respect to the Collateral, 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 quarter, a ratio of Quick Assets to Current Liabilities of at least
1.50 to 1.0. For purposes of the foregoing, however, Current Liabilities shall
not include deferred revenues.
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 $4,000,000 through
the period ending September 30, 1998; thereafter, Borrower shall maintain, as of
the last day of each calendar quarter, a Tangible Net Worth of not less than
$5,000,000 through the period ending March 31, 1999; and, thereafter, Borrower
shall maintain, as of the last day of each calendar quarter, a Tangible Net
Worth of not less than $6,000,000.
6.10 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:
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<PAGE> 20
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 (iii) 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 change in Borrower's ownership of greater than 49% such that a change
in control of the Borrower results therefrom. 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, provided
that the foregoing shall not restrict the merger of one Subsidiary into another
Subsidiary if Borrower has given reasonable prior notice to Bank of such an
occurrence.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments; Loans; Guarantees. 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, or make any loans of
any money or any other assets to any Person, or guarantee or otherwise become
liable with respect to the obligations of any other Person.
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 [Inapplicable]
7.10 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.
7.11 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
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<PAGE> 21
and as to which Borrower signs and files a financing statement where needed to
perfect Bank's security interest.
7.12 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);
8.3 Material Adverse Change. If there (i) occurs a material adverse
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default
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<PAGE> 22
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 45 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 between One-Hundred Thousand
Dollars ($100,000) and Two-Hundred Thousand Dollars ($200,000) shall be rendered
against Borrower and shall remain unsatisfied and unstayed for a period of
twenty-five (25) days (provided that no Credit Extensions will be made prior to
the satisfaction or stay of such judgment); or if a judgment or judgments for
the payment of money in an amount, individually or in the aggregate, of over
Two-Hundred Thousand Dollars ($200,000) shall be rendered against Borrower and
shall remain unsatisfied and unstayed for a period of fifteen (15) 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:
(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;
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<PAGE> 23
(c) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letters of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit;
(d) Liquidate any Exchange Contracts not yet settled and demand that
Borrower immediately deposit cash with Bank in an amount sufficient to cover any
losses incurred by Bank due to liquidation of the Exchange Contracts at the then
prevailing market price;
(e) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(f) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the Collateral
if Bank so requires, and to make the Collateral available to Bank as Bank may
designate. Borrower authorizes Bank to enter the premises where the Collateral
is located, to take and maintain possession of the Collateral, or any part of
it, and to pay, purchase, contest, or compromise any encumbrance, charge, or
lien which in Bank's determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's premises, Borrower hereby grants Bank a license to
enter such premises and to occupy the same, without charge in order to exercise
any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(g) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Bank;
(h) 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;
(i) 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;
(j) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(k) 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
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<PAGE> 24
requests for verification of Accounts or notify account debtors of Bank's
security interest in the Accounts; (b) endorse Borrower's name on any checks or
other forms of payment or security that may come into Bank's possession; (c)
sign Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle, and
adjust all claims under and decisions with respect to Borrower's policies of
insurance; 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; 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.
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<PAGE> 25
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 ObjectShare, Inc.
16811 Hale Avenue, Suite A
Irvine, California 92606
Attn: Kevin Brooks
FAX: 949-253-3734
If to Bank Silicon Valley Bank
38 Technology Drive, Suite 150
Irvine, CA 92618
Attn: Manager
FAX: 949-789-1930
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 Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Orange,
State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall , indemnify ,defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and
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<PAGE> 26
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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
OBJECTSHARE, INC.
By: Glenn Brown
Title: Chief Financial Officer
By: Eugene L. Goda
Title: President and CEO
SILICON VALLEY BANK
By: Dan McGregor
Title: Silcon Valley Bank
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<PAGE> 27
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) 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;
(b) 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;
(c) (i) any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or
held; (ii) any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections;
(iii) all patents, patent applications and like protections including without
limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same; (iv) all mask work or similar
rights available for the protection of semiconductor chips, now owned or
hereafter acquired; (v) all know-how, trade secrets, customer lists, proprietary
information, inventions, methods, procedures and formulae; and (vi) all rights
of publicity, rights to use likenesses and similar rights now owned or hereafter
acquired;
(d) All contract rights and general intangibles relating to the
foregoing items in (a), (b) and (c);
(d) 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
(e) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE> 28
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _________________
FAX#: (408) __________ 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 #___________________________________
<PAGE> 29
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: ObjectShare, Inc. Bank: Silicon Valley Bank
Commitment Amount: $
<TABLE>
<S> <C> <C>
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 (70% of #14) $_____________
16. [reserved]
17. [reserved]
BALANCES
18. Maximum Loan Amount $_____________
19. Total Funds Available [Lesser of #18 or (#15 plus #17)] $_____________
20. Present balance owing on Line of Credit $_____________
21. Outstanding under Sublimits (FX and L/C ) $_____________
22. RESERVE POSITION (#19 minus #20 and #21) $_____________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
___________________________
By: _______________________
Authorized Signer
<PAGE> 30
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM:
The undersigned authorized officer of ObjectShare, Inc. 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 h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- -----------
<S> <C> <C> <C> <C>
Quarterly financial statements Within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 20 days Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ -----------
<S> <C> <C> <C> <C>
Maintain on a Qtrly Basis:
Minimum Quick Ratio 1.50:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $4MM, as applicable $________ Yes No
Minimum Tangible Net Worth $5MM, as applicable $________ Yes No
Minimum Tangible Net Worth $6MM, as applicable $________ Yes No
</TABLE>
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
<PAGE> 1
EXHIBIT 10.2
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement is
made as of the 10th day of December 1998, by and between ObjectShare, Inc., a
Delaware corporation ("Assignor"), and Silicon Valley Bank, a California banking
corporation ("Assignee") whose address is 3003 Tasman Drive, Santa Clara,
California 95054.
RECITALS
A. Assignee has agreed to lend to Assignor certain funds (the "Loans"),
pursuant to a Loan and Security Agreement dated December 10, 1998 (the "Loan
Agreement") and Assignor desires to borrow such funds from Assignee.
B. In order to induce Assignee to make the Loans, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing
Assignor's "Obligations" (as defined in the Loan Agreement) to Assignee
(collectively, the "Obligations").
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment, Patent Mortgage and Grant of Security Interest. As
collateral security for the prompt and complete payment and performance of all
of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, but not as an ownership interest
in and to Assignor's entire right, title and interest in, to and under the
following (all of which shall collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now of hereafter existing, created,
acquired or held, including without limitation those set forth on Exhibit A
attached hereto (collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Assignor
now or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections
including, without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including without
limitation the patents and patent applications set forth on Exhibit B attached
hereto (collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Assignor connected with
and symbolized by such trademarks, including without limitation those set forth
on Exhibit C attached hereto (collectively, the "Trademarks")
(f) Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not he obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(g) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights; and
(h) All amendments, extensions, renewals and extensions of any of
the Copyrights, Trademarks or Patents; and
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE CONSTRUED
AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE ASSIGNOR'S
OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. Authorization and Request. Assignor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
-1-
<PAGE> 2
3. Covenants and Warranties. Assignor represents, warrants, covenants
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for
non-exclusive licenses granted by Assignor to its customers in the ordinary
course of business.
(b) Performance of this Assignment does not conflict with or
result in a breach of any agreement to which Assignor is bound, except to the
extent that certain intellectual property agreements prohibit the assignment of
the rights thereunder to a third party without the licensor's or other party's
consent and this Assignment constitutes an assignment.
(c) During the term of this Agreement, Assignor will not transfer
or otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(d) To its knowledge, each of the Patents is valid and
enforceable, and no part of the Collateral has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Collateral violates the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material
adverse change in the composition of the Collateral, including but not limited
to any subsequent ownership right of the Assignor in or to any Trademark, Patent
or Copyright not specified in this Assignment;
(f) Assignor shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and (iii)
not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall not
be unreasonably withheld unless Assignor determines that reasonable business
practices suggest that abandonment is appropriate.
(g) Assignor shall promptly register the most recent version of
any of Assignor's Copyrights, if not so already registered, and shall, from time
to time, execute and file such other instruments, and take such further actions
as Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
(h) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the Obligations upon making the filings referred to
in clause (i) below;
(i) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any U.S. governmental authority of
U.S. regulatory body is required either (i) for the grant by Assignor of the
security interest granted hereby or for the execution, delivery or performance
of this Assignment by Assignor in the U.S. or (ii) for the perfection in the
United States or the exercise by Assignee of its rights and remedies thereunder;
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(k) Assignor shall not enter into any agreement that would
materially impair or conflict with Assignor's obligations hereunder without
Assignee's prior written consent, which consent shall not be unreasonably
withheld. Assignor shall not permit the inclusion in any material contract to
which its becomes a party of any provisions that could or might in any way
prevent the creation of a security interest in Assignor's rights and interest in
any property included within the definition of the Collateral acquired under
such contracts, except that certain contracts may contain anti-assignment
provisions that could in effect prohibit the creation of a security interest in
such contracts.
(l) Upon any executive officer or Assignor obtaining actual
knowledge thereof, Assignor will promptly notify Assignee in writing of any
event that materially adversely affects the value of any material Collateral,
the ability of Assignor to dispose of any material Collateral of the rights and
remedies of Assignee in relation thereto, including the levy of any legal
process against any of the Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs
-2-
<PAGE> 3
and reasonable expenses incurred in the reasonable exercise of its rights under
this section 4.
5. Inspection Rights. Assignor hereby grants to Assignee and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, and any of Assignor's
plants and facilities that manufacture, install or store products (or that have
done so during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested, but not more than one (1) in every six (6) months;
provided, however, nothing herein shall entitle Assignee access to Assignor's
trade secrets and other proprietary information.
6. Further Assurances; Attorney in Fact.
(a) On a continuing basis, Assignor will, subject to any prior
licenses, encumbrances and restrictions and prospective licenses, make, execute,
acknowledge and deliver, and file and record in the proper filing and recording
places in the United States, all such instruments, including, appropriate
financing and continuation statements and collateral agreements and filings with
the United States Patent and Trademarks Office and the Register of Copyrights,
and take all such action as may reasonably be deemed necessary or advisable, or
as requested by Assignee, to perfect Assignee's security interest in all
Copyrights, Patents and Trademarks and otherwise to carry out the intent and
purposes of this Collateral Assignment, or for assuring and confirming to
Assignee the grant or perfection of a security interest in all Collateral.
(b) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, Assignee or otherwise, from time to time in Assignee's
discretion, upon Assignor's failure or inability to do so, to take any action
and to execute any instrument which Assignee may deem necessary or advisable to
accomplish the purposes of this Collateral Assignment, including, without
limitation:
(i) To modify, in its sole discretion, this Collateral
Assignment without first obtaining Assignor's approval of or signature to such
modification by amending Exhibit A, Exhibit B and Exhibit C, thereof, as
appropriate, to include reference to any right, title or interest in any
Copyrights, Patents or Trademarks acquired by Assignor after the execution
hereof or to delete any reference to any right, title or interest in any
Copyrights, Patents or Trademarks in which Assignor no longer has or claims any
right, title or interest; and
(ii) 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 Assignor where permitted by law.
7. Events of Default. The occurrence of any of the following shall
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor
in this Assignment.
8. Remedies. Upon the occurrence and continuance of an Event of Default,
Assignee shall have the right to exercise all the remedies of a secured party
under the California Uniform Commercial Code, including without limitation the
right to require Assignor to assemble the Collateral and any tangible property
in which Assignee has a security interest and to make it available to Assignee
at a place designated by Assignee. Assignee shall have a nonexclusive, royalty
free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses (including
reasonable attorney's fees) incurred by Assignee in connection with the exercise
of any of Assignee's rights hereunder, including without limitation any expense
incurred in disposing of the Collateral. All of Assignee's rights and remedies
with respect to the Collateral shall be cumulative.
9. Indemnity. Assignor agrees to defend, indemnify and hold harmless
Assignee 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 this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation, reasonable attorneys fees and
reasonable expenses), except for losses arising form or out of Assignee's gross
negligence or willful misconduct.
10. Reassignment. At such time as Assignor shall completely satisfy all
of the obligations secured hereunder, Assignee shall execute and deliver to
Assignor all deed, assignments, and other instruments as may necessary or proper
to reinvest in Assignor full title to the property assigned hereunder, subject
to any disposition thereof which may have been made by Assignee pursuant hereto.
-3-
<PAGE> 4
11. Course of Dealing. No course of dealing, nor any failure to
exercise, nor any delay in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
12. Attorneys' Fees. If any action relating to this Assignment is
brought by either party hereto against the other party, the prevailing party
shall be entitled to recover reasonable attorneys fees, costs and disbursements.
13. Amendments. This Assignment may be amended only by a written
instrument signed by both parties hereto.
14. Counterparts. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. California Law and Jurisdiction. This Assignment shall be governed
by the laws of the State of California, without regard for choice of law
provisions. Assignor and Assignee consent to the nonexclusive jurisdiction of
any state or federal court located in Santa Clara County, California.
16. Confidentiality. In handling any confidential information, Assignee
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 Assignment
except that the disclosure of this information may be made (i) to the affiliates
of the Assignee, (ii) to prospective transferee or purchasers of an interest in
the obligations secured hereby, provided that they have entered into comparable
confidentiality agreement in favor of Assignor and have deliver a copy to
Assignor, (iii) as required by law, regulation, rule or order, subpoena judicial
order or similar order and (iv) as may be required in connection with the
examination, audit or similar investigation of Assignee.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on
the day and year first above written.
ADDRESS OF ASSIGNOR: ASSIGNOR:
16811 Hale Avenue, Suite A OBJECTSHARE, INC.
Irvine, California 92606
By: Glenn Brown
Title: Chief Financial Officer
-4-
<PAGE> 5
EXHIBIT "A"
COPYRIGHTS
REG. NO. REG. DATE COPYRIGHT
-------- --------- ---------
-5-
<PAGE> 6
EXHIBIT "B"
PATENTS
DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS
- ---------- ------- --------- ----------- ------
-6-
<PAGE> 7
EXHIBIT "C"
TRADEMARKS
MARK COUNTRY SERIAL NO. STATUS
- ---- ------- ---------- ------
-7-
<PAGE> 8
STATE OF CALIFORNIA )
) ss.
COUNTY OF ________________ )
On _____________________, 1998, before me, __________________________
_________________________________________, Notary Public, personally appeared
_______________________________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
Witness my hand and official seal.
-------------------------------
(Seal)
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,638
<SECURITIES> 0
<RECEIVABLES> 3,436
<ALLOWANCES> (272)
<INVENTORY> 65
<CURRENT-ASSETS> 5,219
<PP&E> 6,145
<DEPRECIATION> (5,268)
<TOTAL-ASSETS> 6,980
<CURRENT-LIABILITIES> 4,377
<BONDS> 0
0
0
<COMMON> 50,125
<OTHER-SE> (47,522)
<TOTAL-LIABILITY-AND-EQUITY> 6,980
<SALES> 3,982
<TOTAL-REVENUES> 3,982
<CGS> 2,130
<TOTAL-COSTS> 3,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> (1,086)
<INCOME-TAX> 20
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,106)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
