<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 30 June 1996
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 0-26376
ON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3162846
(State of incorporation) (IRS Employer Identification Number)
One Cambridge Center
Cambridge Massachusetts 02142
(617) 374-1400
(Address and telephone of principal executive offices)
___________
Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--------
11,000,985 shares of the registrant's Common stock, $0.01 par value, were
outstanding as of July 31, 1996.
THIS DOCUMENT CONTAINS ______ PAGES.
THE EXHIBIT INDEX IS ON PAGE 20.
1
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ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1996
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Item Number Page
- - ------------- --------
</TABLE>
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Condensed Consolidated Financial Statements
<S> <C>
Balance sheets:
June 30, 1996 and December 31, 1995 3
Statements of operations:
Three and six months ended June 30, 1996 and 1995 4
Statements of cash flows:
Six months ended June 30, 1996 and 1995 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
2
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ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
<S> <C><C> <C><C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25,460 $ 33,338
Accounts receivable, net of allowance
for doubtful accounts and sales
returns of $1,055 and $605,
respectively 7,749 6,377
Inventories, net 3,367 2,834
Prepaid expenses and other current assets 1,874 1,374
---------- ---------------
Total current assets 38,450 43,923
---------- ---------------
Property and equipment, at cost:
Computers and equipment 5,104 2,173
Equipment acquired under capital leases 3,895 3,804
Furniture and fixtures 223 133
---------- ---------------
Less - Accumulated depreciation 3,305 2,069
---------- ---------------
5,917 4,041
---------- ---------------
Direct marketing costs 2,164 1,554
Other assets and deposits 98 127
Purchased intangibles, net of $1,398
and $993 of accumulated
amortization, respectively 2,245 528
---------- ---------------
$ 48,874 $ 50,173
========== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease
obligations $ 1,139 $ 1,143
Accounts payable 4,631 3,392
Accrued expenses 1,931 2,265
Reserve for distributor inventories 600 934
Deferred revenue 737 627
---------- ---------------
Total current liabilities 9,038 8,361
---------- ---------------
Capital lease obligations, net of
current portion 1,015 1,506
---------- ---------------
Stockholders' Equity:
Common stock, $.01 par value -
Authorized - 20,000,000 shares Issued
and outstanding - 10,993,400 shares
and 10,180,024 shares, respectively 110 102
Additional paid in capital 55,234 45,051
Accumulated deficit (16,169) (4,493)
Accumulated deficit of S corporation (354) (354)
---------- ---------------
Total stockholders' equity 38,821 40,306
---------- ---------------
$ 48,874 $ 50,173
========== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenue:
- - ------
<S> <C> <C> <C> <C>
Net product revenue $ 13,405 $ 10,359 $ 24,372 $ 18,996
Other revenue 421 166 763 340
------------ ----------- ------------ -------------
Total revenue 13,826 10,525 25,135 19,336
------------ ----------- ------------ -------------
Operating expenses:
- - -----------------
Cost of product revenue 2,520 1,975 5,290 3,694
Sales and marketing 6,577 5,044 12,048 9,309
Research and development 2,317 1,706 4,283 3,306
General and administrative 1,142 731 2,089 1,475
Charge for purchased research
and development --- --- 13,285 ---
------------ ----------- ------------ -------------
Income (loss) from operations 1,270 1,069 (11,860) 1,552
------------ ----------- ------------ -------------
Interest income (expense), net 282 (26) 624 (52)
------------ ----------- ------------ -------------
Income (loss) before provision
for income taxes 1,552 1,043 (11,236) 1,500
------------ ----------- ------------ -------------
Provision for income taxes (112) (320) (439) (460)
------------ ----------- ------------ -------------
Net income (loss) income $ 1,440 $ 723 $ (11,675) $ 1,040
============ =========== ============ =============
Net income (loss) per share $ .13 $ .09 $ (1.08) $ .13
============ =========== ============ =============
Shares used in per share calculation 11,284,761 8,122,280 10,823,913 8,123,428
============ =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
MARCH 31,
1996 1995
-------- ------
<S> <C> <C>
Cash Flows from Operating Activities
Net (Loss) Income $ (11,675) $ 1,040
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities
Charge for purchased research and
development 13,285 ---
Depreciation and amortization 1,641 753
Increase in direct marketing costs (609) (391)
Changes in assets and liabilities:
Accounts receivable (1,324) (239)
Inventories (532) (920)
Prepaid expenses and other current
assets (500) (900)
Accounts payable 839 418
Accrued expenses (336) 947
Reserve for distributor inventories (334) (285)
Deferred revenue (7) 55
--------- -------
Net cash provided by operating
activities 448 478
--------- -------
Cash Flows From Investing Activities
Escrow receivable --- 625
Change in other assets and deposits 30 ---
Purchase of property and equipment, net (2,898) (234)
Purchase of neTrend Corporation (2,260) ---
Purchase of Leprechaun Software
International, Ltd, net of cash
acquired (786) ---
Purchase of Technocom plc (1,963) ---
--------- -------
Net cash (used in) provided by
investing activities (7,877) 391
--------- -------
Cash Flows From Financing Activities
Exercise of stock options 104 13
Stock purchase through ESPP 33 ---
Principal repayments on obligation
under capital lease (586) (347)
--------- -------
Net cash used in financing
activities (449) (334)
--------- -------
Net (decrease) increase in cash and
cash equivalents (7,878) 535
Cash and cash equivalents, beginning of
period 33,338 2,798
--------- -------
Cash and cash equivalents, end of period $ 25,460 $ 3,333
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $ 136 $ 119
Income taxes $ 1,151 $ 159
========= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-Q, June 30, 1996
(dollars in thousands, except per share amount)
(unaudited)
1. Interim Financial Statements
----------------------------
The accompanying consolidated financial statements have been presented
by ON Technology Corporation (together with its consolidated subsidiaries, the
"Company") without audit (except for the balance sheet information as of
December 31, 1995) in accordance with generally accepted accounting principles
for interim financial statements and with the instructions to Form-10Q and
Regulation S-X pertaining to interim financial statements. Accordingly, these
interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of June 30, 1996 and June 30, 1995, and results of operations for the three and
six months ended June 30, 1996 and June 30, 1995. The results for the interim
periods presented are not necessarily indicative of results to be expected for
any future period. The financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the Company's
Form 10-K.
2. Net Income (Loss) Per Common and Common Equivalent Share
---------------------------------------------------------
Net income (loss) per common and common equivalent share is computed
using the weighted average number of common and common equivalent shares
outstanding during each period in accordance with the treasury stock method.
The weighted average number of common shares assumes that all series of
redeemable convertible preferred stock previously issued and outstanding had
been converted to common stock as of the original issuance date.
3. Direct Marketing Costs
----------------------
The Company sells its products through various channels, including
free trial direct marketing. The Company incurs substantial costs in advance of
a free trial campaign, including the rental of mailing lists, postage and
printing. In 1994, the Company began capitalizing such costs in accordance with
the American Institute of Certified Public Accountants' (AICPA) Statement of
Position 93-7, Reporting on Advertising Costs. The Company amortizes such costs
over a three month period, which approximates the period of expected revenues.
The Company has recorded approximately $2,164 and $1,554 of capitalized direct
marketing costs in the accompanying condensed consolidated balance sheets at
June 30, 1996 and December 31, 1995, respectively.
4. Subsequent Events
-----------------
In connection with a strategic reorganization and restructuring, ON
expects to record a one-time, pre-tax restructuring and related inventory charge
totaling $6.5 million to $7.5 million in the third quarter ending September 30,
1996. The restructuring charge includes facility consolidations and severance
costs related to the reduction of approximately 100 people from the work force.
6
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition and Results of
Operations
FORM 10-Q, June 30, 1996
(unaudited)
OVERVIEW
The Company develops, markets and supports communication and network
management software, including client/server tools for group scheduling, e-mail,
software metering, server auditing, anti-virus and firewall technology.
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain forward-looking
statements. In particular, statements contained in this Form 10-Q that are not
historical statements (including, but not limited to, statements concerning
estimates of future revenues, operating expense levels and such operating
expense levels relative to the Company's total revenues) constitute forward-
looking statements under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as percentages of the Company's total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net product revenue 97.0% 98.4% 97.0% 98.2%
Other revenue 3.0% 1.6% 3.0% 1.8%
----------------------------------------
Total revenue 100% 100.0% 100% 100.0%
----------------------------------------
Operating expenses:
Cost of product revenue 18.2% 18.8% 21.0% 19.1%
Sales and marketing 47.6% 47.9% 47.9% 48.1%
Research and development 16.8% 16.2% 17.0% 17.1%
General and administrative 8.3% 6.9% 8.3% 7.6%
Charge for purchased R&D 0.0% 0.0% 52.9% 0.0%
----------------------------------------
Income (loss) from operations 9.1% 10.2% (47.1%) 8.1%
----------------------------------------
Interest income (expense), net 2.1% (.3%) 2.5% (.3%)
----------------------------------------
Net income (loss) before provision for
income taxes 11.2% 9.9% (44.6%) 7.8%
----------------------------------------
Provision for income taxes (.8%) (3.0%) (1.7%) (2.4%)
----------------------------------------
Net income (loss) 10.4% 6.9% (46.3%) 5.4%
========================================
</TABLE>
PRODUCT REVENUE. The Company's net product revenue is derived
primarily from licensing of software products. Net product revenue also
includes revenue from catalog sales of third party products and catalog
advertising space. For the three months ended June 30, net product revenue
increased $3.0 million (29.4%) from 1995 to 1996. For the six months ended June
30, net product revenue increased $5.4 million (28.3%) from 1995 to 1996. Both
increases were primarily the result of the licensing of communications and
network management software to new customers and to customers upgrading existing
licenses.
OTHER REVENUE. The Company's other revenue consists of rentals of
portions of the Company's customer lists, royalties received in connection with
licensing ON's software to third parties and maintenance revenue. For the three
months ended June 30, other revenue increased $.3 million (153.6%) from 1995 to
1996. For the six months ended June 30, other revenue increased $.4 million
(124.4%) from 1995 to 1996. This increase was primarily due to an increase in
revenue generated from maintenance agreements.
COST OF PRODUCT REVENUE. Cost of product revenue primarily consists
of expenses associated with product documentation, production and fulfillment
costs and royalty fees associated with internally developed products as well as
7
<PAGE>
products that are licensed from third party developers. In addition, cost of
product revenue includes the cost of third party products resold through the
Company's catalog, the cost of producing the catalog and amortization of
purchased intangibles. For the three months ended June 30, cost of product
revenue increased $.5 million (27.6%) from 1995 to 1996. For the six months
ended June 30, cost of product revenue increased $1.6 million (43.2%) from 1995
to 1996. This increase was primarily due to a $.6 million inventory write down
relating to acquisitions and an increase in product sales from 1995 to 1996. The
product sales related increase was consistent as a percentage of total revenue
from 1995 to 1996.
SALES AND MARKETING EXPENSE. Sales and marketing expense primarily
consists of compensation and benefits paid to sales and marketing personnel and
the costs of direct mail and telemarketing campaigns including the costs of
product trials requested by potential customers. Sales and marketing expense
also includes the costs of administering the catalog operation, the costs of
public relations, trade shows and conferences, and the telephone and information
technology costs associated with sales activities. For the three months ended
June 30, sales and marketing expenses increased $1.5 million (30.4%) from 1995
to 1996. For the six months ended June 30, sales and marketing expenses
increased $2.7 million (29.4%) from 1995 to 1996. These increases, however,
were approximately the same as a percent of total revenue from 1995 to 1996. The
increase for both periods were primarily the result of additional sales
personnel required to support the growth in the customer base, the costs
associated with our marketing efforts of existing products, the beginning of ON
Technology UK Ltd's marketing programs in Europe, and the launch of our new
firewall product. The Company anticipates that sales and marketing expense will
continue to increase in absolute dollars as the Company continues to expand
direct marketing efforts, but that sales and marketing expense will remain
consistent or decrease as a percentage of total revenue.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
includes costs associated with the development of new products, the enhancement
of existing products, and the provision of technical support. For the three
months ended June 30, research and development expense increased by $.6 million
(35.8%) from 1995 to 1996. For the six months ended June 30, research and
development expense increased by $1.0 million (29.6%) from 1995 to 1996. The
increase in absolute dollars was primarily related to the increase in the size
of the product portfolio, the associated costs of product development,
enhancements and maintenance, and the additional costs associated with our
recent acquisition of neTrend, Inc. and Leprechaun Software International, Inc.
The Company plans to continue to make significant investments in research and
development.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
includes executive compensation, executive support costs, accounting operations,
planning, and business development operations. For the three months ended June
30, general and administrative expense increased $.4 million (56.2%) from 1995
to 1996. For the six months ended June 30, general and administrative expense
increased $.6 million (41.6%) from 1995 to 1996. The increase in absolute
dollars reflects personnel growth and associated costs in general support areas
including costs associated with our recent acquisition of the LAN software
business from Technocom plc, resulting in a newly formed ON Technology UK Ltd,
and the related expenses of administering that office. This increase is offset
by greater efficiency in core administrative operations.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of neTrend Corporation, Leprechaun Software International, Ltd. and
the LAN Software business from Technocom plc during the three months ended March
31, 1996 and for the six months ended June 30, the Company allocated an
aggregate of $13.3 million of the respective purchase prices to incomplete
research and development projects. Accordingly, these costs were expensed as of
the acquisition dates. This allocation represents the estimated fair value
related to the incomplete projects as determined by an independent appraisal.
The development of these projects had not yet reached technological feasibility
and the technology had no alternative future use. The technology acquired in
these acquisitions has required, and will require, substantial additional
development by the Company.
INTEREST INCOME (EXPENSE). Interest income (expense) consists primarily of
interest expense associated with equipment leases and interest income earned on
cash and cash equivalents. For the three months ended June 30, interest income
increased $.3 million from 1995 to 1996. For the six months ended June 30,
interest income increased $.7 million from 1995 to 1996. Both increases were the
result of interest earned from proceeds received from the initial public
offering of common stock in August of 1995.
INCOME TAXES. The tax provision for the three months and six months ended
June 30, 1996 and 1995, respectively, was calculated based upon the Company's
expected 1996 and 1995 effective tax rates of 10.7% and 30.6%, respectively,
giving benefit to available net operating loss carryforwards and research and
development credits.
8
<PAGE>
In connection with a strategic reorganization and restructuring, ON expects to
record a one-time, pre-tax restructuring and related inventory charge totaling
$6.5 million to $7.5 million in the third quarter ending September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash flow
from operations and public and private placements of capital stock. At June 30,
1995 and June 30, 1996, the Company had available cash and cash equivalents of
$3.3 million and $25.5 million, respectively. The Company has an unused and
available line of credit of $10.0 million with a commercial bank. The current
line of credit agreement is on substantially the same terms and conditions as a
line of credit agreement entered into by the Company with the same bank in 1994
except that the principal amount available under the line of credit has been
increased from $5.0 million to $10.0 million. The Company can borrow under this
line of credit up to the greater of $10.0 million or 80% of eligible accounts
receivable, as defined in the line of credit agreement. Advances pursuant to
the line of credit are secured by liens granted on the Company's accounts
receivable. At June 30, 1996, the Company did not have an outstanding balance
under the line of credit agreement.
Net cash provided by operating activities for the six months ended June 30, 1995
and June 30, 1996 was $.4 million for each of the six months. For the six
months ended June 30, 1995, net cash provided by operating activities consisted
primarily of net income of $1 million, a $.8 million increase in depreciation
and amortization, and a $.9 million increase in accrued expenses. This was
partially offset by a decrease in inventories of $.9 million and decrease in
prepaid expenses of $.9 million. For the six months ended June 30, 1996, net
cash provided by operating activities consisted primarily of a $13.3 million
charge for purchased research and development, a $1.6 million increase in
depreciation and amortization, and an $.8 million increase in accounts payable,
partially off-set by a net loss of $(11.7) million.
Net cash provided by (used in) investing activities for the six months ended
June 30, 1995 and June 30, 1996 was $.4 million and $(7.9) million,
respectively. For the six months ended June 30, 1995, net cash used in
investing activities consisted of escrow receivable of $.6 million, partially
offset by increase in purchase of property and equipment of $.2 million. For
the six months ended June 30, 1996, net cash used in investing activities
consisted of acquisition related direct costs and the cash portion of the
purchase price associated with the acquisitions of neTrend Corporation,
Leprechaun Software International, Ltd, and Technocom plc of $2.2 million, $.8
million and $2.0 million, respectively. In addition, there were property and
equipment purchases of $2.9 million.
Net cash used in financing activities for the six months ended June 30, 1995 and
June 30, 1996 was $.3 million and $.4 million, respectively. For the six months
ended June 30, 1995, net cash from financing activities consisted primarily of
principal repayments on obligations under capital leases of $.3 million. For
the six months ended June 30, 1996, net cash provided by financing activities
consisted primarily of principal repayments on obligations under capital leases
of $.6 million, offset by exercise of stock options of $.1 million.
The Company believes that its existing cash balances, funds generated from
operations, and available borrowings under its line of credit will be sufficient
to finance the Company's operations for the next 12 months. In the event the
Company acquires one or more businesses or products, the Company's capital
requirements could increase substantially, and there can be no assurance that
additional capital will be available on terms acceptable to the Company, if at
all.
9
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The risk factors discussed below, among other factors (including the accuracy of
the Company's internal estimates of revenue and operating expense levels), may
cause the Company's actual results to differ materially from the results stated
in the forward-looking statements contained in this Form 10-Q. The following
discussion of the Company's risk factors should be read in conjunction with the
Company's financial statements and related notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's licensing activity and results of operations can fluctuate
significantly on a quarterly basis. Causes of such fluctuations may include,
among other factors the volume and timing of new and repeat orders, the
introduction or announcement of new products or product enhancements by ON or
third parties, failure to ship trials, changes in response rates to the
Company's mailings and telemarketing programs, interruption in the Company's
overnight delivery, telephone or internal networks and databases, work
stoppages, changes in product prices, changes in operating expenses, changes in
product mix, increase in international sales as a percentage of total revenue,
seasonality, trends in the computer industry, unavailability of product,
potential software viruses and perceived threats thereof, customer order
deferrals, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events. While to
date, the Company has not experienced any significant failure to ship trials,
work stoppages or unavailability of products, there can be no assurance any of
such events will not occur in the future. The occurrence of any such event
could have a material adverse effect on the Company's business, financial
condition or results of operations. Because of the nature of its distribution
methods, the Company has virtually no backlog and generally cannot predict when
users will license products. Historically, repeat orders have accounted for a
significant portion of the Company's total revenue; however, there can be no
assurance that the Company will be able to sustain current repeat order rates in
the future. Furthermore, since the Company's cost of total revenue is
relatively low and its operating expenses are relatively fixed, any revenue
shortfall in a quarter will result in a substantially similar shortfall in net
income. In addition, significant quarterly fluctuations in licensing activity
will cause significant fluctuations in the Company's cash flows and the cash and
cash equivalents, accounts receivable and deferred revenue accounts on the
Company's balance sheet.
The Company's business has experienced and is expected to continue to
experience seasonality, due in part to customer buying patterns. In recent
years, the Company generally has had greater demand for its products in the
fourth quarter and has had weaker demand for its products during the first
quarter. These fluctuations are caused primarily by customer budgeting and
purchasing patterns. The Company believes this pattern will continue.
The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance.
10
<PAGE>
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The communications and network management software markets are
characterized by rapid technological developments, changes in customer
requirements, evolving industry standards and frequent new product
introductions. The Company's future success will depend, in part, upon its
ability to enhance its existing applications, develop and introduce new products
that take advantage of technological advances, and respond promptly to new
customer requirements and evolving industry standards. While the Company
believes that it currently offers a broad product line in the communications and
network management software markets, these markets are continuing to evolve and
customer requirements are continuing to change. In response to these changes
the Company believes that it will need to continue to expand its product
offerings. The Company has identified a number of enhancements to its existing
products offerings which it believes are important to its continued success in
the communications and network management software markets, including products
for Windows 95 and Windows NT and Internet-enabling products. There can be no
assurance that the Company will be successful in developing and marketing, on a
timely basis, enhancements to its existing products or new products, or that its
new products will adequately address the changing needs of the marketplace.
Failure by the Company in any of these areas could materially and adversely
affect the Company's business, financial condition or results of operations. In
addition, from time to time the Company or its competitors may announce new
products with capabilities or technologies that could have a potential to
replace or shorten the life cycles of the Company's existing products or render
such products obsolete. There can be no assurance that announcements by the
Company or its competitors of new products will not cause customers to defer
purchasing the Company's existing products. In addition, there can be no
assurance that future changes in DOS, Windows, NetWare or other popular
operating systems would not result in incompatibility with the Company's
products. The Company's failure to introduce new products on a timely basis
that are compatible with operating systems and environments preferred by desktop
computer users would have a material adverse effect on the Company's business,
financial condition and results of operations.
The e-mail marketplace has many competing and evolving standards. To be
successful, an e-mail product should be able to exchange messages with systems
using several of these standards. Because there are so many protocols, the
Company directs significant resources to some standards and invests little or
none in other protocols. There can be no assurance that the Company will make
commercially successful decisions in the allocation of its resources to support
particular standards, or that the Company will be able to keep pace with the
rapid evolution of these standards. Although the Company is not aware of any
other standards that are currently being proposed by industry groups, the
Company believes that such standards will continue to be promulgated as the
communications and network management software markets develop.
COMPETITIVE RISKS
The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future. The Company believes
that the principal competitive factors affecting the market for its products
include performance, functionality, ease of use, ease of installation, quality,
customer support, breadth or product line, speed of product delivery, frequency
of upgrades and updates, brand name recognition, company reputation and price.
Certain of the criteria upon which the performance and quality of the Company's
communications and network management software compete include speed of
response, ease of use, ease of installation, interoperability with other
messaging systems and simplicity of administration. The Company believes that
it generally competes favorably with respect to each of these factors; however,
there can be no assurance that the Company will be able to continue to compete
successfully against current and future competitors. Certain of the Company's
competitors have been in the market longer than the Company, and other
competitors are larger and may have greater name recognition that the Company.
As is the case in many segments of the software industry, the Company may
encounter increasing price competition in the future. This could reduce average
selling prices and, therefore, profit margins. Competitive pressures could
result not only in sustained price reductions but also in a decline in sales
volume, which could adversely affect the Company's business, financial condition
or results of operations. There can be no assurance that the Company will
continue to compete effectively against existing and potential competitors in
the communications and network management software markets, many of whom have
substantially greater financial, technical, marketing and support resources and
name recognition than the Company. In addition, there can be no assurance that
software vendors who currently use traditional distribution methods will not be
in the future decide to compete more directly with the Company by utilizing free
trial marketing. See "--Risks Associated with Free Trial Marketing."
11
<PAGE>
Both the communications software market and the network management software
market are highly fragmented, with products offered by many vendors. In the e-
mail market, the Company competes with offerings from software, shareware and
freeware developers. Shareware is software that is made available
electronically on bulletin boards systems. Shareware users are encouraged to
evaluate the software for a short period of time and then either cease using it
or pay a license fee. In the group scheduling market, the Company also competes
with personal information manager products ("PIMs") that have been enhanced to
include some group scheduling features. Certain competitors have in the past
bundled communications and network management software with their operating
system products or software application suite offerings and have publicly
announced, or the Company believes are likely to provide, such bundles with
future offerings. There can be no assurance that the Company can continue to
compete effectively against communications software which is included free with
the operating system, as these bundled products are improved in the future. In
addition, the trend toward enterprise-wide communications software solutions may
result in a consolidation of the communications software market around a smaller
number of vendors who are able to provide all of the necessary software and
support capabilities.
Historically, the Company's international revenue has been generated
primarily through independent distributors in Europe, Australia, Israel, South
Africa and South America, certain of which are bound by contracts with the
Company but which generally do not represent the Company exclusively. The
competitive environment for communications software tools internationally is
similar to that in North America. The Company has only recently begun to
compete in Asian markets, which have significantly lagged behind North America
and Europe in their adoption of LAN technology. There can be no assurance that
the Company will be able to continue to compete successfully in international
markets.
The widespread inclusion of the functionality of the Company's products as
standard features of operating systems software could render the Company's
products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of the Company's products. If the Company
were unable to develop new communications and network management software to
further enhance operating systems and to replace successfully any obsolete
products, the Company's business, financial condition and results of operations
would be materially and adversely affected.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT
The Company has in the past experienced delays in software development, and
there can be no assurance that it will not experience further delays in
connection with its current or future product development activities. The
Company puts all of its products through alpha and beta test cycles and makes
significant efforts to debug all products before commercial release. The
Company makes well-marked alpha and beta versions of its software available for
evaluation and testing and solicits and responds to input from evaluators.
However, there can be no assurance that the Company's products will not contain
undetected errors or version compatibility issues, particularly when first
introduced or when new versions are released, resulting in loss of or delay in
market acceptance. Delays and difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, financial condition or results of operations.
In addition to developing new products, the Company's internal development
staff is focused on developing upgrades and updates to existing products and
modifying, enhancing and completing any acquired products and incomplete
projects. Future enhancements may, among other things, include additional
functionality, respond to user problems or address issues of compatibility with
changing operating systems and environments. The Company believes that the
ability to provide these enhancements to users frequently and at a low cost is
key to its success. Failure to release such enhancements on a timely basis
could have a material adverse effect on the Company's business, financial
condition or results of operation. There can be no assurance that the Company
will be successful in these efforts.
The Company licenses a number of products from third parties, including
SofTrack and AuditTrack. These licenses expire at various times commencing
December and September of 1996, respectively. If the Company believes that a
licensed product continues to be valuable after the expiration of the initial
license term, it will seek to extend the term of the license. There can be no
assurance that the Company will be able to extend the term of expiring licenses,
or that the economic arrangements for such extensions would be comparable to the
arrangements in effect during the initial license term.
12
<PAGE>
RISKS OF INCLUSION OF COMMUNICATIONS SOFTWARE AND NETWORK MANAGEMENT SOFTWARE IN
SYSTEM SOFTWARE AND APPLICATION SUITES
In the future, vendors of operating system software and group of
applications sold for a single price (generally referred to as application
suites) may continue to enhance their products to include certain functions that
are currently provided most often by communications and network management
software or may bundle these products in their application suites at no
additional charge. The widespread inclusion of the functions provided by the
Company's products as standard features of operating system software could,
particularly if the quality of such functions were comparable to that of the
Company's products, render the Company's products obsolete and unmarketable.
Furthermore, even if the communications and network management software
functions provided as standard features by operating systems are more limited
than that of the Company's products, there is no assurance that a significant
number of customers would not elect to accept such functions in lieu of
purchasing additional software. If the Company were unable to develop new
communications software and network management software products to further
enhance operating systems and to replace successfully any obsolete products, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
DEPENDENCE ON EMERGENCE OF NETWORK MANAGEMENT SOFTWARE
The market for the Company's network management software is new and
evolving, and its growth depends upon the broader market acceptance of network
management software. In addition, there are a number of potential approaches to
the market, including incorporating network management software into network
operating systems. Therefore, even if network management software products gain
broader market acceptance, there can be no assurance that the Company's products
will be chosen by organizations which acquire network management software.
Moreover, a change in the licensing policies of Microsoft or other software
vendors which changes the basis on which concurrent users are measured or
priced could adversely effect the Company's network management software
products. Furthermore, to the extent that the network management software
market does develop, the Company expects that competition will increase. See "-
- - - Competitive Risks," and "-- Risks of Inclusion of Communications Software
and Network Management Software in System Software and Application Suites."
RISKS ASSOCIATED WITH FREE TRIAL MARKETING
The Company provides its customers with 30-day free trials of all of the
Company's principal products ("Free Trial Marketing"). The trials are full
featured versions of the product that are internally designed to cease operation
in 30 days. The Company uses Free Trial Marketing as its primary sales channel.
The Company depends on direct mail, trade shows and telemarketing to find
prospects and install trials. This model represents a significant departure
from marketing strategies relying on a direct sales force, exclusive distributor
relationships and magazine space advertising. While to date this marketing
strategy has successfully resulted in the licensing of the Company's products by
corporate, government and institutional users, given the relatively unproven
nature of this form of marketing, there can be no assurance that this strategy
will continue to be effective in the future for either current or new products.
The failure of this strategy to continue to effectively generate license revenue
would have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company has experienced
significant growth over the past years, the Company's distribution strategy may
make its products less attractive to customers who prefer to purchase through
traditional channels and, as a result, may have the effect of limiting the
Company's potential market. In addition, as mailings are mailed repeatedly to
the same customers, customers' responsiveness to particular offers and products
declines. There can be no assurance that the Company will be able to sustain
current response rates to its mailings in the future. In addition, there can be
no assurance that the Company can continue to create sufficient attractive
offers and to introduce interesting products at a rate sufficient to support the
Company's growth plan or even current revenue. The Company's growth depends
both on its ability to select names from rented lists and to grow its "house
list." The availability and relevance of rentable names to the Company's
products are not certain. In addition, since the ability of the Company to grow
its house list is dependent on the supply of rentable names, house list growth
cannot be assured.
The Company depends on the distribution of Free Trial Marketing disks to
accomplish much of its marketing. If some of the Company's Free Trial Marketing
disks were to become infected with a computer virus, they would cause
difficulties for prospects and could damage the Company's reputation. The
Company does extensive testing for viruses. The Company's use of outside
13
<PAGE>
fulfillment contractors increases the risk that a virus could be shipped
undetected on disks bearing the Company's label. There can be no assurance that
ON would be able to collect adequate compensation from such fulfillment
contractors if such a virus infected disks bearing the Company's label.
The Company fulfills orders received directly from customers through a
third-party fulfillment contractor, which warehouses the Company's products and
ships them directly to ON's customers. The Company also maintains a private use
prospects list at a bonded third-party database firm containing over 4,000,000
unduplicated names. In the event that either the customer fulfillment
contractor or the private use database firm experience a substantial business
interruption, whether through business failure or interruption or some natural
calamity, or the Company's relationship with either of such parties is
terminated for any reason, the Company's ability to continue to mail free trial
offers to prospective customers and to fulfill orders placed by customers would
be adversely affected.
In both the domestic and international markets, increases in postal rates
(including modifications in the classification of mail) or telephone rates, or
changes in postage or telephone regulations which prohibit unsolicited direct
mail or unsolicited telephone calls, could significantly impact the economics of
the Company's Free Trial Marketing strategy. In addition, it is possible that
other software vendors could adopt all or parts of the Company's strategy and
compete more directly or effectively with the Company.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may in the future undertake additional acquisitions that could
present challenges to the Company's management, such as integrating and
incorporating new operations, product lines, technologies and personnel. If the
Company's management is unable to manage these challenges, the Company's
business, financial condition or results of operations could be materially
adversely affected. Any acquisition, depending on its size, could result in
significant dilution to the Company's stockholders. Furthermore, there can be no
assurance that any acquired products will gain acceptance in the Company's
markets.
RISKS OF INDIRECT CHANNELS OF DISTRIBUTION
The Company markets its products through distributors and resellers in
addition to its Free Trial Marketing strategy. These distributors and resellers
also sell other products that are complementary to, or compete with, those of
ON. There can be no assurance that these distributors and resellers will not
give greater priority to products of other suppliers. They have no long-term
obligation to purchase products from the Company. Since the Company's
agreements with its distributors provide for a right of return, revenue
recognized upon sales to distributors is subject to a reserve for returns.
Although management believes that the current reserve balance is adequate to
cover this exposure, there can be no assurance that any future period reserves
for returns will be adequate. In addition, the Company may be unaware of the
nature and scope of the representations made to customers by these distributors
and resellers. For example, they could make representations to customers about
the Company's current and future products which are inaccurate or incomplete.
This could result in the products not meeting the customers' expectations or
requirements. Although the Company's agreements with its distributors generally
provide the Company with recourse against unauthorized action taken by the
distributors, there can be no assurance that the Company could recover adequate
compensation to cover the damage caused by an inaccurate representation. See "-
- - -Risks Associated with International Revenue."
RISKS ASSOCIATED WITH PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies on a combination of contractual rights,
trademarks, trade secrets and copyrights to establish and protect its
proprietary rights in its software. The Company has not to date registered any
of its copyrights. The Company has obtained registrations in the United States
for the following trademarks: ON Technology, Notework, Meeting Maker, ON
Technology & Design, ON Location, Instant Update and Da Vinci Systems update.
The Company uses a printed "shrink-wrap" license for users of its products
distributed through traditional distribution channels in order to protect its
copyrights and trade secrets in those products. Since these shrink-wrap
licenses are not signed by the licensee, many authorities believe that they may
not be enforceable under many state laws and the laws of many foreign
jurisdictions. If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology. There can be no assurance that the Company's
proprietary technology will be protected by the use of the printed shrink-wrap
licenses. If the printed shrink-wrap licenses prove to be unenforceable, this
may have a material adverse effect on the Company's business, financial
condition and results of operations.
14
<PAGE>
In addition, the laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
Furthermore, the Company has obtained only four foreign registrations of its
Notework mark, two foreign registrations of its Meeting Maker mark, and one
foreign registration of its AuditTrack trademark, due to the significant costs
involved in obtaining foreign registrations. As a result, the Company may not
be able to prevent a third party from using its trademarks in many foreign
jurisdictions. If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology.
There can be no assurance that the steps taken by the Company to protect
its proprietary software technology will be adequate to deter misappropriation
of this technology. In addition, the Company does provide customer support to
unlicensed users during the Free Trial Marketing period. Lesser sensitivity by
corporate, government or institutional users to avoiding copyright infringement
could have a material adverse effect on the Company's business, financial
condition and results of operation. While the Company to date has not taken any
legal action to enforce its intellectual property rights against infringing
users, it believes, based upon current interpretations of law, that its use of
Free Trial Marketing and the widespread availability of its trials do not
significantly impact its ability to enforce its intellectual property rights
against infringing users, including corporate, institutional and government
entities. However, there is no assurance that a court or other authority may
not rule otherwise in the future. Such a ruling would have a material adverse
effect on the Company's business, financial condition and results of operations.
There has been substantial litigation in the software industry involving
intellectual property rights of technology companies, although, to date, the
Company has not been subject to any such litigation. Although the Company does
not believe that it is infringing the intellectual property rights of others,
there can be no assurance that such claims, if asserted, would not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, as the Company may acquire or license a
portion of the software included in its future products from third parties, its
exposure to infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of any
software being acquired. The Company generally obtains representations as to
the origin and ownership of such acquired or licensed software and generally
obtains indemnification to cover any breach of such representations. However,
there can be no assurance that such representations are accurate or that such
indemnification will provide adequate compensation for a breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets and other intellectual property rights owned by the
Company. The Company may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could be
costly and cause diversion of management's attention, either of which could have
a material adverse effect on the Company's business, financial condition or
results of operations. Adverse determinations in such litigation could result
in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any one of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. Furthermore, there can be no assurance that
any necessary licenses will be available on reasonable terms, or at all.
RISKS ASSOCIATED WITH INTERNATIONAL REVENUE
In 1995 and in the six months ended June 30, 1996, total revenue from
international licenses (license revenue from outside the United States)
represented approximately 14% and 21%, respectively, of the Company's total
revenue. The Company expects that total revenue from international licenses
will increase in future years; however, there can be no assurance that the
Company will be successful in penetrating international markets. Substantially
all of the Company's license fees are in United States dollars. Risks inherent
in the Company's international sales generally include the impact of fluctuating
exchange rates on demand for its products, longer payment cycles, greater
difficulty in protecting intellectual property, greater difficulty in accounts
receivable collection, unexpected changes in regulatory requirements,
seasonality due to the slowdown in European business activity during the third
quarter, and tariffs and other trade barriers. There can be no assurance that
these factors will not have a material adverse effect on the Company's future
international license revenue. Further, in countries with a high incidence of
software piracy, the Company may experience a higher rate of piracy of its
products.
In addition, a significant portion of the Company's international revenue
is generated through independent distributors and resellers. Since these
distributors and resellers are not employees of the Company and are not required
to offer the Company's products exclusively, there can be no assurance that they
15
<PAGE>
will continue to market the Company's products. Also, despite the Company's
substantial dependence in the international market upon the marketing, sales and
customer support of its distributors and resellers, the Company currently has
limited control over its distributors and resellers, and the Company may be
unaware of the nature and scope of the representations made to customers by
these agents. For example, independent agents could make representations to
customers about the Company's current and future products which are inaccurate
or incomplete, which could result in the products not meeting customers'
expectations or requirements.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
technical and management employees. While the Company's employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, the employees, with the exception of Messrs. Risley, Platzman,
Batson, Bogdan, Rizzi and O'Sullivan are generally not otherwise subject to
employment agreements or noncompetition covenants. The loss of the services of
any of the Company's key employees could have a material adverse effect on the
Company's business, financial condition or results of operation. The Company
does not maintain life insurance policies on key employees. The Company's
success also depends in large part upon its ability to attract and retain highly
skilled technical, managerial, sales and marketing personnel. Competition in the
software industry for such personnel is intense. There can be no assurance that
the Company will be successful in retaining its existing key personnel and in
attracting and retaining the personnel it requires.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and in the future
may be, subject to wide fluctuations in response to actual or anticipated
quarterly operating results of the Company, announcements of technological
innovations or new applications by the Company or its competitors and general
market conditions in the software industry, as well as other events or factors.
In addition, stock markets have experienced extreme price and volume trading
volatility in recent years. This volatility has had a substantial effect on the
market price of many technology companies and has often been unrelated to the
operating performance of those companies. This volatility may adversely effect
the market price of the Company's Common Stock.
RISKS ASSOCIATED WITH STRATEGIC REORGANIZATION
In August 1996, the Company implemented a reorganization and restructuring
of its operations. This action was designed to consolidate the three
acquisitions the Company made during the first quarter ended March 31, 1996, to
decrease the Company's emphasis on mature products, such as e-mail, and to
better focus the Company's resources on bringing new products to the rapidly
changing network management software market. There can be no assurance that
these objectives will be achieved. Furthermore, there can be no assurance that
the Company will not engage in further reorganizations or restructurings in the
future.
16
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1996
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On March 29, 1996, the Board of Directors caused to be distributed to
stockholders of record as of March 8, 1996, a Notice of Annual Meeting of
Stockholders, Proxy and Proxy Statement for Annual Meeting held on April 30,
1996. As of the record date, 10,232,607 shares of common stock (excluding
treasury shares) were outstanding and entitled to vote.
At the meeting, the stockholders acted upon the following proposals: (i)
election of one Class I director; (ii) approval and ratification of an
amendment to the Company's 1995 Employee Stock Purchase Plan (the "Plan") to
permit employees of the Company to participate in the Plan following three
months of employment with the Company; (iii) approval and ratification of an
amendment to the Company's 1992 Employee and Consultant Stock Option Plan (the
"Stock Option Plan") to increase the number of shares authorized for issuance
under the Stock Option Plan from 1,800,000 shares to 2,550,000 shares; and (iv)
ratification of the selection of Arthur Andersen LLP as the independent auditors
of the Company for the fiscal year ending December 31, 1996.
All of the above matters were approved by the stockholders. Vote "For"
represents affirmative votes and do not include abstentions or broker non-votes.
In cases where a signed proxy was submitted by the proxy were vote "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy.
The voting results were as follows:
<TABLE>
<CAPTION>
Broker
Matter For Against Withheld Abstain Non-Votes
----------------------------- --------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
I. Election of Class I Directors 6,940,867 0 10,836 N/A N/A
William C. Hulley
II. Approval of Amendments to 6,834,191 51,518 N/A 9,735 56,259
1995 Employee Stock Purchase
Plan
III. Approval of Amendment to 1992 6,167,115 134,921 N/A 9,235 640,432
Employee and Consultant Stock
Option Plan
IV. Ratification of Independent 6,948,764 780 N/A 2,109 50
Auditors
</TABLE>
17
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 20 are
filed or incorporated by reference as part of this Report.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated August 14, 1996
in relation to the announcement of a strategic Company reorganization
and restructuring.
18
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1996
SIGNATURES
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.
ON TECHNOLOGY CORPORATION
/s/ Christopher A. Risley
---------------------------------
Date: August 14, 1996 Name: Christopher A. Risley
Title: Chief Executive Officer
/s/ John M. Bogdan
---------------------------------
Date: August 14, 1996 Name: John M. Bogdan
Title: Vice President of Finance
and Chief Financial Officer
19
<PAGE>
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
FORM 10-Q, June 30, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
10.1 Letter Agreement between the Company
and Fleet National Bank with respect to
Revolving Loans dated April 1, 1996
10.2 Accounts Receivable Security Agreements
between the Company and Fleet National Bank
dated April 1, 1996
11.0 Computation of Net Income (Loss) per share
27.0 Financial Data Schedule
</TABLE>
20
<PAGE>
EXHIBIT 10.1
ON TECHNOLOGY CORPORATION
One Cambridge Center
Cambridge, MA 02142
April 1, 1995
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between ON
Technology Corporation, a Delaware corporation (the "Borrower") and Fleet
National Bank (successor by merger to Fleet Bank of Massachusetts, N.A.) (the
"Bank") with respect to Revolving Loans (hereinafter defined) which may be made
by the Bank to the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
-----------------
1.1. Reference to Documents. Reference is made to (i) that certain
----------------------
$10,000,000 face principal amount promissory note (the "Revolving Note") of even
date herewith made by the Borrower and payable to the order of the Bank, and
(ii) that certain Accounts Receivable Security Agreement of even date herewith
from the Borrower to the Bank (the "Security Agreement"). This letter agreement
amends and restates in its entirety, and replaces, that certain letter agreement
dated January 20, 1994 (the "1994 Agreement") between the Borrower and Fleet
Bank of Massachusetts, N.A.("Fleet Mass"), the Bank having succeeded to the
rights of Fleet Mass thereunder. Upon the execution and delivery of this letter
agreement, the Bank will have no further commitment to make loans nor any
further obligations under the 1994 Agreement.
1.2. The Borrowing; Revolving Note. Subject to the terms and conditions
-----------------------------
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, at the Principal Office
of the Bank on any Business Day prior to the first to occur of (i) the
Expiration Date, or (ii) the earlier termination of the within-described
revolving financing arrangements pursuant to (S)5.2 or (S)6.7; provided,
however, that the aggregate principal amount of Revolving Loans outstanding
shall at no time exceed the lesser of (1) the Maximum Revolving Amount
(hereinafter defined) or (2) the Borrowing Base (hereinafter defined). Within
such limits, and subject to the terms and conditions hereof, the Borrower may
obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans again
on one or more occasions. The
1
<PAGE>
Revolving Loans shall be evidenced by the Revolving Note and interest thereon
shall be payable at the times and at the rate provided for in the Revolving
Note. Overdue principal shall bear interest at a fluctuating rate per annum
which at all times shall be equal to the sum of (i) two (2%) percent per annum
plus (ii) the per annum rate otherwise payable under the Revolving Note (but in
no event in excess of the maximum rate from time to time permitted by then
applicable law), compounded monthly and payable on demand. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Revolving Note or on the books of the Bank, at or following the
time of making each Revolving Loan and of receiving any payment of principal,
an appropriate notation reflecting such transaction and the then aggregate
unpaid principal balance of the Revolving Loans. The amount so noted shall
constitute presumptive evidence as to the amount owed by the Borrower with
respect to principal of the Revolving Loans. Failure of the Bank to make any
such notation shall not, however, affect any obligation of the Borrower or any
right of the Bank hereunder or under the Revolving Note.
1.3. Repayment; Renewal. The Borrower shall repay in full all Revolving
------------------
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date, or (ii) an acceleration under (S)5.2(a) following an Event of Default. The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan. In addition, if at any time the Borrowing Base
is in an amount which is less than the then outstanding aggregate Revolving
Loans, the Borrower will forthwith prepay so much of the Revolving Loans as may
be required so that the aggregate outstanding Revolving Loans will not exceed
the Borrowing Base. The Bank may, at its sole discretion, renew the financing
arrangements described in this letter agreement by extending the Expiration Date
in a writing signed by the Bank and accepted by the Borrower. Neither the
inclusion in this letter agreement or elsewhere of covenants relating to periods
of time after the Expiration Date, nor any other provision hereof, nor any
action (except a written extension pursuant to the immediately preceding
sentence), non-action or course of dealing on the part of the Bank will be
deemed an extension of, or agreement on the part of the Bank to extend, the
Expiration Date.
1.4. Advances and Payments. The proceeds of all Revolving Loans shall be
---------------------
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes and not for the acquisition of the capital
stock of another Person nor for any acquisition of all or substantially all of
the assets of any other Person or all or substantially all of the assets
comprising any line of business of another Person.
The Bank may charge any general deposit account of the Borrower at the
Bank with the amount of all payments of interest, principal and other sums when
same are due, from time to time, under this letter agreement and/or the
Revolving Note and will thereafter notify the Borrower of the amount so charged.
The failure of the Bank so to charge any account or to give any such notice
shall not affect the obligation of the Borrower to pay interest, principal or
other sums as provided herein or in the Revolving Note.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note shall be stated to be due on a day which is not a Business Day,
such payment may be made on the
-2-
<PAGE>
next succeeding Business Day, and interest payable on each such date shall
include the amount thereof which shall accrue during the period of such
extension of time. All payments by the Borrower hereunder and/or in respect of
the Revolving Note shall be made net of any impositions or taxes and without
deduction, set-off or counterclaim, notwithstanding any claim which the Borrower
may now or at any time hereafter have against the Bank.
All payments of interest, principal and any other sum payable hereunder
and/or under the Revolving Note shall be made to the Bank, in immediately
available funds, at its Principal Office or at such other address as the Bank
may direct. All payments received by the Bank after 2:00 p.m. on any day
shall be deemed received as of the next succeeding Business Day. All monies
received by the Bank shall be applied first to fees, charges, costs and expenses
payable to the Bank under this letter agreement, the Revolving Note and/or any
of the other Loan Documents, next to interest then accrued on account of any
Revolving Loans and only thereafter to principal of the Revolving Loans. All
interest and fees payable hereunder and/or under the Revolving Note shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.
1.5. Conditions to Advance. Prior to the making of the initial Revolving
---------------------
Loan, the Borrower shall deliver to the Bank duly executed copies of this
letter agreement, the Security Agreement, the Revolving Note and the documents
and other items listed on the Closing Agenda delivered herewith by the Bank to
the Borrower, all of which, as well as all legal matters incident to the
transactions contemplated hereby, shall be satisfactory in form and substance to
the Bank and its counsel.
Without limiting the foregoing, any Revolving Loan (including the initial
Revolving Loan) is subject to the further conditions precedent that on the date
on which such Revolving Loan is made (and after giving effect thereto):
(a) Each of the representations and warranties of the Borrower made in
any of Subsections 2.1(a) (second sentence only), 2.1(c), 2.1(d), 2.1(k), 2.1(1)
and 2.1(m) of this letter agreement shall continue to be correct in all material
respects as of the date of such Revolving Loan.
(b) All covenants and agreements of the Borrower contained herein and/or
in any of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Revolving Loan.
(c) No event which constitutes, or which with notice or lapse of time or
both would constitute, an Event of Default shall have occurred and be
continuing.
(d) There shall be no action, suit or proceeding affecting the Borrower or
any Subsidiary of the Borrower before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, in
which an adverse decision would, in the reasonable opinion of the Bank, have a
material adverse effect on the assets, business, financial condition or
prospects of the Borrower or any such Subsidiary.
-3-
<PAGE>
Each request by the Borrower for any Revolving Loan, and each acceptance
by the Borrower of the proceeds of any Revolving Loan, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan and after giving effect thereto all of the conditions set forth in the
foregoing clauses (a)-(d) of this (S)1.5 will be satisfied. Each request for a
Revolving Loan will be accompanied by a borrowing base certificate on a form
satisfactory to the Bank, executed by the chief financial officer of the
Borrower, unless such a certificate shall have been previously furnished setting
forth the Borrowing Base as at a date not more than 30 days prior to the date of
the requested borrowing.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1. Representations and Warranties. In order to induce the Bank to
------------------------------
enter into this letter agreement and to make Revolving Loans hereunder, the
Borrower warrants and represents to the Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. The Borrower has full corporate power
to own its property and conduct its business as now conducted and as
contemplated to be conducted, to grant the security interests contemplated by
the Security Agreement and to enter into and perform this letter agreement and
the other Loan Documents. The Borrower is duly qualified to do business and in
good standing in Massachusetts. The Borrower is also duly qualified to do
business and in good standing in each other jurisdiction where such
qualification is required by the nature of the Borrower's business and where the
failure so to qualify would result in a material adverse effect upon the assets,
business, financial condition or prospects of the Borrower, all such
jurisdictions where the Borrower is so qualified being listed on item 2.1(a) of
the attached Disclosure Schedule. At the date hereof, the Borrower has no
Subsidiaries except as disclosed on item 2.1(a) of the attached Disclosure
Schedule. The Borrower is not a member of any partnership or joint venture.
(b) The Borrower owns 100% of the outstanding capital stock of each
Subsidiary.
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than filings
under the Uniform Commercial Code with the Secretary of State of The
Commonwealth of Massachusetts, the City Clerk of Cambridge, Massachusetts
and Middlesex (South) Registry of Deeds), registration, consent or approval
under, any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the
Borrower;
(ii) violate any provision of the charter or By-laws of the Borrower, or
result in a breach of or constitute a default or require any waiver or
consent under any material indenture or material loan or credit agreement or
any other material agreement, lease or
-4-
<PAGE>
instrument to which the Borrower is a party or by which the Borrower or any
of its properties may be bound or affected or require any other consent of
any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank),
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents have been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary of the Borrower before any court or governmental department
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could prevent the consummation of the transactions contemplated hereby or call
into question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any such Subsidiary.
(f) The Borrower is not in violation of any term of its charter or By-laws
as now in effect. Neither the Borrower nor any Subsidiary of the Borrower is in
material violation of any term of any mortgage, indenture or judgment, decree or
order, or any other instrument, contract or agreement to which it is a party or
by which any of its property is bound.
(g) The Borrower has filed all federal, foreign, state and local tax
returns, reports and estimates required to be filed by the Borrower. All such
filed returns, reports and estimates are, to the best knowledge of the Borrower,
proper and accurate and the Borrower has paid all taxes, assessments,
impositions, fees and other governmental charges required to be paid in respect
of the periods covered by such returns, reports or estimates. No deficiencies
for any tax, assessment or governmental charge have been asserted or assessed,
and the Borrower knows of no material tax liability or basis therefor.
(h) The Borrower (and each Subsidiary of the Borrower) is in compliance
with all requirements of law, federal, state and local, and all requirements of
all governmental bodies or agencies having jurisdiction over it, the conduct of
its business, the use of its properties and assets, and all premises occupied by
it, failure to comply with any of which laws and requirements could (singly or
in the aggregate with all other such failures) have a material adverse effect
upon the assets, business, financial condition or prospects of the Borrower and
its Subsidiaries, taken as a whole. Without limiting the foregoing, the Borrower
has all the franchises, licenses, leases, permits, certificates and
authorizations material to the conduct of its business and the use of its
properties and all premises occupied by it, as now conducted, owned and used and
as proposed to be conducted, owned and used.
-5-
<PAGE>
(i) The audited financial statements of the Borrower as at December 31,
1995, heretofore delivered to the Bank, fairly present the financial condition
of the Borrower as at the date thereof and for the period covered thereby. As of
December 31, 1995, the Borrower did not have any known liability, contingent or
otherwise, not disclosed in the aforesaid December 31, 1995 financial statements
or in any notes thereto that could materially affect the financial condition of
the Borrower. Except as otherwise disclosed in item 2.1(i) of the Disclosure
Schedule attached hereto, since December 31, 1995, there has been no material
adverse development in the business or condition of the Borrower and the
Borrower has not, directly or through any Subsidiary, entered into any
transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at One Cambridge Center, Cambridge, MA 02142 (the
"Premises"). All of the books and records of the Borrower relating to
Receivables are located at the Premises, although books and records of
Subsidiaries may be located elsewhere.
(k) The Borrower and each Subsidiary of the Borrower owns or has a valid
right to use the patents, licenses, copyrights, trademarks, trademark
applications, trademark rights, trade names or trade name rights and franchises
("Intellectual Property") now being used to conduct its business, other than any
items of such Intellectual Property as to which the Borrower's or such
Subsidiary's failure to own or have the valid right to use such items would not
(singly or in the aggregate with all other such failures on the Borrower's or
such Subsidiary's part) have a materially adverse effect on the business, assets
or condition, financial or otherwise of the Borrower or any such Subsidiary. The
conduct of the Borrower's and each Subsidiary's business as now operated does
not conflict with valid patents, licenses, copyrights, trademarks, trademark
rights and trade names, trade name rights or franchises of others in any manner
that would materially adversely affect the business or assets or condition,
financial or otherwise, of the Borrower or any such Subsidiary.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions relating to the business of
the Borrower or other ideas relating to the business of the Borrower susceptible
to legal protection developed or conceived by any such officer or key employee.
(m) The Borrower is not, to its knowledge, a party to any contract or
agreement which now has or, as far as can be foreseen by the Borrower at the
date hereof, may have a material adverse effect on the financial condition,
business, prospects or properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
------------------------------------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding:
-6-
<PAGE>
3.1. Legal Existence; Qualification; compliance. The Borrower will
------------------------------------------
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts. Further, the Borrower will qualify to do business and remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each
jurisdiction where the Borrower or such Subsidiary, as the case may be,
maintains any facility, office, warehouse or other location and in each other
jurisdiction in which the failure so to qualify would (singly or in the
aggregate with all other such failures )have a material adverse effect on the
financial condition, business or prospects of the Borrower or any such
Subsidiary. The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws and, in all material
respects, with all contractual requirements by which it or any of its properties
may be bound, except any such contractual requirements as to which the failure
so to comply would not (singly or in the aggregate with all other such failures)
have a material adverse effect on the assets, financial condition, business or
prospects of the Borrower or on any such Subsidiary. The Borrower will comply
with (and will cause each Subsidiary of the Borrower to comply with) all
applicable laws, rules and regulations (including, without limitation, ERISA and
those relating to environmental protection) other than (i) laws, rules or
regulations the validity or applicability of which the Borrower or such
Subsidiary shall be contesting in good faith by proceedings which serve as a
matter of law to stay the enforcement thereof and (ii) those laws, rules and
regulations the failure to comply with any of which could not (singly or in the
aggregate with all such other failures) have a material adverse effect on the
financial condition, business or prospects of the Borrower or any such
Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
----------------------------------
preserve (and cause each subsidiary of the Borrower to maintain and preserve)
all of its properties in good working order and condition, ordinary wear and
tear excepted, making all necessary repairs thereto and replacements thereof.
The Borrower will maintain all such insurance as may be required under the
Security Agreement and will also maintain, with financially sound and reputable
insurers, insurance with respect to its property and business against such
liabilities, casualties and contingencies and of such types and in such amounts
as shall be reasonably satisfactory to the Bank from time to time and in any
event all such insurance as may from time to time be customary for companies
conducting a business similar to that of the Borrower in similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge
----------------------------
(and will cause each subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, the Collateral,
franchises, income, unemployment, old age benefits, withholding, or sales or use
prior to the date on which penalties would attach thereto, and all lawful
claims (whether for any of the foregoing or otherwise) which, if unpaid, might
give rise to a lien upon any on any property of the Borrower or any such
Subsidiary, except any of the foregoing which is being contested in good faith
and appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and for which the Borrower has established and is
maintaining adequate reserves in
-7-
<PAGE>
accordance with generally accepted accounting principles. The Borrower will pay,
and will cause each of its Subsidiaries to pay, in a reasonably timely manner
(giving effect, as to trade debt, to the Borrower's usual business practices at
the date hereof as long as no lien arises and no assets of the Borrower are
jeopardized), all material lease obligations, all material trade debt, material
purchase money obligations, material equipment lease obligations and all of its
other material Indebtedness, except any of the foregoing which is being
contested in good faith and by appropriate proceedings which serve as a matter
of law to stay the enforcement thereof and for which the Borrower has
established and is maintaining adequate reserves in accordance with generally
accepted accounting principles. The Borrower will perform and fulfill all
covenants and agreements under any material leases of real estate, agreements
relating to material purchase money debt material equipment leases and other
material contracts, except any of the foregoing which is being contested in good
faith and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and for which the Borrower has established and is
maintaining adequate reserves in accordance with generally accepted accounting
principles. The Borrower will maintain in full force and effect, and Comply with
the terms and conditions of, all permits, permissions and licenses material to
its business.
3.4. Accounts. The Borrower will maintain its principal depository and
--------
operating accounts with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
-------------------
course, the business in which it is presently engaged, which consists of the
development and licensing of computer software. The Borrower will not, without
the prior written consent of the Bank, directly or indirectly enter into any
other lines of business, businesses or ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
----------------------
(i) Within 90 days after the end of each fiscal year of the Borrower, a
copy of the annual audit report for such fiscal year for the Borrower,
including therein consolidated and consolidating balance sheets of the
Borrower and Subsidiaries as at the end of such fiscal year and related
consolidated and consolidating statements of income, stockholders' equity
and cash flow for the fiscal year then ended. The annual consolidated
financial statements shall be certified by independent public accountants
selected by the Borrower and reasonably acceptable to the Bank, such
certification to be in such form as is generally recognized as
"unqualified".
(ii) within 45 days after the end of each fiscal quarter of the Borrower,
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries and related consolidated and consolidating statements of income
and stockholders' equity and cash flow, unaudited but prepared in accordance
with generally accepted accounting principles (except that such quarterly
statements need not contain footnotes) and certified as fairly stating the
Borrower's financial results and condition for the periods indicated in
accordance with generally accepted accounting principles (subject to normal
year-end audit adjustments) by the chief financial officer of the Borrower,
such balance sheets to be
-8-
<PAGE>
as at the end of such fiscal quarter and such statements of income and
stockholders' equity and cash flow to be for such fiscal quarter and for the
year to date.
(iii) At the time of delivery of each annual or quarterly statement of the
Borrower, a certificate executed by the chief financial officer of the
Borrower stating that he or she has reviewed this letter agreement and the
other Loan Documents and has no knowledge of any default by the Borrower in
the performance or observance of any of the provisions of this letter
agreement or of any of the other Loan Documents or, if he or she has such
knowledge, specifying each such default and the nature thereof. Each such
certificate shall also set forth the calculations necessary to evidence
compliance with (S)(S)3.7-3.1O, (S)4.3 and (S)4.5.
(iv) Monthly, within 15 days after the end of each month, (A) an aging
report in form satisfactory to the Bank covering all Receivables of the
Borrower outstanding as at the end of such month and (B) a certificate of
the chief financial officer of the Borrower setting forth the Borrowing Base
as at the end of such month, all in form reasonably satisfactory to the
Bank; provided, however, that the Borrower need not provide a borrowing base
certificate or aging report as at the end of any month when no Revolving
Loans are outstanding. Any subsequent borrowing will be conditioned on the
Bank's receipt of a current aging report and a borrowing base certificate
complying with the requirements of the last paragraph of (S)1.5.
(V) Prior to April 1 in each year ear, the Board-approved budget of income
and expenses for such year, in detail reasonably satisfactory to the Bank.
(vi) Promptly after receipt, a copy of all audits or reports submitted to
the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
letter of comments directed by such accountants to the management of the
Borrower.
(vii) As soon as possible and in any event within five days of the
occurrence of each Event of Default or any event which, with the giving of
notice or passage of time or both, could constitute an Event of Default, the
statement of the Borrower setting forth details of such Event of Default or
event and the action which the Borrower proposes to take with respect
thereto.
(viii) Promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party; provided
that the Borrower need not give any such notice with respect to any such
action, suit or proceeding which seeks only monetary damages and is in an
amount less than $50,000.
(ix) Promptly after the Borrower has knowledge thereof, written notice of
any development or circumstance which may reasonably be expected to have a
material
-9-
<PAGE>
adverse effect on the Borrower or its business, properties, assets,
Subsidiaries or condition, financial or otherwise.
(x) Promptly after the Borrower has knowledge that 50% or more of its
outstanding shares of capital stock have been acquired or are owned by any
other Person, written notice to the Bank of such fact.
(xi) Promptly upon request, such other information respecting the
financial condition, operations, Receivables or assets of the Borrower or
any subsidiary as the Bank may from time to time reasonably request.
3.7. Debt to Worth. The Borrower will maintain on a consolidated basis
-------------
as at the end of each fiscal quarter (commencing with its results as at March
31, 1996) a Leverage Ratio of not more than 1.0 to 1. As used herein, "Leverage
Ratio" means the ratio of (x) Senior Debt of the Borrower and/or any
Subsidiaries to (y) Capital Base of the Borrower and Subsidiaries.
3.8. Capital Base. The Borrower will maintain as at the end of each
------------
fiscal quarter (commencing with its results as at March 31, 1996) a Capital Base
which shall be not less than the CB Requirement in effect at such fiscal
quarter-end. As used herein, "CB Requirement" will at all times mean
$30,000,000, except that as at the end of any fiscal quarter during which an
Acquisition occurs (and not for any other fiscal quarter), the CB Requirement
will be deemed to be the result of (x) $30,000,000 less (y) the total of (i)
----
all One-Time Non-cash Charges incurred by the Borrower during said fiscal
quarter in respect of such Acquisition and (ii) all One-Time Cash Charges
incurred by the Borrower during said fiscal quarter in respect of such
Acquisition (provided that the aggregate of all One-Time Cash Charges incurred
by the Borrower from and after the ate hereof will not exceed $4,000,000 per
fiscal year).
3.9. Quick Ratio. The Borrower will maintain as at the end of each
-----------
fiscal quarter (commencing with its results as at March 31, 1996) a ratio of Net
Quick Assets to Current Liabilities, which ratio shall not be not less than 2.0
to 1.
3.10. Profitability. The Borrower will not incur a quarterly Adjusted
-------------
Net Loss in any fiscal quarter of its 1996 fiscal year (including the fiscal
quarter ended March 31, 1996) in excess of $2,500,000. The Borrower will not
incur a quarterly Adjusted Net Loss in any fiscal quarter of its 1997 fiscal
year or of any subsequent fiscal year in excess of $1,000,000. Further, and
without limiting the foregoing, the Borrower will not incur a quarterly Adjusted
Net Loss in any two consecutive fiscal quarters (commencing with the two
quarters ending June 30, 1996). Further, and without limiting the foregoing, the
Borrower will achieve annual Net Income of not less than $3,000,000 for its
fiscal year ending December 31, 1996 and will achieve annual Net Income of not
less than $5,000,000 for its fiscal rear ending December 31, 1997 and for each
fiscal year thereafter.
3.11. Books and Records. The Borrower will maintain (and cause each of
-----------------
its Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times fairly reflect all of its transactions in accordance
with generally accepted accounting
-10-
<PAGE>
principles consistently applied. The Borrower will, at any reasonable time and
from time to time upon reasonable notice and during normal business hours (and
at any time upon reasonable notice and during normal business hours following
the occurrence of an Event of Default), permit the Bank, and any agents or
representatives thereof, to examine and make copies of and take abstracts from
the records and books of account of, and visit the properties of the Borrower
and any of its Subsidiaries, and to discuss its affairs, finances and accounts
with its managers, officers or directors and independent accountants, all of
whom are hereby authorized and directed to cooperate with the Bank in carrying
out the intent of this (S)3.11. All financial statements of the Borrower
hereafter delivered pursuant to this letter agreement will fairly present the
financial condition of the Borrower as at the date thereof and for the periods
covered thereby in accordance with generally accepted accounting principles.
3.12. Minimum Balances. The Borrower will at all times maintain in its
----------------
deposit accounts at the Bank an aggregate of not less than $5,000,000 in
collected funds which are subject to no lien or pledge or to any rights on the
part of anyone other than the Borrower and the Bank.
IV. NEGATIVE COVENANTS
------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or
------------
suffer to exist any Indebtedness (nor allow any of its Subsidiaries to create,
incur, assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Revolving Note;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes, assessments
and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or the deferred purchase price of
property) incurred upon customary terms in the ordinary course of
business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
for use in the Borrower's business; provided that, at the time of
incurrence of any Indebtedness permitted under this clause (iv), and after
giving effect thereto, the Borrower shall be in compliance with each of
(S)(S)3.7, 3.8 and 3.9, with such compliance being determined as at the
date of incurrence of such purchase money Indebtedness even if not a
fiscal quarter-end;
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<PAGE>
(v) other Indebtedness existing at the date hereof, but only to the extent
set forth on item 4.1 of the attached Disclosure Schedule;
(vii) Indebtedness of any Person which hereafter becomes a Subsidiary of
the Borrower pursuant to any Permitted Acquisition and Indebtedness of the
Borrower resulting from the Borrower's assumption, pursuant to a Permitted
Acquisition, of the Indebtedness of any other Person which is acquired by
the Borrower pursuant to such Permitted Acquisition; provided that in each
case such Indebtedness shall have existed prior to such acquisition and
shall not have been incurred in connection therewith nor in contemplation
thereof ; and
(vii) Subordinated Debt; provided that the amount, interest rate, payment
schedule and other terms and conditions thereof shall have been approved by
the Bank, in its discretion, prior to the date of incurrence of such
Subordinated Debt.
4.2. Liens. The Borrower will not create, incur, assume or suffer to
-----
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens") upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall not at
the time be delinquent or thereafter can be paid without interest or
penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith and
by appropriate proceedings 'which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made in
accordance with generally accepted accounting principles;
(iii) pledges or deposits under workmen's compensation laws, unemployment
insurance, social security, retirement benefits or similar legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing purchase
money Indebtedness to the extent permitted by clause (iv) of (S)4.1;
provided that no such Lien will extend to any property of the Borrower or
any Subsidiary other than the specific items of equipment financed;
(vi) Liens securing purchase money financing of any Person which is
acquired by the Borrower pursuant to any Permitted Acquisition; provided
that (A) such purchase money financing shall have existed prior to such
acquisition and shall not have been
-12-
<PAGE>
incurred in contemplation thereof and (B) no such Lien will extend to any
property of the Borrower or any Subsidiary other than the specific items so
financed;
(vii) Liens encumbering only assets not located in the United States;
provided that the Bank is given prompt notice of any such Liens hereafter
arising or created; or
(viii) other Liens existing at the date hereof, but only to the extent and
with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
4.3. Guaranties. The Borrower will not, without the prior written
----------
consent of the Bank, assume, guarantee endorse or otherwise become directly or
continentally liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will, not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business, (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule, and (iii) other guaranties of capital leases of its Subsidiaries not
in excess of $3,000,000 in aggregate amount outstanding at any one time.
Further, the total of (x) the aggregate amount guaranteed at any time pursuant
to the guaranties permitted under clause (iii) of the immediately preceding
sentence plus (y) the aggregate amount of all loans and advances made by the
----
Borrower and/or its Subsidiaries to others and then outstanding will not exceed
$3,000,000.
4.4. Dividends. The Borrower will not make any distributions to its
---------
shareholders, pay any dividends (other than dividends payable solely in capital
stock of the Borrower) or redeem, purchase or otherwise acquire, directly or
indirectly, any of its capital stock, unless at the time of each such
distribute on, dividend payment, redemption, purchase or other acquisition, and
after giving effect thereto, there will not be nor will there result therefrom
any Default or Event of Default.
4.5. Loans and Advances. The Borrower will not make any loans or
------------------
advances (and will not permit any of its Subsidiaries to make any loans or
advances) to any Person, including, without limitation, the Borrower's
directors, officers and employees, except (i) advances to employees for
relocation expenses and (ii) advances to directors, officers or employees with
respect to expenses incurred by them in the ordinary course of their duties and
advances against salary, the aggregate outstanding amount of all of which loans
and advances under clause (i) and/or clause (ii) will not exceed at any one time
the Permitted Advance Amount. As used herein, the "Permitted Advance Amount" in
effect at any time is the result of: (x) $3,000,000 minus (y) the aggregate
-----
amount then guaranteed pursuant to clause (iii) of the first sentence of (S)4.3.
4.6. Investments. The Borrower will not, without the Bank's prior
-----------
written consent, invest in, hold or purchase any stock or securities of any
Person (nor will the Borrower permit any of its Subsidiaries to invest in,
purchase or hold any such stock or securities) except (i) readily marketable
direct obligations of, or obligations guarantied by, the United States of
America or any agency thereof, (ii) other investment grade debt securities,
(iii) mutual funds, the assets of which
-13-
<PAGE>
are primarily invested in items of the kind described in the foregoing clauses
(i) and (ii) of this (S)4.6, (iv) time deposits with or certificates of deposit
issued by the Bank and any other obligations of the Bank or the Bank's parent,
(v) deposits in any other bank organized in the United States having capital in
excess of $100,000,000, (vi) Permitted Acquisitions and (vii) non-material
investments obtained incidental to Permitted Acquisitions.
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the
--------------------------
prior written consent of the Bank, acquire any Subsidiary or make any other
acquisition of the stock of any Person or of all or substantially all of the
assets of any other Person, except pursuant to Permitted Acquisitions or
incidental to Permitted Acquisitions. The Borrower will not become a partner in
any partnership. The Borrower will not suffer or permit to exist any
circumstance in which the Tangible Net Worth of the Borrower alone (exclusive of
the Borrower's interest in any Subsidiary and exclusive of any loan or advance
by the Borrower to any Subsidiary) is at any time less than 75% of the
consolidated Tangible Net Worth of the Borrower and Subsidiaries. The total of
all One-Time Cash Charges incurred by the Borrower from and after the date
hereof in connection with Acquisitions will not exceed $4,000,000 per fiscal
year.
4.8. Merger. The Borrower will not, without the prior written consent of
------
the Bank, merge or consolidate with any Person (except pursuant to a Permitted
Acquisition where the Borrower is the survivor) or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9. Affiliate Transactions. The Borrower will not, without the prior
----------------------
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate or the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms'-length transaction with any Person not an
affiliate; provided that nothing in this (S)4.9 shall be deemed to prohibit the
payment of salary, bonuses or other similar payments to any officer or
director of the Borrower, nor to prevent the hiring of additional officers, in
each case at a salary level and bonus structure consistent with industry
practice, nor to prevent reasonable periodic increases in salary. For the
purposes hereof, "affiliate" means any Person which, directly or indirectly,
controls or is controlled by or is under common control with the Borrower; any
officer or director or former officer or director of the Borrower; any Person
owning of record or beneficially, directly or indirectly, 5% or more of any
class of capital stock of the Borrower or 5% or more of any class of capital
stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family or any of the foregoing. "Control means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.
4.10. Change of Address, etc. The Borrower will not change its name or
-----------------------
legal structure, nor will the Borrower move its chief executive office or
principal place of business from the address described in the first sentence of
(S)2.1(j) above, nor will the Borrower remove any books or records from such
address, without, in each instance, giving the Bank at least 30 days' prior
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<PAGE>
written notice and providing all such financing statements, certificates and
other documentation as the Bank may request in order to maintain the perfection
and priority of the security interests granted or intended to be granted
pursuant to the Security Agreement. The Borrower will not change its fiscal year
or methods of financial reporting unless, in each instance, prior written notice
of such change is given to the Bank and prior to such change the Borrower enters
into amendments to this letter agreement in form and substance satisfactory to
the Bank in order to preserve unimpaired the rights of the Bank and the
obligations of the Borrower hereunder.
4.11. Hazardous Waste. Except as provided below, the Borrower will not
---------------
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by
the Borrower or any Subsidiary of the Borrower, (ii) any potential or known
release or threat of release of any hazardous material or oil at or from any
site or vessel owned, occupied or operated a by the Borrower or any Subsidiary
of the Borrower, and (iii) any incurrence of any expense or loss by any
government or governmental authority in connection with the assessment,
containment or removal of any hazardous material or oil for which expense or
loss the Borrower or any Subsidiary of the Borrower may be liable.
Notwithstanding the foregoing, the Borrower and its Subsidiaries may use, store
and transport, and need not notify the Bank of the use, storage or
transportation of, (x) oil in reasonable quantities, as fuel for heating of
their respective facilities or for vehicles or machinery used in the ordinary
course of their respective businesses and (y) hazardous materials that are
solvents, cleaning agents or other materials used in the ordinary course of the
respective business operations of the Borrower and its Subsidiaries, in
reasonable quantities, as long as in any case the Borrower or the Subsidiary
concerned (as the case may be) has obtained and maintains in effect any
necessary governmental permits, licenses and approvals complies with all
requirements of applicable federal, state and local law relating to such use,
storage or transportation, follows the protective and safety procedures that a
prudent businessperson conducting a business the same as or similar to that of
the Borrower or such Subsidiary (as the case may be) would follow, and disposes
of such materials (not consumed in the ordinary course) only through licensed
providers of hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Revolving Loan shall be used
---------------
directly or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly
-----------------
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment or terms of
Subordinated Debt, or make any payment of any Subordinated Debt except to the
extent expressly permitted in the subordination agreement relating thereto.
-15-
<PAGE>
V. DEFAULT AND REMEDIES
--------------------
5.1. Events of Default. The occurrence of any one of the following
-----------------
events shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note on or before the date when due; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with the
execution and delivery of this letter agreement or any other instrument,
document, certificate or statement executed and delivered in connection with any
Revolving Loan shall at any time prove to have been incorrect in any material
respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of (S)(S)3.3, 3.6, 3.7, 3.8, 3.9, 3.10 or
3.12 or Article IV; or
(d) The Borrower shall default in the performance or observance of any
agreement or obligation under (S)3.1 and such failure shall continue uncured for
30 days after the Borrower shall have notice or knowledge thereof; or
(e) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or understanding now existing or hereafter entered into with or for
the benefit of the Bank (or any affiliate of the Bank); or
(g) Any default shall exist and remain unwaived or uncured beyond the
expiration of any applicable notice and/or grace period with respect to any
Indebtedness for borrowed money of the Borrower or any subsidiary of the
Borrower in excess of $100,000 in aggregate principal amount or with respect to
any instrument evidencing, guaranteeing, securing or otherwise relating to any
such Indebtedness, or any such Indebtedness in excess of $100,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration
or otherwise, or shall have been declared to be due and payable prior to its
stated maturity, or any event or circumstance shall occur which permits, or with
the lapse of time or giving of notice or both would permit, the acceleration of
the maturity of any such Indebtedness by the holder or holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the
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<PAGE>
property of the Borrower or any such subsidiary, or bankruptcy, reorganization,
arrangement, insolvency or similar proceedings shall be instituted by or against
the narrower or any such subsidiary under the laws of any jurisdiction (except
for an involuntary proceeding filed against the Borrower or any Subsidiary of
the Borrower which is dismissed within 60 days following the institution
thereof); or
(i) Any attachment, execution or similar process shall be issued or levied
against any of the property the Borrower or any Subsidiary and such attachment,
execution or similar process shall not be paid, stayed, released, vacated or
fully bonded within 30 days after its issue or levy; or
(j) Any final uninsured judgment in excess of $100,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction and shall remain unpaid for more than 60 days; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank would have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) The Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force
and effect; or
(m) The security interests and liens of the Bank in and on any material
portion of the Collateral covered or intended to be covered by the Security
Agreement shall for any reason (other than due to payment in full of all amounts
secured thereby or due to written release by the Bank) not be fully perfected
first priority liens and security interests; or
(n) There shall be any action, suit or proceeding affecting the Borrower
or any Subsidiary of the Borrower before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, in
which an adverse decision would, in the reasonable opinion of the Bank, have a
material adverse effect on the condition (financial or otherwise), operations,
properties, assets, liabilities or earnings of the Borrower; or
(o) If 50% or more of the outstanding capital stock of the Borrower is at
any time acquired or held by any other Person.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
------------------------------
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative);
-17-
<PAGE>
(a) Declare the entire unpaid principal amount of the Revolving Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving Note,
and under the Security Agreement and each and any other agreement with the Bank;
and exercise all other rights and remedies which the Bank may have under
applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
-------
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code.
VI. MISCELLANEOUS
-------------
6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs
------------------
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan and any
amendments or modifications of any of the foregoing, as well as the costs and
expenses (including, without limitation, the reasonable fees and out-of-pocket
expenses of legal counsel) incurred by the Bank in connection with preserving,
enforcing or exercising, upon default, any rights or remedies under this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents delivered or to be delivered hereunder or in connection herewith,
all whether or not legal action is instituted. In addition, the Borrower shall
be obligated to pay any and all stamp and other taxes payable or determined to
be payable in connection with the execution and delivery of this letter
agreement, the Security Agreement, the
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<PAGE>
Revolving Note and all other instruments and documents to be delivered in
connection with any Obligation. Any fees, expenses or other charges which the
Bank is entitled to receive from the Borrower under this Section shall bear
interest from the date of any demand therefor until the date when paid at a rate
per annum equal to the sum of (i) two (2%) percent plus (ii) the per annum rate
otherwise payable under the Revolving Note (but in no event in excess of the
maximum rate permitted by then applicable law).
6.2. Capital Adequacy. If the Bank shall have determined that the
----------------
adoption or phase-in after the date hereof of any applicable law rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, and/or the within-described revolving loan facility to a level
below that which the Bank could have achieved (taking into consideration the
Bank's policies with respect to capital adequacy immediately before such
adoption, phase-in, change or compliance and assuming that the Bank's capital
was then fully utilized) but for such adoption, phase-in, change or compliance
by any amount deemed by the Bank to be material: (i) the Bank shall promptly
after its determination of such occurrence give notice thereof to the Borrower,
and (ii) the Borrower shall pay forthwith to the Bank as an additional fee such
amount as the Bank certifies to be the amount that will compensate it for such
reduction with respect to the Revolving Loans and/or the within-described
revolving loan facility.
A certificate of the Bank claiming compensation under this Section shall
be conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving rise to such compensation, the additional
amount or amounts to be paid to it hereunder and the method by which such
amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the
Bank to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall reduce any
obligation of the Borrower to the Bank under this section.
6.3. Facility Fees. The Borrower will pay to the Bank, on the last day
-------------
of each calendar quarter (commencing on June 30, 1996) as long as the within-
described revolving loan arrangements are in effect and on the Expiration Date,
non-refundable commitment fees (the "Commitment Fees"), computed quarterly in
arrears on the daily average unused portion of the Maximum Revolving Amount
during the calendar quarter for which such Commitment Fees are to be determined.
Such Commitment Fees will be payable, based on such daily average unused portion
of the Maximum Revolving Amount at the rate of 0.2% per annum. As used herein,
the "unused portion" of the Maximum Revolving Amount shall mean such unused
portion as results either from the fact that the Bank has for any reason not
made Revolving Loans up to the Maximum Revolving Amount or from the fact that
the Borrower has repaid Revolving Loans so as to increase the amount of such
unused portion. Fees described in this Section are in addition to
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<PAGE>
any balances and fees required by the Bank or any of its affiliates in
connection with any other services made available to the Borrower.
6.4. Other Agreements. The provisions of this letter agreement are not
----------------
in derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.
6.5. Governing Law. This letter agreement and the Revolving Note shall
-------------
be governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6 Addresses for Notices, etc. All notices, requests, demands and other
--------------------------
communications provided for hereunder shall be in writing and shall be
mailed or delivered (including delivery by over-night courier service) to the
applicable party at the address indicated below:
If to the Borrower:
ON Technology Corporation
One Cambridge Center
Cambridge, MA 02142
Attentions: President
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<PAGE>
with a copy to:
Gabor Garai, Esquire
Epstein Becker & Green, P.C.
75 State Street
Boston, MA 02109
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street
Boston, MA 02109
Attention: Kimberly A. Martone, Vice President
or as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.7. Binding Effect; Assignment; Termination. This letter agreement
---------------------------------------
shall be binding upon the Borrower, its successors and assigns and shall inure
to the benefit of the Borrower and the Bank and their respective permitted
successors and assigns. The Borrower may not assign this letter agreement or any
rights hereunder without the express written consent of the Bank. The Bank may,
in accordance with applicable law, from time to time assign or grant
participations in this letter agreement, the Revolving Loans and/or the
Revolving Note; provided that, unless the Borrower shall otherwise consent (such
consent not to be unreasonably withheld), the terms of any such assignment or
participation (other than an assignment or participation to an affiliate of the
Bank or an assignment to a Federal Reserve Bank as security) shall provide, in
effect, that the Bank shall retain the power to declare the Revolving Note
accelerated upon the occurrence of any Event of Default and the effective power
to give waivers with respect to any Events of Default other than payment
defaults. The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank; provided that no such termination will release or waive any of the Bank's
rights or remedies or any of the Borrower's obligations under this letter
agreement or any of the other Loan Documents unless and until the Borrower has
paid in full the Revolving Loans and all interest thereon and all fees and
charges payable in connection therewith.
6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the
-----------------------
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any
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<PAGE>
such suit, action or proceeding brought in such a court and any claim that any
such suit, action or proceeding has been brought in an inconvenient forum. The
Borrower agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or proceeding shall have been effected upon the Borrower in one of the manners
specified in the following paragraph of this (S)6.8 or as otherwise permitted by
law.
The Borrower hereby consents to process being served in any suit, action
or proceeding of the nature referred to in the preceding paragraph of this
(S)6.8 either (i) by mailing a copy thereof by registered or certified mail,
postage prepaid, return receipt requested, to it at its address set forth in
(S)6.6 or (ii) by serving a copy thereof upon it at its address set forth in
(S)6.6.
6.9. Severability. In the event that any provision of this letter
------------
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.
VII. DEFINED TERMS
-------------
7.1. Definitions. In addition to terms defined elsewhere in this letter
-----------
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Acquisition" - The acquisition by the Borrower or by any Subsidiary of
the Borrower of (i) all or substantially all of the capital stock of any other
Person, (ii) all or substantially all of the assets of any other Person or (iii)
all or substantially all of the assets comprising any division or line of
business of any other Person.
"Adjusted Net Income" (or "Adjusted Net Loss") - For any fiscal quarter,
the sum of (i) the Net Income (or Net Loss, expressed as a negative number) of
the Borrower and its Subsidiaries for such fiscal quarter, plus (ii) for any
----
fiscal quarter during which an Acquisition occurs, the total of (1) all One-Time
Non-Cash Charges incurred by the Borrower during such fiscal quarter in respect
of such Acquisition and (2) all One-Time Cash Charges incurred by the Borrower
during such fiscal quarter in respect of such Acquisition (provided that the
aggregate of all One-Time Cash Charges incurred by the Borrower from and after
the date hereof will not exceed $4,000,000). If the result of the foregoing
calculation for any fiscal quarter is positive, it will be referred to as the
Borrower's "Adjusted Net Income" for such fiscal quarter. If such result is
negative, the amount by which same is less than zero will be referred to as the
Borrower's "Adjusted Net Loss" for such fiscal quarter.
"Borrowing Base" - At any time, the sum of (i) 80% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding,
plus (ii) 40% of the aggregate principal amount of the Foreign Qualified
- - ----
Receivables of the Borrower then outstanding.
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<PAGE>
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a
public holiday under the laws of the United States of America or The
Commonwealth of Massachusetts applicable to a national bank.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible Net
Worth of the Borrower and Subsidiaries plus (ii) the principal amount of
Subordinated Debt of the Borrower then outstanding (nothing contained herein
being deemed to authorize the incurrence of any additional Subordinated Debt).
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in (S)7.2(b) below.
"Current Liabilities" - All liabilities of any corporation or other entity
which would, in accordance with generally accepted accounting principles, be
classified as current liabilities of an entity conducting a business the same as
or similar to that of such entity, including, without limitation, all
capitalized lease payments and other payments under capitalized leases and fixed
prepayments of, and sinking fund payments with respect to, Indebtedness required
to be made within one year from the date of determination. "Current Liabilities"
shall also and in any event be deemed to include the Revolving Loans.
"Default" - Any event or circumstances which, with the giving of notice or
passage of time or both, could become an Event of Default.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Expiration Date" - April 1, 1998 unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Foreign Qualified Receivables" - Those Receivables of the Borrower which
satisfy all of the criteria to be Qualified Receivables except that the relevant
customers are not located in the United States.
"Indebtedness" - The total of all obligations of a Person, whether current
or long-term, senior or subordinated, which in accordance with generally
accepted accounting principles would be included as liabilities upon such
Person's balance sheet at the date as of which Indebtedness is to be determined,
and shall also include guaranties, endorsements (other than for collection in
the ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Loan Documents" - Each of this letter agreement, the Revolving Note, the
Security Agreement and each other instrument, document or agreement evidencing,
securing, guaranteeing
-23-
<PAGE>
or relating in any way to any of the Revolving Loans, all whether now existing
or hereafter arising or entered into.
"Maximum Revolving Amount" - Ten Million ($10,000,000) Dollars.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - At any time, the total of (i) such current assets of
the Borrower as consist of cash, demand deposits with the bank, United States
Treasury obligations and other readily-marketable "money market" instruments to
the extent otherwise permitted under this letter agreement, plus (ii) the
principal amount of the Receivables of the Borrower at such time (less an
allowance for bad debts consistent with the Borrower's normal practice).
"One-Time Cash Charges" - All non-recurring cash expenditures which
constitute charges against the Borrower's Net Income and arise from Acquisitions
hereafter made by the Borrower.
"One-Time Non-Cash Charges" - All non-recurring charges against the
Borrower's Net Income which do not involve the expenditure of cash and which
arise from Acquisitions hereafter made by the Borrower, including, without
limitation, write-offs of capitalized research and development costs and write-
offs of goodwill.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Acquisition" - Any acquisition by the Borrower of the stock or
assets of another Person as to which all of the following conditions are met:
(i) the business so acquired shall be in the same line of business as the
Borrower (being the development and licensing of computer software), (ii) at the
time of each such acquisition and after giving effect thereto there will not be
nor will result therefrom any Default or Event of Default and (iii) prior to any
such acquisition the Borrower will provide the bank (unless the Bank, in its
sole discretion, waives the provisions of this clause (iii)) with evidence, on a
pro forma basis, reasonably satisfactory to the Bank that such acquisition would
- - --- -----
not lead to a failure on the Borrower's part to comply with any of (S)(S)3.7-
3.10, inclusive, as at the next following fiscal quarter-end.
"Person" - an individual, corporation, partnership, joint venture, trust,
or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Principal Office" - The principal place of business of the Bank in
Boston, MA, now located at 75 State Street, Boston, MA 02109.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of bona fide sales made to customers of the Borrower (which customers
---- ----
are located in the United States and are not Subsidiaries of or otherwise
affiliated with the Borrower) in the ordinary course of the
-24-
<PAGE>
Borrower's business and which remain unpaid no more than 90 days past the date
of invoice for such sale, the payment of which is not in dispute. Unless the
Bank in its sole discretion otherwise determines with respect to any Receivable,
a Receivable which would otherwise be a Qualified Receivable shall be deemed not
to be a Qualified Receivable (i) if the Bank does not have a fully perfected
first priority security interest in such Receivable; (ii) if such Receivable is
not free and clear of all adverse interest in favor of any Person other than the
Bank; (iii) if such Receivable is subject to any deduction, off-set, contra
account, counterclaim or condition, (iv) if a field examination made by the Bank
fails to confirm that such Receivable exists and satisfies all of the criteria
set forth herein to be a Qualified Receivable; (v) if such Receivable is not
invoiced within such period of time as is consistent with the Borrower's normal
practices at the date hereof; (vi) if the customer or account debtor has
disputed liability or made any claim with respect to the Receivable or the
merchandise covered thereby or with respect to any other Receivable due from
said customer to the Borrower; (vii) if the customer or account debtor has filed
a petition for bankruptcy or any other application for relief under the
Bankruptcy Code or effected an assignment for the benefit of creditors, or if
any petition or any other application for relief under the Bankruptcy Code has
been filed against said customer or account debtor, or if the customer or
account debtor has suspended business, become insolvent, ceased to pay its debts
as they become due, or had or suffered a receiver or trustee to be appointed for
any of its assets or affairs; (viii) if the customer or account debtor has
failed to pay other Receivables so that an aggregate of 50% of the total
Receivables owing to the Borrower by such customer or account debtor has been
outstanding for more than 90 days; or (ix) if the relevant account debtor is the
United states government or any agency thereof, unless the Receivable is
assigned to the Bank under the Federal Assignment of Claims Act.
"Receivables" - All of the Borrower's present and future accounts,
accounts receivable and notes, drafts, acceptances and other instruments
representing or evidencing a right to payment for goods sold or for services
rendered.
"Senior Debt" - as determined at any time, the principal amount of all
Indebtedness of the Borrower (other than contingent liabilities which would
appear only in footnotes and not on the face of a balance sheet of the Borrower
prepared in accordance with the generally accepted accounting principles) then
outstanding less the then principal amount of Subordinated Debt.
"Subordinated Debt" - any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower
and/or any of its Subsidiaries, directly or indirectly, owns, or has the right
to control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total
-25-
<PAGE>
liabilities of such Person. Total intangible assets shall be deemed to include,
but shall not be limited to, the excess of cost over book value of acquired
businesses accounted for by the purchase method, formulae, trademarks, trade
names, patents, patent rights and deferred expenses (including, but not limited
to, unamortized debt discount and expense, organizational expense, capitalized
software costs and experimental and development expenses).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
7.2. Security Agreement. (a) The Borrower acknowledges and agrees that
------------------
the "Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement.
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the collateral described therein, all of the
Borrower's files, books and records (including, without limitation, all
electronically recorded data) all whether now owned or existing or hereafter
acquired, created or arising. The Borrower hereby grants to the Bank a security
interest in all such Collateral in order to secure the full and prompt payment
and performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as defined in
(S)5.1 of this letter agreement), the Bank may, at any time, without further
notice to the Borrower, notify account debtors that the Collateral has been
assigned to the Bank and that payments by such account debtors shall be made
directly to the Bank. At any time after the occurrence of an Event of Default,
the Bank may collect the Borrower's Receivables, or any of same, directly from
account debtors and may charge the collection costs and expenses to the
Borrower.
This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
ON TECHNOLOGY CORPORATION
By
------------------------------
Its
-26-
<PAGE>
FLEET NATIONAL BANK
By
-------------------------
Its
By
-------------------------
Its
-27-
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(e) Litigation
Item 2.1(i) Transactions not in the ordinary course
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
<PAGE>
PROMISSORY NOTE
$10,000,000.00 Boston, Massachusetts
April 1, 1996
For VALUE RECEIVED, the undersigned ON Technology corporation, a Delaware
corporation (the "Borrower") hereby promises to pay to the order of FLEET
NATIONAL BANK (the "Bank") the principal amount of Ten Million and 00/100
($10,000,000.00) Dollars or such portion thereof as may be advanced by the Bank
pursuant to (S)1.2 of that certain letter agreement of even date herewith
between the Bank and the Borrower (the "Letter Agreement") and remains
outstanding from time to time hereunder ("Principal"), with interest, at the
rate hereinafter set forth, on the daily balance of all unpaid Principal, from
the date hereof until payment in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times be equal to
the Prime Rate, as in effect from time to time (but in no event in excess of the
maximum rate permitted by then applicable law). A change in the aforesaid rate
of interest shall become effective on the same day on which any change in the
Prime Rate is effective. Overdue Principal shall bear interest at a fluctuating
rate per annum which at all times shall be equal to the sum of (i) two (2%)
percent per annum plus (ii) the per annum rate otherwise payable under this note
(but in no event in excess of the maximum rate permitted by then applicable
law), compounded monthly and payable on demand. As used herein, "Prime Rate"
means that rate of interest per annum announced by the Bank from time to time as
its prime rate, it being understood that such rate is merely a reference rate,
not necessarily the lowest, which serves as the basis upon which effective rates
of interest are calculated for obligations making reference thereto. If the
entire amount of any required Principal and/or interest is not paid within ten
(10) days after the same is due, the Borrower shall pay to the Bank a late fee
equal to five percent (5%) of the required, payment, provided that such late fee
shall be reduced to three percent (3%) of any required Principal and interest
that is not paid within fifteen (15) days of the date it is due if this note is
secured by a mortgage on an owner-occupied residence of 1-4 units.
All outstanding Principal and all interest accrued thereon shall be due
and payable in full on the first to occur of: (i) an acceleration under (S)5.2
of the Letter Agreement or (ii) April 1, 1998. The Borrower may at any time and
from time to time prepay all or any portion of said Principal, without premium
or penalty. Under certain circumstances set forth in the Letter Agreement,
prepayments of Principal may be required.
<PAGE>
Payments of both Principal and interest shall be made, in immediately
available funds, at the office of the Bank located at 75 State Street, Boston,
Massachusetts 02109, or at such other address as the Bank may from time to time
designate.
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank, at
or following the time of making any Revolving Loan (as defined in the Letter
Agreement) and of receiving any payment of Principal, an appropriate notation
reflecting such transaction and the then aggregate unpaid balance of Principal.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower hereunder or under the Letter Agreement. The unpaid
Principal amount of this note, as recorded by the Bank from time to time on such
schedule or on such books, shall constitute presumptive evidence of the
aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement. This
note is secured by, and is entitled to the benefit of, the Security Agreement
(as defined in the Letter Agreement). This note is subject to prepayment as set
forth in the Letter Agreement. The maturity of this note may be accelerated upon
the occurrence of an Event of Default, as provided in the Letter Agreement.
Executed, as an instrument under seal, as of the day and year first above
written.
CORPORATE SEAL ON TECHNOLOGY CORPORATION
ATTEST :
By:
- - --------------------------- ------------------------
Secretary Name:
Title:
-2-
<PAGE>
Exhibit 10.2
[FLEET BANK LOGO HERE] ACCOUNTS RECEIVABLE
SECURITY AGREEMENT
(SHORT FORM)
April , 1996
__________________
(Date)
To secure the due payment and performance of all of the liabilities and
obligations hereunder of the undersigned, herein called "Borrower", to Fleet
National Bank, herein called "Bank", and all other liabilities and obligations
of Borrower to Bank of every name and nature whatsoever, direct or indirect,
absolute or contingent, now existing or hereafter arising or acquired,
including, without limitation, the due payment and performance of all
liabilities and obligations under any and all notes, all hereinafter called
"Obligations", the Borrower hereby grants to Bank a continuing security interest
in all accounts, accounts receivable, notes, bills, drafts, acceptances, and all
other debts, obligations and liabilities, in whatever form, owing to Borrower
from any person, firm or corporation or any other legal entity, whether now
existing or hereafter arising, now or hereafter received by or belonging or
owing to Borrower for goods sold by it or for services rendered by it or however
otherwise same may have been established or created, all guarantees and
securities therefor, all right, title and interest of Borrower in the
merchandise or services which gave rise thereto, including the rights of
reclamation and stoppage in transit, all rights of an unpaid seller of
merchandise or services (all hereinafter called "Collateral") and in the
proceeds thereof, including, without limitation, all proceeds of credit, fire or
other insurance, and any tax refunds.
If* all Obligations of Borrower to Bank shall, at the option of the Bank, and
without notice to or demand upon Borrower become and be immediately due and
payable and thereupon Bank may exercise any and all rights and remedies of a
secured party available under the Uniform Commercial Code and all other
applicable law.
*an Event of Default occurs under the Letter Agreement of even date between
the Bank Borrower, as same may be from time to time amended,
If in the event of the sale of the Collateral the proceeds thereof are
insufficient to pay all amounts to which Bank is legally entitled, Borrower will
be liable for the deficiency, together with interest thereon and the reasonable
fees of any attorney employed by Bank to collect such deficiency.
Bank shall have the right to enforce any remedies hereunder alternatively,
successively or concurrently. A waiver of any default of Borrower shall not be
a waiver of any subsequent, similar or other default. No delay in the exercise
of any of Bank's rights or remedies hereunder shall constitute a waiver of such
right or remedy or of any other right or remedy.
This Agreement shall not be construed to be in limitation of or in
substitution for any other grant of security interest from Borrower to Bank made
prior to or contemporaneously herewith, and no other such grant of a security
interest made prior to or contemporaneously herewith, and no other such grant of
a security interest made subsequent to or contemporaneously herewith shall be
construed to be in limitation of or in substitution for this Agreement unless
expressly and specifically provided therein.
This Agreement shall take effect as a sealed instrument, shall be construed
according to the laws of the Commonwealth of Massachusetts, shall be binding
upon the heirs, executors, administrators, successors and assigns of Borrower
and shall insure to the benefit of the successors and assigns of Bank.
ON TECHNOLOGY CORPORATION
Witnessed by: ___________________________
(Borrower)
_____________________________ By:________________________
Its (Title)
FLEET NATIONAL BANK One Cambridge Center
Address:____________________
(Number and Street)
By:__________________________ Cambridge, MA 02142
Its ____________________________
(City, County and State)
<PAGE>
EXHIBIT 11.0
ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
Computation of Net Income (Loss) Per Share (1)
FORM 10-Q, June 30, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Income (Loss) 1,440 723 (11,675) 1,040
Pro Forma Earnings Per Share
Weighted Average Common Shares
Outstanding During Period........... 10,977,038 7,363,173 10,823,913 3,414,282
Weighted Average Common Equivalent
Shares Outstanding During Period...... 307,723 471,126 --- 579,533
Conversion of Preferred Stock........... --- --- 3,841,632
Dilutive Effect of Common Equivalent
Shares Issued Subsequent to May 23,
1994 (2) --- 287,981 --- 287,981
---------- --------- ---------- ---------
11,284,761 8,122,280 10,823,913 8,123,428
========== ========= ========== =========
Pro Forma Net Income (Loss) Per Common
and Common Equivalent Share........ $ .13 $ .09 $ (1.08) $ .13
========== ========= ========== =========
- - ----------------------------------
</TABLE>
(1) Primary and fully diluted net income (loss) per share has not been
separately presented, as the amounts would not be meaningful.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options issued at prices below the initial public offering price
per share ("cheap stock") during the twelve month period immediately preceding
the initial filing date of the Company's Registration Statement for its initial
public offering have been included as outstanding for all periods presented.
The dilutive effect of the common and common stock equivalents was computed in
accordance with the treasury stock method.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 25,460
<SECURITIES> 0
<RECEIVABLES> 8,804
<ALLOWANCES> 1,055
<INVENTORY> 3,367
<CURRENT-ASSETS> 38,450
<PP&E> 9,222
<DEPRECIATION> 3,305
<TOTAL-ASSETS> 48,874
<CURRENT-LIABILITIES> 9,038
<BONDS> 0
0
0
<COMMON> 55,344
<OTHER-SE> (16,523)
<TOTAL-LIABILITY-AND-EQUITY> 48,874
<SALES> 24,372
<TOTAL-REVENUES> 25,135
<CGS> 5,290
<TOTAL-COSTS> 18,420
<OTHER-EXPENSES> 13,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> (11,236)
<INCOME-TAX> 439
<INCOME-CONTINUING> (11,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,675)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
