<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 0-28436
OPEN MARKET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3214536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
245 FIRST STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (Zip Code)
(617) 949-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of October 31, 1997, there were 30,912,266 shares of the Registrant's Common
Stock outstanding.
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OPEN MARKET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION 18
ITEM 1. Legal Proceedings.
ITEM 2. Changes in Securities and Use of Proceeds.
ITEM 3. Defaults Upon Senior Securities.
ITEM 4. Submission of Matters to a Vote of Security Holders.
ITEM 5. Other Information.
ITEM 6. Exhibits and Reports on Form 8-K.
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,111 $ 49,765
Marketable securities 8,683 22,268
Accounts receivable, net of allowances of $1,399 and
$200, respectively 14,717 5,126
Loan to founder 1,500 1,500
Prepaid expenses and other current assets 1,299 1,468
---------------- ----------------
Total current assets 59,310 80,127
---------------- ----------------
Property, plant and equipment, at cost:
Computers and office equipment 10,869 6,194
Land & building 4,200 -
Leasehold improvements 1,504 1,081
Furniture & fixtures 725 493
---------------- ----------------
17,298 7,768
Less: Accumulated depreciation and amortization 5,136 2,568
---------------- ----------------
12,162 5,200
Intangible assets, net (Note 3) 8,192 -
Other assets 1,782 475
---------------- ----------------
$ 81,446 $ 85,802
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 39 $ 35
Line of Credit 3,700 -
Note payable (Note 3) 10,000 -
Accounts payable 2,446 4,338
Accrued expenses 14,272 5,680
Deferred revenues 4,523 3,254
---------------- ----------------
Total current liabilities 34,980 13,307
---------------- ----------------
Long-term obligations, net of current maturities 89 128
Stockholders' equity:
Preferred stock, $.10 par value -
Authorized - 2,000,000 shares;
Issued and outstanding - none - -
Common stock, $.001 par value -
Authorized - 100,000,000 shares; - -
Issued and outstanding - 30,902,623 shares and
28,565,246 shares at September 30, 1997 and December
31, 1996, respectively 31 28
Additional paid-in capital 137,392 114,977
Deferred compensation (302) -
Other equity (Note 3) 6,920 -
Accumulated deficit (97,664) (42,638)
---------------- ----------------
Total stockholders' equity 46,377 72,367
---------------- ----------------
$ 81,446 $ 85,802
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Product revenues $11,859 $ 5,250 $ 33,348 $ 10,500
Service revenues 3,872 1,456 9,275 3,589
------------- ------------- -------------- -------------
Total revenues 15,731 6,706 42,623 14,089
------------- ------------- -------------- -------------
COST OF REVENUES:
Product revenues 468 147 1,973 416
Service revenues 2,294 1,303 6,815 2,760
------------- ------------- -------------- -------------
Total cost of revenues 2,762 1,450 8,788 3,176
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Gross profit 12,969 5,256 33,835 10,913
------------- ------------- -------------- -------------
OPERATING EXPENSES:
Selling and marketing 9,417 6,347 26,989 15,628
Research and development 7,107 4,264 19,943 11,892
General and administrative 3,021 1,638 8,676 4,619
Acquired in-process research and
development (Note 3) - - 34,250 -
------------- ------------- -------------- -------------
Total operating expenses 19,545 12,249 89,858 32,139
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Loss from operations (6,576) (6,993) (56,023) (21,226)
------------- ------------- -------------- -------------
OTHER INCOME (EXPENSE):
Interest income 719 1,163 2,318 1,934
Interest expense (287) (8) (557) (72)
Other expense (95) (7) (180) (7)
------------- ------------- -------------- -------------
Loss before provision for foreign taxes (6,239) (5,845) (54,442) (19,371)
------------- ------------- -------------- -------------
Provision for foreign taxes 133 25 584 25
------------- ------------- -------------- -------------
NET LOSS $(6,372) $(5,870) $(55,026) $(19,396)
============= ============= ============== =============
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $(0.20) $(0.21) $(1.79) $(0.71)
============= ============= ============== =============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
(Note 2) 31,476 28,186 30,798 27,313
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1997 1996
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(55,026) $(19,396)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,569 1,233
Amortization of intangible assets 946 -
Deferred compensation 78 -
Charge associated with the issuance of a stock purchase
warrant - 211
Charge associated with acquired in-process research &
development 34,250 -
Changes in assets and liabilities, net of acquisition-
Accounts receivable (6,185) (3,614)
Prepaid expenses and other current assets 489 (945)
Accounts payable (1,892) 886
Accrued expenses 5,324 2,753
Deferred revenues (380) (2,676)
-------------- ----------------
Net cash used in operating activities (19,827) (21,548)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,849) (2,758)
Issuance of loan to founder - (1,500)
Purchase of marketable securities, net - (29,512)
Sale of marketable securities, net 13,585 -
Increase in other assets (1,181) (115)
Net cash acquired from the purchase of Waypoint 372 -
Net cash used in the purchase of Folio (11,400) -
-------------- ----------------
Net cash used in investing activities (1,473) (33,885)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from line of credit 3,700 -
Proceeds from long-term obligations - 650
Payments on long-term obligations (35) (1,485)
Proceeds from issuance of redeemable convertible preferred
stock, net of issuance costs - 26,050
Proceeds from initial public offering, net of issuance costs - 76,127
Proceeds from issuance of common stock 981 167
-------------- ----------------
Net cash provided by financing activities 4,646 101,509
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,654) 46,076
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49,765 3,712
-------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,111 $ 49,788
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 25 $ 64
============== ================
Taxes paid during the period $ 143 $ -
============== ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Conversion of redeemable convertible preferred stock into
common stock $ - $ 38,155
============== ================
In connection with the acquisition of Waypoint (see Note 3), the
following non-cash transaction occurred:
Fair value of assets acquired $ 9,922 $ -
Liabilities assumed (156) -
Issuance of common stock (9,548) -
Cash acquired (590) -
-------------- ----------------
Cash acquired in acquisition, net of acquisition costs $ (372) $ -
============== ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
CONT.:
In connection with the acquisition of Folio (see Note 3),
the following non-cash transaction occurred:
Fair value of assets acquired $ 45,512 $ -
Liabilities assumed (5,682) -
Issuance of common stock (18,430) -
Issuance of note payable (10,000) -
-------------- ----------------
Cash paid for acquisition and acquisition costs $11,400 -$
============== ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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OPEN MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. Basis of Presentation
The consolidated financial statements of Open Market, Inc. (the Company)
presented herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996, included in the Company's annual report on the Form 10-K filed with
the Securities and Exchange Commission on March 31, 1997.
The consolidated financial statements and notes herein are unaudited but, in
the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to these
consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Cash, Cash Equivalents and Marketable Securities
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Under SFAS No. 115, investments for which the
Company has the positive intent and ability to hold to maturity, consisting of
cash equivalents and marketable securities, are reported at amortized cost,
which approximates fair market value. Cash equivalents are highly liquid
investments with maturities of less than three months at the time of
acquisition. Marketable securities consist of investment grade commercial
paper, corporate notes, certificates of deposit, and obligations of a U.S.
governmental agency and certain municipalities with maturities at the time of
acquisition of greater than three months but less than one year. The average
maturity of the Company's marketable securities is approximately nine months
at September 30, 1997.
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(c) Net Loss per Common and Common Equivalent Share
For the three and nine month periods ended September 30, 1997, net loss
per common and common equivalent share is computed by dividing the net loss by
the weighted average number of common and common equivalent shares outstanding
during the period, including the weighted average number of shares to be
issued or returned as part of the Folio acquisition as discussed in Note 3.
For the three and nine month periods ended September 30, 1996, net loss per
common and common equivalent share is computed by dividing the net loss by the
weighted average number of common and common equivalent shares outstanding
during the period, which consists of (i) the weighted average number of shares
of common stock issuable upon conversion of all shares of Series A, B and C
redeemable convertible preferred stock and (ii) for periods prior to the
initial public offering, stock options granted after March 31, 1995 and prior
to the initial public offering as required by the Securities and Exchange
Commission using the treasury stock method. Other common stock equivalents
have not been included, as the effect would be antidilutive.
During the first quarter of 1997, the Financial Accounting Standards Board
adopted Statement of Financial Accounting Standards (SFAS) No. 128,Earnings
per Share, which supersedes APB Opinion No. 15. The Company does not believe
the adoption of this accounting standard will have any impact on the Company's
financial position or results of operations.
3. ACQUISITIONS
(a) Waypoint Software Corporation
On February 12, 1997, the Company acquired all of the outstanding shares
of capital stock of Waypoint Software Corporation (Waypoint), a software
development company specializing in the business-to-business industrial
catalog segment of the Internet. As payment of the purchase price, the Company
issued an aggregate of approximately 739,000 shares of its common stock to the
stockholders of Waypoint and issued options to acquire approximately 6,000
shares of the Company's common stock at $0.456 per share to Waypoint option
holders. The value of the shares of, and the options to acquire, the Company's
common stock issued in connection with the acquisition was approximately
$11,000 based on a weighted average market price, as defined, of the Company's
freely tradable shares. The shares issued were subject to certain selling
restrictions and, as a result, were not freely tradable. Therefore, for
purposes of calculating aggregate consideration paid, the value of the shares
issued was recorded at a discounted value. In addition, in connection with
this acquisition, the Company has entered into employment agreements with
certain of the principals of Waypoint under which the Company has agreed to
pay bonuses in an aggregate amount of $1,200 over two years depending on
certain future events, as defined. For financial statement purposes, this
acquisition was accounted for as a purchase, and accordingly, the results of
operations of Waypoint subsequent to February 12, 1997 are included in the
Company's consolidated statements of operations. The shares of common stock of
the Company issued to the former stockholders of Waypoint have been registered
for resale pursuant to a registration statement on Form S-3
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<PAGE>
declared effective by the Securities and Exchange Commission on June 11, 1997.
The aggregate purchase price of $9,922 consisted of the following:
Description Amount
----------- ---------------
Common stock $9,548
Assumed liabilities 156
Acquisition costs 218
---------------
Total purchase price: $9,922
===============
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has preliminarily been allocated as
follows:
Description Amount
----------- ---------------
Current assets $ 590
Property, plant and equipment 76
Other assets 6
Inprocess research & development 9,250
---------------
Total assets acquired: $9,922
===============
The in-process research and development has been expensed as a charge against
operations as of the closing of the transaction, and is included in the
accompanying consolidated statement of operations. The amount allocated to
acquired in-process research and development relates to projects that had not
yet reached technological feasibility and that, until completion of development,
have no alternative future use. These projects required substantial development
and testing prior to the reaching of technological feasibility. However, there
was no assurance that these projects would reach technological feasibility or
develop into products that might be sold profitably by the Company. The
technology acquired in the acquisition of Waypoint has required, and will
continue to require, substantial additional development by the Company.
(b) Folio Corporation
Pursuant to a Stock Purchase Agreement dated as of February 20, 1997 (the
"Stock Purchase Agreement"), the Company acquired all of the outstanding shares
of capital stock of Folio Corporation (Folio), a leading supplier of software
for managing business-critical information. As payment of the purchase price,
the Company (i) issued 897,866 shares of common stock of the Company, (ii) made
a cash payment of $10,000, (iii) agreed to issue 897,866 shares of common stock
of the Company in January 1998 and (iv) issued a promissory note of the Company
in the original principal amount of $10,000 payable in either cash or a
combination of cash and common stock of the Company. The value of the shares of
common stock of the Company issued or reserved for issuance was approximately
$25,000 based on a weighted average market price, as defined, of the Company's
freely tradable shares. The shares issued on March 7, 1997, as well as the
shares to be issued in January 1998 were not freely tradable due to selling
restrictions. Therefore, although 448,933 shares were registered by the Company
in August 1997 upon the request of the former stockholder of Folio as required
under the terms of the Stock Purchase Agreement, for purposes of calculating the
aggregate consideration and, the value of such shares, was recorded at a
discount. The Stock Purchase Agreement provided for a purchase price adjustment
based on the change in the net assets of Folio from the estimated value at
December 31, 1996 through the date of closing. As a result of this adjustment,
the former stockholder of Folio returned 270,116 shares of common stock of the
Company issued in the transaction. Other equity in the accompanying consolidated
balance sheet includes the value of the shares to be issued in January 1998. For
financial statement purposes, this acquisition was accounted for as a purchase,
and accordingly, the results of operations of Folio subsequent to March 7, 1997
are included in the Company's consolidated statement of operations.
-8-
<PAGE>
The aggregate purchase price of $45,512 consisted of the following:
Description Amount
----------- ---------------
Common stock $18,430
Cash paid 10,000
Note payable 10,000
Assumed liabilities 5,682
Acquisition costs 1,400
---------------
Total purchase price: $45,512
===============
The purchase price was allocated based upon the fair value of the tangible
and intangible assets acquired. These allocations represent the fair values
determined by an independent appraisal. The appraisal incorporated proven
valuation procedures and techniques in determining the fair value of each
intangible asset. The purchase price has preliminarily been allocated as
follows:
Description Amount
----------- ---------------
Current assets $ 4,729
Property, plant and equipment 6,605
Other assets 41
In-process research & development 25,000
Other acquired intangible assets 9,137
---------------
Total assets acquired: $45,512
===============
The in-process research and development has been expensed as a charge against
operations as of the closing of the transaction, and is included in the
accompanying consolidated statement of operations. The amount allocated to
acquired in-process research and development relates to projects that had not
yet reached technological feasibility and that, until completion of development,
have no alternative future use. These projects
-9-
<PAGE>
will require substantial development and testing prior to reaching technological
feasibility. However, there can be no assurance that these projects will reach
technological feasibility or develop into products that may be sold profitably
by the Company. The technology acquired in the acquisition of Folio has
required, and will continue to require, substantial additional development by
the Company. The intangible assets are being amortized over five to seven years.
The Company recorded approximately $946 of amortization expense relating to
these intangible assets during the first three quarters of 1997.
(c) Pro forma results of operations
The following unaudited pro forma combined results of operations of the
Company assume that the Waypoint and Folio acquisitions were completed on
January 1, 1997 and 1996, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
For the three For the nine
months months
ended September 30, ended September 30,
--------------------------------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues $15,731 $11,002 $ 45,368 $ 26,396
Net loss (6,372) (8,393) (23,793) (26,128)
Net loss per share $ (0.20) $ (0.28) $ (0.76) $ (0.88)
</TABLE>
These pro forma amounts represent the historical operating results of
Waypoint and Folio prior to their respective dates of acquisition, combined
with those of the Company with appropriate adjustments which give effect to
interest income, interest expense, amortization expense, as well as the
exclusion of the charge for acquired in-process research and development. For
the three and nine month periods ended September 30, 1996, the results of
Waypoint have not been included as they had not yet commenced operations.
These pro forma results are not necessarily indicative of operating results
which would have occurred if the Waypoint and Folio acquisitions had been
operated by current management during the periods presented.
4. STOCKHOLDERS' EQUITY
(a) 1994 Stock Incentive Plan
The 1994 Stock Incentive Plan, as amended, (the 1994 Plan) allows for the
issuance of up to 15,201,000 shares of the Company's common stock through the
grant of incentive stock options, nonqualified stock options or the issuance
of restricted common stock to employees and consultants.
A summary of stock option activity under the 1994 Plan is as follows:
Number of Exercise Price
Shares Per Share
--------------- ------------------------
Outstanding, December 31, 1996.... 4,967,331 $.17 - $35.13
Granted...................... 2,439,206 .25 - 15.75
Exercised.................... (641,481) .17 - 12.00
Canceled..................... (466,448) .25 - 21.50
--------------- ------------------------
Outstanding, September 30, 1997... 6,298,608 $.17 - $35.13
=============== =========================
Exercisable, September 30, 1997... 1,923,613 $.17 - $35.13
=============== =========================
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The Company records deferred compensation when stock options are granted
at an exercise price per share that is less than the fair market value on the
date of the grant. Deferred compensation is recorded in an amount equal to the
excess of the fair market value per share over the exercise price multiplied
by the number of options granted. During the nine month period ended September
30, 1997, the Company recorded $330 of deferred compensation for the grant of
30,000 options as described above. Deferred compensation of $28 was recognized
as an expense in the three month period ended September 30, 1997 and the
remaining amount will be recognized over the estimated vesting period of the
underlying options. Additionally, in connection with the modification of a
certain option agreement, the Company recorded $50 in compensation expense for
the nine month period ended September, 1997.
(b) 1996 Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), the
Company has reserved 250,000 shares of its common stock for issuance in
accordance with the Purchase Plan. Under the terms of the Purchase Plan,
employees who meet certain eligibility requirements may purchase shares of the
Company's common stock at 85% of the closing price of the common stock on the
first or last day of each six-month offering period, whichever is lower. Upon
the completion of the second offering period on July 31, 1997, the Company
issued 35,260 shares for gross proceeds of approximately $333.
5. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
The Company recorded revenues of greater than 10% of total revenues from
the following customers during the following periods:
Significant PERCENTAGE OF
----------- -------------------
CUSTOMERS CUSTOMER REVENUES
----------- -------------------
A B* C D*
--- --- --- ---
Three months ended September 30, 1997..1 13% - - -
Three months ended September 30, 1996..3 15% - - -
Nine months ended September 30, 1997...1 - 18% - -
Nine months ended September 30, 1996...3 25% - 14% 14%
* - Theses customers are related parties as discussed below.
Customer B and the Company share a common board member who represents an
investor who has an ownership interest in both companies. Customer D is a
related party through its stock ownership in the Company. The Company has
entered into agreements with certain related parties which provide for
-11-
<PAGE>
product and service revenues. The Company believes that the terms of these
transactions are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. The Company recognized revenues from
certain related parties of approximately $1,033 and $6,058 for the three and
nine month period ended September 30, 1997, respectively and $1,068 and $2,730
for the three and nine month period ended September 30, 1996, respectively. As
of September 30, 1997, there are no accounts receivable and deferred revenue
balances for related parties.
6. LINE-OF-CREDIT ARRANGEMENT
The Company has an unsecured line-of-credit arrangement with a bank, which
provides up to $15,000 in financing. Borrowings under this line are limited to
80% of eligible domestic accounts receivable and 90% of eligible foreign
accounts receivable, as defined, and bear interest at the prime lending rate
(8.5% at October 31, 1997). The Company is required to comply with certain
restrictive covenants under this agreement. There was $3,700 of borrowings
outstanding as of September 30, 1997.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
Overview
Open Market, Inc. (the Company) develops, markets, licenses and supports
high performance software products that allow its customers to engage in
business-to-business and business-to-consumer electronic commerce on the
Internet. These products have been deployed by companies across a wide spectrum
of industries, including publishing, retail, manufacturing, telecommunications,
and financial services. Open Market's Folio Products Division supplies software
for the electronic publishing of high-value information.
REVENUES
Total revenues were approximately $15,731 for the three months ended
September 30, 1997, a significant increase from approximately $6,706 for the
three months ended September 30, 1996. Total revenues for the nine months ended
September 30, 1997 were approximately $42,623 compared to approximately $14,089
for the nine months ended September 30, 1996. One customer accounted for 13% of
the Company's revenues for the three months ended September 30, 1997 and another
single customer accounted for 18% of the Company's revenues for the nine months
ended September 30, 1997. Three customers accounted for an aggregate of
approximately 58% and 53% of total revenues for the three months and nine months
ended September 30, 1996, respectively. While in any particular quarter a single
customer may account for a material portion of revenues, the Company does not
expect that it will derive a material portion of its future revenues from a
single customer.
Product revenues were approximately $11,859 or 75% of total revenues for the
three months ended September 30, 1997 compared to $5,250 or 78% of total
revenues for the three months ended September 30, 1996. Product revenues were
approximately $33,348 or 78% of total revenues for the nine months ended
September 30, 1997 compared to $10,500 or 75% of total revenues for the nine
months ended September 30, 1996. Product revenues for the three and nine months
ended September 30, 1997 were comprised of license revenue from Transact(TM),
the Company's flagship product for Internet commerce, SecureLink(TM), a commerce
enabling technology, and Axcess(TM), as well as the line of Folio products. The
Company has delivered certain products during the first nine months of 1997 to
Raptor which allowed the Company to recognize approximately $5,000 in product
revenues. Product revenues for the first three quarters of 1996 included an
initial $2,000 license fee from a reseller for the right to sublicense the
Company's Web server products. Royalty revenues from the Company's reseller
arrangements are recognized when earned. The Company believes that product
revenues as a
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<PAGE>
percentage of total revenues will fluctuate on a quarterly basis.
Service revenues were approximately $3,872 or 25% of total revenues for the
three months ended September 30, 1997 compared to $1,456 or 22% of total
revenues for the three months ended September 30, 1996. Service revenues were
approximately $9,275 or 22% of total revenues for the nine months ended
September 30, 1997 compared to $3,589 or 25% of total revenues for the nine
months ended September 30, 1996. Service revenues relate to (i) development,
consulting and other services performed for certain customers to assist them in
their development of services and products for the Internet and (ii) customer
support services, which include postcontract customer support, installation,
training and other services related to product sales.
COST OF REVENUES
Cost of product revenues increased to approximately $468 for the three month
period ended September 30, 1997 from approximately $147 for the three month
period ended September 30, 1996. The increase in cost of product revenues was
directly related to the increased product revenue. Cost of product revenues
were approximately $1,973 for the nine month period ended September 30, 1997
compared to $416 for the nine months ended September 30, 1996. In the nine month
period ended September 30, 1997, cost of product revenues included the costs to
distribute products, including the cost of media on which they are delivered, as
well as third-party royalties for technology incorporated into certain products
of the Company.
Cost of service revenues increased to approximately $2,294 for the three month
period ended September 30, 1997, primarily due to the increase in revenue, from
approximately $1,303 for the three month period ended September 30, 1996. Cost
of service revenues were approximately $6,815 for the nine month period ended
September 30, 1997 compared to $2,760 for the nine months ended September 30,
1996. Cost of service revenues consists primarily of personnel and related costs
incurred in providing development, consulting and other services to customers.
The increase is primarily attributable to costs associated with the higher
service revenues and the expansion of the Company's consulting practice.
Management believes that it will continue to invest in a world-wide services
organization to meet the needs of its global customers.
OPERATING EXPENSES
Selling and marketing expenses consist primarily of the cost of sales and
marketing personnel and consultants, as well as the costs associated with
marketing programs and literature. These expenses increased to approximately
$9,417 and $26,989 for the three and nine month periods ended September 30,
1997, respectively, from approximately $6,347 and $15,628 for the three and nine
month periods ended September 30, 1996, respectively. The substantial increase
in these expenses for these periods was primarily attributable to increases in
the number of domestic and foreign sales and marketing personnel, sales
commissions, promotional expenses, the Company's acquisition of Folio during the
first quarter of 1997 and, to a lesser
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<PAGE>
extent, the preparation and distribution of new product sales literature.
Research and development expenses consist primarily of the cost of research
and development personnel and independent contractors, certain purchased
technology, as well as equipment and facility costs related to such activities.
These expenses increased to approximately $7,107 and $19,943 for the three and
nine month periods ended September 30, 1997, respectively, from approximately
$4,264 and $11,892 for the three and nine month periods ended September 30,
1996, respectively. The substantial increase in these periods was primarily
attributable to the Company's acquisitions of Waypoint and Folio during the
first quarter of 1997 and the hiring of additional software engineers and
consultants to develop and enhance the Company's products. Qualifying
capitalizable software development costs were immaterial in both periods, and
accordingly, the Company has charged all such expenses to research and
development in the period incurred. The Company believes that continued
investments in research and development are required to remain competitive in
the software industry. Certain research and development expenditures are
incurred substantially in advance of the related revenue and in some cases do
not generate revenue.
General and administrative expenses consist primarily of the cost of
finance, management and administrative personnel, as well as legal and other
professional fees. These expenses increased to approximately $3,021 and $8,676
for the three and nine month periods ended September 30, 1997, respectively,
from $1,638 and $4,619 for the three and nine month periods ended September 30,
1996, respectively. The substantial increase for these periods was primarily
attributable to the Company's acquisitions of Waypoint and Folio during the
first quarter of 1997, the related amortization of intangible assets, the hiring
of additional management and administrative personnel to support the expansion
of the Company's operations and, to a lesser extent, an increase in legal and
other professional fees.
In connection with the acquisitions of Waypoint in February 1997 and Folio
in March 1997, the Company allocated $9,250 and $25,000, respectively, of the
purchase price to acquired in-process research and development. Accordingly,
these costs were expensed as of the acquisition dates. The amount allocated to
acquired in-process research and development relates to projects that had not
yet reached technological feasibility and that, until completion of development,
have no alternative future use. These projects will require substantial
development and testing prior to the reaching of technological feasibility.
However, there can be no assurance that these projects will reach technological
feasibility or develop into products that may be sold profitably by the Company.
The technology acquired in the acquisitions of Waypoint and Folio have required,
and will continue to require, substantial additional development by the Company.
Interest income represents interest earned on cash, cash equivalents and
marketable securities and a loan to a founder. Interest income was approximately
$719 and $2,318 for the three and nine month periods ended
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<PAGE>
September 30, 1997, respectively, compared to approximately $1,163 and $1,934
for the three and nine month periods ended September 30, 1996, respectively. The
decrease in the interest income for the three months ended September 30, 1997
from the three months ended September 30, 1996 was due to lower average balances
in cash, cash equivalents, and marketable securities. The balances were lower
due to cash used in normal business operations as well as cash used for the
Folio acquisition. Interest expense was approximately $287 and $557 for the
three and nine month periods ended September 30, 1997, respectively, compared to
approximately $8 and $72 for the three and nine month periods ended September
30, 1996, respectively. Interest expense relates primarily to the Company's line
of credit with a bank, a note payable issued in conjunction with the Folio
acquisition as well as an obligation under a license agreement. Other expense of
$95 and $180 for the three and nine month periods ended September 30, 1997
represents foreign currency translation losses.
The Company has recorded a provision for foreign income taxes of $133 and $584
for the three and nine month period ended September 30, 1997 relating to
estimated taxes due in foreign jurisdictions compared to a provision of $25 for
the three and nine months ended September 30, 1996. The Company has had losses
for U.S. tax purposes for all periods to date and, accordingly, there has been
no provision for U.S. income taxes.
To date, inflation has not had a significant impact on the Company's
operations.
Liquidity and Capital Resources
At September 30, 1997, the Company had approximately $41,794 in cash, cash
equivalents and marketable securities, a decrease of $30,239 from December 31,
1996. The Company paid $11,400 in cash as part of the purchase price and
acquisition costs of Folio in March 1997.
The Company's operating activities utilized cash and cash equivalents of
approximately $19,827 and $21,548 for the nine month periods ended September 30,
1997 and 1996, respectively. Accounts receivable increased by $9,591 to $14,717
from December 31, 1996 to September 30, 1997. Accrued expenses increased by
$8,592 to $14,272 from December 31, 1996 to September 30, 1997.
The Company's investing activities used cash and cash equivalents of
approximately $1,473 and $33,885 for the nine month periods ended September 30,
1997 and 1996, respectively. The principal uses of cash and cash equivalents
for the nine months ended September 30, 1997 were the $11,400 paid in connection
with the purchase price and the acquisition costs of Folio as well as
purchasing $2,849 of property and equipment. These uses were partially offset by
the sale of $13,585 in marketable securities during the nine months ended
September 30, 1997.
The Company's financing activities provided cash and cash equivalents of
approximately $4,646 and $101,509 for the nine month periods ended September 30,
1997 and 1996, respectively. In 1997, the Company borrowed
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<PAGE>
approximately $3,700 from a line of credit. Also, the Company received proceeds
from the issuance of common stock for approximately $1,000. During the first
nine months of 1996 the financing was primarily from the proceeds from the
Company's initial public offering and the private sales of equity securities.
Capital expenditures were approximately $2,849 and $2,758 for the nine month
period ended September 30, 1997 and 1996, respectively. While the Company has no
material purchase commitments as of September 30, 1997, in March 1997, the
Company entered into a facility lease for its new corporate headquarters under
which the Company will pay approximately $32,352 from February 1998 through
February 2010. The Company estimates that capital expenditures for the next
twelve months will range from approximately $7,000 to $8,000.
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $39,000. These losses are available to
reduce federal and state taxable income, if any, in future years. These losses
are subject to review and possible adjustment by the Internal Revenue Service
and may be limited in the event of certain cumulative changes in ownership
interests of significant shareholders over a three-year period in excess of 50%.
The Company believes that it has experienced a change in ownership in excess of
50%. The Company does not believe that this change in ownership will
significantly impact the Company's ability to utilize its net operating loss
carryforwards.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for at least the next 12 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures.
Certain Factors That May Affect Future Results
This Quarterly Report contains certain forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, the words "believes," "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by forward-
looking statements made in this Quarterly Report and presented elsewhere by
management from time to time. These factors include without limitation, the
actual timing of new product introductions, the Company's ability to integrate
its recent acquisitions, competition from other providers of software products
and those factors in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. Other Information.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1* Loan and Security Agreement
Exhibit 10.2 Export-Import Bank Loan and Security Agreement
Exhibit 11 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
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<PAGE>
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 hereunto duly authorized.
OPEN MARKET, INC.
(Registrant)
Date: November 14, 1997 By: /s/ Gary B. Eichhorn
-----------------------
GARY B. EICHHORN,
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: November 14, 1997 By: /s/ Regina O. Sommer
-----------------------
REGINA O. SOMMER,
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -------------
10.1* Loan and Security Agreement
10.2 Export-Import Bank Loan and Security Agreement
11 Computation of Earnings Per Share
27 Financial Data Schedule (EDGAR)
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
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<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
EXHIBIT 10.1
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of September 26, 1997,
by and between SILICON VALLEY BANK, a California-chartered bank, with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
and with a loan production office located at Wellesley Office Park, 40 William
Street, Suite 350, Wellesley, Massachusetts 02181, doing business under the name
"Silicon Valley East" ("Bank") and OPEN MARKET, INC., a Delaware corporation,
with its chief executive offices located at 245 First Street, Cambridge,
Massachusetts 02142 and FOLIO CORPORATION, a Utah corporation with its chief
executive offices located at 5072 North Three Hundred West, Provo, Utah (jointly
and severally, the "Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, accounts receivable, drafts, royalties, contract rights, and all
other forms of obligations owing to Borrower arising out of the sale or
lease of goods (including, without limitation, the licensing of software
and other technology) or the rendering of services by Borrower, whether or
not earned by performance, and any and all credit insurance, guaranties,
and other security therefor, as well as all merchandise returned to or
reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a loan advance or advances under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any other Person that
owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person,
and each of such Person's senior executive officers, directors, and
partners.
"Borrower Agreement" means, collectively, a certain Borrower Agreement
of even date between Borrower and Bank and a certain Export-Import Bank
Loan and Security Agreement of even date between Borrower and Bank, each
evidencing a separate pre-export working capital line of credit in the
maximum principal amount of $5,000,000.00, to be advanced pursuant to the
terms thereunder, and subject to the terms, covenants and conditions
contained therein.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, amendment, and administration of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency
Proceeding) whether or not suit is brought, unless a final court of
competent jurisdiction finds the Bank acted with gross negligence or
willful misconduct.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: records concerning Accounts, the
Collateral, and all computer programs, or tape files containing such
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<PAGE>
information.
"Borrowing Base" means an amount equal to eighty percent (80.0%) of
Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"Closing Date" means the date of this Agreement.
"Code" means the Massachusetts Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
"Committed Revolving Line" means a credit extension to Borrower by
Bank hereunder of up to Ten Million Dollars ($10,000,000.00).
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to
(i) any indebtedness, lease, dividend, letter of credit or other obligation
of another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that
such amount shall not in any event exceed the maximum amount of the
obligations under the guarantee or other support arrangement.
"Credit Extension" means each Advance, Letter of Credit, Exchange
Contract or any other extension of credit by Bank for the benefit of
Borrower (or either of them) hereunder, including, without limitation,
advances under the Borrower Agreement.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on
the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding
Credit Extensions made under this Agreement, including all Indebtedness
that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable
at the option of Borrower or any Subsidiary to a date more than one year
from the date of determination, but excluding Subordinated Debt.
"Eligible Accounts" means those Accounts of Borrower that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4. Unless
otherwise agreed to by Bank in writing, Eligible Accounts shall NOT include
---
the following:
(a) Accounts that the account debtor has failed to pay within one
hundred and twenty (120) days of invoice date;
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<PAGE>
(b) Accounts with respect to an account debtor, fifty percent
(50%) or more of whose Accounts the account debtor has failed to pay
within one hundred twenty (120) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five
percent (25%) of the aggregate dollar amount of all Accounts, only to
the extent such obligations exceed the aforementioned percentage,
except as approved in writing by Bank;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for
Eligible Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department,
agency, or instrumentality thereof;
(f) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g.
accounts payable, customer deposits, credit accounts etc.) against
amounts owed to Borrower;
(g) Accounts generated by demonstration or promotional goods,
or with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be
conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, or employee of Borrower; and
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank
believes, in its reasonable discretion, that there may be a basis for
dispute (but only to the extent of the amount subject to such dispute
or claim), or is subject to any Insolvency Proceeding, or becomes
insolvent, or goes out of business; and
(j) Accounts the collection of which Bank reasonably determines
after reasonable inquiry and consultation with Borrower to be
doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States and that are: (1) covered by credit insurance in form and amount,
and by an insurer reasonably satisfactory to Bank less the amount of any
deductible(s) which may be owing thereon; or (2) supported by one or more
letters of credit either advised or negotiated through Bank or in favor of
Bank as beneficiary, in an amount and of a tenor, and issued by a financial
institution, reasonably acceptable to Bank; or (3) that Bank reasonably
approves on a case-by-case basis.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"Exchange Contract" has the meaning set forth in Section 2.1.3.
"GAAP" means generally accepted accounting principles defined by the
controlling pronouncements of the Financial Accounting Standards Board as
from time to time amended or supplemented.
"Guarantor" means any present or future guarantor of the Obligations.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of
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<PAGE>
property or services, including without limitation reimbursement and other
obligations with respect to surety bonds and letters of credit, (b) all
obligations evidenced by notes, bonds, debentures or similar instruments,
(c) all capital lease obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance
or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Letter of Credit" means a letter of credit or similar undertaking
issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower in favor of Bank, and any other present or
future agreement entered into between Borrower and/or for the benefit of
Bank in connection with this Agreement, including, without limitation, the
Borrower Agreement, all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations under the Loan Documents.
"Maturity Date" means one day prior to one year from the Anniversary
Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement executed in connection with or relating thereto, including,
without limitation, the Borrower Agreement, whether absolute or contingent,
due or to become due, now existing or hereafter arising, including any
interest that accrues after the commencement of an Insolvency Proceeding
and including any debt, liability, or obligation owing from Borrower to
others that Bank may have obtained by assignment or otherwise.
"Payment Date" means the first calendar day of each month commencing
on the first such day after the Closing Date and ending on the Maturity
Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
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<PAGE>
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
(f) Indebtedness in connection with real estate leases for
Folio Corporation's existing premises in Provo, Utah, and premises to
be leased by Open Market, Inc. in Burlington, Massachusetts.
(g) Other Indebtedness not exceeding One Million Dollars
($1,000,000.00) in the aggregate outstanding at any time; and
(h) Extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) - (g) above,
provided that the principal amount thereof is not increased or the
--------
terms thereof are not modified to impose more burdensome terms upon
Borrower or Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any
agency or any State thereof maturing within one (1) year from the date
of acquisition thereof, (ii) commercial paper maturing no more than
one (1) year from the date of creation thereof and currently having
the highest rating obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the
--------
same have no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such Equipment, or (ii) existing on such
equipment at the time of its acquisition, provided that the Lien is
--------
confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor,
licensor or under any lease or license provided that such leases,
subleases, licenses and sublicenses do not prohibit the grant of the
security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described
in clauses (a) through (c) above, provided
--------
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<PAGE>
that any extension, renewal or replacement Lien shall be limited to
the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not
increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable, marketable securities, and
investments with maturities of fewer than 120 days of Borrower determined
in accordance with GAAP. Quick Assets shall not include deferred income or
revenue.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Director of Finance of
Borrower.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than fifty percent (50%) of the voting stock or other
equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the consolidated
total assets of Borrower and its Subsidiaries minus, without duplication,
-----
(i) the sum of any amounts attributable to (a) goodwill, (b) intangible
items such as unamortized debt discount and expense, patents, trade and
service marks and names, copyrights and research and development expenses
except prepaid expenses, and (c) all reserves not already deducted from
assets, and (ii) Total Liabilities.
---
"Total Liabilities" means as of any applicable date, any date as of
which the amount thereof shall be determined, all obligations that should,
in accordance with GAAP be classified as liabilities on the consolidated
balance sheet of Borrower, including in any event all Indebtedness, but
specifically excluding Subordinated Debt.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions. Subject to and upon the terms and conditions of
------------------
this Agreement, Borrower promises to pay to the order of Bank, in lawful money
of the United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at the rates
specified under the terms hereof.
2.1.1 (a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make
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<PAGE>
Advances to Borrower in an aggregate outstanding amount not to exceed (i) the
Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii)
the face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) and minus (iii) the Foreign Exchange Reserve.
Subject to the terms and conditions of this Agreement, amounts borrowed pursuant
to this Section 2.1 may be repaid and reborrowed at any time during the term of
this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time
on the Business Day that the Advance is to be made. Each such notification shall
be promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer (as designated in writing in accordance with the terms
hereof), or without instructions if in Bank's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer or a designee thereof (as
designated in writing in accordance with the terms hereof), and Borrower shall
indemnify and hold Bank harmless for any damages or loss suffered by Bank as a
result of such reliance. Bank will credit the amount of Advances made under
this Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.1.2 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of
the Committed Revolving Line or the Borrowing Base, whichever is less, minus
(ii) the then outstanding principal balance of the Advances; provided that the
--------
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed
U.S.$2,000,000.00. Each Letter of Credit shall have an expiry date no later than
the Maturity Date. All Letters of Credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of standard Application and Letter of Credit
Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any
loss, cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any repayment obligation
arising under any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
-7-
<PAGE>
2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements.
-------------------------------------------------------
(a) Subject to the terms of this Agreement, Borrower may enter
into foreign exchange contracts (the "Exchange Contracts") not to exceed an
aggregate amount of U.S.$2,000,000.00 (the "Contract Limit"), pursuant to which
Bank shall sell to, or purchase from, Borrower foreign currency on a spot or
future basis. Borrower shall not request any Exchange Contracts at any time it
is in breach of any of the provisions of this Agreement. All Exchange Contracts
must provide for delivery of settlement on or before the Maturity Date. The
amount available under the Committed Revolving Line at any time shall be reduced
by the following amounts (the "Foreign Exchange Reserve") on any given day on
which an amount hereunder is to be determined (the "Determination Date"): (i) on
all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed on or more than two Business Days after the Determination
Date, 10% of the gross amount of the Exchange Contracts; plus (ii) on all
outstanding Exchange Contracts on which delivery is to be effected or settlement
allowed within two Business Days after the Determination Date, 100% of the gross
amount of the Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange Contracts
at any time (a) that an Event of Default occurs and is continuing, or (b) that
there is no sufficient availability under the Committed Revolving Line and
Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without
limitation of any applicable indemnities, Borrower agrees to reimburse Bank for
any and all reasonable fees, costs and expenses relating thereto or arising in
connection therewith.
(c) Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and settlement allowed in
any two business day period to be more than $20,000,000.00 (the "Settlement
Limit") nor shall Borrower permit the total gross amount of all Exchange
Contracts to which Borrower is a party, outstanding at any one time, to exceed
the Contract Limit. Notwithstanding the above, however, the amount which may be
settled in any two (2) business day period may be increased above the Settlement
Limit up to, but in no event to exceed, the amount of the Contract Limit under
either of the following circumstances:
(i) if there is sufficient availability under the Committed
Revolving Line in the amount of the Foreign Exchange Reserve as of each
Determination Date, provided that Bank in advance shall reserve the full
amount of the Foreign Exchange Reserve against the Committed Revolving
Line; or
(ii) if there is insufficient availability under the
Committed Revolving Line, as to settlements within any two (2) business day
period, provided that Bank, in its sole discretion, may: (A) verify good
funds overseas prior to crediting Borrower's deposit account with Bank (in
the case of Borrower's sale of foreign currency); or (B) debit Borrower's
deposit account with Bank prior to delivering foreign currency overseas (in
the case of Borrower's purchase of foreign currency).
(d) In the case of Borrower's purchase of foreign currency,
Borrower in advance shall instruct Bank upon settlement either to treat the
settlement amount as an advance under the Committed Revolving Line, or to debit
Borrower's account for the amount settled.
(e) Borrower shall execute all standard form applications and
agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.
(f) Without limiting any of the other terms of this Agreement or
any such standard form applications and agreement of Bank, Borrower agrees to
indemnify Bank and hold it harmless, from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and expenses (including,
without limitation, attorneys' reasonable fees of counsel of Bank's choice), of
every nature and description which it may sustain or incur, based upon, arising
out of, or in any way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby.
-8-
<PAGE>
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement
is greater than the lesser of (i) the Committed Revolving Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances shall bear interest, on the average daily balance thereof, at a per
annum rate equal to the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default (until cured), at a rate equal to
the lesser of (i) three (3) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default, and (ii) the
maximum interest rate allowed by applicable law.
(c) Payments. Interest hereunder shall be due and payable on
--------
each Payment Date. Borrower hereby authorizes Bank to debit any accounts with
Bank, including, without limitation, Account Number 700772870 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any interest not paid when due shall be compounded
by becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from
-----------
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
------------------
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 3:00 p.m. Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. As compensation for the Bank's maintenance of
------------
sufficient funds available for such purpose, the Bank shall have earned a
Committed Revolving Line Facility Fee (so referred to herein), which fee
shall be paid quarterly, on a calendar year basis, in arrears, in an
amount equal to a quarter of One percent (0.25%) of the average unused
portion of the Committed Revolving Line, as determined by the Bank. The
Borrower shall not be entitled to any credit, rebate or repayment of any
Committed Revolving Line Facility Fee previously earned by the Bank
pursuant to this Section notwithstanding any termination of the within
Agreement, or suspension or termination of the Bank's
obligation to make loans and advances hereunder.
Notwithstanding the foregoing, the Facility Fee shall be waived for
every quarter in which the
-9-
<PAGE>
Borrower maintains average aggregate outstanding Credit Extensions under
the Committed Revolving Line of Credit of $1,500,000.00 or more.
(b) Financial Examination and Appraisal Fees. Bank's customary
----------------------------------------
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts,
and for each appraisal of Collateral and financial analysis and examination
of Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon demand from Bank, including, without
-------------
limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and
expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law, regulation, treaty
----------------
or official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall
----
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
2.8 Borrower Liability. Either Borrower may, acting singly, request
------------------
Credit Extensions hereunder. Each Borrower hereby appoints the other as agent
for the other for all purposes hereunder, including with respect to requesting
Credit Extensions hereunder. Each Borrower hereunder shall be obligated to
repay all Credit Extensions made hereunder, regardless of which Borrower
actually receives the benefit of said Credit Extension, as if each Borrower
hereunder directly received all Credit Extensions. Each Borrower acknowledges
---
that, to the extent the other Borrower has or may have certain rights of
subrogation or reimbursement against the other for claims arising out of this
Agreement, that those rights are hereby waived.
2.9 Subrogation and Similar Rights. Notwithstanding any other provision
------------------------------
of this Agreement or other related document, each Borrower irrevocably waives
all rights that it may have at law or in equity (including, without limitation,
any law subrogating the Borrower to the rights of Lender under the Loan
Documents) to seek
-10-
<PAGE>
contribution, indemnification or any other form of reimbursement from any other
Borrower, or any other Person now or hereafter primarily or secondarily liable
for any of the Obligations, for any payment made by the Borrower with respect to
the obligations in connection with the Loan Documents or otherwise and all
rights that it might have to benefit from, or to participate in, any security
for the Obligations as a result of any payment made by the Borrower with respect
to the Obligations in connection with the Loan documents or otherwise. Any
agreement providing for indemnification, reimbursement or any other arrangement
prohibited under this Section shall be null and void. If any payment is made to
a Borrower in contravention of this Section, such Borrower shal hold such
payment in trust for Bank and such payment shall be promptly delivered to Bank
for application to the Obligations, whether matured or unmatured.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension. The obligation of
------------------------------------------------
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement executed by the Borrower;
(b) Export-Import Bank Loan and Security Agreement by Borrower;
(c) the Borrower Agreement executed by the Borrower;
(d) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(e) an opinion of Borrower's counsel;
(f) financing statements (Forms UCC-1) for the Borrower;
(g) insurance certificates for Borrower;
(h) payment of the Facility Fee and Bank Expenses then due
specified in Section 2.5 hereof;
(i) Certificates of Good Standing and Foreign Qualification;
(j) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
---------------------------------------------
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) Except as otherwise disclosed to the Bank, the
representations and warranties contained in Section 5 shall be true and
correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrower on the date of such Credit Extension as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST (THIS IS NOT AN ALL ASSETS SECURITY INTEREST)
-----------------------------
-11-
<PAGE>
4.1 Grant of Security Interest. Borrower, as their interests may
--------------------------
appear, hereby grants and pledges to Bank a continuing security interest in all
presently existing and hereafter acquired or arising Collateral, in order to
secure prompt payment of any and all Obligations and in order to secure prompt
performance by Borrower of each of its covenants and duties under the Loan
Documents. Except as set forth in the Schedule, such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the reasonable request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, without causing any disruption of
Borrower's operations (prior to an Event of Default) to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
----------------------------------
corporation duly existing and in corporate good standing under the laws of its
state or country of incorporation and qualified and licensed to do business in,
and is in good corporate standing in, any state or country in which the conduct
of its business or its ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound. Borrower
is not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
---------------------------
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or in the case of services is obligated to be
performed, or delivered to the account debtor or to the account debtor's agent
for immediate shipment to and unconditional acceptance by the account debtor.
Neither Borrower has received notice of actual or imminent Insolvency Proceeding
of any account debtor whose accounts are included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Name; Location of Chief Executive Office. Borrower has not done
----------------------------------------
business and will not without at least thirty (30) days prior written notice to
Bank do business under any name other than that specified on the signature page
hereof. The chief executive office of Borrower is located at the address
indicated in Section 10 hereof.
5.6 Litigation. There are no actions or proceedings pending, or, to
----------
Borrower's knowledge, threatened
-12-
<PAGE>
by or against Borrower or any Subsidiary before any court or administrative
agency in which an adverse decision could have a Material Adverse Effect.
5.7 No Material Adverse Change in Financial Statements. All consolidated
--------------------------------------------------
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.8 Solvency. The fair saleable value of Borrower's assets (including
--------
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
5.9 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act, the failure to comply with which will not result in a
Material Adverse Effect. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.10 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
5.11 Taxes. Borrower and each Subsidiary has filed or caused to be filed
-----
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith by proper proceedings with adequate reserves
under GAAP.
5.12 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.13 Government Consents. Borrower and each Subsidiary has obtained all
-------------------
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.14 Full Disclosure. No representation, warranty or other statement made
---------------
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary, in light of the circumstances, in order to make the statements
contained in such certificates or statements not misleading.
-13-
<PAGE>
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrowe, and each of them, shall do all of the
following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which would reasonably likely have a Material Adverse Effect.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver
-------------------------------------------
to Bank: (a) as soon as available, but in any event within thirty (30) days
after the end of each quarter, a company prepared consolidated balance sheet and
income statement covering Borrower's consolidated operations during such period,
in a form reasonably acceptable to Bank and certified by a Responsible Officer;
(b) as soon as available, but in any event within ninety (90) days after the end
of Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably accepted to the Bank (Arthur Andersen shall be
deemed to be acceptable to the Bank); (c) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could be reasonably likely to result in a Material Adverse
Effect; and (d) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto, together with aged listings of
---------
Accounts.
Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank a Compliance Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT D hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
-----
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower will make, and will cause each Subsidiary to make,
timely payment or deposit of all material tax payments and withholding taxes
required of it by applicable laws, including, but not limited to, those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment if
the amount or validity of such payment is (i) contested in good faith by
appropriate proceedings , (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
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<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
6.5 Insurance.
---------
(a) Borrower, at its expense, shall keep its assets insured, as
appropriate, against loss or damage by fire, theft, explosion, sprinklers, and
all other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of its assets in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Bank. At
Bank's request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor.
6.6 Principal Depository. Borrower shall maintain a principal operating
--------------------
account with Bank.
6.7 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar quarter, a ratio of Quick Assets to Current Liabilities of at least
*** to ***.
6.8 Tangible Net Worth. Borrower shall maintain, as of the last day of
------------------
each calendar quarter, a Tangible Net Worth of not less than the amounts listed
below:
September 30, 1997 $*************
December 31, 1997 $*************
March 31, 1998 $*************
June 30, 1998 $*************
September 30, 1998 $*************
6.9 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Each Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
neither Borrower will do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
------------
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers: (i) of inventory
or equipment in the ordinary course of business, (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) that constitute payment
of normal and usual operating expenses in the ordinary course of business; (iv)
of worn-out or obsolete equipment, (v) the sale of the Borrower's premises
located at 5072 North Three Hundred West, Provo, Utah 84604; or (vi)
dispositions of assets in arms length transactions, which assets have a value in
the aggregate of up to $500,000.00, as reasonably reflected in the Borrower's
books and records, which dispositions shall not result in a Material Adverse
Effect, or Event of Default.
7.2 Changes in Business, or Management, Business Locations. Engage in
------------------------------------------------------
any business, or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto), or if any two
of the following current officers cease to hold their current position:
Chairman, President or Chief Financial Officer, and replacements reasonably
satisfactory to Bank are not made in within thirty (30) days. Borrower will not,
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
-15-
<PAGE>
The Borrower has advised the Bank of its relocation to One Wayside Drive, in
Burlington, Massachusetts, which will be effective on or about February, 1998.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
-----------------------
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
Notwithstanding the foregoing, the Borrower may acquire the assets or stock of
or merge with, another corporation, provided (a) the Borrower is the surviving
legal entity, and (b) such transaction will not result in the failure of the
Borrower to comply with the other terms and conditions of this Agreement.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
-------------
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Transactions with Affiliates. Directly or indirectly enter into or
----------------------------
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.8 Subordinated Debt. Make any payment in respect of any Subordinated
-----------------
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.9 Compliance. Become an "investment company" or a company controlled
----------
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation would be reasonably likely to result in a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by either Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Sections
6.3, 6.6, 6.7, or 6.8, or violates any of the covenants contained in Article 7
of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, and as to
-16-
<PAGE>
any default under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure such default within ten (10) days after
the occurrence thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent attempts
by Borrower be cured within such ten (10) day period, and such default is likely
to be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default (provided
that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a Material Adverse
-----------------------
Effect, or (ii) is a material impairment of the value or priority of Bank's
security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) Business Days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 60 Business Days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
----------------
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of Five Hundred Thousand Dollars
($500,000.00) or that would reasonably likely to result in a Material Adverse
Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Five Hundred
Thousand Dollars ($500,000.00) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
------------------
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
8.10 Guaranty. Any guaranty of all or a portion of the Obligations
--------
ceases for any reason to be in full force and effect, or any Guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank
in connection with such guaranty, or any of the circumstances described in
Sections 8.4, 8.5 or 8.8 occur with respect to any Guarantor.
-17-
<PAGE>
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, immediately due and payable (provided
that upon the occurrence of an Event of Default described in Section 8.5,
all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash, or adequately secure
same in a manner satisfactory to Bank, with Bank in an amount equal to the
amount of any Letters of Credit remaining undrawn, as collateral security
for the repayment of any future drawings under such Letters of Credit, and
Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letters of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit;
(d) Liquidate any Exchange Contracts not yet settled and demand
that Borrower immediately deposit cash with Bank in an amount sufficient to
cover any losses incurred by Bank due to liquidation of the Exchange
Contracts at the then prevailing market price;
(e) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(f) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to
be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's
premises, Borrower hereby grants Bank a license to enter such premises and
to occupy the same, without charge in order to exercise any of Bank's
rights or remedies provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account
of Borrower held by Bank;
(h) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-
free license or other right, solely pursuant to the provisions of this
Section 9.1, to use, without charge, Borrower's labels, rights of use of
any name, trade names, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with
Bank's exercise of its rights under this Section 9.1, Borrower's rights
under all licenses and all franchise agreements shall inure to Bank's
benefit;
(i) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Bank determines is commercially reasonable, and apply the proceeds thereof
to the Obligations in whatever manner or order it deems appropriate;
-18-
<PAGE>
(j) Bank may credit bid and purchase at any public sale, or at
any private sale as permitted by law; and
(k) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable. The appointment of Bank
as Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may notify any account debtor owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
-------------
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Except as otherwise set forth herein, Borrower
---------------
waives demand, protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper,
-19-
<PAGE>
and guarantees at any time held by Bank on which Borrower may in any way be
liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Open Market, Inc.
245 First Street
Cambridge, Massachusetts 02142
Attn: Ms. Regina Sommer, Chief Financial Officer
FAX: (617) 949-7136
Folio Corporation
5072 North 300 West
Provo, Utah 84604
Attn: Mr. David McGinn, Treasurer
With a copy to: Open Market, Inc.
245 First Street
Cambridge, Massachusetts 02142
Attention: Legal Counsel
FAX: (617) 949-7147
If to Bank: Silicon Valley East
Wellesley Office Park
40 William Street - Suite 350
Wellesley, Massachusetts 02181
Attn: Ms. Pamela J. Aldsworth, Vice President
FAX: (617) 431-9906
With a copy to: Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attention: David A. Ephraim, Esquire
FAX: (617) 723-6831
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
------------------------------------
The law of the Commonwealth of Massachusetts shall apply to this Agreement.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, MASSACHUSETTS.
-20-
<PAGE>
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall indemnify, defend, protect and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the LOAN DOCUMENTS;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the LOAN DOCUMENTS, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall
--------------------------
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run;
provided that so long as the obligations referred to in the first sentence of
this Section 12.7 have been satisfied, and Bank has no commitment to make any
Credit Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 Countersignature. This Agreement shall become effective only when
----------------
it shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first
-21-
<PAGE>
above written.
OPEN MARKET, INC.
By: /s/ Regina O. Sommer
_____________________________
Title: Senior Vice President &
Chief Financial Officer
_____________________________
FOLIO CORPORATION
By: /s/ David B. McGinn
_____________________________
Title: Vice President Finance &
Treasurer
_____________________________
By:
_____________________________
Title:
_____________________________
SILICON VALLEY BANK, d/b/a SILICON VALLEY
EAST
By: /s/ Pamela Aldsworth
_____________________________
Name: Pamela Aldsworth
_____________________________
Title: Vice President
_____________________________
SILICON VALLEY BANK
By: /s/ Amy B. Young
_____________________________
Name: Amy B. Young
_____________________________
Title: Vice President
_____________________________
(Signed in Santa Clara County, California)
-22-
<PAGE>
EXHIBIT A
---------
(THIS IS NOT AN ALL ASSETS SECURITY AGREEMENT)
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing
to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower;
(b) All proceeds, documents, cash, deposit accounts, securities,
investment property, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _______________________
FAX#: (408) ________________________ TIME: _______________________
FROM: _____________________________________________________________________
BORROWER'S NAME
FROM: _____________________________________________________________________
AUTHORIZED SIGNER'S NAME
___________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE: ____________________________________________________________________
FROM: ACCOUNT # ______________________________ TO
ACCOUNT#_________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
BANK USE ONLY:
TELEPHONE REQUEST:
-----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
__________________________
Authorized Requester
___________________________________
Authorized Signature (Bank)
Phone # ___________________________
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Open Market, Inc./Folio Coporation Bank: Silicon Valley Bank
Commitment Amount: $10,000,000.00
<TABLE>
<CAPTION>
<S> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ________ $ ______________________
2. Additions (please explain on reverse) $ ______________________
3. TOTAL ACCOUNTS RECEIVABLE $ ______________________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 120 days due $ ______________________
5. Balance of 50% over 90 day accounts $ ______________________
6. Concentration Limits $ ______________________
7. Ineligible Foreign Accounts $ ______________________
8. Governmental Accounts $ ______________________
9. Contra Accounts $ ______________________
10. Promotion or Demo Accounts $ ______________________
11. Intercompany/Employee Accounts $ ______________________
12. Other (please explain on reverse) $ ______________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ ______________________
14. Eligible Accounts (#3 minus #13) $ ______________________
15. LOAN VALUE OF ACCOUNTS (____% of #14) $ ______________________
BALANCES
16. Maximum Loan Amount $ ______________________
17. Total Funds Available Lesser of #16 or (#13 plus #15)] $ ______________________
18. Present balance owing on Line of Credit $ ______________________
19. Outstanding under Sublimits ( ) $ ______________________
20. RESERVE POSITION (#17 minus #18 and #19) $ ______________________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
--------------------------------
COMMENTS: BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
___________________________ COMPLIANCE STATUS: YES / NO
--------------------------------
By: _______________________
Authorized Signer
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: OPEN MARKET, INC./FOLIO CORPORATION
The undersigned authorized officer of OPEN MARKET, INC. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
compliance for the period ending ______________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of
determination that Borrower is not in compliance with any of the terms of the
Agreement, and that such compliance is determined not just at the date this
certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING
YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
<S> <C> <C>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
Quarterly financial statements Quarterly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R Agings with B.B. + C.C. Monthly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Minimum Quick Ratio ***:*** _____:1.0 Yes No
Minimum Tangible Net Worth (See Loan Agreement) $________ Yes No
</TABLE>
--------------------------------
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
--------------------------------
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
Date:
- ---------------------------- --------------
Signature
- ----------------------------
Title
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Open Market, Inc./Folio Corporation Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $10,000,000.00.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Working capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
- --------------
Amount paid to Borrower directly: $ 0.00
Undisbursed Funds $10,000,000.00
Principal $10,000,000.00
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF ____________________, 1997.
BORROWER: OPEN MARKET, INC. FOLIO CORPORATION
__________________________ __________________________
Authorized Officer Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
BORROWER: Open Market, Inc./Folio Corporation BANK: Silicon Valley Bank
INSURANCE REQUIREMENTS. Open Market, Inc., and Folio Corporation
("Borrower") understands that insurance coverage is required in connection with
the extending of a loan or the providing of other financial accommodations to
Borrower by Bank. These requirements are set forth in the Loan Documents. The
following minimum insurance coverages must be provided on the following
described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be cancelled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.
INSURANCE COMPANY. Borrower may obtain insurance from any insurance
company Borrower may choose that is reasonably acceptable to Bank. Borrower
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Borrower agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of ____________________________, 1997, or earlier. Borrower
acknowledges and agrees that if Borrower fails to provide any required insurance
or fails to continue such insurance in force, Bank may do so at Borrower's
expense as provided in the Loan and Security Agreement. The cost of such
insurance, at the option of Bank, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. BORROWER ACKNOWLEDGES
THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED
PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE
LOAN; HOWEVER, BORROWER'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Borrower authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED _______________, 1997.
BORROWER:Open Market, Inc. BORROWER:Folio Corporation
X______________________________ X______________________________
Authorized Officer Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:
PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
<PAGE>
EXHIBIT 10.2
EXPORT-IMPORT BANK LOAN AND SECURITY AGREEMENT
This EXPORT-IMPORT BANK LOAN AND SECURITY AGREEMENT (the "Exim Agreement")
is entered into as of September 26, 1997, by and between SILICON VALLEY BANK
("Bank") and OPEN MARKET, INC.and FOLIO CORPORATION (jointly and severally, the
"Borrower").
RECITALS
A. Borrower and Bank are parties to that certain Loan and Security
Agreement of even date herewith (the "Domestic Agreement"), together with
related documents.
B. Borrower and Bank desire in this Exim Agreement to set forth their
agreement with respect to a working capital facility to be guaranteed by
Export-Import Bank of the United States.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. Except as otherwise defined, terms that are
-----------
capitalized in this Exim Agreement shall have the meaning assigned in the
Domestic Loan Documents. As used in this Exim Agreement, the following terms
shall have the following definitions:
"Advances" means any loans or extensions of credit hereunder.
"Borrower Agreement" means the Export-Import Bank of the United
States Working Capital Guarantee Program Borrower Agreement between
Borrower and Bank.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Domestic Agreement" has the meaning set forth in recital paragraph
A.
"Domestic Loan Documents" means the Domestic Agreement and the
instruments and documents executed in connection with that Agreement.
"Exim Bank" means Export-Import Bank of the United States.
"Exim Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, and administration of the Loan
Documents, including any costs incurred in relation to opposing or seeking
to obtain relief from any stay or restructuring order prohibiting Bank from
exercising its rights as a secured creditor, foreclosing upon or disposing
of Collateral, or such related matters; and Bank's reasonable attorneys'
fees and expenses incurred in enforcing or defending the Loan Documents,
whether or not suit is brought, unless a final court of competent
jurisdiction finds the Bank acted with gross negligence or willful
misconduct.
"Exim Committed Line" means Five Million Dollars ($5,000,000).
"Exim Eligible Foreign Accounts" means those Accounts payable in
United States Dollars that arise in the ordinary course of Borrower's
business from Borrower's sale of Eligible Foreign Inventory (i) with
respect to which the account debtor is not a resident of the United States;
and (ii) that have been validly assigned and comply with all of Borrower's
representations and warranties to Bank; standards of eligibility may be
fixed and revised from time to time by Bank in Bank's reasonable judgment
and upon
<PAGE>
notification thereof to the Borrower in accordance with the provisions
hereof. Exim Eligible Foreign Accounts shall not include the following:
(a) Accounts with a term in excess of one hundred twenty (120)
days;
(b) Accounts that the account debtor has failed to pay within
sixty (60) calendar days of the original due date of the invoice
unless such accounts are insured through Exim Bank export credit
insurance for comprehensive commercial and political risk, or through
Exim Bank approved private insurers for comparable coverage, in which
case ninety (90) calendar days shall apply;
(c) Accounts with respect to an account debtor, fifty percent
(50%) or more of whose Accounts the account debtor has failed to pay
within one hundred twenty (120) days of the original date of invoice;
(d) Accounts evidenced by a letter of credit until the date of
shipment of the items covered by the subject letter of credit;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor is
located in a country in which Exim Bank is legally prohibited from
doing business;
(g) Accounts with respect to which the account debtor is
located in a country in which Exim Bank coverage is not available for
commercial reasons;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of Borrower's liability to
such account debtor.
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto (but only to the
extent of the amount subject to such dispute or claim), or is subject
to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(j) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of the aggregate dollar amount of all
Accounts, only to the extent such obligations exceed such percentage,
except as approved in writing by Bank;
(k) Accounts generated by the sale of products purchased for
military purposes;
(l) Accounts generated by sales of Inventory which constitutes
defense articles or defense services;
(m) Accounts payable in currency other than Dollars;
(n) Accounts which are due and owing and the collection of
which must be made outside the United States;
(o) Accounts the collection of which Bank or Exim Bank
determines in its reasonable judgment to be doubtful; and
(p) Accounts that are excluded from the Borrowing Base under
the Borrower
-2-
<PAGE>
Agreement.
"Exim Guarantee" means that certain Master Guarantee Agreement or
other agreement, as amended from time to time, the terms of which are
incorporated by reference into this Exim Agreement, pursuant to which Exim
Bank guarantees Borrower's obligations under this Exim Agreement.
"Exim Loan Documents" means, collectively, this Exim Agreement, the
Domestic Loan Documents, any note or notes executed by Borrower, and any
other agreement entered into between Borrower and Bank in connection with
this Exim Agreement, all as amended or extended from time to time.
"Exim Maturity Date" means the earliest of (i) the Maturity Date
under the Domestic Loan Documents, or (ii) September 25, 1998.
"Note" is defined in Section 2.1.1.
"Obligations" shall mean the Exim Loan Documents.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1.1 Revolving Advances. Subject to the terms and conditions of this
------------------
Exim Agreement, Bank agrees to make Advances to Borrower in an amount not to
exceed the lesser of the Exim Committed Line or the Borrowing Base. For
purposes of this Exim Agreement "Borrowing Base" shall mean an amount equal to
ninety percent (90%) of the Exim Eligible Foreign Accounts.
To evidence the Advances, Borrower shall execute and deliver to Bank on the
date hereof a promissory note (the "Note") in substantially the form attached
hereto as EXHIBIT B.
---------
Whenever Borrower desires an Advance, either Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall
be promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT C hereto. In addition to the procedure set forth in the preceding
- ---------
sentence, Bank is authorized to make Advances under this Exim Agreement, based
upon written instructions received from a Responsible Officer or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank will credit the
amount of Advances made under this Section 2.1.1 to Borrower's deposit account.
Amounts borrowed pursuant to this Section 2.1.1 may be repaid and re-borrowed at
any time during the term of this Exim Agreement so long as no Event of Default
has occurred and is continuing.
2.1.2 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of
the Exim Committed Line or the Borrowing Base, whichever is less, minus (ii) the
then outstanding principal balance of the Advances; provided that the face
--------
amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed
U.S.$2,000,000.00. Each Letter of Credit shall have an expiry date no later than
the Exim Maturity Date. All Letters of Credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of standard Application and Letter of Credit
Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any
loss, cost, expense or liability, including, without
-3-
<PAGE>
limitation, reasonable attorneys' fees, arising out of or in connection with any
repayment obligation arising under any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Exim Committed Line shall be reduced by the amount of such
reserve for so long as such letter of credit remains outstanding.
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations pursuant to this Exim Agreement owed by Borrower to Bank pursuant to
Section 2.1 of this Exim Agreement is greater than the lesser of (i) the
Borrowing Base or (ii) the Exim Committed Line, at the option of Bank, Borrower
shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as specified to the contrary in any Loan
-------------
Document, any Advances under this Exim Agreement shall bear interest, on the
average Daily Balance, at a rate equal to the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default, at a rate equal to the lesser of
(i) three (3) percentage points above the rate that applied immediately prior to
the occurrence of the Event of Default, and (ii) the maximum interest rate
allowed by applicable law.
(c) Payments. Interest hereunder shall be due and payable on each
--------
Payment Date. Bank shall, at its option, charge such interest, all Exim Bank
Expenses, and all Periodic Payments against Borrower's deposit account or
against the Exim Committed Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time
-----------
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased contemporaneously with such change by an amount equal to such
change in the Prime Rate. All interest chargeable under the Exim Loan Documents
shall be computed on the basis of a three hundred sixty (360) day year for the
actual number of days elapsed.
2.4 Crediting Payments. The receipt by Bank of any wire transfer of
------------------
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such wire transfer is of immediately available federal funds and
is made to the appropriate deposit account of Bank or unless and until such
check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any payment (other
than a wire transfer of immediately available funds) received by Bank after 3:00
p.m. California time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day.
2.5 Fees. Borrower shall pay to Bank the following fees:
----
(a) Financial Examination and Appraisal Fees. Bank's reasonable
----------------------------------------
fees and reasonable out-of-pocket expenses for Bank's initial audit of
Borrower's Accounts and financial analysis and examination
-4-
<PAGE>
of Borrower performed from time to time by Bank or its agents;
(b) Exim Fee. A facility fee equal to Seventy-Five Thousand
--------
Dollars ($75,000), which fee shall be due and fully earned upon the Closing
Date; and
(c) Exim Bank Expenses. On the Closing Date, Exim Bank Expenses
------------------
incurred through the Closing Date and, after the Closing Date, all Exim
Bank Expenses as they become due, if any.
2.6 Term. This Exim Agreement shall become effective once duly executed
----
and authorized by Borrower and Bank and shall continue in full force and effect
for a term ending on the Exim Maturity Date, on which date all Obligations shall
become immediately due and payable. Notwithstanding the foregoing, Bank shall
have the right to terminate this Exim Agreement immediately and without notice
upon the occurrence of an Event of Default and Borrower shall have the right to
terminate this Exim Agreement immediately upon payment in full of its
Obligations then outstanding hereunder. Notwithstanding any termination of this
Exim Agreement, all of Bank's security interest in all of the Collateral and all
of the terms and provisions of this Exim Agreement shall continue in full force
and effect until all Obligations have been paid and performed in full, and no
termination shall impair any right or remedy of Bank, nor shall any such
termination relieve Borrower of any Obligation to Bank until all of the
Obligations have been paid and performed in full.
2.7 Use of Proceeds. Borrower will use the proceeds of Advances only
---------------
for the purposes specified in the Borrower Agreement. Borrower shall not use the
proceeds of the Advances for any purpose prohibited by the Borrower Agreement.
2.8 Borrower Liability. Either Borrower may, acting singly, request
------------------
Advances hereunder. Each Borrower hereby appoints the other as agent for the
other for all purposes hereunder, including with respect to requesting Advances
hereunder. Each Borrower hereunder shall be obligated to repay all Advances made
hereunder, regardless of which Borrower actually receives said Advance, as if
each Borrower hereunder directly received all Advances. Each Borrower
---
acknowledges that, to the extent the other Borrower has or may have certain
rights of subrogation or reimbursement against the other for claims arising out
of this Agreement, that those rights are hereby waived.
2.9 Subrogation and Similar Rights. Notwithstanding any other provision
------------------------------
of this Agreement or other related document, each Borrower irrevocably waives
all rights that it may have at law or in equity (including, without limitation,
any law subrogating the Borrower to the rights of Lender under the Loan
Documents) to seek contribution, indemnification or any other form of
reimbursement from any other Borrower, or any other Person now or hereafter
primarily or secondarily liable for any of the Obligations, for any payment made
by the borrower with respect to the Obligations in connection with the Loan
Documents or otherwise and all rights that it might have to benefit from, or to
participate in, any security for the Obligations as a result of any payment made
by the Borrower with respect to the Obligations in connection with the Loan
documents or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be
null and void. If any payment is made to a Borrower in contravention of this
Section, such Borrower shal hold such payment in trust for Bank and such payment
shall be promptly delivered to Bank for application to the Obligations, whether
matured or unmatured.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1;
(b) timely receipt by Bank of a copy of the executed firm written
export purchase order relating to the requested Advance, the payment terms
of which shall be acceptable to Bank (the "Export
-5-
<PAGE>
Order");
(c) timely receipt by Bank of an Export Order and Borrowing Base
Certificate as defined in the Borrower Agreement;
(d) the Exim Guarantee shall be in full force and effect; and
(e) except as otherwise disclosed to the Bank, the
representations and warranties contained in Section 5 hereof shall be true
and accurate in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though
made at and as of each such date (except to the extent they relate
specifically to an earlier date, in which case such representations and
warranties shall continue to have been true and accurate as of such date),
and no Potential Event of Default or Event of Default shall have occurred
and be continuing, or would result from such Advance.
The making of each Advance shall be deemed to be a representation and
warranty by Borrower on the date of such Advance as to the accuracy of the facts
referred to in subsection (e) of this Section 3.1.
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Each Borrower, as its interest may
--------------------------
appear, hereby grants to Bank a continuing security interest in all presently
existing and hereafter acquired or arising Collateral in order to secure prompt
repayment of any and all Obligations and in order to secure prompt performance
by Borrower of each of its covenants and duties under the Exim Loan Documents.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the reasonable request of bank, all
financing statements and other documents that Bank may reasonably request, in
form satisfactory to Bank, to perfect and continue perfected Bank's security
interests in the Collateral and in order to fully consummate all of the
transactions contemplated under the Exim Loan Documents.
4.3 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney, with power to: (a) send requests for verification of
Accounts; (b) endorse Borrower's name on any checks or other forms of payment or
security that may come into Bank's possession; (c) sign the name of Borrower on
any of the documents described in Section 4.2 (regardless of whether an Event of
Default has occurred); (d) sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (e) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (f) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable. The appointment of Bank
as Borrower's attorney-in-fact, and each of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and Bank's obligation to provide Advances hereunder is terminated.
4.4 Right to Inspect. Each of Bank and Exim Bank (through any of their
----------------
respective officers, employees, or agents) shall have the right, upon reasonable
prior notice, from time to time during Borrower's usual business hours, without
causing any disruptions of Borrower's operations (prior to an Event of Default)
to inspect Borrower's Books, facilities and activities, and to check, test, and
appraise the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral. Bank
shall conduct semi-annual accounts receivable audits, the results of which
audits shall be satisfactory to Bank. Borrower will cause its officers and
employees to give their full cooperation and assistance in connection therewith.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents, warrants and covenants as follows:
-6-
<PAGE>
5.1 Domestic Loan Documents. The representations and warranties
-----------------------
contained in the Domestic Loan Documents, which are incorporated into this Exim
Agreement, are true and correct.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of the
Obligations, each Borrower shall do all of the following:
6.1 Domestic Loan Documents. Borrower shall comply in all respects with
-----------------------
the provisions of the Domestic Loan Documents, which provisions are incorporated
into this Exim Agreement.
6.2 Terms of Sale. Borrower shall cause all sales of products upon
-------------
which Advances are based either to be (i) supported by one or more irrevocable
letters of credit in an amount and of a tenor, naming a beneficiary and issued
by a financial institution acceptable to Bank or (ii) on open account to
creditworthy buyers that have been preapproved in writing by Bank and Exim Bank.
6.3 Borrower Agreement. Borrower shall comply with all of the terms of
------------------
the Borrower Agreement. In the event of any conflict or inconsistency between
any provision contained in the Borrower Agreement with any provision contained
in this Exim Agreement, the more strict provision, with respect to Borrower,
shall control.
6.4 Notice in Event of Filing of Action for Debtor's Relief. Borrower
-------------------------------------------------------
shall notify Bank in writing within five (5) days of the occurrence of any of
the following: (1) Borrower begins or consents in any manner to any proceeding
or arrangement for its liquidation in whole or in part or to any other
proceeding or arrangement whereby any of its assets are subject generally to the
payment of its liabilities or whereby any receiver, trustee, liquidator or the
like is appointed for it or any substantial part of its assets (including
without limitation the filing by Borrower of a petition for appointment as
debtor-in-possession under Title 11 of the U.S. Code); (2) Borrower fails to
obtain the dismissal or stay on appeal within thirty (30) calendar days of the
commencement of any proceeding arrangement referred to in (1) above; (3)
Borrower begins any other procedure for the relief of financially distressed or
insolvent debtors, or such procedure has been commenced against it, whether
voluntarily or involuntarily, and such procedure has not been effectively
terminated, dismissed or stayed within thirty (30) calendar days after the
commencement thereof, or (4) Borrower begins any procedure for its dissolution,
or a procedure therefor has been commenced against it.
6.5 Payment in Dollars. Borrower shall require payment in United States
------------------
Dollars for the products, unless Exim Bank otherwise agrees in writing.
6.6 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Exim
Agreement.
7. NEGATIVE COVENANTS
------------------
Each Borrower covenants and agrees that so long as any credit hereunder
shall be available and until payment in full of the Obligations, neither
Borrower will do any of the following, or enter into any agreement to do any of
the following:
7.1 Domestic Loan Documents. Violate or otherwise fail to comply with
-----------------------
any provisions of the Domestic Loan Documents, which provisions are incorporated
into this Exim Agreement.
7.2 Loans to Shareholders or Affiliates. Without Exim Bank's prior
-----------------------------------
written consent, make any loans to any shareholder or entity affiliated with
Borrower. As used in this Section 7.2, the term "loan" does not include salary,
rent paid to an affiliated entity owned by the shareholders, or to other
expenses incurred in the ordinary
-7-
<PAGE>
course of Borrower's business.
7.3 Borrower Agreement. Violate or otherwise fail to comply with any
------------------
provision of the Borrower Agreement.
7.4 Exim Guarantee. Take any action, or permit any action to be taken,
--------------
that causes or, with the passage of time, could reasonably be expected to cause,
the Exim Guarantee to cease to be in full force and effect.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events with respect to either Borrower
shall constitute an Event of Default by Borrower under this Exim Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of, or any
---------------
interest on, any Advances when due and payable; or fails to pay any portion of
any other Obligations not constituting such principal or interest, including
without limitation Exim Bank Expenses (or any interest but for the provision of
the United States Bankruptcy Code, would have occurred on any accounts), within
thirty (30) days of receipt by Borrower of an invoice therefor;
8.2 Covenant Default; Cross Default. If Borrower fails or neglects to
-------------------------------
perform, keep, or observe any material term, provision, condition, covenant, or
agreement contained in this Exim Agreement, in any of the Domestic Loan
Documents, the Borrower Agreement or the Exim Loan Documents, or an Event of
Default occurs under any of the Domestic Loan Documents or the Borrower
Agreement; or
8.3 Exim Guarantee. If the Exim Guarantee ceases for any reason to
--------------
be in full force and effect, or if the Exim Bank declares the Exim Guarantee
void or revokes or purports to revoke any obligations under the Exim Guarantee.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence of an Event of Default,
-------------------
Bank may, at its election, without notice and without demand, do any one or more
of the following:
(a) Declares all Obligations, whether evidenced by this Exim
Agreement, or by any of the other Exim Loan Documents, immediately due and
payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Exim Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Notify customers of Borrower or other third parties to pay
amounts owing to Borrower directly to the Bank;
(e) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to
be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned
premises, Borrower hereby grants Bank a license to enter into possession of
such premises and to occupy the same, without charge, in order to exercise
any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
-8-
<PAGE>
(f) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling
any Collateral and, in connection with Bank's exercise of its rights under
this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Bank determines is commercially reasonable;
(i) Bank may credit bid and purchase at any public sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Exim Direction. Upon the occurrence of an Event of Default,
--------------
Exim Bank shall have a right to: (i) direct Bank to exercise the remedies
specified in Section 9.1 and (ii) request that Bank accelerate the maturity of
any other loans to Borrower as to which Bank has a right to accelerate.
9.3 Exim Notification. Bank shall have the right to immediately notify
-----------------
Exim Bank in writing if it has knowledge of the occurrence of any of the
following events: (1) any failure to pay any amount due under this Loan Exim
Agreement or the Note; (2) the Borrowing Base is less than the sum of
outstanding Advances hereunder; (3) any failure to pay when due any amount
payable to Bank by the Borrower under any loan(s) extended by Bank to Borrower;
(4) the filing of an action for debtor's relief by, against, or on behalf of
Borrower; or (5) any threatened or pending material litigation against Borrower,
or any material dispute involving Borrower.
In the event that it sends such a notification to Exim Bank, Bank shall
have the right to thereafter send Exim Bank a written report on the status of
the events covered by said notification on each Business Day which occurs every
thirty (30) calendar days after the date of said notification, until such time
as Bank files a claim with Exim Bank or said default or other events have been
cured. Bank shall not have any obligation to make any Advances following said
notification to Exim Bank, unless Exim Bank gives its written approval thereto.
If directed to do so by Exim Bank, Bank shall have a right promptly to exercise
any rights it may have against Borrower to demand the immediate repayment of all
amounts outstanding under the Exim Loan Documents.
9.4 Remedies Cumulative. Bank's rights and remedies under this Exim
-------------------
Agreement, the Exim Loan Documents, the Domestic Loan Documents and all other
agreements shall be cumulative. Bank shall have all other rights and remedies
not inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any Event of Default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election, or
acquiescence by it.
10. WAIVERS; INDEMNIFICATION
------------------------
10.1 Demand; Protest. Except as otherwise set forth herein, Borrower
---------------
waives demand, protest, notice of protest, notice of dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees at any time held by Bank on which
Borrower may in any way be liable.
10.2 Bank's Liability for Inventory. Bank shall not in any way or manner
------------------------------
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion
-9-
<PAGE>
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
10.3 Indemnification. Borrower agrees to defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Exim Agreement,
and (b) all losses or Exim Bank Expenses in any way suffered, incurred, or paid
by Bank as a result of or in any way arising out of, following, or consequential
to transactions between Bank and Borrower whether under this Exim Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11. NOTICES
-------
Unless otherwise provided in this Exim Agreement, all notices or demands by
any party relating to this Exim Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by certified mail, postage
prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank,
as the case may be, at the address set forth in the Domestic Loan Documents.
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
The law of the Commonwealth of Massachusetts shall apply to this Agreement.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
13. GENERAL PROVISIONS
------------------
13.1 Successors and Assigns. This Exim Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Exim Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participations in all or any part of, or any interest in
Bank's rights and benefits hereunder.
13.2 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Exim Agreement.
13.3 Severability of Provisions. Each provision of this Exim Agreement
--------------------------
shall be severable from every
-10-
<PAGE>
other provision of this Exim Agreement for the purpose of determining the legal
enforceability of any specific provision.
13.4 Amendments in Writing. This Exim Agreement cannot be changed or
---------------------
terminated orally. Without the prior written consent of Exim Bank, no material
amendment of or deviation from the terms of this Exim Agreement or the Note
shall be made that would adversely affect the interests of Exim Bank under the
Exim Guarantee, including without limitation the rescheduling of any payment
terms provided for in this Exim Agreement. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Exim Agreement, if
any, are merged into this Exim Agreement.
13.5 Counterparts. This Exim Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Exim
Agreement.
13.6 Survival. All covenants, representations and warranties made in
--------
this Exim Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 10.3 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13.7 Countersignature. This Agreement shall become effective only when
----------------
it shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Exim Agreement to
be executed as of the date first above written.
OPEN MARKET, INC.
By: /s/ Regina O. Sommer
___________________________________
Name: Regina O. Sommer
___________________________________
Title: Senior Vice President & Chief
Financial Officer
___________________________________
FOLIO CORPORATION
By: /s/ David B. McGinn
___________________________________
Name: David B. McGinn
___________________________________
Title: Vice President Finance &
Treasurer
___________________________________
SILICON VALLEY BANK, d/b/a
SILICON VALLEY EAST
By:
___________________________________
Name:
___________________________________
Title:
___________________________________
-11-
<PAGE>
SILICON VALLEY BANK
By: /s/ Lalitha Swart
_______________________________________
Name: Lalitha Swart
_____________________________________
Title: Senior Vice President
_____________________________________
(Signed in Santa Clara County, California)
-12-
<PAGE>
EXHIBIT A
---------
(THIS IS NOT AN ALL ASSETS SECURITY AGREEMENT)
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing
to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower;
(b) All proceeds, documents, cash, deposit accounts, securities,
investment property, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing.
-13-
<PAGE>
EXHIBIT B
---------
Revolving Promissory Note
(Export-Import Line)
$5,000,000.00 September 26, 1997
FOR VALUE RECEIVED, the undersigned (the "Borrower"), promises to pay to
the order of Silicon Valley Bank ("Bank"), at such place as the holder hereof
may designate, in lawful money of the United States of America, the aggregate
unpaid principal amount of all advances ("Advances") made by Bank to Borrower,
up to a maximum principal amount of Five Million Dollars ($5,000,000), plus
interest on the aggregate unpaid principal amount of such Advances, at the rates
and in accordance with the terms of the Borrower Agreement between Borrower and
Bank of even date herewith, as amended from time to time (the "Loan Agreement")
on the first calendar day of each month after an Advance has been made. The
entire principal amount and all accrued interest shall be due and payable on
September 25, 1998, or on such earlier date, as provided for in the Loan
Agreement.
Borrower irrevocably waives the right to direct the application of any and
all payments at any time hereafter received by Bank from or on behalf of
Borrower, and Borrower irrevocably agrees that Bank shall have the continuing
exclusive right to apply any and all such payments against the then due and
owing obligations of Borrower as Bank may deem advisable. In the absence of a
specific determination by Bank with respect thereto, all payments shall be
applied in the following order: (a) then due and payable fees and expenses; (b)
then due and payable interest payments and mandatory prepayments; and (c) then
due and payable principal payments and optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all reasonable costs and reasonable expenses
including all reasonable attorneys' fees, incurred in such collection or in any
suit or action to collect this Note or in any appeal thereof, unless a final
court of competent jurisdiction finds that the Bank acted with gross negligence
or willful misconduct. Borrower waives presentment, demand, protest, notice of
protest, notice of dishonor, notice of nonpayment, and any and all other notices
and demands in connection with the delivery, acceptance, performance, default or
enforcement of this Note, as well as any applicable statute of limitations. No
delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right. Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern the
rights and obligations of Borrower with respect to all obligations hereunder.
The law of the Commonwealth of Massachusetts shall apply to this Agreement.
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER
-14-
<PAGE>
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. BORROWER REPRESENTS AND WARRANTS
THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY
AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
OPEN MARKET, INC.
By: ______________________________________
Name: _____________________________________
Title:
_____________________________________
FOLIO CORPORATION
By: ______________________________________
Name: _____________________________________
Title:
_____________________________________
-15-
<PAGE>
EXHIBIT C
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS
3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _____________________________
================================================================================
FROM:___________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE
NUMBER: ________________________________________________________________________
FROM ACCOUNT #_________________________ TO ACCOUNT#_____________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_____________________________________
PRINCIPAL PAYMENT (ONLY) $_____________________________________
INTEREST PAYMENT (ONLY) $_____________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_____________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
================================================================================
FAX#: (408) 432-3249 TIME: ______________________
BANK USE ONLY:
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_______________________________________ ___________________________________
Authorized Requester Phone #
_______________________________________ ___________________________________
Received by (Bank) Phone #
___________________________________
Authorized Signature (Bank)
EXHIBIT D
BORROWING BASE CERTIFICATE
-16-
<PAGE>
COLLATERAL SCHEDULE
(FOREIGN A/R LINE OF CREDIT)
________________________________________________________________________________
Borrower: Open Market, Inc. Lender: Silicon Valley Bank
245 First Street 3003 Tasman Drive
Cambridge, MA 02142 Santa Clara, CA 95054
Commitment Amount: $5,000,000.00
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C>
FOREIGN ACCOUNTS RECEIVABLE FROM EXPORT ACTIVITIES
1. Accounts Receivable Book Value as of __________________ $__________
2. Additions (please explain on reverse) $__________
3. TOTAL FOREIGN ACCOUNTS RECEIVABLE $__________
ACCOUNTS RECEIVABLE DEDUCTIONS
4. Term in excess of 120 days $__________
5. Amounts over 120 days $__________
6. Balance of 50% over 120 day accounts $__________
7. Excess 25% Concentration $__________
8. Credit Balances over 120 days $__________
9. Accounts not payable in the U.S. Dollars or payable
in other than U.S. Dollars $__________
10. Governmental and Military Accounts $__________
11. Contra Accounts $__________
12. Promotion, Demo or Consignment Accounts $__________
13. Intercompany/Employee and Affiliate Accounts $__________
14. Accounts in the form of L/Cs, if subject items have
not yet been shipped by Borrower $__________
15. Accounts arising from Inventory not originally located
in and shipped from the U.S. $__________
16. Accounts arising from the sale of defense articles or items $__________
17. Accounts of buyers located in or from countries in which
shipment is prohibited or no coverage available $__________
18. Amounts due and collectable outside U.S. $__________
19. Other exclusions $__________
20. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________
21. Eligible Accounts (No. 3 - No. 20) $__________
22. Loan Value of Accounts (90%-Advance) $__________
BALANCES
23. Maximum Loan Amount $__________
24. Total Available $__________
25. Present balance owing on Line of Credit $__________
26. Outstanding under Sublimits $__________
27. RESERVE POSITION (No. 24 - (No. 25 + No. 26)) $__________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Collateral Schedule complies
with the representations and warranties set forth in the Borrower Agreement,
executed by Borrower and acknowledged by Lender, and the Export-Import Bank Loan
and Security Agreement, executed by Borrower and acknowledged by Lender dated
September 26, 1997, as may be amended from time to time, as if all
representations and warranties were made as of the date hereof, and that
Borrower is, and shall remain, in full compliance with its agreements,
covenants, and obligations under such agreement. Such
-17-
<PAGE>
representations and warranties include, without limitation, the following:
Borrower is using disbursements only for the purpose of enabling Borrower to
finance the cost of manufacturing, producing, purchasing or selling items
intended for export. Borrower is not using disbursements for the purpose of:
(a) servicing any of Borrower's unrelated pre-existing or future indebtedness;
(b) acquiring fixed assets or capital goods for the use of Borrower's business;
(c) acquiring, equipping, equipping or renting commercial space outside the
United States; (d) supporting research and development; (e) paying salaries of
non-U.S. citizens or non-U.S. permanent residents who are located in the offices
of the United States; or (f) serving as a retainage or warranty bond.
Additionally, disbursements are not being used to finance the manufacture,
purchase or sale of any of the following: (a) items to be sold to a buyer
located in a country in which the Export Import Bank of the United States is
legally prohibited from doing business; (b) that part of the cost of the items
which is not U.S. Content unless such part is not greater than fifty percent
(50%) of the cost of the items and is incorporated into the items in the United
States; (c) defense articles or defense services or items directly or indirectly
destined for use by military organizations designed primarily for military use
(regardless of the nature or actual use of the items); or (d) any items to be
used in the construction, alteration, operation or maintenance of nuclear power,
enrichment, reprocessing, research or heavy water production facilities.
Sincerely,
Open Market, Inc.
By:___________________________________
Name:_________________________________
Chief Financial Officer
Date:_________________________________
Folio Corporation
By:___________________________________
Name:_________________________________
Chief Financial Officer
--------------------------------
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
VERIFIED BY:____________________
Date:___________________________
--------------------------------
-18-
<PAGE>
EXHIBIT 11
OPEN MARKET, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1997 1996 1997 1996
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net loss............................. $(6,372) $(5,870) $(55,026) $(19,396)
=========== ============ ============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Weighted average common shares
outstanding......................... 30,832 28,186 30,225 18,379
Shares to be issued (other
equity)............................. 644 - 573 -
Weighted average shares to
reflect common stock options
issued after March 31, 1996,
pursuant to the treasury stock
method.............................. - - - 1,896
Weighted average shares to
reflect the conversion of
Series A, B and C Preferred
Stock............................... - - - 7,038
----------- ------------ ------------- -------------
Pro forma weighted average
number of common and common
equivalent shares outstanding....... 31,476 28,186 30,798 27,313
=========== ============ ============ =============
Pro forma net loss per common
and common equivalent share......... $ (0.20) $ (0.21) $ (1.79) $(0.71)
=========== ============ ============ =============
</TABLE>
-1-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 33,111
<SECURITIES> 8,683
<RECEIVABLES> 14,717
<ALLOWANCES> 1,399
<INVENTORY> 0
<CURRENT-ASSETS> 59,310
<PP&E> 17,298
<DEPRECIATION> 5,136
<TOTAL-ASSETS> 81,446
<CURRENT-LIABILITIES> 34,980
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 46,346
<TOTAL-LIABILITY-AND-EQUITY> 81,446
<SALES> 33,348
<TOTAL-REVENUES> 42,623
<CGS> 1,973
<TOTAL-COSTS> 8,788
<OTHER-EXPENSES> 89,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 557
<INCOME-PRETAX> (54,442)
<INCOME-TAX> 584
<INCOME-CONTINUING> (55,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,026)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
