-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Au1fz3pULBn+dfwCZsa6AHJhWei8Kz12/LQzRqRqR5ATFlXyEq5h8CPIgqBc7NvP fYMJHYsoeLhTnltBY92Q4w== 0000950135-97-001521.txt : 19970401 0000950135-97-001521.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001521 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VMARK SOFTWARE INC CENTRAL INDEX KEY: 0000885474 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042818132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20059 FILM NUMBER: 97569248 BUSINESS ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 BUSINESS PHONE: 5083663888 MAIL ADDRESS: STREET 1: 50 WASHINGTON ST CITY: WESTBOROUGH STATE: MA ZIP: 01581-1013 10-K 1 ANNUAL REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) COMMISSION FILE NUMBER: 0-20059 ------------------------ VMARK SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2818132 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 50 WASHINGTON STREET WESTBORO, MASSACHUSETTS 01581-1021 (Address of principal executive offices) Telephone number: (508) 366-3888 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of Each Class Common Stock, $0.1 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 13, 1997, there were outstanding 8,365,578 shares of the registrant's common stock, $.01 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $55,147,827. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III. ================================================================================ 2 This Form 10-K, future filings of the registrant, press releases of the registrant, and oral statements made with the approval of an authorized executive officer of the Registrant may contain forward looking statements. In connection therewith, please see the cautionary statements and risk factors contained in Item 1. "Business -- Cautionary Statement" and "Business -- Risk Factors", which identify important factors which could cause actual results to differ materially from those in any such forward-looking statements. PART I ITEM 1. GENERAL VMARK Software, Inc. ("VMARK" or the "Company") designs, develops, markets, sells and supports software for developing, deploying, and maintaining business applications and data warehousing solutions. The Company's principal product offerings are UniVerse, a relational database management system (RDBMS); DataStage, a software product that simplifies data mart and data warehouse development; and ESL, an application development tool for building robust, cross-platform client/server applications. VMARK products are available worldwide and are complemented by a variety of services including product support, consulting, and education. BUSINESS STRATEGY The Company was founded in 1984 to develop and market UniVerse, providing a means for over 4,000 business software applications, originally developed on certain proprietary systems, to be migrated with minimal re-coding to Unix. This preserves investments in established business applications and user knowledge. Once an application has been migrated to UniVerse, it can run on any platform supported by UniVerse without further modification. The Company has established a base of Value Added Resellers ("VARs") that market UniVerse as part of their vertical market business solutions. The Company has periodically released updated versions of UniVerse containing new and enhanced functionality, and has also ported UniVerse to the Windows NT operating system, providing new deployment options for UniVerse applications. Over the past few years, VMARK has expanded its product and service offerings through growth, internal development, partnerships, and acquisitions. The Company's strategy is to provide cost-effective and comprehensive software and services for developing, deploying, and maintaining business applications and data warehouses. The new DataStage product leverages the Company's core technology and distribution channels expertise, enabling VMARK to participate in the rapidly expanding data warehouse market. DataStage allows data warehouse, access, and analysis functionality to be integrated with software application packages in a single environment that can be implemented quickly and cost-effectively as a complete information delivery solution. Key features of VMARK strategy are: - - Improved User and Developer Productivity. The Company's principal focus is to offer products and services that improve the productivity of users and developers in creating, retrieving, manipulating, and storing business data, and in exploiting the business intelligence inherent in that data. - - Portability. The Company designs its products to operate uniformly across a broad range of computer systems, including PCs, workstations, and servers. The Company believes that users are demanding increased flexibility to deploy applications without the necessity of having to re-program applications or retrain users. - - Client/Server Technologies. The Company believes that client/server technology will continue to play a major role in increased user flexibility. In 1996, the Company released new versions of UniVerse and ESL with enhanced client/server capabilities, and also developed DataStage, a new client/server tool for rapid data warehouse development. - - Well-Leveraged Distribution. VMARK sells its products worldwide to a broad range of customer segments through multiple channels, including more than 300 Value Added Resellers (VARs) who provide packaged 2 3 application solutions for numerous vertical markets; systems Integrators who utilize VMARK products and services when building solutions for their customers; a worldwide direct sales force; and, value added distributors which sell VMARK products as an integral part of their commercial offerings. By directing its sales efforts through these worldwide distribution channels, the Company's products are marketed and sold in over 40 countries. - - International Presence. VMARK has emphasized international sales through wholly owned subsidiaries and a network of independent distributors. In 1996, international sales (both direct and export) accounted for 39% of revenues. - - Recurring Revenue. The Company's distribution and pricing strategies for its products are intended to generate recurring revenue. The sale of a development license generally leads to follow-on sales as applications are deployed and expanded. The Company also receives maintenance fees. - - Worldwide Customer Service. The Company offers on-site installation assistance, telephone support, consulting services, and education for a fee both at worldwide VMARK locations and on-site at VAR and customer locations. PRODUCTS Universe UniVerse is a relational database management system for client/server business applications. It delivers the reliability, scalability, and flexibility that line-of-business solutions developers demand. UniVerse provides the capabilities needed to develop, enhance, and deploy high-performance applications on both Unix and Windows NT platforms. UniVerse offers full suite of tools and services for graphical user interface enhancement; fully integrated ANSI SQL, ODBC, and OCX database interfaces; Internet/Intranet development; distributed database support; and enterprise-wide connectivity. UniVerse employs a single, scaleable architecture and common set of administration tools and development interfaces on both Unix and Windows NT. UniVerse serves small workgroups as easily as it serves large businesses. UniVerse is capable of supporting thousands of concurrent users on an economically sized and economically priced system. UniVerse is also very flexible and easy to administer. UniVerse operates on a wide range of UNIX and Windows NT-based systems, including those offered by the following:
VENDOR PLATFORM VENDOR PLATFORM - ------ -------- ------ -------- Bull HN DPX 20 DPX/2-3xx Pyramid MIServer T Series MIServer S Series Data General AViiON Series Sequent Symmetry/ptx Digital Equipment OSF/1 Alpha AXP systems Siemens Nixdorf RM400-05/10, MX300/500, Application DEC 433 MS500 and RM600 systems Encore Computer Series 91 Silicon Graphics R4X Series Hewlett-Packard HP9000 Series Stratus R/25 and R/300 Continuum Series IBM RISC System/6000 Series Sun Microsystems SPARC Power PC ICL DRS 6000 Tandem Integrity S2 Motorola M88000 Unisys 6000/65 NCR System 3000 Series Generic ix86/Pentium All 386/486/Pentium system certified to run SCO UNIX and/or UnixWare Novell UnixWare
3 4 On the Windows NT operating system, UniVerse runs on many Intel-based systems, Digital Alpha-based systems, MIPS-based systems from Siemens Nixdorf and NEC, and PowerPC-based systems from Motorola and IBM. UniVerse is priced on the basis of the number of users. The domestic list price is $435 per user for licenses of 4 to 63 users and $365 per user for licenses of 64 or more users. Datastage DataStage is a comprehensive solution for the fast, easy creation and maintenance of data marts and data warehouses. DataStage is an integrated, simple-to-use system that provides the tools for the customer to build and manage these vital data stores. As a result, users have access to the data they need to make faster, smarter business decisions. DataStage addresses what has historically been the most difficult and time-consuming portion of a data mart or data warehouse implementation. Using a simple, point-and-click interface, the user can easily extract, cleanse, transform, and integrate data from operation systems, archives, and third-party data sources. The result is a cost-effective, usable data mart or warehouse which is up and running quickly, and which can easily adapt to change. DataStage offers support for a wide variety of data sources, including popular databases such as Oracle, Microsoft SQL Server, UniVerse, Sybase, Informix, and others, as well as legacy databases, thus minimizing incompatibility issues. DataStage pricing is based upon the number and type of components required; the list price for a single, run-time system is $27,900. ESL ESL is an integrated tool set for building robust, cross-platform client/server applications. ESL features an integrated development environment with a full set of visual tools, a debugger, compiler, and a non-procedural, event-driven language. ESL provides developers with connectivity to a wide range of databases and communications protocols, with particularly strong support for both terminal-oriented and transactional connection to mainframes. This makes ESL ideally suited for modernizing mainframe applications without touching any code on the mainframe itself. From a single set of source code, ESL applications can be compiled for deployment on OS/2, 16-bit Windows environments, Windows 95 and Windows NT Workstation. ESL development systems range in price from $3,500 to $10,900. ESL Client Services (run-time environment) cost $195 per user. SERVICES The Company believes that a variety of services are necessary to complement the marketing and sales of VMARK's products. Customer support personnel provide worldwide coverage on a 7-day, 24-hour basis. VMARK also offers consulting services to assist customers with implementing solutions based upon VMARK's technologies. VMARK also provides education services that help customers maximize the benefit of their VMARK-based solutions. A variety of classes are offered regularly at VMARK training centers, or can be delivered as needed at the customer's site. In addition to providing education services for our own products, VMARK is an authorized training provider for Microsoft products. 4 5 SALES AND MARKETING The Company sells its products worldwide to a broad range of customer segments through multiple channels, including: - - More than 300 Value Added Resellers (VARs) which provide packaged application solutions for numerous vertical markets - - Systems Integrators which utilize VMARK products and services when building solutions for their customers - - A worldwide direct sales force - - Value added distributors which sell VMARK products as an integral part of their commercial offerings. In the United States, the Company's sales and support personnel are located at its Westboro, Massachusetts headquarters; Costa Mesa, California; Englewood, Colorado; Atlanta, Georgia; Rosemont, Illinois; Bridgewater, New Jersey Lawrenceville, New Jersey; Cary, North Carolina; Irving, Texas; and Bellevue, Washington. The Company has seven wholly owned international subsidiaries: - - VMARK Software, Ltd. with offices in Bracknell, Milton Keynes and Warrington, Cheshire, England - - VMARK Software, S.A. based in Paris, France, with branch offices in Madrid and Barcelona, Spain - - VMARK Software GmbH, in Stuttgart, Germany - - VMARK Software Africa Pty. Ltd. in Parktown, South Africa - - VMARK Software, Canada, Inc. in Markham, Ontario, Canada - - VMARK Asia-Pacific, Pty., Ltd. with headquarters in North Sydney, Australia, with offices in Kuala Lumpur and Malaysia - - VMARK Software Japan in Tokyo, Japan The Company also has exclusive distributors in Argentina, Brazil, and Ecuador which, in turn, maintain a distributor sales channel. Revenue derived from outside the United States was approximately 39%, 44%, and 40% of total revenue in 1996, 1995, and 1994 respectively. The Company intends to continue making investments in international activities. The Company has various marketing programs to assist in the sale of its products and services, including regional seminars, reseller and user group meetings. In addition, the Company participates in various computer trade shows. The Company also provides catalogs, visual aids, newsletters and product brochures. 5 6 CUSTOMERS VMARK's products are used by end-users in a broad range of industries. As of December 31, 1996, over 1,000,000 users employed VMARK products. A sampling of its users include: Allied Domecq Kaiser Permanente Anheuser-Busch Medaphis Armco Steel Mitsubishi Electric UK Bankers Trust New York City Library Blue Cross/Blue Shield Minnesota Neiman Marcus British Gas The Perrier Group BP Oil Renault Cabletron Sears, Roebuck & Co. Carolina Freight Stanford University Charles Schwab Travelers Chase Manhattan U. K. Ministry of Corporation Defense Eurotunnel University of Southern California France Telecom U. S. Library of Congress GE Aerospace U. S. Sprint Harte Hanks Wells Fargo Hyatt International Xerox
PRODUCT DEVELOPMENT The Company believes that continuing enhancements of its products and the development of new products will be required in order to maintain its competitive position. In November 1996, the Company began shipping commercially UniVerse Release 9, which offer a common set of core database features, administration tools, and development interfaces on both Unix and Windows NT. In December 1996, the company began shipping commercially ESL for Windows 95 and Windows NT, giving customers an upgrade path from OS/2 and 16-bit Windows environments to Microsoft's latest 32-bit operating systems. This new release enhances the value of existing ESL applications and also provides a platform for developing new business-critical applications. Throughout 1996, the Company invested in the development of its new DataStage product. The Company's current development efforts are focused on enhancing the features of, and adding new functionality to, all of its products. In 1996, 1995, and 1994, the Company's expenses relating to product development were $8,875,000, $10,111,000, and $10,605,000 respectively. Apart from the personnel reduction related to the Object Studio development effort which occurred on June 1996, the Company has experienced little turnover in its product development personnel and believes that the experience, stability, and depth of its product development staff are important factors in the Company's success. COMPETITION The computer software and service industry is intensely competitive. VMARK competes with many companies offering alternative solutions to the needs addressed by VMARK's products. Many of these competitors have greater financial, marketing or technical resources than VMARK and may be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements or to devote greater resources to the promotion and sale of their products than can VMARK. The Company competes with other providers of database management products and services for resellers. The Company's resellers in turn compete with the vendors of other computer software and service providers. 6 7 EMPLOYEES As of December 31, 1996, the Company had a total of 369 employees worldwide, consisting of 236 in sales, support and marketing, 75 in engineering, and 58 in finance and administration. The Company has experienced no work stoppages and believes its relations with its employees are good. PROPRIETARY RIGHTS AND LICENSES The Company depends upon a combination of copyrights and restrictions on access to its trade secrets to protect its proprietary rights. The Company distributes its products under software license agreements which grant customers a perpetual, non-exclusive license to the Company's products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of the Company's products. Generally, the Company's products are furnished to customers only in object code form. In the limited cases where the Company makes its source codes available to third parties, it does so only under an obligation of confidentiality. In addition, the Company generally enters into confidentiality agreements with management and programming staff and limits access to and distribution of its proprietary information. While the Company has not registered any of its copyrights, it generally includes copyright notices in its software. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of the Company's products or to obtain information that the Company regards as proprietary. The Company believes that, due to the rapid pace of innovation within the software industry, factors such as the technological and creative skills of its personnel and ongoing reliable product maintenance and support are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. In addition, the Company believes its policy of not furnishing updates, enhancements and other continuing product support to unauthorized users of its software products substantially reduces the risk of unauthorized reproduction. All trademarks and registered trademarks used herein are the property of their respective owners. CAUTIONARY STATEMENT When used anywhere in the Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "project", or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the various risk factors described below in this Form 10-K could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RISK FACTORS Information with respect to risk factors is located in Item 7, "Management's Discussion of Financial Condition and Results of Operations" under the caption "Factors Affecting Future Results". ITEM 2. PROPERTIES The Company's principal administrative, marketing, product development, and support facilities are located in Westboro, Massachusetts, where the Company occupies approximately 90,000 square feet of office space under a lease that expires in 2014. The Company also leases office space for its twenty US and foreign 7 8 sales and support offices and one foreign product development office. The terms of these leases generally range from one to five years. The Company believes the current space is adequate for its current needs and that additional space will be available as needed. ITEM 3. LEGAL PROCEEDINGS LITIGATION The Company is a defendant, together with certain of its officers, in two actions initially filed in October 1995 in the U.S. District Court in the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaints that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company has denied the allegations in its answer to the Complaint and the proceeding is now in the early stages of discovery. Based upon its review to date, Company management believes that the actions are without merit and plans to oppose them vigorously. Management is of the opinion that the Company will prevail in this matter and that the eventual outcome of this Complaint will not be material to the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the year ended December 31, 1996 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common stock of VMARK Software, Inc. is traded on the NASDAQ Stock Market under the symbol "VMRK". The table below presents the high and low prices for VMARK Software, Inc. common stock for the periods indicated. The prices reflect interdealer prices, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions.
1996 HIGH LOW ---- ----- ----- First Quarter......................................... $ 9.875 $6.50 Second Quarter........................................ 12.625 7.00 Third Quarter......................................... 11.125 6.50 Fourth Quarter........................................ 10.00 5.50
1996 HIGH LOW ---- ---- ---- First Quarter......................................... $ 19.25 $12.75 Second Quarter........................................ 19.00 10.75 Third Quarter......................................... 21.50 13.25 Fourth Quarter........................................ 15.125 5.75
The Company has not paid cash dividends on its common stock and does not intend to do so in the foreseeable future. The Company presently intends to retain its earnings to finance future growth of its business. Cash dividends are subject to restriction under the Company's line of credit agreement. As of December 31, 1996, there were 343 shareholders of record and approximately 4,000 beneficial owners of the Company's common stock. 8 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31 --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Software................................... $35,149 $37,365 $40,867 $39,486 $39,188 Services and other......................... 34,117 30,999 24,585 17,717 12,589 ------- ------- ------- ------- ------- Total revenue........................... 69,266 68,364 65,452 57,203 51,777 ------- ------- ------- ------- ------- Costs and expenses: Cost of software........................... 4,745 5,040 4,989 4,335 3,211 Cost of services and other................. 18,552 16,539 11,870 9,710 6,880 Selling and marketing...................... 26,929 26,082 23,885 22,332 23,083 Product development........................ 8,875 10,111 10,605 10,211 7,674 General and administrative................. 7,351 7,908 6,801 7,345 8,542 Merger integration, exit and restructuring costs................................... 4,322 6,882 1,700 4,800 2,100 Litigation................................. -- 499 650 -- -- Purchased research and development......... -- -- 2,750 -- -- ------- ------- ------- ------- ------- Total costs and expenses................ 70,774 73,061 63,250 58,733 51,490 ------- ------- ------- ------- ------- Income (loss) from operations................ (1,508) (4,697) 2,202 (1,530) 287 ------- ------- ------- ------- ------- Other income (expense): Other income (net)......................... 472 664 626 432 489 Interest expense........................... (869) (990) (105) (20) (73) Loss on investment in joint venture........ (176) -- -- -- -- ------- ------- ------- ------- ------- Total other income (expense)............ (573) (326) 521 412 416 Income (loss) before provision for income taxes, extraordinary items and change in accounting................................. (2,081) (5,023) 2,723 (1,118) 703 Provision (credit) for income taxes.......... 560 (1,133) 2,944 1,080 954 ------- ------- ------- ------- ------- Loss before extraordinary items and change in accounting................................. (2,641) (3,890) (221) (2,198) (251) Extraordinary item -- reduction of income taxes due to carryforward of net operating losses..................................... -- -- -- -- 1,330 Extraordinary item -- loss from disposal of assets acquired in a pooling of interest, net of tax benefit......................... (4,734) -- -- -- -- Change in accounting......................... -- -- -- 650 -- ------- ------- ------- ------- ------- Net income (loss)............................ $(7,375) $(3,890) $ (221) $(1,548) $ 1,079 ======= ======= ======= ======= ======= Income (loss) per common share: Loss before extraordinary items and change in accounting........................... $ (0.33) $ (0.49) $ (0.03) $ (0.29) $ (0.03) Extraordinary items........................ (0.58) -- -- -- 0.18 Change in accounting....................... -- -- -- 0.09 -- ------- ------- ------- ------- ------- Net income (loss)............................ $ (0.91) $ (0.49) $ (0.03) $ (0.21) $ 0.15 ======= ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding.............. 8,096 8,013 7,824 7,515 7,426 ======= ======= ======= ======= =======
DECEMBER 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash and short-term investments.............. $14,733 $12,267 $16,017 $16,649 $20,266 Working capital.............................. 14.282 17,566 22,668 19,233 22,274 Total assets................................. 59,977 63,353 65,482 47,422 47,703 Long term debt, less current portion......... 9,015 9,227 9,438 2 16 Stockholders' equity......................... 28,831 37,167 39,338 33,701 36,203
9 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain items from the Company's Consolidated Statement of Operations as a percentage of total revenue and the percentage change in dollar amounts of such items.
YEAR ENDED DECEMBER 31 PERIOD-TO-PERIOD CHANGE ------------------------- ----------------------------- 1996 1995 1994 1996 VS. 1995 1995 VS. 1994 ----- ----- ----- ------------- ------------- Revenue: Software.............................. 50.7% 54.7% 62.4% (5.9)% (8.6)% Services and other.................... 49.3 45.3 37.6 10.1 26.1 ----- ----- ----- ---- ------ Total revenue.................... 100.0 100.0 100.0 1.3 4.4 ----- ----- ----- ---- ------ Costs and expenses: Costs of software..................... 6.9% 7.4% 7.6% (5.9)% 1.0% Costs of services and other........... 26.8 24.2 18.1 12.2 39.3 Selling and marketing................. 38.9 38.2 36.5 3.2 9.2 Product development................... 12.8 14.8 16.2 (12.2) (4.7) General and administrative............ 10.6 11.6 10.4 (7.0) 16.3 Merger integration, restructuring costs............................... 6.2 10.1 2.6 (37.2) * Litigation costs...................... -- .7 1.0 * * Purchased research & development...... -- -- 4.2 * * ----- ----- ----- ---- ------ Total costs and expenses......... 102.2 107.0 96.6 (3.1) 15.5 ----- ----- ----- ---- ------ Income (loss) from operations.............. (2.2)% (7.0)% 3.4% 67.9% (313.3)% ===== ===== ===== ==== ======
- --------------- * Not meaningful 1996 COMPARED TO 1995 The Company's revenue is derived from the licensing of software and the delivery of related services. These services include consulting, training, porting, and product maintenance. The Company generally licenses its software for use on individual computers. Customers may elect to contract with the Company for product maintenance, which includes product and documentation enhancements, as well as telephone support for product problem resolution, by paying annual or quarterly fees or paying fees based upon usage of such maintenance services. The Company's total revenue increased 1% to $69,266,000 in 1996 from $68,364,000 in 1995. Software license revenue decreased 6% to $35,149,000 in 1996 from $37,365,000 in 1995. The overall decline in license revenue resulted from decreased sales of the Hyperstar middleware product, the ESL integrated development tool and the UniVerse database management software. The decline in sales of the UniVerse product can be attributed to delays in new UniVerse orders as customers awaited the release of UniVerse 9.0, which was released for general availability in the middle of the fourth quarter of 1996. Sales of UniVerse licenses for the fourth quarter of 1996 exceeded sales for the second and third quarters of 1996. Services and other revenue increased 10% to $34,117,000 in 1996 from $30,999,000 in 1995. All the major elements of services and other revenue increased in 1996 versus 1995 with training revenue increasing 34% to $5,821,000, consulting revenue increasing 10% to $10,496,000 and maintenance revenue increasing 5% to $17,351,000 in 1996. The increase in training revenue for 1996 came solely as a result of an increase in the training associated with VMARK products such as UniVerse. The Company undertook, in 1996, a strategy of aggressively selling appropriate training and education courses associated with the sale of new VMARK licenses. Consulting revenue increased as the Company was engaged to perform several large consulting contracts during 1996. These contracts were some of the largest in the Company's history and the revenue was recognized ratably over the length of the contracts in 1996. Maintenance revenue increased consistent with the expansion of the Company's installed base. Costs of software, which consist of amortization of technology licenses and capitalized software, product royalties, product documentation, packaging, media and production costs decreased 6% to $4,745,000 in 1996 10 11 from $5,040,000 in 1995. As a percentage of license revenue, costs of software remained consistent at 13% for both 1996 and 1995. The dollar decrease in costs of software for 1996 compared to 1995 is a result of lower royalty costs due to a decrease in license sales as well as the full amortization of previously capitalized software and purchased technology. Costs of services and other, which consist of personnel-related costs, outside consulting fees, facilities and other costs associated with the delivery of consulting, training and maintenance revenues, increased 12% to $18,552,000 in 1996 from $16,539,000 in 1995. As a percent of service and other revenue the costs of these services increased to 54% in 1996 from 53% in 1995; causing a 1% decrease in the gross margin realized from service revenue in 1996. The dollar increase in the costs of services and other is due directly to the increase in the level of services and other revenue recognized in 1996. The costs of services and other is variable over a twelve month period and should increase or decrease consistently with the services and other revenue. The 1% loss of gross margin in 1996 versus 1995 is attributed to the larger increases in consulting and training revenue as compared to maintenance revenue. Consulting and training revenue historically have a lower gross margin than maintenance revenue. Sales and marketing expenses which consist primarily of sales organization costs, marketing program expenses, advertising and salespersons salaries and commissions, increased 3% to $26,929,000 in 1996 from $26,082,000 in 1995. As a percent of total revenue, sales and marketing costs increased 1% to 39% of revenue in 1996 from 38% of revenue in 1995. The increase in sales and marketing costs is a result of increased investment in the North American sales force in the latter part of 1996, additional marketing spending associated with the Company's release 9.0 of UniVerse and beta release of DataStage and continued investment in its international operations. This increased spending occurred in the second half of 1996 while the revenue impact from these products and related promotions is expected to occur in the future. Product development expenses, which consist principally of costs of development staff and facility-related costs, decreased 12% to $8,875,000 in 1996 from $10,111,000 in 1995. As a percent of total revenue, product development expenses decreased 2% to 13% of revenue in 1996 from 15% in 1995. The Company experienced this reduction in 1996 due to economies of scale associated with the merger with Easel Corporation, headcount reductions in connection with the second quarter restructuring and the establishment of a joint venture in connection with future development efforts associated with the Object Studio product line. General and administrative expenses, which consist of the costs of finance, legal, human resources, information systems and administrative functions decreased 7% to $7,351,000 in 1996 from $7,908,000 in 1995. As a percent of total revenue, general and administrative costs decreased 1% to 11% in 1996 from 12% in 1995. The dollar decrease in expenses is due to a reduction in headcount associated with these functions in 1996 and a reduction in the bad debt provision recorded in 1996 compared to 1995. In 1996, the Company recorded non-recurring charges of $4,322,000. These charges related to two separate restructurings undertaken by the Company in May and December 1996. In May, the Company recorded a $2,125,000 restructuring charge associated with the downsizing of the ObjectStudio product line and associated development efforts. The charge included approximately $1,900,000 in employee severance and benefits, $153,000 for the write-off of capitalized software and $72,000 for facility abandonment. In December the Company recorded a $2,197,000 restructuring charge associated with further staff reductions throughout all areas of the Company, as well as the write-off of certain intangible assets associated with discontinued product lines. The charge included approximately $1,591,000 in employee severance and $606,000 in intangible asset write-offs. Other expenses increased by 76% during 1996 when compared to 1995. This increase is due principally to the Company's share in the loss of the joint venture, which amounted to $176,000 in 1996. The Company recorded a $560,000 tax provision in 1996 on a loss before tax of $2,081,000 representing an effective rate of 27% compared to an effective tax rate of (23)% in 1995. The 1996 tax provision was a result of earnings generated from operations in certain international jurisdictions, partially offset by the benefit of timing differences occurring in the United States and was also impacted by certain non-deductible costs 11 12 associated with funding of the joint venture. In addition, benefit of losses generated by certain foreign subsidiaries was not recognized due to uncertainty regarding realization. Future effective tax rates will be dependent on a number of factors including but not limited to geographical mix of earnings. Total net deferred tax assets amount to $10,813,000 against which the Company has provided a revaluation allowance 5,444,000 at December 31, 1996. Realization of the Company's net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating loss carryforwards. In December 1996, as part of the Company's ongoing efforts to direct the business towards growth areas, management, at the direction of the Board of Directors, undertook a review of all existing businesses, including those acquired through the merger with Easel. Following this review, in December 1996, management recommended and the Board of Directors approved a comprehensive plan to exit certain businesses. In general, these businesses represented portions of the business with minimal profitability and lower future growth prospects. Among the product lines and businesses to be discontinued or abandoned were certain product lines of business present at the date of the merger with Easel. Because these dispositions were not contemplated at the date of the merger and are therefore outside of the normal course of business, they have been presented as an extraordinary item in accordance with APB16. The extraordinary item aggregated $5,918,000 before tax, with a related tax benefit of $1,184,000. See Note 12 to the consolidated financial statements for further discussion. 1995 COMPARED TO 1994 The Company's total revenue increased 4% to $68,364,000 in 1995 from $65,452,000 in 1994. Software license revenue decreased 9% to $37,365,000 in 1995 from $40,867,000 in 1994. The decline in software license revenue was driven principally by a decrease in demand for the ESL product. Growth in other products resulted from a continued expansion of distribution channels, successful sales and marketing efforts and an overall increase in the customer base. License revenue was less than originally anticipated for the second and third quarters of 1995. In the second quarter, the Company experienced lower than expected performance from one of its U.S. sales regions. In the third quarter, efforts required to effect the merger with Easel diverted attention from the core business. Additionally, the Company has been experiencing a longer sales cycle for some of its new products. Services and other revenue increased 26% to $30,999,000 in 1995 from $24,585,000 in 1994. Growth in services and other revenue primarily resulted from the increases in customer maintenance support due to higher user levels and increased consulting revenue. Costs of software consists principally of cost of product media, documentation, duplication and packaging, product royalties and amortization of certain intangible assets. Costs of software increased slightly by 1% to $5,040,000 in 1995 from $4,989,000 in 1994. As a percentage of software license revenue, cost of software was 13% in 1995 compared to 12% in 1994. The absolute dollar increase was primarily due to amortization expense on additional capitalized software, as well as a slight shift in product mix that carried a higher royalty expense. The percentage increase resulted from the drop in license revenue. Cost of services and other consists principally of personnel, consultant and facility related costs associated with providing customer maintenance support and training. Costs of services and other increased 39% to $16,539,000 in 1995 from $11,870,000 in 1994 and increased as a percentage of services and other revenue to 53% in 1995 from 48% in 1994. The absolute dollar increases were recognized in maintenance, training and consultancy as personnel were added in each of these areas to support revenue growth. The increased percentage of costs compared to revenue in services and other is the result of a shift towards more training and consulting revenue, which carry lower margins than maintenance revenue. Selling and marketing expenses increased 9% to $26,082,000 in 1995 from $23,885,000 in 1994. As a percentage of total revenue, selling and marketing expenses increased slightly to 38% in 1995 from 37% in 1994. These increases were due primarily to the increase in the direct sales effort of the Company, an increase in marketing activities (i.e. advertising, trade shows, etc.), the Company's continued investment to expand its international presence and the effect of the decline in license revenue. 12 13 Product development expenses consists principally of personnel and facility related costs. Product development expenses decreased 5% to $10,111,000 in 1995 from $10,605,000 in 1994 and decreased as a percentage of total revenue to 15% in 1995 from 16% in 1994. The decrease was primarily attributable to the Company's ability to leverage personnel and facilities in the development efforts of the combined companies. General and administrative expenses include the cost of finance, information systems, human resources, legal and administrative functions. General and administrative expenses increased 16% to $7,908,000 in 1995 from $6,801,000 in 1994. The percentage of total revenue increased to 12% in 1995 from 10% in 1994. The increase in absolute dollars and expenses was the result of an increase in the provision for bad debts, increased international management costs and other costs such as insurance and employee benefits, associated with the growth of the business. The Company incurred a non-recurring charge of $6,882,000 during 1995 due to the merger with Easel. These costs related to a formal plan and consisted primarily of severance, facility closings, business advisory fees, and legal and accounting fees associated with the transaction. In addition to these costs, the Company recorded $499,000 in litigation and settlement costs during 1995 of which approximately $199,000 related to the reimbursement of legal costs in excess of the initial estimate associated with a judgment against the Company rendered in the fourth quarter of 1994. The difference in estimate was not determinable until the second quarter of 1995. The remaining $300,000 in expenses related to settlements to resolve certain disagreements with two customers of Easel. Management decided to settle these disagreements in order to avoid the related management distraction and a protracted legal remedy. Restructuring costs of $1,700,000 were recorded in 1994. The restructuring included moving certain sales and marketing functions into two business units, as well as a selective reduction in staff of 24 persons, including certain management personnel. The restructuring charge included approximately $1,000,000 for employee severance and benefits and $700,000 for facilities consolidation. During 1994, the Company incurred a charge of $650,000 related to a judgment against the Company from a lawsuit which originated in 1991. The Company recorded a charge of $2,750,000 in 1994, reflecting the allocation of a portion of the purchase price for the assets of Constellation Software, Inc. ("CSI") to research and development in process. The products purchased from CSI had neither reached technological feasibility nor did they have any alternative use as of the acquisition date. The products reached technological feasibility in late 1994. Other income increased slightly by 6% year over year as average cash balances were higher during 1995. Increases to interest expense during 1995 reflect in large part, the lease obligations of the Company's headquarters facility in Westboro, MA. INFLATION Certain of the Company's expenses increase with general inflation in the economy. However, the Company does not believe that its results of operations have been, or will be, adversely affected by inflation. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through sales of equity securities and positive cash flow from operations. As of December 31, 1996, the Company had $14,733,000 in cash and equivalents and $14,282,000 in working capital. The Company has a working capital line of credit with a bank under which the Company may borrow, on an unsecured basis, up to the lesser of $5,000,000 or 80% of eligible accounts receivable, conditioned upon meeting certain financial covenants, including maintaining specified levels of quarterly earnings, tangible net worth, working capital and liquidity. The line of credit also limits the Company's ability to pay dividends. As of December 31, 1996, the Company's eligible accounts receivable exceeded the amount necessary to access fully the line of credit, however, there were no borrowings outstanding on the line. The Company also has a share repurchase line of credit with the same bank under which the Company may borrow up to $5,000,000 to be used solely to make open market repurchases of the Company's common stock. At December 31, 1996 there was $1,462,000 of borrowings outstanding under the share repurchase line of credit facility. The lines of credit expire in June 1997. 13 14 Accounts receivable, net of the allowance for doubtful accounts, decreased from $15,468,000 at December 31, 1995 to $14,860,000 at December 31, 1996. The allowance for doubtful accounts decreased slightly to $1,864,000 at December 31, 1996 from $1,891,000 at December 31, 1995. Throughout 1996, the Company improved its receivable cash collections and generated $7,232,000 in cash from operations. The Company used $3,756,000 in investing activities in 1996. The Company's significant cash investments in 1996 consisted of expenditures for property and equipment of $1,820,000 and expenditures for intangible assets and capitalized software of $1,821,000. Current liabilities increased from $16,915,000 as of December 31, 1995 to $22,131,000 as of December 31, 1996. The increase is attributable to accrued restructuring costs of $5,546,000 at December 31, 1996, which relates to costs associated with the elimination of non-strategic businesses and workforce reductions which occurred during 1996. Most of these costs will be paid within one year, however, certain costs will be paid over a 5 year period. Long-term liabilities decreased slightly year over year as payments were made on capital lease obligations. The Company hedges its exposure to foreign currency fluctuations through foreign exchange forward contracts. As of December 31, 1996, the Company had foreign exchange forward contracts outstanding used to hedge foreign exchange exposure on intercompany balances of certain of its international subsidiaries. These contracts are comprised of a contract to buy British pounds sterling with a notional amount of $5,644,000 and contracts to sell foreign currency aggregating $6,007,000 of notional amount (principally French francs and German marks). These contracts are short-term in duration (typically 60-90 days) and have limited market risk, since decreases or increases in the unrealized gain or loss on any position is generally fully offset by corresponding increases or decreases in gains and losses on the intercompany balances being hedged. Credit risk is limited to the risk that counterparties to these contracts fail to deliver at maturity. The Company deals only with reputable financial institutions in entering into these contracts and therefore believes that credit risk is insignificant. Currency forward contracts are used only to hedge identified foreign currency commitments and are never held for speculative purposes. The gains and losses associated with currency rate changes on these contracts, net of the corresponding gains and losses on the hedged intercompany accounts, are recorded as a component of other income/expense in the period the change occurs. Foreign exchange gains or losses were not material in any period presented. The Company believes that its available cash and anticipated cash generated from operations will be sufficient to finance the Company's operations and meet its foreseeable cash requirements, including expected capital expenditures, at least through 1997 and for the foreseeable future. These sources can be augmented by short-term borrowings under the credit facility, which currently has availability of $5.0 million. FACTORS AFFECTING FUTURE RESULTS The Company operates in a rapidly changing environment that involves a number of risks, many of which are beyond the Company's control. The following discussion highlights some of these risks. The Company's future operating results may vary substantially from period to period. The timing and amount of the Company's license fee revenues are subject to a number of factors that make estimation of revenues and operating results prior to the end of the quarter extremely uncertain. Quarterly fluctuations may be caused by several factors including but not limited to timing of customer orders, adjustments of delivery schedules to accommodate customer or regulatory requirements, timing and level of international sales, mix of products sold, and timing of level of expenditures for sales, marketing and new product development. The Company generally ships its products upon receipt of orders and maintains no significant backlog. The company has experienced a pattern of recording 60 percent to 80 percent of its quarterly revenues in the third month of the quarter, with a concentration of such revenues in the last two weeks of that third month. The Company's operating expenses are based on projected annual and quarterly revenue levels and a substantial portion of the Company's costs and expenses, including costs of personnel and facilities, cannot be easily reduced. As a result, projected revenues are not achieved in the expected time frame, the Company's results of operations for that quarter would be adversely affected. Accordingly, the results of any one period may not be indicative of the operating results for future periods. 14 15 The market price of the Company's common stock is highly volatile. Failure to achieve revenue, earnings, and other operating and financial results as forecasted or anticipated by analysts could result in an immediate adverse effect on the market price of the Company's stock. The Company currently derives a substantial portion of its total revenue from its core database product UniVerse. The Company's future results will depend, to a significant extent, on continued market acceptance of this product as well as market acceptance of new products, such as DataStage. Any factor adversely affecting the market for these products would have a material adverse effect of the Company's business and financial results. The market for the Company's products is characterized by ongoing technological developments and changes in customer requirements and industry standards. If the Company is unable to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements or if errors are found in products after commercial shipments, the Company's business and results of operations will be adversely affected. Approximately 38% of the Company's total revenue in fiscal 1996 was attributable to international sales made through international subsidiaries. Because a substantial portion of the Company's total revenue is derived from such international operations, which are conducted in foreign currencies, changes in the value of those currencies relative to the United States dollar may affect the Company's results of operations and financial position. The Company engages in certain currency-hedging transactions intended to reduce the effect of fluctuations of foreign currency exchange rates on the Company's results of operations. However, there can be no assurance that such hedging transactions will materially reduce the effect of fluctuations on such results. If, for any reason, exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, the Company's business could be adversely affected. Other potential risks inherent in the Company's international business generally include longer payment cycles, greater difficulties in accounts receivable collection and the burdens of complying with a wide variety of foreign laws and regulations. The market for application development software is intensely competitive. The Company competes with many companies offering alternative solutions to the needs addressed by the Company's products. Many of these competitors may have greater financial, marketing, or technical resources than the Company and may be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements or to devote greater resources to the promotion and sale of their products than the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements and the related independent auditor's report are presented in the following pages. The consolidated financial statements filed in this Items 8 are as follows:
PAGE ----- Independent Auditors' Report......................................................... 16 Consolidated Balance Sheets as of December 31, 1996 and 1995......................... 17 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996.................................................................. 18 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996..................................................... 19 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996.................................................................. 20 Notes to Consolidated Financial Statements........................................... 31-32 Selected Quarterly Financial Data (unaudited)........................................ 32
15 16 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of VMARK Software, Inc.: We have audited the consolidated balance sheets of VMARK Software, Inc. and its subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Boston, Massachusetts January 27, 1997 16 17 VMARK SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 1996 1995 -------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and equivalents....................................................... $ 14,733 $12,267 Accounts receivable (less allowance for doubtful accounts, $1,864 in 1996 and $1,891 in 1995)....................................................... 14,860 15,468 Income tax receivable...................................................... 771 3,464 Prepaid expenses and other current assets.................................. 4,309 2,355 Deferred income taxes...................................................... 1,320 927 Assets held for sale....................................................... 420 -- -------- ------- Total current assets.................................................. 36,413 34,481 -------- ------- Property and equipment: Building under capital lease............................................... 9,689 9,689 Computer equipment......................................................... 7,040 8,716 Office furnishings and fixtures............................................ 3,187 4,499 Leasehold improvements..................................................... 1,239 897 -------- ------- Total................................................................. 21,115 23,801 Less accumulated depreciation and amortization............................. 6,950 8,548 -------- ------- Property and equipment -- net.............................................. 14,205 15,253 -------- ------- Other long-term assets: Intangible assets -- net................................................... 3,667 8,055 Deferred income taxes...................................................... 4,049 4,043 Other long-term assets..................................................... 1,643 1,521 -------- ------- Total other long-term assets.......................................... 9,359 13,619 -------- ------- Total.......................................................................... $ 59,977 $63,353 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit............................................................. $ 1,462 $ -- Note payable............................................................... -- 587 Current portion of capital lease obligation................................ 211 195 Accounts payable........................................................... 2,779 4,306 Accrued compensation....................................................... 2,021 2,002 Accrued expenses........................................................... 3,958 2,281 Accrued merger and restructuring costs..................................... 5,546 1,286 Deferred revenue........................................................... 5,738 5,514 Income taxes payable....................................................... 416 744 -------- ------- Total current liabilities............................................. 22,131 16,915 -------- ------- Long-term liabilities: Capital lease obligation................................................... 9,015 9,227 Deferred rent.............................................................. -- 44 -------- ------- Total long-term liabilities........................................... 9,015 9,271 -------- ------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, authorized 10,000,000 shares; issued none Common stock, $.01 par value, authorized 25,000,000 shares; issued and outstanding 8,380,474 in 1996 and 8,103,695 in 1995....................... 83 81 Additional paid-in capital................................................. 46,297 44,383 Accumulated deficit........................................................ (14,584) (7,209) Cumulative translation adjustment.......................................... 105 (88) Treasury stock at cost, 280,082 shares in 1996............................. (2,956) -- Unearned compensation...................................................... (114) -- -------- ------- Total stockholders' equity............................................ 28,831 37,167 -------- ------- Total.......................................................................... $ 59,977 $63,353 ======== =======
See notes to consolidated financial statements. 17 18 VMARK SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Software................................................... $35,149 $37,365 $40,867 Services and other......................................... 34,117 30,999 24,585 ------- ------- ------- Total revenue......................................... 69,266 68,364 65,452 ------- ------- ------- Costs and expenses: Cost of software........................................... 4,745 5,040 4,989 Cost of services and other................................. 18,552 16,539 11,870 Selling and marketing...................................... 26,929 26,082 23,885 Product development........................................ 8,875 10,111 10,605 General and administrative................................. 7,351 7,908 6,801 Merger integration, exit and restructuring costs........... 4,322 6,882 1,700 Litigation costs........................................... -- 499 650 Purchased research and development......................... -- -- 2,750 ------- ------- ------- Total costs and expenses.............................. 70,774 73,061 63,250 ------- ------- ------- Income (loss) from operations................................... (1,508) (4,697) 2,202 ------- ------- ------- Other income (expense): Other income (net)......................................... 472 664 626 Interest expense........................................... (869) (990) (105) Loss on investment in joint venture........................ (176) -- -- ------- ------- ------- Total other income (expense).......................... (573) (326) 521 ------- ------- ------- Income (loss) before provision for income taxes and extraordinary item............................................ (2,081) (5,023) 2,723 Provision for (benefit from) income taxes....................... 560 (1,133) 2,944 ------- ------- ------- Loss before extraordinary item.................................. (2,641) (3,890) (221) Extraordinary loss from disposal of assets acquired in a pooling of interests, net of tax benefit of $1,184.................... (4,734) -- -- ------- ------- ------- Net loss........................................................ $(7,375) $(3,890) $ (221) ======= ======= ======= Loss per common share: Loss before extraordinary item............................. $ (0.33) $ (0.49) $ (0.03) Extraordinary item......................................... (0.58) -- -- ------- ------- ------- Net loss per common share....................................... $ (0.91) $ (0.49) $ (0.03) ======= ======= ======= Weighted average number of common and common equivalent shares outstanding....................................... 8,096 8,013 7,824 ======= ======= =======
See notes to consolidated financial statements. 18 19 VMARK SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE ------------------ PAID-IN ACCUMULATED TRANSLATION TREASURY UNEARNED SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK COMPENSATION TOTAL --------- ------- ----------- ------------ ----------- --------- ------------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance, January 1, 1994...... 7,609,100 $76 $38,973 $ (3,098) $(299) $ -- $ -- $35,652 Issuance of stock for cash.... 182,284 1 1,180 1,181 Issued in an acquisition...... 101,871 1 2,202 2,203 Tax benefit arising from early disposition of stock options..................... 364 364 Net loss...................... (221) (221) Translation adjustment........ 159 159 --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1994.... 7,893,255 78 42,719 (3,319) (140) -- -- $39,338 Issuance of stock for cash.... 214,217 3 1,423 1,426 Repurchase and retirement of common stock................ (3,777) (59) (59) Tax benefit arising from early disposition of stock options..................... 300 300 Net loss...................... (3,890) (3,890) Translation adjustment........ 52 52 --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1995.... 8,103,695 81 44,383 (7,209) (88) -- -- 37,167 Issuance of stock for cash.... 276,779 2 1,582 1,584 Unearned compensation......... 140 (140) -- Repurchase of common stock (280,082 shares)............ (2,956) (2,956) Tax benefit arising from early disposition of stock options..................... 192 192 Net loss...................... (7,375) 26 (7,349) Translation adjustment........ 193 193 --------- --- ------- -------- ----- ------- ----- ------- Balance, December 31, 1996.... 8,380,474 $83 $46,297 $(14,584) $ 105 $(2,956) $(114) $28,831 ========= === ======= ======== ===== ======= ===== =======
See notes to consolidated financial statements. 19 20 VMARK SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Cash flows from operating activities: Net loss........................................................ $(7,375) $(3,890) $ (221) Adjustments to reconcile net loss to cash provided by operating activities (net of acquisitions): Depreciation and amortization.............................. 2,873 2,681 2,262 Purchased research and development......................... -- -- 2,750 Amortization of intangible assets.......................... 2,801 4,333 3,226 Equity in loss of joint venture............................ 176 -- -- Deferred income taxes...................................... (316) (1,494) (1,620) Stock compensation......................................... 26 -- -- Writedown of assets in connection with exit of businesses............................................... 3,059 -- -- Increase (decrease) in cash from: Current assets........................................ 1,498 (1,255) (4,908) Current liabilities................................... 4,490 2,084 1,413 ------- ------- ------- Cash provided by operating activities........................... 7,232 2,459 2,902 ------- ------- ------- Cash flows from investing activities: Expenditures for property and equipment.................... (1,820) (3,141) (2,855) Expenditures for intangible assets......................... (163) (2,250) (1,773) Capitalized software costs................................. (1,658) (418) (790) Increase in cash surrender value of officers' life insurance and deposits and other......................... (115) (461) (434) ------- ------- ------- Cash used in investing activities..................... (3,756) (6,270) (5,852) ------- ------- ------- Cash flows from financing activities: Sale of common stock....................................... 1,584 1,426 1,181 Repurchase of common stock................................. (2,956) (59) -- Repayments of note payable................................. (587) -- -- Borrowing (repayments) under line of credit................ 1,462 (1,250) 1,250 Repayments of capital lease and other obligations.......... (240) (165) (30) ------- ------- ------- Cash provided by (used in) financing activities....... (737) (48) 2,401 ------- ------- ------- Effect of exchange rate changes on cash......................... (273) 109 (83) ------- ------- ------- Increase (decrease) in cash and equivalents..................... 2,466 (3,750) (632) Cash and equivalents, beginning of year......................... 12,267 16,017 16,649 ------- ------- ------- Cash and equivalents, end of year............................... $14,733 $12,267 $16,017 ======= ======= =======
See notes to consolidated financial statements. 20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business -- VMARK Software, Inc. and subsidiaries (the Company) designs, develops, markets, sells and supports software for developing, deploying, and maintaining business applications and data warehousing solutions. The Company also provides a comprehensive range of services, including customer maintenance support, training, on-site assistance and consulting. The Company has operations in the United States, Canada, Europe, Australia, and Africa. Selling and marketing activities are conducted through direct selling efforts, value-added resellers, and distributors throughout the world. Research and development efforts are conducted in the United States and the United Kingdom. Basis of Presentation -- The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 1996 presentation. Foreign Currency Translation -- The functional currency of a foreign operation is deemed to be the local country's currency. Assets and liabilities of operations outside the United States are translated into United States dollars using current exchange rates at the balance sheet date. Results of operations are translated at average exchange rates prevailing during each period. Translation adjustments are accumulated as a separate component of stockholders' equity. The Company hedges its exposure to foreign currency fluctuations through foreign exchange forward contracts. As of December 31, 1996, the Company had foreign exchange forward contracts outstanding used to hedge foreign exchange exposure on intercompany balances of certain of its international subsidiaries. These contracts are comprised of a contract to buy British pounds sterling with a notional amount of $5,644,000 and contracts to sell foreign currency aggregating $6,007,000 of notional amount (principally French francs and German marks). These contracts are short-term in duration (typically 60-90 days) and have limited market risk, since decreases or increases in the unrealized gain or loss on any position is generally fully offset by corresponding increases or decreases in gains and losses on the intercompany balances being hedged. Credit risk is limited to the risk that counterparties to these contracts fail to deliver at maturity. The Company deals only with reputable financial institutions in entering into these contracts and therefore believes that credit risk is insignificant. Currency forward contracts are used only to hedge identified foreign currency commitments and are never held for speculative purposes. The gains and losses associated with currency rate changes on these contracts, net of the corresponding gains and losses on the hedged intercompany accounts, are recorded as a component of other income/expense in the period the change occurs. Foreign exchange gains or losses were not material in any period presented. Revenue Recognition -- Revenue from the sale of software licenses is recognized upon shipment of the product provided that no significant obligations remain and collection of the receivables is considered probable. Insignificant vendor and post-contract support obligations, if any, are accrued upon shipment. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements. Porting revenues are recognized as contractually defined milestones are attained. Revenue from training and consulting is recognized as the related services are performed. Concentration of Credit Risk -- The Company sells its products to various companies in several industries. The Company performs on-going credit evaluations of its customers and maintains allowances for potential credit losses, and such losses have been within management's expectations. The Company generally requires no collateral from its customers. Software Development Costs -- Certain software development costs for products and product enhancements are capitalized after technological feasibility has been established. Such costs are included in intangible assets and are amortized over two to three years using the straight-line method. The unamortized balance of the capitalized costs was $272,000 and $1,126,000 at December 31, 1996 and 1995 respectively. Related accumulated amortization was approximately $119,000 and $2,808,000 at December 31, 1996 and 1995, 21 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively. Research and development costs and software development costs incurred before technological feasibility has been established are expensed as incurred. Property and Equipment -- Purchased property and equipment is recorded at cost. Leased equipment is recorded at the present value of the minimum lease payments required during the lease period. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets (three to eleven years) or over the terms of the related leases (three to twenty years) whichever is shorter. Capitalized cost of the leased assets was $9,689,000 and related accumulated amortization was $1,008,000 and $524,000 at December 31, 1996 and 1995, respectively. Intangible Assets -- Intangible assets, other than capitalized software development costs, are principally comprised of purchased technology, customer maintenance support agreements and goodwill and are recorded at cost. Amortization expense is recorded to cost of software and cost of services and other depending on the use of the related intangible asset. Amortization expense is provided on a straight-line method over the estimated life of the asset (two to five years). The Company periodically reviews the carrying value of intangible assets in relation to expectations of nondiscounted future cash flows attributable to each asset. A permanent impairment in the value of an intangible asset is recognized in operating results in the period the impairment occurs. Accumulated amortization was $7,590,000 and $8,403,000 at December 31, 1996 and 1995, respectively. Cash Flow Information -- The Company considers all short-term, highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents. Supplemental cash flow information is as follows (in thousands):
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ Cash paid for income taxes...................... $ 386 $2,906 $3,875 Cash refunds of income taxes.................... 3,406 -- -- Cash paid for interest.......................... 869 896 69 Capital lease obligation (Note 3)............... -- -- 9,630 Deferred tax liability assumed in business combination (Note 2).......................... -- -- 340 Transfer of accounts receivable as consideration for purchase acquisition...................... -- 1,000 -- Stock issued in purchase acquisition............ -- -- 2,203
Income Taxes -- Deferred taxes are provided to reflect temporary differences in bases between book and tax assets and liabilities. Deferred tax assets and liabilities are measured using currently enacted tax rates (See Note 5). Income (Loss) Per Common Share -- Income (loss) per common share is computed using the weighted average number of common and common equivalent shares outstanding during each year. Common stock equivalents consist of stock options and warrants (using the treasury stock method), except where such items would be antidilutive. Use of Estimates -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires, of necessity, the use of estimates to determine the appropriate carrying value of certain assets and liabilities. Each of these estimates requires the Company to assess past history and to estimate probable outcomes in the future. These estimates could change. Fair Value of Financial Instruments -- Financial instruments held or used by the Company include cash and its equivalents, accounts receivable, accounts payable, capital lease obligations and foreign currency forward contracts. The fair values of these instruments are based on management's estimates, which could change if market conditions change. With the exception of forward contracts, management believes that the 22 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) carrying value of these instruments approximates fair value. The fair value of foreign currency forward contracts at December 31, 1996 aggregated $12,048,000. Stock-Based Compensation -- Compensation cost associated with awards of stock or options to employees is measured using the intrinsic value method. Tax benefits associated with early exercise of stock options are generally recorded as increases to additional paid-in capital. 2. MERGERS AND ACQUISITIONS Merger with Easel Corporation On June 14, 1995, the Company merged with Easel Corporation (Easel). In connection with the merger, the Company issued approximately 1,500,000 shares of common stock to Easel shareholders in exchange for substantially all of their interest in Easel. In addition, options outstanding under Easel's option plans were converted to options under the Company's plans, adjusted only for the impact of the exchange ratio between the shares of the two companies. The merger qualified for pooling-of-interests treatment and, accordingly, the Company's financial statements have been restated to include the accounts of Easel for all periods presented. In connection with the merger, the Company recorded one-time charges aggregating $6,882,000, reflecting costs of integrating the operations of the two companies, as well as the costs of personnel termination (for which a specific plan was in place), facilities closures, and legal, accounting and investment banking fees associated with the transaction. All related costs were completely paid by the end of 1996. Information regarding the separate revenue and net income (loss) of the combining companies through the date of consummation of the Merger is presented below (in thousands). There were no adjustments required to conform the accounting policies of the two companies in the years presented, other than recognition of certain tax attributes of Easel in combination of $1,150,000 in 1994.
JANUARY TO JUNE ------------------ 1995 1994 -------- ------- Revenue: VMARK................................................ $ 27,198 $45,200 Easel................................................ 8,405 20,252 -------- ------- Combined........................................ $ 35,603 $65,452 ======== ======= Net income (loss): VMARK................................................ $ (2,698) $ 3,822 Easel................................................ (1,203) (4,043) -------- ------- Combined........................................ $ (3,901) $ (221) ======== =======
Acquisitions Over the last three years, the Company has made the following acquisitions, all of which were accounted for as purchases and the results of operations included with those of the Company from the date of acquisition (amounts in thousands):
FAIR VALUE OF LIABILITIES TOTAL COMPANY ACQUIRED CASH PAID SHARES ISSUED ASSUMED CONSIDERATION - ---------------- --------- ------------- ----------- ------------- FT Technology Institute (January 1996)......... $ 360 $ -- $ -- $ 360 VMARK Canada (September 1995).................. 1,329 -- 171 1,500 Edgetech S.A. (January 1995)................... 1,500 -- -- 1,500 ASG (July 1994)................................ 1,231 -- 492 1,723 Constellation (February 1994).................. -- 2,203 1,934 4,137
FT Technology Institute -- FT Technology Institute operates as an education and service training business based in Sydney, Australia. The purchase price was allocated between property and equipment and 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) goodwill based upon an independent appraisal. In December 1996, the Company decided to withdraw from the business associated with this acquisition. The writedown of the remaining net book value of related assets and employee termination costs are included in the results of operations in 1996 as a component of operating expense. See Note 10. VMARK Canada -- VMARK Canada previously operated as an independent distributor for the Company. Of the total cash included in consideration for the purchase, $750,000 was paid at closing and the remainder was payable in the form of a note which was paid in February 1996. The purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. Edgetech S.A. -- Edgetech S.A. previously operated as an independent distributor for the Company. Of the total cash consideration shown above, $500,000 was paid at closing and the remainder was payable in the form of a note. In March 1995, the Company transferred an account receivable to the sellers in full satisfaction of amounts due. The Company guaranteed collection of the receivable, which has since been repaid, and paid interest to the sellers aggregating $71,600. The purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. ASG -- ASG operated in the education services market. The purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. In December 1996, the Company decided to sell the remaining business associated with this acquisition. The 1996 financial statements reflect the writedown of the fixed and intangible assets to the anticipated selling price, as well as the employee termination costs associated with the sale. The amounts are a component of the extraordinary loss from disposal of assets acquired in a pooling of interests. See Note 12. Constellation -- Constellation (CSI) was a developer of object-oriented, client-server products for commercial business applications. In connection with the acquisition, the Company issued 101,871 shares of common stock and assumed the obligation under CSI options to issue, upon exercise, 23,129 shares of common stock. Approximately 50% of the share and option exercise obligations are contingent upon the achievement of certain revenue milestones over five years following the acquisition. Of this 50% obligation, none has been earned as of December 31, 1996. Achievement of these milestones was deemed probable and the consideration involved was recorded at the date of consummation. Of the total consideration paid, $2,750,000 was allocated to research and development in process, for which no alternative use existed, and charged to expense at the date of consummation. The remainder of the purchase price was allocated between property and equipment and intangible assets based upon an independent appraisal. Pro Forma Results of Operations -- The results of operations of the acquired entities were not significant to the Company. Accordingly, pro forma information has not been presented. Other Purchases -- During 1995 and 1994, the Company purchased completed software tools and technology from outside vendors totaling $480,000, and $561,000, respectively. 3. FINANCING AND LEASING ARRANGEMENTS The Company has a twenty-year capital lease on its principal operating facility which commenced in November 1994. The Company leases other office facilities, motor vehicles and certain office furnishings under noncancelable operating lease agreements expiring on various dates through December 2001. Total rent expense under all operating leases for the years ended December 31, 1996, 1995 and 1994 approximated $1,832,000, $2,665,000 and $2,857,000, respectively. 24 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996, future minimum payments under operating and capital leases are due as follows (in thousands):
OPERATING LEAS CAPITAL LEASE ---------------- --------------- 1997................................... $1,437 $ 982 1998................................... 1,139 982 1999................................... 926 982 2000................................... 731 982 2001................................... 473 982 Thereafter............................. -- 13,065 ------ ------ $4,706 17,975 ====== Less amount representing interest...... (8,749) ------ 9,226 Amounts due within one year............ 211 ------ Long-term debt......................... $ 9,015 ======
The Company has an unsecured working capital line of credit with a bank under which the Company may borrow up to the lesser of 80% of eligible accounts receivable or $5,000,000. The Company's eligible accounts receivable at December 31, 1996 exceed the amount necessary to access fully the line of credit. The agreement limits the Company's ability to pay dividends and, among other things, requires the Company to maintain specified minimum levels of tangible net worth and working capital and limits the ratio of debt to tangible net worth. The Company also has a share repurchase line of credit with the same bank under which the Company may borrow up to $5,000,000 to be used solely to make open market repurchases of the Company's common stock. Interest on outstanding borrowings under both facilities is at the bank's prime rate (8.25% at December 31, 1996). At December 31, 1996 there was $1,462,000 of borrowings outstanding under the share repurchase line of credit facility. The outstanding balance is due in equal installments beginning April 30, 1997 through March 31, 2000. The lines of credit expire in June 1997. 4. STOCKHOLDERS' EQUITY Preferred Stock -- The Board of Directors is authorized to designate one or more series of preferred stock and to establish the voting, dividend, liquidation and other rights and preferences of the shares of each series, and to provide for the issuance of shares of any series. The Board of Directors has designated 15,000 shares of $0.01 par value preferred stock as Series A Junior Preferred Stock. At December 31, 1996, no shares of preferred stock were outstanding. Preferred Share Purchase Rights -- On June 6, 1996, the Company's Board of Directors declared a dividend of one purchase right (a "Right") for every outstanding share of the Company's common stock. The Rights were distributed on June 12, 1996 to holders of record as of that date. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock at a price of $75, subject to adjustments in certain events. The Rights will be exercisable only if a person or group acquires 15% or more of the outstanding shares of the Company's common stock or announces a tender offer, the consummation of which would result in such person or group owning 30% or more of the Company's common stock. If a person or group ( other than the Company and its affiliates) acquires 15% or more of the Company's outstanding common stock, each Right (other than Rights held by such person or group) will entitle the holder to receive shares of Common Stock, or in certain circumstances, cash, property, or other securities of the Company, having a market value of two times the exercise price of the Right. In addition if the Company were acquired in a merger or other business combination, or if more than 50% of its assets or earning power were sold, each holder of a Right would be entitled to exercise such Right and thereby receive common stock of the acquiring company with a market value of two times the exercise price of the Right. Furthermore, at any time after a person or group acquires more than 15% of the outstanding stock, but prior to the acquisition of 50% of such stock, the Board of Directors may, at its option, exchange all or a part of the 25 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rights at an exchange ratio of one share of Common Stock for each Right. The Company will be entitled to redeem the Rights at $.01 per Right, subject to adjustment in certain events, at any time on or prior to the tenth day after public announcement that a 15% or greater position has been acquired by any person or group. The Rights expire on June 12, 2006. 1986 Stock Option Plan -- The Company's 1986 Stock Option Plan (the 1986 Plan) provides for the issuance of up to an aggregate 2,916,000 shares of common stock upon the exercise of incentive stock options (ISOs) and non-qualified stock options (NSOs) granted to key employees and consultants of the Company and its subsidiaries. The exercise price for ISOs must be at least equal to the fair market value of the underlying shares of common stock at the time of grant, and the exercise price of NSOs may be at any price established by the Board of Directors. The term of each option may not exceed ten years. Options are exercisable either in full immediately, or in installments, as the Board of Directors may determine at the time it grants such options. In general, the shares acquired by exercising the options vest ratably over five years from the date the options first become exercisable. As of December 31, 1996, there were 630,161 options available for grant under the 1986 Plan. 1991 Director Stock Option Plan -- In December 1991, the Company adopted the 1991 Director Stock Option Plan (the Director Plan), which provides for the grant of non-qualified stock options to non-employee directors of the Company for the purchase of up to an aggregate of 200,000 shares of common stock. Under the Director Plan, each non-employee director is entitled to receive, when first elected to serve as a director, an option to purchase 15,000 shares. In addition, each non-employee director is entitled to receive on January 31 of each year, commencing in 1996, an option to purchase 5,000 shares. The exercise price of the options may not be less than fair market value on the date of grant. Options may only be exercised with respect to vested shares. As of December 31, 1996, there were 36,744 options available for grant under the Director Plan. Effective January 31, 1997, the number of shares issuable under the plan was increased to 350,000 and the annual grant was increased to 10,000 shares with a three year vesting term. 1995 Non-Statutory Stock Option Plan -- The Company's 1995 Non-Statutory Stock Option Plan (the 1995 Plan), provides for the grant of non-qualified stock options to key employees (other than executive officers, who are not eligible to participate) and consultants of the Company for the purchase of up to an aggregate of 2,250,000 shares of common stock. The exercise price of the options may be at any price established by the Board of Directors which administers the 1995 Plan. The term of each option may not exceed ten years. Options are exercisable over periods determined at the discretion of the Board of Directors and are generally subject to vesting on a monthly basis over five years. As of December 31, 1996, there were 996,086 options available for grant under the 1995 Plan. The following is a summary of activity for all of the Company's option plans:
WEIGHTED AVERAGE EXERCISE PRICE SHARE PER SHARE --------- ---------------- Outstanding at January 1, 1994.................. 1,213,561 $14.68 Granted.................................... 650,249 16.75 Assumed in an acquisition (Note 2)......... 23,129 .41 Exercised.................................. (137,160) 4.29 Canceled................................... (341,519) 18.25 --------- ------ Outstanding at December 31, 1994................ 1,408,260 10.82 Granted.................................... 903,881 8.99 Exercised.................................. (157,095) 3.94 Canceled................................... (270,664) 14.59 --------- ------ Outstanding at December 31, 1995................ 1,884,382 9.61 Granted.................................... 1,484,317 8.33 Exercised.................................. (118,983) 4.49 Canceled................................... (775,359) 12.04 --------- ------ Outstanding at December 31, 1996................ 2,474,357 $ 8.14 ========= ======
26 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth information regarding options outstanding at December 31, 1996:
OPTIONS EXERCISABLE AND/OR OPTIONS OUTSTANDING SHARES TRANSFERABLE -------------------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICES NUMBER PRICES $ .16 - $ 2.50 134,429 5.1 $ 1.96 134,429 $ 1.96 4.90 - 6.75 383,264 9.2 6.39 75,991 6.02 7.00 - 8.75 1,240,586 9.0 7.65 265,982 7.69 9.12 - 11.00 568,483 9.1 10.32 95,317 10.15 12.00 - 14.88 106,944 7.4 12.64 54,851 12.66 16.00 - 17.88 36,501 7.6 16.82 18,020 17.03 20.59 - 24.11 4,150 6.5 23.50 4,112 23.50 --------- ------- 2,474,357 8.7 $ 8.14 648,702 $ 7.45 ========= =======
As described in Note 1, the Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees. Had the Company used the fair value method to measure compensation, the Company's net loss and loss per share for the years ended December 31, 1996 and 1995 would have been $9,462,000 or $1.17 per share in 1996 and $4,317,000 or $0.54 per share in 1995. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions in 1996 and 1995: an expected life of 6 years, expected volatility of 64.9%, a dividend yield of 0% and a risk-free interest rate of 6.10%. The weighted average fair value of options granted in 1996 and 1995 was $5.33 and $6.09, respectively. The option pricing model used was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of ten years. However, management believes that the assumptions used and the model applied to value the awards yields a reasonable estimate of the fair value of the grants made under the circumstances. During 1996, a total of 80,000 options were granted to certain officers of the Company at exercise prices which were an aggregate of $140,000 lower than the market value at the date of grant. This amount was recorded as unearned compensation and is being amortized to expense over the five year vesting period of the options. Related compensation expense was approximately $26,000 in 1996. The weighted average exercise price of the options involved is $6.38 per share. In January 1996, the Company offered non-officer employees holding incentive stock options with an exercise price greater than $7.75 (the then current market price) per share, the opportunity to exchange their options for the equivalent number of non-qualified stock options with an exercise price equal to fair market value of the common stock. As a result of this offer, options for approximately 326,107 shares were exchanged. Options assumed in the acquisition of Constellation Software, Inc. in 1994 were converted to options in the Company's stock at the same relative exercise price (adjusted only for the conversion rate) present for the option prior to the acquisition. On January 31, 1997, an additional 50,000 options were granted under the Directors Plan at an exercise price of $7.00. Also, on January 28, 1997 a total of 373,500 options were granted to employees under the 1995 Plan with an exercise price of $6.625. Employee Stock Purchase Plan -- The Company's Employee Stock Purchase Plan (the Purchase Plan) provides for the purchase of Company's common stock at six-month intervals at 85% of the lower of the fair market value on the first day or the last day of each six-month period. The Company issued 157,590, 58,580 and 42,900 shares in 1996, 1995 and 1994, respectively, under the Purchase Plan. At December 31, 1996, 207,093 shares were reserved for future issuances under the Purchase Plan. The pro forma disclosures presented above include compensation expense related to the Purchase Plan of $446,000 and $168,000 in 1996 and 1995, respectively. 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES The components of income (loss) before income taxes and extraordinary item was comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Domestic..................................... $ (611) $(3,783) $ 2,497 Foreign...................................... (1,470) (1,240) 226 ------- -------- ------ $(2,081) $(5,023) $ 2,723 ======= ======== ======
The provision for (benefit from) income taxes consisted of the following (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Current: Federal.................................................... $(295) $ -- $3,688 State...................................................... (55) -- 601 Foreign.................................................... 73 361 275 ----- ------- ------ Total................................................. (277) 361 4,564 ----- ------- ------ Deferred: Federal.................................................... 824 (770) (1,449) State...................................................... 154 (88) (170) Foreign.................................................... (141) (636) (1) ----- ------- ------ Total 837 (1,494) (1,620) ----- ------- ------ Total $ 560 $(1,133) $2,944 ===== ======= ======
Components of the Company's deferred income tax assets and liabilities at December 31, 1996 and 1995 were as follows (in thousands):
1996 1995 ------- ------- Current assets: Accounts receivable........................................ $ 404 $ 550 Accrued expenses and other................................. 916 377 ------- ------- Total current assets.................................. $ 1,320 $ 927 ======= ======= Long-term assets and liabilities: Property and equipment..................................... $ 80 $ 327 Intangible assets.......................................... 385 362 Capitalized software costs................................. -- (428) Net operating loss carryforwards -- U.S.................... 5,725 5,725 Net operating loss carryforwards -- foreign................ 2,403 1,227 Tax credit carryforwards -- U.S............................ 967 1,052 Other -- foreign........................................... (67) 46 Valuation allowance........................................ (5,444) (4,268) ------- ------- Total net long-term assets............................ $ 4,049 $ 4,043 ======= =======
The increase in the net deferred tax asset relating to foreign currency translation was $52,000 in 1996. During 1996 the valuation allowance was increased by $1,176,000 representing foreign loss carryforwards generated for which realization does not appear likely. There was no change in the valuation allowance during 1995. During 1994, the valuation allowance was increased by $953,000, representing pre-merger net operating 28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) losses generated by Easel which, due to statutory limitations on usage by the combined company, are deemed more likely than not to expire unutilized. Net operating loss carryforwards expire through 2010, in the case of U.S. generated losses, and are available indefinitely in the case of foreign generated losses, however, the losses cannot be applied against income generated in a trade or business significantly different from that which gave rise to the carryforward. A reconciliation between the U.S. statutory and the effective tax rate is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Statutory tax rate................................ (35)% (35)% 35% State taxes, net of federal benefit............... (4) (4) 4 Surtax exemption.................................. (1) 1 (1) Nondeductible charges............................. 35 12 35 Foreign income taxes.............................. 4 3 -- Easel net operating losses for which no benefit is recognized...................................... -- -- 35 Foreign net operating losses for which no benefit is recognized................................... 26 -- -- ---- ---- ---- Effective tax rate................................ 27% (23)% 108% ==== ==== ====
6. SEGMENT INFORMATION The Company operates in one industry segment consisting of the development, marketing and support of software for the development and execution of commercial applications for industry standard operating systems. Geographic segment information was as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- Revenue: North America (including export sales)........................ $43,095 $49,358 $41,681 Europe........................................................ 18,972 7,967 19,163 Other......................................................... 7,199 11,039 4,608 ------- ------- ------- Total revenue................................................. $69,266 $68,364 $65,452 ======= ======= ======= Merger integration, exit and restructuring costs: North America................................................. $ 3,471 $ 5,561 $ 1,500 Europe........................................................ 277 998 -- Other......................................................... 574 323 200 ------- ------- ------- Total merger integration, exit and restructuring costs........ $ 4,322 $ 6,882 $ 1,700 ======= ======= ======= Operating income (loss): North America................................................. $ (45) $(3,227) $ 2,019 Europe........................................................ (673) (1,748) (8) Other......................................................... (790) 278 191 ------- ------- ------- Total operating income (loss)................................. $(1,508) $(4,697) $ 2,202 ======= ======= ======= Identifiable assets: North America................................................. $48,979 $58,661 $62,098 Europe........................................................ 11,247 3,145 7,919 Other......................................................... 3,885 945 2,345 Eliminations.................................................. (4,134) 602 (6,880) ------- ------- ------- Total identifiable assets..................................... $59,977 $63,353 $65,482 ======= ======= =======
29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LITIGATION The Company is a defendant, together with certain of its officers, in two actions initially filed in October 1995 in the U.S. District Court in the District of Massachusetts. Those actions have been consolidated through the filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs allege in the Complaint that the Company and certain of its officers, during July through October 1995, made certain untrue statements and failed to disclose certain information regarding the Company's prospective financial performance in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and omissions artificially inflated the market prices of the Company's stock. The plaintiffs purport to bring the actions on behalf of certain classes of stockholders and seek damages in unspecified amounts. The Company had denied the allegations in its answer to the Complaint and the proceeding is now in the early stages of discovery. Based upon its review to date, management believes that the actions are without merit and plans to oppose them vigorously. During 1994, the Massachusetts Appeals Court rendered a decision against the Company of approximately $382,000 plus interest and costs, including reasonable attorney's fees. The decision related to a claim of misrepresentation and breach of warranty. The full amount of the judgment including estimated costs, was charged to earnings during 1994. The costs associated with this claim were paid in full during 1995 and exceeded the initial amount recorded by $199,000. This excess was charged to earnings in 1995. During 1995, the Company also recorded approximately $300,000 in costs relating to the settlement and payout of two potential lawsuits involving Easel at the time of the merger with the Company. 8. RETIREMENT PLANS The Company provides certain supplemental requirement benefits to its executive officers, which it has funded through life insurance policies in a "split dollar" arrangement. The executive officers are allowed to borrow against the excess cash surrender value in the policy over and above the Company's cumulative paid in premiums. Upon termination of a policy or the death of the insured executive, the Company will receive proceeds equal to the amount of the cumulative premium paid by the Company. The Company may borrow against its share of the accumulated cash surrender value in the respective policies at any time. The Company accounts for these policies as a defined contribution plan and expenses premiums on the policies as incurred, which represents the compensation element of the plan. In addition, since the Company controls its share of the cash surrender value of the policies at all times, it accounts for any changes in cash surrender value in accordance with the guidance provided in Financial Accounting Standards Board Technical Bulletin No. 85-4, "Accounting for Purchases of Life Insurance." Accordingly, increases or decreases in cash surrender value are recognized each period and the asset recorded on the Company's books represents the lesser of the Company's share of cash surrender value or the cumulative premiums paid on the policies. This amount is included in other long-term assets and was $1,356,000 and $983,000 at December 31, 1996 and 1995 respectively. Total premiums in 1996, 1995, and 1994 were approximately $466,000, $420,000, and $416,000, respectively. The Company has a 401(k) retirement and savings plan (the Plan) covering substantially all domestic employees. The Plan allows each participant to contribute up to 15% of his or her base wage up to an amount not to exceed an annual statutory maximum. Through December 31, 1995, the Company matched contributions in an amount equal to 25% of the contributions of each participant in excess of 2% of such participant's annual compensation up to 4% of such participant's annual compensation. Effective January 1, 1996, the Company increased its matching contribution to 50% of the contributions of each participant in excess of 2% of such participant's annual compensation, up to 4% of such participant's annual compensation. The Company made matching contributions to the Plan of approximately $315,000, $125,000, and $80,000 in 1996, 1995, and 1994, respectively. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal year ended December 31, 1994, VMARK entered into transactions with respect to software products and services with a company (the related party) whose chairman of the board and president is a member of the VMARK Board. The aggregate value of such transactions, which were in the ordinary course of VMARK's business and priced at standard rates, was approximately $320,000 with respect to the purchase by the related party of products and services from VMARK and approximately $227,000 with respect to the purchase by VMARK of products and services from the related party. 10. RESTRUCTURING COSTS The 1996 results include a $2,125,000 restructuring charge associated with the downsizing of Object Studio -- related activities. The charge was recorded pursuant to a formal plan adopted and announced in May 1996. The plan was adopted as a result of the signing of a letter of intent to form the joint venture which has undertaken the development and enhancement of the Object Studio product line. The charge included approximately $1,900,000 in employee severance and benefits, $153,000 for the write off of capitalized software and $72,000 related to abandonment of facilities. As of December 31, 1996, approximately $418,000 in employee severance and benefits were unpaid. The 1996 results also include a $2,197,000 charge associated with a restructuring and reduction in staff from all areas of the Company. The restructuring was designed to bring costs in line with revenues and included $1,591,000 in employee severance and benefits and $606,000 for the write off of intangible assets. None of the employee severance and benefits had been paid as of December 31, 1996. Included in the 1994 results is a $1,700,000 charge recorded by Easel associated with a restructuring and reduction in staff of 24 employees from all areas of Easel, announced by Easel on August 31, 1994, which was intended to streamline the organization and align expenses to better fit revenue. The restructuring charge included approximately $1,000,000 for employee severance and benefits and $700,000 for facilities consolidation. As of December 31, 1995 and 1994, the remaining restructuring reserve of $185,000 and $1,157,000, respectively, was included in accrued expenses. All amounts were paid by the end of 1996. 11. JOINT VENTURE In October 1996, the Company established a joint venture with one of its resellers to develop and support the Object Studio product suite of object-oriented application development tools. The Company contributed certain product rights and transferred certain development personnel to the joint venture in exchange for a 50% ownership in the venture, which is called CinMark, Inc. Royalties are required to be paid to CinMark by both parties. The Company's share in CinMark's loss for the quarter ended December 31, 1996 is included as a component of other income and expense. 12. EXTRAORDINARY ITEM In December 1996, as part of the Company's ongoing efforts to direct the business towards growth areas, management, at the direction of the Board of Directors, undertook a review of all existing businesses, including those acquired through the merger with Easel discussed in Note 2. Following this review, in December 1996, management recommended and the Board of Directors approved a comprehensive plan to exit certain businesses. In general, these businesses represented portions of the business with minimal profitability and lower future growth prospects. For discussion of certain abandoned businesses and asset write-offs, see Note 10. Among the product lines and businesses to be discontinued or abandoned were certain products or lines of business present at the date of the merger with Easel. Because these dispositions were not contemplated at the date of the merger and are therefore outside of the normal course of business, they have been presented as an extraordinary item. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the extraordinary item recorded in 1996 consist of the following (in thousands): Net loss on disposition of ASG................................... $ 537 Object Studio: Asset writedown............................................. 1,845 Facilities closure.......................................... 1,419 Severance related costs..................................... 417 Expected costs and funding for joint venture................ 1,700 ------ Pre-tax extraordinary item....................................... 5,918 Tax benefit...................................................... (1,184) ------ Extraordinary item............................................... $4,734 ======
The Company's US education business, ASG, was sold to a third party for $420,000. The net loss reflected above represents the writedown of the assets of ASG to net realizable value. The amount received for ASG is included in assets held for sale on the consolidated balance sheet. As part of the decision to reposition the Company's product offerings, the Company entered into certain agreements with the other party to the joint venture described in Note 11. As a result of these agreements, the Company effectively transferred all of its rights to sell the product to the other party, and will cease to sell Object Studio related product. Because generation of revenue related to Object Studio sales is now no longer within the control of the Company, the Company is unable to develop reasonable estimates of expected cash flow streams to be generated by future sales. In addition, the joint venture has been structured so that the Company's future cash stream from royalties will be only a percentage of what it would have been had the Company retained all rights to the product. Therefore, the Company has written off the remaining unamortized cost of this product at December 31, 1996. Most remaining employees of one of the Company's foreign subsidiaries, dedicated to Object Studio sales, were effectively terminated and the estimated cost of such terminations was charged off. The Company also incurred costs for facility abandonment related to the subsidiary and committed to provide funding to the joint venture of $1,700,000 which has also been charged to the extraordinary item. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED -- IN THOUSANDS)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 ---- 1996 Revenue........................................... $17,736 $17,958 $16,688 $16,884 Income (loss) from operations.......................... 970 (531) 316 (2,263) Net income (loss)...................................... 559 (725) 131 (7,340) Net income (loss) per common share..................... .09 (.09) .02 (.91) 1995 ---- Revenue................................................ $17,876 $17,727 $15,557 $17,204 Income (loss) from operations.......................... 2,306 (6,207) (1,345) 549 Net income (loss)...................................... 1,513 (4,589) (1,074) 260 Net income (loss) per common share..................... .19 (.58) (.13) .03
32 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors may be found under the caption "Election of Directors" appearing in the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions " Executive Officer Compensation" and " Director Compensation" appearing in the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Principal Stockholders" and "Stock Ownership of Directors and Executive Officers" appearing in the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (1) Financial Statements The following financial statements are filed as part of this Annual Report: Independent Auditors' Report.......................................................... Consolidated Balance Sheets as of December 31, 1996 and 1995.......................... Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996................................................................... Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996...................................................... Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996................................................................... Notes to Consolidated Financial Statements............................................ Selected Quarterly Financial Data (unaudited).........................................
(2) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits Documents listed below, except for documents incorporated herein by reference, are being filed as exhibits herewith. Pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, certain exhibits re incorporated herein by reference. 3.2 Second Restated Certificate of Incorporation of the Company. (1) 3.3 By-laws of the Company, as amended and restated effective as of March 17, 1992.(1) 3.3a Amendment to By-laws effective February 10, 1994.(4)
33 34 3.4 Certificate of Designations, Rights, Preferences and Privileges of Series A Junior Preferred Stock. (8) 4.1 Rights Agreement dated as of June 12, 1996 between the Company and State Street Bank and Trust Company, as Rights Agent (8) #10.1a 1986 Stock Option Plan, as amended and restated. (3) #10.1d Amendment to 1986 Stock Option Plan effective January 28, 1997. #10.2 1991 Director Stock Option Plan, as amended and restated.(3) #10.2b Amendment to 1991 Director Stock Option Plan effective January 31, 1997. #10.2c Amendment to 1991 Director Stock Option Plan effective July 29, 1996. 10.6 Restated Registration Rights Agreement dated as of April 10, 1992 between the Company and certain of its stockholders.(1) 10.11a Lease dated as of May 5, 1994 between the Company and 50 Washington Street Associated Limited Partnership(5) #10.18a Employee Stock Purchase Plan, as amended and restated. (3) #10.21 Split Dollar Life Insurance Agreement between the Company and James J. Capeless dated as of October 12, 1993.(4) #10.22 Split Dollar Life Insurance Agreement between the Company and Charles A. Cornell dated as of October 12, 1993.(4) #10.23 Split Dollar Life Insurance Agreement between the Company and James K. Walsh dated as of October 12, 1993.(4) #10.24 Split Dollar Life Insurance Agreement between the Company and Thomas M. Palka dated as of October 12, 1993.(4) #10.25 Split Dollar Life Insurance Agreement between the Company, Gillian R. Reynolds as trustee under the Andrew Ridgers Irrevocable Trust dated February 16, 1995 and Andrew Ridgers dated as of April 27, 1994. (7) #10.26 Split Dollar Life Insurance Agreement between the Company and Stephen W. Machnik dated as of April 27, 1994. (7) #10.27 Split Dollar Life Insurance Agreement between the Company and Jason E. Silvia dated as of April 27, 1994. (7) 10.28 Asset Purchase Agreement between the Company and Constellation Software, Inc. dated February 15, 1994.(6) #10.31 1995 Non-Statutory Stock Option Plan, as amended and restated effective as of January 7, 1996. #10.32 Split Dollar Life Insurance Agreement between the Company and Charles F. Kane dated as of December 15, 1995 #10.33 Split Dollar Life Insurance Agreement between the Company and Peter L. Fiore dated as of September 15, 1996. #10.34 Split Dollar Life Insurance Agreement between the Company and Pete Gyenes dated as of June 15, 1996. 10.35 Loan and Security Agreement dated as of May 3, 1996 by and between Silicon Valley Bank and Company 10.36 Amended and Restated Promissory Note -- Revolving Line of Credit loans by the Company to Silicon Valley Bank, dated May 3, 1996. 10.37 Promissory Note -- Share Repurchase Line of Credit loans by the Company to Silicon Valley Bank dated May 3, 1996. 23 Independent Auditors' Consents. 27.1 Financial Data Schedule.
- --------------- # Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the respective exhibit filed with the Company's Registration Statement on Form S-1, File No. 33-46533, initially filed on March 19, 1992. (3) Incorporated by reference to the respective exhibit to the Company's Registration Statement on Form S-8, File No. 333-00218, filed on January 5, 1996. (4) Incorporated by reference to the exhibit filed with the Company's Form 10-K dated March 28, 1994. 34 35 (5) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated May 19, 1994. (6) Incorporated by reference to the exhibit filed with the Company's Form 8-K dated March 1, 1994. (7) Incorporated by reference to the exhibit with the Company's Form 8-K dated March 29, 1996. (8) Incorporated by reference to the respective exhibit of the Company's Registration Statement on Form 8-A dated July 17, 1996, File No. 000-20059, filed on July 29, 1996. (9) Incorporated by reference to the exhibit filed with the Company's Form 10-K dated March 28, 1996. Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1996. 35 36 SCHEDULE 11 VMARK SOFTWARE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE BEGINNING OF COSTS AND AT END OF YEAR EXPENSES DEDUCTIONS YEAR ------------- ----------- ----------- ---------- Allowance for doubtful accounts receivable: For the Year Ended December 31, 1996.......... $1,891,000 $1,286,000 $(1,313,000) $1,846,000 ========== ========== =========== ========== For the Year Ended December 31, 1995.......... $ 828,000 $1,849,000 $ (786,000) $1,891,000 ========== ========== =========== ========== For the Year Ended December 31, 1994.......... $ 533,000 $ 669,000 $ (374,000) $ 828,000 ========== ========== =========== ==========
36 37 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 1997. VMARK SOFTWARE, INC. By: /s/ ROBERT M. MORRILL ---------------------------------- ROBERT M. MORRILL CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- --------------- /s/ ROBERT M. MORRILL Chairman, President, and Chief March 28, 1997 - --------------------------------------------- Executive Officer (Principal ROBERT M. MORRILL Executive Officer) /s/ CHARLES F. KANE Executive Vice President of March 28, 1997 - --------------------------------------------- Finance, Chief Financial CHARLES F. KANE Officer (Principal Finance and Accounting Officer) /s/ JAMES DOW Director March 28, 1997 - --------------------------------------------- JAMES DOW /s/ ROBERT G. CLAUSSEN Director March 28, 1997 - --------------------------------------------- ROBERT G. CLAUSSEN /s/ ALPHONSE LUCCHESE Director March 28, 1997 - --------------------------------------------- ALPHONSE LUCCHESE /s/ RANDOLPH S. NAYLOR Director March 28, 1997 - --------------------------------------------- RANDOLPH S. NAYLOR /s/ BENJAMIN F. ROBELEN Director March 28, 1997 - --------------------------------------------- BENJAMIN F. ROBELEN
37 EX-10.2C 2 AMENDMENT TO 1991 DIRECTOR STOCK OPTION PLAN 1 EXHIBIT 10.2C VMARK SOFTWARE, INC Amendment To 1991 Director Stock Option Plan Section 5 (e) of the plan is amended, effective July 29, 1996, subject to stockholder approval as required by Section 10, so that it shall read in its entirety as follows: (e) Exercise Period --------------- Each option may be exercised on a cumulative basis as to one-third of the shares subject to the option on each of the first, second and third anniversaries of the date of grant of such option, provided that, subject to the provisions of Section (5) f no option may be exercised more than 90 days after the optionee ceases to serve as a director of the Company and further provided that, in the event of a change of control of the Company, such option shall become fully exercisable. For purposes of the foregoing, a "change of control" shall mean (i) the direct or indirect acquisition by any person, entity or group acting in concert of more than 35% of the aggregate voting power of the outstanding securities of the Company having the right to vote at elections of directors, (ii) a majority of the board on July 29, 1996 or for whose nomination for such membership a majority of such members voted in favor, or (iii) the disposition by the Company of substantially all its business, other than in connection with a mere change of place of incorporation or similar mere change in form. No option shall be exercisable after the expiration of ten years from the date of grant. EX-10.1D 3 AMENDMENT TO 1986 STOCK OPTION PLAN 1 EXHIBIT 10.1D VMARK STOFTWARE, Inc. Amendment To 1986 Stock Option Plan The plan is amended, effective January 28, 1997, so that Section 8 (g) shall read in its entirety as follows: (g) TERMINATION OF OPTIONS. Each option shall terminate and may no longer be exercised if the optionee ceases for any reason to be neither an employee of nor consultant to the Company, or its parent or a subsidiary, in accordance with the following provisions: (i) if the optionee's relationship shall have been terminated by resignation or other voluntary action, or shall have been terminated involuntarily for cause, the option shall terminate and may no longer be exercised: (ii) if the optionee's relationship shall have been terminated for any reason other than cause, resignation or other voluntary action before he is eligible to retire, disability, or death, he may at any time within a period of three (3) months after such termination exercise his option to the extent that the option was exercisable by him on the date of such termination; (iii) if the optionee's relationship shall have been terminated because of disability within the meaning of Section 22 (e) (3) of the Code, he may at any time within a period of one (1) year after such termination exercise his option to the extent that the option was exercisable by him on the date of such termination; and (iv) if the optionee dies at a time when he might have exercised the option, then his estate, personal representative or beneficiary to whom it has been transferred pursuant to Paragraph 8 (f) hereof may at any time within a period of one (1) year after the optionee's death exercise the option to the extent the optionee might have exercised it at the time of his death; provided, however, that no option may be exercised to any extent by anyone after the date of expiration of the option. EX-10.31 4 1995 NON STATUTORY STOCK OPTION PLAN 1 EXHIBIT 10.31 VMARK SOFTWARE, INC. 1995 NON-STATUTORY STOCK OPTION PLAN As Amended and Restated Effective as of January 7, 1996 1. PURPOSE. The purpose of this 1995 Non-Statutory Stock Option Plan (the "Plan") is to advance the interests of VMARK Software, Inc. (the "Company") by strengthening the ability of the Company to attract, retain and motivate key employees (other than executive officers, who are not eligible to participate in the Plan) and consultants by providing them with an opportunity to purchase stock of the Company or otherwise share in the appreciation of such stock. It is intended that this purpose will be effected by the granting of non-statutory options (i.e., options which are not intended to qualify as "incentive stock options" as described in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")). 2. EFFECTIVE DATES. The Plan originally became effective on December 13, 1995, the date it was adopted by the Board of Directors of the Company (the "Board"). To the extent at any time that amendments are made to the Plan for which stockholder approval is necessary under applicable tax or securities laws or under the Board action adopting such amendment, options that may be granted only as a result of such amendments may be granted before such approval, but no such options may be exercised until such approval is obtained and such options will be null and void if such approval is not obtained. 3. STOCK SUBJECT TO THE PLAN. The number of shares that may be issued under this Plan shall not exceed in the aggregate 1,250,000 shares of the common stock, $.01 par value, of the Company (the "Shares"). Any Shares subject to an option which for any reason expires or is terminated unexercised as to such Shares may again be the subject of an option under the Plan. The 1 2 Shares delivered upon exercise of options under this Plan may, in whole or in part, be either authorized but unissued Shares or issued Shares reacquired by the Company. 4. ADMINISTRATION. This Plan shall be administered by a committee (the "Committee") consisting of two (2) or more members of the Board. Subject to the provisions of this Plan, the Committee shall have full power to construe and interpret the Plan and to establish, amend and rescind rules and regulations for its administration. Any decisions made with respect thereto shall be final and binding on the Company, the optionees and all other persons. 5. ELIGIBLE PARTICIPANTS. Options may be granted to such key employees, other than executive officers, or consultants of the Company or of any of its present or future subsidiaries, as are selected by the Committee. 6. DURATION OF THE PLAN. This Plan shall terminate on December 12, 2005, unless terminated earlier pursuant to Paragraph 12 hereafter, and no options may be granted thereafter. 7. TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan shall be evidenced by stock option agreements not inconsistent with this Plan and in such form as the Committee shall approve from time to time, which agreements shall evidence among their terms and conditions the following: (a) PRICE. The purchase price per Share payable upon the exercise of each option granted hereunder shall be determined by the Committee at the time the option is granted. (b) NUMBER OF SHARES. Each option agreement shall specify the number of Shares to which it pertains. (c) EXERCISE OF OPTIONS. Each option shall be exercisable for the full amount or for any part thereof and at such intervals or in such installments as the Committee may determine 2 3 at the time it grants such option; provided, however, that no option shall be exercisable with respect to any Shares later than ten (10) years after the date of the grant of such option. (d) NOTICE OF EXERCISE AND PAYMENT. An option shall be exercisable only by delivery of a written notice to the Company's Treasurer, or any other officer of the Company designated by the Committee to accept such notices on its behalf, specifying the number of Shares for which it is exercised. If said Shares are not at that time effectively registered under the Securities Act of 1933, as amended, the optionee shall include with such notice a letter, in form and substance satisfactory to the Company, confirming that the Shares are being purchased for the optionee's own account for investment and not with a view to distribution. Payment shall be made in full at the time the option is exercised. Payment shall be made by (i) cash, (ii) cashier's or certified check, (iii) if permitted by the Committee, by delivery and assignment to the Company of shares of Company stock having a fair market value (as determined by the Committee) equal to the exercise price, (iv) if permitted by the Committee, by promissory note, or (v) by a combination of (i), (ii), (iii), or (iv). (e) WITHHOLDING TAXES; DELIVERY OF SHARES. The Company's obligation to deliver Shares upon exercise of an option, in whole or in part, shall be subject to the optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The optionee may satisfy the obligation, in whole or in part, by electing to have the Company withhold Shares having a value equal to the amount required to be withheld. The value of Shares to be withheld shall be based on the fair market value of the Shares on the date the amount of tax to be withheld is to be determined (the "Tax Date"). The optionee's election to have Shares withheld for this purpose will be subject to the following restrictions: (1) the election must be made prior to the 3 4 Tax Date, (2) the election must be irrevocable, and (3) the election will be subject to the right of the Committee to disapprove the election. (f) NON-TRANSFERABILITY. No option shall be transferable by the optionee otherwise than by will or the laws of descent and distribution, and each option shall be exercisable during his lifetime only by him. (g) TERMINATION OF OPTIONS. Each option shall terminate and may no longer be exercised if the optionee ceases for any reason to be an employee of the Company, or its parent or a subsidiary, in accordance with the following provisions: (i) if the optionee's employment shall have been terminated by resignation or other voluntary action, or if such employment shall have been terminated involuntarily for cause, the option shall terminate and may no longer be exercised; (ii) if the optionee's employment shall have been terminated for any reason other than cause, resignation or other voluntary action before he is eligible to retire, disability or death, he may at any time within a period of three (3) months after such termination of employment exercise his option to the extent that the option was exercisable by him on the date of termination of his employment; (iii) if the optionee's employment shall have been terminated because of disability within the meaning of Section 22(e)(3) of the Code, he may at any time within a period of one (1) year after such termination of employment exercise his option to the extent that the option was exercisable by him on the date of termination of his employment; and (iv) if the optionee dies at a time when he might have exercised the option, then his estate, personal representative or beneficiary to whom it has been transferred pursuant to Paragraph 8(f) hereof may at any time within a period of one (1) year after the optionee's death exercise the option to the extent the optionee might have exercised it at the time of his death; provided, however, that no option may be exercised to any extent by anyone after the date of expiration of the option. 4 5 (h) RIGHTS AS STOCKHOLDER. The optionee shall have no rights as a stockholder with respect to any Shares covered by his option until the date of issuance of a stock certificate to him for such Shares. (i) REPURCHASE OF SHARES BY THE COMPANY. Any Shares purchased by an optionee upon exercise of an option may in the discretion of the Committee be subject to repurchase by the Company if and to the extent specifically set forth in the option agreement pursuant to which the Shares were purchased. 8. STOCK DIVIDENDS; STOCK SPLITS; STOCK COMBINATION; RECAPITALIZATIONS. Appropriate adjustment shall be made in the maximum number of Shares subject to the Plan and in the number, kind, and option price of Shares covered by outstanding options granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the effective date of the Plan. 9. MERGER; SALE OF ASSETS; DISSOLUTION. In the event of a change of the Shares resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of shares which thereafter may be optioned and sold under the Plan, and the number and kind of shares then subject to options granted hereunder and the option price per share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause every 5 6 option outstanding hereunder to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder. 10. DEFINITIONS. (a) The term "key employees" refers to those non-executive administrative, technical or managerial employees who are determined by the Committee to be eligible for options under this Plan. (b) The term "optionee" means a key employee to whom an option is granted under this Plan. (c) The term "parent" shall have, for purposes of this plan, the meaning ascribed to it under Section 424(e) of the Code and the regulations promulgated thereunder. (d) The term "subsidiary" shall have, for purposes of this Plan, the meaning ascribed to it under Section 424(f) of the Code and the regulations promulgated thereunder. 11. TERMINATION OR AMENDMENT OF PLAN. The Board may at any time terminate the Plan or make such changes in or additions to the Plan as it deems advisable, provided that no such termination or amendment shall adversely affect or impair any then outstanding option without the consent of the optionee holding such option. * * * * * Amended by the Board of Directors Effective January 7, 1996. 1-233903 6 EX-10.32 5 SPLIT DOLLAR LIFE INS. AGREEMENT (C. KANE) 1 SPLIT DOLLAR LIFE INSURANCE AGREEMENT AGREEMENT made as of the 15th day of December 1995, by and between VMARK SOFTWARE, INC., a Delaware corporation ("VMARK") and Charles F. Kane (the "Insured"). WHEREAS, the Insured is an executive officer and key employee of VMARK; and WHEREAS, VMARK wishes to provide an incentive for the Insured's continued performance of services to VMARK by making available to him a split-dollar life insurance program; and WHEREAS, the Insured wishes to participate in such program; and WHEREAS, the Insured and VMARK have arranged for the purchase of Policy No. 9658404 in the face amount of $1,024,410 on the life of the Insured (the "Policy") issued by Massachusetts Mutual Life Insurance Company (the "Insurance Company"); and WHEREAS, the Policy is a whole-life policy which will be fully paid upon the payment of 10 consecutive annual premiums of $39,234 each (if the annual installment option is elected). NOW, THEREFORE, the parties agree as follows: 1. $26,500 of each annual premium due on the Policy (or a proportionate amount of any other premium installment) shall be paid when due by VMARK until such obligation shall terminate in accordance with the provisions of paragraph 2 or 13 below, provided that VMARK shall have no obligation to any pay premiums in respect of benefits hereafter added to the Policy 2 by the Insured. 2. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall be subject to the following: (a) In the event the employment of the Insured by VMARK is terminated for any reason, VMARK's obligation to make premium payments shall terminate immediately unless, prior to such termination of employment, there has been a Change of Control (as defined in paragraph 17(c) below), in which event VMARK's obligation to make premium payments shall terminate on the fifth anniversary of such termination of employment, subject to (b) below. (b) In the event the Insured voluntarily terminates his employment with VMARK following a Change of Control and, within the 24 month period immediately following such termination, directly or indirectly engages in any activity which is in competition with the business of VMARK, VMARK's obligation to make premium payments shall immediately terminate. (c) In the event, and to the extent, the board of directors of VMARK determines, in its sole reasonable judgement, that any premium payment would have a materially detrimental effect upon its financial condition, such payment or a portion thereof may be deferred until such time or times as the payment of all or a portion of the deferred amount may be paid without such effect. Payment of deferred amounts shall be applied, as appropriate, to (i) make the premium payment, (ii) repay the amount borrowed against the Policy to make such payment, or (iii) reimburse the Insured for making such payment. Any such deferrals and subsequent payments shall be effected pro rata in respect of the Policy and other policies issued in connection with similar executive split-dollar life insurance programs. 3 3. VMARK acknowledges that ownership of the Policy is held by the Insured, including without limitation the rights to transfer such ownership, designate beneficiaries and borrow against the Policy, subject only to the Collateral Assignment (as defined in paragraph 5 below) and other limitations specifically described herein. 4. The Insured acknowledges that VMARK makes no representations or warranties regarding the Policy, including without limitation regarding the amounts which may become available for borrowing against the Policy or the tax treatment of any proceeds of or other matters in connection with the Policy. 5. The Insured has executed and delivered to VMARK an assignment (the "Collateral Assignment") of certain rights in the Policy in order to secure the right of VMARK to receive, not later than the death of the Insured, an amount equal to the aggregate of all premiums thereon paid by VMARK, including any amounts paid or reimbursed pursuant to paragraph 2(c)(ii) or (iii) above ("2-c Amounts"). A copy of the Collateral Assignment is attached as Exhibit A hereto. 6. In the event either party wishes to exercise a right which under the Policy, subject to the provisions hereof and of the Collateral Assignment, may be exercised by such party alone, the other party shall co-sign any documents and take such other steps as may be required by the Insurance Company to effect the exercise of such right. 7. VMARK acknowledges that any borrowing by it against the Policy could materially reduce the intended benefits to the Insured pursuant to this Agreement. Any such borrowing shall be subject to the following: (a) No such borrowings shall be made except to the extent that the board of directors of VMARK determines, in its sole reasonable judgment, that alternative sources of funds are not available on reasonably satisfactory terms and that the failure to make such 4 borrowing would have a materially detrimental effect upon VMARK. (b) VMARK shall pay all interest due on any such borrowings in such timely manner that the intended benefits to the Insured pursuant hereto are, to the extent possible by reason of prompt interest payments, preserved. (c) Any such borrowings shall be made substantially pro rata, in accordance with the aggregate premiums paid by the Company, against the Policy and all other similar policies of the Company on the lives of its executive officers. Any repayment of principal on such borrowings against the Policy and other such policies shall be allocated in such manner as the Company, in its reasonable discretion, deems will ensure, to the extent possible by reason of such allocation, that the intended benefits to the respective insureds are preserved, and otherwise pro rata as set forth above. 8. The Insured shall not surrender the Policy unless the cash value thereof at the time of surrender, net of any then outstanding borrowings against the Policy, exceeds the aggregate amount of all premiums thereon paid by VMARK through such time, including any 2-c Amounts. 9. The Insured shall not borrow against the Policy if the aggregate amount of (a) such borrowing and any other borrowings against the Policy by the Insured or his assigns other than VMARK, including interest accrued and expected to be accrued thereon ("Borrowings") and (b) all premiums thereon paid by VMARK through such time, including any 2-c Amounts, shall exceed (i) prior to January 1, 2022, the cash value of the Policy without regard to any Borrowings, or (ii) on or after said date, the death benefit of the Policy (including any additions thereto) without regard to any Borrowings, provided that the foregoing shall not prevent any borrowing to pay premiums not paid by VMARK pursuant to paragraph 2(c) above. 10. The Insured shall elect to have premiums paid on an annual installment basis unless 5 VMARK agrees in writing to the election of another installment option. 11. Upon the death of the Insured while the Policy is in effect, but prior to the exercise by either the Insured or VMARK of his or its respective rights to acquire full ownership of the Policy pursuant to paragraph 12 below, VMARK shall promptly furnish the Insurance Company an affidavit specifying the amount of proceeds payable to it pursuant to the Collateral Assignment. 12. The Insured shall have the right after December 31, 1999 to reacquire from VMARK the rights assigned pursuant to the Collateral Assignment. Such right may be exercised (a) at any time, by payment to VMARK in cash or by certified or bank check of an amount equal to the aggregate of all premiums on the Policy paid by VMARK through such time, including any 2-c Amounts, or (b) on or after January 1, 2006, if VMARK's obligation to make premium payments has not terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17(a) below), by delivery to VMARK of a non-interest bearing promissory note in such amount payable not later than the death of the Insured and secured by a pledge of collateral, provided that the board of directors of VMARK at the time may reject such method of exercise if, in its sole reasonable discretion, it deems such note and collateral to provide repayment arrangements less secure or otherwise not commercially equivalent to the arrangements otherwise provided herein. Against receipt of such payment or delivery, VMARK shall execute and deliver to the Insured a full release of the Collateral Assignment satisfactory in form to the Insurance Company. In the event that (i) VMARK's obligation to make premium payments has terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17 (a) below), and (ii) the Insured does not exercise his rights under this paragraph 12 within sixty days following such termination of VMARK's obligation, then his rights under this paragraph 12 shall lapse. Upon the lapse of such rights, VMARK shall have the right from time to time to acquire from the Insured all rights and other incidents of ownership in and under the Policy upon 6 payment of ten dollars to the Insured. Against receipt of such payment the Insured shall execute and deliver such documents and take such other steps to effect the transfer of such ownership to VMARK as may be satisfactory in form to the Insurance Company. 13. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall, if not previously terminated pursuant to the provisions of paragraph 2 above, terminate upon the exercise of the Insured's rights or the lapse thereof under paragraph 12 above. 14. Nothing herein shall be construed to obligate VMARK to continue the employment of the Insured or to pay any benefits under the Policy under any circumstances. 15. In the event VMARK shall sell or otherwise dispose of substantially all its business and assets, it shall (a) cause the acquiring party to deliver to the Insured a written assumption of all the respective obligations of VMARK hereunder and under the Policy and Collateral Assignment or (b) retain sufficient assets to pay premiums on the Policy to the extent required. In the event of an assumption under (a) above, the word "VMARK" shall mean or include, as the context indicates, any such acquiring party. 16. The Insured may assign all its rights hereunder and under the Policy and Collateral Assignment, provided that the assignee shall deliver to VMARK a written assumption of all the respective obligations of the Insured hereunder and thereunder. In the event of such assignment and assumption, the word "Insured" shall mean or include, as the context indicates, any such assignee, provided that the Policy shall insure the life of the initial Insured only and not of any assignee or other successor. 17. For purposes of paragraph 2 above: 7 (a) The Insured shall not be deemed to have voluntarily terminated his employment with VMARK if the termination occurs within nine months following (i) a reduction of his salary other than a reduction applicable to executives generally, (ii) a material demotion in the level of his duties, or (iii) a material change of the location of his employment; (b) "Cause" shall mean (i) commission by the Insured of a willful, wrongful act, such as embezzlement, against VMARK, (ii) conviction of the Insured of a felony involving moral turpitude, (iii) willful, gross and repeated neglect by the Insured of his executive employment duties, or (iv) intentional and repeated failure of the Insured to observe specific directives or policies of the board of directors of VMARK applicable to his executive employment duties; and (c) "Change of Control" shall mean (i) the direct or indirect acquisition by any person, entity or group acting in concert of more than 35% of the aggregate voting power of the outstanding securities of VMARK having the right to vote at elections of directors, (ii) a majority of the board of directors of VMARK ceasing to consist of individuals who are currently members of such board or for whose nomination for such membership a majority of such current members voted in favor, or (iii) the disposition by VMARK of substantially all its business, other than in 8 connection with a mere change of place of incorporation or similar mere change in form. 18. This Agreement shall be construed and enforced under the laws of Massachusetts. Except as provided by paragraphs 15 and 16 above, no rights or obligations hereunder or under the Policy or Collateral Assignment shall be voluntarily assigned without the prior written consent of the other party, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the parties and their respective successors, assigns, heirs and legal representatives. This Agreement may not be amended or otherwise modified without the prior written consent of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. VMARK Software, Inc. By - ----------------------------- ------------------------------- (Witness) Its Chairman - ----------------------------- ------------------------------- (Witness) Charles F. Kane 757291-000 ds1.307322-1 EX-10.33 6 SPLT DOLLAR LIFE INS. AGREEMENT (P. FIORE) 1 SPLIT DOLLAR LIFE INSURANCE AGREEMENT AGREEMENT made as of the 15th day of September 1996, by and between VMARK SOFTWARE, INC., a Delaware corporation ("VMARK") and Peter L. Fiore (the "Insured"). WHEREAS, the Insured is an executive officer and key employee of VMARK; and WHEREAS, VMARK wishes to provide an incentive for the Insured's continued performance of services to VMARK by making available to him a split-dollar life insurance program; and WHEREAS, the Insured wishes to participate in such program; and WHEREAS, the Insured and VMARK have arranged for the purchase of Policy No. 9895313 in the face amount of $988,830 on the life of the Insured (the "Policy") issued by Massachusetts Mutual Life Insurance Company (the "Insurance Company"); and WHEREAS, the Policy is a whole-life policy which will be fully paid upon the payment of 10 consecutive annual premiums of $39,000 each (if the annual installment option is elected). NOW, THEREFORE, the parties agree as follows: 1. $29,250 of each annual premium due on the Policy (or a proportionate amount of any other premium installment) shall be paid when due by VMARK until such obligation shall terminate in accordance with the provisions of paragraph 2 or 13 below, provided that VMARK shall have no obligation to any pay premiums in respect of benefits hereafter added to the Policy 2 by the Insured. 2. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall be subject to the following: (a) In the event the employment of the Insured by VMARK is terminated for any reason, VMARK's obligation to make premium payments shall terminate immediately unless, prior to such termination of employment, there has been a Change of Control (as defined in paragraph 17(c) below), in which event VMARK's obligation to make premium payments shall terminate on the fifth anniversary of such termination of employment, subject to (b) below. (b) In the event the Insured voluntarily terminates his employment with VMARK following a Change of Control and, within the 24 month period immediately following such termination, directly or indirectly engages in any activity which is in competition with the business of VMARK, VMARK's obligation to make premium payments shall immediately terminate. (c) In the event, and to the extent, the board of directors of VMARK determines, in its sole reasonable judgement, that any premium payment would have a materially detrimental effect upon its financial condition, such payment or a portion thereof may be deferred until such time or times as the payment of all or a portion of the deferred amount may be paid without such effect. Payment of deferred amounts shall be applied, as appropriate, to (i) make the premium payment, (ii) repay the amount borrowed against the Policy to make such payment, or (iii) reimburse the Insured for making such payment. Any such deferrals and subsequent payments shall be effected pro rata in respect of the Policy and other policies issued in connection with similar executive split-dollar life insurance programs. 3 3. VMARK acknowledges that ownership of the Policy is held by the Insured, including without limitation the rights to transfer such ownership, designate beneficiaries and borrow against the Policy, subject only to the Collateral Assignment (as defined in paragraph 5 below) and other limitations specifically described herein. 4. The Insured acknowledges that VMARK makes no representations or warranties regarding the Policy, including without limitation regarding the amounts which may become available for borrowing against the Policy or the tax treatment of any proceeds of or other matters in connection with the Policy. 5. The Insured has executed and delivered to VMARK an assignment (the "Collateral Assignment") of certain rights in the Policy in order to secure the right of VMARK to receive, not later than the death of the Insured, an amount equal to the aggregate of all premiums thereon paid by VMARK, including any amounts paid or reimbursed pursuant to paragraph 2(c)(ii) or (iii) above ("2-c Amounts"). A copy of the Collateral Assignment is attached as Exhibit A hereto. 6. In the event either party wishes to exercise a right which under the Policy, subject to the provisions hereof and of the Collateral Assignment, may be exercised by such party alone, the other party shall co-sign any documents and take such other steps as may be required by the Insurance Company to effect the exercise of such right. 7. VMARK acknowledges that any borrowing by it against the Policy could materially reduce the intended benefits to the Insured pursuant to this Agreement. Any such borrowing shall be subject to the following: (a) No such borrowings shall be made except to the extent that the board of directors of VMARK determines, in its sole reasonable judgment, that alternative sources of funds are not available on reasonably satisfactory terms and that the failure to make such 4 borrowing would have a materially detrimental effect upon VMARK. (b) VMARK shall pay all interest due on any such borrowings in such timely manner that the intended benefits to the Insured pursuant hereto are, to the extent possible by reason of prompt interest payments, preserved. (c) Any such borrowings shall be made substantially pro rata, in accordance with the aggregate premiums paid by the Company, against the Policy and all other similar policies of the Company on the lives of its executive officers. Any repayment of principal on such borrowings against the Policy and other such policies shall be allocated in such manner as the Company, in its reasonable discretion, deems will ensure, to the extent possible by reason of such allocation, that the intended benefits to the respective insureds are preserved, and otherwise pro rata as set forth above. 8. The Insured shall not surrender the Policy unless the cash value thereof at the time of surrender, net of any then outstanding borrowings against the Policy, exceeds the aggregate amount of all premiums thereon paid by VMARK through such time, including any 2-c Amounts. 9. The Insured shall not borrow against the Policy if the aggregate amount of (a) such borrowing and any other borrowings against the Policy by the Insured or his assigns other than VMARK, including interest accrued and expected to be accrued thereon ("Borrowings") and (b) all premiums thereon paid by VMARK through such time, including any 2-c Amounts, shall exceed (i) prior to January 1, 2022, the cash value of the Policy without regard to any Borrowings, or (ii) on or after said date, the death benefit of the Policy (including any additions thereto) without regard to any Borrowings, provided that the foregoing shall not prevent any borrowing to pay premiums not paid by VMARK pursuant to paragraph 2(c) above. 10. The Insured shall elect to have premiums paid on an annual installment basis unless 5 VMARK agrees in writing to the election of another installment option. 11. Upon the death of the Insured while the Policy is in effect, but prior to the exercise by either the Insured or VMARK of his or its respective rights to acquire full ownership of the Policy pursuant to paragraph 12 below, VMARK shall promptly furnish the Insurance Company an affidavit specifying the amount of proceeds payable to it pursuant to the Collateral Assignment. 12. The Insured shall have the right after September 30, 2000 to reacquire from VMARK the rights assigned pursuant to the Collateral Assignment. Such right may be exercised (a) at any time, by payment to VMARK in cash or by certified or bank check of an amount equal to the aggregate of all premiums on the Policy paid by VMARK through such time, including any 2-c Amounts, or (b) on or after September 15, 2006, if VMARK's obligation to make premium payments has not terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17(a) below), by delivery to VMARK of a non-interest bearing promissory note in such amount payable not later than the death of the Insured and secured by a pledge of collateral, provided that the board of directors of VMARK at the time may reject such method of exercise if, in its sole reasonable discretion, it deems such note and collateral to provide repayment arrangements less secure or otherwise not commercially equivalent to the arrangements otherwise provided herein. Against receipt of such payment or delivery, VMARK shall execute and deliver to the Insured a full release of the Collateral Assignment satisfactory in form to the Insurance Company. In the event that (i) VMARK's obligation to make premium payments has terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17 (a) below), and (ii) the Insured does not exercise his rights under this paragraph 12 within sixty days following such termination of VMARK's obligation, then his rights under this paragraph 12 shall lapse. Upon the lapse of such rights, VMARK shall have the right from time to time to acquire from the Insured all rights and other incidents of ownership in and under the Policy upon 6 payment of ten dollars to the Insured. Against receipt of such payment the Insured shall execute and deliver such documents and take such other steps to effect the transfer of such ownership to VMARK as may be satisfactory in form to the Insurance Company. 13. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall, if not previously terminated pursuant to the provisions of paragraph 2 above, terminate upon the exercise of the Insured's rights or the lapse thereof under paragraph 12 above. 14. Nothing herein shall be construed to obligate VMARK to continue the employment of the Insured or to pay any benefits under the Policy under any circumstances. 15. In the event VMARK shall sell or otherwise dispose of substantially all its business and assets, it shall (a) cause the acquiring party to deliver to the Insured a written assumption of all the respective obligations of VMARK hereunder and under the Policy and Collateral Assignment or (b) retain sufficient assets to pay premiums on the Policy to the extent required. In the event of an assumption under (a) above, the word "VMARK" shall mean or include, as the context indicates, any such acquiring party. 16. The Insured may assign all its rights hereunder and under the Policy and Collateral Assignment, provided that the assignee shall deliver to VMARK a written assumption of all the respective obligations of the Insured hereunder and thereunder. In the event of such assignment and assumption, the word "Insured" shall mean or include, as the context indicates, any such assignee, provided that the Policy shall insure the life of the initial Insured only and not of any assignee or other successor. 17. For purposes of paragraph 2 above: 7 (a) The Insured shall not be deemed to have voluntarily terminated his employment with VMARK if the termination occurs within nine months following (i) a reduction of his salary other than a reduction applicable to executives generally, (ii) a material demotion in the level of his duties, or (iii) a material change of the location of his employment; (b) "Cause" shall mean (i) commission by the Insured of a willful, wrongful act, such as embezzlement, against VMARK, (ii) conviction of the Insured of a felony involving moral turpitude, (iii) willful, gross and repeated neglect by the Insured of his executive employment duties, or (iv) intentional and repeated failure of the Insured to observe specific directives or policies of the board of directors of VMARK applicable to his executive employment duties; and (c) "Change of Control" shall mean (i) the direct or indirect acquisition by any person, entity or group acting in concert of more than 35% of the aggregate voting power of the outstanding securities of VMARK having the right to vote at elections of directors, (ii) a majority of the board of directors of VMARK ceasing to consist of individuals who are currently members of such board or for whose nomination for such membership a majority of such current members voted in favor, or (iii) the disposition by VMARK of substantially all its business, other than in 8 connection with a mere change of place of incorporation or similar mere change in form. 18. This Agreement shall be construed and enforced under the laws of Massachusetts. Except as provided by paragraphs 15 and 16 above, no rights or obligations hereunder or under the Policy or Collateral Assignment shall be voluntarily assigned without the prior written consent of the other party, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the parties and their respective successors, assigns, heirs and legal representatives. This Agreement may not be amended or otherwise modified without the prior written consent of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. VMARK Software, Inc. By - --------------------------- --------------------------------- (Witness) Its Chairman - --------------------------- --------------------------------- (Witness) Peter L. Fiore EX-10.34 7 SPLIT DOLLAR LIFE INS. AGREEMENT (P. GYENES) 1 SPLIT DOLLAR LIFE INSURANCE AGREEMENT AGREEMENT made as of the 15th day of June 1996, by and between VMARK SOFTWARE, INC., a Delaware corporation ("VMARK") and Peter Gyenes (the "Insured"). WHEREAS, the Insured is an executive officer and key employee of VMARK; and WHEREAS, VMARK wishes to provide an incentive for the Insured's continued performance of services to VMARK by making available to him a split-dollar life insurance program; and WHEREAS, the Insured wishes to participate in such program; and WHEREAS, the Insured and VMARK have arranged for the purchase of Policy No. 9879040 in the face amount of $1,516,401 on the life of the Insured (the "Policy") issued by Massachusetts Mutual Life Insurance Company (the "Insurance Company"); and WHEREAS, the Policy is a whole-life policy which will be fully paid upon the payment of 10 consecutive annual premiums of $86,500 each (if the annual installment option is elected). NOW, THEREFORE, the parties agree as follows: 1. $59,500 of each annual premium due on the Policy (or a proportionate amount of any other premium installment) shall be paid when due by VMARK until such obligation shall terminate in accordance with the provisions of paragraph 2 or 13 below, provided that VMARK shall have no obligation to any pay premiums in respect of benefits hereafter added to the Policy 2 by the Insured. 2. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall be subject to the following: (a) In the event the employment of the Insured by VMARK is terminated for any reason, VMARK's obligation to make premium payments shall terminate immediately unless, prior to such termination of employment, there has been a Change of Control (as defined in paragraph 17(c) below), in which event VMARK's obligation to make premium payments shall terminate on the fifth anniversary of such termination of employment, subject to (b) below. (b) In the event the Insured voluntarily terminates his employment with VMARK following a Change of Control and, within the 24 month period immediately following such termination, directly or indirectly engages in any activity which is in competition with the business of VMARK, VMARK's obligation to make premium payments shall immediately terminate. (c) In the event, and to the extent, the board of directors of VMARK determines, in its sole reasonable judgement, that any premium payment would have a materially detrimental effect upon its financial condition, such payment or a portion thereof may be deferred until such time or times as the payment of all or a portion of the deferred amount may be paid without such effect. Payment of deferred amounts shall be applied, as appropriate, to (i) make the premium payment, (ii) repay the amount borrowed against the Policy to make such payment, or (iii) reimburse the Insured for making such payment. Any such deferrals and subsequent payments shall be effected pro rata in respect of the Policy and other policies issued in connection with similar executive split-dollar life insurance programs. 3 3. VMARK acknowledges that ownership of the Policy is held by the Insured, including without limitation the rights to transfer such ownership, designate beneficiaries and borrow against the Policy, subject only to the Collateral Assignment (as defined in paragraph 5 below) and other limitations specifically described herein. 4. The Insured acknowledges that VMARK makes no representations or warranties regarding the Policy, including without limitation regarding the amounts which may become available for borrowing against the Policy or the tax treatment of any proceeds of or other matters in connection with the Policy. 5. The Insured has executed and delivered to VMARK an assignment (the "Collateral Assignment") of certain rights in the Policy in order to secure the right of VMARK to receive, not later than the death of the Insured, an amount equal to the aggregate of all premiums thereon paid by VMARK, including any amounts paid or reimbursed pursuant to paragraph 2(c)(ii) or (iii) above ("2-c Amounts"). A copy of the Collateral Assignment is attached as Exhibit A hereto. 6. In the event either party wishes to exercise a right which under the Policy, subject to the provisions hereof and of the Collateral Assignment, may be exercised by such party alone, the other party shall co-sign any documents and take such other steps as may be required by the Insurance Company to effect the exercise of such right. 7. VMARK acknowledges that any borrowing by it against the Policy could materially reduce the intended benefits to the Insured pursuant to this Agreement. Any such borrowing shall be subject to the following: (a) No such borrowings shall be made except to the extent that the board of directors of VMARK determines, in its sole reasonable judgment, that alternative sources of funds are not available on reasonably satisfactory terms and that the failure to make such 4 borrowing would have a materially detrimental effect upon VMARK. (b) VMARK shall pay all interest due on any such borrowings in such timely manner that the intended benefits to the Insured pursuant hereto are, to the extent possible by reason of prompt interest payments, preserved. (c) Any such borrowings shall be made substantially pro rata, in accordance with the aggregate premiums paid by the Company, against the Policy and all other similar policies of the Company on the lives of its executive officers. Any repayment of principal on such borrowings against the Policy and other such policies shall be allocated in such manner as the Company, in its reasonable discretion, deems will ensure, to the extent possible by reason of such allocation, that the intended benefits to the respective insureds are preserved, and otherwise pro rata as set forth above. 8. The Insured shall not surrender the Policy unless the cash value thereof at the time of surrender, net of any then outstanding borrowings against the Policy, exceeds the aggregate amount of all premiums thereon paid by VMARK through such time, including any 2-c Amounts. 9. The Insured shall not borrow against the Policy if the aggregate amount of (a) such borrowing and any other borrowings against the Policy by the Insured or his assigns other than VMARK, including interest accrued and expected to be accrued thereon ("Borrowings") and (b) all premiums thereon paid by VMARK through such time, including any 2-c Amounts, shall exceed (i) prior to January 1, 2010, the cash value of the Policy without regard to any Borrowings, or (ii) on or after said date, the death benefit of the Policy (including any additions thereto) without regard to any Borrowings, provided that the foregoing shall not prevent any borrowing to pay premiums not paid by VMARK pursuant to paragraph 2(c) above. 10. The Insured shall elect to have premiums paid on an annual installment basis unless 5 VMARK agrees in writing to the election of another installment option. 11. Upon the death of the Insured while the Policy is in effect, but prior to the exercise by either the Insured or VMARK of his or its respective rights to acquire full ownership of the Policy pursuant to paragraph 12 below, VMARK shall promptly furnish the Insurance Company an affidavit specifying the amount of proceeds payable to it pursuant to the Collateral Assignment. 12. The Insured shall have the right after June 30, 2000 to reacquire from VMARK the rights assigned pursuant to the Collateral Assignment. Such right may be exercised (a) at any time, by payment to VMARK in cash or by certified or bank check of an amount equal to the aggregate of all premiums on the Policy paid by VMARK through such time, including any 2-c Amounts, or (b) on or after June 15, 2006, if VMARK's obligation to make premium payments has not terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17(a) below), by delivery to VMARK of a non-interest bearing promissory note in such amount payable not later than the death of the Insured and secured by a pledge of collateral, provided that the board of directors of VMARK at the time may reject such method of exercise if, in its sole reasonable discretion, it deems such note and collateral to provide repayment arrangements less secure or otherwise not commercially equivalent to the arrangements otherwise provided herein. Against receipt of such payment or delivery, VMARK shall execute and deliver to the Insured a full release of the Collateral Assignment satisfactory in form to the Insurance Company. In the event that (i) VMARK's obligation to make premium payments has terminated pursuant to paragraph 2(a) or (b) above due to the Insured's voluntary termination of his employment (as limited by paragraph 17 (a) below), and (ii) the Insured does not exercise his rights under this paragraph 12 within sixty days following such termination of VMARK's obligation, then his rights under this paragraph 12 shall lapse. Upon the lapse of such rights, VMARK shall have the right from time to time to acquire from the Insured all rights and other incidents of ownership in and under the Policy upon payment 6 of ten dollars to the Insured. Against receipt of such payment the Insured shall execute and deliver such documents and take such other steps to effect the transfer of such ownership to VMARK as may be satisfactory in form to the Insurance Company. 13. VMARK's obligation to make premium payments pursuant to paragraph 1 above shall, if not previously terminated pursuant to the provisions of paragraph 2 above, terminate upon the exercise of the Insured's rights or the lapse thereof under paragraph 12 above. 14. Nothing herein shall be construed to obligate VMARK to continue the employment of the Insured or to pay any benefits under the Policy under any circumstances. 15. In the event VMARK shall sell or otherwise dispose of substantially all its business and assets, it shall (a) cause the acquiring party to deliver to the Insured a written assumption of all the respective obligations of VMARK hereunder and under the Policy and Collateral Assignment or (b) retain sufficient assets to pay premiums on the Policy to the extent required. In the event of an assumption under (a) above, the word "VMARK" shall mean or include, as the context indicates, any such acquiring party. 16. The Insured may assign all its rights hereunder and under the Policy and Collateral Assignment, provided that the assignee shall deliver to VMARK a written assumption of all the respective obligations of the Insured hereunder and thereunder. In the event of such assignment and assumption, the word "Insured" shall mean or include, as the context indicates, any such assignee, provided that the Policy shall insure the life of the initial Insured only and not of any assignee or other successor. 17. For purposes of paragraph 2 above: 7 (a) The Insured shall not be deemed to have voluntarily terminated his employment with VMARK if the termination occurs within nine months following (i) a reduction of his salary other than a reduction applicable to executives generally, (ii) a material demotion in the level of his duties, or (iii) a material change of the location of his employment; (b) "Cause" shall mean (i) commission by the Insured of a willful, wrongful act, such as embezzlement, against VMARK, (ii) conviction of the Insured of a felony involving moral turpitude, (iii) willful, gross and repeated neglect by the Insured of his executive employment duties, or (iv) intentional and repeated failure of the Insured to observe specific directives or policies of the board of directors of VMARK applicable to his executive employment duties; and (c) "Change of Control" shall mean (i) the direct or indirect acquisition by any person, entity or group acting in concert of more than 35% of the aggregate voting power of the outstanding securities of VMARK having the right to vote at elections of directors, (ii) a majority of the board of directors of VMARK ceasing to consist of individuals who are currently members of such board or for whose nomination for such membership a majority of such current members voted in favor, or (iii) the disposition by VMARK of substantially all its business, other than in 8 connection with a mere change of place of incorporation or similar mere change in form. 18. This Agreement shall be construed and enforced under the laws of Massachusetts. Except as provided by paragraphs 15 and 16 above, no rights or obligations hereunder or under the Policy or Collateral Assignment shall be voluntarily assigned without the prior written consent of the other party, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the parties and their respective successors, assigns, heirs and legal representatives. This Agreement may not be amended or otherwise modified without the prior written consent of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. VMARK Software, Inc. By - -------------------------- ------------------------------ (Witness) Its Chairman - -------------------------- ------------------------------ (Witness) Peter Gyenes EX-10.35 8 LOAN & SECURITY AGREEMENT 1 LOAN AND SECURITY AGREEMENT dated as of May 3, 1996 by and between SILICON VALLEY BANK and VMARK SOFTWARE, INC. $5,000,000 Revolving Line of Credit $5,000,000 Share Repurchase Line of Credit 2 EXHIBITS AND SCHEDULES ---------------------- EXHIBITS -------- A - Description of Collateral B-1 - Loan Payment/Revolving Line Advance Telephone Request Form B-2 - Loan Payment/Repurchase Advance Telephone Request Form C - Borrowing Base Certificate D - Compliance Certificate E-1 - Promissory Note (Revolving Line of Credit) E-2 - Promissory Note (Share Repurchase Line of Credit) F-1 - Disbursement Request and Authorization (Revolving Line of Credit) F-2 - Disbursement Request and Authorization (Share Repurchase Line of Credit) SCHEDULES --------- A - Disclosure Schedule 3 This LOAN AND SECURITY AGREEMENT (the "Agreement") is entered into as of May 3, 1996, by and between SILICON VALLEY BANK ("Bank"), a California-chartered bank with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 40 William Street, Wellesley, Massachusetts 02181 doing business under the name "Silicon Valley East", and VMARK SOFTWARE, INC. ("Borrower"), a Delaware corporation. This Agreement amends and restates in full the Letter Agreement dated April 13, 1993 between Borrower and Bank, as previously amended by Loan Modification Agreements dated November 4, 1994, December 27, 1994, May 5, 1995 and November 21, 1995, and the Promissory Note of Borrower, dated May 15, 1990, as previously amended through the date hereof. RECITALS -------- Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT --------- The parties agree as follows: 1.. DEFINITIONS AND CONSTRUCTION ---------------------------- 1.1. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING DEFINITIONS: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Revolving Line Advance" means an advance under the Revolving Line of Credit. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. 4 "Borrowing Base" has the meaning set forth in Section 2.1 hereof. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on EXHIBIT A attached hereto. "Committed Revolving Line" means Five Million Dollars ($5,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "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 Revolving Line Advances, Repurchase Advances and other 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. "Daily Balance" means, with respect to any Obligation, the amount of such Obligation owed at the end of a given day. "Deferred Revenues" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as deferred revenues on the consolidated balance sheet of Borrower and its Subsidiaries as at such date. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; PROVIDED, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: 1.1.0.1. ACCOUNTS THAT THE ACCOUNT DEBTOR HAS FAILED TO PAY WITHIN NINETY (90) DAYS OF INVOICE DATE; 5 1.1.0.2. ACCOUNTS WITH RESPECT TO AN ACCOUNT DEBTOR, FIFTY PERCENT (50%) OF WHOSE ACCOUNTS THE ACCOUNT DEBTOR HAS FAILED TO PAY WITHIN NINETY (90) DAYS OF INVOICE DATE; 1.1.0.3. ACCOUNTS WITH RESPECT TO WHICH THE ACCOUNT DEBTOR IS AN OFFICER, EMPLOYEE, OR AGENT OF BORROWER; 1.1.0.4. ACCOUNTS 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; 1.1.0.5. ACCOUNTS WITH RESPECT TO WHICH THE ACCOUNT DEBTOR IS AN AFFILIATE (OTHER THAN BY VIRTUE OF BEING DIRECTLY OR INDIRECTLY UNDER COMMON OWNERSHIP OR CONTROL WITH BORROWER) OF BORROWER; 1.1.0.6. 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, AND ACCOUNTS ARISING FROM PRODUCTS SHIPPED TO OR SERVICES PROVIDED TO BRANCHES OR OFFICES LOCATED IN THE UNITED STATES OF ANY ACCOUNT DEBTOR THAT DOES NOT HAVE ITS PRINCIPAL PLACE OF BUSINESS IN THE UNITED STATES; 1.1.0.7. ACCOUNTS WITH RESPECT TO WHICH THE ACCOUNT DEBTOR IS A FEDERAL, STATE, OR LOCAL GOVERNMENTAL ENTITY OR ANY DEPARTMENT, AGENCY, OR INSTRUMENTALITY THEREOF. 1.1.0.8. 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 AGAINST AMOUNTS OWED TO BORROWER; 1.1.0.9. ACCOUNTS WITH RESPECT TO AN ACCOUNT DEBTOR, INCLUDING SUBSIDIARIES AND AFFILIATES, WHOSE TOTAL OBLIGATIONS TO BORROWER EXCEED TWENTY-FIVE PERCENT (25%) OF ALL ACCOUNTS, TO THE EXTENT SUCH OBLIGATIONS EXCEED THE AFOREMENTIONED PERCENTAGE, EXCEPT AS APPROVED IN WRITING BY BANK; 1.1.0.10. ACCOUNTS WITH RESPECT TO WHICH THE ACCOUNT DEBTOR DISPUTES LIABILITY OR MAKES ANY CLAIM WITH RESPECT THERETO AS TO WHICH BANK BELIEVES, IN ITS SOLE DISCRETION, THAT THERE MAY BE A BASIS FOR DISPUTE (BUT ONLY TO THE EXTENT OF THE AMOUNT SUBJECT TO SUCH DISPUTE OR CLAIM), OR IS SUBJECT TO ANY INSOLVENCY PROCEEDING, OR BECOMES INSOLVENT, OR GOES OUT OF BUSINESS; AND 1.1.0.11. ACCOUNTS THE COLLECTION OF WHICH BANK REASONABLY DETERMINES TO BE DOUBTFUL. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that Bank approves on a case-by-case basis. 6 "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "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. "Letters of Credit" has the meaning set forth in Section 2.1.1 hereof. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "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, and Borrower's Books relating to any of the foregoing. "Notes" means those certain promissory notes of the Borrower, the forms of which are attached hereto as EXHIBITS E-1 and E-2. 7 "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Payment Date" means the monthly date for payment determined pursuant to Sections 2.1 and 2.2 hereof. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: 1.1.0.11.1. INDEBTEDNESS OF BORROWER IN FAVOR OF BANK ARISING UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT; 1.1.0.11.2. INDEBTEDNESS EXISTING ON THE CLOSING DATE AND DISCLOSED IN THE SCHEDULE; 1.1.0.11.3. SUBORDINATED DEBT; AND 1.1.0.11.4. INDEBTEDNESS TO TRADE CREDITORS INCURRED IN THE ORDINARY COURSE OF BUSINESS. "Permitted Investment" means: 1.1.0.11.4.1. INVESTMENTS EXISTING ON THE CLOSING DATE DISCLOSED IN THE SCHEDULE; AND 1.1.0.11.4.2. (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: 1.1.0.11.4.2.1. Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; 1.1.0.11.4.2.2. Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, PROVIDED the same have no priority over any of Bank's security interests; 1.1.0.11.4.2.3. 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; 1.1.0.11.4.2.4. Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, PROVIDED that any extension, renewal or replacement Lien shall be limited to the property 8 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, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of Borrower determined in accordance with GAAP "Repurchase Advance" means an advance under the Repurchase Line of Credit. "Repurchase Line of Credit" means the line of credit established in Section 2.2 hereof. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Line of Credit" means the revolving line of credit established in Section 2.1 hereof. "Revolving Maturity Date" means June 5, 1997. "Schedule" means the schedule of exceptions attached hereto. "Share Repurchase Availability Expiration Date" has the meaning set forth in Section 2.2 hereof. "Share Repurchase Line" means Five Million Dollars ($5,000,000). "Shares" means the outstanding shares of Common Stock of Borrower. "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 any corporation or partnership in which (I) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, 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 at 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. 9 1.2. ACCOUNTING TERMS. ALL ACCOUNTING TERMS NOT SPECIFICALLY DEFINED HEREIN SHALL BE CONSTRUED IN ACCORDANCE WITH GAAP AND ALL CALCULATIONS MADE HEREUNDER SHALL BE MADE IN ACCORDANCE WITH GAAP. WHEN USED HEREIN, THE TERMS "FINANCIAL STATEMENTS" SHALL INCLUDE THE NOTES AND SCHEDULES THERETO. 2.. LOANS AND TERMS OF PAYMENT -------------------------- 2.1. SUBJECT TO AND UPON THE TERMS AND CONDITIONS OF THIS AGREEMENT, BANK AGREES TO MAKE ADVANCES (EACH A "REVOLVING LINE ADVANCE" AND, COLLECTIVELY, THE "REVOLVING LINE ADVANCES") TO BORROWER IN AN AGGREGATE AMOUNT NOT TO EXCEED (I) THE LESSER OF (A) THE COMMITTED REVOLVING LINE OR (B) THE BORROWING BASE MINUS THE THEN OUTSTANDING PRINCIPAL BALANCE OF ANY REPURCHASE ADVANCES, MINUS (II) THE FACE AMOUNT OF ALL OUTSTANDING LETTERS OF CREDIT (AS DEFINED BELOW) (INCLUDING AMOUNTS DUE WITH RESPECT TO DRAWN BUT UNREIMBURSED LETTERS OF CREDIT). FOR PURPOSES OF THIS AGREEMENT, "BORROWING BASE" SHALL MEAN AN AMOUNT EQUAL TO EIGHTY PERCENT (80%) OF ELIGIBLE ACCOUNTS. 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. Whenever Borrower desires an Revolving Line 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 Revolving Line Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Revolving Line Advance Form in substantially the form of EXHIBIT B-1 hereto. Bank is authorized to make Revolving Line Advances under this Agreement, based upon instructions received from a Responsible Officer, or without instructions if in Bank's discretion such Revolving Line 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, 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 Revolving Line Advances made under this Section 2.1 to Borrower's deposit account. Interest shall accrue from the date of each Revolving Line Advance (which, for purposes of calculating interest due hereunder, shall include the amount of any unpaid Obligations of Borrower with respect to any drawn but unreimbursed Letters of Credit) at the rate specified in Section 2.4 and shall be payable monthly in accordance with Section 2.4(c) (such date for payment being a "Payment Date" for purposes hereof). The Revolving Line of Credit shall terminate on the Revolving Maturity Date, at which time all Revolving Line 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. 10 2.1.1. LETTERS OF CREDIT ----------------- 2.1.1.1. SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT, BORROWER MAY USE THE REVOLVING LINE OF CREDIT FOR LETTERS OF CREDIT TO BE ISSUED BY BANK FOR THE ACCOUNT OF BORROWER ("LETTERS OF CREDIT") IN AN AGGREGATE FACE AMOUNT NOT TO EXCEED (i) THE LESSER OF (a) THE COMMITTED REVOLVING LINE OR (b) THE BORROWING BASE MINUS THE THEN OUTSTANDING PRINCIPAL BALANCE OF ANY REPURCHASE ADVANCES, MINUS (ii) THE THEN OUTSTANDING PRINCIPAL BALANCE OF ANY REVOLVING LINE ADVANCES; PROVIDED, HOWEVER, THAT THE FACE AMOUNT OF OUTSTANDING LETTERS OF CREDIT (INCLUDING DRAWN BUT UNREIMBURSED LETTERS OF CREDIT SHALL NOT IN ANY CASE EXCEED TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000). EACH SUCH LETTER OF CREDIT SHALL HAVE AN EXPIRATION DATE NO LATER THAN FORTY-FIVE (45) DAYS BEFORE THE REVOLVING MATURITY DATE. ALL SUCH 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 APPLICATION AND LETTER OF CREDIT AGREEMENT. 2.1.1.2. 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 AND HOLD BANK HARMLESS FROM ANY LOSS, COST, EXPENSE OR LIABILITY, INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES, ARISING OUT OF OR IN CONNECTION WITH ANY LETTERS OF CREDIT. 2.1.2. LETTER OF CREDIT REIMBURSEMENT; RESERVE --------------------------------------- 2.1.2.1. 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. 2.1.2.2. 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 TWENTY PERCENT (20%) 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. 11 2.2. SHARE REPURCHASE ADVANCES ------------------------- 2.2.0.1. AT ANY TIME FROM THE DATE HEREOF THROUGH OCTOBER 29, 1996 (THE "SHARE REPURCHASE AVAILABILITY EXPIRATION DATE"), BORROWER MAY FROM TIME TO TIME REQUEST ADVANCES (EACH A "REPURCHASE ADVANCE" AND, COLLECTIVELY, THE "REPURCHASE ADVANCES") FROM BANK IN AN AGGREGATE AMOUNT NOT TO EXCEED THE LESSER OF (i) THE SHARE REPURCHASE LINE OR (ii) THE BORROWING BASE MINUS THE THEN OUTSTANDING PRINCIPAL BALANCE OF ALL REVOLVING LINE ADVANCES AND MINUS THE FACE AMOUNT OF ALL OUTSTANDING LETTERS OF CREDIT (INCLUDING DRAWN BUT UNREIMBURSED LETTERS OF CREDIT). ANY REPURCHASE ADVANCE OR REPURCHASE ADVANCES SHALL BE USED ONLY TO MAKE OPEN-MARKET REPURCHASES OF SHARES AND BORROWER SHALL DELIVER TO BANK, AT THE TIME OF EACH REPURCHASE ADVANCE REQUEST, EVIDENCE REASONABLY SATISFACTORY TO BANK IDENTIFYING THE NUMBER AND AGGREGATE PRICE OF SHARES REPURCHASED, OR TO BE REPURCHASED, WITH THE PROCEEDS OF ANY SUCH REPURCHASE ADVANCE. 2.2.0.2. INTEREST SHALL ACCRUE FROM THE DATE OF EACH REPURCHASE ADVANCE AT THE RATE SPECIFIED IN SECTION 2.4 AND SHALL BE PAYABLE MONTHLY IN ACCORDANCE WITH SECTION 2.4(c). ANY REPURCHASE ADVANCE OR REPURCHASE ADVANCES THAT ARE OUTSTANDING ON THE SHARE REPURCHASE AVAILABILITY EXPIRATION DATE WILL BE PAYABLE IN THIRTY-SIX (36) EQUAL MONTHLY INSTALLMENTS OF PRINCIPAL, PLUS ALL ACCRUED INTEREST, BEGINNING ON NOVEMBER 28, 1996 AND ON THE SAME DAY OF EACH MONTH FOLLOWING THE SHARE REPURCHASE AVAILABILITY EXPIRATION DATE. 2.2.0.3. BORROWER MAY BY WRITTEN NOTICE TO BANK RECEIVED ON OR BEFORE OCTOBER 29, 1996, DEFER THE SHARE REPURCHASE AVAILABILITY EXPIRATION DATE TO APRIL 28, 1997, IN WHICH CASE ANY REPURCHASE ADVANCE OR REPURCHASE ADVANCES THAT ARE OUTSTANDING ON SUCH SHARE REPURCHASE AVAILABILITY EXPIRATION DATE WILL BE PAYABLE IN THIRTY-SIX (36) EQUAL MONTHLY INSTALLMENTS OF PRINCIPAL, PLUS ALL ACCRUED INTEREST, BEGINNING ON MAY 28, 1997 AND ON THE SAME DAY OF EACH MONTH FOLLOWING THE SHARE REPURCHASE AVAILABILITY EXPIRATION DATE. THE MONTHLY DATE FOR PAYMENT DETERMINED UNDER SUBSECTION (b) OR (c), AS THE CASE MAY BE, OF THIS SECTION 2.2 SHALL BE THE "PAYMENT DATE" FOR PURPOSES HEREOF. 2.2.0.4. WHENEVER BORROWER DESIRES A REPURCHASE 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 REPURCHASE ADVANCE IS TO BE MADE. EACH SUCH NOTIFICATION SHALL BE PROMPTLY CONFIRMED BY A PAYMENT/REPURCHASE ADVANCE FORM IN SUBSTANTIALLY THE FORM OF EXHIBIT B-2 HERETO. BANK IS AUTHORIZED TO MAKE REPURCHASE ADVANCES UNDER THIS AGREEMENT, BASED UPON INSTRUCTIONS RECEIVED FROM A RESPONSIBLE OFFICER, OR WITHOUT INSTRUCTIONS IF IN BANK'S DISCRETION SUCH REPURCHASE 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, AND BORROWER SHALL INDEMNIFY AND HOLD BANK HARMLESS FOR ANY DAMAGES OR LOSS SUFFERED BY BANK AS 12 A RESULT OF SUCH RELIANCE. BANK WILL CREDIT THE AMOUNT OF REPURCHASE ADVANCES MADE UNDER THIS SECTION 2.2 TO BORROWER'S DEPOSIT ACCOUNT. 2.3. OVERADVANCES. IF, AT ANY TIME OR FOR ANY REASON, THE AMOUNT OF OBLIGATIONS OWED BY BORROWER TO BANK 2.3.0.1. IN RESPECT OF REVOLVING LINE ADVANCES PURSUANT TO SECTION 2.1 OF THIS AGREEMENT (TOGETHER WITH OBLIGATIONS IN RESPECT OF ANY OUTSTANDING LETTERS OF CREDIT, INCLUDING DRAWN BUT UNREIMBURSED LETTERS OF CREDIT) SHALL EXCEED THE LESSER OF (i) THE COMMITTED REVOLVING LINE OR (ii) THE BORROWING BASE MINUS THE THEN OUTSTANDING PRINCIPAL BALANCE OF ANY REPURCHASE ADVANCES; OR 2.3.0.2. IN RESPECT OF REPURCHASE ADVANCES PURSUANT TO SECTION 2.2 OF THIS AGREEMENT SHALL EXCEED THE LESSER OF (i) THE SHARE REPURCHASE LINE OR (ii) THE BORROWING BASE MINUS THE THEN OUTSTANDING PRINCIPAL BALANCE OF ALL REVOLVING LINE ADVANCES AND MINUS THE FACE AMOUNT OF ALL OUTSTANDING LETTERS OF CREDIT (INCLUDING DRAWN BUT UNREIMBURSED LETTERS OF CREDIT), then Borrower shall immediately pay to Bank, in cash, an amount such that the amount of any such Obligations shall no longer exceed the limitations set forth in subsections (a) or (b) of this Section 2.3, as the case may be. 2.4. INTEREST RATES, PAYMENTS, AND CALCULATIONS ------------------------------------------ 2.4.0.1. INTEREST RATE. EXCEPT AS SET FORTH IN SECTION 2.4(b), (i) ANY REVOLVING LINE ADVANCES (WHICH, FOR PURPOSES OF CALCULATING INTEREST DUE HEREUNDER, SHALL INCLUDE THE AMOUNT OF ANY UNPAID OBLIGATIONS OF BORROWER WITH RESPECT TO ANY DRAWN BUT UNREIMBURSED LETTERS OF CREDIT) SHALL BEAR INTEREST, ON THE AVERAGE DAILY BALANCE THEREOF, AT A RATE EQUAL TO THE PRIME RATE AND (ii) ANY REPURCHASE ADVANCES SHALL BEAR INTEREST, ON THE AVERAGE DAILY BALANCE THEREOF, AT A RATE EQUAL TO THE PRIME RATE PLUS ONE-HALF PERCENT (1/2%). 2.4.0.2. DEFAULT RATE. ALL OBLIGATIONS SHALL BEAR INTEREST, FROM AND AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT, AT A RATE EQUAL TO FIVE (5) PERCENTAGE POINTS ABOVE THE INTEREST RATE APPLICABLE IMMEDIATELY PRIOR TO THE OCCURRENCE OF THE EVENT OF DEFAULT. 2.4.0.3. PAYMENTS. INTEREST HEREUNDER SHALL BE DUE AND PAYABLE ON THE PAYMENT DATE OF EACH MONTH DURING THE TERM HEREOF. BORROWER HEREBY AUTHORIZES BANK TO DEBIT ANY ACCOUNTS WITH BANK, INCLUDING, WITHOUT LIMITATION, ACCOUNT NUMBER 700238670, 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 MAKES AGAINST BORROWER'S ACCOUNTS. ANY SUCH 13 DEBITS AGAINST BORROWER'S ACCOUNTS IN NO WAY SHALL BE DEEMED A SET-OFF. ANY INTEREST NOT PAID WHEN DUE SHALL BE COMPOUNDED BY BECOMING A PART OF THE OBLIGATIONS, AND SUCH INTEREST SHALL THEREAFTER ACCRUE INTEREST AT THE RATE THEN APPLICABLE HEREUNDER. 2.4.0.4. 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. 2.5. 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 SHALL BE IMMEDIATELY APPLIED TO CONDITIONALLY REDUCE OBLIGATIONS, BUT SHALL NOT BE CONSIDERED A PAYMENT ON ACCOUNT UNLESS SUCH PAYMENT IS OF IMMEDIATELY AVAILABLE FEDERAL FUNDS OR UNLESS AND UNTIL SUCH CHECK OR OTHER ITEM OF PAYMENT IS HONORED WHEN PRESENTED FOR PAYMENT. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, ANY WIRE TRANSFER OR PAYMENT RECEIVED BY BANK AFTER 12:00 NOON PACIFIC TIME SHALL BE DEEMED TO HAVE BEEN RECEIVED BY BANK AS OF THE OPENING OF BUSINESS ON THE IMMEDIATELY FOLLOWING BUSINESS DAY. WHENEVER ANY PAYMENT TO BANK UNDER THE LOAN DOCUMENTS WOULD OTHERWISE BE DUE (EXCEPT BY REASON OF ACCELERATION) ON A DATE THAT IS NOT A BUSINESS DAY, SUCH PAYMENT SHALL INSTEAD BE DUE ON THE NEXT BUSINESS DAY, AND ADDITIONAL FEES OR INTEREST, AS THE CASE MAY BE, SHALL ACCRUE AND BE PAYABLE FOR THE PERIOD OF SUCH EXTENSION. 2.6. FEES. BORROWER SHALL PAY TO BANK THE FOLLOWING: ---- 2.6.0.1. REVOLVING LINE OF CREDIT FACILITY FEE. IN CONNECTION WITH THE REVOLVING LINE OF CREDIT, A REVOLVING LINE OF CREDIT FACILITY FEE EQUAL TO (i) SEVEN THOUSAND FIVE HUNDRED DOLLARS ($7,500), WHICH SHALL BE DUE ON THE CLOSING DATE AND SHALL BE FULLY EARNED AND NON-REFUNDABLE PLUS (ii) TWO THOUSAND FIVE HUNDRED DOLLARS ($2,500), WHICH SHALL BE DUE ON THE FIRST DAY WHEN THE AVERAGE DAILY BALANCE OF THE REVOLVING LINE OF CREDIT EXCEEDS TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000); 2.6.0.2. REPURCHASE LINE OF CREDIT FACILITY FEE. IN CONNECTION WITH THE REPURCHASE LINE OF CREDIT, A REPURCHASE LINE OF CREDIT FACILITY FEE EQUAL TO TWELVE THOUSAND FIVE HUNDRED DOLLARS ($12,500), WHICH SHALL BE DUE ON THE CLOSING DATE AND SHALL BE FULLY EARNED AND NON-REFUNDABLE. 14 2.6.0.3. 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; 2.6.0.4. BANK EXPENSES. UPON DEMAND FROM BANK, INCLUDING, WITHOUT LIMITATION, UPON THE DATE HEREOF, ALL BANK EXPENSES INCURRED THROUGH THE DATE HEREOF, INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES, AND, AFTER THE DATE HEREOF, ALL BANK EXPENSES, INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES, AS AND WHEN THEY BECOME DUE. 2.7. ADDITIONAL COSTS. IN CASE ANY LAW, REGULATION, TREATY OR OFFICIAL DIRECTIVE OR THE INTERPRETATION OR APPLICATION THEREOF BY ANY COURT OR ANY GOVERNMENTAL AUTHORITY CHARGED WITH THE ADMINISTRATION THEREOF OR THE COMPLIANCE WITH ANY GUIDELINE OR REQUEST OF ANY CENTRAL BANK OR OTHER GOVERNMENTAL AUTHORITY (WHETHER OR NOT HAVING THE FORCE OF LAW): 2.7.0.1. 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); 2.7.0.2. 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 2.7.0.3. 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. 15 2.8. 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 REVOLVING MATURITY DATE. NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE RIGHT TO TERMINATE ITS OBLIGATION TO MAKE REVOLVING LINE ADVANCES OR REPURCHASE ADVANCES UNDER THIS AGREEMENT IMMEDIATELY AND WITHOUT NOTICE UPON THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT. NOTWITHSTANDING TERMINATION, BANK'S LIEN ON THE COLLATERAL SHALL REMAIN IN EFFECT FOR SO LONG AS ANY OBLIGATIONS ARE OUTSTANDING. 3.. CONDITIONS OF LOANS ------------------- 3.1. CONDITIONS PRECEDENT TO INITIAL REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE. THE OBLIGATION OF BANK TO MAKE THE INITIAL REVOLVING LINE ADVANCE OR INITIAL REPURCHASE ADVANCE IS SUBJECT TO THE CONDITION PRECEDENT THAT BANK SHALL HAVE RECEIVED, IN FORM AND SUBSTANCE SATISFACTORY TO BANK, THE FOLLOWING: 3.1.0.1. THIS AGREEMENT; 3.1.0.2. THE NOTES AND ANY OTHER LOAN DOCUMENTS; 3.1.0.3. A CERTIFICATE OF THE SECRETARY OF BORROWER WITH RESPECT TO INCUMBENCY AND RESOLUTIONS AUTHORIZING THE EXECUTION AND DELIVERY OF THIS AGREEMENT; 3.1.0.4. AN OPINION OF BORROWER'S COUNSEL; 3.1.0.5. FINANCING STATEMENTS (FORMS UCC-1); 3.1.0.6. FAVORABLE RESULTS OF AN AUDIT OF BORROWER'S ACCOUNTS; 3.1.0.7. PAYMENT OF THE FEES AND BANK EXPENSES THEN DUE SPECIFIED IN SECTION 2.6 HEREOF; AND 3.1.0.8. SUCH OTHER DOCUMENTS, AND COMPLETION OF SUCH OTHER MATTERS, AS BANK MAY REASONABLY DEEM NECESSARY OR APPROPRIATE. 3.2. CONDITIONS PRECEDENT TO ALL REVOLVING LINE ADVANCES AND REPURCHASE ADVANCES. THE OBLIGATION OF BANK TO MAKE EACH REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE, INCLUDING THE INITIAL REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE, IS FURTHER SUBJECT TO THE FOLLOWING CONDITIONS: 16 3.2.0.1. TIMELY RECEIPT BY BANK OF THE PAYMENT/REVOLVING LINE ADVANCE FORM OR PAYMENT/REPURCHASE ADVANCE FORM AS PROVIDED IN SECTIONS 2.1 AND 2.2 RESPECTIVELY; AND 3.2.0.2. 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/REVOLVING LINE ADVANCE FORM AND ON THE EFFECTIVE DATE OF EACH REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE AS THOUGH MADE AT AND AS OF EACH SUCH DATE, AND NO EVENT OF DEFAULT SHALL HAVE OCCURRED AND BE CONTINUING, OR WOULD RESULT FROM SUCH REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE. THE MAKING OF EACH REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE SHALL BE DEEMED TO BE A REPRESENTATION AND WARRANTY BY BORROWER ON THE DATE OF SUCH REVOLVING LINE ADVANCE OR REPURCHASE ADVANCE AS TO THE ACCURACY OF THE FACTS REFERRED TO IN THIS SECTION 3.2(b). 4.. CREATION OF SECURITY INTEREST ----------------------------- 4.1. GRANT OF SECURITY INTEREST. BORROWER GRANTS AND PLEDGES TO BANK A CONTINUING SECURITY INTEREST IN ALL PRESENTLY EXISTING AND HEREAFTER ACQUIRED OR ARISING COLLATERAL IN ORDER TO SECURE PROMPT REPAYMENT OF ANY AND ALL OBLIGATIONS AND IN ORDER TO SECURE PROMPT PERFORMANCE BY BORROWER OF EACH OF ITS COVENANTS AND DUTIES UNDER THE LOAN DOCUMENTS. EXCEPT AS SET FORTH IN THE SCHEDULE, SUCH SECURITY INTEREST CONSTITUTES A VALID, FIRST PRIORITY SECURITY INTEREST IN THE PRESENTLY EXISTING COLLATERAL, AND WILL CONSTITUTE A VALID, FIRST PRIORITY SECURITY INTEREST IN COLLATERAL ACQUIRED AFTER THE DATE HEREOF. BORROWER ACKNOWLEDGES THAT BANK MAY PLACE A "HOLD" ON ANY DEPOSIT ACCOUNT PLEDGED AS COLLATERAL TO SECURE THE OBLIGATIONS. 4.2. DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. BORROWER SHALL FROM TIME TO TIME EXECUTE AND DELIVER TO BANK, AT THE REQUEST OF BANK, ALL NEGOTIABLE COLLATERAL, ALL FINANCING STATEMENTS AND OTHER DOCUMENTS THAT BANK MAY REASONABLY REQUEST, IN FORM SATISFACTORY TO BANK, TO PERFECT AND CONTINUE PERFECTED BANK'S SECURITY INTERESTS IN THE COLLATERAL AND IN ORDER TO FULLY CONSUMMATE ALL OF THE TRANSACTIONS CONTEMPLATED UNDER THE LOAN DOCUMENTS. 4.3. RIGHT TO INSPECT. BANK (THROUGH ANY OF ITS OFFICERS, EMPLOYEES, OR AGENTS) SHALL HAVE THE RIGHT, UPON REASONABLE PRIOR NOTICE, FROM TIME TO TIME DURING BORROWER'S USUAL BUSINESS HOURS, TO INSPECT BORROWER'S BOOKS AND TO MAKE COPIES THEREOF AND TO CHECK, TEST, AND APPRAISE THE COLLATERAL IN ORDER TO VERIFY BORROWER'S FINANCIAL CONDITION OR THE AMOUNT, CONDITION OF, OR ANY OTHER MATTER RELATING TO, THE COLLATERAL. 17 5.. REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants as follows: 5.1. DUE ORGANIZATION AND QUALIFICATION. BORROWER AND EACH SUBSIDIARY IS A CORPORATION DULY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF ITS STATE OF INCORPORATION AND QUALIFIED AND LICENSED TO DO BUSINESS IN, AND IS IN GOOD STANDING IN, ANY STATE IN WHICH THE CONDUCT OF ITS BUSINESS OR ITS OWNERSHIP OF PROPERTY REQUIRES THAT IT BE SO QUALIFIED. 5.2. DUE AUTHORIZATION; NO CONFLICT. THE EXECUTION, DELIVERY, AND PERFORMANCE OF THE LOAN DOCUMENTS ARE WITHIN BORROWER'S POWERS, HAVE BEEN DULY AUTHORIZED, AND ARE NOT IN CONFLICT WITH NOR CONSTITUTE A BREACH OF ANY PROVISION CONTAINED IN BORROWER'S ARTICLES 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 PROPERTY GIVING RISE TO SUCH ELIGIBLE ACCOUNTS HAS BEEN DELIVERED TO THE ACCOUNT DEBTOR OR TO THE ACCOUNT DEBTOR'S AGENT FOR IMMEDIATE SHIPMENT TO AND UNCONDITIONAL ACCEPTANCE BY THE ACCOUNT DEBTOR. BORROWER HAS NOT RECEIVED NOTICE OF ACTUAL OR IMMINENT INSOLVENCY PROCEEDING OF ANY ACCOUNT DEBTOR THAT IS INCLUDED IN ANY BORROWING BASE CERTIFICATE AS AN ELIGIBLE ACCOUNT. 5.5. MERCHANTABLE INVENTORY. ALL INVENTORY IS IN ALL MATERIAL RESPECTS OF GOOD AND MARKETABLE QUALITY, FREE FROM ALL MATERIAL DEFECTS. 5.6. NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. EXCEPT AS DISCLOSED IN THE SCHEDULE, BORROWER HAS NOT DONE BUSINESS 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. 18 5.7. LITIGATION. EXCEPT AS SET FORTH IN THE SCHEDULE, THERE ARE NO ACTIONS OR PROCEEDINGS PENDING BY OR AGAINST BORROWER OR ANY SUBSIDIARY BEFORE ANY COURT OR ADMINISTRATIVE AGENCY IN WHICH AN ADVERSE DECISION COULD HAVE A MATERIAL ADVERSE EFFECT OR A MATERIAL ADVERSE EFFECT ON BORROWER'S INTEREST OR BANK'S SECURITY INTEREST IN THE COLLATERAL. BORROWER DOES NOT HAVE KNOWLEDGE OF ANY SUCH PENDING OR THREATENED ACTIONS OR PROCEEDINGS. 5.8. NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. ALL CONSOLIDATED FINANCIAL STATEMENTS RELATED TO BORROWER AND ANY SUBSIDIARY THAT HAVE BEEN DELIVERED BY BORROWER TO BANK FAIRLY PRESENT IN ALL MATERIAL RESPECTS BORROWER'S CONSOLIDATED FINANCIAL CONDITION AS OF THE DATE THEREOF AND BORROWER'S CONSOLIDATED RESULTS OF OPERATIONS FOR THE PERIOD THEN ENDED. THERE HAS NOT BEEN A MATERIAL ADVERSE CHANGE IN THE CONSOLIDATED FINANCIAL CONDITION OF BORROWER SINCE THE DATE OF THE MOST RECENT OF SUCH FINANCIAL STATEMENTS SUBMITTED TO BANK. 5.9. SOLVENCY. BORROWER IS SOLVENT AND ABLE TO PAY ITS DEBTS (INCLUDING TRADE DEBTS) AS THEY MATURE. 5.10. REGULATORY COMPLIANCE. BORROWER AND EACH SUBSIDIARY HAS MET THE MINIMUM FUNDING REQUIREMENTS OF ERISA WITH RESPECT TO ANY EMPLOYEE BENEFIT PLANS SUBJECT TO ERISA. NO EVENT HAS OCCURRED RESULTING FROM BORROWER'S FAILURE TO COMPLY WITH ERISA THAT IS REASONABLY LIKELY TO RESULT IN BORROWER'S INCURRING ANY LIABILITY THAT COULD HAVE A MATERIAL ADVERSE EFFECT. BORROWER IS NOT AN "INVESTMENT COMPANY" OR A COMPANY "CONTROLLED" BY AN "INVESTMENT COMPANY" WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940. BORROWER IS NOT ENGAGED PRINCIPALLY, OR AS ONE OF THE IMPORTANT ACTIVITIES, IN THE BUSINESS OF EXTENDING CREDIT FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (WITHIN THE MEANING OF REGULATIONS G, T AND U OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM). BORROWER HAS COMPLIED WITH ALL THE PROVISIONS OF THE FEDERAL FAIR LABOR STANDARDS ACT. BORROWER HAS NOT VIOLATED ANY STATUTES, LAWS, ORDINANCES OR RULES APPLICABLE TO IT, VIOLATION OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT. 5.11. ENVIRONMENTAL CONDITION. NONE OF BORROWER'S OR ANY SUBSIDIARY'S PROPERTIES OR ASSETS HAS EVER BEEN USED BY BORROWER OR ANY SUBSIDIARY OR, TO THE BEST OF BORROWER'S KNOWLEDGE, BY PREVIOUS OWNERS OR OPERATORS, IN THE DISPOSAL OF, OR TO PRODUCE, STORE, HANDLE, TREAT, RELEASE, OR TRANSPORT, ANY HAZARDOUS WASTE OR HAZARDOUS SUBSTANCE OTHER THAN IN ACCORDANCE WITH APPLICABLE LAW; TO THE BEST OF BORROWER'S KNOWLEDGE, NONE OF BORROWER'S PROPERTIES OR ASSETS HAS EVER BEEN DESIGNATED OR IDENTIFIED IN ANY MANNER PURSUANT TO ANY ENVIRONMENTAL PROTECTION STATUTE AS A HAZARDOUS WASTE 19 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 RELEASING, OR OTHERWISE DISPOSING OF HAZARDOUS WASTE OR HAZARDOUS SUBSTANCES INTO THE ENVIRONMENT. 5.12. TAXES. BORROWER AND EACH SUBSIDIARY HAS FILED OR CAUSED TO BE FILED ALL TAX RETURNS REQUIRED TO BE FILED, AND HAS PAID, OR HAS MADE ADEQUATE PROVISION FOR THE PAYMENT OF, ALL TAXES REFLECTED THEREIN. 5.13. SUBSIDIARIES. BORROWER DOES NOT OWN ANY STOCK, PARTNERSHIP INTEREST OR OTHER EQUITY SECURITIES OF ANY PERSON, EXCEPT FOR PERMITTED INVESTMENTS. 5.14. GOVERNMENT CONSENTS. BORROWER AND EACH SUBSIDIARY HAS OBTAINED ALL CONSENTS, APPROVALS AND AUTHORIZATIONS OF, MADE ALL DECLARATIONS OR FILINGS WITH, AND GIVEN ALL NOTICES TO, ALL GOVERNMENTAL AUTHORITIES THAT ARE NECESSARY FOR THE CONTINUED OPERATION OF BORROWER'S BUSINESS AS CURRENTLY CONDUCTED. 5.15. FULL DISCLOSURE. NO REPRESENTATION, WARRANTY OR OTHER STATEMENT MADE BY BORROWER IN ANY CERTIFICATE OR WRITTEN STATEMENT FURNISHED TO BANK CONTAINS ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMITS TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED IN SUCH CERTIFICATES OR STATEMENTS NOT MISLEADING. 6.. AFFIRMATIVE COVENANTS --------------------- Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make an Revolving Line Advance or Repurchase Advance hereunder, Borrower shall do all of the following: 6.1. GOOD STANDING. BORROWER SHALL MAINTAIN ITS AND EACH OF ITS SUBSIDIARIES' CORPORATE EXISTENCE AND GOOD STANDING IN ITS JURISDICTION OF INCORPORATION AND MAINTAIN QUALIFICATION IN EACH JURISDICTION IN WHICH THE FAILURE TO SO QUALIFY COULD HAVE A MATERIAL ADVERSE EFFECT. BORROWER SHALL MAINTAIN, AND SHALL CAUSE EACH OF ITS SUBSIDIARIES TO MAINTAIN, TO THE EXTENT CONSISTENT WITH 20 PRUDENT MANAGEMENT OF BORROWER'S BUSINESS, IN FORCE ALL LICENSES, APPROVALS AND AGREEMENTS, THE LOSS OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT. 6.2. GOVERNMENT COMPLIANCE. BORROWER SHALL MEET, AND SHALL CAUSE EACH SUBSIDIARY TO MEET, THE MINIMUM FUNDING REQUIREMENTS OF ERISA WITH RESPECT TO ANY EMPLOYEE BENEFIT PLANS SUBJECT TO ERISA. BORROWER SHALL COMPLY, AND SHALL CAUSE EACH SUBSIDIARY TO COMPLY, WITH ALL STATUTES, LAWS, ORDINANCES AND GOVERNMENT RULES AND REGULATIONS TO WHICH IT IS SUBJECT, NONCOMPLIANCE WITH WHICH COULD HAVE A MATERIAL ADVERSE EFFECT OR A MATERIAL ADVERSE EFFECT ON THE COLLATERAL OR THE PRIORITY OF BANK'S LIEN ON THE COLLATERAL. 6.3. FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. BORROWER SHALL DELIVER TO BANK: (a) AS SOON AS AVAILABLE, BUT IN ANY EVENT WITHIN TWENTY-FIVE (25) DAYS AFTER THE END OF EACH MONTH OR, IF THERE ARE NO OBLIGATIONS THEN OUTSTANDING, WITHIN FORTY-FIVE (45) DAYS AFTER THE END OF EACH QUARTER, A BORROWER-PREPARED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT COVERING BORROWER'S CONSOLIDATED OPERATIONS DURING SUCH PERIOD, CERTIFIED BY AN OFFICER OF BORROWER REASONABLY ACCEPTABLE TO BANK; (b) AS SOON AS AVAILABLE, BUT IN ANY EVENT WITHIN NINETY (90) DAYS AFTER THE END OF BORROWER'S FISCAL YEAR, AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF BORROWER PREPARED IN ACCORDANCE WITH GAAP, CONSISTENTLY APPLIED, TOGETHER WITH AN UNQUALIFIED OPINION ON SUCH FINANCIAL STATEMENTS OF AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM REASONABLY ACCEPTABLE TO BANK; (c) WITHIN FIVE (5) DAYS OF FILING, COPIES OF ALL STATEMENTS, REPORTS AND NOTICES SENT OR MADE AVAILABLE GENERALLY BY BORROWER TO ITS SECURITY HOLDERS OR TO ANY HOLDERS OF SUBORDINATED DEBT AND ALL REPORTS ON FORM 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION; (d) PROMPTLY UPON RECEIPT OF NOTICE THEREOF, A REPORT OF ANY LEGAL ACTIONS PENDING OR THREATENED AGAINST BORROWER OR ANY SUBSIDIARY THAT COULD RESULT IN DAMAGES OR COSTS TO BORROWER OR ANY SUBSIDIARY OF ONE HUNDRED THOUSAND DOLLARS ($100,000) OR MORE; AND (e) SUCH BUDGETS, SALES PROJECTIONS, OPERATING PLANS OR OTHER FINANCIAL INFORMATION AS BANK MAY REASONABLY REQUEST FROM TIME TO TIME. Within twenty-five (25) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable. Within forty-five (45) days after the last day of each quarter, Borrower shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 21 6.4. INVENTORY; RETURNS. BORROWER SHALL KEEP ALL INVENTORY IN GOOD AND MARKETABLE CONDITION, FREE FROM ALL MATERIAL DEFECTS. RETURNS AND ALLOWANCES, IF ANY, AS BETWEEN BORROWER AND ITS ACCOUNT DEBTORS SHALL BE ON THE SAME BASIS AND IN ACCORDANCE WITH THE USUAL CUSTOMARY PRACTICES OF BORROWER, AS THEY EXIST AT THE TIME OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT. BORROWER SHALL PROMPTLY NOTIFY BANK OF ALL RETURNS AND RECOVERIES AND OF ALL DISPUTES AND CLAIMS, WHERE THE RETURN, RECOVERY, DISPUTE OR CLAIM INVOLVES MORE THAN FIFTY THOUSAND DOLLARS ($50,000). 6.5. TAXES. BORROWER SHALL MAKE, AND SHALL CAUSE EACH SUBSIDIARY TO MAKE, DUE AND TIMELY PAYMENT OR DEPOSIT OF ALL MATERIAL FEDERAL, STATE, AND LOCAL TAXES, ASSESSMENTS, OR CONTRIBUTIONS REQUIRED OF IT BY LAW, AND WILL EXECUTE AND DELIVER TO BANK, ON DEMAND, APPROPRIATE CERTIFICATES ATTESTING TO THE PAYMENT OR DEPOSIT THEREOF; AND BORROWER WILL MAKE, AND WILL CAUSE EACH SUBSIDIARY TO MAKE, TIMELY PAYMENT OR DEPOSIT OF ALL MATERIAL TAX PAYMENTS AND WITHHOLDING TAXES REQUIRED OF IT BY APPLICABLE LAWS, INCLUDING, BUT NOT LIMITED TO, THOSE LAWS CONCERNING F.I.C.A., F.U.T.A., STATE DISABILITY, AND LOCAL, STATE, AND FEDERAL INCOME TAXES, AND WILL, UPON REQUEST, FURNISH BANK WITH PROOF SATISFACTORY TO BANK INDICATING THAT BORROWER OR A SUBSIDIARY HAS MADE SUCH PAYMENTS OR DEPOSITS; PROVIDED THAT BORROWER OR A SUBSIDIARY NEED NOT MAKE ANY PAYMENT IF THE AMOUNT OR VALIDITY OF SUCH PAYMENT IS CONTESTED IN GOOD FAITH BY APPROPRIATE PROCEEDINGS AND IS RESERVED AGAINST (TO THE EXTENT REQUIRED BY GAAP) BY BORROWER. 6.6. INSURANCE --------- 6.6.0.1. BORROWER, AT ITS EXPENSE, SHALL KEEP ITS PROPERTIES INSURED AGAINST LOSS OR DAMAGE BY FIRE, THEFT, EXPLOSION, SPRINKLERS, AND ALL OTHER HAZARDS AND RISKS, AND IN SUCH AMOUNTS, AS ORDINARILY INSURED AGAINST BY OTHER OWNERS IN SIMILAR BUSINESSES CONDUCTED IN THE LOCATIONS WHERE BORROWER'S BUSINESS IS CONDUCTED ON THE DATE HEREOF. 6.6.0.2. ALL SUCH POLICIES OF INSURANCE SHALL BE IN SUCH FORM, WITH SUCH COMPANIES, AND IN SUCH AMOUNTS AS REASONABLY SATISFACTORY TO BANK. BORROWER SHALL DELIVER TO BANK CERTIFIED COPIES OF SUCH POLICIES OF INSURANCE AND EVIDENCE OF THE PAYMENTS OF ALL PREMIUMS THEREFOR. 6.7. PRINCIPAL DEPOSITORY; COMPENSATING BALANCE. BORROWER SHALL MAINTAIN ITS PRINCIPAL DEPOSITORY AND OPERATING ACCOUNTS WITH BANK. IN CONNECTION WITH THE REPURCHASE LINE OF CREDIT, BORROWER SHALL MAINTAIN AN AVERAGE DAILY BALANCE OF AT LEAST TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) IN A NON-INTEREST-PAYING ACCOUNT WITH BANK; PROVIDED, HOWEVER, THAT THE AFORESAID MINIMUM AVERAGE DAILY BALANCE SHALL BE INCREASED TO THREE HUNDRED 22 SEVENTY-FIVE THOUSAND DOLLARS ($375,000) IN THE EVENT THAT BORROWER EXERCISES ITS OPTION UNDER SECTION 2.2(c) HEREOF TO EXTEND THE AVAILABILITY OF THE REPURCHASE LINE OF CREDIT PAST THE ORIGINAL SHARE REPURCHASE AVAILABILITY EXPIRATION DATE. 6.8. QUICK RATIO. BORROWER SHALL MAINTAIN, AS OF THE LAST DAY OF EACH CALENDAR MONTH, OR AS OF THE LAST DAY OF EACH QUARTER IF THERE ARE NO OBLIGATIONS OUTSTANDING, A RATIO OF QUICK ASSETS TO CURRENT LIABILITIES (NET OF CURRENT DEFERRED REVENUES) OF AT LEAST 2.0 TO 1.0. 6.9. TANGIBLE NET WORTH. BORROWER SHALL MAINTAIN, AS OF THE LAST DAY OF EACH CALENDAR MONTH, OR AS OF THE LAST DAY OF EACH QUARTER IF THERE ARE NO OBLIGATIONS OUTSTANDING, A TANGIBLE NET WORTH OF NOT LESS THAN TWENTY MILLION DOLLARS ($20,000,000). 6.10. LEVERAGE. BORROWER SHALL MAINTAIN, AS OF THE LAST DAY OF EACH CALENDAR MONTH, OR AS OF THE LAST DAY OF EACH QUARTER IF THERE ARE NO OBLIGATIONS OUTSTANDING, A RATIO OF TOTAL LIABILITIES (NET OF DEFERRED REVENUES) TO TANGIBLE NET WORTH OF NOT MORE THAN 1.25 TO 1.0. 6.11. MINIMUM DEBT SERVICE COVERAGE. SO LONG AS THERE ARE ANY OBLIGATIONS OUTSTANDING, BORROWER SHALL MAINTAIN, AS OF THE LAST DAY OF EACH QUARTER, A RATIO OF CASH FLOW TO THE CURRENT PORTION OF LONG-TERM INDEBTEDNESS (INCLUDING LONG-TERM INDEBTEDNESS OWED TO BANK) OF AT LEAST 1.5 TO 1.0. "CASH FLOW" IS DEFINED AS NET INCOME (LOSS) FOR SUCH QUARTER DETERMINED ACCORDING TO GAAP, PLUS (a) INTEREST EXPENSE, (b) TAXES, (c) DEPRECIATION AND (d) AMORTIZATION DEDUCTED IN DETERMINING NET INCOME, MINUS (i) CAPITAL EXPENDITURES AND (ii) PLUS OR MINUS DECREASES OR INCREASES IN CAPITALIZED SOFTWARE, AS APPROPRIATE 6.12. FURTHER ASSURANCES. AT ANY TIME AND FROM TIME TO TIME BORROWER SHALL EXECUTE AND DELIVER SUCH FURTHER INSTRUMENTS AND TAKE SUCH FURTHER ACTION AS MAY REASONABLY BE REQUESTED BY BANK TO EFFECT THE PURPOSES OF THIS AGREEMENT. 7.. NEGATIVE COVENANTS ------------------ Borrower covenants and agrees that, so long as any credit 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 Revolving Line Advances or Repurchase Advances, Borrower will not do any of the following: 23 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: (I) TRANSFERS OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS; (II) TRANSFERS OF NON-EXCLUSIVE LICENSES AND SIMILAR ARRANGEMENTS FOR THE USE OF THE PROPERTY OF BORROWER OR ITS SUBSIDIARIES; OR (III) TRANSFERS OF WORN-OUT OR OBSOLETE EQUIPMENT. 7.2. CHANGE IN BUSINESS. ENGAGE IN ANY BUSINESS, OR PERMIT ANY OF ITS SUBSIDIARIES TO ENGAGE IN ANY BUSINESS, OTHER THAN THE BUSINESSES CURRENTLY ENGAGED IN BY BORROWER AND ANY BUSINESS SUBSTANTIALLY SIMILAR OR RELATED THERETO (OR INCIDENTAL THERETO), OR SUFFER A MATERIAL CHANGE IN BORROWER'S OWNERSHIP, MANAGEMENT OR DIRECTORS. BORROWER WILL NOT, WITHOUT THIRTY (30) DAYS PRIOR WRITTEN NOTIFICATION TO BANK, RELOCATE ITS CHIEF EXECUTIVE OFFICE. 7.3. MERGERS OR ACQUISITIONS. MERGE OR CONSOLIDATE, OR PERMIT ANY OF ITS SUBSIDIARIES TO MERGE OR CONSOLIDATE, WITH OR INTO ANY OTHER BUSINESS ORGANIZATION, OR ACQUIRE, OR PERMIT ANY OF ITS SUBSIDIARIES TO ACQUIRE, ALL OR SUBSTANTIALLY ALL OF THE CAPITAL STOCK OR PROPERTY OF ANOTHER PERSON. 7.4. INDEBTEDNESS. CREATE, INCUR, ASSUME OR BE OR REMAIN LIABLE WITH RESPECT TO ANY INDEBTEDNESS, OR PERMIT ANY SUBSIDIARY SO TO DO, OTHER THAN PERMITTED INDEBTEDNESS. 7.5. ENCUMBRANCES. CREATE, INCUR, ASSUME OR SUFFER TO EXIST ANY LIEN WITH RESPECT TO ANY OF ITS PROPERTY, OR ASSIGN OR OTHERWISE CONVEY ANY RIGHT TO RECEIVE INCOME, INCLUDING THE SALE OF ANY ACCOUNTS, OR PERMIT ANY OF ITS SUBSIDIARIES SO TO DO, EXCEPT FOR PERMITTED LIENS. 7.6. DISTRIBUTIONS. PAY ANY DIVIDENDS OR MAKE ANY OTHER DISTRIBUTION OR PAYMENT ON ACCOUNT OF OR IN REDEMPTION, RETIREMENT OR PURCHASE OF ANY CAPITAL STOCK. 7.7. INVESTMENTS. DIRECTLY OR INDIRECTLY ACQUIRE OR OWN, OR MAKE ANY INVESTMENT IN OR TO ANY PERSON, OR PERMIT ANY OF ITS SUBSIDIARIES SO TO DO, OTHER THAN PERMITTED INVESTMENTS. 7.8. TRANSACTIONS WITH AFFILIATES. DIRECTLY OR INDIRECTLY ENTER INTO OR PERMIT TO EXIST ANY MATERIAL TRANSACTION WITH ANY AFFILIATE OF BORROWER EXCEPT FOR TRANSACTIONS THAT ARE IN THE ORDINARY COURSE OF BORROWER'S BUSINESS, UPON FAIR 24 AND REASONABLE TERMS THAT ARE NO LESS FAVORABLE TO BORROWER THAN WOULD BE OBTAINED IN AN ARM'S LENGTH TRANSACTION WITH A NONAFFILIATED PERSON. 7.9. SUBORDINATED DEBT. MAKE ANY PAYMENT IN RESPECT OF ANY SUBORDINATED DEBT, OR PERMIT ANY OF ITS SUBSIDIARIES TO MAKE ANY SUCH PAYMENT, EXCEPT IN COMPLIANCE WITH THE TERMS OF SUCH SUBORDINATED DEBT, OR AMEND ANY PROVISION CONTAINED IN ANY DOCUMENTATION RELATING TO THE SUBORDINATED DEBT WITHOUT BANK'S PRIOR WRITTEN CONSENT. 7.10. INVENTORY. STORE THE INVENTORY WITH A BAILEE, WAREHOUSEMAN, OR SIMILAR PARTY UNLESS BANK HAS RECEIVED A PLEDGE OF THE WAREHOUSE RECEIPT COVERING SUCH INVENTORY. EXCEPT FOR INVENTORY SOLD IN THE ORDINARY COURSE OF BUSINESS AND EXCEPT FOR SUCH OTHER LOCATIONS AS BANK MAY APPROVE IN WRITING, BORROWER SHALL KEEP THE INVENTORY ONLY AT THE LOCATION SET FORTH IN SECTION 10 HEREOF AND SUCH OTHER LOCATIONS OF WHICH BORROWER GIVES BANK PRIOR WRITTEN NOTICE AND AS TO WHICH BORROWER SIGNS AND FILES A FINANCING STATEMENT WHERE NEEDED TO PERFECT BANK'S SECURITY INTEREST. 7.11. COMPLIANCE. BECOME AN "INVESTMENT COMPANY" 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 REVOLVING LINE ADVANCE OR REPURCHASE 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 LAW OR REGULATION, WHICH VIOLATION COULD HAVE A MATERIAL ADVERSE EFFECT OR A MATERIAL ADVERSE EFFECT ON THE COLLATERAL OR THE PRIORITY OF BANK'S LIEN ON THE COLLATERAL, OR PERMIT ANY OF ITS SUBSIDIARIES TO DO ANY OF THE FOREGOING. 8.. EVENTS OF DEFAULT ----------------- Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1. PAYMENT DEFAULT. IF BORROWER FAILS TO PAY, WHEN DUE, ANY OF THE OBLIGATIONS. 25 8.2. COVENANT DEFAULT ---------------- 8.2.0.1. IF BORROWER FAILS TO PERFORM ANY OBLIGATION UNDER SECTIONS 6.7, 6.8, 6.9, 6.10 AND 6.11 OR VIOLATES ANY OF THE COVENANTS CONTAINED IN SECTION 7 OF THIS AGREEMENT, OR 8.2.0.2. IF BORROWER FAILS OR NEGLECTS TO PERFORM, KEEP, OR OBSERVE ANY OTHER MATERIAL TERM, PROVISION, CONDITION, COVENANT, OR AGREEMENT CONTAINED IN THIS AGREEMENT, IN ANY OF THE LOAN DOCUMENTS, OR IN ANY OTHER PRESENT OR FUTURE AGREEMENT BETWEEN BORROWER AND BANK AND AS TO ANY DEFAULT UNDER SUCH OTHER TERM, PROVISION, CONDITION, COVENANT OR AGREEMENT THAT CAN BE CURED, HAS FAILED TO CURE SUCH DEFAULT WITHIN TEN (10) DAYS AFTER BORROWER RECEIVES NOTICE THEREOF OR ANY OFFICER OF BORROWER BECOMES AWARE 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 REVOLVING LINE ADVANCE OR REPURCHASE ADVANCES WILL BE REQUIRED TO BE MADE DURING SUCH CURE PERIOD); 8.3. MATERIAL ADVERSE CHANGE. IF THERE (i) OCCURS A MATERIAL ADVERSE CHANGE IN THE BUSINESS, OPERATIONS, OR CONDITION (FINANCIAL OR OTHERWISE) OF THE BORROWER, OR (ii) IS A MATERIAL IMPAIRMENT OF THE PROSPECT OF REPAYMENT OF ANY PORTION OF THE OBLIGATIONS OR (iii) IS A MATERIAL IMPAIRMENT OF THE VALUE OR PRIORITY OF BANK'S SECURITY INTERESTS IN THE COLLATERAL; 8.4. ATTACHMENT. IF ANY MATERIAL PORTION OF BORROWER'S ASSETS IS ATTACHED, SEIZED, SUBJECTED TO A WRIT OR DISTRESS WARRANT, OR IS LEVIED UPON, OR COMES INTO THE POSSESSION OF ANY TRUSTEE, RECEIVER OR PERSON ACTING IN A SIMILAR CAPACITY AND SUCH ATTACHMENT, SEIZURE, WRIT OR DISTRESS WARRANT OR LEVY HAS NOT BEEN REMOVED, DISCHARGED OR RESCINDED WITHIN TEN (10) DAYS, OR IF BORROWER IS ENJOINED, RESTRAINED, OR IN ANY WAY PREVENTED BY COURT ORDER FROM CONTINUING TO CONDUCT ALL OR ANY MATERIAL PART OF ITS BUSINESS AFFAIRS, OR IF A JUDGMENT OR OTHER CLAIM BECOMES A LIEN OR ENCUMBRANCE UPON ANY MATERIAL PORTION OF BORROWER'S ASSETS, OR IF A NOTICE OF LIEN, LEVY, OR ASSESSMENT IS FILED OF RECORD WITH RESPECT TO ANY OF BORROWER'S ASSETS BY THE UNITED STATES GOVERNMENT, OR ANY DEPARTMENT, AGENCY, OR INSTRUMENTALITY THEREOF, OR BY ANY STATE, COUNTY, MUNICIPAL, OR GOVERNMENTAL AGENCY, AND THE SAME IS NOT PAID WITHIN TEN (10) DAYS AFTER BORROWER RECEIVES NOTICE THEREOF, PROVIDED THAT NONE OF THE FOREGOING SHALL CONSTITUTE AN EVENT OF DEFAULT WHERE SUCH ACTION OR EVENT IS STAYED OR AN ADEQUATE BOND HAS BEEN POSTED PENDING A GOOD FAITH CONTEST BY BORROWER 26 (PROVIDED THAT NO REVOLVING LINE ADVANCES OR REPURCHASE 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 TEN (10) DAYS (PROVIDED THAT NO REVOLVING LINE ADVANCES OR REPURCHASE ADVANCES WILL BE MADE PRIOR TO THE DISMISSAL OF SUCH INSOLVENCY PROCEEDING); 8.6. OTHER AGREEMENTS. IF THERE IS A DEFAULT IN ANY AGREEMENT TO WHICH BORROWER IS A PARTY WITH A THIRD PARTY OR PARTIES RESULTING IN A RIGHT BY SUCH THIRD PARTY OR PARTIES, WHETHER OR NOT EXERCISED, TO ACCELERATE THE MATURITY OF ANY INDEBTEDNESS IN AN AMOUNT IN EXCESS OF ONE HUNDRED THOUSAND DOLLARS ($100,000) OR THAT COULD HAVE A MATERIAL ADVERSE EFFECT; 8.7. SUBORDINATED DEBT. IF BORROWER MAKES ANY PAYMENT ON ACCOUNT OF SUBORDINATED DEBT, EXCEPT TO THE EXTENT SUCH PAYMENT IS ALLOWED UNDER ANY SUBORDINATION AGREEMENT ENTERED INTO WITH BANK; 8.8. JUDGMENTS. IF A JUDGMENT OR JUDGMENTS FOR THE PAYMENT OF MONEY IN AN AMOUNT, INDIVIDUALLY OR IN THE AGGREGATE, OF AT LEAST FIFTY THOUSAND DOLLARS ($50,000) SHALL BE RENDERED AGAINST BORROWER AND SHALL REMAIN UNSATISFIED AND UNSTAYED FOR A PERIOD OF TEN (10) DAYS (PROVIDED THAT NO REVOLVING LINE ADVANCES OR REPURCHASE ADVANCES WILL BE MADE PRIOR TO THE SATISFACTION OR STAY OF SUCH JUDGMENT); OR 8.9. MISREPRESENTATIONS. IF ANY MATERIAL MISREPRESENTATION OR MATERIAL MISSTATEMENT EXISTS NOW OR HEREAFTER IN ANY WARRANTY OR REPRESENTATION SET FORTH HEREIN OR IN ANY CERTIFICATE DELIVERED TO BANK BY ANY RESPONSIBLE OFFICER PURSUANT TO THIS AGREEMENT OR TO INDUCE BANK TO ENTER INTO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. 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: 27 9.1.0.1. DECLARE ALL OBLIGATIONS, WHETHER EVIDENCED BY THIS AGREEMENT, BY ANY OF THE OTHER LOAN DOCUMENTS, OR OTHERWISE, IMMEDIATELY DUE AND PAYABLE (PROVIDED THAT UPON THE OCCURRENCE OF AN EVENT OF DEFAULT DESCRIBED IN SECTION 8.5 ALL OBLIGATIONS SHALL BECOME IMMEDIATELY DUE AND PAYABLE WITHOUT ANY ACTION BY BANK); 9.1.0.2. 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; 9.1.0.3. SETTLE OR ADJUST DISPUTES AND CLAIMS DIRECTLY WITH ACCOUNT DEBTORS FOR AMOUNTS, UPON TERMS AND IN WHATEVER ORDER THAT BANK REASONABLY CONSIDERS ADVISABLE; 9.1.0.4. 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, FOR UP TO ONE HUNDRED TWENTY (120) DAYS IN ORDER TO EXERCISE ANY OF BANK'S RIGHTS OR REMEDIES PROVIDED HEREIN, AT LAW, IN EQUITY, OR OTHERWISE; 9.1.0.5. 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; 9.1.0.6. 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; 28 9.1.0.7. 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; 9.1.0.8. BANK MAY CREDIT BID AND PURCHASE AT ANY PUBLIC SALE; AND 9.1.0.9. 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; PROVIDED BANK MAY EXERCISE SUCH POWER OF ATTORNEY TO SIGN THE NAME OF BORROWER ON ANY OF THE DOCUMENTS DESCRIBED IN SECTION 4.2 REGARDLESS OF WHETHER AN EVENT OF DEFAULT HAS OCCURRED. THE APPOINTMENT OF BANK AS BORROWER'S ATTORNEY IN FACT, AND EACH AND EVERY ONE OF BANK'S RIGHTS AND POWERS, BEING COUPLED WITH AN INTEREST, IS IRREVOCABLE UNTIL ALL OF THE OBLIGATIONS HAVE BEEN FULLY REPAID AND PERFORMED AND BANK'S OBLIGATION TO PROVIDE ADVANCES HEREUNDER IS TERMINATED. 9.3. ACCOUNTS COLLECTION. AT ANY TIME FROM THE DATE OF THIS AGREEMENT, BANK MAY NOTIFY ANY PERSON OWING FUNDS TO BORROWER OF BANK'S SECURITY INTEREST IN SUCH FUNDS AND VERIFY THE AMOUNT OF SUCH ACCOUNT. BORROWER SHALL COLLECT ALL AMOUNTS OWING TO BORROWER FOR BANK, RECEIVE IN TRUST ALL PAYMENTS AS BANK'S TRUSTEE, AND 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 29 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 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. NO WAIVER BY BANK SHALL BE EFFECTIVE UNLESS MADE IN A WRITTEN DOCUMENT SIGNED ON BEHALF OF BANK AND THEN SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFIC PURPOSE FOR WHICH IT WAS GIVEN. 9.7. DEMAND; PROTEST. BORROWER WAIVES DEMAND, PROTEST, NOTICE OF PROTEST, NOTICE OF DEFAULT OR DISHONOR, NOTICE OF PAYMENT AND NONPAYMENT, NOTICE OF ANY DEFAULT, NONPAYMENT AT MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION, OR RENEWAL OF ACCOUNTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND GUARANTEES AT ANY TIME HELD BY BANK ON WHICH BORROWER MAY IN ANY WAY BE LIABLE. 30 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, 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: Vmark Software, Inc. 50 Washington Street Westborough, Massachusetts 01581 Attn: Charles Kane FAX: (508) 389-8767 If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, California 95054 Attn: Greg Linvill FAX: (408) 496-2429 With copies to: Silicon Valley East 40 William Street Wellesley, Massachusetts 02181 Attn: Timothy O'Loughlin Vice President FAX: (617) 431-9906 Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attn: Dennis J. White, Esq. FAX: (617) 338-2880 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. 31 11.. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ------------------------------------------ THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND BANK HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS, BUT IF FOR ANY REASON THE BANK IS DENIED ACCESS TO SUCH COURTS, THEN IN SUCH EVENT THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12.. GENERAL PROVISIONS ------------------ 12.1. SUCCESSORS AND ASSIGNS. THIS AGREEMENT SHALL BIND AND INURE TO THE BENEFIT OF THE RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS OF EACH OF THE PARTIES; PROVIDED, HOWEVER, THAT NEITHER THIS AGREEMENT NOR ANY RIGHTS HEREUNDER MAY BE ASSIGNED BY BORROWER WITHOUT BANK'S PRIOR WRITTEN CONSENT, WHICH CONSENT MAY BE GRANTED OR WITHHELD IN BANK'S SOLE DISCRETION. BANK SHALL HAVE THE RIGHT WITHOUT THE CONSENT OF OR NOTICE TO BORROWER TO SELL, TRANSFER, NEGOTIATE, OR GRANT PARTICIPATION IN ALL OR ANY PART OF, OR ANY INTEREST IN, BANK'S OBLIGATIONS, RIGHTS AND BENEFITS HEREUNDER. 12.2. INDEMNIFICATION. BORROWER SHALL 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 AGREEMENT; 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 THIS AGREEMENT, 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. 32 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 ORALLY. 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 SET FORTH IN THE FIRST SENTENCE OF THIS SECTION 12.7 HAVE BEEN SATISFIED, AND BANK HAS NO COMMITMENT TO MAKE ANY REVOLVING LINE ADVANCES OR REPURCHASE ADVANCES OR TO MAKE ANY OTHER LOANS TO BORROWER, BANK SHALL RELEASE ALL SECURITY INTERESTS GRANTED HEREUNDER AND REDELIVER ALL COLLATERAL HELD BY IT IN ACCORDANCE WITH APPLICABLE LAW. 12.8. CONFIDENTIALITY. IN HANDLING ANY CONFIDENTIAL INFORMATION BANK SHALL EXERCISE THE SAME DEGREE OF CARE THAT IT EXERCISES WITH RESPECT TO ITS OWN PROPRIETARY INFORMATION OF THE SAME TYPES TO MAINTAIN THE CONFIDENTIALITY OF ANY NON-PUBLIC INFORMATION THEREBY RECEIVED OR RECEIVED PURSUANT TO THIS AGREEMENT EXCEPT THAT DISCLOSURE OF SUCH INFORMATION MAY BE MADE (i) TO THE SUBSIDIARIES OR AFFILIATES OF BANK IN CONNECTION WITH THEIR PRESENT OR PROSPECTIVE BUSINESS RELATIONS WITH BORROWER, (ii) TO PROSPECTIVE TRANSFEREES OR PURCHASERS OF ANY INTEREST IN THE LOANS, PROVIDED THAT THEY HAVE ENTERED INTO A COMPARABLE CONFIDENTIALITY AGREEMENT IN FAVOR OF BORROWER AND HAVE DELIVERED A COPY TO BORROWER, (iii) AS REQUIRED BY LAW, REGULATIONS, RULE OR ORDER, SUBPOENA, JUDICIAL ORDER OR SIMILAR ORDER AND (iv) AS MAY BE REQUIRED IN CONNECTION WITH THE EXAMINATION, AUDIT OR SIMILAR INVESTIGATION OF BANK. CONFIDENTIAL INFORMATION HEREUNDER SHALL NOT INCLUDE INFORMATION THAT EITHER: (a) IS IN THE PUBLIC DOMAIN OR IN THE KNOWLEDGE OR POSSESSION OF BANK WHEN DISCLOSED TO BANK, OR BECOMES PART OF THE PUBLIC DOMAIN AFTER DISCLOSURE TO BANK THROUGH NO FAULT OF BANK; OR 33 (B) IS DISCLOSED TO BANK BY A THIRD PARTY, PROVIDED BANK DOES NOT HAVE ACTUAL KNOWLEDGE THAT SUCH THIRD PARTY IS PROHIBITED FROM DISCLOSING SUCH INFORMATION. 12.9. COUNTERSIGNATURE. THIS AGREEMENT SHALL BECOME EFFECTIVE ONLY WHEN IT SHALL HAVE BEEN EXECUTED BY BORROWER AND BANK, PROVIDED, HOWEVER, IN NO EVENT SHALL THIS AGREEMENT BECOME EFFECTIVE UNTIL SIGNED BY AN OFFICER OF THE BANK IN CALIFORNIA. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. VMARK SOFTWARE, INC. By: Name: Title: SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: Name: TIMOTHY O'LOUGHLIN -------------------------------- Title: VICE PRESIDENT ------------------------------- SILICON VALLEY BANK By: Name: Title: (signed in Santa Clara County, California) 34 EXHIBIT 13. DESCRIPTION OF COLLATERAL The Collateral shall consist of all right, title and interest of Borrower in and to the following: 13.1. ALL ACCOUNTS, INCLUDING ALL NOW EXISTING AND HEREAFTER ARISING ACCOUNTS, CONTRACT RIGHTS, ROYALTIES, LICENSE RIGHTS AND ALL OTHER FORMS OF OBLIGATIONS OWING TO BORROWER ARISING OUT OF THE SALE OR LEASE OF GOODS, THE LICENSING OF TECHNOLOGY OR THE RENDERING OF SERVICES BY BORROWER, WHETHER OR NOT EARNED BY PERFORMANCE, AND ANY AND ALL CREDIT INSURANCE, GUARANTIES, AND OTHER SECURITY THEREFOR, AS WELL AS ALL MERCHANDISE RETURNED TO OR RECLAIMED BY BORROWER AND BORROWER'S BOOKS RELATING TO ANY OF THE FOREGOING; 13.2. ALL DOCUMENTS, CASH, DEPOSIT ACCOUNTS, SECURITIES, LETTERS OF CREDIT, CERTIFICATES OF DEPOSIT, INSTRUMENTS AND CHATTEL PAPER NOW OWNED OR HEREAFTER ACQUIRED AND BORROWER'S BOOKS RELATING TO THE FOREGOING; AND 13.3. ANY AND ALL CLAIMS, RIGHTS AND INTERESTS IN ANY OF THE ABOVE AND ALL SUBSTITUTIONS FOR, ADDITIONS AND ACCESSIONS TO AND PROCEEDS THEREOF. 35 EXHIBIT 14-1. LOAN PAYMENT/REVOLVING LINE ADVANCE TELEPHONE REQUEST FORM (REVOLVING LINE OF CREDIT) DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: FAX#: TIME: - -------------------------------------------------------------------------------- FROM: - -------------------------------------------------------------------------------- VMARK SOFTWARE, INC. - -------------------- 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 (REVOLVING LINE 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 any Revolving Line 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. 36 - -------------------------------------------------------------------------------- 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) 37 - -------------------------------------------------------------------------------- EXHIBIT B-2 LOAN PAYMENT/REPURCHASE ADVANCE TELEPHONE REQUEST FORM (SHARE REPURCHASE LINE OF CREDIT) DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: FAX#: TIME: FROM: - -------------------------------------------------------------------------------- VMARK SOFTWARE, INC. - ------------------- 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 (REPURCHASE 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 any Repurchase 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. 38 - -------------------------------------------------------------------------------- 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) 39 EXHIBIT 15. BORROWING BASE CERTIFICATE Borrower: Vmark Software, Inc. Bank: Silicon Valley Bank
Commitment Amount: 0$10,000,000 ($5,000,000 Revolving Line of Credit) ($5,000,000 Share Repurchase Line of Credit) ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $ 2. Additions (please explain on reverse) $ 3. TOTAL ACCOUNTS RECEIVABLE $ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $ 5. Balance of 50% over 90 day accounts $ 6. Concentration Limits $ 7. Foreign Accounts $ 8. Governmental Accounts $ 9. Contra Accounts $ 10. Promotion or Demo Accounts $ 11. Intercompany/Employee Accounts $ 12. Other (please explain on reverse) $ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ 14. Eligible Accounts (#3 MINUS #13) $ 15. LOAN VALUE OF ACCOUNTS (80% of #14) $ BALANCES 16. Maximum Loan Amount $10,000,000 17. Total Funds Available [Lesser of #16 or #15] $ 18. Outstanding under Revolving Line of Credit (including amount of any outstanding Letters of Credit or drawn but unreimbursed Letters of Credit) $ 19. Outstanding under Share Repurchase Line of Credit $ 20. RESERVE POSITION (#17 MINUS sum of #18 and #19) $
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: VMARK SOFTWARE, INC. - ------------------- By: Authorized Signer 40 EXHIBIT 16. COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: VMARK SOFTWARE, INC. The undersigned authorized officer ("Officer") of Vmark Software, Inc. ("Borrower") hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement (the "Agreement") between Borrower and Silicon Valley Bank ("Bank"), (i) Borrower is in complete compliance for the period ending __________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that no borrowings may be requested by the Borrower at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ------------------------------------------------------------------------------------ Quarterly financial statements Quarterly within 45 days Yes No Annual (CPA Audited) FYE within 90 days Yes No BBC and A/R Agings Monthly within 25 days Yes No A/R Audit Initial and Semi-Annual Yes No FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------------------------------------------------------------------------ Maintain on a Monthly Basis: Minimum Quick Ratio 2.0:1.0 _____:1.0 Yes No Minimum Tangible Net Worth $20,000,000 $________ Yes No Maximum Leverage (Total Liabilities [less Deferred Revenues]/Tangible Net Worth) 1.25:1.0 _____:1.0 Yes No Maintain on a Quarterly Basis: Minimum Debt Service Coverage (Cash Flow/Current Portion of Long Term Indebtedness) 1.50:1.0 _____:1.0 Yes No
COMMENTS REGARDING EXCEPTIONS: See Attached. Sincerely, SIGNATURE TITLE: DATE: 41 EXHIBIT 17.-1. PROMISSORY NOTE (REVOLVING LINE OF CREDIT) 42 EXHIBIT E-2 PROMISSORY NOTE (SHARE REPURCHASE LINE OF CREDIT) 43 EXHIBIT F-1 DISBURSEMENT REQUEST AND AUTHORIZATION (REVOLVING LINE OF CREDIT) BORROWER: Vmark Software, Inc. BANK: Silicon Valley Bank LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal amount up to $5,000,000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of this loan is: _______________. 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 $ Undisbursed Funds $ Principal $ CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Prepaid Finance Charges Paid in Cash: $ $________ Loan Fee $________ Accounts Receivables Audit Other Charges Paid in Cash: $ $_______ UCC Search Fees $_______ UCC Filing Fees $_______ Outside Counsel Fees and Expenses (Estimate) Total Charges Paid in Cash $
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from Borrower's account numbered 700238670 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 , 19___. BORROWER: Authorized Officer 44 EXHIBIT F-2 DISBURSEMENT REQUEST AND AUTHORIZATION (SHARE REPURCHASE LINE OF CREDIT) BORROWER: Vmark Software, Inc. BANK: Silicon Valley Bank LOAN TYPE. This is a Variable Rate Line of Credit of a principal amount up to $5,000,000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of this loan is: _______________. 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 $ Undisbursed Funds $ Principal $ CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Prepaid Finance Charges Paid in Cash: $ $_______ Loan Fee $_______ Accounts Receivables Audit Other Charges Paid in Cash: $ $_______ UCC Search Fees $_______ UCC Filing Fees $_______ Outside Counsel Fees and Expenses (Estimate) Total Charges Paid in Cash $
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from Borrower's account numbered 700238670 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 , 19___. BORROWER: Authorized Officer 45 SCHEDULE A DISCLOSURE SCHEDULE [IF BORROWER'S RESPONSE IS "NONE", PLEASE INITIAL HERE:___________] EX-10.36 9 AMENDED & RESTATED PROMISSORY NOTE 1 Exhibit 10.36 AMENDED AND RESTATED PROMISSORY NOTE (REVOLVING LINE OF CREDIT LOANS) $5,000,000 Wellesley, Massachusetts As of May 3, 1996 (Originally dated May 15, 1990) For value received, the undersigned, VMARK SOFTWARE, INC., a Delaware corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at 3003 Tasman Drive, Santa Clara, California 95054, or to its order, the lesser of (a) FIVE MILLION DOLLARS ($5,000,000) or (b) the outstanding principal amount hereunder, on June 5, 1997 (the "MATURITY DATE"), together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) until the Maturity Date, payable monthly in arrears on the fifth day of each calendar month occurring after the date hereof and on the Maturity Date. The Borrower promises to pay on demand interest on any overdue principal (and to the extent permitted by law, overdue interest) at a per annum rate of interest five (5) percentage points higher than the rate of interest in effect immediately prior to the time such amount became due. The Bank's "Prime Rate" is the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). Computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest is payable. This promissory note amends and restates the terms and conditions of the obligations of the Borrower under the promissory note dated May 15, 1990, as previously amended (the "ORIGINAL NOTE"), by the Borrower to the Bank. Nothing contained in this promissory note shall be deemed to create or represent the issuance of new indebtedness or the exchange by the Borrower of the Original Note for a new promissory note. This promissory note is the note relating to the Revolving Line of Credit referred to in the Loan and Security Agreement dated as of May 15, 1996 between the Bank and the Borrower (together with all related schedules, and as the same may be amended, modified or supplemented from time to time, the "LOAN AND SECURITY AGREEMENT"), and is subject to optional and mandatory prepayment as provided therein, and is entitled to the benefits thereof and of the other Loan Documents referred to therein. This note is secured by the Loan and Security Agreement and by any other Security Instruments referenced in the Loan and Security Agreement. Each reference in each Loan Document (as defined in the Loan and Security Agreement) to "the Note", "thereof", "therein", "thereunder", or words of like import referring to the Original Note, shall mean and be a reference to the Original Note, as amended and restated hereby. Upon the occurrence of any Event of Default under, and as defined in, the Loan and Security Agreement, at the option of the Bank, the principal amount then outstanding of and the accrued interest on the advances under this note and all other amounts payable under this note shall become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. 2 The Bank shall keep a record of the amount and the date of the making of each advance pursuant to the Loan and Security Agreement and each payment of principal with respect thereto by maintaining a computerized record of such information and printouts of such computerized record, which computerized record, and the printouts thereof, shall constitute PRIMA FACIE evidence of the accuracy of the information so endorsed. The undersigned agrees to pay all reasonable costs and expenses of the Bank (including, without limitation, the reasonable fees and expenses of attorneys) in connection with the enforcement of this note and the other Loan Documents and the preservation of their respective rights hereunder and thereunder. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Borrower and every endorser or guarantor of this note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral for this note, and to the additions or releases of any other parties or persons primarily or secondarily liable. THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY. BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS IS DENIED TO THE BANK, THEN, IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. 3 ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. VMARK SOFTWARE, INC. By: ------------------------------------- Name: Title: [Seal] EX-10.37 10 PROMISSORY NOTE 1 Exhibit 10.37 PROMISSORY NOTE (SHARE REPURCHASE LINE OF CREDIT LOANS) $5,000,000 Wellesley, Massachusetts As of May 3, 1996 For value received, the undersigned, VMARK SOFTWARE, INC., a Delaware corporation (the "BORROWER"), promises to pay to SILICON VALLEY BANK (the "BANK") at the office of the Bank located at 3003 Tasman Drive, Santa Clara, California 95054, or to its order, the lesser of (a) FIVE MILLION DOLLARS ($5,000,000) or (b) the outstanding principal amount hereunder on October 29, 1996, in thirty-six (36) consecutive equal monthly installments of principal payable on the twenty-eighth day of each month, commencing November 28, 1996, and ending October 28, 1999 (the "MATURITY DATE"), together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) plus one-half percent (1/2%) until the Maturity Date, payable monthly in arrears on the twenty-eighth day of each calendar month occurring after the date hereof and on the Maturity Date; PROVIDED, HOWEVER, that if the Borrower has pursuant to the terms of the Loan and Security Agreement (as defined below) exercised its option to defer the Share Repurchase Availability Expiration Date (as defined in the Loan and Security Agreement) to April 28, 1997, the Borrower shall instead be obligated to pay to the Bank the lesser of (a) FIVE MILLION DOLLARS ($5,000,000) or (b) the outstanding principal amount hereunder on April 28, 1997, in thirty-six (36) consecutive equal monthly installments of principal payable on the twenty-eighth day of each month, commencing May 28, 1997, and ending April 28, 2000 (the "EXTENDED MATURITY DATE"), together with interest on the principal amount hereof from time to time outstanding at a fluctuating rate per annum equal to the Prime Rate (as defined below) plus one-half percent (1/2%) until the Extended Maturity Date, payable monthly in arrears on the twenty-eighth day of each calendar month occurring after the date hereof and ending on the Extended Maturity Date. The Borrower promises to pay on demand interest at a per annum rate of interest on any overdue principal (and to the extent permitted by law, overdue interest) equal to the rate of interest in effect immediately prior to the time such amount became due plus five (5) percentage points. The Bank's "Prime Rate" is the per annum rate of interest from time to time announced and made effective by the Bank as its Prime Rate (which rate may or may not be the lowest rate available from the Bank at any given time). Computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest is payable. This promissory note is the note relating to the Share Repurchase Line of Credit referred to in the Loan and Security Agreement dated as of May 3, 1996 between the Bank and the Borrower (together with all related schedules, and as the same may be amended, modified or supplemented from time to time, the "LOAN AND SECURITY AGREEMENT"), and is subject to optional and mandatory prepayment as provided therein, and is entitled to the benefits thereof and of the other Loan Documents referred to therein. This note is secured by the Loan and Security Agreement and by any other Security Instruments referenced in the Loan and Security Agreement. Upon the occurrence of any Event of Default under, and as defined in, the Loan and Security Agreement, at the option of the Bank, the principal amount then outstanding of and the accrued interest on the advances under this note and all other amounts payable under this note shall become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. The Bank shall keep a record of the amount and the date of the making of each advance pursuant to the Loan and Security Agreement and each payment of principal with respect thereto either by maintaining a computerized record of such information and printouts of such computerized record, 2 which computerized record, and the print outs thereof, shall constitute PRIMA FACIE evidence of the accuracy of the information so endorsed. The undersigned agrees to pay all reasonable costs and expenses of the Bank (including, without limitation, the reasonable fees and expenses of attorneys) in connection with the enforcement of this note and the other Loan Documents and the preservation of their respective rights hereunder and thereunder. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Bank, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Borrower and every endorser or guarantor of this note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral for this note, and to the additions or releases of any other parties or persons primarily or secondarily liable. THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA. THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY. BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS TO SUCH COURTS IS DENIED TO THE BANK, THEN, IN THE STATE OF CALIFORNIA) IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. 3 ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. VMARK SOFTWARE, INC. By: ---------------------------------- Name: Title: [Seal] EX-23 11 INDEPENDANT AUDITOR CONSENT 1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-49022 on Form S-3/S-8, No. 33-64566 on Form S-8, No. 33-80372 on Form S-8, No. 33-85806 on Form S-8, and No. 333-00218 on Form S-8 of our report dated January 27,1997, appearing in the Annual Report on Form 10-K of VMARK Software, Inc. for the year ended December 31, 1996. Boston, Massachusetts March 27, 1997 EX-27 12 FINANIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ON THE FORM 10-K TO WHICH THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 14,733,000 0 16,724,000 1,864,000 0 36,413,000 21,115,000 6,950,000 59,977,000 22,131,000 0 0 0 83,000 28,748,000 59,977,000 35,149,000 69,266,000 4,745,000 23,297,000 0 1,286,000 869,000 (2,081,000) 560,000 (2,641,000) 0 (4,734,000) 0 (7,375,000) (0.91) (0.91)
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