-----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, COhrigfFb4rOe2MYPdi8oLhd+Hp8FZHWwDkI/p9qw6bvb0g83hDluw+Bt3vB5xJe LsTwyrxSAPOu1MNgIUbt/w== 0000891554-98-001114.txt : 19980902 0000891554-98-001114.hdr.sgml : 19980902 ACCESSION NUMBER: 0000891554-98-001114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980831 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTECH INC CENTRAL INDEX KEY: 0000354260 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 042453033 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10665 FILM NUMBER: 98701956 BUSINESS ADDRESS: STREET 1: 4695 44TH STREET N E STREET 2: SUITE B 130 CITY: GRAND RAPIDS STATE: MI ZIP: 49512 BUSINESS PHONE: 6169572330 MAIL ADDRESS: STREET 1: 4695 44TH STREET N E STREET 2: SUITE B 130 CITY: GRAND RAPIDS STATE: MI ZIP: 49512 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISION WASHINGTON, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1998 Commission file number 0-10665 SofTech, Inc. (Exact name of registrant as specified in its charter) Massachusetts 04-2453033 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification Number) 4695 44th Street S.E., Suite B-130, Grand Rapids, MI 49512 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 957-2330 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value (Title of Class) 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 II of this Form 10-K or any amendment to this Form 10-K. [_] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $27,706,000 as of August 18, 1998. On August 18, 1998 the registrant had outstanding 6,822,842 shares of common stock of $.10 par value, which is the registrant's only class of common stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive proxy statement to be filed in connection with the registrant's 1998 annual meeting are incorporated by reference into Part III of this report, to the extent set forth in said Part III. 1 PART I ITEM 1 - BUSINESS THE COMPANY SofTech, Inc. was formed in Massachusetts on June 10, 1969. The Company had an initial public offering in August 1981 and a secondary offering in December 1982. From inception until the disposition of the Government Systems Division in December 1993, the Company's primary business was that of custom software development for the U.S. Government, primarily the Department of Defense. Today, SofTech is a leading provider of Design through Manufacturing Technologies and Services. It offers its own proprietary software technology to the 2D CAD and CAM markets, partners with 3D and Product Data Management ("PDM") technology companies, and provides hardware and a full array of service offerings in order to bring complete solutions to its customers' mechanical engineering problems. The Company believes that this "one-stop-shopping" concept is important to many of its customers. The following is a brief synopsis of the Company's evolution over the last two fiscal years. In June 1996, the Company developed a strategy to focus all of its resources on the CAD/CAM and PDM marketplace. An important part of implementing that strategy was to dispose of all unrelated businesses. This process was completed with the sale of the Company's Network Systems Group ("NSG") in September 1996 and the distribution of the net proceeds from that sale in the form of dividends (return of capital) to shareholders in December 1996 and June 1997 totaling approximately $2.56 per share. As of June 1996 the Company's CAD/CAM and PDM business was that of marketing and supporting the sale of Parametric Technology Corporation's (NASDAQ:PMTC) Pro/ENGINEER(TM) family of software offerings. The Company had been one of the largest distributors of PMTC's products since the introduction of Pro/ENGINEER(TM) in 1988. The Company had been notified (as had all of PMTC's distributors) that as of September 30, 1996, it would no longer be allowed to market the Pro/ENGINEER(TM) software. All PMTC distributors would instead be focused on marketing a newly introduced mid-range software offering named PT/Modeler(TM). The capability and the pricing of this product is described in detail in the Company's 1997 Form 10-K in "ITEM 1 - BUSINESS" under the caption "PRODUCT TRANSITION". The Company signed a distribution agreement for PT/Modeler(TM) in July 1996 and marketed that product through September 30, 1997, at which time the distribution agreement terminated and was not renewed. The change from selling the Pro/ENGINEER(TM) software family of products caused a significant detrimental impact on the business model of the Company. Instead of marketing a $20,000 per unit Pro/ENGINEER(TM) software package that was sold primarily on a $20,000 UNIX workstation and brought with it a $10,000 services contract, the Company was marketing a $4,000 software package that operated only on an Intel based personal computer. It became clear that the Company needed to establish itself as an entity that was not dependent on a third party for its viability. In December 1996 and in February 1997 the Company completed two acquisitions of CAD/CAM services-only businesses as the initial step towards that independence. The Company also opened 5 new offices in 5 new states to broaden its geographic reach in the U.S. market. By the end of fiscal 1997 the Company had 11 offices in 10 states in the U.S. In November 1997 the Company acquired the Advanced Manufacturing Technology division ("AMT") of CIMLINC Incorporated. This division possessed 2D CAD technology, an installed base and a newly introduced CAM technology product called PROSPECTOR(TM). This technology acquisition was followed by the acquisition of Adra Systems in May 1998. ADRA also has a 2D CAD technology, an installed base of approximately 20,000 seats eand a recurring service business. In January 1998 the Company also signed a distribution agreement with Structural Dynamics Research Corporation (NASDAQ:SDRC) to market its 3D CAD products throughout North America. Lastly, during fiscal 1998 the Company acquired another CAD/CAM services-only business and an SDRC distributor. By the end of fiscal 1998 the Company had 25 offices in 16 states in the U.S., 4 offices in Western Europe and indirect distribution for its technology in Asia. 2 PRODUCT AND SERVICES As noted above, the Company has evolved over the last two years through acquisitions and internal expansion from a distributor of PMTC's products into an independent technology and services entity. This transition has made it difficult to draw comparisons from period to period. The following table is meant to help clarify this issue by detailing the components of product revenue by fiscal year. Product revenue was composed of the following (000's): 1998 1997 1996 ------- ------- ------- SofTech software (AMT & ADRA) $ 3,023 $ -- $ -- Hardware 4,286 6,212 6,717 PMTC software 612 2,442 2,895 Other 3rd party software 618 675 668 Other 113 -- 14 ------- ------- ------- Total product revenue $ 8,652 $ 9,329 $10,294 ======= ======= ======= The evolution of the business described above is clearly visible in the preceding table. In fiscal 1996 the Company's product revenue included derived primarily from the sale of PMTC software (Pro/ENGINEER(TM)) and hardware. The hardware sold was high-end workstations and was driven by the sale of the Pro/ENGINEER(TM) software. Sales of Pro/ENGINEER(TM) software and related high-end workstations carried into fiscal year 1997 (the distribution agreement for Pro/ENGINEER(TM) ended September 30, 1996). The shift in October 1996 to the mid-range software offering of PMTC selling on an Intel based machine resulted in a reduction in revenue derived from both software and hardware and is the reason for the 9% decrease overall in product revenue in 1997 as compared to 1996. In fiscal 1998 (September 1997) the PT/Modeler(TM) distribution agreement with PMTC terminated and the revenue from that product ceased. The full impact of the shift to PT/Modeler(TM) and Intel based machines can be seen in the 31% decline in hardware revenue in fiscal 1998 as compared to 1997. The acquisitions of AMT and ADRA by the Company during fiscal 1998 replaced lost revenue from PMTC software and hardware. For fiscal 1999 it is expected that the revenue derived from the sale of SofTech technology will be the primary product revenue source. The strategic relationships with 3D and PDM technology companies should more than replace the PMTC revenue generated in fiscal 1998. The components of services revenue has also changed dramatically as a result of the changes detailed above. Service revenue was composed of the following (000's): 1998 1997 1996 ------- ------- ------- Consulting, discreet services and training $ 6,231 $ 2,228 $ 726 Maintenance of AMT and ADRA software 2,142 -- -- Hardware and 3rd party software maintenance 2,928 3,139 2,638 Other 26 8 -- ------- ------- ------- Total service revenue $11,327 $ 5,375 $ 3,364 ======= ======= ======= The changes in the make-up of the business are also quite evident when the components of service revenue are detailed as in the above table over the last three years. In fiscal 1996, the service revenue was composed primarily of hardware and 3rd party software maintenance (primarily PMTC software maintenance). The discreet services revenue generated in fiscal 1996 were, for the most part, related to the sale of the Pro/ENGINEER(TM) software. With the acquisition of two services-only businesses in fiscal 1997, the consulting, discreet services and training revenue more than tripled from fiscal 1996 and is responsible for the 60% overall growth in service revenue. This consulting, discreet services and training revenue nearly triples again from fiscal 1997 to 1998 as the 1997 acquisitions contributed for the full 1998 fiscal year and is the primary reason for the service revenue growth of 111% from fiscal 1997 to 1998. The maintenance revenue generated from hardware and 3rd party software agreements declined slightly from fiscal 1997 to 1998 but is expected to decline by about 50% from fiscal 1998 to 1999 due to the termination of the PMTC distribution agreement. COMPETITION The Company competes against much larger entities in an extremely competitive market for all of its software and service offerings. The 2D software technologies acquired in the acquisitions in fiscal 1998 compete directly with the offerings of such companies as AutoDesk and MicroCADAM. This 2D technology is also marketed as a complementary offering to many 3D products offered by companies such as PMTC, Dassault, Unigraphics and SolidWorks that all possess some level of 2D drafting capability. These companies all have resources far in excess of those of the Company. The Company's CAM technology, PROSPECTOR(TM), is marketed to the Plastic Injection Mold and Tool & Die industries. While the large CAD companies such as PMTC, Dassault, SDRC and AutoDesk have modules that compete in this market, none focus exclusively and therefore the competition is more limited than in the 2D software technology market. 3 The service offerings of the Company which include consulting, training, discreet engineering services and contract placement compete with offerings by all of the large CAD companies noted above, small regional engineering services companies and the in-house capabilities of its customers. PERSONNEL As of May 31, 1998, the Company employed 214 persons. This headcount distributed over functional lines is as follows: Sales = 47; Product Development = 32, Engineers = 102; General & Administrative = 33. The ability of the Company to attract qualified individuals with the necessary skills is currently, and is expected to continue to be, a constraint on future growth. BACKLOG Backlog as of May 31, 1998 and 1997 was approximately $243,000 and $944,000, respectively. Deferred maintenance revenue, which represents primarily software maintenance contracts at May 31, 1998 and hardware maintenance agreements at May 31, 1997 to be performed during the following year, totaled approximately $3,522,000 and $358,000 at May 31, 1998 and 1997, respectively. Given the short time period between receipt of order and delivery, on average 30 days, the Company does not believe that backlog is an important measure as to the relative health of the business. RESEARCH AND DEVELOPMENT With the acquisitions of the software technologies of AMT and ADRA, the Company now has approximately 32 engineers in its research and development groups located in Michigan and Massachusetts. In fiscal 1998 the Company incurred R&D expense of approximately $350,000 related to the continued development of the technology. The Company's ability to continue to maintain the ADRA software so it is compatible with the popular 3D offerings in the marketplace and to continue to improve the PROSPECTOR(TM) technology is critical to its future success. The Company expects to incur R&D expenditures of approximately $3 million in fiscal 1999. CUSTOMERS No single customer accounted for more than 10% of the Company's revenue in fiscal 1998, 1997 or 1996. The Company is not dependent on a single customer, or a few customers, the loss of which would have a material adverse effect on the business. SEASONALITY The first quarter, which begins June 1 and ends August 31, has historically been the slowest quarter of the Company's fiscal year. Management believes this weakness is due primarily to the buying habits of the customers and the fact that the quarter falls during prime vacation periods. EXECUTIVE OFFICERS OF THE REGISTRANT The current executive officers of the Company are as follows: Name Age Position - -------------------------------------------------------------------------------- Mark R. Sweetland 49 President and Chief Executive Officer, Director Timothy J. Weatherford 33 Executive Vice President, Sales, Director Joseph P. Mullaney 41 Vice President, Treasurer and Chief Financial Officer Andrew C. Bristol 38 Vice President, Sales Jeanne Naysmith 50 Vice President, Product Development Executive officers of the Company are elected at the first Board of Directors meeting following the Stockholders' meeting at which the Directors are elected. Following is biographical information with respect to those Executive Officers not identified in the Proxy Statement: Joseph P. Mullaney was appointed Vice President, Treasurer, and Chief Financial Officer of the Company in November 1993. He started with the Company in May 1990 as Assistant Controller and was promoted to Corporate Controller in June 1990. Prior to his employment with SofTech he was employed for seven years at the Boston office of Coopers & Lybrand as an auditor in various staff and management positions. 4 Andrew C. Bristol was appointed Vice President of Sales of the Company upon his hire in April 1997. Prior to his employment with SofTech he was employed for seven years with Parametric Technology Corporation ("PMTC") in various sales and sales management positions within the Great Lakes Region. Jeanne Naysmith was appointed Vice President of Product Development of the Company upon his hire in November 1997. Prior to employment with SofTech he was employed for eighteen years with CIMLINC Incorporated in various sales and management positions, most recently as Vice President with responsibility for the AMT division. ITEM 2 - PROPERTIES The Company leases office space in Grand Rapids and Troy, Michigan; Indianapolis, Indiana; Louisville, Kentucky; Charlotte, North Carolina; Milwaukee, Wisconsin; Cincinnati and Cleveland, Ohio; Yardley, Pennsylvania; Knoxville, Tennessee; Austin, Dallas and Houston, Texas; Maitland, Florida; Windsor, Ontario; Lenexa, Kansas; Mobile, Alabama; Mesa, Arizona; Calverton, Maryland; Nottingham, England, and Ismaning, Germany. The total space leased for these locations is approximately 57,000 square feet. The fiscal 1998 rent was approximately $550,000. In July 1998, the Company signed a five-year lease with an annual cost of approximately $330,000 for 19,500 square feet in Tewksbury, Massachusetts relating to the ADRA acquisition. The Company believes that the current office space is adequate for current and anticipated levels of business activity. As part of an NSG acquisition in fiscal 1995, the Company purchased a 10,000 square foot, two-story office building in Raleigh, North Carolina. This property, while currently being marketed for sale, is being occupied by the Company's Southeast Services Group. ITEM 3 - LEGAL PROCEEDINGS On March 26, 1998, plaintiff Parametric Technology Corporation ("PMTC") filed an action in the Superior Court, Middlesex County, alleging that the Company owes PMTC $905,942 in unpaid maintenance services and other disputed items. Upon filing the complaint, PMTC sought to attach, through a trustee process, that amount of the Company's funds. After a hearing on April 7, 1998, PMTC's motion for trustee process was denied. The Company filed a counterclaim against PMTC asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and intentional interference with contractual and advantageous relations. The counterclaims allege damages in excess of those claimed by PMTC. On May 1, 1998, PMTC filed a second action in the United States District Court for the District of Massachusetts (PMTC v. SofTech, Inc., Civil Action No. 98CV10764-REK) seeking unspecified damages in connection with the Company's alleged infringement of PMTC's copyrights. More recently PMTC has sent a letter to the Company alleging possible claims under the Lanham Act. The Company intends to vigorously defend against these actions, and believes that it has meritorious defenses to these claims. The Company is not a party to any other material legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this Report to a vote of the Stockholders of SofTech. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS The Company's common stock trades on the NASDAQ Stock Market under the symbol "SOFT". At May 31, 1998, there were approximately 311 holders of record of the Company's common stock. This does not include the shareholders that have their shares held in street name with brokers or other agents, that totaled approximately 4.7 million shares, or 74% of outstanding shares. The table below sets forth quarterly high and low bid prices of the common stock for the indicated fiscal periods as provided by the National Quotation Bureau. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. 1998 1997 ---------------------- -------------------- High Low High Low --------------------------------------------------- First Quarter 3 5/8 1 1/2 3 1/2 2 1/2 Second Quarter 2 1/2 1 7/16 3 2 1/2 Third Quarter 3 3/8 2 1/4 4 1/16 2 1/16 Fourth Quarter 7 7/8 3 1/8 3 1/2 2 1/4 The Company distributed the net proceeds from the sale of its Network Systems Group in the form of two distributions. On December 30, 1996, the Company made the first installment in cash at a rate of $1.50 per share to its shareholders of record on 5 December 26, 1996. The second installment was in the form of a distribution of DSN shares at a rate of approximately 0.1031 for each share of SofTech owned on the record date of May 23, 1997. All fractional shares were paid in cash at the assumed market price of $10.00 per share. The distribution date of this second installment was June 6, 1997. It is anticipated that these distributions will qualify for treatment as a distribution in partial liquidation pursuant to Section 302(b)(4) of the Internal Revenue Code of 1986, as amended. See note H to the Consolidated Financial Statements of the Company included herein. The Company has not paid any other cash dividends in the past and it does not anticipate paying cash dividends in the foreseeable future. ITEM 6 - SELECTED FINANCIAL DATA The table set forth below contains certain financial data for each of the last five fiscal years of the Company. This data should be read in conjunction with the detailed information, financial statements and notes thereto, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Fiscal Year (in thousands, except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Revenue from continuing operations $ 19,979 $ 14,704 $ 13,658 $ 10,403 $ 6,662 Income (loss) from continuing operations 1,334 2,282 (456) (18) 966 Diluted earnings per share: Income (loss) from continuing operations .22 .50 (.11) .00 .25 Net income (loss) .22 .09 (1.44) (.60) .70 Basic earnings per share: Income (loss) from continuing operations .23 .52 (.11) (.00) .26 Net income (loss) .23 .10 (1.44) (.60) .73 Weighted average number of shares outstanding - diluted 6,114 4,530 4,076 3,848 3,810 Weighted average number of shares outstanding - basic 5,711 4,410 4,076 3,848 3,650 Working capital (deficit) (7,519) 2,920 12,191 17,929 20,441 Total assets 36,060 10,152 17,037 23,505 22,063 Total liabilities 24,878 3,315 2,080 2,811 1,221 Stockholders' equity 11,182 6,837 14,957 20,694 20,842
Note: The results for fiscal year 1998 include the effect of the acquisitions of the AMT division of CIMLINC Incorporated and the ADRA business of MatrixOne, Inc. in November and May of fiscal 1998, respectively. The results for fiscal years 1998 and 1997 include an investment gain on the disposal of DSN shares of approximately $253,000 and $2.1 million, respectively. The results for fiscal years 1998 and 1997 include the effect of the acquisitions of Computer Graphics Corporation and Ram Design and Graphics Corp. in December and February of fiscal 1997, respectively. See Note I to the Consolidated Financial Statements included herein for certain pro forma information related to these acquisitions. The financial information for fiscal 1996 and prior fiscal years have been restated to reflect the operating results of the Network Systems Group as a discontinued operation. Certain amounts for prior years have been reclassified to conform to the 1998 presentation. 6 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME STATEMENT ANALYSIS The table below presents the relationship, expressed as a percentage, between income and expense items and total revenue, for each of the three years ended May 31, 1998. In addition, the change in those items, again expressed as a percentage, for each of the two years ended May 31, 1998 is presented.
Percentage change Items as a percentage of revenue year to year 1998 1997 1996 1997 to 1998 1996 to 1997 ---------------------------------------------------------------- Revenue Products 43.3% 63.4% 75.4% (7.3)% (9.4)% Services 56.7 36.6 24.6 110.7 59.8 ----- ----- ----- Total revenue 100.0 100.0 100.0 35.9 7.7 Cost of sales Products 18.6 41.7 53.5 (39.6) (16.0) Services 32.6 25.5 18.5 73.9 48.3 ----- ----- ----- Total cost of sales 51.2 67.2 72.0 3.5 .5 Gross margin Products 57.1 34.3 29.1 54.6 17.9 Services 43.0 30.3 24.9 201.9 21.7 Total gross margin 49.1 32.8 28.0 104.1 17.1 R&D and S.G.& A 41.8 31.8 31.2 79.4 9.5 Gain on investments 1.3 14.5 -- (88.1) N/A Interest expense 1.3 -- -- 100.0 N/A ----- ----- ----- Income (loss) from continuing operations before income taxes 7.3 15.5 (3.2) (35.9) 622.7 Income tax provision .6 -- .1 N/A (115.0) ----- ----- ----- Income (loss) from continuing operations 6.7 15.5 (3.3) (41.5) 600.4 ===== ===== =====
DESCRIPTION OF THE BUSINESS SofTech was formed in 1969 and its stock has been publicly listed on the NASDAQ Exchange since 1981 under the symbol "SOFT". For much of its past until the disposition of the Government Systems Division ("GSD") in December 1993, the Company's primary business was that of customized software development for the Department of Defense. In June 1996 the Company devised a strategy to focus all of its resources on the CAD/CAM and PDM marketplace and either discontinued or disposed of all of its operations that were not related to that market. In December 1996 and in June 1997 the Company returned approximately $2.56 per share of capital to its shareholders in the form of distributions that resulted from the sale of the non-core business units. In June 1996 the Company had 6 offices in 5 states marketing the Pro/ENGINEER(TM) software as its primary offering. As more fully detailed in the Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under the caption "PRODUCT TRANSITION", effective September 30, 1996 the Company was no longer allowed to resell Pro/ENGINEER(TM) but instead was licensed by PMTC to market a mid-range offering known as PT/Modeler(TM). The Company marketed this product through September 30, 1997 when the distribution agreement was terminated and was not renewed. As part of the decision to focus all of its resources on the CAD/CAM and PDM marketplace in June 1996, the Company developed a growth strategy to be pursued through internal growth and/or acquisitions aimed at reducing its dependence on technology providers such as PMTC. In fiscal 1997 the Company acquired two CAD/CAM services-only businesses. In fiscal 1998 the Company acquired two CAD/CAM technology companies, a CAD/CAM and PDM services business and a Structural Dynamics Research Corporation ("SDRC") reseller. As a result, the Company now has 25 offices in 16 states and 4 offices in Western Europe along with indirect distribution relationships in Asia. Most importantly, the Company now possesses technology of its own, more than 100 degreed mechanical engineers and a stable, recurring service business that can reduce the impact of fluctuations in the software order flow from quarter to quarter due to forces outside the Company's control. 7 RESULTS OF OPERATIONS Total revenue increased from $14.7 million in fiscal 1997 to approximately $20.0 million in fiscal 1998, an increase of 36%. The increase was primarily the result of the acquisitions of the two services businesses in the last half of fiscal 1997 that were included in fiscal 1998 results for the full year and the two technology companies acquired in fiscal 1998. The technologies the Company now owns through these acquisitions have essentially become the primary technology offerings although reseller agreements with third party technology companies is expected to be of continued importance. The dependence on the PMTC distribution agreement has been eliminated with these acquisitions. Total revenue increased from $13.7 million in fiscal 1996 to $14.7 million in fiscal 1997, an increase of 8%. This increase in revenue was primarily the result of the acquisitions of the services-only businesses during fiscal 1997 offset by a decrease in revenue from hardware and software sales resulting from the transition to the mid-range software offering as discussed in the 1997 Form 10-K filing in "Item 1 - BUSINESS" under the caption "PRODUCT TRANSITION". Product revenue, which includes revenue from the sale of hardware and software, decreased approximately 7% in fiscal 1998 from fiscal 1997. This decrease is the result of the termination of the PMTC distribution agreement in September 1997, the cessation of the Company's marketing of PMTC's PT/Modeler(TM) product and the shift to the sale of the Company's own technology acquired in the fiscal 1998 acquisitions of the Advanced Manufacturing Technology division of CIMLINC ("AMT") and the Adra Systems business of Matrix One, Incorporated ("ADRA"). The market for the PT/Modeler(TM) software is a mainstream 3-D market and the sale price for this software was approximately $4,000. The CAM technology acquired by the Company in the AMT acquisition has a much higher sale price, approximately $16,000 per unit, and is marketed primarily to the Plastic Injection Molding and the Tool and Die Industries. This specialized product offered to a niche market, sold on the basis of improved throughput, allows for a higher sales price per unit than the 3D design software previously marketed by the Company. Product revenue decreased approximately 9% in fiscal 1997 from fiscal 1996, also. This decrease resulted primarily from the Company's transition on October 1, 1996 from being a reseller of Pro/ENGINEER(TM) software sold primarily on UNIX hardware to the PT/Modeler(TM) family of software operating exclusively on Intel based machines. Service revenue increased approximately 111% from fiscal 1997 to fiscal 1998. This increase of approximately $6.0 million is the result of the two services-only businesses acquired in the second half of fiscal 1997 contributing for the entire year in fiscal 1998, the expansion of the Company's Consulting Services business and the services revenue generated from the acquisitions of the technology companies (AMT and ADRA) in fiscal 1998. Service revenue increased nearly 60% from fiscal 1996 to fiscal 1997, or about $2.0 million. This increase was primarily the result of the fiscal 1997 acquisitions of the services-only businesses discussed previously. Product gross margins improved to 57% for fiscal 1998 as compared to 34% in fiscal 1997. This improvement is the result of the termination of the PMTC distribution agreement in September 1997, the sale of the Company's own technology beginning in November 1997 which has a gross margin of about 90% and the reduced hardware revenue generated in fiscal 1998 as compared to fiscal 1997. The fiscal 1998 product gross margins increased from 41% and 44% in Q1 and Q2, respectively, to 62% and 67% in Q3 and Q4, respectively, with the technology acquisitions. It is anticipated that the product gross margins will continue to increase in fiscal 1999 as an increased percentage of product revenue is derived from the sale of the Company's own software technology. Product gross margin improved to 34% in fiscal 1997 from 29% in fiscal 1996. The increased margin was the result of the transition to the PT/Modeler(TM) family of products with a 75% margin and an indirect commission included in product revenue. This indirect commission was earned by the Company for PMTC direct sales of Pro/ENGINEER(TM) software into the Company's Pro/ENGINEER(TM) customer base for the period from October 1, 1996 to December 31, 1996. The Pro/ENGINEER(TM) software sold by the Company in fiscal 1996 had a margin of between 37% and 40%. Service gross margins improved to 43% in fiscal 1998 as compared to 30% in fiscal 1997. This improvement is partially the result of the Company's acquisition of AMT in November and the higher margins enjoyed by that business unit on service offerings as compared to the Company's fiscal 1997 experience. In addition, the increase in business generated from the Consulting Services group, which carries a higher bill rate, and the improved average billing rates experienced by the service group overall as a result of an increased demand for these type of services within the marketplace, have caused the service margin to increase in fiscal 1998 relative to 1997. Service gross margins improved to 30% in fiscal 1997 as compared to 25% in fiscal 1996. The improvement from fiscal 1996 to 1997 was due primarily to the additional higher margin services revenue generated from the fiscal 1997 acquisitions of the services-only businesses. Selling, general and administrative expenses increased approximately 72% in fiscal 1998 from 1997, an increase of approximately $3.3 million. Approximately 64% or $2.1 million of that increase was the result of increased headcount related to the acquisitions and internal expansion over the last two years. Infrastructure expenses related to facilities accounted for approximately $600,000 of the increase and non-cash expenses primarily related to amortization of goodwill and software accounted for approximately $500,000 of the increase. Selling, general and administrative expense for fiscal 1997 increased 9% from fiscal 1996. A one-time charge of $426,000 was included in fiscal 1996 selling, general and administrative expenses. Before this one-time charge the increase from 1996 to 1997 was approximately 21% which was the result of increased operating expenses associated with the acquisitions of the services-only businesses in fiscal 1997. 8 In fiscal 1998 and fiscal 1997, the results from continuing operations included realized gains on available-for-sale securities of $253,000 and $2,126,000, respectively. These gains resulted from the distribution of shares received in the sale of the Company's NSG business in September 1996 as described in the Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under the caption `DISCONTINUED OPERATIONS" and in "Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" under the caption "RESULTS OF OPERATIONS". The effective tax rate for fiscal 1998 was approximately 9%, which included a current federal tax provision of $164,000 partially offset by a deferred federal tax benefit of $125,000. The current federal tax provision was reduced by the use of net operating loss carryforward benefits. In addition, the effective tax rate includes foreign taxes of $25,000 and state and local taxes of $63,000. The effective tax rate for fiscal 1997 was zero as a result of a federal tax benefit of $74,000 offsetting a state tax provision of $71,000. The federal tax benefit was generated from a current federal tax provision of $105,000 which was offset by the recovery of $179,000 of taxes paid in fiscal 1995 through the utilization of net operating losses ("NOL") carried back. The effective tax rate in fiscal 1996 was 5% that related primarily to state and local taxes. As of May 31, 1998, the Company has research and development tax credits of approximately $646,000 available to offset future federal taxes that may be payable. CAPITAL RESOURCES AND LIQUIDITY The Company's cash position as of May 31, 1998 was $429,000. This represents a decrease of approximately $938,000 from the fiscal 1997 year-end balance of $1,367,000. In addition, as described below, the Company has substantially increased its debt level from fiscal year end 1997. These short and long term debt arrangements were entered into in order to acquire the ADRA business. At fiscal year end 1998 the Company had short-term borrowings of approximately $9.7 million. These borrowings included a $4.4 million short term note due on or before July 6, 1998 related to the ADRA acquisition, $2.6 million of borrowings under the Company's $4.0 million line of credit arrangement and a $2.5 million short term bridge loan extended by Greenleaf Capital to facilitate the ADRA acquisition. The President of Greenleaf Capital is also a member of the Board of Directors of the Company. In addition to the short-term borrowings, the Company also entered into a long term borrowing arrangement with Greenleaf Capital whereby the Company received $5.0 million repayable in approximately four years. These funds, together with the senior facility described below, were utilized to acquire the ADRA business. Subsequent to fiscal year end, the Company entered into a $9.0 million senior loan facility. The proceeds from this senior facility were utilized to pay off the $4.4 million short-term note and to pay off the borrowings under the $4.0 million line of credit. This $4.0 million line of credit has been terminated. Approximately $1.0 million of the bridge loan was also paid down with the proceeds from the senior facility. The short and long term debt of approximately $15.5 million (including the $9.0 million senior facility entered into subsequent to fiscal year end) going into fiscal 1999 adds an element of financial risk that the Company has not experienced in the past. The terms of the senior facility require certain levels of profitability on a quarterly basis in order to remain in compliance with the loan covenants. In addition, the Company is completely dependent on cash flow from operations to meet its near term working capital needs and to make debt service payments. The monthly interest expense is approximately $130,000 on these borrowings. In addition, the term loan portion of the senior facility requires principal repayments of $375,000 on a quarterly basis beginning August 31, 1998. As noted previously, the loan covenants on the senior facility require that the Company maintain certain minimum financial ratios in order to remain in compliance with the loan terms. The key financial ratios are summarized as follows: o Operating Cash Flow expressed as a ratio to Debt Service (principal and interest expense) must be in excess of 1.25; o Total Funded Debt expressed as a ratio to EBITDA (earnings before interest, taxes, depreciation and amortization) may not exceed 2.5:1; o EBITDA expressed as a ratio to Interest Expense may not be less than 1.75:1; and o EBIT must be in excess of $1,250,000 for the fiscal quarter ended February 28, 1999 and $1,500,000 for each fiscal quarter thereafter. While the debt load and the loan covenants summarized above add a significant level of financial risk to the Company, the financial model which assumes approximately 5% growth from the ADRA business, approximately 15% growth for the AMT business and 20% growth for the services business generates sufficient cash flow and profitability to meet the debt service requirements, provide working capital and increase the cash balance throughout the year. However, future operating results are dependent on a number of factors, many of which are outside the control of the Company. These factors include, but are not limited to, market acceptance of the Company's PROSPECTOR(TM) technology, continued revenue generated from the CADRA(TM) product family, the ability to assimilate the acquisitions into the Company, the ability of senior management to manage the expected growth and the ability of the Company to attract and retain qualified personnel both in our existing markets and in new office locations. Approximately 25% of the CADRA(TM) revenue has previously been 9 generated from the Asian market and part of the future growth of the PROSPECTOR(TM) technology revenue is anticipated from that market. It is anticipated that the growth projected from the Asian market can be replaced with better than forecasted growth from North America and Western Europe in the near term, however, prolonged instability in the Asian market could have a detrimental impact on growth in fiscal years beyond 1999. YEAR 2000 In general, the "Year 2000 Issue" is a looming problem for many companies in that many computer programs have been written using two rather than four digits to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. With the Company's acquisitions in fiscal 1998 it became a software developer and owner of technology for the first time. As part of those acquisitions, Sellers represented through discussions and Company management attempted to verify through due diligence procedures that the technology acquired in each acquisition was Year 2000 compliant. Management has continued to verify such compliance since the acquisitions. It is management's assessment that the Company's technology, to the extent that it is time-sensitive, allows for date recognition using four digits thereby reducing or eliminating the risk associated with the Year 2000 issue for its own technology. However, the Company has not determined the impact of third party technologies which interface and communicate with its technology at its customers' sites. During fiscal 1999, the Company will replace its financial computer software including all underlying subledger modules which will be Year 2000 compliant. The third party package chosen is in the process of being implemented. The expected out-of-pocket cost of purchasing this package is estimated to be approximately $150,000. The expected cost of implementing this package, which will be performed by the Company's internal resources, is not expected to be material. The Company has been working with its significant suppliers and customers to determine the extent to which the Company may be vulnerable to a failure by any of these third parties to correct their Year 2000 problems. There can be no assurance that the technology of other companies on which the Company's systems and technologies rely will be timely converted and will not have an adverse effect on the Company's operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are included herein and are indexed under item 14(a)(1)-(2). ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under "Nomination and Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement to be filed in connection with the Company's 1998 annual meeting is incorporated by reference herein. The current executive officers of the Company are set forth under the caption "Executive Officers" in ITEM 1 of this Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION The information under "Nomination and Election of Directors" will be included in the Company's definitive proxy statement, to be filed in conjunction with the Company's 1998 annual meeting, and is incorporated by reference herein. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under "Security Ownership of Management and Principal Stockholders" in the Company's definitive proxy statement, to be filed in connection with the Company's 1998 annual meeting, is incorporated by reference herein. 10 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under "Nomination and Election of Directors" in the Company's definitive proxy statement, to be filed in connection with the Company's 1998 annual meeting, is incorporated by reference herein. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following items are filed as part of this report: (1) Consolidated Financial Statements: Report of Ernst & Young L.L.P., Independent Auditors 13 Report of Coopers & Lybrand LLP, Independent Accountants 14 Consolidated Statements of Operations and Retained Earnings (Deficit) - Years ended May 31, 1998, 1997 and 1996 15 Consolidated Balance Sheets - May 31, 1998 and 1997 16 Consolidated Statements of Cash Flows - Years ended May 31, 1998, 1997 and 1996 17 Notes to Consolidated Financial Statements 18-27 (2) Consolidated Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 28 The reports of the registrant's independent accountants with respect to the above-listed financial statements and financial statement schedule appear on pages 13 and 14 of this report. All other financial statements and schedules not listed have been omitted because they are either not required or not applicable or because the required information has been included elsewhere in the financial statements or footnotes. (3) Exhibits: (2)(i) Asset Purchase Agreement by and among SofTech, Inc., Information Decisions, Inc., System Constructs, Inc., and Data Systems Network Corporation filed as Exhibit 2.1 to Form 8-K, dated September 12, 1996, is incorporated herein by reference. (2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and among SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation, and the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to Form S-3, dated June 30, 1997, is incorporated herein by reference. (2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated herein by reference. (2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to Form 8-K, dated November 10, 1997, is incorporated herein by reference. (2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems, Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form 8-K, dated May 7, 1998, is incorporated herein by reference. (3)(i) Articles of Organization filed as Exhibit 3(a) to Registration Statement No. 2-73261 are incorporated herein by reference. Amendment to the Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal quarter ended November 28, 1986 is incorporated by reference. (3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K are incorporated herein by reference. Reference is made to Exhibit (3)(a) above, which is incorporated by reference. Form of common stock certificate, filed as Exhibit 4(A), to Registration statement number 2-73261, is incorporated by reference. (10)(i) Board resolutions relating to 1981 Non-qualified Stock Option Plan, 1981 Incentive Stock Option Plan, and forms of options, filed as Exhibits 28(A) and 28(B) to registration statement No. 2-82554, are incorporated by reference. Also, the Company's 1984 Stock Option Plan is incorporated by reference to Exhibit 28(c) to Registration Statement 33-5782. (10)(ii) Imperial Bank Credit Agreement dated July 1, 1998, filed herewith. (10)(iii) Imperial Bank Warrant Agreement dated July 1, 1998, filed herewith. (21) Subsidiaries of the Registrant, filed herewith. (23.1) Consent of Ernst & Young LLP, filed herewith. (23.2) Consent of PricewaterhouseCoopers LLP, filed herewith. 11 (27) Financial Data Schedule, filed herewith. (b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on May 22, 1998 pursuant to Item 7 of Form 8-K, reporting the purchase of substantially all of the net assets of the Adra Systems business of MatrixOne, Incorporated on May 7, 1998. In addition, the Company filed a Form 8-K/A with the Securities and Exchange Commission on July 21, 1998 providing the required audited financial statements of the Adra Systems business. (c) The Company hereby files, as part of this Form 10-K, the exhibits listed in Item 14(a)(3) above that are not incorporated by reference. (d) The Company hereby files, as part of this Form 10-K, the consolidated financial statement schedule listed in Item 14(a)(2) above. 12 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders SofTech, Inc. We have audited the accompanying consolidated balance sheet of SofTech, Inc. and subsidiaries as of May 31, 1998 and the related consolidated statements of operations and retained earnings (deficit) and cash flows for the year then ended. Our audit also included the information for the year ended May 31, 1998, included in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SofTech, Inc. and subsidiaries as of May 31, 1998, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Grand Rapids, Michigan August 10, 1998 13 REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders SofTech, Inc. We have audited the accompanying consolidated balance sheet of SofTech, Inc. as of May 31, 1997, and the related consolidated statements of operations and retained earnings (deficit) and cash flows for the two years in the period ended May 31, 1997 and the financial statement schedule for the years ended May 31, 1997 and 1996 listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SofTech, Inc. as of May 31, 1997 and the consolidated results of its operations and its cash flows for each of the two years in the period ended May 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has generated minimal operating income and the Company's product offerings have been limited by a major supplier. These factors raise substantial doubt as to the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A under the caption "Plan of Operations." The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts August 7, 1997 14 SOFTECH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) For the Years Ended May 31,
1998 1997 1996 -------- -------- -------- (in thousands, except per share data) Revenue: Products $ 8,652 $ 9,329 $ 10,294 Services 11,327 5,375 3,364 -------- -------- -------- Total Revenue 19,979 14,704 13,658 Cost of sales: Cost of products sold 3,708 6,133 7,303 Cost of services provided 6,454 3,761 2,526 -------- -------- -------- Total Cost of sales 10,162 9,894 9,829 Gross margin 9,817 4,810 3,829 Research and development expenses 354 -- -- Selling, general and administrative 8,001 4,657 4,265 -------- -------- -------- Income (loss) from operations 1,462 153 (436) Gain on available-for-sale securities 253 2,126 -- Interest expense 254 -- -- -------- -------- -------- Income (loss) from continuing operations before income taxes 1,461 2,279 (436) Provision (benefit) for income taxes (Note B) 127 (3) 20 -------- -------- -------- Income (loss) from continuing operations 1,334 2,282 (456) Discontinued operations (Note H): Loss from discontinued operations (less applicable provision (benefit) for income taxes of $(294) in 1997 and $132 in 1996) -- (1,587) (4,701) Loss from disposal (net of applicable benefit for income taxes of $50 in 1997 and $0 in 1996) -- (269) (700) -------- -------- -------- Net income (loss) 1,334 426 (5,857) Retained earnings (deficit), beginning of year (52) (478) 5,379 -------- -------- -------- Retained earnings (deficit), end of year $ 1,282 $ (52) $ (478) -------- -------- -------- Per Share Data (Note A): Per Common Share - Diluted: Income (loss) from continuing operations $ 0.22 $ 0.50 $ (0.11) ======== ======== ======== Net income (loss) $ 0.22 $ 0.09 $ (1.44) ======== ======== ======== Per Common Share - Basic: Income (loss) from continuing operations $ 0.23 $ 0.52 $ (0.11) ======== ======== ======== Net income (loss) $ 0.23 $ 0.10 $ (1.44) ======== ======== ========
See accompanying notes to consolidated financial statements. 15 SOFTECH, INC. CONSOLIDATED BALANCE SHEETS AS OF MAY 31,
1998 1997 -------- -------- (in thousands, except share data) Assets: Current assets: Cash and cash equivalents $ 429 $ 580 Available-for-sale securities (Note A) -- 787 Accounts receivable (less allowance of $649 and $305 in 1998 and 1997, respectively) 9,290 3,300 Unbilled costs and fees 1,153 491 Inventory 338 378 Other receivables 232 263 Current portion of notes receivable from officers 421 -- Prepaid expenses and other assets 233 264 Deferred income taxes (Note B) 125 -- -------- -------- Total current assets 12,221 6,063 -------- -------- Property and equipment, at cost: Data processing equipment 2,849 1,646 Office furniture 216 120 Leasehold improvements 89 62 Land and building 583 514 -------- -------- Total property and equipment 3,737 2,342 Less accumulated depreciation and amortization 1,457 864 -------- -------- 2,280 1,478 Other assets: Capitalized software costs, less amortization of $184 (Note A) 13,816 -- Goodwill, net (Note A) 7,252 2,497 Notes receivable from officers, less current portion 368 -- Other assets 123 114 -------- -------- $ 36,060 $ 10,152 ======== ======== Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 2,386 $ 1,664 Accrued expenses 3,470 1,024 Deferred maintenance revenue 3,522 383 Accrued income taxes 335 -- Net liabilities (assets) of discontinued operations (Note H) 338 (6) Current portion of capital lease obligations (Note G) 180 78 Current portion of long term debt (Note F) 9,509 -- -------- -------- Total current liabilities 19,740 3,143 -------- -------- Long-term liabilities: Capital lease obligations, less current portion (Note G) 238 -- Long-term debt, less current portion (Note F) 4,900 172 -------- -------- Total long term liabilities 5,138 172 -------- -------- Commitments and contingencies (Notes G and J) Stockholders' equity (Notes D and E): Common stock, $.10 par value; authorized 10,000,000 shares; issued 6,793,699 and 5,678,433 shares in 1998 and 1997, respectively 679 568 Capital in excess of par value 10,703 7,488 Retained earnings (deficit) 1,282 (52) Unrealized gain on available-for-sale securities -- 315 Treasury stock, 443,157 shares, at cost (deduct) (1,482) (1,482) -------- -------- Total stockholders' equity 11,182 6,837 -------- -------- $ 36,060 $ 10,152 ======== ========
See accompanying notes to consolidated financial statements. 16 SOFTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended May 31,
1998 1997 1996 -------- -------- -------- (in thousands) Cash flows from operating activities: Net income (loss) $ 1,334 $ 426 $ (5,857) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 1,455 907 708 Loss on sale of NSG -- 269 700 Gain on sale of available-for-sale securities (253) (2,126) -- Gain on disposal of equipment -- -- (60) Provision (benefit) for deferred income taxes (125) -- 593 Change in operating assets and liabilities, net of effects of businesses acquired: Accounts receivable and unbilled costs and fees (3,398) (68) 412 Inventory 160 155 (51) Other receivables 95 82 537 Prepaid expenses and other assets 264 (187) 56 Accounts payable and accrued expenses (571) 452 (731) Deferred maintenance revenue (75) (286) -- Net assets/liabilities of discontinued operations 344 4,650 4,379 -------- -------- -------- Total adjustments (2,104) 3,848 6,543 -------- -------- -------- Net cash provided (used) by operating activities (770) 4,274 686 -------- -------- -------- Cash flows from investing activities: Capital expenditures (770) (571) (419) Proceeds from sale of capital equipment -- -- 248 Proceeds from sale of available-for-sale securities 810 26 -- Payments for business acquisitions (13,315) (151) (28) Loans to officers (789) -- -- Other investing activities (10) -- 45 -------- -------- -------- Net cash used by investing activities (14,074) (696) (154) -------- -------- -------- Cash flows from financing activities: Borrowings under subordinated debt agreements 7,500 -- -- Proceeds from bank line of credit 2,778 -- -- Note payable 4,400 -- -- Proceeds from exercise of stock options 16 114 112 Proceeds from capital lease financing 300 145 -- Principal payments on capital lease obligations (132) (18) -- Payments on bank line of credit (169) -- -- Payment of cash distribution to shareholders -- (6,256) -- -------- -------- -------- Net cash provided (used) by financing activities 14,693 (6,015) 112 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (151) (2,437) 644 Cash and cash equivalents, beginning of year 580 3,017 2,373 -------- -------- -------- Cash and cash equivalents, end of year $ 429 $ 580 $ 3,017 ======== ======== ======== Supplemental disclosures of cash flow information: Non cash investing activities: Fair value of shares issued in connection with acquisitions $ 3,211 $ 1,193 $ 8 Income taxes paid $ 70 $ 51 $ 33 Interest paid $ 140 $ -- $ --
( ) Denotes reduction in cash and cash equivalents. See accompanying notes to consolidated financial statements. 17 SOFTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements of the Company include the accounts of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc. (IDI), Softech Technologies Ltd., Adra Systems, GmbH, Ram Design and Graphics Corp (RAM), System Constructs, Inc. (SCI), SofTech Investments, Inc. ("SII"), Compass, Inc. (Compass) and AMG Associates, Inc. (AMG). SCI, SII, Compass and AMG are all inactive subsidiaries. The Network Systems Group (NSG) of IDI and SCI were operations sold in September 1996 and are therefore presented as discontinued operations (See Note H). All significant intercompany transactions have been eliminated upon consolidation. BUSINESS TRANSITION: At May 31, 1997, the Company faced two significant risks associated with its operations. First, the relationship with Parametric Technology Corporation (NASDAQ:PMTC), the technology provider of the Company's core software offering, was uncertain. Second, there was uncertainty whether the Company had sufficient financial resources given the Company's history, minimal operating income and dependence on the PMTC relationship. During 1998, the Company elected not to renew and terminated its reseller agreement with PMTC and acquired four businesses including two CAD/CAM technology companies, a CAD/CAM and Product Data Management ("PDM") services business and a Structural Dynamics Research Corporation ("SDRC") reseller. As a result, the Company has eliminated its dependence upon technology providers and now possesses technology of its own, more than 100 degreed mechanical engineers, and a stable, recurring service business that can reduce the impact of fluctuations in the software order flow from quarter to quarter due to forces outside the Company's control. The Company now has 25 offices in 16 states and 4 offices in Western Europe along with indirect distribution relationships in Asia. In addition, subsequent to year end, the Company entered into a senior credit facility to refinance short-term debt obligations outstanding at May 31, 1998. INDUSTRY SEGMENT AND CONCENTRATION OF RISKS: The Company operates in one industry segment and is engaged in the development, marketing, distribution and support of CAD/CAM and Product Data Management ("PDM") computer solutions. As the Company has expanded and evolved into more of a service provider, its operations are no longer as dependent on one or a small group of vendors. In addition, the Company believes there is no concentration of risk with any single customer or small group of customers whose failure or nonperformance would materially affect the Company's results. No customer exceeds ten percent of net sales. Foreign operations acquired in 1998 represent approximately 4% of consolidated revenues and assets. AVAILABLE-FOR-SALE SECURITIES: The Company classified its holdings of DSN stock as available-for-sale as of May 31, 1997. Available-for-sale securities are stated at fair value with unrealized gains and losses included in stockholders' equity. Realized gains and losses are included in other income (expense). The cost of securities sold is based on the specific identification method. Such holdings were sold in fiscal 1998. INVENTORY: Inventory consists of equipment purchased for resale and service parts and is stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. The Company provides for depreciation and amortization on a straight-line basis over the following estimated useful lives: Data processing equipment 3-5 years Office furniture 5-10 years Leasehold improvements Lesser of useful life or life of lease Depreciation expense, including amortization of assets under capital lease, was approximately $602,000, $328,000, and $217,000 for fiscal 1998, 1997 and 1996, respectively. Maintenance and repairs are charged to expense as incurred; betterments are capitalized. At the time property and equipment are retired, sold, or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts. Any resulting gain or loss on disposal is credited or charged to income. 18 INCOME TAXES: The provision for income taxes is based on the earnings reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. REVENUE RECOGNITION: Revenue from software license and service revenue is accounted for in accordance with The AICPA's Statement of Position (SOP) 91-1. Software license revenue is recognized upon delivery, provided that there are no significant obligations remaining and collectibility of the revenue is probable. Service revenue from customer maintenance fees for post-contract support is recognized ratably over the maintenance term, which is typically 12 months. Other service revenue from engineering services, training, installation and consulting is recognized as the related service is performed. Revenue from third party software and computer system sales is recognized upon shipment, or installation and acceptance, if significant performance obligations are required. Deferred revenue represents payments received by the Company in advance of product delivery or service performance. Effective in fiscal 1999, the Company is required to adopt SOP 97-2, "Software Revenue Recognition." The effect of adoption is not expected to have a significant effect on the Company's revenue recognition policies. CAPITALIZED SOFTWARE COSTS: The Company capitalizes certain costs incurred to internally develop and/or purchase software that is licensed to customers. Capitalization of internally developed software begins upon the establishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The Company evaluates the realizability and the related periods of amoritization on a regular basis. During fiscal 1998, the Company capitalized $14 million of software development costs in connection with the acquisitions of AMT and ADRA (see Note I). Such costs are amortized over estimated useful lives ranging from eight to fifteen years using both the ratio of current gross revenues for the product to the total of current and anticipated future gross revenues and straight line methods. During fiscal 1998, the Company amortized approximately $184,000 of such costs to cost of product sold. GOODWILL: Goodwill represents the excess of cost over the fair value of net assets of businesses acquired and is amortized on a straight-line basis over periods ranging from five to fifteen years. Accumulated amortization of goodwill was $2,093,000 and $1,260,000 at May 31, 1998 and 1997, respectively. Included in the loss on disposal of NSG in the year ended May 31, 1996 is a write down of approximately $1.6 million of goodwill acquired through business combinations. The carrying value of all intangible assets is periodically reviewed by the Company, and if necessary, impairments of values are recognized. If there is a permanent impairment in the carrying value, the amount of such impairment is computed by comparing the anticipated discounted future operating cash flows of the acquired business to the carrying value of the assets. In performing this analysis, the Company considers current results and trends, future prospects and other economic factors. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS: The Company's financial instruments, as defined by Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments", consist of cash, accounts receivable, notes receivable, accounts payable, and short- and long-term debt. The Company's estimate of the fair value of these financial instruments approximates their carrying amounts at May 31, 1998 and 1997. The fair value of the long-term debt was determined using discounted cash flow analyses and current interest rates for similar instruments. FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's foreign operations (England, France and Germany), which were all acquired during fiscal 1998, is the local currency. As a result, assets and liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average exchange rates. Foreign currency gains and losses arising from transactions were included in operations in fiscal 1998, but were not significant. Translation gains and losses were not significant in fiscal 1998. NET INCOME (LOSS) PER COMMON SHARE: In February of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share". SFAS 128 simplifies the standards for computing earnings per share, replacing the presentation of primary earnings per share with a presentation of basic earnings per share. SFAS 128 also requires dual presentation of basic and 19 diluted earnings per share on the face of the statement of operations for all entities with complex capital structures. Basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed similar to fully diluted earnings per share pursuant to APB Opinion No. 15, "Earnings per Share", which is superseded by SFAS 128. All earnings per share amounts for all periods have been restated to conform to SFAS 128 requirements. The following table sets forth the reconciliation of weighted average shares used in the computation of basic and diluted earnings per share: 1998 1997 1996 --------- --------- --------- Basic-weighted average shares outstanding during the year 5,710,917 4,410,099 4,075,943 Effect of employee stock options 402,924 119,777 -- --------- --------- --------- Diluted 6,113,841 4,529,876 4,075,943 ========= ========= ========= Options to purchase shares of common stock totaling 1,027,509, 575,323, and 637,600, in 1998, 1997 and 1996, respectively, and common stock warrants have not been included in the denominator for computation of diluted earnings per share because related exercise prices were greater than the average market prices for the period and, therefore, were antidilutive. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain amounts in 1997 and 1996 have been reclassified to conform with the presentation used in 1998. NEW ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of "Comprehensive Income" which is the total of net income and all other non-owner changes in stockholders' equity and its components. SFAS 130 is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. The Company will adopt the standard in fiscal 1999 and does not expect comprehensive income to differ significantly from previously reported net income. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131, which supersedes SFAS Nos. 14, 18, 24 and 30, establishes new standards for segment reporting in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. SFAS 131 is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. The Company will adopt the standard in fiscal 1999 and does not expect the new standard to have a significant effect on previously reported information. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities," which provides a consistent standard for recognition and measurement of derivatives and hedging activities. The Company is required to adopt the standard in fiscal 2001 and is in the process of evaluating SFAS 133 and its impact. B. INCOME TAXES: The provision for income taxes includes the following: For the Years ended May 31, (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Federal $ 164 $ (74) $-- Foreign 25 -- -- State and Local 63 71 20 ----- ----- ---- 252 (3) 20 Deferred (125) -- -- ----- ----- ---- $ 127 $ (3) $ 20 ===== ===== ==== 20 The provision (benefit) for federal income taxes was reduced due to the use of approximately $2.6 million and $1.0 million in net operating loss benefits in 1998 and 1997, respectively. At May 31, 1998, the Company had tax credit carryforwards generated from research and development activities of $646,000 that are available to offset against income taxes and expire from 2002 to 2006. In addition, an alternative minimum tax credit of $155,000 that has no expiration date was also available. The Company's effective tax rates can be reconciled to the federal statutory tax rates as follows: For the Years ended May 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory rate 34% 34% (34)% State and local taxes 3 2 3 Benefit of previously unrecognized net operating loss and credit carryforwards (27) (33) -- Expenses not deductible for tax purposes 8 -- -- Valuation reserve (9) -- 35 Other -- (3) 1 ---- ---- ---- Effective tax rates 9% 0% 5% ==== ==== ==== Deferred tax assets (liabilities) were comprised of the following at May 31: (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets (liabilities): Depreciation $ (8) $ (13) Net operating loss carryovers -- 877 Tax credits 780 981 Receivables 175 394 Gain on sale of stock -- (917) Vacation accrual 56 66 Differences in book and tax bases of assets of acquired businesses 514 299 Reserve for loss on disposal -- 95 Other -- 6 ------- ------- Deferred tax assets 1,517 1,788 Less: valuation allowance (1,392) (1,788) ------- ------- Net deferred tax assets $ 125 $ 0 ======= ======= Due to the uncertainty surrounding the realization of certain favorable tax attributes in future tax returns, the Company has established a valuation reserve against a portion of the otherwise recognizable deferred tax assets. C. EMPLOYEE RETIREMENT PLANS: The Company has an Internal Revenue Code Section 401(k) plan covering substantially all employees. The aggregate retirement plan expense, which consists of an employer match of a portion of employee voluntary contributions, for fiscal 1998, 1997 and 1996 was $59,000, $49,000 and $33,000, respectively. Four former key employees participate in a defined supplemental retirement plan that was established to supplement retirement benefits from other sources such as social security and the Company's defined contribution retirement plan. During fiscal year 1996 the four beneficiaries agreed to a change in benefit. The Company has purchased irrevocable, non-participating annuity contracts to fund the future benefits due these four individuals. The net gain realized from this settlement was $286,000 and was included in the 1996 results from discontinued operations. D. EMPLOYEE STOCK PLANS: The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the granting of both incentive and non-qualified options. Incentive stock options granted under the Plan have an exercise price not less than fair market value of the stock at the grant date and have vesting schedules as determined by the Company's Board of Directors. The Plan permits the granting of non-qualified options at exercise prices and vesting schedules as determined by the Board of Directors. There were options for 144,167 shares available for future grants under the 1994 Plan at May 31, 1998. The following are the shares exercisable at the corresponding weighted average exercise price at May 31, 1998, 1997 and 1996, respectively: 316,304 at $1.98; 212,880 at $2.19; and 220,530 at $5.75. 21 Information for the years 1996 through 1998 with respect to this plan is as follows: Weighted Number of Average Stock Options Shares Option Price - -------------------------------------------------------------------------------- Outstanding at May 31, 1995 599,800 $5.89 Options granted 165,000 4.54 Options terminated (167,700) 5.40 Options exercised (35,500) 2.95 -------- Outstanding at May 31, 1996 561,600 5.82 Options granted 549,000 1.32 Options terminated (415,500) 5.48 -------- Outstanding at May 31, 1997 695,100 1.60 Options granted 449,000 2.59 Options terminated (153,167) 1.61 Options exercised (18,000) 0.89 -------- Outstanding at May 31, 1998 972,933 $2.07 ======== The following table summarizes information about stock options outstanding at May 31, 1998 under the 1994 Plan:
Options Outstanding Options Exercisable -------------------------------- ------------------------------ Weighted Options Average Weighted Options Weighted Exercise Outstanding at Contractual Average Exercisable at Average Price Range May 31, 1998 Remaining Life Exercise Price May 31, 1998 Exercise Price - ---------------------------------------------------------------------------------------------------------- $0.010 to $0.440 43,000 1.22 years $0.37 43,000 $0.37 $1.065 to $1.75 460,833 4.75 years 1.24 124.604 1.07 $1.878 to $2.375 294,000 7.12 years 2.07 68,200 1.91 $3.940 to $5.063 175,100 3.22 years 4.70 80,500 4.32 ------- ------- Total 972,933 316,304 ======= =======
In addition, there were 460,000 options granted outside of the plan during fiscal 1998 to employees of AMT and ADRA; companies acquired during the year. At May 31, 1998, 457,500 of these options were outstanding, of which 91,500 were exercisable, at a weighted average exercise price of $3.64. The 1994 Plan calls for the adjustment of option exercise prices to reflect equity transactions such as stock issuances, dividend distributions and stock splits. The outstanding options at May 31, 1998 reflect the downward price adjustments made following the cash distribution in December 1996 and the DSN stock distribution in June 1997 of $1.50 and $1.06, respectively. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its plans. Because the number of shares is known and the exercise price of options granted have been equal to fair value at date of grant, no compensation expense has been recognized in the statement of operations. The Company has adopted the disclosure-only provisions of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS 123, the Company's net income and earnings per share at May 31 would have approximated the pro forma amounts indicated below: (000's omitted) 1998 1997 1996 - -------------------------------------------------------------------------------- Net income (loss) - as reported $1,334 $426 $(5,857) Net income (loss) - pro forma $1,141 $343 $(5,865) Earnings (loss) per share - diluted - as reported $0.22 $0.09 $(1.44) Earnings (loss) per share - diluted - pro forma $0.19 $0.08 $(1.44) 22 The weighted-average fair value of each option granted in 1998, 1997 and 1996 is estimated as $2.04, $0.81 and $1.17, respectively on the date of grant using the Black-Scholes model with the following weighted average assumptions: Expected life 4 to 5 years Assumed annual dividend growth rate 0% Expected volatility .65 to .85 Risk free interest rate (the month-end yields on 4 year treasury strips equivalent zero coupon) 5.6% - 6.36% The effects of applying SFAS 123 in this pro forma disclosure may not be indicative of future amounts. SFAS 123 does not apply to awards prior to 1996 and additional awards in future years are anticipated. In 1998, the Company adopted an Employee Stock Purchase Plan, under which all employees of the Company and certain of its subsidiaries who meet certain minimum requirements will be able to purchase shares of SofTech common stock through payroll deductions. The purchase price per share is 85% of the fair market value of the common stock on the Offering Date or the Exercise Date, whichever is less. It is expected that this plan will be implemented during the second quarter of fiscal 1999. As of May 31, 1998, 150,000 shares of SofTech common stock were available for sale to employees under the plan. E. COMMON STOCK: Common stock changes during the three years ended May 31, 1998, 1997, and 1996 were as follows:
Par Value Capital in Shares of Shares Excess of ($ in thousands) Outstanding Issued Par Value - -------------------------------------------------------------------------------------------------- Balance, May 31, 1995 4,052,547 $ 450 $ 16,347 Shares issued for stock options exercised 40,500 4 108 Shares issued in connection with acquisitions 1,729 -- 8 ---------- ---------- ---------- Balance, May 31, 1996 4,094,776 454 16,463 Shares issued for stock options exercised 76,000 8 106 Shares issued in connection with acquisitions 655,000 65 1,141 Shares issued in lieu of compensation 409,500 41 708 Distributions of cash and DSN stock (Notes A and H) -- -- (10,930) ---------- ---------- ---------- Balance, May 31, 1997 5,235,276 568 7,488 Shares issued for stock options exercised 18,000 2 14 Shares issued in connection with acquisitions 1,097,266 109 3,101 Warrants issued in connection with subordinated note -- -- 100 ---------- ---------- ---------- Balance, May 31, 1998 6,350,542 $ 679 $ 10,703 ========== ========== ==========
F. DEBT OBLIGATIONS: Debt obligations of the Company consist of the following obligations at May 31, 1998 (in thousands): Revolving credit facility, maturing in June 1998, with interest payable monthly at the prime rate (8.5% at May 31, 1998) plus 0.5% $ 2,609 Note payable to MatrixOne, payable by July 6, 1998 with interest at 7% 4,400 $5,000,000 subordinated note, maturing in December 2002, with interest payable monthly at 10.5%, net of unamortized debt discount of $100 at an imputed interest rate of 11% 4,900 Bridge loan, maturing upon finalization of senior loan facility, with interest payable monthly at 12% 2,500 ------- 14,409 Less current maturities (9,509) ------- $ 4,900 ======= 23 At May 31, 1998, the Company had a credit facility with a commercial lending institution that provided for borrowings of up to $4.0 million, limited to 85% of domestic accounts receivable outstanding less than 90 days from invoice date. Availability was subject to compliance with several covenants, including a minimum tangible net worth. Annual commitment fees under this agreement were $10,000. That line of credit agreement expired on June 28, 1998 and was repaid in full on July 1, 1998 as part of the closing of a new senior loan facility (see discussion below). The Company had a short term note payable to MatrixOne, an unaffiliated company, in the amount of $4.4 million relating to the acquisition of ADRA that was payable within 60 days of the acquisition. This note was also repaid in full on July 1, 1998 upon the closing of the new senior loan facility. The Company has a subordinated note to Greenleaf Capital ("Greenleaf") in the amount of $5 million. The note is due in December 2002 and carries a 1% commitment fee. In addition, the note provides Greenleaf with warrants to purchase up 300,000 shares of SofTech stock at an exercise price of $8.00 per share through December 31, 2002. The estimated fair value of the warrants is $100,000 and the related debt discount is being amortized through December 2002 using the interest method. The number of warrants earned by Greenleaf is a function of the amount owed under the subordinated debt facility at various dates in the future. The following table outlines those dates and amounts: Cumulative Date Borrowing # of Warrants ---- --------- ------------- December 31, 2000 $2.0 million 120,000 December 31, 2000 3.0 million 180,000 December 31, 2001 4.0 million 240,000 December 31, 2002 5.0 million 300,000 The Company has a short-term bridge note payable to Greenleaf in the amount of $2.5 million that was used to fund the acquisition of ADRA. Interest is payable monthly at 12%. The bridge note includes a 1% commitment fee and is payable upon the completion of the senior loan facility. William D. Johnston, a director of SofTech since September 1996, is the President of Greenleaf. Management sought and received non-binding commitments from several sources for the subordinated debt facility and the bridge loan that were ultimately provided by Greenleaf. Management recommended and the Board of Directors, other than Mr. Johnston who abstained from such vote, unanimously approved the transaction with Greenleaf. Subsequent to May 31, 1998, the Company entered into a $9.0 million senior loan facility, consisting of a $6 million term loan and a $3 million revolving credit facility, with interest payable monthly at prime plus 2.25%. The proceeds from this senior facility were utilized to pay off the $4.4 million note to MatrixOne and the borrowings under the revolving credit facility which has been terminated. Approximately $1.0 million of the bridge loan was also paid down with the proceeds from the senior facility. The Company's aggregate short and long term borrowings of approximately $15.5 million (including the $9.0 million senior facility entered into subsequent to fiscal year end) going into fiscal 1999 adds an element of financial risk that the Company has not experienced in the past. The terms of the senior facility require certain levels of profitability on a quarterly basis in order to remain in compliance with the loan covenants. In addition, the Company is completely dependent on cash flow from operations to meet its near term working capital needs and to make debt service payments. The monthly interest expense is approximately $130,000 on these borrowings. In addition, the term loan portion of the senior facility requires principal repayments of $375,000 on a quarterly basis beginning August 31, 1998. Annual maturities of debt obligations subsequent to May 31, 1998, adjusted for the senior facility, are as follows: 1999 - $3 million; 2000 - $4.5 million; 2001 - $1.5 million; 2002 - $1.5 million; 2003 - $5.0 million. The loan covenants on the senior facility require that the Company maintain certain minimum financial ratios related to cash flows, funded debt and earnings in order to remain in compliance with the loan terms. G. LEASE COMMITMENTS: OPERATING LEASES The Company conducts its operations in facilities leased through 2003. Rental expense for fiscal years 1998, 1997, and 1996 was approximately $550,000, $270,000 and $203,000, respectively. At May 31, 1998, minimum annual rental commitments under noncancellable leases were as follows: Fiscal Year -------------------------------------- 1999 $562,000 2000 408,000 2001 287,000 2002 236,000 2003 226,000 24 CAPITAL LEASES The Company has equipment-leasing arrangements with commercial lending institutions. These leases are secured by computer equipment acquired in one of the services-only acquisitions. For financial reporting purposes, the leases have been classified as capital leases; accordingly, assets with a net book value of approximately $295,000 (included in data processing equipment in the accompanying balance sheet at May 31, 1998) have been recorded. The approximate minimum annual lease payments under all capitalized leases as of May 31, 1998 are as follows: 1999, $221,000; 2000, $191,000; and 2001, $64,000. The present value of the minimum lease payments is $418,000, including current maturities of $180,000. H. DISCONTINUED OPERATIONS: On September 12, 1996, the Company completed the sale of its Network Systems Group ("NSG") to Data Systems Network Corporation ("DSN"). DSN purchased certain assets and assumed certain liabilities of NSG with a net book value on July 31, 1996 of approximately $200,000 in exchange for $890,000 in cash and 540,000 shares of DSN common stock, which were registered with the Securities and Exchange Commission in May 1997. The tangible assets acquired by DSN from SofTech totaled approximately $1.7 million and were primarily composed of fixed assets and service inventory for maintaining the NSG installed base of hardware and software. Liabilities assumed by DSN from SofTech included deferred revenue associated with maintenance contracts and other accrued expenses with a total book value of about $1.5 million. The sale agreement provides for dollar for dollar adjustments based on the net book value of the assets as of the transaction date. This transaction resulted in an after tax loss of approximately $970,000, of which an estimate of $700,000 was provided for in the 1996 results. The Company distributed the net proceeds from the sale of its Network Systems Group in the form of two distributions. On December 30, 1996, the Company made the first installment in cash at a rate of $1.50 per share to its shareholders of record on December 26, 1996, totaling $6,256,164. The second installment was in the form of a distribution of 455,988 DSN shares at a rate of approximately 0.1031 for each share of SofTech owned on the record date of May 23, 1997. All fractional shares were paid in cash at the assumed market price of $10.00 per share. The distribution date of this second installment was June 6, 1997. Revenue from discontinued operations for the years ended May 31, 1997 and 1996 was approximately $7,490,000 and $30,397,000, respectively. The net assets (liabilities) of discontinued operations, which are included in the Consolidated Balance Sheets as of May 31, are as follows: (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Accounts receivable (net) $ -- $ 355 Deferred income taxes receivable -- 334 ----- ----- Total assets -- 689 ----- ----- Accounts payable -- 129 Accrued expenses 338 554 ----- ----- Total liabilities 338 554 ----- ----- Net assets (liabilities) of discontinued operations $(338) $ 6 ===== ===== I. ACQUISITIONS: On November 10, 1997, the Company completed the acquisition of certain assets and assumed certain liabilities of the Advanced Manufacturing Technology ("AMT") division of CIMLINC, Incorporated ("CIMLINC"). AMT is a technology group that targets its application software products to the mold and die industry. AMT employed 31 full time employees and was located in Troy, Michigan. AMT's software products have been primarily targeted to the tier two automotive component suppliers in the U.S. marketplace that create molds and dies from electronic models. AMT's' software technology enhances the efficiency of the mold building process by reducing project development time and costs and increasing the quality of molds and tools. The assets acquired included office furniture, computer equipment and off-the-shelf software currently marketed and supported by AMT as PROSPECTOR(TM), EXPERTCAD(TM), EXPERTCAM(TM), TOOLDESIGNER(TM) AND TOOLMAKER(TM). The purchase price for the acquired AMT assets was $1,750,000 in cash, 200,000 shares of the Company's common stock and the assumption of certain liabilities. The source of the funds used in the acquisition came from existing working capital resources including the Company's prior credit facility. SofTech provided CIMLINC with a guarantee that the shares received in the transaction would have a value of at least $1.0 million within two years or an additional payment would be due for the difference. It is the Company's understanding that all 200,000 shares issued to CIMLINC have been sold thereby negating the guarantee. 25 In addition, the Company issued a total of 507,266 shares of common stock to certain AMT employees to satisfy certain amounts due and as a replacement for stock options and stock ownership in CIMLINC. The acquisition was accounted for as a purchase and, accordingly, AMT's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. The purchase resulted in the recording of capitalized software of $4.0 million, fixed assets of $.2 million and goodwill of approximately $1.7 million, which is being amortized on a straight-line basis over fifteen years. On May 7, 1998, the Company completed the acquisition of certain assets and assumed certain liabilities of the Adra Systems, Inc. ("ADRA"), a technology company with products primarily related to the two-dimensional computer aided design ("2D CAD") marketplace. SofTech acquired all of the material assets of the ADRA operation including accounts receivable and fixed assets including office furniture and computer equipment. The Company also acquired all intellectual property rights, as defined in the Asset Purchase Agreement, used in the ADRA operations. Goodwill of $2.0 million recorded in connection with the acquisition is being amortized on a straight-line basis over fifteen years. The purchase price for the acquired assets was $11.4 million of which $7.0 million was paid at the closing and $4.4 million was paid on July 1, 1998. In addition, contingent cash payments of up to $2.2 million could be due if certain license revenue goals are attained over the twelve month period immediately following the transaction. Payment of these amounts will be accounted for as additional purchase price. The source of the funds for the initial cash payment of $7.0 million came from a $5.0 million subordinated debt facility with Greenleaf Capital, Inc. ("Greenleaf") and $2.0 million of a $2.5 million bridge loan also provided by Greenleaf. This acquisition has been accounted for as a purchase and, accordingly, ADRA's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. Effective April 1, 1998, the Company acquired certain assets of Design Tech Consulting, Inc., an engineering services company, in exchange for 80,000 shares of the Company's common stock valued at $340,000. The transaction has been accounted for as a purchase and, accordingly, Design Tech's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. The excess of cost over the fair value of the net assets acquired was approximately $365,000 and is being amortized on a straight-line basis over ten years. The purchase of Design Tech in April 1998 provides for certain additional contingent payments if specified revenue goals are attained during each of the twelve-month periods ending March 31, 1999, 2000 and 2001. The former shareholders of Design Tech will earn an additional award of 50,000 SofTech shares if service revenue generated in the Chicago Region equals or exceeds specified levels for the three years following the purchase. Payment of these amounts, if required, will be accounted for as additional purchase price. Effective May 1, 1998, the Company acquired certain assets of CompuCore LLC in exchange for 100,000 shares of the Company's common stock valued at $462,500. CompuCore is a value-added reseller of Structural Dynamics Research Corporation's ("SDRC") software products. The transaction has been accounted for as a purchase and, accordingly, CompuCore's assets, liabilities and results of operations have been consolidated with those of the Company since the date of the acquisition. The excess of cost over the fair value of the net assets acquired was approximately $474,000 and is being amortized on a straight-line basis over ten years. Effective January 1, 1997, the Company acquired all of the outstanding common stock of Computer Graphics Corp. (CGC) in exchange for 405,000 shares of the Company's common stock with a value of $628,000. The transaction has been accounted for as a purchase and, accordingly, CGC's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. The excess of cost over the fair value of the net assets acquired was approximately $635,000 and is being amortized on a straight-line basis over five years. The purchase of CGC also provided for additional consideration of up to 210,000 additional shares of the Company's common stock if certain revenue and operating profit goals were achieved during the twelve months ended December 31, 1997. The maximum additional consideration was earned in fiscal 1998 and resulted in additional goodwill of $709,000. Effective February 27, 1997, the Company acquired the stock of Ram Design and Graphics Corp. ("RAM") in exchange for 250,000 shares of the Company's common stock valued at $578,000 plus 50,000 stock options that vest equally over five years. The transaction has been accounted for as a purchase and, accordingly, RAM's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. The excess of cost over the fair value of the net assets acquired was approximately $600,000 and is being amortized on a straight-line basis over five years. Effective January 5, 1995, the Company acquired the net assets of Micro Control, Inc. for approximately $1.0 million in cash and 281,497 shares of the Company's common stock valued at $1.7 million. The transaction has been accounted for as a purchase and, accordingly, RAM's assets, liabilities and results of operations have been consolidated with those of the Company since the date of acquisition. The excess of cost over the fair value of the net assets acquired was approximately $2,420,000 and is being amortized on a straight-line basis over five years. On September 20, 1995, the purchase agreement with the seller was modified to eliminate contingent payments dependent upon future operating results in exchange for an additional cash payment to the 26 seller of $426,000. The entire payment of $426,000 was expensed and included in selling, general and administrative expense in fiscal 1996. The unaudited pro forma revenue, net income from continuing operations and net income from continuing operations per share - diluted of the Company, assuming AMT, ADRA, Design Tech, CompuCore, CGC and RAM had been acquired as of the beginning of fiscal 1997, would have been $39,250,000, $2,200,000 and $.33 and $41,895,000, $3,125,000, $.53, for fiscal 1998 and 1997, respectively. J. LITIGATION: On March 26, 1998, plaintiff Parametric Technology Corporation ("PMTC") filed an action in the Superior Court, Middlesex County, alleging that the Company owes PMTC $905,942.10 in unpaid maintenance services and other disputed items. Upon filing the complaint, PMTC sought to attach, through trustee process, that amount of the Company's funds. After a hearing on April 7, 1998, PMTC's motion for trustee process was denied. The Company filed a counterclaim against PMTC asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and intentional interference with contractual and advantageous relations. The counterclaims allege damages in excess of those claimed by PMTC. On May 1, 1998, PMTC filed a second action in the United States District Court for the District of Massachusetts (PMTC v. SofTech, Inc., Civil Action No. 98CV10764-REK) seeking unspecified damages in connection with the Company's alleged infringement of PMTC's copyrights. More recently PMTC has sent a letter to the Company alleging possible claims under the Lanham Act. The Company intends to vigorously defend against all of these cases, and believes that it has meritorious defenses to these claims. 27 SOFTECH, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the three years ended May 31, 1998
Col. A Col. B Col. C Col. D Col. E Col. F - ------ --------- --------- ---------- ------ -------- Balance, Charged Balance, beginning costs and end of Description of period expenses Deductions Other period - --------------------------------------------------------------------------------------------------------------- Allowance for uncollectible accounts receivable (in thousands): Year ended May 31, 1998 $ 305 $ -- $201(1) $ 545(2) $ 649 Year ended May 31, 1997 200 125 20 -- 305 Year ended May 31, 1996 -- 200 -- -- 200
(1) Represents uncollectible accounts written off, net of recoveries. (2) Relates to amounts acquired in the acquisitions of AMT and ADRA. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SofTech, Inc. By /s/ Mark R. Sweetland ------------------------------ Mark R. Sweetland, President Date: August 31, 1998 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/ Mark R. Sweetland President and Chief Executive Officer 8/31/98 - ---------------------------- (Principal executive officer) and Mark R. Sweetland Director /S/ Joseph P. Mullaney Vice President, Treasurer, 8/31/98 - ---------------------------- Chief Financial Officer (Principal Joseph P. Mullaney financial and accounting officer) /S/ Timothy J. Weatherford Executive Vice President, Sales and 8/31/98 - ---------------------------- Director Timothy J. Weatherford /S/ Ronald A. Elenbaas Director 8/31/98 - ---------------------------- Ronald A. Elenbaas /S/ William Johnston Director 8/31/98 - ---------------------------- William Johnston /S/ Kenneth Ledeen Director 8/31/98 - ---------------------------- Kenneth Ledeen /S/ Timothy Tyler Director 8/31/98 - ---------------------------- Timothy Tyler 29 EX-10.(II) 2 CREDIT AGREEMENT EXHIBIT 10(ii) CREDIT AGREEMENT dated as of July 1, 1998 among SOFTECH, INC. as Borrower INFORMATION DECISIONS, INC. as Guarantor THE FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO, as the Banks and IMPERIAL BANK as Agent and Issuer TABLE OF CONTENTS PAGE ---- I. DEFINITIONS 1.1. Defined Terms............................................ 1 1.2. Use of Defined Terms..................................... 34 1.3. Cross-References......................................... 34 1.4. Accounting and Financial Determinations.................. 34 1.5. General Provisions Relating to Definitions............................................. 35 II. COMMITMENTS 2.1. Commitments.............................................. 35 2.2. Facility A Commitment Amount............................. 36 2.3. Commitments Several...................................... 36 III. LOANS AND NOTES 3.1. Borrowing Procedures..................................... 37 3.1.1. Requests for Borrowing........................... 37 3.1.2. Funding Reliance for Loans....................... 38 3.2. Notes.................................................... 38 3.3. Principal Payments....................................... 39 3.3.1. Repayments....................................... 39 3.3.2. Facility A Loan Prepayments...................... 39 3.3.3. Facility B Loan Prepayments and Repayments....... 40 3.3.4. Certain Mandatory Prepayments.................... 42 3.4. Interest Payments........................................ 42 3.4.1. Interest Rates................................... 42 3.4.2. Interest on Overdue Amounts...................... 43 3.4.3. Payment Dates.................................... 43 3.5. The Borrowing Base....................................... 44 3.6. Fees..................................................... 44 3.6.1. Closing Fee...................................... 44 3.6.2. Commitment Fees.................................. 44 3.6.3. Cancellation Fee................................. 44 3.7. Making of Payments; Computations; etc.................... 44 3.7.1. Making of Payments............................... 44 3.7.2. Setoff........................................... 45 3.7.3. Due Date Extension............................... 45 3.7.4. Notices of Changes in Prime Rate; Notice of Eurodollar Rates.................... 45 3.7.5. Computations..................................... 46 -ii- 3.7.6. Recordkeeping.................................... 46 3.8. Taxes.................................................... 46 3.9. Use of Proceeds.......................................... 47 IV. FUNDING OPTIONS 4.1. Pricing of Each Loan..................................... 47 4.2. Conversion Procedures.................................... 48 4.3. Continuation Procedures.................................. 48 4.4. Limitations on Interest Periods and Continuation and Conversion Elections.................. 48 4.4.1. Interest Periods................................. 48 4.4.2. Conditions Precedent............................. 49 4.4.3. Other Limitations................................ 49 4.5. Increased Costs.......................................... 49 4.6. Interest Rate Inadequate or Unfair....................... 51 4.7. Changes in Law Rendering Eurodollar Loans Unlawful.............................. 51 4.8. Funding Losses........................................... 52 4.9. Discretion of Bank as to Manner of Funding............... 52 4.10. Conclusiveness of Statements; Survival of Provisions..... 52 V. LETTERS OF CREDIT 5.1. Requests for Letters of Credit........................... 53 5.2. Issuances and Extensions................................. 54 5.3. Fees and Expenses........................................ 54 5.4 Other Banks' Participations.............................. 54 5.5 Disbursements............................................ 55 5.6 Reimbursement............................................ 56 5.7 Deemed Disbursements..................................... 56 5.8 Nature of Reimbursement Obligations...................... 57 5.9 Indemnity................................................ 58 VI. GUARANTIES 6.1. Guaranty................................................. 59 6.1.1. Guaranty of Payment.............................. 59 6.1.2. Guaranty of Performance.......................... 59 6.2. Guaranty Absolute........................................ 59 6.3. Reinstatement, etc....................................... 61 6.4. Waiver................................................... 61 6.5. Subordination of Subrogation Rights...................... 61 VII. CONDITIONS TO CREDIT EXTENSIONS 7.1. Conditions to Making First Credit Extensions............. 62 -iii- 7.1.1. Execution and Delivery of this Agreement and the Notes................................... 62 7.1.2. Pledge Agreement.................................. 62 7.1.3. Security Agreements; UCC Filings, etc............. 63 7.1.4. Borrowing Base Report............................. 63 7.1.5. Accounts Receivable Aging Report.................. 63 7.1.6. Other Loan Documents; Subordinated Debt Documents and Acquisition Documents............. 64 7.1.7. Closing Date Certificate; Closing Date Payments........................................ 64 7.1.8. Resolutions, etc.................................. 65 7.1.9. Certificates of Good Standing..................... 65 7.1.10. Compliance Certificate............................ 66 7.1.11. Opinion of Counsel................................ 66 7.1.12. Financial Statements.............................. 66 7.1.13. No Materially Adverse Effect...................... 66 7.1.14. Fees and Expenses................................. 66 7.1.15. Certificate as to Compliance with Warranties; Absence of Litigation; etc...................... 66 7.1.16. Lockbox Agreement................................. 66 7.2. All Credit Extensions..................................... 66 7.2.1. Compliance with Warranties; Absence of Litigation; No Default; etc..................... 67 7.2.2. Credit Request; Continuation/Conversion Notice 67 7.2.3. Borrowing Base Report............................. 67 7.2.4. Legality of Transactions.......................... 68 7.2.5. Satisfactory Legal Form, etc...................... 68 VIII. WARRANTIES, ETC. 8.1. Organization, etc......................................... 68 8.2. Power, Authority.......................................... 68 8.3. Validity, etc............................................. 69 8.4. Financial Information..................................... 69 8.5. Projections............................................... 70 8.6. Materially Adverse Effect................................. 70 8.7. Existing Indebtedness; Absence of Defaults................ 70 8.8. Litigation, etc........................................... 71 8.9. Regulations, G, U and X................................... 71 8.10. Government Regulation..................................... 71 8.11 Taxes..................................................... 72 8.12. Compliance with ERISA..................................... 72 8.13. Labor Controversies....................................... 72 8.14. Corporate Structure, etc.................................. 72 8.15. Ownership of Properties; Liens............................ 72 8.16. Patents, Trademarks, Copyrights, etc...................... 73 -iv- 8.17. Collateral Documents..................................... 73 8.18. Environmental Matters.................................... 73 8.19. Compliance with Applicable Laws.......................... 74 8.20. Existing Investments..................................... 74 8.21. Transactions with Affiliates............................. 74 8.22. Certain Documents, etc................................... 75 8.23. Ownership of Subsidiaries, etc........................... 75 8.24. Dormant Subsidiaries..................................... 75 8.25. Representations in Loan Documents........................ 75 IX. COVENANTS 9.1. Certain Affirmative Covenants............................ 76 9.1.1. Financial Information, etc........................ 76 9.1.2. Maintenance of Corporate Existence, etc........... 79 9.1.3. Foreign Qualification............................. 79 9.1.4. Payment of Taxes, etc............................. 79 9.1.5. Maintenance of Property........................... 79 9.1.6. Notice of Default, etc............................ 80 9.1.7. Books and Records................................. 81 9.1.8. Compliance with Laws, etc......................... 81 9.1.9. Identification of Subsidiaries; Provision of Collateral..................................... 81 9.1.10 Lockbox Arrangement............................... 82 9.2. Certain Negative Covenants............................... 83 9.2.1. Limitation on Nature of Business.................. 83 9.2.2. Indebtedness...................................... 83 9.2.3. Liens............................................. 83 9.2.4. Financial Covenants............................... 84 9.2.5. Investments....................................... 84 9.2.6. Restricted Payments............................... 85 9.2.7. Mergers; Sales of Property........................ 86 9.2.8. Acquisitions...................................... 86 9.2.9. Modification of Governing Documents, etc.......... 86 9.2.10. Transactions with Affiliates...................... 86 9.2.11. Sale of Capital Stock, etc........................ 87 9.2.12. Change of Control Triggering Events............... 87 9.2.13. Change of Location or Name........................ 87 9.2.14. Dormant Subsidiaries.............................. 88 X. EVENTS OF DEFAULT 10.1.Events of Default........................................ 88 10.1.1. Non-Payment of Obligations...................... 88 10.1.2. Non-Performance of Certain Obligations.......... 88 10.1.3. Non-Performance of Other Obligations............ 88 -v- 10.1.4. Breach of Warranty.............................. 89 10.1.5. Default Under Other Instruments................. 89 10.1.6. Bankruptcy, Insolvency, etc..................... 89 10.1.7. Judgments....................................... 90 10.1.8. Impairment of Security, etc..................... 90 10.1.9. Change of Control Triggering Event.............. 91 10.2. Action if Bankruptcy................................... 91 10.3. Action if Other Event of Default....................... 91 XI. THE AGENT 11.1. Actions................................................ 91 11.2. Exculpation............................................ 92 11.3. Successor.............................................. 93 11.4. Loan Documents, etc.................................... 94 11.5. Loans by Agent......................................... 94 11.6. Credit Decisions....................................... 94 11.7. Notices, etc., to the Agent............................ 94 XII. ADDITIONAL BANKS AND PARTICIPANTS 12.1. Participations by Banks................................ 94 12.1.1. Participations.................................. 94 12.1.2. Notice to Borrower; Participant's Rights of Set-off in Certain Cases....................... 95 12.1.3. Rights of Participants.......................... 95 12.2. Assignments by Banks................................... 96 12.2.1. Assignments..................................... 96 12.2.2. Effect of Assignment and Acceptance Agreement... 97 12.2.3. Delivery of New Notes by Borrower Following Assignments................................... 97 12.2.4. Agent's Maintenance of Register................. 97 12.2.5. Actions of Agent; Fees.......................... 97 12.2.6. Assigning Bank, Purchasing Bank and Other Parties; Confirmations and Agreements......... 98 12.3. Disclosure of Information.............................. 98 12.4. Assistance............................................. 99 12.5. Taxes.................................................. 99 12.6. Federal Reserve Bank................................... 100 XIII. MISCELLANEOUS 13.1. Waivers, Amendments, etc............................... 100 13.2. Notices................................................ 101 13.3. Costs and Expenses..................................... 102 13.4. Indemnification........................................ 103 -vi- 13.5. Survival............................................... 104 13.6 .Severability........................................... 104 13.7. Headings............................................... 104 13.8. Counterparts; Entire Agreement......................... 104 13.9 Choice of Law.......................................... 104 13.10 Successors and Assigns................................. 105 13.11 Further Assurances..................................... 105 13.12 Confidentiality........................................ 105 13.13 Consent to Jurisdiction................................ 106 13.14 Waiver of Jury Trial................................... 106 LIST OF SCHEDULES SCHEDULE 1 - DISCLOSURE SCHEDULE Schedule 2 - AGENT AND BANKS LIST OF EXHIBITS EXHIBIT A - FORM OF FACILITY A NOTE EXHIBIT B - FORM OF FACILITY B NOTE EXHIBIT C - FORM OF LOAN REQUEST EXHIBIT D - FORM OF ISSUANCE REQUEST EXHIBIT E - FORM OF ASSIGNMENT AND ACCEPTANCE EXHIBIT F - FORM OF COMPLIANCE CERTIFICATE EXHIBIT G - FORM OF PLEDGE AGREEMENT EXHIBIT H - FORM OF SECURITY AGREEMENT EXHIBIT I - FORM OF PATENT SECURITY AGREEMENT EXHIBIT J - FORM OF TRADEMARK SECURITY AGREEMENT EXHIBIT K - FORM OF SUBORDINATION AGREEMENT EXHIBIT L - FORM OF LEGAL OPINION OF COUNSEL FOR THE CREDIT PARTIES EXHIBIT M - FORM OF CLOSING DATE CERTIFICATE EXHIBIT N - FORM OF WARRANT -vii- CREDIT AGREEMENT CREDIT AGREEMENT, dated as of July 1, 1998, among (a) SOFTECH, INC., a Massachusetts corporation ("Borrower"), (b) INFORMATION DECISIONS, INC., a Michigan corporation ("IDI"), (c) the financial institutions which are now, or in accordance with Section 12.2 hereafter become, parties hereto as Banks (collectively, "Banks") and (d) IMPERIAL BANK, a bank organized under the laws of the State of California, in its capacity as Agent for the Banks (in such capacity, "Agent") and as Issuer with respect to Letters of Credit (as defined below) (in such capacity, "Issuer"). RECITALS The Borrower has requested that the Agent and the Banks make certain revolving credit facilities (including a letter of credit facility) and acquisition facilities available to the Borrower. The proceeds of the loans are to be used by the Borrower for payment of the Secured Seller Note and certain other Indebtedness of the Borrower, and for working capital, as more fully described in Section 3.9, and the letters of credit are to be issued from time to time to support obligations incurred by the Borrower for working capital. The Agent and the Banks are willing to make the facilities available to the Borrower and to make loans and issue letters of credit to the Borrower thereunder, all upon the terms and subject to the conditions contained in this Agreement. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. Defined Terms. The following terms, when used in this Agreement, including the introductory paragraph and Recitals above or in any of the other Loan Documents, shall, except where the context otherwise requires, have the following meanings: "Accounts Receivable" means all rights of the Borrower and its domestic U.S. Subsidiaries (other than Dormant Subsidiaries) now owned and hereafter acquired to payment for the Sale of software or products or provision of services in the ordinary course of business, whether or not evidenced by an Instrument. The amount of any Accounts Receivable shall be determined in accordance with GAAP. -2- "Acquisition" means any transaction, or any series of related transactions, in which the Borrower or any of its Subsidiaries (a) acquires any business or all or substantially all of the Property of any Person or any division or business unit thereof, whether through purchase of assets, merger or otherwise, (b) directly or indirectly acquires control of at least a majority (in number of votes) of the Securities of any corporation, partnership or other Person having ordinary voting power for the election of directors or managers of such corporation, partnership or other Person, or (c) directly or indirectly acquires control of a majority of the equity interests in any Person. "Acquisition Documents" means the Asset Purchase Agreement, the Seller Security Agreement, the Secured Seller Note and the Seller Warrant. "Adra" means Adra Systems, GmbH. "Affiliate" of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, or (b) any other Person who is a Relative, director or officer of such Person or of any Person described in clause (a). For purposes of this definition, control of a Person shall mean the power, whether direct or indirect, to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. For purposes of this Agreement and the other Loan Documents, the Banks shall not be or be deemed to be an Affiliate of the Borrower or its Subsidiaries. "Affiliate Transaction" means any of the following transactions or arrangements: (a) the making by the Borrower or any of its Subsidiaries of any payment or prepayment (whether of principal, premium, interest or any other sum) of or on account of, or any payment or other distribution by the Borrower or by any of its Subsidiaries on account of the redemption, repurchase, defeasance or other acquisition for value of, any Indebtedness of any kind whatsoever (i) of the Borrower to any other SofTech Affiliate; or (ii) of any Subsidiary of the Borrower to any SofTech Affiliate; (b) the making of any loans, advances or other Investments of any kind whatsoever by the Borrower or any of its Subsidiaries to or in any other SofTech Affiliate or by any Subsidiary of the Borrower to or in any holder of any Indebtedness described in clause (a) of this definition; -3- (c) the Sale by the Borrower or any of its Subsidiaries of all or any part of its respective Property to, or for the direct or indirect benefit of, any SofTech Affiliate; (d) the incurrence by the Borrower or any of its Subsidiaries of any Indebtedness (i) of the Borrower to any other SofTech Affiliate; or (ii) of any of the Borrower's Subsidiaries to any SofTech Affiliate; (e) the declaration or payment by the Borrower or any of its Subsidiaries of any dividends or other distributions on account of, or the making by the Borrower or any of its Subsidiaries of any payment or other distribution on account of the purchase, repurchase, redemption or other acquisition for value of, any shares of Capital Stock or any other Securities of any SofTech Affiliate; (f) the payment by the Borrower or any of its Subsidiaries to any SofTech Affiliate of any fees or commission of any kind, including, without limitation, management or consulting fees, investment banking or underwriting fees or commissions, arrangement, placement or syndication fees, or brokers', finders' or other transaction fees or commissions; or (g) any other transaction or Contractual Obligation between any SofTech Affiliate and the Borrower or any of its Subsidiaries. For the purposes of this Agreement and the other Loan Documents, the term "Affiliate Transaction" shall not include any compensation paid or issued to officers or directors of the Borrower or any of its Subsidiaries in the ordinary course of business. "Agreement" means this Credit Agreement. "Applicable Law" means and includes statutes and rules and regulations thereunder and interpretations thereof by any Governmental Authority charged with the administration or the interpretation thereof, and orders, requests, directives, instructions and notices of any Governmental Authority. "Approval" means each approval, consent, filing or registration by or with any Governmental Authority or any creditor or shareholder of the Borrower or any of its Subsidiaries necessary to authorize or permit the execution, delivery or performance by the Borrower or any Subsidiary of any of the Loan Documents to which it is a party or the validity or -4- enforceability of any of such Loan Documents against the Borrower or such Subsidiary. "Asset Purchase Agreement" means the Asset Purchase Agreement dated as of May 7, 1998 by and among the Borrower, Adra Systems, Inc., Adra Systems, GmbH and MatrixOne, Inc. "Assigning Bank" is defined in Section 12.2.1. "Assignment of Lockbox Agreement" is defined in Section 9.1.10. "Assignment" is defined in Section 12.2.1. "Assignment and Acceptance Agreement" is defined in Section 12.2.1. "Authorized Officers" is defined in subclause (ii) of Section 7.1.8(a). "Banks" is defined in the introductory paragraph hereto. "Bankruptcy Code" means Title 11 of the United States Code. "Bankruptcy or Insolvency Proceeding" means, with respect to any Person, any insolvency or bankruptcy proceeding, or any receivership, liquidation, reorganization or other similar proceeding in connection therewith, relative to such Person or its creditors, as such, or to its Property, or any proceeding for voluntary liquidation, dissolution, or other winding up of such Person, whether or not involving insolvency or bankruptcy. "Borrower" is defined in the introductory paragraph hereto. "Borrowing" means any Credit Extension under Section 3.1 consisting of Loans made by the Banks to the Borrower on a single Drawdown Date. "Borrowing Base" means, subject to Section 3.5 hereof, at the relevant time of reference thereto, an amount determined by the Agent by reference to the most recent Borrowing Base Report delivered to the Agent and the other Banks pursuant to subclause (v) of Section 9.1.1(c) hereof, which is equal to the sum of 80% of Eligible Accounts Receivable of the Borrower and its Subsidiaries plus 40% of Qualified Maintenance Receivables of the Borrower and its Subsidiaries; provided, however, that upon occurrence of a Renewal Event, no Qualified Maintenance Receivable shall thereafter be included in determining the Borrowing Base. -5- "Borrowing Base Report" means a Borrowing Base Report duly executed and delivered to the Agent and the Banks by the chief financial, accounting or executive Authorized Officer of the Borrower in the form provided from time to time to the Borrower by the Agent. "Business Day" means a day on which banks are open for business in San Jose, California. "Cancellation Fee" is defined in Section 3.6.3 hereto. "Capital Expenditures" means amounts paid or indebtedness incurred by the Borrower or any of its Subsidiaries in connection with the purchase or lease by the Borrower or any of its Subsidiaries of capital assets that would be required to be capitalized and shown on the balance sheet of such Person in accordance with generally accepted accounting principles. "Capitalized Lease Obligations" means, with respect to any Person, all monetary obligations of such Person under any leasing or other similar arrangement which in accordance with GAAP is required to be classified on the balance sheet of such Person as a capitalized lease. "Capital Stock" means any shares, interests, participations or other equivalents (howsoever designated) of corporate capital stock or any options, warrants or other rights to subscribe for, or to purchase, or to convert any Property into, or to exchange any Property for, any such corporate capital stock, options, warrants or other rights. "Cash Equivalents" means: (a) marketable obligations issued or unconditionally guaranteed by the United States government, in each case maturing within one (1) year after the date of acquisition thereof; (b) marketable direct obligations issued by any State of the United States or any political subdivision of any such State or any public instrumentality thereof maturing within one (1) year after the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (c) commercial paper maturing less than one (1) year after the date of acquisition thereof, issued by a corporation organized under the laws of any State of the United States or of the District -6- of Columbia and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's; (d) shares of a money market fund which: (i) is a registered investment company under the Investment Company Act of 1940 ("1940 Act"); and (ii) complies with Rule 270.2a7 of the 1940 Act (the "Rule"); and either (A) is rated in one of the two highest rating categories by S&P or Moody's; or (B) (1) has assets of at least $200,000,000 at all times upon and after the date of acquisition of such shares, and (2) will limit its portfolio investments to instruments that are, at the time of acquisition, "First Tier Securities" or "Government Securities" as such terms are defined in the Rule; (e) certificates of deposit maturing within one (1) year after the date of acquisition thereof, issued by the Banks or by any commercial bank that is a member of the Federal Reserve System that has capital, surplus and undivided profits (as shown on its most recent statement of condition) aggregating not less than $100,000,000 and is rated A or better by S&P or Moody's; and (f) repurchase agreements entered into with the Banks or any commercial bank of the nature referred to in clause (e), secured by a fully-perfected first-priority Lien on any obligation of the type described in any of clauses (a) through (e), having a fair market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation thereunder of the Banks or other commercial bank. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Change of Control" means an event or series of events (including a merger, consolidation, issue or Sale of Capital Stock or other Securities, reorganization, voting agreement or otherwise) as a result of which (a) any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (i) holds or acquires, directly or indirectly, outstanding Voting Shares of the Borrower such that such person or group, together with all Affiliates thereof, is or becomes the "beneficial -7- owner" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) of outstanding Voting Shares of the Borrower entitling such person or group, together with such Affiliates, to exercise more than 40% of the total voting power of all classes of outstanding Voting Shares of the Borrower, or (ii) has a sufficient number of its or their nominees elected to the Board of Directors of the Borrower such that such nominees so elected (whether new or continuing as directors) shall constitute a majority of the Board of Directors of the Borrower, or (b) individuals who are directors of the Borrower on the date hereof (and any new directors whose election by the directors of the Borrower or whose nominations for election by the stockholders of the Borrower was approved by a vote of at least two-thirds of the directors still then in office who either were directors on the date hereof or whose election or nomination for election was previously so approved) shall cease to constitute a majority of the Board of Directors of the Borrower. "Change of Control Triggering Event" is defined in Section 10.1.9. "Closing Date" means the date on which the first Loans are made or to be made by the Banks to the Borrower hereunder. "Closing Date Certificate" is defined in Section 7.1.7. "Closing Fee" is defined in Section 3.6.1. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral" means, collectively, the collateral provided by the Borrower and its Subsidiaries to the Agent under the Collateral Documents. "Collateral Documents" means, collectively, the Security Agreements, the Pledge Agreement, all other Instruments executed and delivered to the Agent and the Banks pursuant to Section 7.1.3, all Instruments executed and delivered to the Agent pursuant to Section 9.1.9 from time to time after the date hereof, and all other Instruments that shall from time to time after the date hereof be identified by the Agent and the Borrower as "Collateral Documents" for purposes of this Agreement and the other Loan Documents. "Commitments" means, collectively, the Facility A Commitment and the Facility B Commitment. "Commitment Fees" is defined in Section 3.6.2. -8- "Commitment Termination Event" means: (a) automatically and without any notice or further action, the occurrence of any Default under Section 10.1.6; or (b) the occurrence and continuation of any other Event of Default and the declaration of all or any portion of the outstanding principal amount of any Loans to be due and payable pursuant to clause (b) of Section 10.3 or, in the absence of such declaration, the declaration of termination of all of the Commitments pursuant to clause(a) of Section 10.3. "Compliance Certificate" means a certificate duly executed by an Authorized Officer of the Borrower and each of its Subsidiaries, substantially in the form of Exhibit F attached hereto (with such changes thereto as may be agreed upon from time to time by the Agent and the Borrower), for purposes of monitoring the compliance of the Borrower and its Subsidiaries with the Loan Documents. "Consolidated Current Assets" means all assets of the Borrower and its Subsidiaries on a consolidated basis that, in accordance with generally accepted accounting principles, are properly classified as current assets, provided that (i) notes and accounts receivable shall be included only if good and collectible as determined by the Borrower in accordance with established practice consistently applied and, with respect to such notes, only if payable on demand or within one (1) year from the date as of which Consolidated Current Assets are to be determined and if not directly or indirectly renewable or extendible at the option of the debtors, by their terms, or by the terms of any instrument or agreement relating thereto, beyond such year, and, with respect to such accounts receivable, only if payable and outstanding not more than ninety (90) days after the date of the shipment of goods or other transaction out of which any such account receivable arose; and such notes and accounts receivable shall be taken at their face value less reserves determined to be sufficient in accordance with generally accepted accounting principles; and (ii) inventory shall be included only if and to the extent that the same shall consist of saleable finished goods ready and available for shipment to purchasers thereof. "Consolidated Current Liabilities" means all liabilities and other Indebtedness of the Borrower and its Subsidiaries on a consolidated basis maturing on demand or within one (1) year from the date as of which Consolidated Current Liabilities are to be determined, and such other liabilities as may properly be classified as current liabilities in accordance with generally accepted accounting principles. -9- "Consolidated Debt Service" means, in relation to the Borrower and its Subsidiaries for any period, the sum of: (a) all Consolidated Gross Interest Expense of the Borrower and its Subsidiaries for such period; and (b) all amounts for which the Borrower or its Subsidiaries shall be obligated (without regard to any applicable subordination provisions or other similar prohibitions) to make payments during such period (i) in respect of principal of Indebtedness for Borrowed Money or on account of the redemption or repurchase of Securities evidencing Indebtedness for Borrowed Money, and (ii) in accordance with the payment, redemption or repurchase schedule fixed by the terms of the Instruments governing such Indebtedness for Borrowed Money; provided that the Consolidated Debt Service for any period shall not include any principal of Indebtedness for Borrowed Money required to be paid, or any principal of any Securities required to be redeemed or repurchased, (A) otherwise than on specific dates fixed by governing Instruments for such payment, redemption or repurchase (except as otherwise described below), and (B) only out of or with Excess Cash Flow available to the Borrower and its Subsidiaries. Consolidated Debt Service, for any period, (i) shall not include payments on or in respect of the Seller Note or the Greenleaf Bridge Note out of proceeds of the initial Loans made on the Closing Date, and (ii) shall include prepayments of principal of the Greenleaf Note or the Greenleaf Bridge Note made after the Closing Date. "Consolidated Earnings Before Interest and Taxes" means, for the applicable period, the Consolidated Net Operating Profit of the Borrower and its Subsidiaries, before payment or provision for any income taxes or interest expense for such period, determined in accordance with GAAP. "Consolidated EBITDA" means, for the applicable period, the sum of (a) the Consolidated Earnings Before Interest and Taxes for such period, plus (b) the aggregate amount of all depreciation and amortization expense of the Borrower and its Subsidiaries for such period, determined in accordance with GAAP. For purposes of determining the Consolidated EBITDA of the Borrower and its Subsidiaries for any period, (i) there shall be excluded from such Consolidated EBITDA all operating profit and all related depreciation and amortization expense attributable to any Property sold -10- or disposed of by the Borrower or any of its Subsidiaries other than in the ordinary course of business during such period as if such Property were not owned at any time by the Borrower or any of its Subsidiaries during such period, and (ii) there shall be included in such Consolidated EBITDA all operating profit and all related depreciation and amortization expense attributable to any Property acquired by the Borrower or any of its Subsidiaries other than in the ordinary course of business during such period as if such Property were owned by the Borrower or any of its Subsidiaries at all times during such period. For all purposes of this Agreement, the "operating profit" and related "depreciation" and "amortization" expense attributable to any Person or attributable to any Property for any period shall be determined in a manner consistent in all relevant respects with the method used to determine Consolidated Net Operating Profit and Consolidated EBITDA, but on a non-consolidated basis. "Consolidated Gross Interest Expense" means, for the applicable period, the sum of (a) the aggregate of the interest expense on Indebtedness for Borrowed Money of the Borrower and its Subsidiaries for such period, plus (b) without duplication, that portion of capital lease rentals of the Borrower and its Subsidiaries representative of the interest factor for such fiscal period, in each case, as determined for such period and consolidated in accordance with GAAP. "Consolidated Net Operating Profit" means, for the applicable period, the amount set forth opposite the line item "Net Operating Profit" on the consolidated statement of income of the Borrower and its Subsidiaries for such period, all as determined and consolidated in accordance with GAAP. "Contingent Obligation" means, in relation to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations shall in any event include: (a) any direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of -11- business), co-making, discounting with recourse or Sale with recourse by such Person of the obligation of another; and (b) any Indebtedness of such Person of the type described in clause (a) of the definition of the term "Indebtedness". The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Continuation/Conversion Notice" means a notice, signed by an Authorized Officer of the Borrower, complying with the requirements of Section 4.2 or 4.3, as applicable, and otherwise in form and substance reasonably satisfactory to the Agent. "Contractual Obligation" means, in relation to any Person, any agreement or obligation under any Security issued by such Person or under any Instrument or undertaking to which such Person is a party or by which it or any of its Property is bound. "Corporation" means any corporation, limited liability company, association, joint stock company, business trust or other similar organization or business enterprise. "Credit Extension" means (a) the advancing of Loans by the Banks to the Borrower pursuant to Article II and Article III and (b) the issuance or extension by the Issuer of Letters of Credit pursuant to Article V. "Credit Parties" means the Borrower and the Guarantor. "Credit Request" means any Loan Request or Issuance Request. "Default" means any Event of Default or any condition or event which, after notice or lapse of time, or both, would become an Event of Default. "Disbursement Date" is defined in Section 5.5. "Disclosure Schedule" means the Disclosure Schedule attached hereto as Schedule 1. "Dollars" and the sign "$" mean lawful money of the United States. "Domestic Office" means, in relation to any Bank, the office thereof designated as such in Schedule 2 attached hereto (or designated as such pursuant to an Assignment and Acceptance Agreement), or such other office of the Bank within the United States as may be designated from time to time by notice from the Bank to the Borrower and the Agent, -12- respectively, by and through which each of the Loans and other Credit Extensions will be made by such Bank hereunder. "Dormant Subsidiary" means, at the date hereof, (a) Computer Graphics Corporation, an Indiana corporation, (b) RAM Design & Graphics Corporation, a North Carolina corporation, (c) Systems Constructs, Inc., a New York corporation, (d) SofTech Investments, Inc., a Massachusetts corporation, (e) AMG Associates, Inc., a Maryland corporation, and (f) Compass, Inc., a Massachusetts corporation; and any other Subsidiary of the Credit Parties that shall hold no material assets or liabilities and that shall not be engaged in any material business operations, that shall have no Subsidiaries other than Dormant Subsidiaries, and that shall be approved as a Dormant Subsidiary by the Agent in writing in response to a written request of the Borrower. "Drawdown Date" means any date (which must be a Business Day) on which any Loan is made or to be made to the Borrower pursuant to Section 3.1. "Eligible Accounts Receivable" means the aggregate amount of the unpaid portions of Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Accounts Receivable): (a) that the Borrower reasonably and in good faith determines to be collectible; (b) that are with account debtors that (i) are not Affiliates or Subsidiaries of the Borrower or any of its Subsidiaries, (ii) purchased the goods or services giving rise to the relevant Account Receivable in an arm's length transaction, and (iii) are not insolvent or involved in any Bankruptcy or Insolvency Proceeding; (c) that are not subject to any Lien other than Permitted Liens; (d) in which the Agent has a valid and perfected security interest; (e) that are not outstanding for more than ninety (90) days past the invoice date of the respective original invoices therefor; (f) that do not exceed, from any single account debtor and its Affiliates, twenty percent (20%) of all Accounts Receivable that are Eligible Accounts Receivable (but the portion of such -13- Accounts Receivable not in excess of such percentage may be Eligible Accounts Receivable); (g) that are payable in Dollars; (h) that do not arise from consignment or guaranteed sales, that are not bill and hold accounts, collection accounts or c.o.d. accounts, and that are not distributor sample accounts; (i) that are not Accounts Receivable from Government Authorities, unless such Accounts Receivable have been formally assigned to the Banks in accordance with Applicable Law; (j) that are not contract receivables or Accounts Receivable arising from pre-billing arrangements; (k) that are not payable from an office outside of the United States, unless such Accounts Receivable are backed by a letter of credit in an amount reasonably acceptable to the Agent or by other insurance or credit support in form and substance reasonably satisfactory to the Agent; (l) that are not due from any account debtor if more than twenty percent (20%) of all Accounts Receivable owing from such account debtor would not be Eligible Accounts Receivable; (m) that are not federal excise tax obligations on the sale of products that are the subject of such Account Receivable; (n) that are not Accounts Receivable requiring the performance of services by the Borrower or any of its Subsidiaries prior to payment; (o) that are not customer or account debtor deposits; (p) that are paid directly to the Lockbox Account; and (q) that have not otherwise been determined by the Agent, in its reasonable discretion, to be excluded from Eligible Accounts Receivable, and for which the Agent shall have notified the Borrower; provided, that all Maintenance Receivables shall be excluded in determining Eligible Accounts Receivable. "Environmental Laws" means all Applicable Laws relating to health and safety matters or protection of the environment or relating to or -14- imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance, material or pollutant, in each case as in effect from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. "Eurodollar Loan" means any Loan which bears interest at a rate determined by reference to the Eurodollar Rate (Reserve Adjusted). "Eurodollar Office" means, in relation to the Agent or any Bank, the office thereof designated as such on Schedule 2 hereto (or designated as such pursuant to an Assignment and Acceptance Agreement), or such other office, whether or not outside the United States, of such Bank as may be designated from time to time by notice from such Bank to the Borrower and the Agent as the office from which such Bank shall be making or maintaining Eurodollar Loans hereunder. "Eurodollar Rate" means, in relation to each Interest Period applicable to any Eurodollar Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by the Agent as the annual rate at which Agent is offered Dollar deposits in immediately available funds two (2) Business Days prior to the beginning of such Interest Period by prime banks in the interbank eurodollar market as at or about 1:00 p.m., San Jose time, for delivery on the first day of such Interest Period, for the number of days comprised therein and in an amount equal to the amount of the Eurodollar Loan for such Interest Period. "Eurodollar Rate Margin" means with respect to the principal amount of any Loans maintained as Eurodollar Loans, the rate per annum determined in accordance with the schedule set forth below based upon the Leverage Ratio for the Reference Period ending on the day immediately preceding the commencement of the fiscal quarter immediately prior to such fiscal quarter: ================================================================================ Eurodollar Leverage Ratio Rate Margin - -------------------------------------------------------------------------------- LEVEL III Greater than 2.25:1.00 3.25% - -------------------------------------------------------------------------------- LEVEL II Greater than 1.50:1.00, but less than or equal 2.75% to 2.25:100 - -------------------------------------------------------------------------------- 15 - -------------------------------------------------------------------------------- LEVEL I Less than or equal to 1.50:1.00 2.25% ================================================================================ provided that, notwithstanding the foregoing, during the period from the Closing Date until the first anniversary of the Closing Date, the Eurodollar Rate Margin shall be 3.25%. "Eurodollar Rate (Reserve Adjusted)" means, with respect to any Eurodollar Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: Eurodollar Rate = Eurodollar Rate (Reserve Adjusted) --------------------------------- 1 - Eurodollar Reserve Percentage "Eurodollar Reserve Percentage" means, with respect to any Eurodollar Loan for any Interest Period, a percentage (expressed as a decimal) equal to the daily average during such Interest Period of the maximum percentages in effect on each day of such Interest Period, as prescribed by the F.R.S. Board, for determining the maximum reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D or any other applicable regulation of the F.R.S. Board that prescribes reserve requirements applicable to "Eurocurrency Liabilities" as currently defined in Regulation D. "Event of Default" is defined in Section 10.1. "Excess Cash Flow" means, for any period (a) Operating Cash Flow of the Borrower and its Subsidiaries, minus (b) Consolidated Debt Service, minus (c) the aggregate amount of optional prepayments of the Facility B Loans during such period (without duplication of any amounts included in Consolidated Debt Services for each period). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Facility A Commitment" means, with respect to each Bank, such Bank's obligation pursuant to clause (a) of Section 2.1 to make Facility A Loans. "Facility A Commitment Amount" is defined in Section 2.2. "Facility A Commitment Termination Date" means May 31, 2000. "Facility A Loans" is defined in clause (a) of Section 2.1. -16- "Facility A Note" is defined in clause (a) of Section 3.2 and shall also mean and refer to all other promissory notes accepted from time to time in substitution therefor, replacement or renewal thereof or refunding thereof. "Facility B Commitment" means, with respect to each Bank, such Bank's obligation pursuant to clause (c) of Section 2.1 to make Facility B Loans. "Facility B Commitment Amount" means $6,000,000. "Facility B Installment" is defined in subclause (ii) of Section 3.3.3(a). "Facility B Loans" is defined in clause (c) of Section 2.1. "Facility B Note" is defined in clause (b) of Section 3.2 and shall also mean and refer to all other promissory notes accepted from time to time in substitution therefor, replacement or renewal thereof or refunding thereof. "Fair Market Value" means, with respect to any asset or Property, the price which could be negotiated in an arm's length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. "Federal Funds Rate" means, for any day, the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, the "Composite 3:30 p.m. Quotations") for such day under the caption "Federal Funds Effective Rate". If such rate is not published in the Composite 3:30 p.m. Quotations for any Business Day, the rate for such day will be the arithmetic mean of the rates for the last transaction in overnight federal funds arranged prior to 9:00 a.m., San Jose time, on such day by each of the three leading brokers of federal funds transactions in New York City, selected by the Agent. The Federal Funds Rate for any day which is not a Business Day shall be the rate for the immediately preceding Business Day. "Fees" means, collectively, the Closing Fee, the Commitment Fee and the Cancellation Fee. -17- "Final Maturity Date" means, (a) with respect to the Facility A Loans, May 31, 2000, and (b) with respect to the Facility B Loans, May 31, 2002. "Fleet Bank" means Fleet National Bank. "F.R.S. Board" means the Board of Governors of the Federal Reserve System. "GAAP" is defined in Section 1.4. "Governing Documents" means, relative to any Person, its certificate or articles of incorporation, any authorizing resolutions of its Board of Directors setting forth the rights, preferences and privileges of any class or series of its Capital Stock, its by-laws and all shareholder agreements, voting trusts or other similar arrangements applicable to any shares of its Capital Stock. "Governmental Authority" means any foreign, federal, state, regional, local, municipal or other government, or any department, commission, board, bureau, agency, public authority or instrumentality thereof, or any court or arbitrator. "Greenleaf Bridge Note" means the letter agreement, dated May 6, 1998, between Greenleaf Capital, Inc. and the Borrower. "Greenleaf Letter Agreement" means the letter agreement dated on or about June 30, 1998, between the Agent and Greenleaf Capital, Inc. "Greenleaf Note" means the Commercial Revolving Note, dated as of May 7, 1998, originally issued by the Borrower to Keystone Bank and assigned to Greenleaf Capital, Inc. on or about June 16, 1998, in the principal amount of $5,000,000. "Guaranties" means, collectively, the guaranties of each of the Guarantors to the Agent and the Banks contained in Article VI, as such Guaranties are originally given, or, if varied or supplemented from time to time, as so varied or supplemented. "Guarantors" means (a) IDI, and (b) each Subsidiary of the Borrower that hereafter becomes party to this Agreement as a Guarantor. "Hazardous Material" means and includes the following: any "hazardous substance", as defined in CERCLA; any "hazardous waste", as defined in the Resource Conservation and Recovery Act, as amended; -18- any petroleum product; or any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable Environmental Laws. "Historical Financials" is defined in Section 8.4. "Imperial" means Imperial Bank, a bank organized under the laws of the State of California. "Impermissible Qualification" means, relative to the opinion or certification of the Independent Public Accountant as to any financial statement of the Borrower or any of its Subsidiaries, any qualification or exception to such opinion or certification: (a) which is of a "going concern" or similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement; or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause the Borrower or any of its Subsidiaries to be in default of any of their Obligations under Section 9.2.4. "Incur" means, with respect to any Indebtedness of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness on the balance sheet of such Person (and "incurrence," "incurred," and "incurring" shall have meanings correlative to the foregoing). For purposes of this Agreement, Indebtedness (including Indebtedness for Borrowed Money) of any Person acquired by the Borrower or any of its Subsidiaries in any Acquisition (whether by purchase, merger, consolidation, other business combination or otherwise) shall be deemed to be incurred upon completion of the Acquisition of such Person. "Indebtedness" means, in relation to any Person at any time, all of the obligations of such Person which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person prepared as at such time, and in any event shall include: (a) all indebtedness of such Person arising or incurred under or in respect of any agreement, contingent or otherwise, made by such Person -19- (i) to purchase any indebtedness of any other Person or to advance or supply funds for the payment or purchase of any indebtedness of any other Person, or (ii) to purchase, sell or lease (as lessee or lessor) any Property, or to purchase or sell transportation or services, primarily for the purpose of enabling any other Person to make payment of any indebtedness of such other Person or to assure the owner of such other Person's indebtedness against loss, regardless of the delivery or non-delivery of the Property or the furnishing or non-furnishing of the transportation or services, or (iii) to make any Investment in any other Person for the purpose of assuring a minimum equity, asset base, working capital or other balance sheet condition for or as at any date or to provide funds for the payment of any liability, dividend or stock liquidation payment or otherwise to supply funds to or in any manner invest in any other Person; (b) all indebtedness of such Person of any kind (including all Capitalized Lease Obligations of such Person) arising or incurred under or in respect of any lease or other similar agreement or contract (whether written or oral) pursuant to which such Person shall (as lessee) lease or hire from any other Person or Persons any Property; (c) all indebtedness, obligations and liabilities secured by or arising under or in respect of any Liens upon or in any Property owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, obligations and liabilities; provided, however, that for purposes of determining the amount of any Indebtedness of the type described in this clause, if recourse with respect to such Indebtedness is limited to such Property, the amount of such Indebtedness shall be limited to the Fair Market Value of such Property; (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, even though recourse with respect to such indebtedness is limited to such Property; (e) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and bankers' acceptances issued for the account of such Person; and -20- (f) all indebtedness of such Person arising or incurred under or in respect of any Contingent Obligations. "Indebtedness for Borrowed Money" means, in relation to any Person at any time, (a) all Indebtedness of such Person for borrowed money (including all notes payable and drafts accepted representing extensions of credit and all obligations evidenced by bonds, debentures, notes or other similar Instruments on which interest charges are customarily paid), all Indebtedness of such Person relative to the face amount of all letters of credit, whether or not drawn, all Indebtedness of such Person constituting Capitalized Lease Obligations, and all Indebtedness of such Person of the type described in clause (d) of the definition of the term "Indebtedness" and all other obligations of such Person for the deferred purchase price of Property or services, and (b) all Contingent Obligations of such Person in respect of any Indebtedness of any other Persons of the kind described in clause (a) of this definition. Anything in the foregoing sentence of this definition to the contrary notwithstanding, for purposes of this Agreement and the other Loan Documents, the term "Indebtedness for Borrowed Money", when used in relation to any Person, shall in no event include any Indebtedness or Contingent Obligations of such Person in respect of any accounts payable, accrued liabilities or other Indebtedness to trade creditors or employees. "Indemnified Liabilities" is defined in Section 13.4. "Indemnified Party" is defined in Section 13.4. "Independent Public Accountant" means Ernst & Young LLP, or any other firm of certified public accountants of recognized standing selected by the Borrower and reasonably acceptable to the Agent. "Instrument" means any contract, agreement, indenture, mortgage or other document or writing (whether a formal agreement, letter or otherwise) under which any obligation is evidenced, assumed or undertaken, or any right to any Lien is granted or perfected. "Interest Period" means, relative to any Eurodollar Loan, the period, selected in accordance with Section 4.4.1, for which such Eurodollar Loan bears interest at a rate determined with reference to the Eurodollar Rate (Reserve Adjusted). "Investment" means, in relation to any Person, (a) any loan, advance or other extension of credit made by such Person to any other Person; -21- (b) the creation of any Contingent Obligation of such Person to support any of the Indebtedness of any other Person; or (c) any capital contribution by such Person to, or purchase of Capital Stock or other Securities or partnership interests by such Person in, any other Person, or any other investment evidencing an ownership or similar interest of such Person in any other Person. "Issuance Request" means a request and certificate duly executed by the chief financial, accounting or executive Authorized Officer of the Borrower, in or substantially in the form of Exhibit C attached hereto (with such changes thereto as may be agreed upon from time to time by the Agent and the Borrower). "Issuer" means Imperial Bank, in its capacity as issuer of one or more Letters of Credit, or any affiliate, unit or agency of Imperial Bank which has agreed to issue one or more Letters of Credit at the request of the Agent. "Letter of Credit" is defined in Section 5.1. "Letter of Credit Availability" means, at any time, an amount equal to the lesser of: (a) the difference of $1,000,000 minus the then aggregate amount of all unpaid and outstanding Reimbursement Obligations; and (b) the Maximum Facility A Availability. "Letter of Credit Outstandings" means, at any time, an amount equal to the sum of (a) the then aggregate amount which is undrawn and available under all outstanding Letters of Credit, plus (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations. "Leverage Ratio" means the ratio, calculated as of the last day of any Reference Period, of (a) Total Liabilities at such time, less the outstanding amount of Designated Seller Debt at such time, to (b) Consolidated EBITDA for such Reference Period. The term "Designated Seller Debt" shall mean all Permitted Subordinated Seller Debt -22- designated by the Agent as Designated Seller Debt for purposes of this definition on or prior to the date of incurrence of such Permitted Subordinated Seller Debt. "Lien" means any mortgage, security interest, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory, judgment or otherwise), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan" means either of the Facility A Loans or the Facility B Loans; and "Loans" means, collectively, the Facility A Loans and the Facility B Loans. "Loan Documents" means, collectively, this Agreement, the Notes, the Warrant, the Letters of Credit, the Subordination Agreement, the Greenleaf Letter Agreement, the Collateral Documents, and each other Instrument executed and delivered pursuant to or in connection with any thereof. "Loan Request" means a loan request and certificate duly executed and delivered to the Agent by the chief financial, accounting or executive Authorized Officer of the Borrower, in or substantially in the form of Exhibit C attached hereto, with such changes thereto as may be agreed upon by the Borrower and the Agent. "Lockbox Account" means a blocked depository Lockbox account number 9373266339 at Fleet Bank which is subject to the provisions of the Assignment of Lockbox Agreement. "Maintenance Receivables" means all rights to payment of the Borrower and its domestic U.S. Subsidiaries (other than Dormant Subsidiaries) now owned hereafter acquired services rendered under maintenance service agreements. "Materially Adverse Effect" means, in relation to any event, occurrence or development of whatsoever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), (a) a materially adverse effect on the business, Property, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole; -23- (b) a materially adverse effect on the ability of the Borrower or any of its Subsidiaries to perform any of its payment or other material Obligations under any Loan Document to which it is a party; or (c) a material impairment of the validity or enforceability of any Loan Document or any material impairment of the rights, remedies or benefits available to the Agent or the Banks under any Loan Document. "Maturity" means, relative to any Loan, the date on which such Loan is stated to be due and payable in whole or in part (in accordance with the Note evidencing such Loan, this Agreement or otherwise) or such earlier date when such Loan (or any portion thereof) shall be or become due and payable in whole or in part in accordance with the terms of this Agreement, whether by required prepayment, declaration, acceleration or otherwise. "Maximum Facility A Availability" means, at any date of determination, an amount equal to the lesser of (a) the Facility A Commitment Amount, less the sum of (i) the aggregate outstanding principal amount of Facility A Loans, plus (ii) the aggregate amount of Letter of Credit Outstandings, or (b) the Borrowing Base, less the sum of (i) the aggregate outstanding principal amount of Facility A Loans, plus (ii) the aggregate amount of Letter of Credit Outstandings. "Net Equity Proceeds" means, with respect to the issuance by the Borrower of any Capital Stock, the gross amount of cash consideration payable to or receivable by the Borrower in respect of such issuance, less (to the extent applicable and without duplication) reasonable sales and underwriting commissions, investment banking, accounting and legal fees and disbursements, and printing expenses and any governmental fees incurred in connection with such issuance and payable by the issuer of such Capital Stock. If the Borrower receives any Property (other than cash) as part of the consideration for any such issuance, Net Equity Proceeds shall be deemed to include any cash payments in respect of such Property when and to the extent received by the Borrower. "Notes" means, collectively, the Facility A Notes and the Facility B Notes. "Obligations" means, collectively, all of the indebtedness, obligations and liabilities existing on the date of this Agreement or arising from time to time thereafter, whether direct or indirect, joint or -24- several, actual, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, of the Borrower to the Agent or the Banks (a) in respect of any of the Loans made to the Borrower by the Banks pursuant to this Agreement, (b) under or in respect of any of the Letters of Credit issued pursuant to this Agreement, or (c) under or in respect of this Agreement, the Notes or any of the other Loan Documents. For all purposes of this Agreement and the other Loan Documents, the term "Obligations" shall include all Reimbursement Obligations of the Borrower. "Operating Cash Flow" means, for any period, the difference of (a) Consolidated EBITDA for such period, minus (b) the aggregate amount of cash taxes actually paid by the Borrower and its Subsidiaries for such period, minus Capital Expenditures of the Borrower and the Subsidiaries for such period, plus the amount of any decrease (or minus the amount of any increase) in Working Capital of the Borrower and its Subsidiaries during such period, minus the amount of any software development expenses capitalized on the consolidated balance sheet of the Borrower during such period. "Paid (or payment) in full" means paid (or payment) in full in cash. "Participant" is defined in Section 12.1.1. "Patent Security Agreements" means, collectively, the Patent Security Agreements, substantially in the form of Exhibit H attached hereto, to be executed and delivered by the Borrower and each of its Subsidiaries on or prior to the Closing Date in favor of the Agent for the benefit of the Secured Parties. "Percentage" of any Bank means, at any time, the percentage set forth opposite such Bank's name on Schedule 2 hereto (or, if such Bank has executed an Assignment and Acceptance Agreement, opposite such Bank's signature on the most recent Assignment and Acceptance Agreement then executed by it). "Permitted Acquisition" means any Acquisition by the Borrower from time to time after the Closing Date; provided, however, that: (a) after giving effect to such Acquisition, all of the Property acquired pursuant thereto shall be owned exclusively by the Borrower or one of its direct Subsidiaries that, immediately upon completion of such Acquisition, shall have become party -25- hereto and shall have complied with the covenants contained in Section 9.1.9 hereof; (b) the Borrower shall have demonstrated to the reasonable satisfaction of the Agent, based on historical financial statements, projections and pro-forma financial statements, in each case certified by an Authorized Officer of the Borrower, that all covenants, including all covenants contained in Article IX hereof, contained herein (A) would have been satisfied on a pro forma basis as at the end of or for the most recent Reference Period, and (B) will be satisfied on a pro forma basis through the Final Maturity Date of all Loans, based on operating and financial projections which are consistent with historical results which conservatively can be expected for the future; (c) the Acquisition is of a Person or business engaged in the business of the Borrower as of the date hereof, or of a business reasonably incidental or related thereto; and (d) at any time any offer or commitment is made to engage in any such Acquisition, at any time any agreement to engage in any such Acquisition is entered into, and after giving effect to any such Acquisition, no Default or Event of Default shall occur or be continuing. "Permitted Capital Stock" means any Capital Stock of any Person with respect to which such Person has no obligation to (a) declare or pay any dividend (other than dividends payable in shares of Permitted Capital Stock), at any time on or prior to December 31, 2002, (b) make any redemption, repurchase, retirement or acquisition, whether through a Subsidiary of such Person or otherwise, at any time on or prior to December 31, 2002, (c) make any return of capital to the holder thereof at any time on or prior to December 31, 2002, or (d) make any other distribution of any kind at any time on or prior to December 31, 2002. "Permitted Disposition" means: (a) any Sale by the Borrower or any of its Subsidiaries of its software or products in the ordinary course of its business; (b) any Sale by the Borrower or any of its Subsidiaries in the ordinary course of its business of its equipment or other tangible personal Property that is obsolete or no longer useful or necessary to its business; -26- (c) any Sale by the Borrower or any of its Subsidiaries in the ordinary course of its business, and in a manner consistent with its customary and usual cash management practices, of its Permitted Investments; or (d) the creation or incurrence by the Borrower or any of its Subsidiaries of any Liens permitted by Section 9.2.3. "Permitted Indebtedness" means any of the following Indebtedness: (a) Indebtedness of the Borrower or any of its Subsidiaries in respect of taxes, assessments, levies or other governmental charges, and Indebtedness of any such Person in respect of accounts payable or other Indebtedness to trade creditors incurred in the ordinary course of business or in respect of claims against it for labor, materials or supplies, to the extent that (in each case) the payment thereof shall not at the time be required to be made in accordance with the provisions of Section 9.1.4; (b) Indebtedness of any of the Borrower or any of its Subsidiaries secured by Liens of carriers, warehousemen, mechanics, landlords or materialmen that constitute Permitted Liens under clause (c) or (e) of the definition thereof; (c) Indebtedness of the Borrower or any of its Subsidiaries in respect of judgments or awards which have been in force for less than the applicable appeal period so long as (i) (in each case) such Person shall at the time in good faith be prosecuting an appeal or proceedings for review and execution thereof shall have been stayed pending such appeal or review, and (ii) the aggregate amount of all such Indebtedness of the Borrower and its Subsidiaries outstanding at any time (determined on a consolidated basis in accordance with GAAP) does not exceed $500,000; (d) Indebtedness incurred by the Borrower or any of its Subsidiaries in connection with the acquisition, construction or improvement by such Person of equipment used or to be used in the ordinary course of business of such Person; provided, however, that (i) the aggregate amount of all such Indebtedness of the Borrower or any of its Subsidiaries outstanding at any time (determined on a consolidated basis in accordance with GAAP) does not exceed $1,500,000, and (ii) any Liens on such equipment -27- securing such Indebtedness constitute Permitted Liens under clause (g) of the definition thereof; (e) Contractual Obligations of the Borrower or any of its Subsidiaries (other than Contractual Obligations constituting Indebtedness for Borrowed Money) under Instruments (including operating leases or subleases of real or personal Property, but in any event excluding any Instruments creating, governing or securing Indebtedness for Borrowed Money) entered into in the ordinary course of business of such Person, and Contingent Obligations of the Borrower or any of its Subsidiaries incurred in the ordinary course of business of such Person in respect of any of such Contractual Obligations; (f) Indebtedness under or in respect of Contingent Obligations of the Borrower or any of its Subsidiaries in respect of letters of credit or surety or other bonds issued in the ordinary course of business of such Person in connection with Liens that constitute Permitted Liens under clause (c) of the definition thereof; (g) Indebtedness for Borrowed Money of the Borrower and its Subsidiaries that (i) is existing on the date of this Agreement and is not otherwise expressly permitted by this Agreement, (ii) is identified in Section 8.7 of the Disclosure Schedule and (iii) does not, with respect to any such item of Indebtedness for Borrowed Money, at any time exceed the outstanding amount of such Indebtedness for Borrowed Money set forth in Section 8.7 of the Disclosure Schedule, minus any repayments or prepayments, or repurchases or other acquisitions, of principal of such Indebtedness for Borrowed Money; and (h) any extension, refunding, replacement or renewal of any Indebtedness referred to in paragraph (g), so long as such Indebtedness is not increased or secured by additional Property. "Permitted Investments" means any of the following Investments by the Borrower or any of its Subsidiaries: (a) Investments that (i) are owned or held by the Borrower or are outstanding or are in effect on the date of this Agreement, and (ii) are identified in Section 8.20 of the Disclosure Schedule; (b) Investments in cash and Cash Equivalents; (c) Investments in the form of Accounts Receivable; -28- (d) Investments in the form of advances or prepayments to suppliers in the ordinary course of business; and (e) Investments in the form of loans or advances to employees in the ordinary course of business for travel expenses, drawing accounts or other similar business-related expenses. "Permitted Liens" means any of the following Liens: (a) Liens that (i) are in existence on the date of this Agreement, and (ii) are identified in Section 8.15 of the Disclosure Schedule,; (b) Liens to secure taxes, assessments, levies or other governmental charges imposed upon the Borrower or any of its Subsidiaries, and Liens to secure claims against the Borrower or any of its Subsidiaries for labor, materials or supplies, to the extent (in each case) that the payment thereof shall not at the time be required to be made in accordance with the provisions of Section 9.l.4; (c) Deposits or pledges made by the Borrower or any of its Subsidiaries in the ordinary course of its business (i) in connection with, or to secure payment of, workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, (ii) to secure the performance of bids, tenders, statutory obligations, leases or contracts (other than contracts relating to borrowed money), or (iii) to secure surety, appeal, indemnity or performance bonds, in each case in the ordinary course of the business of such Person, and in each case only to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Section 9.1.4; (d) Liens in respect of judgments or awards against the Borrower or any of its Subsidiaries to the extent that such judgments or awards constitute Permitted Indebtedness under clause (c) of the definition thereof; (e) Liens of carriers, warehousemen, mechanics, landlords or materialmen incurred in the ordinary course of the business of the Borrower or any of its Subsidiaries, in each case, for sums not overdue or being contested in good faith by appropriate proceedings, and for which appropriate reserves with respect thereto have been established and maintained on the consolidated books of the Borrower and its Subsidiaries -29- in accordance with GAAP to the extent required under such principles; (f) easements, rights-of-way, zoning and other similar restrictions and other similar encumbrances or title defects which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (g) Liens created by the Borrower or any of its Subsidiaries to secure the payment of the cost of equipment acquired, constructed or improved by such Person after the date of this Agreement and which Liens are created substantially contemporaneously with or within 360 days after the acquisition, construction or improvement of the equipment subject thereto (all Liens of the type described in this clause (g) being hereinafter called "Purchase Money Liens"); provided, however, that: (i) any equipment subject to any such Purchase Money Lien created by the Borrower or any of its Subsidiaries is used or to be used in the ordinary course of business of such Person; (ii) no such Purchase Money Lien on any such equipment shall extend to or cover any Property of such Person other than such equipment; and (iii) the aggregate amount of all Indebtedness of the Borrower and its Subsidiaries outstanding at any time and secured by all such Purchase Money Liens on equipment (determined on a consolidated basis in accordance with GAAP) shall at no time exceed $1,500,000; and (h) Extensions, renewals and replacements of Liens described in clauses (a) and (g) of this definition, provided that each such extension, renewal or replacement Lien is limited to the Property covered by the Lien so extended, renewed or replaced and does not secure any Indebtedness that is different from or in excess of that secured immediately prior to such extension, renewal or replacement. "Permitted Subordinated Seller Debt" means Seller Debt: -30- (a) that is not guarantied in any manner by any Subsidiary of the Borrower or secured by any Property of any Subsidiary of the Borrower; (b) the terms of which, including (i) the payment, prepayment, redemption, repurchase and other similar terms, (ii) the interest rate and interest and fee payment terms and (iii) the covenants, defaults and other provisions, shall be acceptable in all respects to the Agent; and (c) that is subordinated in right of payment and exercise of remedies to the prior payment in full of all the Obligations, and any Indebtedness which refunds, refinances or replaces the Obligations, pursuant to a subordination agreement among the holder of such Indebtedness, the Borrower and the Agent which is acceptable in all respects to the Agent. "Person" means any natural person, corporation, partnership, joint venture, association, Governmental Authority or any other entity, whether acting in an individual, fiduciary or other capacity. "Pledge Agreement" means the Pledge Agreement, substantially in the form of Exhibit F attached hereto, to be executed and delivered by the Borrower on or prior to the Closing Date in favor of the Secured Parties. "Prime Rate" means the higher of (a) the annual rate of interest announced from time to time by the Agent at its head office in San Jose, California, as its "prime rate" and (b) one-half of one percent (1/2%) above the Federal Funds Rate. "Prime Rate Margin" means with respect to the principal amount of any Loan for any fiscal quarter of the Borrower, the rate per annum determined in accordance with the schedule set forth below based upon the Leverage Ratio for the Reference Period ending on the day immediately preceding the commencement of the fiscal quarter immediately prior to such fiscal quarter: ================================================================================ Prime Leverage Ratio Rate Margin - -------------------------------------------------------------------------------- LEVEL III Greater than 2.25:1.00 2.25% - -------------------------------------------------------------------------------- LEVEL II Greater than 1.50:1.00, but less than or equal to 2.25:1.00 1.75% - -------------------------------------------------------------------------------- -31- - -------------------------------------------------------------------------------- LEVEL I Less than or equal to 1.50:1.00 1.25% ================================================================================ provided that, notwithstanding the foregoing, during the period from the Closing Date until the first anniversary of the Closing Date, the Prime Rate Margin shall be 2.25%. "Projections" is defined in 8.5. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. "Purchasing Bank" is defined in Section 12.2.1. "Public Offering" means any public offering by the Borrower for its own account of Capital Stock of the Borrower pursuant to an effective registration statement on Form S-1, Form S-2 or Form S-3 under the Securities Act of 1933, as amended. "Qualified Maintenance Receivables" means the aggregate amount of the unpaid portions of Maintenance Receivables (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Maintenance Receivables): (a) that the Borrower reasonably and in good faith determines to be collectible; (b) that are with account debtors that (i) are not Affiliates or Subsidiaries of the Borrower or any of its Subsidiaries, (ii) purchased the services giving rise to the relevant Maintenance Receivable in an arm's length transaction, and (iii) are not insolvent or involved in any Bankruptcy or Insolvency Proceeding; (c) that are not subject to any Lien other than Permitted Liens; (d) in which the Agent has a valid and perfected security interest; (e) that are not outstanding for more than ninety (90) days past the due date of the respective Maintenance Receivable; (f) that do not exceed, from any single account debtor and its Affiliates, twenty percent (20%) of all Maintenance Receivables that are Qualified Maintenance Receivables (but the portion of such Maintenance Receivables not in excess of such percentage may be Qualified Maintenance Receivables); -32- (g) that are payable in Dollars; (h) that are not Maintenance Receivables from Government Authorities, unless such Maintenance Receivables have been formally assigned to the Banks in accordance with Applicable Law; (i) that are not payable from an office outside of the United States, unless such Maintenance Receivable are backed by a letter of credit in an amount reasonably acceptable to the Agent or by other insurance or credit support in form and substance reasonably satisfactory to the Agent; (j) that are not due from any account debtor if more than twenty percent (20%) of all Maintenance Receivables owing from such account debtor would not be Qualified Maintenance Receivables; (k) that are not customer or account debtor deposits; (l) that are paid directly to the Lockbox Account; and (m) that have not otherwise been determined by the Agent, in its reasonable discretion, to be excluded from Qualified Maintenance Receivables, and for which the Agent shall have notified the Borrower. "Reference Period" means each period of four (4) consecutive fiscal quarters of the Borrower and its Subsidiaries, commencing with the period June 1, 1998 through May 31, 1999. "Register" is defined in Section 12.2.4. "Reimbursement Obligations" is defined in Section 5.6. "Related Parties" is defined in Section 11.2. "Relative" means, in relation to any Person, any spouse, parent, grandparent, child, grandchild, brother or sister of such Person, or the spouse of any of the foregoing. "Release" means a "release," as such term is defined in CERCLA. "Renewal Event" means the failure, during any three month period, of the Persons representing at least seventy percent (70%) of Borrower's maintenance service customers (determined by either number or -33- percentage of Maintenance Receivables) to renew the maintenance service contracts that would expire during such three month period. "Required Banks" means, at the time any determination thereof is to be made, (a) Banks having in the aggregate more than 51% of the aggregate Commitments, and (b) if all the Commitments have terminated, Banks then holding in the aggregate more than 51% of the aggregate outstanding principal amount of all of the Loans. "Restricted Payments" means: (a) any payment, prepayment, distribution, loan, advance, Investment or Sale by the Borrower or by any or its Subsidiaries which constitutes an Affiliate Transaction; (b) any declaration or payment by the Borrower or by any or its Subsidiaries of any dividends or other distributions on account of, or any payment or other distribution by the Borrower or by any of its Subsidiaries on account of the purchase, repurchase, redemption, retirement or other acquisition for value of, any shares of Capital Stock of the Borrower or any of its Subsidiaries; (c) any payment made to retire or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of the Borrower or any of its Subsidiaries now or hereafter outstanding; and (d) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Subordinated Indebtedness, including any Indebtedness in respect of the Greenleaf Note or the Greenleaf Bridge Note or any Seller Debt. "Sale" means any sale, conveyance, exchange, swap, trade, transfer or other disposition of any Property. "SEC" means the Securities and Exchange Commission. "Secured Parties" means, collectively, the Agent, the Issuer and the Banks. "Secured Seller Note" means the promissory note, dated May 7, 1998, from the Borrower in favor of Adra Systems, Inc. in the principal amount of $4,400,000. -34- "Securities" means any Capital Stock, partnership interests, voting trust certificates, bonds, debentures, notes or other evidences of Indebtedness for Borrowed Money, secured or unsecured, convertible, subordinated or otherwise, or in general any Instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "Security Agreement" means the Security Agreement, substantially in the form of Exhibit H attached hereto, to be executed and delivered by the Borrower and its Subsidiaries on or prior to the Closing Date in favor of the Agent, for the benefit of the Secured Parties. "Security Agreements" means, collectively, the Security Agreement, the Patent Security Agreements, the Trademark Security Agreements and the Assignment of Lockbox Agreement. "Security Instrument" means any security agreement, chattel mortgage, assignment, financing or similar statement or notice, continuation statement, or other agreement or Instrument, or any amendment or supplement to any thereof, providing for, evidencing or perfecting any Lien. "Seller Debt" means Indebtedness of the Borrower (whether in respect of promissory notes, non-compete covenants or otherwise) incurred in connection with any Permitted Acquisition. "Seller Security Agreement" means the Security Agreement dated as of May 7, 1998, made by the Borrower in favor of Adra Systems, Inc. "Seller Warrant" means the common stock purchase warrant, dated May 7, 1998, issued by the Borrower to Adra Systems, Inc. "SofTech Affiliate" means the Borrower or any of its Affiliates (other than any Subsidiaries of the Borrower). "Stated Amount" of each Letter of Credit means the "Stated Amount" as defined therein or, if not defined therein, the face amount thereof. "Stated Expiry Date" is defined in clause (b) of Section 5.1. -35- "Subordinated Debt Documents" means, collectively, (a) the Greenleaf Note, (b) the Greenleaf Bridge Note and (c) each Instrument governing, evidencing or securing any Subordinated Indebtedness. "Subordinated Indebtedness" means collectively (a) Indebtedness under or in respect of the Greenleaf Note and the Greenleaf Bridge Note, (b) Permitted Subordinated Seller Debt, and (c) any other Indebtedness designated by the Agent and the Borrower from time to time as "Subordinated Indebtedness" for purposes of this Agreement. "Subsidiary" means, in relation to any Person (in this paragraph called the "parent") at any time, any corporation, partnership or other Person (a) of which shares of Capital Stock, partnership interests or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership or other Person, or representing a majority of the equity interests in such corporation, partnership or other Person, are at the time owned, controlled or held, directly or indirectly, by the parent, or (b) the management of which is otherwise controlled, directly or indirectly, by the parent. "Taxes" is defined in Section 3.8. "Total Liabilities" means, at any time, the total liabilities of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "Trademark Security Agreements" means, collectively, the Trademark Security Agreements, substantially in the form of Exhibit J attached hereto, to be executed and delivered by the Borrower and each of its Subsidiaries on or prior to the Closing Date in favor of the Agent, for the benefit of the Secured Parties. "Transfer Effective Date" is defined in Section 12.2.1. "Transferee" is defined in Section 12.3. "Unused Commitment Amount" means, for any period (of one or more days), the average daily amount for such period by which the Facility A Commitment Amount (as reduced by any permanent reduction pursuant to Section 2.2) on each day during such period exceeds the sum of (i) the aggregate principal amount of all Facility A Loans outstanding on each such day, plus (ii) the aggregate amount of Letter of Credit Outstandings on each such day. -36- "Voting Shares" means Capital Stock of the class or classes having general voting power under ordinary circumstances to elect the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Warrant" means the common stock purchase warrant, substantially in the form of Exhibit N hereto, executed and delivered by the Borrower on the Closing Date. "Working Capital" means the excess of Consolidated Current Assets over Consolidated Current Liabilities, excluding the aggregate principal amount of all Loans. SECTION 1.2. Use of Defined Terms. Terms for which meanings are provided in this Agreement shall, unless otherwise defined or the context otherwise requires, have such meanings when used in the Notes, the Disclosure Schedule, each of the other Loan Documents and each notice or other communication delivered from time to time in connection with this Agreement or any Instrument executed pursuant hereto. SECTION 1.3. Cross-References. Unless otherwise specified, references in this Agreement or in any of the other Loan Documents to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and unless otherwise specified, references in any Article, Section or definition to any paragraph or clause are references to such paragraph or clause of such Section, Article or definition. SECTION 1.4. Accounting and Financial Determinations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any accounting computation is required to be made, for the purposes of this Agreement and the other Loan Documents, such determination or calculation shall, to the extent applicable, be made in accordance with generally accepted accounting principles ("GAAP"). Inasmuch as the parties have agreed to certain financial ratios and limitations based upon application of generally accepted accounting principles now in effect, in the event of any change after the date hereof in generally accepted accounting principles, which change materially affects the composition or calculation of accounts or items used in determining the financial ratios or limitations herein, the Borrower and the Agent shall cause such ratios or limitations to be appropriately modified so as to eliminate or minimize, to the extent practicable, the effect of such changes. -37- SECTION 1.5. General Provisions Relating to Definitions. Terms for which meanings are defined in this Agreement shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The term "including" means including, without limiting the generality of any description preceding such term. Each reference herein to any Person shall include a reference to such Person's successors and assigns. References to any Instrument defined in this Agreement refer to such Instrument as originally executed or, if subsequently amended or supplemented from time to time, as so amended or supplemented and in effect at the relevant time of reference thereto. ARTICLE II COMMITMENTS SECTION 2.1. Commitments. Subject to the terms and conditions of this Agreement (including Article VI): (a) each Bank severally and for itself alone agrees that it will, from time to time on any Business Day occurring during the period commencing on the date hereof and continuing to and including the Facility A Commitment Termination Date, make loans (relative to each Bank, its "Facility A Loans") to the Borrower equal to such Bank's Percentage of the aggregate principal amount of the Facility A Loans requested by the Borrower pursuant to Section 3.1; provided, however, that no Bank shall be permitted or required to make any Facility A Loan if the amount of such Facility A Loan shall exceed the Maximum Facility A Availability then in effect; (b) the Issuer agrees that it will, from time to time on any Business Day occurring during the period commencing on the Closing Date and continuing to (but not including) the Facility A Commitment Termination Date, issue or extend Letters of Credit for the account of the Borrower or any of its Subsidiaries, all in accordance with the provisions of Article V; provided, however, that neither the Issuer nor any Bank shall be permitted or required to issue or extend, in the case of the Issuer, or participate in the issuance or extension of, in the case of such Bank, a Letter of Credit if the face amount of such Letter of Credit shall exceed either (i) the Maximum Facility A Availability or (ii) the Letter of Credit Availability then in effect; and -38- (c) each Bank severally and for itself alone agrees that it will make a loan (relative to each Bank, its "Facility B Loan") to the Borrower on the initial Drawdown Date hereunder equal to such Bank's Percentage of the aggregate principal amount of the Facility B Loans requested by the Borrower pursuant to Section 3.1. The aggregate amount of the Facility B Loans requested by the Borrower or made by the Banks on the initial Drawdown Date will not exceed $6,000,000. The Facility B Commitments of the Banks will terminate immediately after the fundings of the Facility B Loans on the initial Drawdown Date. SECTION 2.2. Facility A Commitment Amount. The aggregate principal amount ("Facility A Commitment Amount") of the Facility A Commitments of all the Banks on any date on or prior to the Facility A Commitment Termination Date shall be $3,000,000. The Facility A Commitment shall in any event terminate in full and the Facility A Commitment Amount shall be reduced to zero on the Facility A Commitment Termination Date. The Facility A Commitment Amount from time to time in effect shall be subject to permanent reduction, automatically and without further action, by the aggregate principal amount of each voluntary permanent reduction of the Facility A Commitment Amount made by the Borrower from time to time after the date hereof; provided, however, that (a) each such permanent reduction of the Facility A Commitment Amount shall require at least three (3) Business Days' prior notice to the Agent and shall be permanent, and any partial reduction of such amount shall be in a minimum amount of $500,000 or in an integral multiple of $100,000 in excess thereof, and (b) no such permanent reduction of the Facility A Commitment Amount may be made by the Borrower if, after giving effect to such reduction, the Facility A Commitment Amount would be reduced to an amount which is less than the sum of the aggregate principal amount of all Facility A Loans then outstanding and the aggregate amount of Letter of Credit Outstandings at such time. SECTION 2.3 Commitments Several. The failure of any Bank to make any Loan or any other Credit Extension hereunder shall not relieve any other Bank of its obligation (if any) to make a Loan or any other Credit Extension, but no Bank shall be responsible for the failure of any other Bank to make a Loan or other Credit Extension required to be made by such other Bank. -39- ARTICLE III LOANS AND NOTES SECTION 3.1. Borrowing Procedures. Loans shall be made by the Banks in accordance with this Section 3.1. SECTION 3.1.1. Requests for Borrowing. By delivering to the Agent a Loan Request on or before 11:00 a.m., San Jose time, the Borrower may (a) from time to time request, on not less than one (1) nor more than five (5) Business Days' notice for Prime Rate Loans (or not less than three (3) nor more than five (5) Business Days' notice for Eurodollar Loans), that a Facility A Loan be made by the Banks in a minimum aggregate principal amount of $100,000, or any integral multiple of $100,000 in excess thereof, on the Drawdown Date (which must be a Business Day) specified in such Loan Request, and (b) from time to time request, on not less than one (1) nor more than five (5) Business Days' notice for Prime Rate Loans (or not less than three (3) nor more than five (5) Business Days' notice for Eurodollar Loans), that a Facility B Loan be made by the Banks in a minimum aggregate principal amount of $100,000, or any integral multiple of $100,000 in excess thereof, on the initial Drawdown Date for Loan hereunder. The Agent shall promptly notify the Banks of the receipt of any such Loan Request. Subject to the terms and conditions of this Agreement, on or before 3:00 p.m., San Jose time, on the Drawdown Date specified in the Loan Request, each Bank shall provide the Agent with funds in an amount equal to such Bank's Percentage of the requested Loans, by transferring same day or immediately available funds to such account as the Agent shall specify from time to time by notice to the Banks. The proceeds of each Borrowing shall be made available by the Agent to the Borrower on the Drawdown Date specified in the Loan Request by wire transferring such funds in such amount or causing such funds in such amount to be wire transferred to such account of the Borrower, or to such designees of the Borrower, as shall be designated by the Borrower to the Agent in the Loan Request therefor. Each request for Loans made pursuant to this Section 3.1.1 shall constitute the representation and warranty of the Borrower made to the Agent and the Banks that all of the -40- applicable conditions contained in Article VII will, after giving effect to such Loans, be satisfied and the making available of such Loans to the Borrower shall be subject to the satisfaction of the applicable conditions of Article VII. SECTION 3.1.2. Funding Reliance for Loans. With respect to any Loans, unless the Agent shall have been notified in writing by any Bank prior to the date of such Loan at the Agent's address specified pursuant to Section 13.2 that such Bank does not intend to make available to the Agent all or any portion of such Bank's Percentage of the Loans to be made by such Bank on such date, the Agent may (but shall not be obligated to) assume that such Bank has made such amount available to the Agent on that date, and, in reliance on such assumption, the Agent may make available to the Borrower a corresponding amount. If any such amount referred to in the preceding sentence of this Section 3.1.2 is made available by such Bank to the Agent on a date after the date of such Loan, such Bank shall pay to the Agent (for its account) on demand interest on such amount at a rate of interest equal to, for the first three Business Days following the date on which the Agent made such amounts available to the Borrower, the daily average Federal Funds Rate plus 1/2% and, thereafter, at the Prime Rate plus 1-1/2%. A statement of the Agent submitted to any Bank with respect to any amounts owing under this Section 3.1.2 shall be conclusive in the absence of manifest error. If such amount is not in fact made available to the Agent by such Bank within three Business Days after the date of such Loan, the Agent shall be entitled to recover such amount, with interest thereon at the rate per annum then applicable to the Loans, upon demand, from the Bank. Nothing in this Section 3.1.2 shall be deemed to relieve any Bank from its obligation to fulfill its Commitments hereunder or to prejudice any rights which the Borrower or the Agent may have against any Bank as a result of any default by that Bank hereunder. SECTION 3.2. Notes. (a) All Facility A Loans made by each Bank shall be evidenced by a promissory note of the Borrower, dated as of the Closing Date, and in or substantially in the form of Exhibit A attached hereto (as amended, endorsed, replaced or otherwise modified from time to time, such Bank's "Facility A Note"), payable to the order of such Bank in a face amount equal to such Bank's Percentage of the Facility A Commitment Amount. (b) All Facility B Loans made by each Bank shall be evidenced by a promissory note of the Borrower, dated as of the -41- Closing Date, and in or substantially in the form of Exhibit B attached hereto (as amended, endorsed, replaced or otherwise modified from time to time, such Bank's "Facility B Note"), payable to the order of such Bank in a face amount equal to such Bank's Percentage of the Facility B Commitment Amount. The Borrower hereby irrevocably authorizes each Bank to make (or cause to be made) appropriate notations on the grid attached to such Bank's Note (or on a continuation of such grid attached to any such Note and made a part thereof), which notations, if made, shall evidence, among other things, the date of, the outstanding principal of and payments on the Loans evidenced thereby. Any such notations on any such grid indicating the outstanding principal amount of the Loans evidenced thereby shall be rebuttable presumptive evidence of the principal amount thereof owing and unpaid, but the failure to record any such information on such grid shall not, however, limit or otherwise affect the Obligations of the Borrower hereunder or under such Notes to make payments of principal of or interest on the Loans when due. SECTION 3.3. Principal Payments. Repayments and prepayments of principal of the Loans shall be made as follows in accordance with this Section 3.3: SECTION 3.3.1. Repayments. The Borrower promises to make payment in full of all of the unpaid principal of each Loan at the final Maturity thereof. All of the Obligations evidenced by each Bank's Facility A Note shall, if not sooner paid, be in any event due and payable in full on the Final Maturity Date for Facility A Loans. All of the Obligations evidenced by each Bank's Facility B Note shall, if not sooner paid, be in any event due and payable in full on the Final Maturity Date for Facility B Loans. SECTION 3.3.2. Facility A Loan Prepayments. (a) Voluntary Prepayment. The Borrower may, from time to time on any Business Day (without premium or penalty, except as may be required by Section 4.8), make a voluntary prepayment, in whole or in part, of the then aggregate outstanding principal amount of all Facility A Loans; provided, however, that (i) all such voluntary prepayments shall require at least one (1) and no more than five (5) Business Days' prior notice as to prepayments of Prime Rate Loans, and at least three (and no more than five) Business Days' prior notice as -42- to prepayments of Eurodollar Loans, in each case to the Agent (which will promptly notify the Banks thereof); and (ii) all such voluntary prepayments in part shall be in a minimum aggregate principal amount of $100,000 or in any integral multiple of $100,000 in excess thereof; and (b) Each prepayment of any Facility A Loans made pursuant to this Section 3.3.2 shall be without premium or penalty, except as may be required by Section 4.8. Subject always to the terms and conditions hereof, the Borrower shall be entitled to reborrow all or any part of the principal of the Facility A Loans which shall be repaid or prepaid. Voluntary prepayments of any Eurodollar Loans pursuant to subclause (i) of Section 3.3.2(a) shall only be made at the end of the Interest Periods applicable thereto, unless all losses and expenses referred to in Section 4.8 shall be paid by the Borrower to the Agent concurrently with such prepayments. (c) Any partial payment of the Obligations of the Borrower under or in respect of any Facility A Loan shall be applied: (i) first, to the payment of all interest due and payable on principal of such Facility A Loan at the time of such partial payment; (ii) then, to the payment of all (if any) other amounts (except principal) due and payable under the applicable Facility A Note at such time; and (iii) finally, to the payment of the principal of the applicable Facility A Note due and payable at such time. SECTION 3.3.3. Facility B Loan Prepayments and Repayments. (a) The Borrower: (i) Voluntary Prepayments. May, from time to time on any Business Day (without premium or penalty, except as may be required by Section 4.8), make a voluntary prepayment, in whole or in part, of the then aggregate outstanding principal amount of the Facility B Loans; provided, however, that (A) all such voluntary prepayments shall require at least one (1) and no more than five (5) Business Days' prior notice as to prepayments of Prime Rate Loans, and at least three (and no more than five) Business Days' prior notice as to prepayments of Eurodollar Loans, in each case to the -43- Agent (which will promptly notify the Banks thereof); and (B) all such voluntary prepayments in part shall be in a minimum aggregate principal amount of $100,000 or in any integral multiple of $100,000 in excess thereof; and (ii) Certain Mandatory Repayments. Shall pay the aggregate principal amount of all Facility B Loans in sixteen (16) consecutive equal quarterly installments, one such installment due on the last day of each calendar quarter, commencing on August 31, 1998, with a final payment in the remaining principal amount of all Facility B Loans on the Final Maturity Date for Facility B Loans. The principal amount of all Facility B Loans payable on any quarterly payment date shall be referred to as a "Facility B Installment." (iii) Net Equity Proceeds. Shall prepay the outstanding Facility B Loans with the entire amount of Net Equity Proceeds (up to the aggregate outstanding principal of Facility B Loans) received by the Borrower from any Public Offering, immediately upon receipt by the Borrower of such Net Equity Proceeds. (iv) Excess Cash Flow. Shall, within 45 days of the last day of each calendar quarter, beginning September 30, 1998, apply seventy percent (70%) of Excess Cash Flow of the preceding calendar quarter towards prepayment of the outstanding Facility B Loans. (b) Each repayment or prepayment of the Facility B Loans made pursuant to clause (a) of Section 3.3.3 shall be without premium or penalty. Each voluntary prepayment of the Facility B Loans made pursuant to subclause (i) of Section 3.3.3(a), and each mandatory prepayment of Facility B Loans with Net Equity Proceeds or out of Excess Cash Flow pursuant to subclauses (iii) or (iv) of Section 3.3.3(a), shall be applied towards the payment of each of the Facility B Installments in the inverse order of the respective due dates of such Facility B Installments. The Borrower shall not be entitled to reborrow all or any part of the principal of the Facility B Loans which shall be repaid or prepaid at any time. -44- Voluntary prepayments of any Eurodollar Loans pursuant to subclause (i) of Section 3.3.3(a) shall only be made at the end of the Interest Periods applicable thereto, unless all losses and expenses referred to in Section 4.8 shall be paid by the Borrower to the Agent concurrently with such prepayments. (c) Any partial payment of the Obligations of the Borrower under or in respect of any Facility B Note shall be applied: (i) first, to the payment of all of the interest due and payable on principal of such Facility B Note at the time of such partial payment; (ii) then, to the payment of all (if any) other amounts (except principal) due and payable under such Facility B Note at such time; and (iii) finally, to the payment of the principal of such Facility B Note due and payable at such time in accordance with paragraph (b). SECTION 3.3.4. Certain Mandatory Prepayments. The Borrower shall, on each Business Day when the sum of (a) the then aggregate outstanding principal amount of Facility A Loans, plus (b) the then outstanding amount of Letter of Credit Outstandings, exceeds the Borrowing Base, pay to the Agent such excess, for application as follows: (i) to Facility A Loans; and (ii) as cash collateral for Letter of Credit Outstandings. SECTION 3.4. Interest Payments. The Borrower shall make payments of interest in accordance with this Section 3.4 as follows: SECTION 3.4.1. Interest Rates. The Borrower hereby absolutely and unconditionally promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full, as follows: (a) with respect to Facility A Loans: (i) on any portion of each Facility A Loan that constitutes a Prime Rate Loan, at a rate per annum equal to the sum of the Prime Rate from time to time in effect, plus the Prime Rate Margin in effect at such time; and (ii) on any portion of each Facility A Loan that constitutes a Eurodollar Loan, at a rate per annum equal to the Eurodollar Rate (Reserve Adjusted) applicable to each Interest Period for such Eurodollar Loan, plus the Eurodollar Rate Margin in effect at such time; and -45- (b) with respect to Facility B Loans: (i) on any portion of each Facility B Loan that constitutes a Prime Rate Loan, at a rate per annum equal to the sum of the Prime Rate from time to time in effect, plus the Prime Rate Margin in effect at such time; (ii) on any portion of each Facility B Loan that constitutes a Eurodollar Loan, at a rate per annum equal to the Eurodollar Rate (Reserve Adjusted) applicable to each Interest Period for such Eurodollar Loan, plus the Eurodollar Rate Margin in effect at such time; provided, that in no event shall the rate of interest on any Loan exceed the maximum rate permitted by Applicable Law. SECTION 3.4.2. Interest on Overdue Amounts. The Borrower shall pay interest (a) on any overdue principal of any Loan, from the date on which such principal shall have first become due and payable to the date on which such principal shall be paid to the Agent (whether before or after judgment), at a rate per annum that is at all times equal to the sum of the Prime Rate from time to time in effect, plus five percent (5%); and (b) to the maximum extent permitted by Applicable Law, on any overdue interest, fees or other sums (other than principal) owing to the Agent or any Bank, from the fourth Business Day after such overdue amount shall have first become due and payable to the date on which such amount shall be paid to the Agent (whether before or after judgment), at a rate per annum that is at all times equal to the sum of the Prime Rate from time to time in effect, plus five percent (5%). Interest accrued pursuant to this Section 3.4.2 on any overdue principal of any of the Loans, and, to the maximum extent permitted by Applicable Law, on any overdue interest, fees or other sums, shall be payable upon demand and, in any event, on the last Business Day of each month. SECTION 3.4.3. Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Maturity of such Loan; -46- (b) with respect to the outstanding principal amount of each Prime Rate Loan, on the last Business Day of each month; (c) with respect to the outstanding principal amount of all Eurodollar Loans, on the last day of each applicable Interest Period (and, if such Interest Period shall exceed one month, on the last day of each monthly period occurring during such Interest Period); (d) with respect to that portion of the outstanding principal amount of Loans converted into Prime Rate Loans or Eurodollar Loans on a day when interest would not otherwise have been payable pursuant to clause (b) or (c), the date of such conversion; and (e) with respect to any portion of any Loans prepaid pursuant to Section 3.3.2 or Section 3.3.3, on the date of such prepayment. SECTION 3.5. The Borrowing Base. The Borrowing Base shall be determined monthly by the Agent by reference to the Borrowing Base Report delivered to the Agent and the other Banks pursuant to Section 7.1.4 or subclause (iii) of Section 9.1.1(c) hereof, and to such other information as shall be available to the Agent. SECTION 3.6. Fees. SECTION 3.6.l. Closing Fee. The Borrower shall pay to the Agent, for the pro rata accounts of the Banks in accordance with their Percentages, on the Closing Date, a non-refundable closing fee ("Closing Fee") in an amount equal to $90,000. SECTION 3.6.2. Commitment Fees. The Borrower shall pay to the Agent, for the pro rata accounts of each Bank, fees ("Commitment Fees") on the amount of each Bank's allocable portion of the Unused Commitment Amount from time to time in effect during the period commencing on the date hereof and ending on the Final Maturity Date of the Facility A Loans. The Commitment Fees shall be payable by the Borrower to the Agent for each calendar month ending after the date hereof and (a) shall be computed on the Unused Commitment Amount in effect on each day during each calendar month at the annual rate equal to 0.5%, and (b) shall be payable in arrears on the last Business Day of each quarter and on the Final Maturity Date of the Facility A Loans, it being understood that Commitment Fees payable in respect of the -47- Facility A Commitment Amount shall cease to accrue upon the termination of the Facility A Commitment. SECTION 3.6.3. Cancellation Fee. The Borrower shall pay to the Agent, for the pro rata account of the Banks, on the date on which all the Obligations are paid in full and all the Commitments are terminated (but only if such date is prior to the third anniversary of the date hereof), an early termination fee ("Cancellation Fee") in an amount equal to one percent (1%) of the sum of (a) the outstanding principal amount of Facility B Loans at such date (before giving effect to any payments on such date), plus (b) the greater of (i) the outstanding principal amount of Facility A Loans at such date (before giving effect to any payments on such date), plus the aggregate Letter of Credit Outstandings at such date, or (ii) the aggregate Facility A Commitments at such date (before giving effect to any Commitment reductions or terminations at such date.) SECTION 3.7. Making of Payments; Computations; etc. SECTION 3.7.1. Making of Payments. All payments of principal of and interest on the Notes, and all payments of Fees and other sums payable under the Loan Documents, shall be made by the Borrower to the Agent in immediately available funds at its Domestic Office not later than 1:00 p.m., San Jose time, on the date due, and funds received after that hour shall be deemed to have been received by the Agent on the next following Business Day. The Agent shall promptly remit to each Bank its share (if any) of all such payments received in collected funds by the Agent. All payments under Sections 4.5, 4.8, 13.3 and 13.4 shall be made by the Borrower directly to the Bank entitled thereto. Each payment of principal shall be applied to such Loans as the Borrower shall direct by notice to the Agent on or before the date of payment, or, in the absence of such notice, as the Agent shall determine in its discretion. Concurrently with its remittance to any Bank of its share of any such payment, the Agent shall advise such Bank as to the application of such payment. SECTION 3.7.2. Setoff. The Borrower agrees that, regardless of the adequacy of any Collateral, the Agent and each Bank shall continue to have all rights of set-off and bankers' liens provided by Applicable Law, and, in addition thereto, the Borrower further agrees that, if at any time any amount owing by the Borrower under this Agreement or the Notes is then due to the Agent or any Bank, the Agent or such Bank may, regardless of the adequacy of any Collateral, apply to the payment of such amount any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter deposited with or held by -48- such Bank and will promptly notify the Borrower (it being understood that the failure to give any such notice shall not affect the rights of the Agent or the Banks hereunder). SECTION 3.7.3. Due Date Extension. If any payment of principal of or interest on any of the Notes, or any payment of any Fees or other sums payable under any of the Loan Documents, falls due on a day which is not a Business Day, then such due date shall be extended to the next following Business Day (unless, in the case of interest due on the principal amount of any Eurodollar Loan, such next following Business Day is the first day of a calendar month, in which case such due date shall be the immediately preceding Business Day), and additional interest and Commitment Fees shall accrue and be payable for the period of such extension. SECTION 3.7.4. Notices of Changes in Prime Rate; Notice of Eurodollar Rates. Changes in the rate of interest on any Prime Rate Loans shall take effect simultaneously with each change in the Prime Rate. The Agent shall give notice promptly to the Borrower and the Banks of changes in the Prime Rate. The applicable Eurodollar Rate for each Interest Period shall be determined by the Agent, and notice thereof shall be given by the Agent promptly to the Borrower and each Bank. Each determination of the Prime Rate and the applicable Eurodollar Rate by the Agent shall be conclusive and binding upon the parties hereto, in the absence of manifest error. The Agent shall, upon written request of the Borrower or any Bank, deliver to the Borrower or such Bank a statement showing in reasonable detail the computations used by the Agent in determining any applicable Eurodollar Rate hereunder. SECTION 3.7.5. Computations. Interest and Commitment Fees shall be computed based on the actual number of days elapsed and a year of 360 days. SECTION 3.7.6. Recordkeeping. Each Bank shall record in its records, or at its option on the grid attached to each of its Notes, the date and amount of each of the Loans and other Credit Extensions made by such Bank, each repayment and prepayment thereof and, in the case of each Eurodollar Loan, the principal amount thereof and the dates on which each Interest Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on such Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under any Note to repay the -49- principal amount of the Loans or other Credit Extensions evidenced by such Note together with all interest accruing thereon. SECTION 3.8. Taxes. All payments of principal of and interest on the Notes and of all Fees and other sums payable hereunder or under any of the other Loan Documents shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes or other taxes, fees, duties, withholdings or charges of any nature whatsoever imposed by any Governmental Authority, but excluding franchise taxes imposed on the Agent or any Bank and taxes imposed on the Agent or any Bank measured by such Person's net income or receipts imposed by the jurisdiction where such Person's principal lending office is located (all non-excluded items being called "Taxes"). If any withholding or deduction from any such payment to be made hereunder or under any of the other Loan Documents is required in respect of any Taxes pursuant to any Applicable Law, then the Borrower will: (a) pay directly to the relevant Governmental Authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent and each affected Bank an official receipt or other documentation satisfactory to the Agent evidencing that the Borrower has made such payment to such Governmental Authority; and (c) pay to the Agent such additional amounts as are necessary to ensure that the net amount actually received by each affected Bank will equal the full amount such Bank would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Bank with respect to any payment received by the Agent or such Bank hereunder or under any of the other Loan Documents, the Agent or such Bank may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalty, interest or expense) as are necessary in order that the net amount received by the Agent or such Bank after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount the Agent or such Bank would have received had such Taxes not been asserted. If the Borrower fails to pay any Taxes when due to the appropriate Governmental Authority or fails to remit to the Agent when due any payments required by this Section 3.8 or any required receipts or other required documentary evidence, the Borrower shall indemnify the Agent -50- and each of the Banks for any incremental Taxes, interest or penalties that may become payable by the Agent or any of the Banks as a result of any such failure and shall promptly pay to the Agent any amounts not paid when due to the Agent as required by this Section 3.8. SECTION 3.9. Use of Proceeds. The Borrower covenants and agrees that the entire proceeds of all Loans and other Credit Extensions made pursuant hereto will be used and applied by the Borrower as follows: (a) with respect to the Facility A Loans (including Letters of Credit) working capital and other general corporate purposes not prohibited by this Agreement, and (b) with respect to the Facility B Loans, to (i) the payment of the Secured Seller Note and (ii) other general corporate purposes not prohibited by this Agreement. ARTICLE IV FUNDING OPTIONS SECTION 4.1. Pricing of Each Loan. The outstanding principal amount of each Loan made by each Bank may be allocated among different types (as hereinafter defined) of Loans selected by the Borrower from time to time in accordance with Sections 3.1, 4.2 and 4.3. Each Loan shall be either a Prime Rate Loan or a Eurodollar Loan (each a "type" of Loan), as the Borrower shall specify in the initial notice of borrowing delivered by the Borrower pursuant to Section 3.1, or in any Continuation/Conversion Notice delivered by the Borrower pursuant to Section 4.2 or 4.3. All Prime Rate Loans, and all Eurodollar Loans having the same Interest Period, may sometimes be referred to as a "Group" of Loans. SECTION 4.2. Conversion Procedures. Subject to the provisions of Section 4.4, the Borrower may convert all or any part of any outstanding Group of Loans into a Group of Loans of a different type by delivering a Continuation/Conversion Notice to the Agent not later than (a) in the case of conversion into a Prime Rate Loan, 1:00 p.m., San Jose time, on the proposed date of such conversion, and (b) in the case of a conversion into a Eurodollar Loan, 1:00 p.m., San Jose time, at least three (3) Business Days prior to the proposed date of such conversion. Each such notice shall be irrevocable upon receipt by the Agent and shall specify the date and amount of such conversion, the Group of Loans (or portion thereof) to be so converted, the type of Loan to be converted into and, in the case of a conversion into a Eurodollar Loan, the initial Interest Period therefor; provided, however, that no Eurodollar Loan shall be converted on any day other than the last day of its Interest -51- Period. Promptly upon receipt of such notice, the Agent shall advise each Bank thereof. Subject to the provisions of this Section 4.2 and Section 4.4, each Loan shall be so converted on the requested date of conversion. SECTION 4.3. Continuation Procedures. Subject to the provisions of Section 4.4, the Borrower may continue all or any part of any outstanding Group of Eurodollar Loans for an additional Interest Period commencing upon the conclusion of the Interest Period then in effect for such Group of Eurodollar Loans, by delivering a Continuation/Conversion Notice to the Agent not later than 1:00 p.m., San Jose time, at least three (3) Business Days prior to the end of such then-current Interest Period. Each such notice shall be irrevocable upon receipt by the Agent and shall specify the amount to be so continued, the date of such continuation and the Interest Period therefor that is to commence upon the termination of the then-current Interest Period. Promptly upon receipt of such notice, the Agent shall advise each Bank thereof. SECTION 4.4. Limitations on Interest Periods and Continuation and Conversion Elections. The Borrower's rights under Sections 3.1, 4.2 and 4.3 shall be subject to the following limitations. SECTION 4.4.1. Interest Periods. Each Interest Period for a Eurodollar Loan shall commence on the date the Loan is made, if applicable, or on the date such Loan is converted from a Prime Rate Loan, or, in the case of a continuation, on the expiration of the immediately preceding Interest Period for such Eurodollar Loan, and shall end on the date which is one, two, three or six months thereafter, as the Borrower may specify in the related notice of borrowing pursuant to Section 3.1, or in any Continuation/Conversion Notice pursuant to Section 4.2 or 4.3; provided, however, that: (a) each Interest Period for a Eurodollar Loan that would otherwise end on a day which is not a Business Day shall end on the immediately succeeding Business Day (unless such immediately succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the immediately preceding Business Day); (b) the Borrower may not select any Interest Period for any principal of any Loan which would end after the Maturity of such principal; and (c) absent the timely selection of a new Interest Period for a then outstanding Eurodollar Loan, or any part thereof, such -52- Eurodollar Loan or such part, as the case may be, shall, immediately upon the expiration of such Interest Period, automatically and without further action, be converted into a Prime Rate Loan. SECTION 4.4.2. Conditions Precedent. No portion of the outstanding principal amount of any Loan may be continued as, or converted into, one or more Eurodollar Loans unless, on and as of the requested date of continuation or conversion, as the case may be, all of the conditions precedent set forth in Section 7.2 have been satisfied. SECTION 4.4.3. Other Limitations. At all times: (a) the aggregate principal amount of each Group of Eurodollar Loans shall be in a minimum amount of $100,000 or in an integral multiple of $100,000 in excess thereof; and (b) the total number of Eurodollar Loans in effect at any time shall not exceed six (6). SECTION 4.5. Increased Costs. (a) If (i) Regulation D of the F.R.S. Board, or (ii) after the date hereof, the adoption of any Applicable Law, or any change therein or in any existing Applicable Law, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank (or any Eurodollar Office of such Bank) with any request or directive (whether or not having the force of law) of any such Governmental Authority: (A) shall subject any Bank (or any Eurodollar Office of such Bank) to any tax, duty or other charge with respect to the Eurodollar Loans, its Notes or its obligation to make Eurodollar Loans available, or shall change the basis of taxation of payments to any Bank of the principal of or interest on its Eurodollar Loans or any other amounts due under this Agreement in respect of its Eurodollar Loans or its obligation to make Eurodollar Loans available (except for changes in the rate of tax on the overall net income of such Bank or its Eurodollar Office imposed by the jurisdiction in which such Bank's principal executive office or Eurodollar Office is located); or (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed -53- by the F.R.S. Board), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or any Eurodollar Office of such Bank); or (C) shall impose on any Bank (or its Eurodollar Office) any other condition affecting its Eurodollar Loans, its Notes or such Bank's obligation to make Eurodollar Loans available; and the result of any of the foregoing is to increase the cost to (or in the case of Regulation D referred to above, to impose a cost on) such Bank (or any Eurodollar Office of such Bank) of making or maintaining any Eurodollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Eurodollar Office) under this Agreement or under its Notes with respect thereto, then upon demand by such Bank, the Borrower shall pay directly to such Bank such additional amount as will compensate such Bank for such increased cost or such reduction. (b) If any Bank shall reasonably determine that the adoption or phase-in of any Applicable Law regarding capital adequacy, or any change therein or in any existing Applicable Law, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank (or its Eurodollar Office) or any Person controlling such Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, has or would have the effect of reducing the rate of return on such Bank's or such controlling Person's capital as a consequence of such Bank's obligations hereunder (including, without limitation, the Commitments) to a level below that which such Bank or such controlling Person could have achieved but for such adoption, phase-in, change or compliance (taking into consideration such Bank's or such controlling Person's policies with respect to capital adequacy) by an amount deemed by such Bank or such controlling Person to be material, then such Bank shall promptly after its determination of such occurrence give notice thereof to the Borrower. The Borrower and such Bank shall thereafter attempt to negotiate in good faith an adjustment to the compensation payable hereunder which will adequately compensate such Bank for such reduction. If the Borrower and the Bank are unable to agree to such adjustment within thirty (30) days of the day on which the Borrower receives such notice (but not earlier than the -54- effective date of any such applicability, change, interpretation, administration or compliance), the Borrower shall pay such additional amounts which will, in such Bank's reasonable determination, evidenced by calculations in reasonable detail furnished to the Borrower, compensate such Bank or such controlling person for such reduction. In determining such amount, a Bank may use any reasonable methods of averaging, allocating or attributing such reductions among its customers. SECTION 4.6. Interest Rate Inadequate or Unfair. If with respect to any Interest Period: (a) deposits in Dollars (in the applicable amounts) are not being offered to one or more Banks in the relevant market for such Interest Period, or the Agent otherwise determines (which determination shall be binding and conclusive on the Borrower) that by reason of circumstances affecting the interbank eurodollar market, adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate; or (b) the Required Banks determine that the Eurodollar Rate (Reserve Adjusted) as determined by the Agent will not adequately and fairly reflect the cost to such Banks of maintaining or funding Eurodollar Loans for such Interest Period, or that the maintaining or funding of Eurodollar Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Banks materially affects Eurodollar Loans; then the Agent shall promptly notify the Borrower and the Banks, so long as such circumstances shall continue, (i) no Bank shall thereafter have any obligation to fund or make available Eurodollar Loans and (ii) on the last day of the current Interest Period for any Eurodollar Loan, such Eurodollar Loan shall, unless then repaid in full, automatically convert to a Prime Rate Loan. SECTION 4.7. Changes in Law Rendering Eurodollar Loans Unlawful. In the event that the adoption or phase-in of any Applicable Law, or any change therein or in any existing Applicable Law or any change in the interpretation thereof by any Governmental Authority charged with the interpretation or administration thereof, shall make it (or in the good faith judgment of any Bank cause a substantial question as to whether it is) unlawful for any Bank to maintain or fund Eurodollar Loans, then such Bank shall promptly notify the Borrower, the other Banks and the Agent and, so long as such circumstances shall continue, -55- (a) such Bank shall thereafter have no obligation to fund or make available Eurodollar Loans and (b) on the last day of the current Interest Period for any Eurodollar Loan (or, in any event, on such earlier date as may be required by the relevant Applicable Law), such Eurodollar Loan shall, unless then repaid in full, automatically convert to a Prime Rate Loan. SECTION 4.8. Funding Losses. The Borrower hereby agrees that, upon demand by any Bank, the Borrower will indemnify such Bank against any net loss or expense which such Bank may sustain or incur (including, without limitation, any net loss or expense reasonably incurred by reason of the liquidation or employment of deposits or other funds acquired by such Bank to maintain or fund any Eurodollar Loan), as reasonably determined by such Bank, as a result of (a) any payment, repayment, prepayment or conversion of any Eurodollar Loan of such Bank on a date other than the last day of an Interest Period for such Eurodollar Loan (including any conversion pursuant to Section 4.7) or (b) any failure of the Borrower to borrow, continue or convert any Loan on a date specified therefor in a notice of borrowing pursuant to Section 3.1 or in any Continuation/Conversion Notice pursuant to Section 4.2 or 4.3. SECTION 4.9. Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to maintain and fund all or any part of any of the Eurodollar Loans in any manner it sees fit, it being understood, however, that for purposes of this Agreement all determinations hereunder (including determinations of any net loss or expense under Section 4.8) shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period for such Eurodollar Loan through the purchase of a deposit on the first day of such Interest Period having a principal amount equal to the principal amount of such Eurodollar Loan, having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. SECTION 4.10. Conclusiveness of Statements; Survival of Provisions. Demands made by any Bank to the Borrower under Section 4.5 or 4.8 shall be accompanied by a statement setting forth in reasonable detail the basis for the calculations of the amounts being claimed. Such statements, and all other determinations and statements of any Bank pursuant to Section 4.5, 4.6, 4.7 or 4.8, shall be conclusive absent manifest error. Banks may use reasonable averaging and attribution methods in determining compensation under Sections 4.5 and 4.8, and the provisions of such sections shall survive repayment or -56- prepayment of any of the Loans, cancellation of the Notes and any termination of this Agreement. ARTICLE V LETTERS OF CREDIT SECTION 5.1. Requests for Letters of Credit. The Borrower may request, by delivering to the Agent and the Issuer an Issuance Request on or before 1:00 p.m., San Jose time, at any time and from time to time prior to the Facility A Commitment Termination Date and on not less than two nor more than five Business Days' notice, that the Issuer issue, for the account of the Borrower an irrevocable standby letter of credit in such form as may be requested by the Borrower and approved by the Issuer (each a "Letter of Credit"), in support of financial obligations of the Borrower incurred in the ordinary course of its business and which are described in such Issuance Request. Upon receipt of an Issuance Request, the Agent shall promptly notify the Banks thereof. Each Letter of Credit shall by its terms: (a) be issued in a Stated Amount which (i) is at least $100,000 and an integral multiple of $100,000 in excess thereof, and (ii) immediately before giving effect to the issuance of such Letter of Credit, does not exceed (or would not exceed) the Letter of Credit Availability then in effect; (b) be stated to expire on a date (its "Stated Expiry Date") that is no later than the earlier of one year from its date of issuance or the Facility A Commitment Termination Date; and (c) on or prior to its Stated Expiry Date (i) terminate immediately upon notice to the Issuer thereof from the beneficiary thereunder that all obligations covered thereby have been terminated, paid or otherwise satisfied in full, (ii) reduce in part immediately and to the extent the beneficiary thereunder has notified the Issuer thereof that the obligations covered thereby have been paid or otherwise satisfied in part, or -57- (iii) terminate thirty (30) days after notice to the beneficiary thereunder from the Issuer thereof that an Event of Default has occurred and is continuing. By delivery to the Issuer and the Agent of an Issuance Request at least two but not more than five Business Days prior to the Stated Expiry Date of any Letter of Credit, the Borrower may request the Issuer to extend the Stated Expiry Date of such Letter of Credit for an additional period not to exceed the earlier of one year from its date of extension or the Facility A Commitment Termination Date. SECTION 5.2. Issuances and Extensions. Subject to the terms and conditions of this Agreement (including Article VIII), the Issuer shall issue Letters of Credit and extend the Stated Expiry Dates of outstanding Letters of Credit for additional periods of the shorter of (a) one year, or (b) the Facility A Commitment Termination Date, in accordance with the Issuance Requests made therefor. The Issuer will make available the original of each Letter of Credit which it issues in accordance with the Issuance Request therefor to the beneficiary thereof (and will promptly provide each of the Banks with a copy of such Letter of Credit) and will notify the beneficiary under any Letter of Credit issued by it of any extension of the Stated Expiry Date thereof. SECTION 5.3. Fees and Expenses. With respect to each Letter of Credit outstanding hereunder, the Borrower agrees to pay to the Agent on the date of issuance of such Letter of Credit and thereafter quarterly in arrears on the first day of each calendar quarter succeeding a calendar quarter in which any portion of such Letter of Credit was outstanding, a fee (in each case a "Letter of Credit Fee") calculated on each payment date thereof to be the product of the face amount of such Letter of Credit on such day, multiplied by one and one half percent (1 1/2%), multiplied by a fraction, the numerator of which is the number of days in the preceding quarter during which such Letter of Credit was outstanding and the denominator of which is 360. SECTION 5.4. Other Banks' Participations. Each Letter of Credit issued pursuant to Section 5.2 shall, effective upon its issuance and without further action, be issued on behalf of all Banks (including the Issuer) pro rata according to their respective Percentages. Each Bank shall, to the extent of its Percentage, be deemed to have irrevocably participated in the issuance of such Letter of Credit and shall be responsible to reimburse promptly the Issuer for Reimbursement Obligations which have not been reimbursed by the Borrower in accordance with Section 5.5, or which have been reimbursed by the -58- Borrower but must be returned, restored or disgorged by the Issuer for any reason, and each Bank shall, to the extent of its Percentage, be entitled to receive from the Issuer a ratable portion of the letter of credit fees received by the Issuer pursuant Section 5.3, with respect to each Letter of Credit. In the event that the Borrower shall fail to reimburse the Issuer, or if for any reason Facility A Loans shall not be made to fund any Reimbursement Obligation, all as provided in Section 5.5 in an amount equal to the amount of any drawing honored by the Issuer under a Letter of Credit issued by it, or in the event the Issuer must for any reason return or disgorge such reimbursement, the Issuer shall promptly notify each Bank of the unreimbursed amount of such drawing and of such Bank's respective participation therein. Each Bank shall make available to the Issuer, whether or not any Default or Event of Default shall have occurred and be continuing, an amount equal to its respective participation in same day or immediately available funds at the office of the Issuer specified in such notice not later than 12:00 p.m. (San Jose time) on the Business Day after the date notified by the Issuer. In the event that any Bank fails to make available to such Issuer the amount of such Bank's participation in such Letter of Credit as provided herein, the Issuer shall be entitled to recover such amount on demand from such Bank together with interest at the daily average Federal Funds Rate for three Business Days (together with such other compensatory amounts as may be required to be paid by such Bank to the Issuer pursuant to the Rules for Interbank Compensation of the Council on International Banking or the Clearinghouse Compensation Committee, as the case may be, as in effect from time to time) and thereafter at the Prime Rate plus 1-1/2%. Nothing in this Section 5.4 shall be deemed to prejudice the right of any Bank to recover from the Issuer any amounts made available by such Bank to the Issuer pursuant to this Section 5.4 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit by the Issuer in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of the Issuer. The Issuer shall distribute to each other Bank which has paid all amounts payable by it under this Section with respect to any Letter of Credit issued by the Issuer such other Bank's Percentage of all payments received by the Issuer from the Borrower in reimbursement of drawings honored by the Issuer under such Letter of Credit when such payments are received. SECTION 5.5. Disbursements. The Issuer will notify the Borrower and the Agent promptly of the presentment for payment of any Letter of Credit issued by it, together with notice of the date (the "Disbursement Date") such payment shall be made. Subject to the terms and provisions of such Letter of Credit, the Issuer shall make such payment to the beneficiary (or its designee) of such Letter of Credit. -59- Prior to 1:00 p.m., San Jose time, on the Disbursement Date, the Borrower will reimburse the Issuer for all amounts which the Issuer has disbursed under such Letter of Credit issued by it. To the extent the Issuer is not reimbursed in full in accordance with the third sentence of this Section 5.5, the Reimbursement Obligations in respect of a Letter of Credit shall accrue interest at a fluctuating rate determined by reference to the Prime Rate, plus the Prime Rate Margin applicable to Facility A Loans, payable on demand. In the event the Issuer is not reimbursed by the Borrower on the Disbursement Date, or if the Issuer must for any reason return or disgorge such reimbursement, the Banks (including the Issuer) shall fund the Reimbursement Obligations therefor by making Facility A Loans which are Prime Rate Loans as provided in Section 3.1 (the Borrower being deemed to have given a timely Loan Request therefor for such amount); provided, however, that for the purpose of determining the availability of the Commitments immediately prior to giving effect to the application of the proceeds of such Loans, such Reimbursement Obligations shall be deemed not to be outstanding at such time. SECTION 5.6. Reimbursement. The Borrower's Obligations under Section 5.5 to reimburse the Issuer with respect to each Disbursement (including interest thereon) in respect of Letters of Credit (the "Reimbursement Obligations"), and each Bank's obligations to make participation payments in each drawing under Letters of Credit which have not been reimbursed by the Borrower, shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Issuer, any Bank or any beneficiary of any Letter of Credit, including any defense based upon the occurrence of any Default or Event of Default, any draft, demand or certificate or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient, the failure of any Disbursement to conform to the terms of the applicable Letter of Credit (if, in the Issuer's good faith opinion in respect of Letters of Credit, such Disbursement is determined to be appropriate), or any nonapplication or misapplication by the beneficiary of the proceeds of such Disbursement, or the legality, validity, form, regularity or enforceability of such Letter of Credit; and provided, however, that nothing herein shall adversely affect the right of the Borrower to commence any proceeding against the Issuer for any wrongful Disbursement made by the Issuer under a Letter of Credit issued by it as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuer. SECTION 5.7. Deemed Disbursements. Upon the occurrence and during the continuation of any Event of Default, an amount equal to that portion of Letter of Credit Outstandings attributable to outstanding -60- and undrawn Letters of Credit shall, at the option of the Issuer (in the case of Letters of Credit), and without demand upon or notice to the Borrower, be deemed to have been paid or disbursed by the Issuer thereof under such Letters of Credit (notwithstanding that such amount may not in fact have been so paid or disbursed), and, upon notification by the Issuer, as the case may be, to the Agent and the Borrower of its Obligations under this Section 5.7, the Borrower shall be immediately obligated to reimburse the Issuer, as the case may be, the amount deemed to have been so paid or disbursed by the Issuer. Any amounts so received by the Issuer from the Borrower pursuant to this Section 5.7 shall be held as collateral security for the repayment of the Borrower's Obligations, in connection with the Letters of Credit issued by the Issuer. At any time when such Letters of Credit shall terminate and all obligations of the Issuer are either terminated or paid or reimbursed to the Issuer in full, the Obligations of the Borrower under this Section 5.7 shall be reduced accordingly (subject, however, to reinstatement in the event any payment in respect of such Letters of Credit is recovered in any manner from the Issuer), and the Issuer will, if no other monetary Obligations are then owed to the Issuer or the Banks hereunder, return to the Borrower the excess, if any, of (a) the aggregate amount deposited by the Borrower with the Issuer and not theretofore applied by the Issuer to any Reimbursement Obligations owed to the Issuer, over (b) the aggregate amount of all Reimbursement Obligations owed to the Issuer pursuant to this Section, as so adjusted. If any other monetary Obligations shall be owed by the Borrower or any of its Subsidiaries to the Issuer or any Bank hereunder, then the Issuer shall turn over such excess amount to the Agent for application to such Obligations until the same shall be paid in full. At such time when all Events of Default shall have been cured or waived and all of the Borrower's Obligations hereunder shall have been paid in full, the Issuer or the Agent, as the case may be, shall return to the Borrower all amounts then on deposit with the Issuer pursuant to this Section 5.7. All amounts on deposit pursuant to this Section shall, until their application to any Reimbursement Obligations or their return to the Borrower, as the case may be, bear interest at the daily average Federal Funds Rate from time to time in effect (net of the costs of any reserve requirements, in respect of amounts on deposit pursuant to this Section, pursuant to F.R.S. Board Regulation D), which interest shall be held by the Issuer or the Agent, as the case may be, as additional collateral security for the repayment of the Borrower's Obligations in connection -61- with the Letters of Credit issued by the Issuer and the Borrower's other Obligations hereunder or under any Loan Document. SECTION 5.8. Nature of Reimbursement Obligations. The Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. Neither the Issuer nor any Bank (except to the extent of its own gross negligence or willful misconduct) shall be responsible for: (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit or any document submitted by any party in connection with the application for and issuance of a Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (c) the failure of the beneficiary to comply fully with conditions required in order to demand payment under a Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; or (e) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under a Letter of Credit or of the proceeds thereof. None of the foregoing shall affect, impair or prevent the vesting of any of the rights or powers granted to the Issuer or any Bank hereunder. In furtherance and extension, and not in limitation or derogation of any of the foregoing, any action taken or omitted to be taken by the Issuer in good faith shall be binding upon the Borrower and shall not put the Issuer under any resulting liability to the Borrower. SECTION 5.9. Indemnity. In addition to amounts payable as elsewhere provided in this Article V or in Article VI, the Borrower hereby agrees to protect, indemnify, pay and save the Issuer and each Bank participating in any Letter of Credit harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Issuer or such -62- Bank participating in such Letter of Credit may incur or be subject to as a consequence, direct or indirect, of (a) the issuance of any Letter of Credit, other than as a result of the gross negligence or willful misconduct of the Issuer or such Bank participating in such Letter of Credit as determined by a court of competent jurisdiction, or (b) the failure of the Issuer or such Bank participating in such Letter of Credit to honor a drawing under any Letter of Credit issued by it as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority. ARTICLE VI GUARANTIES SECTION 6.1. Guaranty. SECTION 6.1.1. Guaranty of Payment. Each of the Guarantors hereby absolutely, unconditionally and irrevocably guaranties to the Secured Parties the full and punctual payment when due, whether at stated maturity, by scheduled repayment, required prepayment, declaration, acceleration, demand or otherwise (including, without limitation, all amounts which would have become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. 362(a)), of each of the Obligations, in accordance with its terms, whether such Obligations are outstanding on the date of this Agreement or arise or are incurred at any time or times thereafter. The Guaranties hereby made constitute guaranties of payment when due and not of collection, and each of the Guarantors individually agrees that it shall not be necessary or required that any Secured Party exercise any rights, assert any claim or demand or enforce any remedy whatsoever against the Borrower or any of its Subsidiaries before or as a condition to the obligations of the Guarantors hereunder. The liabilities and obligations of each of the Guarantors to the Secured Parties under its respective Guaranty made hereunder shall be unlimited, and such liabilities and obligations are joint and several. SECTION 6.1.2. Guaranty of Performance. Without prejudice to any of the obligations of the Guarantors to the Secured Parties under Section 6.1.1, which obligations are absolute and unconditional, but as a separate undertaking on the part of the Guarantors, each of the Guarantors hereby absolutely, unconditionally and irrevocably, and jointly and severally, covenants and agrees to cause the Borrower to perform and comply with all of the covenants, agreements and conditions to be complied with by the Borrower under the Loan Documents, and each of the Guarantors hereby agrees, jointly and -63- severally, to take or to cause to be taken, promptly and without any expense to the Secured Parties, all such measures as may be appropriate and can be lawfully effected by such Guarantor to prevent the occurrence of any Default and to cure or make good promptly any Default which may occur at any time or times. SECTION 6.2. Guaranty Absolute. The obligations of the Guarantors under Section 6.1.1 are and shall be construed as continuing, absolute, irrevocable and unconditional guaranties of payment, and shall remain in full force and effect, until all of the Obligations shall have been paid in full in cash. The Guarantors guarantee that each of the Obligations will be paid strictly in accordance with the terms of this Agreement and the other Loan Documents, regardless of any Applicable Law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Secured Parties with respect thereto. The liabilities and obligations of the Guarantors under the Guaranties hereby made shall be absolute, unconditional and irrevocable, and also joint and several, irrespective of: (a) any lack of validity or enforceability of this Agreement or any other Loan Document or any other agreement or Instrument relating to any thereof or to any of the Obligations; (b) any change in the corporate existence, structure or ownership of the Borrower or any of its Subsidiaries, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any such Person or any Property of any such Person or any resulting release or discharge of any Obligation contained in this Agreement or any other Loan Document; (c) the failure of any Secured Party (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Guarantor, or any other Person under the provisions of this Agreement or any other Loan Document or any other agreement or Instrument relating to any thereof or under any Applicable Law, or (ii) to exercise any right or remedy against any Collateral; (d) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other compromise, renewal, extension, acceleration or release with respect thereto or with respect to the Collateral, or any other -64- amendment to, rescission, waiver or other modification of, or any consent to departure from, any of the terms of this Agreement or any other Loan Document or any other Instrument relating to any thereof; (e) any increase, reduction, limitation, impairment or termination of any of the Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, or unenforceability of, or any other event or occurrence affecting, any of the Obligations (and the Guarantors hereby waive any right to or claim of any such defense or set-off, counterclaim, recoupment or termination); (f) any exchange, release or non-perfection of any Collateral, or any amendment to or waiver or release of, or consent to departure from, any other guaranties held by any Secured Party securing all or any of the Obligations; (g) any defense, set-off or counterclaim which may at any time be available to or be asserted by any Credit Party or any of its Subsidiaries against any other Credit Party or any of its Subsidiaries or against the Agent; or (h) any other circumstance which might otherwise constitute a suretyship or other defense available to, or a legal or equitable discharge of, the Borrower or any other Guarantor. SECTION 6.3. Reinstatement, etc. The Guarantors agree that the Guaranties hereby made shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Obligations is rescinded or must otherwise be restored by the Agent upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. SECTION 6.4. Waiver. Each of the Guarantors hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations or its Guaranty and any requirement that any Secured Party protect, secure, perfect or insure any Lien or any Property subject thereto or exhaust any right or take any action against the Borrower, the other Guarantors, or any other Person or entity or any Collateral. -65- SECTION 6.5. Subordination of Subrogation Rights. The rights which any Guarantor shall acquire against the Borrower as a consequence of making any payment under its Guaranty are, in this Section 6.5, collectively called the "Subrogation Rights." In the event of any proceeding for the distribution, division or application of all or any part of the Property of the Borrower or any of its Subsidiaries, whether such proceeding be for the liquidation, dissolution or winding up of the Borrower or any of its Subsidiaries, a receivership, insolvency or bankruptcy proceeding, an assignment for the benefit of creditors, or a proceeding by or against the Borrower or any of its Subsidiaries for relief under any bankruptcy, reorganization or insolvency law, if all of the Obligations have not been paid and satisfied in full at the time, the Bank is hereby irrevocably authorized by such Guarantor at any such proceeding: (a) to enforce all of the Subrogation Rights of such Guarantor, in the name of the Agent or in the name of such Guarantor, by proof of debt, proof of claim, suit or otherwise; (b) to collect any Property of the Borrower or any of its Subsidiaries distributed or applied by way of dividend or payment on account of such Subrogation Rights, and to apply the same, or the proceeds of any realization thereof, towards the payment of the Obligations until all the Obligations have been paid and satisfied in full in cash; and (c) to vote all claims arising under or in respect of all such Subrogation Rights. So long as any Obligations remain unpaid, no Guarantor shall take any action of any kind to enforce any of its Subrogation Rights, and no Guarantor shall receive or accept from any Person any payments or other distributions in respect of any of its Subrogation Rights. Should any payment on account of any of the Subrogation Rights be received by any Guarantor, such payment shall be delivered by such Guarantor forthwith to the Agent for the benefit of the Secured Parties in the form received by such Guarantor, except for the addition of any endorsement or assignment necessary to effect transfer of all rights therein to the Agent. Until so delivered, each such payment shall be held by such Guarantor in trust for the benefit of the Secured Parties and shall not be commingled with any other funds of such Guarantor. -66- ARTICLE VII CONDITIONS TO CREDIT EXTENSIONS SECTION 7.1. Conditions to Making First Credit Extensions. The obligations of each Secured Party to make its first Credit Extensions hereunder on the Closing Date are subject to the fulfillment of the following conditions precedent prior to or simultaneously with the making of the first Credit Extensions on the Closing Date: SECTION 7.1.1. Execution and Delivery of this Agreement and the Notes. The Agent shall have received (a) counterparts of this Agreement duly executed and delivered by the Borrower, the Guarantors, the Agent, the Banks and (b) for the account of each Bank, such Bank's Facility A Note and Facility B Note, dated as of the Closing Date, duly executed and delivered by the Borrower and containing appropriate insertions and conforming to the requirements of Section 3.2. SECTION 7.1.2. Pledge Agreement. The Agent shall have received counterparts of the Pledge Agreement, dated as of the Closing Date and duly executed by the Borrower, together with stock certificates evidencing the so-called Initial Pledged Shares identified in Attachment 1 attached thereto (accompanied by undated stock powers duly executed in blank). SECTION 7.1.3. Security Agreements; UCC Filings, etc. The Agent shall have received counterparts of the Security Agreement, each dated as of the Closing Date and duly executed and delivered by the Borrower and each of the other Credit Parties, together (in each case) with (a) acknowledgment copies of proper financing statements (Form UCC-1), or such other evidence of filing or the making of arrangements for filing as may be reasonably acceptable to the Agent, naming each Credit Party as the debtor, and the Agent as the secured party, and other similar Instruments or documents, filed under the Uniform Commercial Code in the States identified in the Security Agreement; (b) executed copies of proper financing statements (Form UCC-3) necessary to release all Liens and other rights of any other Persons in the Collateral described in any Security Agreement previously granted by any Credit Party (or an undertaking reasonably satisfactory to the Agent by the secured party under any such security agreement to execute and deliver all financing statements (Form UCC-3) reasonably required by the Agent to -67- release all such Liens), except for any Lien that constitutes a Permitted Lien under clause (a) of the definition thereof; and (c) certified copies of search reports, dated a date reasonably near (but prior to) the Closing Date, listing all effective financing statements which name any Credit Party (under its present name or any previous name) as debtor and which are filed in the jurisdictions in which filings were made or are to be made pursuant to clause (a), together with copies of such financing statements. Any other action, including the taking of possession of specific Collateral by the Agent, reasonably required by the Agent to create in favor of the Agent and for the benefit of the Secured Parties perfected first-priority Liens in the Collateral described in the Security Instruments referred to in this Section 7.1.3 shall have been properly taken by or on behalf of the Borrower. Section 7.1.4. Borrowing Base Report. The Agent shall have received from the Borrower the initial Borrowing Base Report, dated as of the Closing Date, evidencing the Borrowing Base as of a recent date acceptable to the Agent. SECTION 7.1.5. Accounts Receivable Aging Report. The Agent shall have received from the Borrower an Accounts Receivable and accounts payable aging report of the Borrower and the other Credit Parties dated as of a date which shall be no more than ten (10) days prior to the Closing Date, and certified by the chief financial or accounting Authorized Officer of the Borrower to be true and complete in all material respects as of such date. SECTION 7.1.6. Other Loan Documents; Subordinated Debt Documents and Acquisition Documents. (a) Each of the other Loan Documents shall have been duly and properly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect. (b) The Agent shall have received counterparts of each of such other Loan Documents. Each Loan Document shall, where applicable, be substantially in the form of an Exhibit attached hereto, and all other Loan Documents shall be in form and substance reasonably satisfactory to the Required Banks and the Agent. All exhibits, schedules or other attachments to any of the -68- Collateral Documents shall be in form and substance reasonably satisfactory to the Required Banks and the Agent. (c) The Agent shall have received true and complete copies of each of the Acquisition Documents, and each of the Subordinated Debt Documents for the Subordinated Indebtedness in respect of the Greenleaf Note and the Greenleaf Bridge Note. SECTION 7.1.7. Closing Date Certificate; Closing Date Payments. (a) The Agent shall have received a duly executed and completed certificate, dated as of the Closing Date, in or substantially in the form of Exhibit M, duly executed and delivered by an Authorized Officer of the Borrower and each of the other Credit Parties. (b) All outstanding obligations under the Secured Seller Note shall have been paid in full; the Secured Seller Note shall have been discharged in its entirety; all Liens securing the Secured Seller Note shall have been terminated; and arrangements satisfactory to the Agent shall have been made to file all Lien termination statements in all appropriate jurisdictions. The Borrower shall have repaid $1,000,000 of principal under the Greenleaf Bridge Note; and, after giving effect to such payment, not more than $1,500,000 in principal shall be outstanding under the Greenleaf Bridge Note. (c) The Borrower shall have delivered to the Agent a statement certifying as to uses of all proceeds of Loans made on the Closing Date. SECTION 7.1.8. Resolutions, etc. The Agent shall have received: (a) from the Borrower and each of the other Credit Parties, a certificate, dated as of the Closing Date, of its Secretary or any Assistant Secretary as to (i) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of, in each case, to the extent the Borrower and such other Credit Party is a party thereto, this Agreement, and each of the other Loan Documents; -69- (ii) the incumbency and signatures of the officers of the Borrower (the "Authorized Officers") authorized to act with respect to this Agreement, and each of the other Loan Documents (upon which certificate the Agent and the Banks may conclusively rely until the Agent shall have received a further certificate of the Borrower canceling or amending such prior certificate, which further certificate shall be reasonably satisfactory to the Agent); and (iii) each Governing Document of the Borrower and the other Credit Parties; (iv) any shareholder agreement, stock subscription agreement, voting trust agreement, securities purchase agreement or similar agreement to which it is a party; (b) such other documents (certified as of the Closing Date) as the Agent may reasonably request with respect to any matter relevant to this Agreement and the other Loan Documents or the transactions contemplated hereby or thereby. Each of such documents shall be in form and substance reasonably satisfactory to the Agent and the Required Banks. SECTION 7.1.9. Certificates of Good Standing. The Agent shall have received a certificate signed by the Secretary of State of the State of incorporation of the Borrower and each of the other Credit Parties, dated a date reasonably near (but prior to) the Closing Date, stating that the Borrower or such other Credit Party is a corporation duly organized, validly existing and in good standing under the laws of such State. SECTION 7.1.10 Compliance Certificate. The Agent shall have received a duly executed and completed Compliance Certificate, dated as of the Closing Date, in or substantially in the form of Exhibit E hereto, duly executed by an Authorized Officer of the Borrower. SECTION 7.1.11. Opinion of Counsel. The Agent shall have received an opinion, dated the Closing Date addressed to the Agent and the Banks from Goodwin, Procter & Hoar LLP, counsel to the Borrower and the Guarantors, in or substantially in the form of Exhibit K hereto, and otherwise in form and substance reasonably satisfactory to the Agent. -70- SECTION 7.1.12. Financial Statements. The Borrower shall have furnished to the Agent and the Banks the Historical Financials and the Projections. SECTION 7.1.13. No Materially Adverse Effect. No events or developments shall have occurred since December 31, 1997 which, individually or in the aggregate, have had or could reasonably be expected to have a Materially Adverse Effect. SECTION 7.1.14. Fees and Expenses. The Agent shall have received from the Borrower payment in full of all of the Fees required to be paid on or prior to the Closing Date in accordance with Sections 3.6.1, and the Agent shall have received from the Borrower payment in full of its reasonable out-of-pocket costs and expenses (including reasonable counsel fees and disbursements) payable in accordance with Section 13.3 for which invoices have been submitted to the Borrower on or prior to the Closing Date. SECTION 7.1.15 Certificate as to Compliance with Warranties; Absence of Litigation; etc. The Agent shall have received, with counterparts for each of the Agent and the Banks, a duly executed and completed certificate, dated as of the Closing Date, duly executed by an Authorized Officer of the Borrower to the effect set forth in Section 7.2.1. SECTION 7.1.16 Lockbox Agreement. Fleet Bank shall have received instructions from the Borrower to forward the proceeds of all payments to the Lockbox Account to a concentration account established at Imperial Bank. SECTION 7.2. All Credit Extensions. The obligations of the Issuer and each Bank to make each of its Credit Extensions hereunder (including its first Credit Extensions to be made on the Closing Date) shall also be subject to the satisfaction of each of the following conditions precedent set forth in this Section 7.2. SECTION 7.2.1. Compliance with Warranties; Absence of Litigation; No Default; etc. The representations and warranties set forth in Article VIII, in the Collateral Documents and in the other Loan Documents shall have been true and correct in all material respects as of the date made; and, both immediately before and immediately after giving effect to each of such Credit Extensions, (a) such representations and warranties shall be true and correct in all material respects with the same effect as if then made (except for any such representation or warranty that relates solely to a prior date); -71- (b) (i) no litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower (after due inquiry), threatened against the Borrower or any of its Subsidiaries or affecting the business, operations or prospects of any thereof which was not disclosed by the Borrower to the Banks in Section 8.8 of the Disclosure Schedule, and (ii) no development shall have occurred in any litigation, arbitration or governmental investigation or proceeding so disclosed, which, in either event, has had or could reasonably be expected to have a Materially Adverse Effect, or relates to the validity or enforceability of this Agreement, the Notes or any other Transaction Documents or of any Transaction Obligations existing under or, if such Credit Extension is made, would be existing under any thereof; and (c) no Default shall have occurred and then be continuing. SECTION 7.2.2. Credit Request; Continuation/Conversion Notice. The Agent shall have received a Loan Request, Issuance Request or Continuation/Conversion Notice, as applicable, for each Credit Extension. The delivery of such Credit Request shall constitute a representation and warranty by the Borrower that on and as of the requested date of such Credit Extension, and before and after giving effect to such Credit Extension, all representations and warranties required by Section 7.2.1 are true and correct. SECTION 7.2.3. Borrowing Base Report. In the case of any request for any Facility A Loan, the Agent shall have received from the Borrower, if the Agent has so requested, such information and reports relating to the Borrowing Base, and such certificates of Authorized Officers of the Borrower relating to the Borrowing Base, as the Agent shall have reasonably requested in order to calculate and confirm the Borrowing Base as of the Drawdown Date of such Facility A Loan. SECTION 7.2.4. Legality of Transactions. It shall not be unlawful (a) for the Issuer or the Agent or any Bank to perform any of its obligations under any of the Loan Documents or (b) for the Borrower to perform any of its obligations under any of the Loan Documents. SECTION 7.2.5. Satisfactory Legal Form, etc. All documents executed and delivered or submitted pursuant hereto by or on behalf of -72- the Borrower or any of its Subsidiaries shall be reasonably satisfactory in form and substance to the Agent and its special counsel; the Agent and its special counsel shall have received all such information, and such counterpart originals or such certified or other copies of such materials, as the Agent or its special counsel may reasonably request; and all legal matters incident to the transactions contemplated by this Agreement shall be reasonably satisfactory to special counsel to the Agent. ARTICLE VIII WARRANTIES, ETC. In order to induce the Secured Parties to enter into this Agreement and in order to induce the Secured Parties to make loans and other Credit Extensions hereunder, each Credit Party represents and warrants to the Secured Parties as set forth in this Article VIII as follows: SECTION 8.1. Organization, etc. Each of the Borrower and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary and where the failure to so qualify would have or could reasonably be expected to have a Materially Adverse Effect, and has full power and authority and holds all requisite governmental licenses, permits and other approvals to own or hold under lease its material Property, except where the failure to hold such licenses, permits and other approvals would not have a Material Adverse Effect, and to conduct its business substantially as currently conducted by it and as proposed to be conducted by it, and to execute, deliver and perform the Loan Documents executed or to be executed by it. SECTION 8.2. Power, Authority. Each of the Borrower and its Subsidiaries has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of the Loan Documents executed or to be executed by it. The execution, delivery and performance of each of the Loan Documents to which the Borrower or any of its Subsidiaries is or is to become a party do not and will not (except for Approvals which have been already given or obtained) require any Approvals, will not conflict with, result in any violation of, or constitute any default under, (a) any provisions of any Governing Document of Borrower or such Subsidiary, (b) any Contractual Obligations of the Borrower or any of its Subsidiaries, or (c) any Applicable Laws, and do not and will not result in or require the creation -73- or imposition of any Liens on any of the material Property of the Borrower or any of its Subsidiaries pursuant to the provisions of any agreements (excluding, however, the Liens created by the Collateral Documents) or other Instruments binding upon or applicable to the Borrower or any of its Subsidiaries or any of their respective Property. SECTION 8.3. Validity, etc. This Agreement has been duly executed and delivered by the Borrower and the Guarantors and constitutes the legal, valid, and binding Obligation of the Borrower and the Guarantors, enforceable in accordance with its terms. Each of the other Loan Documents, including without limitation the Notes, to which the Borrower or any of its Subsidiaries is or is to become a party has been, or, upon execution and delivery thereof will be, duly executed and delivered by the Borrower or such Subsidiary, and does or will constitute the legal, valid and binding obligation of the Borrower or such Subsidiary, enforceable in accordance with its terms. The enforceability of this Agreement and the other Loan Documents against the Borrower and its Subsidiaries shall be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws at the time in effect affecting the enforceability of the rights of creditors generally and to general equitable principles. SECTION 8.4. Financial Information. All balance sheets, all statements of income and of cash flows, and all other financial statements which have been furnished by or on behalf of the Borrower to the Agent, for the purposes of or in connection with this Agreement, including: (a) the audited consolidated balance sheets at May 31, 1997, May 31, 1996 and May 31, 1995 and the related audited consolidated statements of income, of retained earnings and of cash flows, for the fiscal years then ended, of the Borrower and its Subsidiaries accompanied by the notes thereto and the reports thereon of the Independent Public Accountant, and the related letters to management for each of the fiscal years (or six month periods) then ended; (b) the unaudited consolidated balance sheet at February 28, 1998 and the related unaudited consolidated statements of income and of cash flows, for the nine-month period then ended of the Borrower and its Subsidiaries; and (c) the unaudited consolidated balance sheet at April 30, 1998 and the related unaudited consolidated statements of income and of cash flows (the financial statements referred to in clauses -74- (a), (b) and (c) being herein referred to, collectively, as the "Historical Financials"); have been prepared in accordance with GAAP consistently (except as otherwise described therein) applied throughout the periods involved (except that the financial statements referred to in clauses (b) and (c) do not include footnotes) and present fairly (subject to normal year-end adjustments in the case of the financial statements referred to in clause (b) and (c)) the financial condition of the corporations covered thereby as at the dates thereof and the results of its operations for the periods then ended. SECTION 8.5. Projections. The projected consolidated statements of income and of cash flows of the Borrower and its Subsidiaries for each of the fiscal quarters of the Borrower and its Subsidiaries from June 1, 1998 through May 31, 2000, all of which have been delivered to the Agent and the Banks prior to the date of this Agreement (collectively, the "Projections"), have been prepared on the basis of the assumptions accompanying them and reflect, as of the date of preparation, the best good faith estimates by the Borrower of the performance of the Borrower and its Subsidiaries for the periods covered thereby based on such assumptions. SECTION 8.6. Materially Adverse Effect. (a) For purposes of the Credit Extensions to be made on the Closing Date, no events or developments have occurred since May 31, 1997 which, individually or in the aggregate, have had or could reasonably be expected to have a Materially Adverse Effect. (b) For purposes of each Credit Extension requested to be made after the Closing Date, no events or developments have occurred since the Closing Date which, individually or in the aggregate, have had or could reasonably be expected to have a Materially Adverse Effect. SECTION 8.7. Existing Indebtedness; Absence of Defaults. The Indebtedness for Borrowed Money of the Borrower and its Subsidiaries in existence on the Closing Date is identified in Section 8.7 of the Disclosure Schedule. With respect to each item of Indebtedness for Borrowed Money identified in Section 8.7 of the Disclosure Schedule, the Borrower has delivered or otherwise made available to the Agent a true and complete copy of each Instrument evidencing such Indebtedness for Borrowed Money or pursuant to which such Indebtedness for Borrowed Money was issued or secured (including each amendment, consent, waiver or other similar Instrument executed and/or delivered in respect -75- thereof), as the same is in effect on the Closing Date. Except as otherwise disclosed in Section 8.7 of the Disclosure Schedule, none of the Borrower or its Subsidiaries is in default in the payment of any such Indebtedness for Borrowed Money or in the performance of any other material obligation under any Instrument evidencing such Indebtedness for Borrowed Money or pursuant to which such Indebtedness for Borrowed Money was issued or secured. SECTION 8.8. Litigation, etc. Except as to matters identified in Section 8.8 of the Disclosure Schedule, there is no pending or, to the best knowledge of the Borrower (after due inquiry), threatened litigation, arbitration or governmental investigation or proceeding against the Borrower or any of its Subsidiaries or to which any of the material Property of any thereof is subject which (a) if adversely determined, could reasonably be expected to have a Materially Adverse Effect; (b) relates to this Agreement or any of the other Loan Documents; or (c) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, any of the transactions contemplated by or in connection with this Agreement or any of the other Loan Documents. None of such pending or threatened proceedings has had or could reasonably be expected to have a Materially Adverse Effect. SECTION 8.9. Regulations G, U and X. None of the Borrower or any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. None of the proceeds of any of the Loans or other Credit Extensions will be used for the purpose of, or be made available by the Borrower in any manner to any other Person to enable or assist such Person in, directly or indirectly, purchasing or carrying margin stock. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section 8.9 with such meanings. SECTION 8.10. Government Regulation. None of the Borrower or its Subsidiaries is an "investment company" or a "company controlled by an investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a -76- "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 8.11. Taxes. Each of the Borrower and its Subsidiaries has filed all material tax returns and material reports required by Applicable Law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. No tax Liens (other than tax Liens that constitute Permitted Liens under paragraph (b) of the definitions thereof) have been filed with respect to the Borrower or any of its Subsidiaries and, to the knowledge of the Borrower (after due inquiry), no claims are being asserted with respect to any such taxes or charges (and no basis exists for any such claims), which Liens and claims, individually or in the aggregate, have had or could reasonably be expected to have a Materially Adverse Effect. SECTION 8.12. Compliance with ERISA. Each of the Borrower and its Subsidiaries is in substantial compliance with all material provisions of ERISA, except to the extent that any failure so to be in compliance with any provisions of ERISA has not had and could not be reasonably expected to have a Materially Adverse Effect. SECTION 8.13. Labor Controversies. Except as disclosed in Section 8.13 of the Disclosure Schedule, there are no labor controversies pending or, to the knowledge of the Borrower (after due inquiry), threatened against the Borrower or any of its Subsidiaries, which, if adversely determined, will have or could reasonably be expected to have a Materially Adverse Effect. SECTION 8.14. Corporate Structure, etc. Section 8.14 of the Disclosure Schedule identifies, as of the Closing Date, each Subsidiary of the Borrower. Section 8.14 of the Disclosure Schedule identifies, with respect to the Borrower and each of its Subsidiaries identified in Section 8.14 of the Disclosure Schedule, as of the Closing Date, (a) the State of incorporation of each such corporation, (b) the number of authorized and outstanding shares of each class of Capital Stock of each such corporation, (c) each of the owners of greater than five percent (5%) of its outstanding Voting Shares, as of the date of this Agreement, and (d) the businesses in which each of such corporations is engaged. SECTION 8.15. Ownership of Properties; Liens. Section 8.15 of the Disclosure Schedule identifies all of the real Property owned or -77- leased by the Credit Parties as of the Closing Date. Each of the Credit Parties has valid fee or leasehold interests in all of its real Property and good and marketable title to all of its material owned personal Property, and none of such Property is or will be subject to any Liens, except such Liens as are permitted by Section 9.2.3. Section 8.15 of the Disclosure Schedule identifies all of the Liens that are in existence upon Property of the Credit Parties on the Closing Date and that secure Indebtedness for Borrowed Money of the Credit Parties. SECTION 8.16. Patents, Trademarks, Copyrights, etc. The Borrower and each of its Subsidiaries owns or possesses all such patent rights, trademark rights, trade name rights, service mark rights and copyrights material to the conduct of its respective business, to its knowledge, without any infringement upon any proprietary or other rights of any other Person, except to the extent that any such infringement has not had and could not reasonably be expected to have a Materially Adverse Effect. SECTION 8.17. Collateral Documents. The provisions of the Collateral Documents will be, from and after the Closing Date, effective to create, in favor of the Agent for the benefit of the Secured Parties and as security for the Obligations, legal, valid and enforceable Liens in all right, title and interest of the Credit Parties in the Collateral described in the Collateral Documents. Each of the Collateral Documents will create a fully perfected Lien in all right, title and interest of the Credit Parties in the Collateral described therein superior in right to any other Liens, existing or future, except to the extent otherwise permitted hereby or by the other Loan Documents. SECTION 8.18. Environmental Matters. Except as identified in Section 8.18 of the Disclosure Schedule: (a) to the knowledge of the Borrower or any of its Subsidiaries, all Property (including underlying groundwater) owned or leased by the Borrower or its Subsidiaries has been, and continues to be, owned or leased by such Person in substantial compliance with all Environmental Laws, except to the extent that any failure so to be in compliance with Environmental Laws has not had and could not reasonably be expected to have a Materially Adverse Effect; (b) there have been no past, and there are no pending or, to the knowledge of the Borrower or any of its Subsidiaries, threatened -78- (i) material claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries from any Governmental Authority with respect to any alleged violation of any Environmental Laws, or (ii) material complaints, notices or inquiries to the Borrower or any of its Subsidiaries from any Governmental Authority alleging liability under any Environmental Laws; (c) to the knowledge of the Borrower, there have been no Releases of Hazardous Materials at, on or under Property now or previously owned or leased by the Borrower or any of its Subsidiaries, the costs to address which, individually or in the aggregate, have had or could reasonably be expected to have a Materially Adverse Effect; (d) each of the Borrower and its Subsidiaries has been issued and is in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and required under Environmental Laws for its businesses, except to the extent that any failure so to be in compliance has not had and could not reasonably be expected to have a Materially Adverse Effect; and (e) to the knowledge of the Borrower and its Subsidiaries, no conditions exist at, on or under any Property now or previously owned or leased by the Borrower or any of its Subsidiaries which, with the passage of time or the giving of notice, or both, will give rise or could reasonably be expected to give rise to liability under any Environmental Laws, which liability will have or could reasonably be expected to have, individually or in the aggregate, a Materially Adverse Effect. SECTION 8.19. Compliance with Applicable Laws. Each of the Borrower and its Subsidiaries is in substantial compliance in all material respects with all Applicable Laws, except to the extent that any failure so to be in compliance has not had and could not reasonably be expected to have a Materially Adverse Effect. -79- SECTION 8.20. Existing Investments. Section 8.20 of the Disclosure Schedule identifies each Investment of the Borrower or any of its Subsidiaries that is owned or held or is outstanding or in effect on the Closing Date other than Investments of the kind described in clause (b), (c), (d) or (e) of the definition of the term "Permitted Investments". SECTION 8.21. Transactions with Affiliates. (a) Section 8.21 of the Disclosure Schedule identifies (i) all (if any) Indebtedness of the Borrower or any of its Subsidiaries to any SofTech Affiliate on or as of the Closing Date and all (if any) Contractual Obligations of the Borrower or any of its Subsidiaries to any SofTech Affiliate on or as of the Closing Date (except obligations to pay compensation to officers and directors of the Borrower and its Subsidiaries in the ordinary course of business). (b) Except as disclosed in Section 8.21 of the Disclosure Schedule, during the period from December 31, 1996 through the Closing Date, no Restricted Payment has been made by the Borrower or its Subsidiaries and no Affiliate Transaction has been entered into, paid, performed or completed. (c) Except as disclosed in Section 8.21 of the Disclosure Schedule, during the period from December 31, 1996 through the Closing Date, none of the Borrower or its Subsidiaries has merged or consolidated with or into any other Person or sold, transferred or otherwise disposed of any Property except in connection with Permitted Dispositions. SECTION 8.22. Certain Documents, etc. The Borrower has delivered to the Agent true and complete copies of each Acquisition Document, the Greenleaf Note and the Greenleaf Bridge Note, and all Instruments governing the issuance of, and the assignment or transfer of any rights under, any of the foregoing. None of such documents shall have been amended in any respect on or prior to the Closing Date. Except for the Greenleaf Note and the Greenleaf Bridge Note, there are no outstanding Subordinated Debt Documents. Greenleaf Capital, Inc. is the holder of all Indebtedness of the Borrower and its Subsidiaries under the Greenleaf Note and the Greenleaf Bridge Note. SECTION 8.23. Ownership of Subsidiaries, etc. (a) The Borrower owns and controls, both legally and beneficially, with full power to vote, one hundred percent (100%) of -80 the issued and outstanding shares of Capital Stock of each of IDI and Adra. (b) Since December 31, 1996, no Change of Control with respect to the Borrower has occurred. SECTION 8.24. Dormant Subsidiaries. No Dormant Subsidiary holds any material assets or liabilities or is engaged in any material operations. SECTION 8.25. Representations in Loan Documents. Each of the representations and warranties made by the Borrower or any of its Subsidiaries in the Loan Documents is true and correct, and the Borrower and its Subsidiaries make to the Secured Parties each such representation and warranty made therein to the same extent and with the same full force and effect as if such representation or warranty were set forth herein in full. ARTICLE IX COVENANTS SECTION 9.1. Certain Affirmative Covenants. The Credit Parties agree with the Secured Parties and warrant that, from and after the date of this Agreement and until all of the Commitments have terminated, all of the Letters of Credit have been fully drawn, terminated or expired, and all of the Obligations have been paid in full, the Credit Parties will, and will cause each of their Subsidiaries to: SECTION 9.1.1. Financial Information, etc. Furnish to the Agent and each Bank copies of the following financial statements, reports and other information: (a) promptly when available and in any event within ninety (90) days after the close of each fiscal year of the Borrower after the date hereof, (i) a consolidated balance sheet as at the close of such fiscal year, and related consolidated statements of income, retained earnings and cash flows for such fiscal year, of the Borrower and its Subsidiaries (with comparable information as at the close of and for the prior fiscal year), such statements for such fiscal year to be audited and accompanied by an audit report issued without -81- Impermissible Qualification by the Independent Public Accountant, (ii) consolidating balance sheets as at the close of such fiscal year, and related consolidating statements of income for such fiscal year, of the Borrower and its Subsidiaries (with comparable information as at the close of and for the prior fiscal year), certified as to fairness of presentation by the principal accounting or financial Authorized Officer of the Parent Company, (iii) a Compliance Certificate calculated as at the close of such fiscal year, and (iv) commencing with the fiscal year of the Borrower ending May 31, 1999, a written statement of the Independent Public Accountant stating that in making the examination necessary to make the audit report on the financial statements delivered pursuant to clause (i), they obtained no knowledge of any default by the Borrower or any of its Subsidiaries in the performance or observance of any of the covenants contained in Article IX, or, if the Independent Public Accountant shall have obtained knowledge of any such default, specifying all such defaults and the nature and status thereof; (b) promptly when available and in any event within forty-five (45) days after the close of each of the first three fiscal quarters of each fiscal year of the Borrower, (i) a consolidated balance sheet as at the close of each such fiscal quarter, and related consolidated statements of income and cash flows for such fiscal quarter and for the portion of the fiscal year then ended, of the Borrower and its Subsidiaries (with comparable information as at the close of and for the corresponding fiscal quarter of the prior fiscal year and for the corresponding portion of such prior fiscal year), certified as to fairness of presentation by the principal accounting or financial Authorized Officer of the Borrower, (ii) consolidating balance sheets as at the close of such fiscal quarter, and related consolidating statements of income and cash flows for such fiscal quarter and for the portion of the fiscal year then ended, of the Borrower and its -82- Subsidiaries (with comparable information as at the close of and for the corresponding fiscal quarter of the prior fiscal year and for the corresponding portion of such prior fiscal year), certified as to fairness of presentation by the principal accounting or financial Authorized Officer of the Borrower, and (iii) a Compliance Certificate calculated as at the close of such fiscal quarter; (c) promptly when available and in any event within thirty (30) days (or, with respect to subclauses (iv) and (v) below, twenty (20) days) after the close of each fiscal month of the Borrower, (i) a consolidated balance sheet as at the close of each such fiscal month, and related consolidated statements of income and cash flows for such fiscal month, of the Borrower and its Subsidiaries, (ii) a statement as at the close of each such fiscal month showing aging and reconciliation of the Accounts Receivable (excluding Maintenance Receivables) and the accounts payable of the Borrower and its Subsidiaries and all collections thereon; (iii) a statement as at the close of each such fiscal month showing aging and reconciliation of Maintenance Receivables of the Borrower and its Subsidiaries and all collections thereon; (iv) an statement as at the end of such fiscal month showing (A) the number of maintenance service agreements eligible for renewal during such month and (B) the number of maintenance service agreements renewed during such month; and (v) a Borrowing Base Report setting forth the amount of (A) Eligible Accounts Receivable and (B) Qualified Maintenance Receivables of the Credit Parties, attached to which shall be all reports and supporting information required by the Agent to confirm the Borrowing Base calculations as of the last day of such month. (d) promptly upon receipt thereof, copies of all detailed financial and management reports, if any, submitted to the Borrower or any of its Subsidiaries by any independent public accountant in connection with any annual or interim audit made by any such independent public -83- accountant of the books of the Borrower or of any of its Subsidiaries; (e) promptly upon completion thereof, and in any event not later than the first day of December of each fiscal year of the Borrower, a copy of the annual business plan and budget for the following fiscal year for the Borrower and its Subsidiaries, including, in each case, budgeted results for each fiscal quarter and for the fiscal year as a whole, together with an explanation of any differences between the sum of the individual budgets and the consolidated totals, and upon the delivery of any financial statements relating to any period included in such budget, a summary comparing the actual financial performance of the Borrower and its Subsidiaries during such period to that provided for in such budget; (f) promptly upon any filing thereof by the Borrower or any of its Subsidiaries with the SEC, any annual, periodic or special reports or registration statements which the Borrower or any of its Subsidiaries may file with the SEC or with any other securities exchange and copies of any financial statements which the Borrower or any of its Subsidiaries may file with any Governmental Authority; and (g) promptly, such additional financial and other information with respect to the Borrower or any of its Subsidiaries as the Agent may from time to time reasonably request. SECTION 9.1.2. Maintenance of Corporate Existence, etc. Maintain and preserve its corporate existence, rights and franchises; continue to own and hold, legally and beneficially, free and clear of all Liens (except Liens permitted by Section 9.2.3), all of the outstanding shares of Capital Stock of each of its Subsidiaries; and take all reasonable steps to maintain its identity as a separate legal entity and to make it apparent to third parties that it is a corporation with Property and liabilities distinct from those of any of its Affiliates, provided that the foregoing shall not prohibit any Credit Party or Adra from entering into any Permitted Disposition. SECTION 9.1.3. Foreign Qualification. Cause to be done at all times all things necessary to be duly qualified to do business and to be in good standing as a foreign corporation in each jurisdiction where the ature of its business makes such qualification necessary and where the -84- failure to so qualify will have or could reasonably be expected to have a Materially Adverse Effect. SECTION 9.1.4. Payment of Taxes, etc. Pay and discharge, as the same become due and payable, all material federal, state and local taxes, assessments and other governmental charges or levies against or on any of its income, profits or Property, as well as all claims of any kind, including all claims for labor, materials and supplies, which, if unpaid, might become a Lien upon any of its Property, and pay before they become delinquent all other material obligations and liabilities; provided, however, that the foregoing shall not require the Borrower or any of its Subsidiaries to pay or discharge any such tax, assessment, charge, levy, claim, obligation or liability (a) which is not yet due and payable, or (b) so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall have set aside on its books adequate reserves in accordance with GAAP with respect thereto. Nothing in this Section 9.1.4 shall impair the absolute and unconditional Obligations of the Borrower to pay all of the Obligations as and when the same shall become due and payable. SECTION 9.1.5. Maintenance of Property. Keep all of its Property that is useful and necessary in its businesses in good working order and condition (ordinary wear and tear excepted), and maintain or cause to be maintained insurance with respect to its Property and businesses against such casualties and contingencies and of such types and in such amounts and with such deductibles as are customary in the case of similar businesses, including without limitation property and casualty insurance complying with the foregoing provisions and naming the Agent as loss payee; and, upon the reasonable request of the Agent, furnish to the Agent at reasonable intervals a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower or by any of its Subsidiaries in accordance with this Section 9.1.5. SECTION 9.1.6. Notice of Default, etc. Give written notice (accompanied by a reasonably detailed explanation with respect thereto) promptly, and in any event within five (5) Business Days after obtaining knowledge thereof, to the Agent of: (a) the occurrence of (i) any Default or Event of Default, or (ii) receipt by the Borrower from or on behalf of any holder of any Capital Stock of the Borrower of any notice, -85- demand or request for redemption, purchase, repurchase or other acquisition by the Borrower of any of its Capital Stock; (b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Borrower to the Agent which has been instituted or, to the knowledge of the Borrower (after due inquiry), is threatened against the Borrower or any of its Subsidiaries or to which any of their respective Property is subject which (i) if adversely determined, will have or could reasonably be expected to have a Materially Adverse Effect, or (ii) relates to this Agreement or any other Loan Document; (c) any material adverse development which shall occur in any litigation, arbitration or governmental investigation or proceeding previously disclosed by the Borrower or any of its Subsidiaries to the Agent; (d) any development in the business, operations, Property, financial condition or prospects of the Borrower or any of its Subsidiaries which has had or could reasonably be expected to have a Materially Adverse Effect; and (e) any termination or any material amendment or modification of any Governing Document of the Borrower or any of its Subsidiaries, which written notice shall include a copy (if in writing) or a description (if not in writing) of any such termination, amendment or modification. SECTION 9.1.7. Books and Records. Keep proper books and records reflecting all of its business affairs and transactions in accordance with GAAP, and permit the Agent and any other Bank or any of their respective representatives, upon reasonable notice at reasonable times and intervals during ordinary business hours, to visit any of its offices and Properties, discuss financial matters relating to the Borrower or any of its Subsidiaries with their officers and the Independent Public Accountant (and the Borrower hereby authorizes the Independent Public Accountant to discuss its financial matters with the Agent, any Bank or any of their respective representatives), and examine and make abstracts or photocopies from any of its books or other corporate records, all at the expense of the Borrower for any charges imposed by such accountant or for making such abstracts or photocopies. The Borrower acknowledges -86- and agrees that the Agent intends to perform a collateral audit at the Borrower's offices and locations at least twice per year, and that the reasonable costs of such audits shall be for the account of the Borrower. SECTION 9.1.8. Compliance with Laws, etc. (a) Obtain all such Approvals and take all such other action with respect to any Governmental Authority as may be required for the execution, delivery or performance of this Agreement and the other Loan Documents and duly perform and comply with all of the terms and conditions of all Approvals so obtained. (b) Comply in all material respects with all Applicable Laws, including all Environmental Laws and all material provisions of ERISA, except to the extent that any failure so to comply will not have and could not reasonably be expected to have a Materially Adverse Effect. SECTION 9.1.9. Identification of Subsidiaries; Provision of Collateral. (a) If and whenever any direct or indirect Subsidiary of the Borrower shall be created or acquired by the Borrower or by any of its Subsidiaries at any time after the date hereof: (i) furnish promptly to the Agent a written notice identifying such Subsidiary and setting forth with respect to such Subsidiary information of the kind required by Section 8.14 with respect to the Borrower; (ii) promptly pledge or cause to be pledged to the Agent, upon the terms contained in a pledge agreement in form and substance reasonably satisfactory to the Agent, and in order to secure payment and performance of all of the Obligations, all of the issued and outstanding shares of the Capital Stock of such Subsidiary; (iii) promptly cause such Subsidiary to execute and deliver to the Agent an accession agreement in form and substance reasonably satisfactory to the Agent upon the terms of which such Subsidiary will become a party hereto as a Guarantor; and (iv) promptly cause such Subsidiary to execute and deliver to the Agent a security agreement in form and -87- substance reasonably satisfactory to the Agent and all such other Security Instruments as shall be required to create in favor of the Agent for the benefit of itself and the Banks, and as security for the payment and performance of all of the Obligations, perfected first-priority Liens with respect to all of the Property (whether tangible or intangible) of such Subsidiary. (b) From time to time after the date hereof, upon and in accordance with the reasonable request of the Agent, and at the cost and expense of the Borrower, promptly create or cause to be created in favor of the Agent for the benefit of the Secured Parties, as security for the payment and performance of all of the Obligations, perfected first-priority Liens with respect to all (if any) of its Property (whether tangible or intangible) which is not then subject to perfected first-priority Liens in favor of the Agent, all such Liens to be created under Security Instruments in form and substance reasonably satisfactory to the Agent; deliver or cause to be delivered to the Agent all such instruments (including legal opinions, Lien search results and releases and termination statements) as the Agent shall reasonably request to evidence satisfaction of the Obligations created by this Section 9.1.9(b); and promptly provide such evidence as the Agent shall from time to time reasonably request as to the perfection and priority of such Liens and any other Liens created pursuant to any of the Collateral Documents. SECTION 9.1.10. Lockbox Arrangement. (a) Within thirty (30) days of the Closing Date, will duly execute and deliver to the Agent an assignment to Imperial of all rights under the Lockbox Agreement (the "Assignment of Lockbox Agreement"). (b) Maintain the Lockbox Account with Fleet Bank and maintain in full force and effect the Lockbox Agreement; (c) Maintain all of its primary operating and investment accounts, and conduct all of its material banking business with Imperial. SECTION 9.2. Certain Negative Covenants. Each Credit Party agrees with the Secured Parties and warrants that, from and after the date of this Agreement and until all of the Commitments have terminated and all the Obligations have been paid in full, the Credit Parties will not, and will not cause or permit any of their Subsidiaries to: -88- SECTION 9.2.1. Limitation on Nature of Business. At any time undertake, conduct or transact, directly or indirectly, any business except the business in which it is presently engaged and any other businesses reasonably incidental or related thereto, or undertake, conduct or transact any business in a manner prohibited by Applicable Law. SECTION 9.2.2. Indebtedness. Incur or permit or suffer to exist, or otherwise become or be liable in respect of or be responsible for, any Indebtedness for Borrowed Money, except: (a) Indebtedness for Borrowed Money of the Credit Parties under any of the Loan Documents or in respect of any of the Loans or any of the Obligations; (b) Permitted Indebtedness of the Borrower or of any of its Subsidiaries (other than Dormant Subsidiaries); (c) Indebtedness for Borrowed Money in respect of Investments permitted by any of clauses (a) through (e) of Section 9.2.5; (d) Indebtedness of the Borrower or its Subsidiaries consisting of dividends declared but not paid, to the extent that such dividends are permitted by Section 9.2.6; and (e) Permitted Subordinated Seller Debt, in an aggregate amount that shall not at any time exceed $500,000. SECTION 9.2.3. Liens. Create, incur, assume, or permit or suffer to exist, any Liens upon any of its Property (including Capital Stock of any of its Subsidiaries), whether now owned or hereafter acquired, except: (a) Liens in favor of the Agent securing the payment or performance of any of the Loans or any of the Obligations; and (b) Permitted Liens. SECTION 9.2.4. Financial Covenants. (a) Total Funded Debt to EBITDA Ratio. For any Reference Period, permit the ratio of (i) Indebtedness for Borrowed Money of the Borrower and its Subsidiaries for such period, to (ii) Consolidated EBITDA for such period, to exceed 2.50:1.00. -89- (b) Minimum Interest Coverage Ratio. The Borrower shall not permit the ratio of Consolidated EBITDA for any Referenced Period to Consolidated Gross Interest Expense for any Referenced Period to be less than 1.75:1.00. (c) Minimum Operating Cash Flow Coverage. For any Reference Period, the Borrower shall not permit the ratio of (i) Operating Cash Flow to (ii) Consolidated Debt Service to be less than 1.25:1.0.. (d) Minimum Consolidated Earnings Before Interest and Taxes. The Borrower shall not permit Consolidated Earnings Before Interest and Taxes to be less than (i) $1,250,000 for the fiscal quarter of the Borrower ending February 28, 1999, or (ii) $1,500,000 for any fiscal quarter ending thereafter. SECTION 9.2.5. Investments. Make, incur, assume, or permit or suffer to exist, or make any offer or commitment to make, or enter into any agreement to make, any Investments in any other Person, except: (a) Permitted Investments; (b) Investments by any Guarantor constituting Restricted Payments permitted by Section 9.2.6(b); (c) Investments by the Borrower in any Guarantor made by way of (i) cash contributions to the capital of such Guarantor, or (ii) cash Investments in the Permitted Capital Stock of such Guarantor; (d) Investments in any Affiliate permitted by clause (e) of Section 9.2.10; (e) Investments by the Borrower in Adra made by way of Loans or advances, provided, however, that the aggregate amount of such Investments after the date hereof shall not exceed $100,000; and (f) Investments by any Credit Party that constitute Permitted Acquisitions. SECTION 9.2.6. Restricted Payments. Make, extend or enter into any offer or commitment to make, or enter into any agreement to make, any Restricted Payments, except: -90- (a) the declaration and payment of cash dividends by any Subsidiary of the Borrower to any Credit Party; (b) payments of interest on the Greenleaf Note, provided that such payments are not prohibited under the Subordination Agreement; (c) payments of interest on the Greenleaf Bridge Note, provided that such payments are not prohibited under the Greenleaf Letter Agreement; (d) payments of principal of the Greenleaf Bridge Note at any time after August 7, 1998, provided, that each of the following conditions is satisfied: (i) no Default or Event of Default shall be continuing on the date of such payment of principal, or shall result therefrom; and (ii) the Borrower shall have established to the reasonable satisfaction of the Agent, based on historical financial results and projections that can reasonably be expected for the future, that, after giving effect to such payment of principal, Borrower will be in compliance with each of the covenants set forth in Section 9.2.4 for each of the next four Reference Periods to end after the date of such payment of principal; and (e) payments, not otherwise permitted by any of the other clauses of this Section 9.2.6, by the Borrower or any of its Subsidiaries to any Affiliates, but, in each case, only to the extent permitted by Section 9.2.10. The Agent and Banks acknowledge that the Borrower may request the consent of the Agent and the Required Banks to certain prepayments or redemptions of principal under the Greenleaf Note in order to reduce the number of warrant shares available under certain warrants delivered by the Borrower to Greenleaf Capital, Inc. Such consent may be granted or withheld by the Agent and the Required Banks in their reasonable discretion. In any event, no such consent will be granted if (i) any Default or Event of Default is continuing or (ii) the Borrower is unable to demonstrate to the reasonable satisfaction of the Agent and the Required Banks that, after giving effect to such prepayment or redemption, the Borrower will be able to (A) satisfy all Obligations hereunder as the same become due, or (B) satisfy all financial covenants set forth in Section -91- 9.2.4 for a period of not less than eight (8) fiscal quarters following such prepayment or redemption. SECTION 9.2.7. Mergers; Sales of Property. Consolidate or merge with or into any Person, engage in any Sale of all or any substantial part of its Property (either in a single transaction or a series of related transactions), sell and thereafter lease back all or any part of its Property, make any offer or commitment to do so, or enter into any agreement to do so, except (a) any Permitted Dispositions, and (b) any merger constituting a Permitted Acquisition. SECTION 9.2.8. Acquisitions. Engage in or undertake, make any offer or commitment to engage in, or enter into any agreement to engage in, any Acquisition, except Permitted Acquisitions. SECTION 9.2.9. Modification of Governing Documents, etc. (a) Consent to or enter into or permit any material amendment, supplement or other modification of any Governing Document of the Borrower or any of its Subsidiaries, any Acquisition Documents or any Subordinated Debt Documents. (b) Cause or permit any Subsidiary of the Borrower to create or permit to exist any contractual restrictions (except for such restrictions set forth herein and in the other Loan Documents) on the making of Restricted Payments or Investments by any Subsidiary of the Borrower to or in the Borrower or any of the Subsidiaries. SECTION 9.2.10. Transactions with Affiliates. Enter into, engage in or perform any Affiliate Transaction, make any offer or commitment to do so, or enter into any agreement to do so, except: (a) Restricted Payments by any Subsidiary to the extent permitted by Section 9.2.6; (b) loans or advances to any director, officer or employee of the Borrower or any of its Subsidiaries made in the ordinary course of business; (c) any other Affiliate Transaction with the Borrower or any other Affiliate not otherwise permitted by any of the other provisions of this Section 9.2.10; provided, that (i) the terms of such Affiliate Transaction, taken as a whole, are no less favorable to the Borrower or its Subsidiaries than would be the case if such Affiliate Transaction had been entered into with a Person that is -92- not an Affiliate, (ii) the aggregate Fair Market Value (as determined on a reasonable basis and in good faith by the Board of Directors of the Borrower) of all Affiliate Transactions permitted by this clause (c) (and not otherwise permitted by any other clause of this Section 9.2.10) during any fiscal year of the Borrower shall not exceed $250,000, and (iii) at the time of the completion of such Affiliate Transaction, and after giving effect thereto, no Default or Event of Default shall occur or be continuing. SECTION 9.2.11. Sale of Capital Stock, etc. Issue, sell, transfer or otherwise dispose of any shares of any Capital Stock of any of the Borrower (except the issuance of shares of Capital Stock upon the exercise of subordinated debt warrants outstanding as of the date hereof and stock options issued to employees under the Borrower's existing stock option plan) or any of its Subsidiaries, except: (a) the pledge from time to time of Capital Stock of the Borrower and any of its Subsidiaries to the Agent for the benefit of the Secured Parties in accordance with the terms of this Agreement and the Collateral Documents; and (b) the issuance and Sale by the Borrower of shares of its Permitted Capital Stock; provided, however, that each of the following conditions shall be satisfied: (i) no Event of Default under Section 10.1.9 shall be continuing at the time of such issuance and sale or shall result therefrom; and (ii) all of the Net Equity Proceeds from any such issuance and Sale pursuant to any Public Offering shall be used by the Borrower, immediately upon its receipt thereof, to prepay Facility B Loans. SECTION 9.2.12. Change of Control Triggering Events. Enter into or undertake any transaction, arrangement or agreement (whether a consolidation, merger, issue or Sale of Capital Stock or other Securities, reorganization, voting agreement or otherwise) that will or could reasonably be expected to result in a Default under Section 10.1.9. SECTION 9.2.13. Change of Location or Name. Change (a) the location of its principal place of business, chief executive office, major executive office, chief place of business or records concerning its business and financial affairs, or (b) its name or the name under or by which it conducts its business, in each case, without first giving the Agent written notice thereof and having taken any and all action -93- reasonably required by the Agent to maintain and preserve the perfected first-priority Liens in favor of the Agent created by the Collateral Documents. SECTION 9.2.14. Dormant Subsidiaries. Hold any material Property in any Dormant Subsidiary, make any Investments in any Dormant Subsidiary, or allow any Dormant Subsidiary to engage in any business operations. ARTICLE X EVENTS OF DEFAULT SECTION 10.1. Events of Default. The term "Event of Default" shall mean any of the following events set forth in this Section 10.1 occurring or existing at any time on or after the date of this Agreement: SECTION 10.1.1. Non-Payment of Obligations. The Borrower shall default: (a) in the payment or prepayment when due under this Agreement or any Note of any principal of any of the Loans, and such default shall continue unremedied for a period of more than one (1) Business Day; (b) in the payment or prepayment when due under this Agreement or any Note of any interest on any of the Loans or other Obligations or any Fees payable under Section 3.6, and such default shall continue unremedied for a period of more than three (3) Business Days; or (c) in the payment when due under this Agreement or any of the other Loan Documents of any other sum (other than any sum referred to in clause (a) or (b)), and such default shall continue unremedied for a period of more than five (5) Business Days. SECTION 10.1.2. Non-Performance of Certain Obligations. The Borrower shall default in the due performance or observance of any of its Obligations under Section 9.1.6 or Section 9.2 (including Sections 9.2.1 through 9.2.13, inclusive), or any holder of any Subordinated Indebtedness shall default in the due performance or observances of any of its obligations under any of the Loan Documents or Subordinated Debt Documents. -94- SECTION 10.1.3. Non-Performance of Other Obligations. The Borrower or any of its Subsidiaries shall default in the due performance or observance of any of its Obligations under any of the Loan Documents (other than the obligations specified in Section 10.1.1 or 10.1.2), and such default shall continue unremedied for more than thirty (30) days after notice thereof shall have been given to the Borrower by the Agent. SECTION 10.1.4. Breach of Warranty. Any representation or warranty of the Borrower or any of its Subsidiaries under any of the Loan Documents is or shall be untrue or incorrect in any material respect when made or deemed made. SECTION 10.1.5. Default Under Other Instruments. (a) The Borrower or any of its Subsidiaries shall fail to make any payments, when due, of any Indebtedness for Borrowed Money of the Borrower or of any of its Subsidiaries (other than the Obligations), such payments shall exceed $500,000 in the aggregate, and such failure shall continue beyond the periods of grace, if any, provided in the Instruments under or by which such Indebtedness for Borrowed Money is governed or evidenced; (b) The Borrower or any of its Subsidiaries shall fail to perform or observe the terms of any Instruments governing or evidencing any Indebtedness for Borrowed Money of the Borrower or of any of its Subsidiaries, and such failure of the kind described in this clause (b) shall permit any one or more holders of such Indebtedness for Borrowed Money to declare immediately due and payable or otherwise to accelerate Indebtedness for Borrowed Money of the Borrower or of any of its Subsidiaries in an aggregate amount exceeding $500,000;or (c) Any Lien on any Property of the Borrower or of any of its Subsidiaries securing any Indebtedness for Borrowed Money of the Borrower or of any of its Subsidiaries in an aggregate amount exceeding $500,000 shall be foreclosed or otherwise enforced. SECTION 10.1.6. Bankruptcy, Insolvency, etc. The Borrower or any of its Subsidiary shall: (a) generally fail to pay its debts as they become due, or admit in writing its inability to pay its debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator, or other custodian for the -95- Borrower or any such Subsidiary or any Property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the involuntary appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any such Subsidiary or for a substantial part of the Property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within sixty (60) days; (d) permit or suffer to exist the involuntary commencement of, or voluntarily commence, any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency laws, or permit or suffer to exist the involuntary commencement of, or voluntarily commence, any dissolution, winding up or liquidation proceeding, in each case, by or against the Borrower or any such Subsidiary, provided that if not commenced by the Borrower or any such Subsidiary, such proceeding shall be consented to or acquiesced in by the Borrower or any such Subsidiary, or shall result in the entry of an order for relief or shall remain undismissed for more than sixty (60) days; (e) with respect to the Borrower, permit or suffer to exist the commencement of any case, proceeding or other action seeking the issuance of a warrant of attachment, execution, distraint or similar process against all or any material part of its Property (except for any such attachment or similar process that would constitute a Permitted Lien); or (f) take any corporate action authorizing, or in furtherance of, any of the foregoing. SECTION 10.1.7. Judgments. A final judgment which, with all other such outstanding final judgments against the Borrower or any of its Subsidiaries, exceeds an aggregate of $500,000 shall be rendered against any of the Borrower or any of its Subsidiaries, and, within thirty (30) days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or within thirty (30) days after the expiration of any such stay, such judgment shall not have been discharged. SECTION 10.1.8. Impairment of Security, etc. Any Loan Document, or any Lien granted thereunder, shall (except in accordance -96- with its terms), in whole or in part, terminate, cease to be effective, or cease to be the legally valid, binding and enforceable obligation of the Borrower thereto; or the Borrower shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability; or any Lien securing any of the Obligations shall, in whole or in part, cease to be a perfected first-priority Lien, subject only to the exceptions permitted by the Loan Documents. SECTION 10.1.9. Change of Control Triggering Event. At any time after the date hereof, any of the following shall occur (each of the following referred to herein as a "Change of Control Triggering Event"): (a) any Change of Control; or (b) the Borrower shall, for any reason whatsoever, cease to own, legally and beneficially, with full power to vote, and free and clear of all Liens (other than Liens in favor of the Agent), directly or indirectly, one hundred percent (100%) of the outstanding Capital Stock of every class of each Subsidiary. SECTION 10.2. Action if Bankruptcy. If any Event of Default described in Section 10.1.6 shall occur, all of the Commitments and all obligations to issue Letters of Credit shall automatically be terminated and the outstanding principal amount of all Loans and the outstanding amount of all other Obligations shall automatically be and become immediately due and payable, and the Borrower shall automatically become obligated to provide cash collateral to the Agent in an amount equal to the undrawn amount under all Letters of Credit, all without notice, demand, presentment or other action of any kind. SECTION 10.3. Action if Other Event of Default. If any Event of Default (other than an Event of Default described in Section 10.1.6) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Agent, upon the direction of the Required Banks, may, by giving notice to the Borrower, declare (a) all of the Commitments and all obligations to issue Letters of Credit to be terminated, whereupon the Commitments and all obligations to issue Letters of Credit shall be immediately terminated, and/or (b) all or any portion of the outstanding principal amount of the Loans or the outstanding amount of any other Obligations to be immediately due and payable, whereupon all of the Commitments and all obligations to issue Letters of Credit shall terminate forthwith and such Loans and other Obligations, or, as the case may be, such portion thereof, shall be and become immediately due and payable, and the Borrower shall automatically become obligated to provide cash collateral to the Agent in an amount equal to the undrawn -97- amount under all Letters of Credit, in each case under clause (a) or (b), without further notice, demand, presentment or other action of any kind. ARTICLE XI THE AGENT SECTION 11.1. Actions. Each Bank or other holder of any Note hereby authorizes the Agent to act on behalf of such Bank or holder under this Agreement and the other Loan Documents and, in the absence of other written instructions from the Required Banks (or, if required by the terms of Section 12.1, from all the Banks) received from time to time by the Agent, (with respect to which the Agent agrees that it will, subject to the next three sentences of this Section 11.1, comply in good faith except to the extent that it is advised by counsel that such compliance would be contrary to any Applicable Law), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Bank agrees (which agreement shall survive any termination of this Agreement) to indemnify the Agent, promptly upon demand, ratably at the time such demand is transmitted, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (collectively, "Indemnified Costs") which may at any time be imposed on, incurred by, or asserted against the Agent, in any way relating to or arising out of this Agreement or any of the other Loan Documents, including the reimbursement of the Agent for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel, amounts paid in settlement and court costs) incurred by the Agent hereunder or in connection herewith or in enforcing the Obligations of the Borrower and its Subsidiaries under this Agreement or any of the other Loan Documents, in all cases as to which the Agent is not reimbursed by the Borrower; except for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which (a) a court of competent jurisdiction has found, in a final nonappealable order, resulted directly and primarily by reason of the Agent's gross negligence or willful misconduct, or (b) have been reimbursed by the Borrower pursuant to Section 13.4. The Agent shall not be required to take any action hereunder or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement or any other Loan Document, unless indemnified to its satisfaction by the Banks against any Indemnified Costs, except for Indemnified Costs resulting directly and primarily by reason of the Agent's gross negligence or willful misconduct. If any indemnity required by this Section 11.1 in favor of the Agent shall become impaired, -98- the Agent may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. The Agent may delegate its duties hereunder to any of its Affiliates, agents or attorneys-in-fact selected in good faith by the Agent. SECTION 11.2. Exculpation. Notwithstanding any provision to the contrary elsewhere in this Agreement or any of the other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any trust or fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Neither the Agent nor any of its directors, officers, employees or agents (collectively, the "Related Parties") shall be liable to any Bank for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor shall the Agent or any of the Related Parties be responsible for any recitals or representations or warranties herein or therein, or for the effectiveness, enforceability, validity, or due execution of this Agreement or any other Loan Document, nor shall the Agent or any of the Related Parties be obligated to make any inquiry respecting the performance by the Borrower of its obligations hereunder or thereunder, or to inspect the Properties, books or records of the Borrower. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement, or writing which it believes to be genuine and to have been presented by a proper Person. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Banks (or, to the extent this Agreement requires a higher percentage, such higher percentage), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks and all future holders of the Obligations. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks (or, to the extent this Agreement requires a higher percentage, such higher percentage) as it deems appropriate. SECTION 11.3. Successor. Subject to the appointment and acceptance of a successor as provided below, the Agent may resign as such at any time upon at least thirty (30) days' prior notice to the Borrower and all Banks, and the Agent may be removed at any time with reasonable cause by the Required Banks. Upon any such resignation or removal, the Required Banks may, upon consultation with the Borrower, appoint another Bank which is a commercial banking institution or trust institution having -99- a combined capital and surplus of at least $500,000,000 as a successor Agent. If the Required Banks do not make such appointment within ten days, the resigning or removed Agent, shall, upon consultation with the Borrower, appoint a new Agent, from among the Banks which are commercial banking or trust institutions having a combined capital and surplus of at least $500,000,000 or, if no Bank accepts such appointment, from among all other commercial banking institutions or trust institutions having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent, such successor Agent shall thereupon become the Agent hereunder and under the other Loan Documents and shall be entitled to receive from the prior Agent, such documents of transfer and assignment as it may reasonably request, and the resigning or removed Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. SECTION 11.4. Loan Documents, etc. Each Bank hereby authorizes the Agent to enter into the applicable Loan Documents and to take all action contemplated thereby. Each Bank agrees that no Bank shall have any right individually to seek to realize upon any security granted by or guaranty provided by any Loan Document, it being understood and agreed that such rights and remedies may be exercised by the Agent for the benefit of the Secured Parties upon the terms of the Loan Documents. SECTION 11.5. Loans by Agent. Any Bank which may at any time be acting as Agent and as a Bank hereunder shall have the same rights and powers with respect to any Loans made by it and any Notes held by it as any Bank and may exercise the same as if it were not a Bank hereunder, and the term "Bank" and, when appropriate, "holder", shall include any Bank who is then Agent. SECTION 11.6. Credit Decisions. Each Bank acknowledges that it has, independently of the Agent or other Banks, and based on the financial information referred to in Section 8.4 and such other documents, information and investigations as it has deemed appropriate, made its own credit decision to make its Commitments and to participate in the Credit Extensions. Each Bank also acknowledges that it will, independently of the Agent or other Banks, and based on such documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement, the Notes or the other Loan Documents. SECTION 11.7. Notices, etc., to the Agent. The Agent will distribute to each Bank each Instrument and copies of all other communications received by the Agent from the Borrower or any of its -100- Subsidiaries in accordance with the terms of this Agreement or any of the other Loan Documents. ARTICLE XII ADDITIONAL BANKS AND PARTICIPANTS SECTION 12.1. Participations by Banks. SECTION 12.1.1 Participations. From and after the date of this Agreement, any Bank may, subject to the prior written consent of the Borrower, which consent will not be unreasonably withheld, in the ordinary course of its business and in accordance with Applicable Law, sell to one or more banks or other entities ("Participants") participating interests in any Loans owing to such Bank, any Notes held by such Bank, any Commitments of such Bank or any other interests of such Bank under this Agreement and under the other Loan Documents (which Sales shall be, as nearly as practicable, and permitting customary rounding of such sales and resulting retained interests, on a pro rata basis as to all of the Loans, Notes, Commitments and other interests of such Bank under the Loan Documents). In the event of any such sale by any Bank of participating interests to a Participant, such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the holder of each of its Notes for all purposes under this Agreement and the other Loan Documents, the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents, and such Bank shall retain the sole right to enforce the Obligations of the Borrower and its Subsidiaries relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement or any of the other Loan Documents. It is understood that nothing in the prior sentence or elsewhere in this Section 12.1.1 shall prohibit a Bank from agreeing with any Participant that such Bank will not, without the consent of such Participant, take any action that would in any event require approval of all of the Banks under Section 13.1. Each Bank hereby agrees that it will not agree with any Participant that such Bank will not take any action without such Participant's consent unless such action would in any event require approval of all Banks under Section 13.1. SECTION 12.1.2. Notice to Borrower; Participant's Rights of Set-off in Certain Cases. The Agent shall, within ten (10) Business Days of the sale to a Participant of an interest in any Loans, provide to the Borrower notice of such sale. The Borrower agrees that each Participant shall be deemed to have all rights of set-off and bankers' liens provided by -101- Applicable Law in respect of its participating interest in amounts owing under this Agreement, any Notes or any of the other Loan Documents to the same extent as if the amount of its participating interest were owing directly to such Participant as a Bank under this Agreement, any Notes or any of the other Loan Documents, provided that such Participant shall only be entitled to such right of set-off if it shall have agreed, for the benefit of the Banks and holders of Notes, in the agreement pursuant to which it shall have acquired its participating interest, to purchase from the Banks and holders of Notes such participations in the Notes held by them as shall be necessary to cause such Participant to share the amount recovered in exercising such right of set-off or bankers' liens pro rata in accordance with the aggregate unpaid principal and interest on the Loans held by each of them. SECTION 12.1.3. Rights of Participants. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 3.8, 4.5, 4.8 and 12.4 with respect to its participation in the Loans outstanding from time to time, and all amounts to which any Participant is entitled thereunder shall be paid by the Borrower directly to the Participant; provided, that no Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred by such transferor Bank to such Participant had no such transfer occurred. SECTION 12.2. Assignments by Banks. SECTION 12.2.1. Assignments. From and after the date of this Agreement, any Bank (any such Bank being referred to herein as an "Assigning Bank") may, subject to the prior written consent of the Borrower, which consent will not be unreasonably withheld, in the ordinary course of its business and in accordance with Applicable Law, assign and transfer to any other Bank or to any Affiliate of such Assigning Bank and, with the consent of the Agent (such consent not to be unreasonably withheld), to any one or more additional banks or financial institutions ("Purchasing Bank") any part of such Assigning Bank's rights and obligations (including Commitments) under this Agreement, its Notes and the other Loan Documents (which assignments and transfers shall be, as nearly as practicable, and permitting customary rounding of such assignments and transfers and resulting retained interests, on a pro rata basis as to all of the Loans, Notes and Commitments of such Assigning Bank and as to all of the other rights and obligations of such Assigning Bank). Any such assignment and transfer ("Assignment") shall be made pursuant to an Assignment and Acceptance Agreement, substantially in the form of Exhibit E attached hereto (an "Assignment and Acceptance Agreement"), executed by such Purchasing Bank and such Assigning Bank (and, in the case of a -102- Purchasing Bank that is not then a Bank or an Affiliate thereof, by the Agent) and delivered to the Agent for its acceptance and recording in the Register (as hereinafter defined); provided, however, that (a) the aggregate principal amount of all Loans and Commitments of the Assigning Bank being assigned pursuant to any such Assignment shall in no event be less than $1,000,000 and shall be in an integral multiple of $500,000 in excess thereof, (b) each such Assignment shall be of a constant, and not a varying, percentage of all of the Assigning Bank's interests in all of its Commitments, Loans and Notes and all of its other rights and obligations under this Agreement, the Notes and the other Loan Documents, and (c) after giving effect to any such Assignment by an Assigning Bank, the aggregate amount of the Assigning Bank's Commitments hereunder shall not be less than $1,000,000. From and after the effective date specified in each Assignment and Acceptance Agreement, which effective date must be at least five (5) Business Days after the execution and delivery of such Assignment and Acceptance Agreement to the Agent and (if required) the acceptance of such Assignment and Acceptance Agreement by the Agent (the "Transfer Effective Date"): (i) the Purchasing Bank thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, have the rights and obligations of a Bank hereunder with respect to the Loans, Commitments and Notes as set forth therein, and (ii) the Assigning Bank thereunder shall, to the extent provided in such Assignment and Acceptance Agreement, be released from its obligations under this Agreement. SECTION 12.2.2. Effect of Assignment and Acceptance Agreement. Each Assignment and Acceptance Agreement duly executed and delivered in compliance with the foregoing provisions of Section 12.2.1 shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank as a Bank hereunder and the resulting adjustment of Percentages. SECTION 12.2.3. Delivery of New Notes By Borrower Following Assignments. In the case of any Assignment under Section 12.2.1 after the Closing Date, within five (5) Business Days after the Transfer Effective Date determined pursuant to the applicable Assignment and Acceptance Agreement and Section 12.2.1, the Borrower shall execute and deliver to the Agent, against surrender of the Notes of the Assigning Bank to the Agent, new Notes to the order of the Purchasing Bank in an amount equal to the Commitments assigned to it pursuant to such Assignment and Acceptance Agreement and new Notes to the order of the Assigning Bank in a principal amount equal to the Commitment retained by it hereunder. Such new Notes shall be dated the Transfer Effective Date (or such other date as may be agreed to by the Borrower, the Agent, the Assigning Bank and the Purchasing Bank) and shall otherwise be in the form of the Notes replaced -103- thereby. The Notes surrendered by the Assigning Bank shall be returned by the Agent to the Borrower marked "cancelled." SECTION 12.2.4. Agent's Maintenance of Register. The Agent shall maintain at its address a copy of each Assignment and Acceptance Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks, the Commitments of each Bank in effect from time to time, and the principal amount of the Loans owing to each Bank from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Banks may treat each Person whose name is recorded in the Register as the maker of the Commitments and as the owner of the Loans recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrower, the Agent or any Bank at any reasonable time and from time to time upon reasonable prior notice. SECTION 12.2.5. Actions of Agent; Fees. Upon its receipt of an Assignment and Acceptance Agreement executed by an Assigning Bank and a Purchasing Bank (and, in the case of a Purchasing Bank that is not then a Bank or an Affiliate thereof, by the Agent), together with (in the case of a Purchasing Bank that is not then a Bank or an Affiliate thereof) payment by the Purchasing Bank to the Agent for the account of the Agent of a registration and processing fee of $2,500, the Agent shall (a) promptly accept such Assignment and Acceptance Agreement, (b) on the Transfer Effective Date determined pursuant thereto and Section 12.2.1, record the information contained therein in the Register, and (c) give notice of such acceptance and recordation to each of the Banks and the Borrower. SECTION 12.2.6. Assigning Bank, Purchasing Bank and Other Parties; Confirmations and Agreements. By executing and delivering an Assignment and Acceptance Agreement, the Assigning Bank thereunder and the Purchasing Bank thereunder shall confirm to and agree with each other and the other parties hereto as follows: (a) other than as provided in such Assignment and Acceptance Agreement, such Assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, any of the other Loan Documents or any other Instrument furnished pursuant hereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any of the other Loan Documents or any other Instrument furnished pursuant hereto; (b) such Assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its Obligations under this Agreement, any of the other Loan Documents or any other Instrument furnished pursuant hereto; (c) such Purchasing Bank -104- confirms that it has received a copy of this Agreement, together with copies of such financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance Agreement; (d) such Purchasing Bank will, independently and without reliance upon any of the Agents, such Assigning Bank or any other Banks and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (e) such Purchasing Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement or any of the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; (f) such Purchasing Bank agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement or any of the other Loan Documents are required to be performed by it as a Bank; and (g) such Purchasing Bank (i) consents in all respects to the provisions of the Loan Documents, (ii) agrees to be bound by the terms of the Loan Documents, and (iii) authorizes the Agent to act on its behalf under the Loan Documents and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. SECTION 12.3. Disclosure of Information. The Borrower and its Subsidiaries authorize each Bank to disclose to any Participant or Purchasing Bank (each, a "Transferee") and any prospective Transferee any and all information in such Bank's possession concerning the Borrower and its Subsidiaries which has been delivered to such Bank by or on behalf of the Borrower and its Subsidiaries or the Agent pursuant to this Agreement or which has been delivered to such Bank by or on behalf of the Borrower and its Subsidiaries, or the Agent in connection with such Bank's credit evaluation of the Borrower and its Subsidiaries prior to becoming a party to this Agreement; provided, that, prior to any such disclosure, the Transferee or prospective Transferee shall agree to be bound by the provisions of Section 13.12. SECTION 12.4. Assistance. In order to facilitate the addition of Purchasing Banks and Participants hereto, the Borrower agrees to cooperate fully and promptly with each Assigning Bank, each Purchasing Bank and the Agent in connection therewith and to provide all reasonable assistance requested by each Assigning Bank, each Purchasing Bank or the Agent relating thereto, including, without limitation: (a) the furnishing promptly of such written materials and financial information regarding the Borrower and its Subsidiaries as -105- each such Assigning Bank, Purchasing Bank or the Agent may reasonably request; (b) the prompt execution of such documents as each such Assigning Bank, Purchasing Bank or the Agent may reasonably request with respect thereto; and (c) the participation by officers of the Borrower and its Subsidiaries in a meeting or teleconference call with prospective Purchasing Banks or prospective Participants, upon the request of each such Assigning Bank, Purchasing Bank or the Agent. SECTION 12.5. Taxes. If any interest in this Agreement or any of the Notes is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the Assigning Bank shall cause such Transferee, concurrently with the effectiveness of such transfer, (a) to represent to the Assigning Bank (for the benefit of the Assigning Bank, the Agent and the Borrower) that under Applicable Law no taxes will be required to be withheld by the Administrative Agent, the Borrower or the Assigning Bank with respect to any payments to be made to such Transferee in respect of the Loans or Notes, (b) to furnish to the Assigning Bank (and, in the case of any Purchasing Bank registered in the Register, the Agent and the Borrower) either U.S. Internal Revenue Service Form 4224, U.S. Internal Revenue Service Form 1001 or U.S. Internal Revenue Service Form W-8 (wherein such Transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder), and (c) to agree (for the benefit of the Assigning Bank, the Agent and the Borrower) to provide the Assigning Bank (and, in the case of any Purchasing Bank registered in the Register, the Agent and the Borrower) a new Form 4224 or Form 1001 upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with Applicable Laws of the U.S. and amendments duly executed and completed by such Transferee, and to comply from time to time with Applicable Law with regard to such withholding tax exemption. SECTION 12.6. Federal Reserve Bank. Nothing herein shall prohibit any Bank from pledging or assigning any of its Loans or Notes to any Federal Reserve Bank in accordance with Applicable law. -106- ARTICLE XIII MISCELLANEOUS SECTION 13.1. Waivers, Amendments, etc. The provisions of this Agreement and the other Loan Documents may from time to time be amended, modified or waived, and any Collateral may be released, if such amendment, modification, waiver or release is consented to in writing by the Required Banks and, in the case of any amendment or modification, the Borrower; provided, however, that no such amendment, modification, waiver or release: (a) which would modify any requirement under any of the Loan Documents that any particular action be taken by all the Banks shall be effective unless consented to by all of the Banks; (b) which would modify this Section, change the definition of "Required Banks" or "Facility A Commitment Termination Date", "Facility B Commitment Termination Date", release any Guaranty, or increase the aggregate amount of all of the Commitments, shall be effective unless consented to by all of the Banks; (c) which would release any substantial (in the reasonable judgment of the Agent) part of the Collateral shall be effective unless consented to by all of the Banks, unless such release is in connection with the Sale of Property permitted by Section 9.2.7 (in which event such release shall not require the consent of any of the Agent or Banks); (d) which would increase the Commitments or the Percentage of any Bank, reduce (other than by application of payments) the amount of any principal, interest, Fees or other sums payable under the Loan Documents to such Bank or reduce the rate of interest on any Obligations to such Bank, shall be made without the consent of such Bank; (e) which would modify Section 3.3.1, Section 3.3.2(a)(ii), 3.3.3(a) or Section 3.3.4(a) shall be effective unless consented to by all of the Banks; (f) which would extend the payment dates for any interest or Fees payable under this Agreement shall be effective unless consented to by all the Banks; or (g) which would adversely affect the interests, rights or obligations of the Agent or would amend the provisions of Section 3.1 -107- or 3.6 relating to the transfer of funds between the Agent and the Banks (including the types of funds or the method of such transfer), shall be made without the consent of the Agent. No failure or delay on the part of the Agent, of any Bank or of any holder of any Note in exercising any power or right under this Agreement, the Notes or any other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances, unless otherwise required by the Loan Documents. The remedies herein provided are cumulative and not exclusive of any other remedies provided in any of the other Loan Documents or at law or in equity. No waiver or approval by the Agent, of any Bank or of any holder of any Note under this Agreement, the Notes or any other Loan Documents shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 13. 2. Notices. (a) All notices and other communications pursuant to this Agreement or any of the other Loan Documents shall be in writing, either delivered in hand or sent by first-class mail, postage prepaid, or sent by facsimile transmission, addressed as follows: (i) if to the Borrower, at 4695 44th Street, S.E., Suite B-130, Grand Rapids, MI 49512, marked "Attention: President", with a copy of each such notice or other communication given simultaneously to Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, marked "Attention: John B. Steele, Esq."; or (ii) if to the Agent, at 9920 South La Cienega Boulevard, 8th Floor, Inglewood, CA 90301, marked "Attention: Richard M. Baker, Esq., Senior Vice President, General Counsel and Secretary", with a copy of each such notice or other communication given simultaneously to John Farrace, Vice President, Syndicated Finance, 9920 South La Cienega Boulevard, 14th Floor, Inglewood, California 90301, to James F. Higgins, Jr., First Vice President, Imperial Bank Merchant Banking Division, 225 Franklin Street, 29th Floor, -108- Boston, MA 02110, and also to Bingham Dana LLP, 150 Federal Street, Boston, MA 02110, marked "Attention: Louis J. Duval, Esq."; or (iii) if to any Bank, at the address set forth for such Bank on Schedule 2 hereto; or (iv) to such other addresses as any party hereto shall have designated in a written notice to the other parties hereto. (b) Any notice or other communication pursuant to this Agreement or any of the other Loan Documents shall be deemed to have been duly given or made and to have become effective when delivered in hand to the party to which it is directed, or, if sent by first-class mail, postage prepaid, or by facsimile transmission, and properly addressed in accordance with paragraph (a) of this Section 13.2, (i) when received by the addressee, or (ii) on the fourth Business Day following the day of the dispatch thereof, whichever of (i) or (ii) shall be the earlier. SECTION 13.3. Costs and Expenses. The Borrower agrees to pay to the Agent upon demand all reasonable out-of-pocket costs and expenses incurred by the Agent in connection with the structuring, preparation, negotiation, review, execution or delivery of this Agreement or any of the other Loan Documents, including all schedules and exhibits, or in connection with any amendments, consents or waivers to this Agreement, any of the other Loan Documents or any related documents as may from time to time hereafter be required or requested (whether or not any of the same become effective), including (in each case) all reasonable (a) costs and expenses of syndication and (b) fees and expenses of counsel (including all local and special counsel) for the Agent from time to time incurred in connection therewith, whether or not any of the transactions contemplated hereby or thereby are consummated, and to pay all reasonable costs and expenses of the Agent (including reasonable fees and expenses of counsel to the Agent) incurred in connection with the preparation, negotiation, review, execution or delivery of the form of any Instrument relevant to this Agreement or any of the other Loan Documents (excluding any assignment by any Bank), the consideration of legal questions relevant hereto and thereto, and the consideration and/or conduct of any proposed or actual restructuring or "workout" of any of the Obligations. The Borrower also agrees to reimburse the Agent and each Bank upon demand for all stamp or other taxes payable in connection with the execution, delivery or enforcement of this Agreement or any Instrument related hereto and for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and -109- legal expenses) incurred by the Agent or such Bank in enforcing any of the Obligations of the Borrower and its Subsidiaries under this Agreement or any other Loan Documents and the consideration and/or conduct of any proposed or actual restructuring or "workout" of any Obligations. SECTION 13.4. Indemnification. In consideration of the execution and delivery of this Agreement by the Agent and each Bank and the extension of the Commitments by each Bank, each of the Borrower and its Subsidiaries hereby indemnifies and holds free and harmless the Agent and the Banks and each of their respective shareholders, officers, directors, employees, agents, subsidiaries and Affiliates (collectively, the "Indemnified Parties" and, individually, an "Indemnified Party") from and against any and all actions, causes of action, suits, losses, costs, liabilities, damages and expenses actually incurred in connection with any of the Loan Documents or any of the transactions contemplated thereby (irrespective of whether such Indemnified Party is a party to the action for which indemnification hereunder is sought), including all reasonable fees and disbursements of counsel, all amounts paid in settlement and all court costs (the "Indemnified Liabilities"), incurred from time to time by the Indemnified Parties or any of them as a result of, or arising out of, or relating to, or as a direct or indirect result of: (a) any transaction financed or to be financed in whole or in part or directly or indirectly with the proceeds of any of the Loans; or (b) the entering into or performance of this Agreement or any of the other Loan Documents by any of the Indemnified Parties or any of the Borrower or any of its Subsidiaries; or (c) the enforcement by any of the Indemnified Parties of any of its rights or remedies under any of the Loan Documents or in respect of any of the Collateral; or (d) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or release from, any real Property owned or operated by the Borrower or any of their Subsidiaries of any Hazardous Material (including, without limitation, any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under Environmental Law), regardless of whether or not caused by, or within the control of, any of the Borrower or their Subsidiaries; -110- except for any portion of such Indemnified Liabilities which a court of competent jurisdiction has found, in a final, nonappealable order, resulted solely by reason of such Indemnified Party's gross negligence or willful misconduct or the breach by such Indemnified Party of its obligations under the Loan Documents. If and to the extent that the foregoing undertaking may be unenforceable for any reason, each of the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under Applicable Law, except as aforesaid to the extent not payable by reason of the Indemnified Party's gross negligence or willful misconduct or breach of such obligations. SECTION 13.5. Survival. The Obligations of the Borrower under Sections 13.3 and 13.4 shall in each case survive any termination of this Agreement and the payment of any of the other Obligations. The representations and warranties made by the Borrower in this Agreement or in any of the other Loan Documents, or in any document, certificate or statement delivered pursuant hereto or thereto or in connection herewith or therewith, shall survive the execution and delivery of this Agreement and each of the other Loan Documents and the making of each of the Loans and other Credit Extensions. SECTION 13.6. Severability. Any provision of this Agreement, the Notes or any of the other Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent only of such prohibition or unenforceability without invalidating any of the remaining provisions of this Agreement, the Notes or any of the other Loan Documents or the enforceability of any such provision in any other jurisdiction. SECTION 13.7. Headings. The various headings of this Agreement and of each of the other Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any of such other Loan Documents or any provisions hereof or thereof. SECTION 13.8. Counterparts; Entire Agreement. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. -111- SECTION 13.9. CHOICE OF LAW. THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW YORK, AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. SECTION 13.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that none of the Borrower or any of its Subsidiaries may assign or transfer any of its rights or obligations hereunder or under any other Loan Documents without the prior written consent of all Banks. SECTION 13.11. Further Assurances. Each of the Borrower and its Subsidiaries hereby agrees that it will, from time to time at its own expense, promptly execute and deliver all such further Instruments and take all such further action that may be necessary or appropriate, or that the Agent or the Required Banks may reasonably request, in order to perfect, preserve or protect any Liens granted or purported to be granted under the Collateral Documents, to enable the Agent and the Banks to exercise and enforce any of their respective rights or remedies under this Agreement or any of the other Loan Documents or otherwise to carry out the intent of this Agreement or any of the other Loan Documents. SECTION 13.12. Confidentiality. Each Bank shall, for a period of five (5) years, hold all non-public information obtained pursuant to the requirements of this Agreement, which has been identified in writing as confidential by the Borrower, in accordance with such Bank's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, provided that in any event it is understood and agreed that each Lender may make disclosure of such information (a) at any time while any Default shall be continuing in connection with the enforcement of rights herein, (b) to its examiners, Affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement, (c) as reasonably required by any bona fide prospective Participant or Purchasing Bank or actual Participant or Purchasing Bank in connection with the contemplated transfer of any Commitments, Loans or Notes or any participations therein, (d) as required or requested by any Applicable Law or any Governmental Authority or pursuant to legal process, (e) which, at the time of disclosure, is publicly available or (f) in connection with any litigation to which any Bank is a party; provided, further, that, -112- (i) unless prohibited by any Applicable Law, each Bank shall notify the Borrower promptly of any request by any Governmental Authority (other than any such request in connection with an examination of the financial condition of such Bank by such Governmental Authority) for disclosure of any such non-public information and shall exercise its reasonable efforts to permit the Borrower, if practical, to respond to such notice prior to disclosure of such information; and(ii) in no event shall any Lender be obligated or required to return any materials furnished by the Borrower. SECTION 13.13. Consent to Jurisdiction. EACH OF THE CREDIT PARTIES BY ITS EXECUTION HEREOF (A) HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE STATE OF CALIFORNIA AND TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CALIFORNIA FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF, AND (B) HEREBY WAIVES TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH PROCEEDING, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT ANY SUCH PROCEEDING BROUGHT IN ONE OF THE ABOVE-NAMED COURTS IS IMPROPER, OR THAT THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT. EACH OF THE CREDIT PARTIES HEREBY CONSENTS TO SERVICE OF PROCESS IN ANY SUCH PROCEEDING IN ANY MANNER PERMITTED BY THE LAWS OF THE STATE OF CALIFORNIA, AND AGREES THAT SERVICE OF PROCESS BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE BORROWER IS REASONABLY CALCULATED TO GIVE ACTUAL NOTICE. SECTION 13.14. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE AGENT, BANKS AND CREDIT PARTIES HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY -113- OBLIGATION OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY OF THE BANKS, AGENT OR CREDIT PARTIES IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH CREDIT PARTY ACKNOWLEDGES THAT THE PROVISIONS OF THIS SECTION 13.14 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE AGENT AND BANKS ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT AND ANY OTHER LOAN DOCUMENT. ANY OF THE BANKS, AGENT OR CREDIT PARTIES MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 13.14 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH OF THE BANKS, AGENT AND CREDIT PARTIES TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. [Remainder of page intentionally left blank.] -114- IN WITNESS WHEREOF, the parties hereto have caused this CREDIT AGREEMENT to be executed by their respective officers hereunto duly authorized as of the day and in the year first above written. BORROWER: SOFTECH, INC. By:____________________________________________ Its: BANKS: IMPERIAL BANK, individually, as a Bank, as Agent, and as Issuer By:____________________________________________ Its: By:____________________________________________ Its: GUARANTOR: INFORMATION DECISIONS, INC. By:____________________________________________ Its: Schedule 1 DISCLOSURE SCHEDULE Schedule 2 ADDRESSES 1. Imperial Bank, as Agent, as Issuer and as a Bank Domestic Office: 225 Franklin Street Suite 2900 Boston, MA 02110 Attention: William J. Sweeney Tel: (617) 521-9413 Fax: (617) 521-9410 EX-10.(III) 3 FORM OF COMMON STOCK PURCHASE WARRANT Exhibit 10(iii) THIS WARRANT MAY NOT BE TRANSFERRED EXCEPT IN THE LIMITED CIRCUMSTANCES SET FORTH HEREIN OR WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY - -------------------------------------------------------------------------------- FORM OF COMMON STOCK PURCHASE WARRANT for the purchase of COMMON STOCK of SOFTECH, INC. (a Massachusetts corporation) Original Issue Date: July 1, 1998 SOFTECH, Inc., a Massachusetts corporation (the "Company"), for good and valuable consideration received, hereby certifies that IMPERIAL BANK, a California banking corporation, or registered assigns permitted hereunder (the "Holder"), is entitled to purchase from the Company, at any time or from time to time during the Warrant Exercise Period (as hereinafter defined), that number of shares of the Company's Common Stock, $.10 par value per share ("Common Stock"), as shall be equal to the Warrant Number (as hereinafter defined), at that price per share of Common Stock as shall be equal to the Purchase Price (as hereinafter defined). 1. Definitions. For the purposes of this Warrant: "Credit Agreement" means the Credit Agreement, dated as of July 1, 1998, among the Company, Information Decisions, Inc., as a Guarantor, the financial institutions that are now, or hereafter become, parties thereto as Banks, and Imperial Bank, as Agent for the Banks and as Issuer with respect to Letters of Credit. "Fair Market Value" means the average of the closing sale prices (if listed on a stock exchange or quoted on the Nasdaq National Market System or any successor thereto), or the average of the mean between the closing bid and asked prices (if quoted on NASDAQ or otherwise publicly traded), of the Common Stock on each of the five (5) trading days prior to the date of exercise. "Original Issuance Date" means July 1, 1998. 2 "Purchase Price" means the average of (i) the average closing share price for the Common Stock on NASDAQ for the sixty (60) trading days prior to the Original Issue Date, and (ii) the average closing share price for the Common Stock on NASDAQ for the sixty (60) trading days after the Original Issuance Date (or such number of trading days less than sixty if the Holder exercises the Warrant prior to sixty tradings after the Original Issuance Date). The Purchase Price is subject to automatic adjustment from time to time in accordance with Section 3. "Termination Date" is defined in Section 7. "Warrant Exercise Period" means the period commencing with the Original Issuance Date of this Warrant and ending on the Termination Date. "Warrant Number" means, initially, 205,705 shares of Common Stock, subject to automatic adjustment from time to time in accordance with Section 3. Unless otherwise defined herein or the context otherwise requires, terms used in this Agreement, including the introductory paragraph hereto, have the meanings given to such terms in the Credit Agreement. 2. Exercise. (a) This Warrant may be exercised by the Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit A, duly executed by such Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full by bank or certified check in lawful money of the United States, of the aggregate Purchase Price payable in respect of the total number of shares of Common Stock purchased upon such exercise. (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in Subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for or other instruments evidencing shares of Common Stock shall be issuable upon such exercise as provided in Subsection 2(d) below shall be deemed to have become the holder or holders of record of the Common Stock represented by such certificates or other instruments. (c) (i) The Holder may at its sole option, and in lieu of paying the Purchase Price pursuant to Subsection 2(a) hereof, exchange this Warrant in whole or in part for a number of shares of Common Stock as determined below. Such shares of Common Stock shall be issued by the Company to the Holder without payment by the Holder of any other exercise price or any cash or other consideration except as set forth herein as of the date hereof. The number of shares of Common Stock to be so issued to the Holder shall be equal to the quotient obtained by dividing (A) the Surrendered Value (as defined below) on the date of surrender of this Warrant pursuant to Subsection 2(a), by 3 (B) the Fair Market Value on the exchange date of one share of Common Stock. (ii) For the purposes of this Subsection 2(c), the "Surrendered Value" of a portion of this Warrant on a given date shall be deemed to be any excess of (A) the aggregate Fair Market Value on such date of the total number of shares of Common Stock otherwise issuable upon exercise of such portion of the Warrant, over (B) the aggregate Purchase Price of such total number of shares of Common Stock. (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or, subject to the terms and conditions hereof, as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full shares of Common Stock to which such Holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof, and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the Warrant Number minus the number of such shares of Common Stock purchased by the Holder upon such exercise. 3. Adjustments; Fractional Securities. (a) If, at any time after the original issue date of this Warrant, the outstanding Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be immediately and automatically proportionately and equitably reduced. If, at any time after the original issue date of this Warrant, the outstanding Common Stock shall be combined into a smaller number of shares, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be immediately and automatically proportionately and equitably increased. When any adjustment is required to be made in the Purchase Price, the number of shares of Common Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the maximum number of shares of Common Stock issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the 4 Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. (b) If, at any time after the original issue date of this Warrant, there shall occur any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in Subsection 3(a) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, or the payment of a liquidating distribution, then, upon consummation of such reorganization, reclassification, consolidation, merger, sale, automatic conversion or liquidating distribution, lawful provision shall be made so that the Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof (to the extent, if any, still exercisable) the kind and amount of shares of stock or other securities or property which such Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger, sale, automatic conversion or liquidating distribution, as the case may be, such Holder had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder of this Warrant such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Purchase Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (c) When any adjustment is required to be made in the Purchase Price or the Warrant Number, the Company shall promptly mail to the Holder a certificate setting forth the Purchase Price and the Warrant Number after such adjustment, and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in Subsection 3(a) or (b) above. (d) The Company shall not be required, upon the exercise of this Warrant, to issue any fractional shares, but shall make an adjustment therefore in cash on the basis of the Fair Market Value of the Common Stock at the time of exercise. 4. Limitation on Sales, etc. The Holder, and each subsequent holder of this Warrant, if any, acknowledges that this Warrant and the underlying shares of Common Stock have not been registered under the Securities Act of 1933, as now in force or hereafter amended, or any successor legislation (the "Act"), and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any Common Stock issued upon its exercise in the absence of (a) an effective registration statement under the Act as to this Warrant or such underlying shares of Common Stock and registration or qualification of this Warrant or such underlying shares of Common Stock under any applicable Blue Sky or state 5 securities laws then in effect, or (b) an opinion of counsel, satisfactory to the Company, that such registration and qualification are not required. Without limiting the generality of the foregoing, unless the offering and sale of the Common Stock to be issued upon the particular exercise of the Warrant shall have been effectively registered under the Act, the Company shall be under no obligation to issue the shares covered by such exercise unless and until the registered Holder shall have executed an investment letter in form and substance reasonably satisfactory to the Company, including a warranty at the time of such exercise that it is acquiring such shares for its own account, for investment, and not with a view to, or for sale in connection with, the distribution of any such shares, in which event the registered Holder shall be bound by the provisions of a legend to such effect on the certificate(s) representing the Common Stock. In addition, without limiting the generality of the foregoing, the Company may delay issuance of the Common Stock hereunder until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including without limitation state securities or "blue sky" laws), provided that the Company shall use all reasonable efforts in good faith to diligently pursue completion of such action or the receipt of such consent. 5. Notices of Record Date, etc. In case: (a) the Company shall take a record of the holders of Common Stock for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any transfer of all or substantially all of the assets of the Company, or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the record date or effective 6 date for the event specified in such notice, provided that the failure to so mail such notice shall not affect the legality or validity of any such action. 6. Reservation of Stock, etc. (a) The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such stock and other property as from time to time shall be issuable upon the exercise of this Warrant. (b) The Company will not, by amendment of its Articles of Organization or through reorganization, consolidation, merger, dissolution, issuance of capital stock or sale of treasury stock (otherwise than upon exercise of this Warrant) or sale of assets, or by any other act or deed, avoid or seek to avoid the material performance or observance of any of the covenants, stipulations or conditions in this Warrant to be observed or performed by the Company. The Company will at all times in good faith assist, insofar as it is able, in the carrying out of all of the provisions of this Warrant in a reasonable manner and in the taking of all other action which may be necessary in order to protect the rights hereunder of the Holder of this Warrant. (c) The Company will maintain an office where presentations and demands to or upon the Company in respect of this Warrant may be made. The Company will give notice in writing to the Holder, at the address of the Holder appearing on the books of the Company, of each change in the location of such office. 7. Termination. This Warrant shall terminate and no longer be exercisable from and after 5:00 p.m., Boston time, on July 1, 2005 (the "Termination Date"). 8. Transfers, etc. (a) The Company will maintain a register containing the names and addresses of the Holders of this Warrant. The Holder may change its, his or her address as shown on the warrant register by written notice to the Company requesting such change. (b) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Holder of this Warrant as the absolute owner hereof for all purposes. 9. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 7 10. Mailing of Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal executive offices or at such other address as the Company shall so notify the Holder. 11. No Rights as Stockholder. Until the exercise of this Warrant, the Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 12. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 13. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 14. Governing Law. The validity, construction and performance of this Warrant shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts executed in and performed entirely within such Commonwealth, without reference to any choice of law principles of such Commonwealth. With respect to any suit, action or other proceeding arising out of this Warrant, or any other transaction contemplated thereby, the parties hereto expressly waive any right they may have to a jury trial and agree that any proceeding hereunder shall be tried by a judge without a jury. [Remainder of this page is intentionally left blank.] 8 IN WITNESS WHEREOF, SOFTECH, INC. has caused this COMMON STOCK PURCHASE WARRANT to be signed in its corporate name and its corporate seal to be impressed hereon by its duly authorized officers on and as of July 1, 1998. The Company: Corporate Seal SOFTECH, INC. By:______________________________ Title: Attest:_________________________ 9 EXHIBIT A PURCHASE FORM To: The undersigned, pursuant to the provisions set forth in the attached COMMON STOCK PURCHASE WARRANT, hereby irrevocably elects either (a) to purchase _____________ shares of Common Stock covered by such Warrant and herewith makes payment of $______________, representing the full purchase price for such shares at the Purchase Price per share provided for in such Warrant, or (b) to surrender _________________ number of shares of such Warrant in exchange for the number of shares of Common Stock determined pursuant to Section 2(c) thereof. Dated: By:__________________________________ 10 EXHIBIT B ASSIGNMENT FORM For Value Received, the undersigned hereby sells, assigns and transfers unto:__________________ the right to purchase Common Stock represented by this Warrant to the extent of ________________ shares, and does hereby irrevocably constitute and appoint ________________, attorney-in-fact to transfer the same on the books of the Company with power of substitution in the premises. Dated: By:__________________________________ EX-21 4 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES
State of Name Under Which Name Incorporation Business is Done - -------------------------------------------------------------------------------- Information Decisions, Inc. Michigan Information Decisions, Inc. Adra Systems GmbH Germany Adra Systems GmbH Softech Technologies Ltd. United Kingdom Softech Technologies Ltd. RAM Design & Graphics Corp. North Carolina RAM Design & Graphics Corp. System Constructs, Inc. New York System Constructs, Inc. SofTech Investments, Inc. Massachusetts SofTech Investments, Inc. AMG Associates, Inc. Maryland Inactive Compass, Inc. Massachusetts Inactive
EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of SofTech, Inc. on Form S-8 (File Nos. 2-73261, 2-82554, 33-5782, 33-80746, 333-61427 and 333-61417) and on Form S-3 (File Nos. 33-63831, 333-30399 and 333-55759) and in the related Prospectus of our report dated August 10, 1998, with respect to the consolidated financial statements and schedule of SofTech, Inc. for the year ended May 31, 1998 included in this Annual Report on Form 10-K. /s/ Ernst & Young LLP Grand Rapids, Michigan August 25, 1998 EX-23.2 6 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 2-73261, 2-82554, 33-5782, 33-80746, 333-61427 and 333-61417) and on Form S-3 (File Nos. 33-63831, 333-30399 and 333-55759) of our report which includes an explanatory paragraph related to the Company's ability to continue as a going concern, dated August 7, 1997, on our audits of the consolidated financial statements and financial statement schedule of SofTech, Inc. as of May 31, 1997, and for the years ended May 31, 1997 and 1996, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts August 28, 1998 EX-27 7 FDS --
5 1,000 YEAR MAY-31-1998 MAY-31-1998 429 0 9,939 (649) 338 12,221 3,737 1,457 36,060 19,740 0 0 0 679 10,503 36,060 19,979 19,979 10,162 18,517 0 0 254 1,461 127 1,334 0 0 0 1,334 0.23 0.22
-----END PRIVACY-ENHANCED MESSAGE-----