-----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, MKG5Xp/Vs1MQXv0Sq5LiF4oY3w58Mn5cP3u8jyLUVzqNo1yPFB4BopCUBrULGYSV qtI+c4Pg70rOMbwTMUMIGA== 0000893877-98-000269.txt : 19980401 0000893877-98-000269.hdr.sgml : 19980401 ACCESSION NUMBER: 0000893877-98-000269 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13442 FILM NUMBER: 98581607 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036857000 10-K405 1 ANNUAL REPORT Form 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 0 - 13442 MENTOR GRAPHICS CORPORATION (Exact name of registrant as specified in its charter) Oregon 93-0786033 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8005 SW Boeckman Road 97070-7777 Wilsonville, Oregon (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (503) 685-7000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $675,067,106 on March 12, 1998, based upon the last price of the Common Stock on that date reported in the Nasdaq National Market. On March 12, 1998, there were 64,677,088 shares of the Registrant's Common Stock outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [X] DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K into which incorporated - ------------------------------------ ---------------------- Portions of the 1998 Proxy Statement Part III 1 Table of Contents Page Part I....................................................................... 3 Item 1. Business.......................................................... 3 Item 2. Properties........................................................ 8 Item 3. Legal Proceedings................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders............... 9 Part II ..................................................................... 10 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............................................. 10 Item 6. Selected Consolidated Financial Data ............................. 11 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations......................................... 12 Item 8. Financial Statements and Supplementary Data ...................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 39 Part III..................................................................... 39 Item 10. Directors and Executive Officers of Registrant.................... 39 Item 11. Executive Compensation............................................ 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 39 Item 13. Certain Relationships and Related Transactions.................... 39 Part IV...................................................................... 39 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 39 2 PART I Item 1. Business This Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption "Factors That May Affect Future Results and Financial Condition" under "Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition." General Mentor Graphics Corporation (the Company) manufactures, markets and supports software and hardware Electronic Design Automation (EDA) products and provides related services which enable engineers to design, analyze, simulate, model, implement and verify the components of electronic systems. Beginning in 1996, the Company expanded its product offerings beyond traditional EDA to include (1) intellectual property (IP) products and services intended to increase design efficiency by delivering standard, reusable functions for the design of hardware components and (2) embedded software development and system verification tools intended to shorten product time-to-market by allowing for simultaneous development and testing of hardware and embedded software. The Company markets its products primarily to large companies in the communications, computer, semiconductor, consumer electronics, aerospace and transportation industries. Customers use the Company's software in the design of such diverse products as supercomputers, automotive electronics, telephone-switching systems, cellular base stations and handsets, computer network hubs and routers, signal processors and personal computers. The Company licenses its products primarily through its direct sales force in North America, Europe and Asia and through distributors in territories where the volume of business does not warrant a direct sales presence. The Company was incorporated in Oregon in 1981 and its common stock is traded on the Nasdaq National Market under the symbol MENT. The Company's executive offices are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. The telephone number at that address is (503) 685-7000. Products Customers use the Company's products in the design, analysis, simulation, modeling, implementation and verification of electronic designs for telecommunication, aerospace, computers, consumer and other electronic products. This use is intended to make design engineers more productive, make even complex designs more accurate and, thus, shrink time-to-market schedules. The electronic design process begins when an electrical engineer describes the architectural, behavioral, functional and structural characteristics of an integrated circuit (IC), printed circuit board (Board) or electronic system. In this process the engineer describes the overall product system architecture and then implements it by creating a design description, simulating the design to reveal electrical defects and reiterating the description until it meets the previously determined design specifications. Engineers use the Company's products to specify the components of the IC or Board, determine the interconnections among the components and define the components' associated physical properties. Engineers also use the Company's simulation products throughout the design process to identify design errors before the design is manufactured. Simulation also gives engineers the ability to test design alternatives. Engineers use the Company's verification products to identify functionality and performance issues while the cost to correct is still low. Verification Verification of electronic designs is addressed by Company products from several aspects, including simulation and emulation of the entire chip, execution of software on the virtual hardware prototype, and analysis of physical implementation effects and their impact on functionality, performance and quality. With advancements in IC technology, the Company expects that the fabrication of "deep submicron" physical feature dimensions will soon be commonplace, and a new threshold in IC complexity and system integration will be crossed. The term "deep submicron" is generally defined as any IC manufacturing process that has transistor gate lengths under 0.35u (microns). The Company's Calibre product line is specifically engineered for physical verification of deep submicron circuit designs. xCalibre is the Company's deep submicron IC backend physical extraction product family consisting of an extraction engine and data management flow tools. Advances in deep submicron process technology and IC complexity have forced designers to seek new solutions for physical extraction. xCalibre closes the gap between creating designs for deep submicron processes and 3 verifying the physical implementation of those designs at a system level. Unlike other physical verification tools, xCalibre offers an open design flow that enables IC designers to take a massive database of electronic circuit information, split it up into manageable pieces for analysis, and reintegrate the information into the overall chip design. The Company's co-verification tools provide a means to verify the hardware and embedded software comprising an electronic system against each other without having to build a hardware prototype. This improves the efficiency of the customers' product development cycles by giving customers more time to fix software bugs, resolve hardware-software interface errors and reduce the risk that a design problem will cause a significant delay in the project schedule. Seamless CVE is the Company's hardware/software co-verification tool that performs full system simulation of embedded systems. Seamless CVE verifies the software-hardware interface by running embedded software against a simulated model of the hardware. Seamless CVE allows the designer to verify the software as a part of the overall system instead of waiting until the hardware design has been completed and verified. Early verification of the entire system identifies functionality and performance issues while the cost to correct them is small. Seamless CVE can be applied to full custom IC, embedded-core application specific integrated circuit (ASIC) and board-level designs. Seamless CVE customers are embedded system developers developing systems that incorporate one or more microcontrollers, microprocessors or digital signal processors (DSP) for controlling or managing an electronic system. This includes telephone switching equipment, network hubs and routers, cellular phones and base stations, automobile engine management modules, aircraft avionics and controls, industrial controls and computer controlled defense equipment. These systems are characterized by a high content of custom hardware and software built around a commercial microcontroller or microprocessor. The Company's design-for-test, or "DFT", product line automates the process of making integrated circuits and systems testable and the generation of their test programs. The Company's DFT products include FastScan, FlexTest, DFTAdvisor, DFTInsight, MBISTArchitect, LBISTArchitect, BSDArchitect, and the recently announced CTIntegrator - an automated test solution for System-on-Chip designs incorporating IP cores. The Company's simulation product line gives electrical designers representative or artificial data to reproduce conditions in a model that could occur in the performance of a system under different operating conditions. The Company offers simulation products for system, Board, ASIC or field programmable gate array simulation. The Company's simulation products include QuickSim II and QuickHDL Pro. In August 1997, the Company and its subsidiary, Model Technology, Inc. (MTI) announced the consolidation of all HDL simulation products under MTI. This unified MTI's V-System and the Company's QuickHDL products into a single product, now known as ModelSim. ModelSim is the market share leader in VHDL simulation. As more ICs, multichip modules (MCMs) and Boards support both analog and digital circuits, designers need a unified simulation solution that allows both analog and digital analysis within the mixed-signal design. The Company offers a range of alternatives for analog and mixed-signal designers. The tools provide a flow that begins with design entry or a language description, continues with verification and analysis options and finishes with a physical description for fabrication. The Company's analog/mixed signal products include Analog Station II, AccuParts, Eldo and Accusim II. Design Re-use and Embedded Software The Company believes that the demand for tools to develop increasingly complex electronic systems cannot be entirely satisfied with traditional EDA tools. Under its Integrated System Design strategy, the Company has combined its EDA products with products and services that facilitate rapid development of complex systems through reusable components referred to in the industry as "intellectual property" or "IP" and the integration of hardware and embedded software development. The IP products and related services provided by the Company's Inventra Business Unit (Inventra) are intended to increase engineering productivity through the use of predefined and preverified "building blocks" or "cores" of frequently used circuit functions for the design of hardware components. Use of IP cores allows designers to focus on optimizing system architecture and developing proprietary functionality. The Company believes that companies which integrate IP into their design methodology can expect better quality products at lower costs and faster time-to-market. Inventra provides IP that is used in ASIC design, IC design, embedded software design and Board design. Inventra IP includes circuit functions for a range of electronic consumer and communications applications including microprocessors, peripheral interface controllers, digital signal processors, and communications controllers cores. 4 Embedded software development tools are provided by the Company's Microtec Division. Embedded software controls the function of hardware components dedicated to specialized tasks of such common consumer products as VCRs, telephones and fax machines. Embedded software is used in a range of other products in the aerospace, communications, medical instrumentation, transportation, computer, industrial and consumer markets. Microtec's embedded software development tools include the VRTX real-time operating system, the XRAY family of debugger products and other software development tools including compilers, assemblers, linkers and simulators. System Design The Company's Monet product defines a new capability for designers, which the Company calls "architectural exploration." Architectural exploration allows designers to rapidly discover the right architecture tradeoffs before they commit resources to creating a hardware prototype. The Company's Renoir product provides a highly automated environment for the design of electronic systems, using graphical tools to capture or reuse high-level designs and functional behavior. The Company's Board/MCM design tools allow designers to select from a library of parts to be included in the Board/MCM, to simulate and test the performance of the Board/MCM, to test for manufacturability, to analyze thermal and signal integrity, and to output data which will allow the Board/MCM to be manufactured. "Boards", a common way of packaging electronic circuits, are epoxy type "boards" upon which ICs, ASICs and discrete components such as resistors and capacitors are mounted. MCMs may be thought of as several ICs or ASICs mounted together in a single package. Products within the MCM and Board design flows include Design Architect, Board Station, Board Architect, MCM Station, Hybrid Station and Library Management System. The Company's Interconnectix business unit's Interconnect Synthesis (IS) products combine the disciplines of timing and signal integrity analysis with the physical implementation of floorplanning, placement and routing. IS products reduce the time consuming iteration cycle among placement, routing, analysis and rework. Platforms The Company's software products run primarily on UNIX workstations in a broad range of price and performance levels, including workstations manufactured by Hewlett-Packard Company and Sun Microsystems, Inc. These computer manufacturers have a substantial installed base of workstations and make frequent introductions of new products. The Company has introduced a significant number of products that run on Windows NT and intends to continue efforts to make its products available on Windows NT. Marketing and Customers During 1997, the Company focused its marketing and selling resources on a limited number of emerging products. Those products include the Calibre physical verification product, the xCalibre physical extraction product, the Seamless CVE hardware/software co-verification tool, intellectual property, and the IS routing products of its Interconnectix business unit. The Company's marketing also emphasizes its Integrated System Design strategy for the integration of both hardware and software development for electronic systems, a direct sales force and large corporate account penetration in the communications, computer, consumer electronics, semiconductor, aerospace, and transportation industries. The Company licenses its products primarily through its direct sales force in North America, Europe and Asia. The Company also licenses its products through distributors in territories where the volume of business is not sufficient to warrant a direct sales presence. During the years ending December 31, 1997, 1996 and 1995 sales outside of North America accounted for 45, 46 and 48 percent, respectively, of total sales. The Company enters into foreign currency forward contracts to help mitigate the impact of foreign currency fluctuations. These contracts do not eliminate all potential impact of foreign currency fluctuations and significant exchange rate movements may have a material adverse impact on the Company's results. Additional information relating to foreign and domestic operations is contained in Note 14 of Notes to Consolidated Financial Statements beginning on Page 36, below. No material portion of the Company's business is dependent on a single customer. The Company has traditionally experienced some seasonal fluctuations in receipts of orders, which are typically stronger in the second and fourth quarters of the year. Due to the complexity of the Company's products, the selling cycle can be three to six months or longer. During the selling cycle the 5 Company's account managers, application engineers and technical specialists make technical presentations and product demonstrations to the customer. At some point during the selling cycle, the Company's products may also be "loaned" to customers for on-site evaluation. As is typical of many other companies in the electronics industry, the Company generally ships its products to customers within 180 days after receipt of an order, and a substantial portion of quarterly shipments tend to be made in the last month of each quarter. The Company licenses its products and some third party products pursuant to purchase and license agreements. The Company generally schedules deliveries only after receipt of purchase orders under these agreements. Alliances In 1997, the Company entered into two significant IP alliances. The first alliance with Synopsys, Inc. was completed in June 1997. This alliance was formed to establish an industry standard interface and process for the development and use of IP and to describe a method for the creation, verification and validation of IP on Synopsys' cell based array circuit and layout technology in a jointly authored "Reuse Methodology Manual." The second alliance was completed in December of 1997 and consists of a three-way agreement among the Company, Synopsys and Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). Under this agreement TSMC will work with the Company and Synopsys to provide evaluation versions of IC physical layouts, which will be created using the method for the creation, verification and validation of IP authored by the Company and Synopsys under their separate agreement. University Programs The Company shares its technology and expertise with universities worldwide through its Higher Education Program (HEP). Founded in 1985 because the Company believes the success of the electronics industry is dependent upon highly skilled engineers, the HEP offers colleges and universities a cost-effective way to acquire the Company's products for teaching and academic research. This program helps to insure that engineering graduates enter industry proficient in the use of state-of-the-art tools and techniques. Through the HEP, the Company develops long term relationships with engineering colleges and universities around the world. The Company has partnerships with more than 300 colleges and universities worldwide. Backlog The Company's backlog of firm orders was approximately $77.7 million on December 31, 1997 as compared to $74.0 million on December 31, 1996. This backlog includes products not shipped and unfulfilled professional services and training. The Company does not track backlog for support services. Support services are typically delivered under annual contracts that are accounted for on a pro rata basis over the twelve-month term of each contract. Substantially all the December 31, 1997 backlog of orders is expected to ship during 1998. Manufacturing Operations The Company's manufacturing operations primarily consist of reproduction of the Company's software and documentation. In North America, manufacturing is substantially outsourced, with distribution to Western Hemisphere customers occurring from major West Coast sites. Distribution centers in The Netherlands, Japan and Singapore serve their respective regions. The Company's line of accelerated verification products, which is comprised of both hardware and software, is manufactured in France. Product Development The Company's research and development is focused on continued improvement of its existing products and the development of new products. During the years ended December 31, 1997, 1996 and 1995, the Company expensed $112,227,000, $92,905,000 and $86,782,000 respectively, and capitalized $0, $5,691,000 and $8,129,000, respectively, related to product research and 6 development. The Company also seeks to expand existing product offerings and pursue new lines of business through acquisitions. Acquisitions accommodate the Company's focused strategic requirements by filling gaps in existing products or technologies, eliminating dependencies on third parties and providing the Company with an avenue into new lines of business. The Company's future success depends on its ability to develop or acquire competitive new products that satisfy customer requirements. Suppliers The Company seeks to provide its customers with software and IP that addresses customers' electronic system design processes. Supplier products fill gaps in the Company's existing product lines and allow it to offer products which are needed by customers but which are not central to the Company's business. Supplier agreements are also used to explore possible new lines of business. Although the Company has supplier agreements with several large suppliers who do not wish to develop a specific internal technology into a commercial product, the Company's suppliers are typically small niche companies that do not have adequate distribution channels for their products. The Company maintains three different types of supplier relationships: (1) a simple remarketing relationship where the supplier's product is added to the Company's price list and drop shipped to the customer directly from the supplier; (2) a partial integration relationship where the supplier's object code is packaged and shipped with other Company products to the customer; and (3) a fully integrated relationship where the Company modifies or enhances the supplier's product before packaging and delivering it to the customer. Supplier agreements are typically multi-year agreements with royalty payments based on a percentage of product revenue. The agreements generally require an escrow of the supplier's source code. Customer support for supplier products is usually provided by the Company with the supplier providing backup support and research and development in the event of a problem with the product itself. Customer Support and Consulting The Company has a worldwide organization to meet its customers' needs for software support. The Company offers support contracts providing software updates and support. Most of the Company's customers have entered into software support contracts. Mentor Consulting, the Company's consulting division, is comprised of a worldwide team of consulting professionals who provide services for Systems-on-a-Chip, Systems to Silicon Verification, Design Reuse, and High Performance Systems Design. The Company's consulting group was established in 1987. Its mission is to team with customers' design groups to increase productivity while reducing costs and time-to-market. Competition The markets for the Company's products are competitive and are characterized by price reductions, rapid technological advances in application software, operating systems and hardware, and new market entrants. The EDA and IP industries tend to be labor intensive rather than capital intensive. This means that the number of actual and potential competitors is significant. While many competitors are large companies with extensive capital and marketing resources, the Company also competes with small companies with little capital but innovative ideas. The Company believes the main competitive factors affecting its business are breadth and quality of application software, product integration, ability to respond to technological change, quality of a company's sales force, price, size of the installed base, level of customer support and professional services. The Company believes that it generally competes favorably in these areas. The Company can give no assurance, however, that it will have financial resources, marketing, distribution and service capability, depth of key personnel or technological knowledge to compete successfully in its markets. The Company's principal competitors are Cadence Design Systems Inc., Synopsys Inc., Avant! Corporation, Zuken-Redac, Quickturn Design Systems, Inc., IKOS Systems, Inc., Wind River Systems Inc., Integrated Systems Inc. and numerous small companies. 7 Employees The Company and its subsidiaries employed approximately 2,570 people full time as of December 31, 1997. The Company's success will depend in part on its ability to attract and retain employees who are in great demand. The Company continues to enjoy satisfactory employee relations. Patents and Licenses The Company holds 23 United States and 9 foreign patents on various technologies. In 1997, the Company was granted four patents and filed six patent applications worldwide. As of January 1998, the Company has a total of 23 patent applications filed and pending and an additional 21 in process but not yet filed. While the Company believes the pending applications relate to patentable technology, there can be no assurance that any patent will be issued or that any patent can be successfully defended. Although the Company believes that patents are less significant to the success of its business than technical competence, management ability, marketing capability and customer support, the Company believes that software patents are becoming increasingly important in the software industry. The Company regards its products as proprietary and protects all products with copyrights, trade secret laws, and internal non-disclosure safeguards, as well as patents, when appropriate, as noted above. The Company typically includes restrictions on disclosure, use and transferability in its agreements with customers and other third parties. Item 2. Properties The Company owns six buildings on 53 acres of land in Wilsonville, Oregon. The Company occupies 341,000 square feet, in five of those buildings, as its corporate headquarters. The Company leases the remaining building and portions of one headquarters building to third parties. The Company also owns an additional 98 acres of undeveloped land adjacent to its headquarters. All corporate functions and a majority of its domestic research and development operations are located at the Wilsonville site. The Company leases additional space in San Jose, California, where some of its domestic research and development takes place, and in various locations throughout the United States and in other countries, primarily for sales and customer service operations. Some additional research and development is done in locations outside the U.S. The Company believes that it will be able to renew or replace its existing leases as they expire and that its current facilities will be adequate through at least 1998. Item 3. Legal Proceedings During 1995, the Company filed suit in U.S. Federal District Court in Portland, Oregon, against Quickturn Design Systems, Inc. (Quickturn) for a declaratory judgment of non-infringement, invalidity and unenforceability of three of Quickturn's patents. These patents relate to products of Meta Systems SRL (Meta), a French company acquired by the Company in 1996 that manufactures and sells computers used for accelerated verification of hardware designs. Quickturn filed a counterclaim against the Company alleging infringement of six of Quickturn's patents, including the three patents subject to the declaratory judgment action. The counterclaim seeks a permanent injunction prohibiting sales of the Company's SimExpress products in the U.S., compensatory and punitive damages and attorneys' fees. Quickturn filed an administrative complaint with the U.S. International Trade Commission (ITC) in 1996 seeking to prohibit the distribution of SimExpress products in the U.S. In August 1996, the ITC issued a ruling effectively prohibiting the importation of this technology into the U.S. In August 1997, the ITC Administrative Law Judge recommended the imposition of evidentiary and monetary sanctions against the Company and Meta. This order has been appealed and no dollar amount of monetary sanctions has been set. In August 1997, the U.S. District Court in Portland, Oregon granted Quickturn a preliminary injunction prohibiting the Company from selling its SimExpress version 1.0 and 1.5 accelerated verification systems in the U.S. The injunction also prohibits the Company from shipping current U.S. inventory modified in the U.S. to any of its non-U.S. locations. . In October 1997, Quickturn also filed an action against Meta and the Company in a German court alleging infringement by SimExpress of a German patent. 8 In December 1997, the ITC issued a Cease and Desist Order prohibiting the Company from importing SimExpress products or components, and from providing repair or maintenance services to existing U.S. customers. That order took effect in 1998. A trial in the U.S. District Court action will likely occur during the second or third quarter of 1998, in which Quickturn will seek a permanent injunction, compensatory damages, punitive damages, and attorneys' fees. An unfavorable ruling in this trial could involve substantial cost to the Company and effectively prevent the Company from manufacturing and selling its existing accelerated verification of hardware design products in the U.S. market. In addition to the above litigation, from time to time the Company is involved in various disputes and litigation matters that arise from the ordinary course of business. These include disputes and lawsuits relating to intellectual property rights, licensing, contracts, and employee relations matters. The Company believes that final resolution of such disputes and lawsuits will not have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1997. Executive Officers of Registrant The following are the executive officers of the Company:
Has Served As An Executive Name Position Age Officer of the Company Since - ----------------------------------------------------------------------------------------------------------------- Walden C. Rhines President, Chief Executive Officer and Director 51 1993 Gregory K. Hinckley Executive Vice President, Chief Operating Officer 51 1997 and Chief Financial Officer G. M. "Ken" Bado Senior Vice President, World Trade 43 1996 Bernd U. Braune Senior Vice President 42 1998 Dean Freed Vice President, General Counsel and Secretary 39 1995 Anthony B. Adrian Vice President, Corporate Controller 55 1998 Dennis Weldon Treasurer 50 1998 - ------------------------------------------------------------------------------------------------------------------
The executive officers are elected by the Board of Directors of the Company at its annual meeting. Officers hold their positions until they resign, are terminated or their successors are elected. There are no arrangements or understandings between the officers or any other person pursuant to which officers were elected and none of the officers are related. Dr. Rhines has served as Director, President and Chief Executive Officer of the Company since October 1993. From 1972 to 1993, Dr. Rhines was employed by Texas Instruments Incorporated, a manufacturer of electrical and electronics products, where he held a variety of technical and management positions and was most recently Executive Vice President of 9 Texas Instruments Semiconductor Group. Dr. Rhines is currently a director of Cirrus Logic, Inc., and Triquint Semiconductor, Inc., both semiconductor manufacturers. Mr. Hinckley has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer since joining the Company in January 1997. From November 1995 until December 1996 he held the position of Senior Vice President with VLSI Technology, Inc. (VLSI), a manufacturer of complex ASICs. From August 1992 until December 1996, Mr. Hinckley held the position of Vice President, Finance and Chief Financial Officer with VLSI. Mr. Hinckley is a director of OEC Medical Systems, Inc., a manufacturer of medical imaging equipment, and Amkor Technology, Inc., an IC packaging, assembly and test services company. Mr. Bado has served as Senior Vice President, World Trade since December 1996. From April 1994 to December 1996 he held the position of Vice President of the Americas. From February 1996 through December 1996 Mr. Bado also held the position of Vice President and General Manager, Professional Services. Mr. Bado was the Southern Area General Manager for North American Sales from January 1991 to April 1994. He has been employed by the Company since September 1988. Mr. Braune joined the Company as a Director of Meta Systems SRL, a French subsidiary of the Company, in July 1997 and was appointed an executive officer with the title of Senior Vice President in 1998. From November 1995 to July 1997 he held the position of Senior Vice President of Worldwide Sales and Marketing for VLSI. From June 1993 to November 1995, Mr. Braune was General Manager and Vice President of European Operations for VLSI. From 1991 to 1993, he was Managing Director for European Operations of NCR Microelectronics, a computing company. Mr. Freed has served as Vice President, General Counsel and Secretary of the Company since July 1995. Mr. Freed served as Deputy General Counsel and Assistant Secretary of the Company from April 1994 to July 1995, and was Associate General Counsel and Assistant Secretary from 1990 to April 1994. He has been employed by the Company since January 1989. Mr. Adrian has served as Vice President, Corporate Controller since joining the Company in January 1998. From August to December of 1997 he held the position of Vice President and Acting Controller for Wickland Oil Company, a petroleum marketing and distribution company. From January 1996 to August 1997 Mr. Adrian served as Managing Director of Wickland Terminals in Australia. From November 1992 to January 1996 Mr. Adrian served as Vice President and Controller of Wickland Oil. Mr. Weldon has served as Treasurer since February 1996. Mr. Weldon served as Director of Finance Administration from June 1994 to January 1996. From July 1991 to June 1994 Mr. Weldon served as Finance Manager. Mr. Weldon has been employed by the Company since July 1988. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock trades on the Nasdaq National Market under the symbol MENT. The following table sets forth for the periods indicated the high and low sales prices for the Company's Common Stock, as reported by the Nasdaq National Market:
Quarter ended March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------- 1997 High................................ $ 11 $ 9 3/8 $ 12 1/2 $ 12 1/16 Low................................. $ 8 5/8 $ 6 5/8 $ 8 1/2 $ 9 - ---------------------------------------------------------------------------------------------------- 1996 High................................ $ 18 1/4 $ 18 3/8 $ 16 1/4 $ 10 5/8 Low................................. $ 12 3/8 $ 13 3/8 $ 8 7/8 $ 7 3/8 - ----------------------------------------------------------------------------------------------------
As of December 31, 1997, the Company had 1,218 stockholders of record. No dividends were paid in 1996 or 1997. The Company does not intend to pay dividends in the foreseeable future. 10 Item 6. Selected Consolidated Financial Data
Year ended December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- In thousands, except per share data and percentages Statement of Operations Data - --------------------------------------------------------------------------------------------------------------------- Total revenues................................... $ 454,727 $ 447,886 $ 432,517 $ 390,119 $ 367,703 Research and development......................... $ 112,227 $ 92,905 $ 86,782 $ 81,231 $ 84,579 Operating income (loss).......................... $ (36,370) $ (9,849) $ 52,554 $ 30,980 $ (46,365) Net income (loss)................................ $ (31,307) $ (4,978) $ 50,506 $ 30,453 $ (48,367) Gross margin percent............................. 65% 70% 73% 73% 67% Operating income (loss) as a percent of revenues...................... (8)% (2)% 12% 8% (13)% Per Share Data - --------------------------------------------------------------------------------------------------------------------- Net income (loss) per share - basic ............. $ (0.48) $ (0.08) $ 0.79 $ 0.50 $ (0.88) Net income (loss) per share - diluted ........... $ (0.48) $ (0.08) $ 0.78 $ 0.49 $ (0.88) Cash dividends per common share outstanding...... $ -- $ -- $ -- $ -- $ 0.16 Weighted average number of shares outstanding - basic............................ 64,885 64,134 63,710 60,361 54,760 Weighted average number of shares outstanding - diluted.......................... 64,885 64,134 65,134 62,211 54,760 Balance Sheet Data - --------------------------------------------------------------------------------------------------------------------- Cash and investments, short-term................. $ 137,060 $ 197,079 $ 211,996 $ 154,255 $ 119,531 Cash and investments, long-term.................. $ -- $ 30,000 $ 30,000 $ 30,000 $ 30,000 Working capital.................................. $ 148,191 $ 200,848 $ 213,491 $ 150,865 $ 103,754 Property, plant and equipment, net............... $ 103,452 $ 102,253 $ 99,605 $ 102,291 $ 108,314 Total assets..................................... $ 402,302 $ 513,359 $ 495,372 $ 429,290 $ 381,583 Short-term borrowings............................ $ -- $ 9,055 $ 9,358 $ 8,661 $ 6,467 Long-term debt and other deferrals............... $ 617 $ 56,375 $ 55,054 $ 53,123 $ 60,182 Stockholders' equity............................. $ 277,537 $ 319,640 $ 326,226 $ 258,419 $ 204,844 - ---------------------------------------------------------------------------------------------------------------------
11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations All numerical references in thousands, except percentages Nature of Operations Mentor Graphics Corporation (the Company) is a supplier of electronic design automation (EDA) systems -- advanced computer software, accelerated verification systems and intellectual property designs and data bases used to automate the design, analysis and testing of electronic hardware and embedded systems software in electronic systems and components. The Company markets its products and services primarily to customers in the communications, computer, semiconductor, consumer electronics, aerospace, and transportation industries. The Company sells and licenses its products primarily through its direct sales force in North America, Europe and Asia, and through distributors in territories where the volume of business does not warrant a direct sales presence. In addition to its corporate offices in Wilsonville, Oregon, the Company has sales, support, software development and professional services offices worldwide. Recent Mergers and Acquisitions Results of operations of all acquisitions accounted for as pooling of interests are included in the Company's Consolidated Financial Statements for all periods presented. Results of operations of all acquisitions accounted for as purchases are included in the Company's Consolidated Financial Statements only from the date of acquisition forward. In 1996, the Company completed nine business combinations, two of which were accounted for as pooling of interests and seven of which were accounted for as purchases. The Company purchased dQdt, Inc. (dQdt), Meta Systems SRL, (Meta), Seto Software GmbH (Seto), Royal Digital Centers, Inc. (Royal Digital), Open Networks Engineering, Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE Technology, Inc. (CAE) in April 1996, May 1996, June 1996, August 1996, November 1996, November 1996 and December 1996, respectively. The total purchase price including acquisition expenses for all 1996 purchase acquisitions was $40,708. The purchase accounting allocations resulted in charges for in-process research and development (R&D) of $26,234, goodwill capitalization of $5,517, and technology capitalization of $8,957. In January and August of 1996, the Company completed the acquisitions of Microtec Research, Inc. (Microtec) and Interconnectix, Inc. (Interconnectix), respectively. These acquisitions were accounted for as pooling of interests. A total of 6,223 and 2,133 shares of the Company's common stock were issued for Microtec and Interconnectix, respectively. Merger expenses of $5,110 were incurred associated with the elimination of duplicate facilities, severance costs, the write-off of certain property and equipment and legal and accounting fees associated with administration of the merger activities. In 1995, the Company completed five business combinations, two of which were accounted for as pooling of interests and three of which were accounted for as purchases. The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December 1995, and December 1995, respectively. The purchase accounting allocations resulted in charges for in-process R&D of $1,430, goodwill capitalization of $528 and technology capitalization of $892. In May and October of 1995, the Company acquired Exemplar Logic, Inc. (Exemplar) and Precedence Incorporated (Precedence), respectively. These acquisitions were accounted for as pooling of interests. A total of 1,512 and 735 shares of the Company's common stock were issued for Exemplar and Precedence, respectively. Merger expenses of $610 were for services rendered to facilitate completion of the merger agreements and for severance costs. 12 Results of Operations Revenues and Gross Margins
Year ended December 31, 1997 Change 1996 Change 1995 - -------------------------------------------------------------------------------------------------------------- System and software revenues............... $ 235,808 (3)% $ 242,147 5% $ 230,533 System and software gross margins.......... $ 182,316 (10)% $ 202,951 4% $ 194,657 Gross margin percent ............. 77.3% 83.8% 84.4% Service and support revenues............... $ 218,919 6% $ 205,739 2% $ 201,984 Service and support gross margins.......... $ 113,378 2% $ 111,119 (8)% $ 120,656 Gross margin percent ............. 51.8% 54.0% 59.7% Total revenues............................. $ 454,727 2% $ 447,886 4% $ 432,517 Total gross margins........................ $ 295,694 (6)% $ 314,070 -- $ 315,313 Gross margin percent ............. 65.0% 70.1% 72.9% - --------------------------------------------------------------------------------------------------------------
System and Software System and software revenues are derived from sales of software products, third party owned software products for which the Company pays royalties, accelerated verification systems and some workstation hardware. For 1997, the decrease in system and software revenue is attributable to a decline in software product sales partially offset by increased sales of accelerated verification systems. Software product revenues declined in 1997 due in part to an accelerated decline of the Company's older integrated circuit (IC) and also certain printed circuit board (Board) products. The rate of decline of revenues for these older IC products is expected to continue to negatively impact system and software revenue growth. The rate of expected increases in revenue from newer product offerings to offset these declines is difficult to predict. For 1996 compared to 1995, software product revenues accounted for approximately 85% of the increase in system and software revenues, while a decline in workstation hardware product revenues was more than offset by added accelerated verification system revenues. The primary factor contributing to the software product growth for 1996 was increased product offerings as a result of internal development and acquisitions over the last several years. The Company added many new products through business combinations accounted for as purchases during 1996 and 1995, which resulted in added revenues only from the date of acquisition and not for all prior periods presented as is the case for pooling of interest transactions. Sales in Japan were negatively affected by a strengthening of the U.S. dollar as compared to the yen in 1997 and 1996. In 1995, sales were positively affected by a weakening of the U.S. dollar against the yen. See "Geographic Revenues Information" below for further details of the effects of foreign currencies on revenues. In December of 1997, the International Trade Commission (ITC) issued permanent exclusion and cease and desist orders which prohibit the Company from selling and supporting the SimExpress accelerated verification products made by its Meta Systems subsidiary in the U.S. This ruling effectively reduces the available market for SimExpress systems sales by approximately 50%. See "Item 3. Legal Proceedings" for further details. While the level of SimExpress systems sales are not a significant component of system and software revenue, the ruling will negatively impact the growth of the Company's newer product offerings in the near term. Sales of SimExpress systems in the U.S. during 1997 were less than 10% of the worldwide total. System and software gross margins as a percent of revenues declined in 1997 due to higher royalty costs, one-time inventory and capitalized software development cost adjustments and higher purchased technology amortization. System and software gross margins as a percent of revenues declined from 1995 to 1996 due to higher costs for royalties related to third party contracts and higher costs for amortization of previously capitalized software development and purchased technology. Increased royalty costs in 1997 are primarily attributable to a write-off of costs associated with a non-refundable royalty contract where the committed costs will not be recovered. In addition, the Company incurred an inventory write-down of all U.S. SimExpress systems inventory as a result of the exclusion and Cease and Desist Orders previously discussed. This ruling also prohibits the export of the majority of the Company's SimExpress inventory outside the U.S. Sales of SimExpress systems are expected to have a negative impact on system and software product gross margins over time because of the lower margin hardware component of these products. 13 The Company recognized an impairment in the value of certain previously capitalized software development costs in the first quarter of 1997, which totaled $5,358 primarily as a result of the accelerated decline in sales of older software product offerings discussed above. These costs were determined to be unrecoverable and were charged to system and software cost of revenues. All remaining previously capitalized software development costs were fully amortized in 1997 to recognize the change in estimated useful lives of these older technologies. Amortization of previously capitalized software development costs to system and software cost of revenue was $5,448, $6,215, and $5,511 for 1997, 1996, and 1995, respectively. Amortization of purchased technology costs to system and software cost of revenues was $5,484, $3,559 and $2,418 for 1997, 1996 and 1995, respectively. The increased amortization in 1997 and 1996 is attributable to the purchase of seven and three companies in 1996 and 1995, respectively. Purchased technology costs are amortized over a three-year period to system and software cost of revenues. Amortization of purchased technology is expected to decline in 1998 as the Company did not acquire any significant purchased technology in 1997 and several older technologies became fully amortized during the year. Service and Support Service and support revenues consist of revenues from annual software support contracts and professional services, which includes consulting services, training services, custom design services and other services. The increase in service and support revenues in 1997 is due primarily to a 19% increase in professional service revenues as well as a slight increase in software support revenues. The increase in 1996 is due primarily to a 4% increase in software support revenues, partially offset by a decline in professional service revenues. The growth levels for software support revenues have declined in 1997 and 1996 due in part to the decline in software product revenues, which resulted in a slower rate of increase to the Company's installed base of customers. In addition, the Company is currently unbundling software support services in response to customer requests. This change allows customers to choose varying levels of phone support and software update support. The effect of this change may result in lower revenue levels as some customers could choose less than full support from available options. Since growth in software support is dependent on continued success of the software product offerings, increases in the Company's installed customer base, and the impact of acquisitions, future software support revenue levels are difficult to predict. Professional service revenues totaled approximately $60,300, $50,500 and $53,800 in 1997, 1996 and 1995, respectively. The increase in professional services in 1997 is attributable to consulting services and custom design services as demand for these services continued to grow. The decline in professional service revenues in 1996 was attributable in part to a process of realigning the core consulting business in an attempt to better support ASIC and IC design methodologies. This realignment resulted in start-up difficulties such as estimating resource requirements to meet engagement deliverables and recruiting and hiring of additional personnel qualified to meet such deliverables, all of which delayed conversion of order backlog into revenue. This decline was partially offset by increased custom design service revenues. Service and support gross margins decreased in 1997 and 1996 as a result of negative professional service gross margins. In 1997, professional service gross margin difficulties were due to unprofitable contracts, most of which were entered into in 1996, where costs of completion exceeded the revenues. The Company has since refined its contract approval practices to reduce the likelihood of entering into unprofitable custom design contracts. In 1996, the negative margin performance was the result of the start-up difficulties discussed above and unexpected costs to complete certain custom design contracts. Consistent with EDA consulting and training business models, gross margins generated by the Company's professional service activities have been, and are expected to continue to be, lower than software support. As a result, service and support gross margins may continue to decline if growth in the professional service business is higher than growth in software support. Geographic Revenues Information Domestic revenues from unaffiliated customers, including service and support revenues, increased by 5% from 1996 to 1997 and 7% from 1995 to 1996. International revenues from unaffiliated customers, including service and support revenues, represented 45%, 46% and 48% of total revenues in 1997, 1996 and 1995, respectively. European revenues increased by 2% from 1996 to 1997 and decreased by 3% from 1995 to 1996. Japanese revenues decreased by 13% from 1996 to 1997 and decreased by 1% from 1995 to 1996. The effects of exchange rate differences from the Japanese Yen to the U.S. dollar negatively impacted revenues by approximately 11% and 14% in 1997 and 1996, respectively. Exclusive of currency effects, lower revenue levels in Japan are the result of the economic slow-down in 1997 and 1996. The effects of exchange rate differences from European currencies to the U.S. dollar for 1997 and 1996 were not significant. Since the Company generates approximately half of its revenues outside of the U.S. and expects this to continue in the future, revenue results should continue to be impacted by the effects of future foreign currency fluctuations. 14 Operating Expenses
Year ended December 31, 1997 Change 1996 Change 1995 - ----------------------------------------------------------------------------------------------------------- Gross research and development............. $ 112,227 14% $ 98,596 4% $ 94,911 Percent of total revenues............. 24.7% 22.0% 21.9% Capitalized software development........... $ -- (100)% $ 5,691 (30)% $ 8,129 Percent of total revenues............. -- 1.3% 1.9% Net research and development............... $ 112,227 21% $ 92,905 7% $ 86,782 Percent of total revenues............. 24.7% 20.7% 20.1% Marketing and selling...................... $ 157,343 7% $ 146,754 7% $ 137,771 Percent of total revenues............. 34.6% 32.8% 31.9% General and administration................. $ 43,636 7% $ 40,918 7% $ 38,206 Percent of total revenues............. 9.6% 9.1% 8.8% Special charges............................ $ 18,858 57% $ 11,998 -- $ (2,040) Percent of total revenues............. 4.1% 2.7% (0.5)% - -----------------------------------------------------------------------------------------------------------
Research and Development As a percent of revenue, gross R&D costs increased slightly from 1996 to 1997 and were approximately flat from 1995 to 1996. The increase in gross R&D spending in 1997 and 1996 was principally attributable to investment in key product areas and merger and acquisition activity. The Company identified key product areas to invest R&D and marketing resources that resulted in higher spending levels in 1997. The areas of emphasis included intellectual property, Interconnect Synthesis, accelerated verification, physical extraction and verification and hardware/software co-verification. Partially offsetting these increases was a reduction in spending for older product lines. Gross R&D costs increased in 1997 compared to 1996 by approximately $8,000 as a result of prior year purchases of dQdt, Meta, Seto, Royal Digital, ONE, Systolic, and CAE. The purchases during 1996 resulted in added expenses only from the date of acquisition and not for all prior periods presented as is the case for pooling of interest transactions. In 1996, gross R&D costs increased due, in part, to the purchases of 3Soft late in 1995 and Seto and Meta in the first half of 1996, which resulted in a year to year increase of approximately $5,000. In addition, other business combinations accounted for as pooling of interests including Microtec, MTI, Exemplar, Precedence and Interconnectix, which were included in 1996 and 1995 results, experienced higher R&D investment in 1997 and 1996. During 1997, the Company capitalized software development costs of $0, compared to $5,691 and $8,129 for 1996 and 1995, respectively. This decrease in capitalization is due to timing and content of product development activities which resulted in a lower level of costs eligible for capitalization. Based on these lower eligible costs, product development activities have been expensed on a current basis. The Company does not expect any significant capitalization in 1998. Marketing and Selling In 1997 and 1996, the increase in marketing and selling costs was principally attributable to investment in key product areas, merger and acquisition activity discussed above and increased sales through third party distributors. The year to year impact of acquisitions on marketing and selling costs in 1997 was approximately $2,000. In addition, selling costs increased approximately $3,000 in 1997 as a result of increased third party sales channel revenue that resulted in higher distributor commissions and other selling costs. The 1996 versus 1995 impact of acquisitions on marketing and selling costs was approximately $6,000. In addition, in 1996 the Company incurred higher selling costs due to higher revenue levels year to year and higher marketing costs due to increased new product introductions. A stronger U.S. dollar during 1997 reduced expenses by approximately 5% and 11% in Europe and Japan, respectively. A stronger U.S. dollar during 1996 reduced expenses by approximately 7% and 17% in Europe and Japan, respectively. General and Administration The increase in general and administrative costs from 1996 to 1997 and 1995 to 1996 were a result of integration costs and additional headcount related to business purchases previously discussed offset by certain administrative savings subsequent to integration of Interconnectix and Microtec. Also in 1997, the Company experienced increased costs of information technology personnel as the global information system reached the implementation phase during the year. Prior to implementation, some of the system architecture costs associated with this project were capitalized and subsequent to implementation these costs were expensed. Costs of information technology is not expected to decline in 1998 as the Company expects to launch other related projects. 15 Special Charges During the first quarter of 1997, the Company recorded a special charge of $8,560. The charge consisted of disposals of subsidiaries and related employee terminations, early termination of an interest rate swap agreement, and recognition of the impairment in value of certain goodwill and purchased technology. Substantially all of the costs associated with this charge were expended in 1997. During the fourth quarter of 1997, the Company recorded a special charge of $10,298. The charge consisted of disposals of subsidiaries and related employee terminations, recognition of the impairment in value of certain goodwill, purchased technology and other assets, some streamlining of worldwide operations and reserves for various legal claims. A majority of the reserves are for claims resulting from the Company's inability to continue selling and supporting its SimExpress products in the U.S. due to cease and desist orders issued by the ITC against the Company in patent litigation involving the products. See "Item 3. Legal Proceedings" for further details. In the fourth quarter of 1996, the Company recorded special charges of $11,998. The Company downsized and redirected certain operations and re-targeted an incentive compensation program resulting in severance costs, facility lease and equipment abandonment costs and other costs totaling approximately $7,000. The Company also recognized a $5,000 write-down for impairment in value of goodwill and certain other assets associated with its Meta subsidiary, as the recoverability of these assets was adversely affected by the ongoing SimExpress patent litigation. During the second quarter of 1995, the Company recorded a $2,040 special charge adjustment. The adjustment was primarily associated with a prior year charge and was mainly the result of reduced estimates for severance costs associated with replacement and globalization of the Company's information systems. Information system implementation delays culminated when a key project plan milestone was missed during the second quarter, resulting in lower estimated costs for write-offs of old equipment due to prolonged in-service periods. In addition, certain actions associated with a product discontinuance plan were not taken when management determined that the technology could be used by the Company's consulting organization and sold as a custom integrated service rather than as a commercial design tool. Merger and Acquisition Related Charges In 1996, the Company incurred merger and acquisition related charges of $31,344 as a result of nine business combinations. Seven acquisitions were accounted for as purchases that resulted in charges for in-process R&D of $26,234. The charges were a result of allocating a portion of the acquisition costs to in-process product development that had not reached technological feasibility. The acquisitions of Microtec and Interconnectix were accounted for as pooling of interests and resulted in merger expenses of $4,410 and $700, respectively, which were associated with the elimination of duplicate facilities, severance costs, the write-off of certain property and equipment and legal and accounting fees associated with administration of the merger activities. In 1995, the Company incurred merger-related charges of $2,040. The purchases of Axiom, 3Soft and Zeelan resulted in charges for in-process R&D of $400, $850, and $180, respectively. The acquisitions of Precedence and Exemplar were accounted for as pooling of interests which resulted in merger expenses of $400 and $210, respectively. These costs were for services rendered to facilitate completion of the merger agreements and severance costs to eliminate redundant management positions. Other Income, Net Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Other income, net.................... $ 3,319 $ 8,411 $ 6,494 - ------------------------------------------------------------------------------- Interest income was $7,723, $9,485, and $9,194 in 1997, 1996 and 1995, respectively. Interest expense was $555, $2,423, and $2,585 in 1997, 1996 and 1995, respectively. The decrease in interest income and interest expense in 1997 versus 1996 is primarily attributable to lower average cash, cash equivalents, short-term investments and borrowings outstanding during 1997 due to pay-down of short term lines of credit and the long term revolving credit facility. In 1996, the Company sold common stock of two independent public companies for $6,744 that had carrying costs of $1,199, resulting in a gain of $5,545. Other income was adversely affected by legal costs, which totaled $4,675 and $3,611 in 1997 and 1996, respectively. 16 Provision (Benefit) for Income Taxes The provision (benefit) for income taxes was ($1,744), $3,540 and $8,542 in 1997, 1996 and 1995, respectively. The tax benefit in 1997 of $1,744 is the result of the mix of profits earned by subsidiaries in taxable jurisdictions and by losses incurred by subsidiaries in low or no tax jurisdictions. In years where the Company is not profitable, the effective tax rate may not reflect the expected tax rate in years when profits are incurred in the majority of the jurisdictions where the Company does business. The tax provision of $3,540 in 1996 is primarily due to one-time non-tax deductible in-process R&D charges and other non-tax deductible costs related to acquisitions. These increases to the tax provision were partially offset by the reversal of the valuation allowance for certain current deferred tax assets and by significant pre-tax income in certain jurisdictions where lower tax rates apply. Based on the Company's operating income levels before tax in the U.S., it was determined that it was more likely than not that certain of its current deferred tax assets in the U.S. would be realized. As such, the tax provision for 1996 was reduced for the reversal of the valuation allowance for those deferred tax assets. The 1995 provision is primarily due to the reversal of the valuation allowance related to deferred tax assets of the Company's Japanese subsidiary when it was determined that it was more likely than not that its deferred tax assets would be realized. The Company's income tax position for each year combines the effects of available tax benefits in certain countries where the Company does business, benefits from available net operating loss carryforwards, and tax expense for subsidiaries with pre-tax income. As such, the Company's income tax position and resultant effective tax rate is uncertain for 1998 and beyond. Effects of Foreign Currency Fluctuations Approximately half of the Company's revenues are generated outside of the United States. For 1997, 1996 and 1995, approximately half of European and all of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. The effects of these fluctuations were substantially offset by local currency cost of revenues and operating expenses, which resulted in an immaterial net effect on the Company's results of operations. The "foreign currency translation adjustment," as reported in the stockholders' equity section of the Consolidated Balance Sheets, decreased to $7,795 at December 31, 1997, from $12,098 at the end of 1996. This reflects the decrease in the value of net assets denominated in foreign currencies since year-end 1996 as a result of a stronger U.S. dollar at the close of 1997. New Accounting Pronouncements In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which supercedes SOP 91-1. The Company will adopt SOP 97-2 for software transactions entered into beginning January 1, 1998. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The revenue allocated to software products generally is recognized upon delivery of the products. The revenue allocated to post-contract customer support generally is recognized ratably over the term of the support and revenue allocated to service elements generally is recognized as the services are performed. The impact on the Company's Consolidated Financial Statements is not expected to be material. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for the reporting and display of comprehensive income and its components. The Company plans to adopt SFAS No. 130 on January 1, 1998. The impact on the Company's Consolidated Financial Statements is not expected to be material. In June 1997, the FASB issued SFAS No. 131, " Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards of reporting operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. The Company plans to adopt SFAS No. 131 on January 1, 1998. The impact on the Company's Consolidated Financial Statements is not expected to be material. 17 Liquidity and Capital Resources
Year Ended December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------- Current assets................................................................ $ 272,339 $ 338,192 Cash and investments, short-term.............................................. $ 137,060 $ 197,079 Cash and investments, long-term............................................... $ -- $ 30,000 Cash provided by operations................................................... $ 13,854 $ 42,314 Cash used for investment activities, excluding short-term investments......... $ (35,606) $ (57,819) Cash provided (used) by financing activities.................................. $ (37,596) $ 206 - -------------------------------------------------------------------------------------------------------------
Cash and Investments Cash and short-term investments decreased $60,019 during 1997. Cash provided by operations was $13,854, a decrease of $28,460 from 1996. A net loss of $31,307 and payments related to special charges taken in the fourth quarter of 1996 and the first quarter of 1997 negatively impacted cash provided by operations in 1997, offset by non-cash asset write-downs and business disposals totaling $17,817. In 1996, cash was negatively impacted by a net loss of $4,978 and nine business combinations, six of which required payments totaling $32,358. Cash used for investing activities was negatively impacted by the capital expenditures of $32,614 and $23,931 in 1997 and 1996, respectively. In 1996, purchase of businesses totaled $32,358 while no similar expenditures were incurred in 1997. Cash used by financing activities was negatively impacted by the pay-down of short term lines of credit and the long term revolving credit facility totaling $61,103 offset by the release of $30,000 in cash held as collateral previously classified as long term on the Consolidated Balance Sheets. Cash and short-term investments were positively impacted by the proceeds from issuance of common stock upon exercise of stock options and employee stock plan purchases in the amount of $9,477 and $12,477 in 1997 and 1996, respectively. This increase was offset by repurchases of common stock of $15,940 in 1997 and $11,507 in 1996. Trade Accounts Receivable The trade accounts receivable balance decreased $2,947 from December 31, 1996 compared to December 31, 1997. Average days sales outstanding in accounts receivable improved from 81 days at the end of 1996 to 76 days at the end of 1997. Other Assets Other assets decreased to $26,511 at December 31, 1997 from $42,914 at December 31, 1996. Previously capitalized software costs decreased by $10,806 as a result of current year amortization and a write-down in recognition of impaired value previously discussed. No software costs were capitalized in 1997. In addition, regular amortization of goodwill and purchased technology further reduced the balance in 1997. Technology costs are being amortized over a three-year period to system and software cost of revenues. Long-term Debt The Company had total borrowings outstanding of $52,480 under its $55,000 committed revolving credit facility as of December 31, 1996. As of December 31, 1996, the Company maintained an interest rate swap agreement associated with the revolving credit facility debt which effectively converted floating rates on $17,500 of the debt to a fixed rate of 9.55%. In 1997, the Company terminated its interest rate swap agreement and paid down the committed revolving credit facility to zero. Subsequent to December 31, 1997, the Company entered into a committed revolving loan with a bank that remains in effect until 2001, which gives the Company the ability to borrow up to $100,000 and is available for general operating purposes. The revolving loan has a variable rate, which is calculated based on the Company's financial position and operating performance. 18 Capital Resources Total capital expenditures increased to $32,614 for 1997 compared to $23,931 for 1996. The increase in capital expenditures is a result of costs associated with leasehold improvements related to moving the Microtec facility closer to the Company's other development site in the San Jose area where costs are expected to be more favorable. In addition, the Company further invested in its global information and sales force automation systems. The Company anticipates that current cash balances, anticipated cash flows from operating activities, and existing credit facilities will be sufficient to meet its working capital needs for at least the next twelve months. Factors That May Affect Future Results and Financial Condition The statements contained in this report that are not statements of historical fact are forward looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward-looking statements. The following discussion highlights factors that could cause actual results to differ materially from the forward-looking statements. The forward-looking statements should be considered in light of these factors. The Company competes in the highly competitive and dynamic EDA and integrated systems design industries. The Company's success is dependent upon its ability to develop and market products that are innovative, cost-competitive and that meet customer expectations. Competition in the EDA industry is intense, which can create adverse effects including, but not limited to, price reductions, lower product margins, loss of market share and additional working capital requirements. A material amount of the Company's software product revenue is usually the result of current quarter order performance of which the majority is usually booked in the last month of each quarter. In addition, the Company's revenue often includes multi-million dollar contracts. The timing of the completion of these contracts and the terms of delivery of software, hardware and other services can have a material impact on revenue recognition for a given quarter. The combination of these factors impairs and delays the Company's ability to identify shortfalls or overages from quarterly revenue targets. The Company generally realizes approximately half of its revenues outside the U.S. and expects this to continue in the future. As such, the effects of foreign currency fluctuations can impact the Company's business and operating results. To hedge the impact of foreign currency fluctuations, the Company enters into foreign currency forward contracts. However, significant changes in exchange rates may have a material adverse impact on the Company's results of operations. In addition, recent significant declines in the value of the currencies of many countries in the Asia Pacific region have affected the Company's sales in the region. The overall instability of Asian currency and stock market economies could adversely affect the economic health of the entire region and could have an adverse effect on the Company's results of operations. International operations subject the Company to other risks including, but not limited to, changes in regional or worldwide economic or political conditions, government trade restrictions, limitations on repatriation of earnings, licensing and intellectual property rights protection. The Company has experienced declines in revenues from its older software product offerings. There can be no assurances that expected increases in revenue from newer software products will be sufficient to offset these declines. The Company is currently addressing staffing needs and operations issues of its consulting services business in an attempt to better focus on ASIC and IC design methodologies and improve profitability. Business reorganizations can increase personnel management complexities including retention and hiring of key technical and management personnel. While the Company will attempt to improve the utilization of its consultants and pricing of its services, there can be no assurance that the challenges will be effectively met. The Company's operating expenses are generally committed in advance of revenue and are based to a large degree on future revenue expectations. Operating expenses are incurred in order to generate and sustain higher future revenue levels. If the revenue does not materialize as expected, the Company's results of operations can be adversely impacted. Acquisitions of complementary businesses are a part of the Company's overall business strategy. There are several risks associated with this strategy including integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, retention of key employees, integration of systems of internal controls, and integration of information systems. All of these factors can impair the Company's ability to forecast, to meet quarterly revenue and earnings targets, and to effectively manage the business for long-term growth. There can be no assurance that these challenges will be effectively met. 19 As a result of the acquisition of Meta Systems, the Company has entered the hardware development and assembly business. Some additional issues must be managed by the Company, such as: procuring hardware components on a timely basis, assembling and shipping systems on a timely basis with appropriate quality control, developing new distribution and shipment processes, managing inventory, developing new processes to deliver customer support of the hardware and placing new demands on the sales force. The Company has recently added new re-usable intellectual property products and consulting services to its portfolio of offerings. As with all markets, there is inherent uncertainty regarding the overall rate of growth. Specifically, growth in the re-usable intellectual property market is subject to significant uncertainties and risks as market participants, including the Company, seek to gain customer acceptance for the overall concept of incorporating these re-usable intellectual property designs into their products, identify and develop the correct products to meet evolving customer demands, and identify and implement effective distribution models for this new class of products. The Company has been able to recruit and retain necessary personnel to research and develop, market, sell and service products that satisfy customers needs. There can be no assurance that the Company can continue to recruit and retain such personnel. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company is involved in various administrative matters and litigation. There can be no assurance that various litigation and administrative matters will not have a material adverse impact on the Company's consolidated financial position or results of operations. See "Item 3. Legal Proceedings" for further discussion. The Company has conducted a review of its products, information technology and facilities computer systems to identify all software that could be affected by the "Year 2000" issue and has developed or is developing product implementation plans to address this issue. The Company expects all Year 2000 conversion projects to be completed on a timely basis. While the Company does not believe its computer systems or applications currently in use will be adversely affected by the upcoming change in the century, the Company has not made an assessment as to whether any of its customers, suppliers or service providers will be so affected. Failure of the Company's software or that of its customers, suppliers or service providers could have a material adverse impact on the Company's business, financial condition and result of operations. Provided the Company's "Year 2000" projects are completed on a timely basis, the expense of these projects, and its related effect on the Company's earnings, is not expected to be material. Due to the factors above, as well as other market factors outside the Company's control, the Company's future earnings and stock price may be subject to significant volatility. Past financial performance should not be considered a reliable indication of future performance. The investment community should use caution in using historical trends to estimate future results or trends. In addition, if future results vary significantly from expectations of analysts, the Company's stock price could be adversely impacted. 20 Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Operations - ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ In thousands, except per share data Revenues: System and software..................................... $ 235,808 $ 242,147 $ 230,533 Service and support..................................... 218,919 205,739 201,984 ----------- ----------- ----------- Total revenues..................................... 454,727 447,886 432,517 ----------- ----------- ----------- Cost of revenues: System and software..................................... 53,492 39,196 35,876 Service and support..................................... 105,541 94,620 81,328 ----------- ----------- ----------- Total cost of revenues............................. 159,033 133,816 117,204 ----------- ----------- ----------- Gross margin....................................... 295,694 314,070 315,313 ----------- ----------- ----------- Operating expenses: Research and development................................ 112,227 92,905 86,782 Marketing and selling................................... 157,343 146,754 137,771 General and administration.............................. 43,636 40,918 38,206 Special charges......................................... 18,858 11,998 (2,040) Merger and acquisition related charges.................. -- 31,344 2,040 ----------- ----------- ----------- Total operating expenses........................... 332,064 323,919 262,759 ----------- ----------- ----------- Operating income (loss)..................................... (36,370) (9,849) 52,554 Other income, net....................................... 3,319 8,411 6,494 ----------- ----------- ----------- Income (loss) before income taxes.................. (33,051) (1,438) 59,048 Provision (benefit) for income taxes.................... (1,744) 3,540 8,542 ----------- ----------- ----------- Net income (loss)....................................... $ (31,307) $ (4,978) $ 50,506 =========== =========== =========== Net income (loss) per share: Basic.............................................. $ (0.48) $ (0.08) $ 0.79 =========== =========== =========== Diluted............................................ $ (0.48) $ (0.08) $ 0.78 =========== =========== =========== Weighted average number of shares outstanding: Basic.............................................. 64,885 64,134 63,710 =========== =========== =========== Diluted............................................ 64,885 64,134 65,134 =========== =========== =========== - ------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
21
Consolidated Balance Sheets - -------------------------------------------------------------------------------------------------------------------- As of December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- In thousands Assets Current assets: Cash and cash equivalents.................................................. $ 84,402 $ 165,406 Short-term investments..................................................... 52,658 31,673 Trade accounts receivable, net of allowance for doubtful accounts of $2,426 in 1997 and $3,163 in 1996......................... 106,010 108,957 Other receivables.......................................................... 6,282 6,697 Prepaid expenses and other................................................. 12,906 15,937 Deferred income taxes...................................................... 10,081 9,522 ------------ ------------ Total current assets................................................... 272,339 338,192 Property, plant and equipment, net............................................. 103,452 102,253 Cash and investments, long-term................................................ -- 30,000 Other assets, net............................................................... 26,511 42,914 ------------ ------------ Total assets........................................................... $ 402,302 $ 513,359 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings...................................................... $ -- $ 9,055 Accounts payable........................................................... 11,125 15,003 Income taxes payable....................................................... 23,000 19,598 Accrued payroll and related liabilities.................................... 31,055 28,592 Accrued liabilities........................................................ 30,119 33,031 Deferred revenue........................................................... 28,849 32,065 ------------ ------------ Total current liabilities.............................................. 124,148 137,344 Long-term debt.................................................................. 120 52,441 Other long-term deferrals....................................................... 497 3,934 ------------ ------------ Total liabilities...................................................... 124,765 193,719 ------------ ------------ Stockholders' Equity: Common stock, no par value, authorized 100,000 shares; 64,367 and 64,608 issued and outstanding for 1997 and 1996, respectively 291,263 297,756 Incentive stock, no par value, authorized 1,200 shares; none issued -- -- Retained earnings (deficit)................................................ (21,521) 9,786 Foreign currency translation adjustment.................................... 7,795 12,098 ------------ ------------ Total stockholders' equity............................................. 277,537 319,640 Commitments and contingencies ................................................. ------------ ------------ Total liabilities and stockholders' equity............................. $ 402,302 $ 513,359 ============ ============ - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
22
Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- In thousands Operating Cash Flows: Net income (loss)............................................ $ (31,307) $ (4,978) $ 50,506 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment....................... 27,516 21,472 25,955 Gain on sale of investments held for sale............... -- (5,545) -- Deferred taxes.......................................... (8,434) (5,988) (1,338) Amortization............................................ 11,604 11,586 10,037 Write-down of assets.................................... 12,422 31,234 1,430 Business disposals...................................... 5,395 -- -- Changes in operating assets and liabilities: Trade accounts receivable............................... 711 (11,201) (4,205) Prepaid expenses and other.............................. 1,571 (5,534) 500 Accounts payable........................................ (3,593) 3,458 (4,549) Accrued liabilities..................................... (2,662) 1,319 1,378 Other liabilities and deferrals......................... 631 6,491 2,539 ----------- ------------ ------------ Net cash provided by operating activities.................... 13,854 42,314 82,253 ----------- ------------ ------------ Investing Cash Flows: Net purchases of short-term investments................. (21,746) (5,018) (14,430) Proceeds from sale of investments held for sale......... -- 6,744 -- Purchases of property, plant and equipment, net ........ (32,614) (23,931) (22,653) Capitalization of software development costs............ -- (5,691) (8,129) Purchase of businesses.................................. -- (32,358) (6,216) Purchase of technologies................................ (2,992) (2,583) (1,444) ----------- ------------ ------------ Net cash used by investing activities........................ (57,352) (62,837) (52,872) ----------- ------------ ------------ Financing Cash Flows: Proceeds from issuance of common stock.................. 9,447 12,477 17,429 Proceeds (repayment) of short-term borrowings........... (8,782) (263) 868 Repayment of long-term debt............................. (52,321) (501) (1,153) Repurchase of common stock.............................. (15,940) (11,507) (2,250) Decrease in cash and investments, long-term............. 30,000 -- -- ----------- ------------ ------------ Net cash provided (used) by financing activities............. (37,596) 206 14,894 ----------- ------------ ------------ Effect of exchange rate changes on cash and cash equivalents .............................. 90 (953) (1,261) ----------- ------------ ------------ Net change in cash and cash equivalents...................... (81,004) (21,270) 43,014 Cash and cash equivalents at beginning of period............. 165,406 186,676 143,662 ----------- ------------ ------------ Cash and cash equivalents at end of period................... $ 84,402 $ 165,406 $ 186,676 =========== ============ ============ - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
23
Consolidated Statements of Stockholders' Equity - -------------------------------------------------------------------------------------------------------------------- Foreign Retained Currency Total Common Stock Earnings Translation Stockholders' Shares Amount (Deficit) Adjustment Equity - --------------------------------------- ------------- ------------- ------------- ------------- ------------- In thousands Balance at December 31, 1994........... 61,495 $ 279,634 $ (33,928) $ 12,713 $ 258,419 ------------- ------------- ------------- ------------- ------------- Stock issued under stock option and stock purchase plans................ 2,490 17,429 -- -- 17,429 Compensation related to nonqualified stock options granted............... -- 104 -- -- 104 Repurchase of common stock............. (110) (2,250) -- -- (2,250) Foreign currency translation -- -- -- 881 881 adjustment Change in value of investments available for sale.................. -- -- 1,137 -- 1,137 Net income............................. -- -- 50,506 -- 50,506 ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1995........... 63,875 294,917 17,715 13,594 326,226 ------------- ------------- ------------- ------------- ------------- Stock issued under stock option and stock purchase plans ............... 1,428 12,477 -- -- 12,477 Stock issued for acquisition of businesses.......................... 138 1,825 -- -- 1,825 Compensation related to nonqualified stock options granted............... -- 44 -- -- 44 Repurchase of common stock............. (833) (11,507) -- -- (11,507) Foreign currency translation -- -- -- (1,496) (1,496) adjustment Change in value of investments available for sale.................. -- -- (2,951) -- (2,951) Net loss............................... -- -- (4,978) -- (4,978) ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1996........... 64,608 297,756 9,786 12,098 319,640 ------------- ------------- ------------- ------------- ------------- Stock issued under stock option and stock purchase plans ............... 1,414 9,447 -- -- 9,447 Repurchase of common stock............. (1,655) (15,940) -- -- (15,940) Foreign currency translation -- -- -- (4,303) (4,303) adjustment Net loss .............................. -- -- (31,307) -- (31,307) ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1997 .......... 64,367 $ 291,263 $ (21,521) $ 7,795 $ 277,537 ============= ============= ============= ============= ============= - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
24 Notes to Consolidated Financial Statements All numerical references in thousands, except percentages and per share data 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Foreign Currency Translation Local currencies are the functional currencies for the Company's foreign subsidiaries except for the Netherlands and Singapore where the U.S. dollar is used as the functional currency. Assets and liabilities of foreign operations are translated to U.S. dollars at current rates of exchange, and revenues and expenses are translated using weighted average rates. Gains and losses from foreign currency translation are included as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included as a component of other income and expense. Financial Instruments The Company enters into forward foreign exchange contracts as a hedge against foreign currency sales commitments. To hedge its foreign currency against highly anticipated sales transactions, the Company also purchases foreign exchange options which permit but do not require foreign currency exchanges at a future date with another party at a contracted exchange price. Remeasurement gains and losses on forward and option contracts are deferred and recognized when the sale occurs. All subsequent remeasurement gains and losses are recognized as they occur to offset remeasurement gains and losses recognized on the related foreign currency accounts receivable balances. At December 31, 1997 and 1996, the Company had forward contracts and options outstanding of $37,959 and $39,058, respectively, to primarily sell various foreign currencies. These contracts generally have maturities which do not exceed twelve months. At December 31, 1997 and 1996, the difference between the recorded value and the fair value of the Company's foreign exchange position related to these contracts was approximately zero. The fair value of these contracts was calculated based on dealer quotes. The Company does not anticipate non-performance by the counterparties to these contracts. The Company entered into a forward contract to stabilize the currency effects on a portion of the Company's net investment in its Japanese subsidiary. This contract to sell Yen 1.65 billion will guarantee the Company $19,859 at the contract's expiration in 1998. Any differences between the contracted currency rate and the currency rate at each balance sheet date will impact the foreign currency translation adjustment component of the stockholders' equity section of the Consolidated Balance Sheets. The result is a partial offset of the effect of Japanese currency changes on stockholders' equity during the contract term. This forward contract should not impact current or future consolidated statements of operations. At December 31, 1997, the difference between the recorded value and the fair value of the Company's foreign exchange position related to this contract was approximately zero. The fair value of this contract was calculated based on dealer quotes. The Company does not anticipate non-performance by the counterparty to this contract. The Company places its cash equivalents and short-term investments with major banks and financial institutions. The Company's investment policy limits its credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different businesses and geographic areas. The carrying amounts of cash equivalents, short-term investments, trade receivables, accounts payable, and short term borrowings approximate fair value because of the short-term nature of these instruments. Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires reporting of investments as either held to maturity, available for sale or trading. Under SFAS No. 115, the securities held had been classified as available for sale, which requires the difference between original carrying cost and market value to be recognized as a component of stockholders' equity. Cash, Cash Equivalents, and Short-Term Investments The Company classifies highly liquid investments purchased with an original maturity of three months or less as cash equivalents. As of December 31, 1997 and 1996, the Company held $178 and $41,211 of short term securities under agreements to resell on January 1, 1998 and 1997, respectively. Due to the short-term nature of these investments, the Company did not take possession of the securities. The Company does not believe it is exposed to any significant credit risk or market risk on cash and cash equivalent balances. 25 Short-term investments consist of certificates of deposit, commercial paper and other highly liquid investments with original maturities in excess of three months. These investments mature primarily in less than one year. Property, Plant and Equipment Property, plant and equipment is stated at cost and consists of land and land improvements, buildings and building equipment, computer equipment and furniture, leasehold improvements, and service spare parts. Expenditures for additions to property, plant and equipment are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation of buildings and building equipment, and land improvements, is computed on a straight-line basis over lives of forty and twenty years, respectively. Depreciation of computer equipment and furniture is computed principally on a straight-line basis over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the lease or estimated useful lives of the improvements. Service spare parts are amortized on a straight-line basis over their estimated useful lives, generally four years. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue Recognition Revenues from system sales and software licenses are recognized at the time of shipment. Contract service revenues are billed in advance and recorded as deferred revenue. Service revenues are then recognized ratably over the contractual period as the services are performed. Training and consulting revenues are recognized as the related services are performed. Custom design and software porting revenues are recognized using the percentage of completion method or as contract milestones are achieved. Software Development Costs The Company accounts for software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company capitalizes certain costs incurred in the production of computer software once technological feasibility of the product to be marketed has been established. Capitalization of these costs ceases when the product is considered available for general release to customers. Costs incurred prior to technological feasibility, including amounts attributable to in-process research and development in business acquisitions, are expensed as incurred. Amortization of capitalized software development costs is calculated as the greater of the ratio that the current product revenues bear to estimated future revenues or the straight-line method over the expected product life cycle of approximately three years. Amortization is included in system and software cost of revenues in the Consolidated Statements of Operations. The Company recognized impairment in value of certain previously capitalized software development costs in the first quarter of 1997 primarily as a result of the accelerated decline in sales of older software product offerings. These costs, which totaled $5,358, were determined to be unrecoverable and were charged to system and software cost of revenues. All remaining previously capitalized software costs were amortized evenly over the final three quarters of 1997 to recognize the change in estimated useful lives of these older technologies. Stockholders' Equity During 1997, the Company repurchased 1,655 shares, approximately 800 of which were repurchased immediately prior to the Employee Stock Purchase Plan (ESPP) purchases and then reissued to plan participants. The remaining shares were repurchased in the fourth quarter of 1997 to be reissued to participants of the ESPP in 1998. The market value of all repurchases was $15,940. 26 During 1996, the Company repurchased 833 shares, approximately 500 of which were repurchased immediately prior to ESPP purchases and then reissued to the plan participants. The remaining shares were repurchased in the first quarter of 1996 and subsequently reissued through stock option exercises prior to consummation of the August 1996 acquisition of Interconnectix, Inc. The market value of all shares repurchased in 1996 was $11,507. In 1996, the Company's Board of Directors rescinded a share repurchase plan except that the Board authorized the continued repurchase of shares for purposes of reissuance under the ESPP. Net Income (Loss) Per Share In the fourth quarter of 1997, the Company adopted SFAS No. 128 "Earnings Per Share". Accordingly, "basic net income (loss) per share" and "diluted net income (loss) per share" for the year ended December 31, 1997 and for all prior periods presented were computed using the weighted average number of common shares outstanding during each year, with diluted net income per share including the effect of potentially dilutive common shares. Common stock equivalents related to stock options are anti-dilutive in a net loss year and, therefore, were not included in 1997 and 1996 diluted net loss per share. For 1995, diluted net income per share was calculated on the basis of the weighted average number of common shares outstanding plus 1,424 shares of dilutive common stock equivalents related to stock options outstanding. Use of Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications and Restatements Certain reclassifications have been made in the accompanying consolidated financial statements for 1995 and 1996 to conform with the 1997 presentation. 2. Special Charges Following is a summary of the major elements of the special charges:
Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Employee severance............................... $ 2,322 $ 3,486 $ (1,540) Asset impairments................................ 5,541 5,000 -- Business disposals............................... 5,395 -- -- Reserves for various claims...................... 3,950 -- -- Other............................................ 1,650 3,512 (500) ----------- ----------- ----------- Total....................................... $ 18,858 $ 11,998 $ (2,040) =========== =========== =========== - ---------------------------------------------------------------------------------------------------
During the first quarter of 1997, the Company recorded a special charge of $8,560. The charge consisted of disposals of subsidiaries and related employee terminations, early termination of an interest rate swap agreement, and recognition of the impairment in value of certain goodwill and purchased technology. Substantially all of the costs associated with this charge were expended in 1997. During the fourth quarter of 1997, the Company recorded a special charge of $10,298. The charge consisted of disposals of subsidiaries and related employee terminations, recognition of the impairment in value of certain goodwill, purchased technology and other assets, some streamlining of worldwide operations and reserves for various legal claims. A majority of the reserves are for claims resulting from the Company's inability to continue selling and supporting its SimExpress products in the U.S due to cease and desist orders issued by the International Trade Commission (ITC) against the Company in patent litigation involving the products. See "Item 3. Legal Proceedings" for further details. 27 In the fourth quarter of 1996, the Company recorded special charges of $11,998. The Company downsized and redirected certain operations and re-targeted an incentive compensation program resulting in severance costs, facility lease and equipment abandonment costs and other costs totaling approximately $7,000. The Company also recognized a $5,000 write-down for impairment in value of goodwill and certain other assets associated with its Meta Systems subsidiary, as the recoverability of these assets was adversely affected by the ongoing SimExpress patent litigation. During the second quarter of 1995, the Company recorded a $2,040 special charge adjustment. The adjustment was primarily associated with a prior year charge and was mainly the result of reduced estimates for severance costs associated with replacement and globalization of the Company's information systems. Information system implementation delays culminated when a key project plan milestone was missed during the second quarter, resulting in lower estimated costs for write-offs of old equipment due to prolonged in-service periods. In addition, certain actions associated with a product discontinuance plan were not taken when management determined that the technology could be used by the Company's consulting organization and sold as a custom integrated service rather than as a commercial design tool. 3. Business Acquisitions Results of operations of all acquisitions accounted for as pooling of interests are included in the Company's Consolidated Financial Statements for all periods presented. Results of operations of all acquisitions accounted for as purchases are included in the Company's Consolidated Financial Statements only from the date of acquisition forward. In 1996, the Company completed nine business combinations, two of which were accounted for as pooling of interests and seven of which were accounted for as purchases. The Company purchased dQdt, Inc. (dQdt), Meta Systems SRL, (Meta), Seto Software GmbH (Seto), Royal Digital Centers, Inc. (Royal Digital), Open Networks Engineering, Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE Technology, Inc. (CAE) in April 1996, May 1996, June 1996, August 1996, November 1996, November 1996 and December 1996, respectively. The total purchase price including acquisition expenses for all 1996 purchase acquisitions was $40,708. The purchase accounting allocations resulted in charges for in-process research and development (R&D) of $26,234, goodwill capitalization of $5,517, and technology capitalization of $8,957. In January and August of 1996, the Company completed the acquisitions of Microtec Research, Inc. (Microtec) and Interconnectix, Inc. (Interconnectix), respectively. These acquisitions were accounted for as pooling of interests. A total of 6,223 and 2,133 shares of the Company's common stock were issued for Microtec and Interconnectix, respectively. Merger expenses of $5,110 were incurred associated with the elimination of duplicate facilities, severance costs, the write-off of certain property and equipment and legal and accounting fees associated with administration of the merger activities. In 1995, the Company completed five business combinations, two of which were accounted for as pooling of interests and three of which were accounted for as purchases. The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December 1995, and December 1995, respectively. The purchase accounting allocations resulted in charges for in-process R&D of $1,430, goodwill capitalization of $528 and technology capitalization of $892. In May and October of 1995, the Company acquired Exemplar Logic, Inc. (Exemplar) and Precedence Incorporated (Precedence), respectively. These acquisitions were accounted for as pooling of interests. A total of 1,512 and 735 shares of the Company's common stock were issued for Exemplar and Precedence, respectively. Merger expenses of $610 were for services rendered to facilitate completion of the merger agreements and for severance costs. 28 4. Income Taxes Domestic and foreign pre-tax income (loss) is as follows:
Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Domestic............................... $ (17,976) $ (10,023) $ 25,826 Foreign................................ (15,075) 8,585 33,222 ----------- ------------ ------------ Total............................. $ (33,051) $ (1,438) $ 59,048 =========== ============ ============ - ---------------------------------------------------------------------------------------------
The provision (benefit) for income taxes is as follows:
Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Current: Federal........................... $ 3,730 $ 3,563 $ 1,511 State............................. 150 118 413 Foreign........................... 2,810 5,847 7,956 ----------- ------------ ------------ Total current..................... 6,690 9,528 9,880 ----------- ------------ ------------ Deferred: Federal........................... (5,848) (6,093) 251 Foreign........................... (2,586) 105 (1,589) ----------- ------------ ------------ Total deferred.................... (8,434) (5,988) (1,338) ----------- ------------ ------------ Total............................. $ (1,744) $ 3,540 $ 8,542 =========== ============ ============ - ---------------------------------------------------------------------------------------------
The effective tax rate differs from the federal tax rate as follows:
Year ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Federal tax rate................................ (35.0)% (35.0)% 35.0% State taxes, net................................ (5.0) (5.0) 5.0 Foreign tax rate differential................... 35.5 (435.4) (4.8) Income and losses of foreign subsidiaries....... (5.8) 457.4 7.2 Foreign tax credits............................. (10.1) (480.5) (7.6) Change in valuation allowance................... 19.3 (212.6) (22.4) Write-off of non-deductible acquisition costs... -- 961.8 -- Other, net...................................... (4.2) (4.6) 2.1 --------- --------- -------- Effective tax rate......................... (5.3)% 246.1% 14.5% ========= ======== ======== - -----------------------------------------------------------------------------------------------
29 The significant components of deferred income tax expense are as follows:
Year ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Net changes in deferred tax assets and liabilities................ $ (14,800) $ (3,462) $ (358) Increase (decrease) in beginning-of-year balance of the valuation allowance for deferred tax assets......... 6,366 (2,526) (980) ----------- ------------ ------------ Total.......................................................... $ (8,434) $ (5,988) $ (1,338) =========== ============ ============ - -----------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities were as follows:
As of December 31, 1997 1996 - ------------------------------------------------------------------------------------------ Deferred tax assets: Depreciation of property and equipment............... $ 1,199 $ 696 Reserves and allowances.............................. 2,235 498 Accrued expenses not currently deductible............ 9,502 6,338 Net operating loss carryforwards..................... 29,614 27,654 Tax credit carryforwards............................. 23,629 21,713 Purchased technology................................. 1,540 1,217 Other, net........................................... 2,008 1,284 ----------- ------------ Total gross deferred tax assets.................. 69,727 59,400 Less valuation allowance......................... (54,888) (48,522) ----------- ------------ Net deferred tax assets.......................... 14,839 10,878 Deferred tax liabilities: Capitalization of software development costs......... -- (4,473) ----------- ------------ Net deferred tax asset .......................... $ 14,839 $ 6,405 =========== ============ - ------------------------------------------------------------------------------------------
The Company has established a valuation allowance for certain deferred tax assets, including those for net operating loss and tax credit carryforwards. Such a valuation allowance is recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. The portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be applied directly to contributed capital is $22,548 as of December 31, 1997. This amount is attributable to differences between financial and tax reporting of employee stock option transactions. As of December 31, 1997, the Company, for federal income tax purposes, has net operating loss carryforwards of approximately $47,116, research and experimentation credit carryforwards of $12,808 and a foreign tax credit carryforward of $9,449. For state income tax purposes, as of December 31, 1997 the Company has net operating loss carryforwards totaling $96,915 from multiple jurisdictions, research and experimentation credits of $1,757 and child care and facility credits of $515. If not used by the Company to reduce income taxes payable in future periods, net operating loss carryforwards will expire between 1999 through 2011, research and experimentation credit carryforwards between 1998 through 2011 and the foreign tax credit carryforward between 2001 through 2002. The Company has not provided for Federal income taxes on approximately $136,632 of undistributed earnings of foreign subsidiaries at December 31, 1997, since these earnings have been invested indefinitely in subsidiary operations. Upon repatriation, some of these earnings would generate foreign tax credits which will reduce the Federal tax liability associated with any future foreign dividend. 30 The Company has settled its Federal income tax obligations through 1991. The Company believes the provisions for income taxes for years since 1991 are adequate. 5. Property, Plant and Equipment A summary of property, plant and equipment follows:
As of December 31, 1997 1996 - --------------------------------------------------------------------------------------- Computer equipment and furniture..................... $ 155,206 $ 162,248 Buildings and building equipment..................... 53,702 53,891 Land and improvements................................ 14,658 14,650 Leasehold improvements............................... 15,320 8,282 Service spare parts.................................. 227 167 ------------ ------------ 239,113 239,238 Less accumulated depreciation and amortization....... (135,661) (136,985) ------------ ------------ Property, plant and equipment, net.............. $ 103,452 $ 102,253 ============ ============ - ---------------------------------------------------------------------------------------
The Company has entered into agreements to lease portions of its headquarters site in Wilsonville, Oregon. Under terms of these agreements approximately 180 square feet of space was made available to a third party on a firm take-down schedule. These agreements are expected to result in rental payments of $2,407 extending through 1998. 6. Other Assets A summary of other assets follows:
As of December 31, 1997 1996 - --------------------------------------------------------------------------------------- Purchased technology, net............................ $ 5,336 $ 13,190 Deferred taxes....................................... 4,758 -- Deposits............................................. 4,607 4,928 Term licensing agreements............................ 3,465 850 Investment in real estate............................ 2,935 2,935 Goodwill, net........................................ -- 3,195 Software development costs, net...................... -- 10,806 Other................................................ 5,410 7,010 ------------ ------------ Total........................................... $ 26,511 $ 42,914 ============ ============ - ---------------------------------------------------------------------------------------
In 1997, the Company recognized an impairment in value of certain goodwill and purchased technology, which resulted in associated write-downs of $2,056 and $2,370, respectively. Total purchased technology amortization expense of $5,484, $3,559, and $2,418 was recorded for the years ended December 31, 1997, 1996, and 1995, respectively. Technology costs are being amortized over a three-year period to system and software cost of revenues. The Company capitalized software development costs amounting to $0 and $5,691 in 1997 and 1996, respectively. In 1997, the Company recognized an impairment in value of certain capitalized software, which resulted in a write-down of $5,358. Related amortization expense of $5,448, $6,215, and $5,511 was recorded for the years ended December 31, 1997, 1996, and 1995, respectively. 31 7. Short-Term Borrowings Short-term borrowings represent drawings by subsidiaries under multi-currency unsecured credit agreements and the current portion of long-term debt. Interest rates are generally based on the applicable country's prime lending rate depending on the currency borrowed. The weighted average interest rate on short-term borrowings during 1997 and 1996 was approximately 6%. The Company has available lines of credit of approximately $25,117 as of December 31, 1997. Certain agreements require compensatory balances, which the Company has met. 8. Long-Term Debt Long-term debt is comprised of the following:
As of December 31, 1997 1996 - --------------------------------------------------------------------------------------- Revolving term credit facility....................... $ -- $ 52,480 Other................................................ 120 801 ------------ ------------ Subtotal........................................ 120 53,281 Less current portion................................. -- (840) ------------ ------------ Total........................................... $ 120 $ 52,441 ============ ============ - ---------------------------------------------------------------------------------------
At December 31, 1996, the Company had a committed credit facility with a bank which remained in effect until December 1997. The commitment level at December 31, 1996 was $52,480. Interest on borrowings under the credit facility was floating rate based. Borrowings were collateralized by cash and investments of $30,000 and a trust deed on the Company's headquarters site in Wilsonville, Oregon of $25,000. At December 31, 1996, the Company had an interest rate swap agreement with a bank which effectively converted floating rates on $17,500 of borrowings to a fixed rate of 9.55%. The average floating interest rate at December 31, 1996 was approximately 6%. Effective February 11, 1997 the Company terminated its interest rate swap agreement at a cost of $1,650. Subsequent to December 31, 1997, the Company entered into a committed revolving loan with a bank that remains in effect until 2001, which gives the Company the ability to borrow up to $100,000 and is available for general operating purposes. The revolving loan has a variable rate, which is calculated based on the Company's financial position and operating performance and is subject to certain loan covenants. 9. Incentive Stock The Board of Directors has the authority to issue incentive stock in one or more series and to determine the relative rights and preferences of the incentive stock. The incentive stock is convertible into common stock upon attainment of specified objectives or upon the occurrence of certain events to be determined by the Board of Directors. 10. Employee Stock and Savings Plans The Company has three common stock option plans which provide for the granting of incentive and nonqualified stock options to key employees, officers, and non-employee directors of the Company and its subsidiaries. The three stock option plans are administered by the Compensation Committee of the Board of Directors, and permit accelerated vesting of outstanding options upon the occurrence of certain changes in control of the Company. The Company also has a stock plan that provides for the sale of common stock to key employees of the Company and its subsidiaries. Shares can be awarded under the plan at no purchase price as a stock bonus and the stock plan also provides for the granting of nonqualified stock options. 32 SFAS No. 123 "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option and similar equity instrument. As is permitted under SFAS No. 123, the Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options granted during 1997, 1996 and 1995 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for grants:
Year ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Risk-free interest rate .................... 6.25% 6% 6% Expected dividend yield..................... 0% 0% 0% Expected life (in years).................... 5.5 5.5 5.5 Expected volatility......................... 89% 91% 94% - --------------------------------------------------------------------------------
Using the Black-Scholes methodology, the total value of options granted during 1997, 1996 and 1995 was $17,862, $32,375 and $19,803, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The weighted average fair value of options granted during 1997, 1996 and 1995 was $6.43, $6.29 and $11.99 per share, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would approximate the pro forma disclosures below:
Year ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Net income (loss)...................................... $ (37,663) $ (12,447) $ 47,937 Net income (loss) per share, basic and diluted......... $ (0.58) $ (0.19) $ 0.75 - -----------------------------------------------------------------------------------------------------------
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to January 1, 1995, and additional awards are anticipated in future years.
The following table summarizes information about options outstanding and exercisable at December 31, 1997. - --------------------------------------------------------------------------------------------------- Outstanding Exercisable ------------------------------------------------- --------------------------- Range of Remaining Weighted Weighted Exercise Number of Contractual Life Average Number of Average Prices Shares (Years) Price Shares Price - ------------------- ---------- ---------------- ------------ ------------- ----------- $00.07 - 7.23 1,234 5.16 $5.26 1,074 $5.39 $ 7.56 - 7.75 2,959 8.68 $7.75 878 $7.75 $ 8.50 - 9.00 1,598 9.10 $9.00 22 $8.91 $ 9.13 - 11.63 1,755 7.71 $10.36 654 $10.93 $11.69 - 17.68 524 6.48 $14.25 286 $13.79 $17.75 - 18.25 3 7.69 $18.13 1 $18.18 $19.76 - 19.76 32 2.36 $19.76 32 $19.76 --------- -------------- ------------- ------------ ----------- $00.07 - 19.76 8,105 7.85 $8.65 2,947 $ 8.32 ========= ============== ============= ============ =========== - ---------------------------------------------------------------------------------------------------
At December 31, 1996 and 1995, 2,517 and 2,409 shares were exercisable at weighted average exercise prices of $7.87 and $9.86, respectively. 33 Options under all four plans generally become exercisable over a four to five-year period from the date of grant or from the commencement of employment at prices generally not less than the fair market value at the date of grant. The excess of the fair market value of the shares at the date of grant over the option price, if any, is charged to operations ratably over the vesting period. At December 31, 1997, 27,810 shares were reserved for issuance and 3,718 shares were available for future grant. Stock options outstanding, the weighted average exercise price and transactions involving the stock option plans are summarized as follows:
Shares Price - --------------------------------------------------------------------------------- Balance at December 31, 1994........................ 6,830 $ 8.27 ----------- ---------- Granted........................................ 1,534 13.87 Exercised...................................... (1,870) 7.10 Canceled....................................... (421) 10.18 ----------- ---------- Balance at December 31, 1995........................ 6,073 9.17 ----------- ---------- Granted........................................ 5,113 9.83 Exercised...................................... (1,013) 5.38 Canceled....................................... (3,323) 13.27 ----------- ---------- Balance at December 31, 1996........................ 6,850 8.23 ----------- ---------- Granted........................................ 2,832 9.23 Exercised...................................... (620) 5.69 Canceled....................................... (957) 9.25 ----------- ---------- Balance at December 31, 1997........................ 8,105 $ 8.65 =========== ========== - ---------------------------------------------------------------------------------
In November 1996, the Compensation Committee of the Board of Directors adopted a resolution to offer employees holding nonqualified stock options for 2,595 shares the opportunity to exchange their existing stock options for new nonqualified stock options. The exchange allowed employees to receive options for the same number of shares at $7.75 per share, the then current market price, instead of an average original exercise price of $14.17. The new options vest over two to six years. The offer was made because the Board of Directors believes lower-priced options provide a greater retention advantage and incentive to key employees and officers. Option holders elected to exchange options covering 1,791 shares. In May 1989, the shareholders adopted the 1989 Employee Stock Purchase Plan and reserved 1,400 shares for issuance. The shareholders have subsequently amended the plan to reserve an additional 6,000 shares for issuance. Under the plan, each eligible employee may purchase up to six hundred shares of stock per quarter at prices no less than 85% of its fair market value determined at certain specified dates. Employees purchased 780 and 516 shares under the plan in 1997 and 1996, respectively. At December 31, 1997, 1,119 shares remain available for future purchase under the plan. The plan will expire upon either issuance of all shares reserved for issuance or at the discretion of the Board of Directors. There are no plans to terminate the plan at this time. The Company has an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company currently matches 50% of eligible employee's contributions, up to a maximum of 6% of the employee's earnings. Employer matching contributions vest over 5 years, 20% for each year of service completed. The Company's matching contributions to the Savings Plan were $2,730, $2,299, and $2,220 in 1997, 1996, and 1995, respectively. 11. Commitments The Company leases a majority of its field office facilities under non-cancelable operating leases. In addition, the Company leases certain equipment used in its research and development activities. This equipment is generally leased on a month-to-month basis after meeting a six-month lease minimum. 34 The Company rents its Japanese facilities under two-year cancelable leases allowing a six-month notice of cancellation. The total remaining commitment under these cancelable leases, which expire beginning after December 1998, is $3,108, of which the first six months payments of $1,404 are included in the schedule below. Future minimum lease payments under all non-cancelable operating leases are approximately as follows:
Annual periods ending December 31, - ---------------------------------------------------------------------------- 1998........................................................ $ 16,484 1999........................................................ 13,395 2000........................................................ 11,517 2001........................................................ 9,322 2002........................................................ 6,879 Later years................................................. 22,251 ----------- Total....................................................... $ 79,848 =========== - ----------------------------------------------------------------------------
Rent expense under operating leases was $19,598, $15,480, and $16,181 for the years ended December 31, 1997, 1996, and 1995, respectively. 12. Other Income, Net Other income (expense) is comprised of the following:
Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Interest income............................................. $ 7,723 $ 9,485 $ 9,194 Interest expense............................................ (555) (2,423) (2,585) Foreign exchange gain (loss)................................ 167 (468) (506) Litigation costs............................................ (4,675) (3,611) -- Gain on sale of investments................................. -- 5,545 -- Other, net.................................................. 659 (117) 391 ---------- ------------ ------------ Total.............................................. $ 3,319 $ 8,411 $ 6,494 ========== ============ ============ - ----------------------------------------------------------------------------------------------------------------
13. Supplemental Cash Flow Information The following provides additional information concerning supplemental disclosures of cash flow activities:
Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Cash paid for: Interest expense....................................... $ 829 $ 2,198 $ 2,317 Income taxes........................................... $ 3,307 $ 1,984 $ 7,611 Issuance of common stock for purchase of business........... -- $ 1,825 -- - ----------------------------------------------------------------------------------------------------------------
35 14. Industry and Geographic Information The Company is a supplier of EDA systems - advanced computer software, accelerated verification systems and intellectual property designs and data bases used to automate the design, analysis and testing of electronic hardware and embedded systems software in electronic systems and components. System and software revenues comprise more than half of the Company's revenues and are derived primarily from software products owned by the Company and by third parties for which royalties are paid by the Company. Service and support revenues are derived primarily from annual software support maintenance contracts and professional services. The Company markets its products primarily to customers in the communications, computer, semiconductor, consumer electronics, aerospace and transportation industries. The Company sells and licenses its products primarily through its direct sales force in North America, Europe and Asia, and through distributors in territories where the volume of business does not warrant a direct sales presence. In addition to its corporate offices in Wilsonville, Oregon, the Company has sales, support, software development and professional services offices worldwide. Intercompany transfers are accounted for at amounts generally above cost. Corporate expenses are general expenses included in the U.S. and are allocated to the operations of each geographic area. For the purposes of determining operating income, corporate administration expenses, corporate marketing expenses and research and development costs are allocated to each region. In addition, special and merger related charges are included in the respective region where the costs were incurred. Corporate assets of cash and investments and the Company's headquarter facilities in Wilsonville, Oregon are included in the U.S. Geographic information for 1997, 1996 and 1995 is set forth in the table below.
Geographic Information U.S. Europe Japan Other Intl. Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------- 1997 Revenues from unaffiliated customers... $ 251,221 $ 115,917 $ 59,295 $ 28,294 $ -- $ 454,727 Intercompany transfers...... -- -- -- 10,611 (10,611) -- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues.............. $ 251,221 $ 115,917 $ 59,295 $ 38,905 $ (10,611) $ 454,727 =========== =========== =========== =========== =========== =========== Operating income (loss)..... $ (24,297) $ (4,060) $ (7,429) $ (584) $ -- $ (36,370) =========== =========== =========== =========== =========== =========== Identifiable assets......... $ 259,417 $ 71,868 $ 34,860 $ 36,157 $ -- $ 402,302 =========== =========== =========== =========== =========== =========== 1996 Revenues from unaffiliated customers... $ 239,972 $ 113,678 $ 67,902 $ 26,334 $ -- $ 447,886 Intercompany transfers...... -- -- -- 17,136 (17,136) -- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues.............. $ 239,972 $ 113,678 $ 67,902 $ 43,470 $ (17,136) $ 447,886 =========== =========== =========== =========== =========== =========== Operating income (loss)..... $ (9,712) $ (16,337) $ 10,917 $ 5,283 $ -- $ (9,849) =========== =========== =========== =========== =========== =========== Identifiable assets......... $ 330,609 $ 105,582 $ 42,634 $ 34,534 $ -- $ 513,359 =========== =========== =========== =========== =========== =========== 1995 Revenues from unaffiliated customers... $ 223,962 $ 117,159 $ 68,650 $ 22,746 $ -- $ 432,517 Intercompany transfers...... -- -- -- 18,524 (18,524) -- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues.............. $ 223,962 $ 117,159 $ 68,650 $ 41,270 $ (18,524) $ 432,517 =========== =========== =========== =========== =========== =========== Operating income............ $ 31,500 $ 6,263 $ 9,940 $ 4,851 $ -- $ 52,554 =========== =========== =========== =========== =========== =========== Identifiable assets......... $ 303,725 $ 110,834 $ 52,047 $ 28,766 $ -- $ 495,372 =========== =========== =========== =========== =========== =========== - -----------------------------------------------------------------------------------------------------------------
36 15. Quarterly Financial Information - Unaudited A summary of quarterly financial information follows:
Quarter ended March 31 June 30 September 30 December 31 - --------------------------------------------------------------------------------------------------------------------- 1997 - --------------------------------------------------------------------------------------------------------------------- Total revenues........................................ $ 101,559 $ 114,638 $ 116,006 $ 122,524 Gross margin.......................................... $ 53,732 $ 76,968 $ 77,642 $ 87,352 Operating income (loss)............................... $ (32,144) $ 2,831 $ 1,059 $ (8,116) Net income (loss)..................................... $ (28,149) $ 3,732 $ 1,901 $ (8,791) Net income (loss) per share, diluted and basic........ $ (0.43) $ 0.06 $ 0.03 $ (0.14) 1996 - --------------------------------------------------------------------------------------------------------------------- Total revenues........................................ $ 109,053 $ 117,279 $ 100,793 $ 120,761 Gross margin.......................................... $ 75,492 $ 83,890 $ 68,934 $ 85,754 Operating income (loss)............................... $ 2,806 $ 4,062 $ (64) $ (16,653) Net income (loss)..................................... $ 3,771 $ 2,526 $ 74 $ (11,349) Net income (loss) per share, diluted and basic........ $ 0.06 $ 0.04 $ 0.00 $ (0.18) - ---------------------------------------------------------------------------------------------------------------------
37 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS Report of Management Management of Mentor Graphics Corporation is responsible for the preparation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and necessarily include some amounts which represent the best estimates and judgments of management. The consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, whose report is included below. The Audit Committee of the Board of Directors is comprised of three directors who are not officers or employees of Mentor Graphics Corporation or its subsidiaries. These directors meet with management and the independent auditors in connection with their review of matters relating to the Company's annual financial statements, the Company's system of internal accounting controls, and the services of the independent auditors. The Committee meets with the independent auditors, without management present, to discuss appropriate matters. The Committee reports its findings to the Board of Directors and also recommends the selection and engagement of independent auditors. Gregory K. Hinckley Executive Vice President and Chief Operating Officer/Chief Financial Officer Walden Rhines President and Chief Executive Officer Independent Auditors' Report To the Stockholders and Board of Directors Mentor Graphics Corporation: We have audited the accompanying consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 financial position of Mentor Graphics Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Portland, Oregon February 3, 1998 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of Registrant The information required by this item concerning the Company's Directors is included under "Election of Directors" in the Company's 1998 Proxy Statement and is incorporated herein by reference. The information concerning the Company's Executive Officers is included herein on page 9 under the caption "Executive Officers of the Registrant." The information required by Item 405 of Regulation S-K is included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy Statement and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is included under "Compensation of Directors," and "Information Regarding Executive Officer Compensation" in the Company's 1998 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is included under "Election of Directors" and "Information Regarding Beneficial Ownership of Principal Shareholders and Management" in the Company's 1998 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is not applicable to the Company. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1 Financial Statements: The following consolidated financial statements are included in Item 8: Page Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 21 Consolidated Balance Sheets as of December 31, 1997 and 1996 22 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 23 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 24 Notes to Consolidated Financial Statements 25 Independent Auditors' Report 38 (a) 2 Financial Statement Schedules The schedule and report listed below are filed as part of this report on the pages indicated: Schedule Page II Valuation and Qualifying Accounts 42 Independent Auditors' Report on Financial Statement Schedul 43 All other financial statement schedules have been omitted since they are not required, not applicable or the information is included in the Consolidated Financial Statements or Notes. 39 (a) 3 Exhibits 3. A. 1987 Restated Articles of Incorporation. Incorporated by reference to Exhibit 4A to the Company's Registration Statement on Form S-3 (Registration No. 33-23024). B. Bylaws of the Company. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-3 (Registration No. 33-56759). 10. *A. 1982 Stock Option Plan. Incorporated by reference to Exhibit 10.A to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (1994 10-K). *B. Nonqualified Stock Option Plan. Incorporated by reference to Exhibit 10.C to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (1989 10-K). *C. 1986 Stock Plan. *D. 1987 Non-Employee Directors' Stock Option Plan. Incorporated by reference to Exhibit 10.D to the Company's 1994 10-K. *E. Form of Indemnity Agreement entered into between the Company and each of its officers and directors. Incorporated by reference to Exhibit B to the Company's 1987 Proxy Statement. F. Lease dated November 20, 1991, for 999 Ridder Park Drive and 1051 Ridder Park Drive, San Jose, California. Incorporated by reference to Exhibit 10.M to the Company's Form SE dated March 25, 1992. G. Credit Agreement between Mentor Graphics Corporation and Bank of America National Trust and Savings Association, dated February 6, 1998. H. Employment Offer Letter dated January 5, 1997 to Gregory K. Hinckley, accepted by Mr. Hinckley January 10, 1997. 21. List of Subsidiaries of the Company. 23. Consent of Accountants. ------------------- * Management contract or compensatory plan or arrangement (b) No reports on Form 8-K were filed by the Company during the last quarter of 1997. 40 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, on March 30, 1998. MENTOR GRAPHICS CORPORATION By /s/ WALDEN C. RHINES ------------------------------------------- Walden C. Rhines President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant on March 30, 1998, in the capacities indicated. Signature Title (1) Principal Executive Officer: /s/ WALDEN C. RHINES President, Chief Executive Officer ---------------------------------- and Director Walden C. Rhines (2) Principal Financial Officer: /s/ GREGORY K. HINCKLEY Executive Vice President, Chief ---------------------------------- Operating Officer Gregory K. Hinckley and Chief Financial Officer (3) Principal Accounting Officer: /s/ ANTHONY B. ADRIAN Vice President, Corporate Controller ---------------------------------- Anthony B. Adrian (4) Directors: /s/ JON A. SHIRLEY Chairman of the Board ---------------------------------- Jon A. Shirley /s/ MARSHA B. CONGDON Director ---------------------------------- Marsha B. Congdon /s/ JAMES R. FIEBIGER Director ---------------------------------- James R. Fiebiger /s/ DAVID A. HODGES Director ---------------------------------- David A. Hodges /s/ FONTAINE K. RICHARDSON Director ---------------------------------- Fontaine K. Richardson 41 SCHEDULE II MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Beginning Ending Description Balance Additions Deductions Balance - ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1995 Allowance for doubtful accounts/1.......... $ 3,554 $ 308 $ 571 $ 3,291 Allowance for obsolete inventory/2......... $ 859 $ 26 $ 496 $ 389 Year ended December 31, 1996 Allowance for doubtful accounts/1.......... $ 3,291 $ 1,168 $ 1,296 $ 3,163 Allowance for obsolete inventory/2......... $ 389 $ 308 $ 292 $ 405 Year ended December 31, 1997 Allowance for doubtful accounts/1........... $ 3,163 $ 1,220 $ 1,957 $ 2,426 Allowance for obsolete inventory/2.......... $ 405 $ 4,626 $ 500 $ 4,531 - ------------------------------------------------------------------------------------------------------------ (1) Deductions primarily represent accounts written off during the period. (2) Deductions represent inventory scrapped during each period.
42 Independent Auditors' Report - ---------------------------- The Board of Directors and Stockholders Mentor Graphics Corporation: Under date of February 3, 1998, we reported on the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which are included in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Portland, Oregon February 3, 1998 43 EX-10.C 2 1986 STOCK PLAN MENTOR GRAPHICS CORPORATION 1986 STOCK PLAN Mentor Graphics Corporation an Oregon corporation 8005 SW Boeckman Road Wilsonville, OR 97070 Mentor Graphics Mentor Graphics recognizes that its continuing growth and profitability depends upon the initiative, ability, and significant contributions of officers and other key employees. Mentor Graphics believes that by affording those employees the opportunity to purchase shares of Mentor Graphics it will enhance its ability to attract and retain them and will provide an incentive for them to exert their best efforts on its behalf. The plan is as follows: 1. Shares Subject to Award. 1.1 Awards made under this Plan shall be for authorized but unissued or reacquired Common Stock of Mentor Graphics. 1.2 Shares may be awarded under section 4 of the Plan for a total of not more than 6,500,000 shares of Common Stock, subject to adjustment under section 6. Any shares of Common Stock issued under the Plan which are returned to the Company shall be added to the shares remaining for future awards under the Plan. 2. Effective Date. This Plan shall be effective December 10, 1986 and continue until terminated by Mentor Graphics. 3. Administration. 3.1 The Plan shall be administered by a compensation committee (Committee) appointed by the Board of Directors of Mentor Graphics. The Committee may delegate any of its administrative duties to one or more agents and may retain advisors to assist it. 3.2 The Committee shall have general responsibility to interpret and administer the Plan. Any decision by the Committee shall be final and bind all parties. The Committee shall keep all records of awards and bonus rights under the Plan and shall be responsible for communication with Plan participants. 3.3 No Committee member shall participate in the decision of any question relating exclusively to an award made to that member. 4. Awards. 4.1 Awards may be made to any officer, key employee or nonemployee consultant of Mentor Graphics, its parent and any subsidiary of Mentor Graphics. 4.2 The Committee shall designate persons to receive awards, and as to each award shall specify the number of shares, the purchase price, and any other terms, conditions and restrictions, including those described in section 4.4, as the Committee in its absolute discretion shall deem appropriate. 4.3 The Committee shall determine the price at which shares of Common Stock shall be sold to participants under the Plan. The Committee may, in its discretion, set any purchase price and may vary the purchase price and payment terms among the participants. Awards may be made for past services, at a price below fair market value or without the payment of any purchase price. 4.4 The Committee may fix a period of time (Restricted Period) during which shares of Common Stock covered by any award under the Plan will be subject to repurchase by the Company at the original purchase price and may not be sold, assigned, transferred, pledged or otherwise disposed of by a participant. The Committee may, in its discretion, set any Restricted Period and may vary the Restricted Period among the participants. 4.5 An award under the Plan shall be evidenced by an agreement executed by Mentor Graphics and the participant in a form prescribed by the Committee. 4.6 Awards may be made in the form of stock options, subject to the following restrictions. Options shall have a term of not more than 10 years plus seven days. Options may not be assigned or transferred except on death, by will or operation of law. An option may be exercised only by the optionee or by a successor or representative after death. The absolute discretion of the Committee as provided in section 4.2 with respect to the terms and conditions of options is not otherwise restricted. 5. Cash Bonus Rights. The Committee may grant cash bonus rights in connection with awards under the Plan. Bonus rights shall be subject to such rules, terms, and conditions as the Committee may prescribe. 6. Changes in Capital Structure. If any change is made in the outstanding Common Stock without Mentor Graphics receiving any consideration, such as a stock split, reverse stock split, stock dividend, or combination or reclassification of the Common Stock, Mentor Graphics shall make a corresponding change in the number of shares remaining available for award under section 1, disregarding fractional shares. The Committee shall make the adjustment, and its determination shall be conclusive. 7. Amendment or Termination of the Plan. The Board of Directors may amend or terminate this Plan at any time. Neither the amendment nor termination of the Plan shall, without the consent of the participant, affect any participant's rights under awards previously made under the Plan and accepted by the participant. EX-10.G 3 CREDIT AGREEMENT - -------------------------------------------------------------------------------- CREDIT AGREEMENT Dated as of February 6, 1998 among MENTOR GRAPHICS CORPORATION, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent, and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO Arranged by BANCAMERICA ROBERTSON STEPHENS - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- ARTICLE I DEFINITIONS..................................................... 1 1.01 Certain Defined Terms........................................... 1 1.02 Other Interpretive Provisions................................... 17 1.03 Accounting Principles........................................... 18 1.04 Designation of Unrestricted Subsidiaries........................ 18 ARTICLE II THE CREDITS..................................................... 19 2.01 Amounts and Terms of Commitments................................ 19 2.02 Loan Accounts................................................... 19 2.03 Procedure for Borrowing......................................... 20 2.04 Conversion and Continuation Elections........................... 21 2.05 Voluntary Termination or Reduction of Commitments............... 22 2.06 Optional Prepayments............................................ 22 2.07 Repayment....................................................... 22 2.08 Interest........................................................ 23 2.09 Fees............................................................ 23 (a) Arrangement, Agency Fees................................... 23 (b) Commitment Fees............................................ 23 (c) Participation Fees......................................... 24 2.10 Computation of Fees and Interest................................ 24 2.11 Payments by the Company......................................... 24 2.12 Payments by the Banks to the Agent.............................. 25 2.13 Sharing of Payments, Etc........................................ 25 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY.......................... 26 3.01 Taxes........................................................... 26 3.02 Illegality...................................................... 27 3.03 Increased Costs and Reduction of Return......................... 28 3.04 Funding Losses.................................................. 28 3.05 Inability to Determine Rates.................................... 29 3.06 Reserves on Offshore Rate Loans................................. 29 3.07 Certificates of Banks........................................... 30 3.08 Delay........................................................... 30 3.09 Substitution of Banks........................................... 30 3.10 Survival........................................................ 30 ARTICLE IV CONDITIONS PRECEDENT............................................ 31 4.01 Conditions of Initial Loans..................................... 31 (a) Credit Agreement and Notes................................. 31 (b) Resolutions; Incumbency.................................... 31 (c) Organization Documents; Good Standing...................... 31 (d) Legal Opinions............................................. 31 (e) Payment of Fees............................................ 31 i. (f) Certificate................................................ 32 (i) Other Documents............................................ 32 4.02 Conditions to All Borrowings.................................... 32 (a) Notice of Borrowing or Conversion/Continuation............. 32 (b) Continuation of Representations and Warranties............. 32 (c) No Existing Default........................................ 32 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................. 33 5.01 Corporate Existence and Power................................... 33 5.02 Corporate Authorization; No Contravention....................... 33 5.03 Governmental Authorization...................................... 33 5.04 Binding Effect.................................................. 34 5.05 Litigation...................................................... 34 5.06 No Default...................................................... 34 5.07 ERISA Compliance................................................ 34 5.08 Use of Proceeds; Margin Regulations............................. 35 5.09 Title to Properties............................................. 35 5.10 Taxes........................................................... 35 5.11 Financial Condition............................................. 35 5.12 Environmental Matters........................................... 36 5.13 Regulated Entities.............................................. 36 5.14 No Burdensome Restrictions...................................... 36 5.15 Copyrights, Patents, Trademarks and Licenses, etc............... 36 5.16 Subsidiaries.................................................... 37 5.17 Insurance....................................................... 37 5.18 Swap Obligations................................................ 37 5.19 Year 2000....................................................... 37 5.20 Full Disclosure................................................. 37 ARTICLE VI AFFIRMATIVE COVENANTS........................................... 38 6.01 Financial Statements............................................ 38 6.02 Certificates; Other Information................................. 38 6.03 Notices......................................................... 39 6.04 Preservation of Corporate Existence, Etc........................ 40 6.05 Maintenance of Property......................................... 40 6.06 Insurance....................................................... 40 6.07 Payment of Obligations.......................................... 40 6.08 Compliance with Laws............................................ 41 6.09 Compliance with ERISA........................................... 41 6.10 Inspection of Property and Books and Records.................... 41 6.11 Environmental Laws.............................................. 41 6.12 Use of Proceeds................................................. 42 ARTICLE VII NEGATIVE COVENANTS.............................................. 42 7.01 Limitation on Liens............................................. 42 7.02 Disposition of Assets........................................... 44 ii. 7.03 Consolidations and Mergers...................................... 45 7.04 Loans and Investments........................................... 45 7.05 Limitation on Indebtedness...................................... 47 7.06 Transactions with Affiliates.................................... 48 7.07 Use of Proceeds................................................. 48 7.08 Contingent Obligations.......................................... 48 7.09 Lease Obligations............................................... 49 7.10 Restricted Payments............................................. 49 7.11 ERISA........................................................... 50 7.12 Change in Business.............................................. 50 7.13 Accounting Changes.............................................. 50 7.14 Financial Covenants............................................. 50 (a) Adjusted Quick Ratio....................................... 50 (b) Minimum Tangible Net Worth................................. 51 (c) Leverage Ratio............................................. 51 (d) Minimum Cash and Accounts Receivable....................... 51 ARTICLE VIII EVENTS OF DEFAULT.............................................. 51 8.01 Event of Default................................................ 51 (a) Non-Payment................................................ 51 (b) Representation or Warranty................................. 52 (c) Specific Defaults.......................................... 52 (d) Other Defaults............................................. 52 (e) Cross-Acceleration......................................... 52 (f) Insolvency; Voluntary Proceedings.......................... 52 (g) Involuntary Proceedings.................................... 53 (h) ERISA...................................................... 53 (i) Monetary Judgments......................................... 53 (j) Non-Monetary Judgments..................................... 53 (k) Change of Control.......................................... 53 (l) Loss of Licenses........................................... 53 8.02 Remedies........................................................ 54 8.03 Rights Not Exclusive............................................ 54 ARTICLE IX THE AGENT....................................................... 55 9.01 Appointment and Authorization; "Agent "......................... 55 9.02 Delegation of Duties............................................ 55 9.03 Liability of Agent.............................................. 55 9.04 Reliance by Agent............................................... 56 9.05 Notice of Default............................................... 56 9.06 Credit Decision................................................. 56 9.07 Indemnification of Agent........................................ 57 9.08 Agent in Individual Capacity.................................... 57 9.09 Successor Agent................................................. 57 9.10 Withholding Tax................................................. 58 iii. ARTICLE X MISCELLANEOUS................................................... 59 10.01 Amendments and Waivers.......................................... 59 10.02 Notices......................................................... 60 10.03 No Waiver; Cumulative Remedies.................................. 61 10.04 Costs and Expenses.............................................. 61 10.05 Company Indemnification......................................... 61 10.06 Payments Set Aside.............................................. 62 10.07 Successors and Assigns.......................................... 62 10.08 Assignments, Participations, etc................................ 62 10.09 Confidentiality................................................. 64 10.10 Set-off......................................................... 64 10.11 Automatic Debits of Fees........................................ 65 10.12 Notification of Addresses, Lending Offices, Etc................. 65 10.13 Counterparts.................................................... 65 10.14 Severability.................................................... 65 10.15 No Third Parties Benefited...................................... 65 10.16 Governing Law and Jurisdiction.................................. 66 10.17 Waiver of Jury Trial............................................ 66 10.18 Entire Agreement................................................ 66 SCHEDULES Schedule 1.01 Existing Facilities Schedule 2.01 Commitments and Pro Rata Shares Schedule 2.09 Participation Fees Schedule 5.05 Litigation Schedule 5.07 ERISA Schedule 5.12 Environmental Matters Schedule 5.15 Intellectual Property Matters Schedule 5.16 Subsidiaries and Minority Interests Schedule 5.17 Insurance Matters Schedule 7.01 Permitted Liens Schedule 7.02 Permitted Asset Dispositions Schedule 7.05 Permitted Indebtedness Schedule 7.08 Contingent Obligations Schedule 10.02 Offshore and Domestic Lending Offices, Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D Form of Opinion of Borrower's Counsel Exhibit E Form of Assignment and Acceptance Agreement Exhibit F Form of Promissory Note Exhibit G Form of Subordination Agreement iv. Exhibit H Form of Notice of Designation of Unrestricted Subsidiary v. CREDIT AGREEMENT ---------------- This CREDIT AGREEMENT is entered into as of February 6, 1998, among Mentor Graphics Corporation, an Oregon corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS ----------- 1.01 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any line of business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 9.09. "Agent-Related Persons" means BofA and any successor agent arising under Section 9.09, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. 1. "Agent's Payment Office" means the address for payments set forth on Schedule 10.02 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Applicable Margin" means, for any day, with respect to any Base Rate Loan or Offshore Rate Loan, the applicable margin (on a per annum basis) set forth on the pricing grid attached as Annex I in accordance with the parameters for calculation and adjustment of such applicable margin also set forth on Annex I. "Arranger" means BancAmerica Robertson Stephens. "Assignee" has the meaning specified in subsection 10.08(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. ss. 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. 2. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, San Francisco, California, or Portland, Oregon, are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Cash Equivalents" means: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof having maturities of not more than 12 months from the date of acquisition; (b) certificates of deposit, time deposits, Eurodollar time deposits, repurchase agreements, reverse repurchase agreements, or bankers' acceptances, having in each case a tenor of not more than 12 months, issued by any U.S. commercial bank or any commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (but including, in any event, Singapore), or a political subdivision of any such country, in each case having combined capital and surplus of not less than $100,000,000 and whose short-term securities are rated at least A-1 by Standard & Poor's Corporation ("S&P") or at least P-1 by Moody's Investor Service, Inc. ("Moody's"); (c) taxable and tax-exempt commercial paper of an issuer rated at least A-l by S&P or at least P-l by Moody's and in either case having a tenor of not more than 270 days; (d) medium term notes of an issuer rated at least AA by S&P or at least Aa2 by Moody's and having a remaining term of not more than 12 months after the date of acquisition by the Company or its Subsidiaries; (e) municipal notes and bonds which are rated at least SP-2 or AA by S&P or at least MIG-2 or Aa by Moody's with tenors of not more than 12 months; (f) investments in taxable or tax-exempt money market funds with assets greater than $500,000,000 and whose assets have average maturities less than or equal to 180 days and are rated at least A-l by S&P or at least P-l by Moody's; 3. (g) money market preferred instruments of an issuer rated at least A-1 by S&P or at least P-1 by Moody's with tenors of not more than 12 months; or (h) other similar investments, subject to the Majority Banks' prior written approval. "Change of Control" means (a) any "person" (as such term is used in subsections 13(d) and 14(d) of the Exchange Act) or group of persons on or after the Closing Date is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then-outstanding voting securities, or (b) the existing directors for any reason cease to constitute a majority of the Company's board of directors. "Existing directors" means (x) individuals constituting the Company's board of directors on the Closing Date, and (y) any subsequent director whose election by the board of directors or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors then in office, which directors either were directors on the Closing Date or whose election or nomination for election was previously so approved. "Closing Date" means the date on which all conditions precedent set forth in Section 4.01 are satisfied or waived by all Banks (or, in the case of subsection 4.01(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment", as to each Bank, has the meaning specified in Section 2.01. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Current Liabilities" means, at any time of determination, all amounts which would, in accordance with GAAP, be included under current liabilities on a consolidated balance sheet of the Company and its Subsidiaries, but in any event including all outstanding Loans, at such time. "Consolidated Tangible Net Worth" means, at any time of determination, in respect of the Company and its Subsidiaries, determined on a consolidated basis, total assets (exclusive of goodwill, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and premium, deferred charges (other than deferred tax assets) and other like intangibles) minus total liabilities (including accrued and deferred income taxes), at such time. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with 4. respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations other than in respect of Swap Contracts, shall be equal to the maximum reasonably anticipated liability in respect thereof and, in the case of Contingent Obligations in respect of Swap Contracts, shall be equal to the Swap Termination Value. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars", "dollars" and "$" each mean lawful money of the United States. "EBITDA" means, with respect to the Company and its Subsidiaries on a consolidated basis for any rolling four-quarter period, net income for such period 5. plus, to the extent deducted in computing such net income, the sum of (a) income tax expense, (b) interest expense, (c) depreciation and amortization expense, and (d) non-cash merger and Acquisition-related charges recorded on and after the Closing Date of up to $50,000,000 in the aggregate, all as determined in accordance with GAAP. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of an Initial Bank or Eligible Assignee, (ii) a Subsidiary of a Person of which an Initial Bank or Eligible Assignee is a Subsidiary, or (iii) a Person of which an Initial Bank or Eligible Assignee is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, including for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition 6. which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA in excess of $1,000,000, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.01. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "Existing Facilities" means the credit facilities identified on Schedule 1.01. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.09(a). "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 3.01. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with 7. similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. Provided, Indebtedness shall not include sales of Permitted Receivables or Permitted Offshore Receivables sold pursuant to Permitted Receivables Purchase Facilities and indemnification, recourse or repurchase obligations thereunder. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities" has the meaning specified in Section 10.05. "Indemnified Person" has the meaning specified in Section 10.05. "Independent Auditor" has the meaning specified in subsection 6.01(a). "Initial Bank" means a Bank party to this Agreement on the Closing Date. 8. "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter, provided, however, that if any Interest Period for an Offshore Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond February 6, 2001. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Joint Venture" means a partnership, limited liability company, joint venture or other similar legal arrangement (whether created by contract or conducted through a separate legal entity) now or hereafter formed by the Company or any of its 9. Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.02, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Leverage Ratio" means, as of any date of determination, the ratio of (a) total consolidated liabilities of the Company and its Subsidiaries on such date to (b) Consolidated Tangible Net Worth, in each case as determined in accordance with GAAP. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease or the interest of a purchaser of Permitted Receivables or Permitted Offshore Receivables under any Permitted Receivables Purchase Facility. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, any Subordination Agreement, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Majority Banks" means at any time at least two Banks then holding at least 66-2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, at least two Banks then having at least 66-2/3% of the Commitments. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and 10. to avoid any Event of Default; or (c) a material impairment of the rights of or benefits available to the Banks or the Agent under any Loan Document. "Material Subsidiary" means any Subsidiary which, for any period, has revenues or assets equal to or greater than five percent (5%) of the consolidated revenues or assets of the Company and its Subsidiaries, taken as a whole, but in any event shall not include any Unrestricted Subsidiary. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Net Issuance Proceeds" means, as to any issuance of debt or equity by any Person, cash proceeds and non-cash proceeds received or receivable by such Person in connection therewith, net of commissions, underwriting discounts and reasonable out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any Person not an Affiliate of such Person. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to subsection 2.02(b), in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB 11. for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "LIBOR" means the rate of interest per annum determined by the Agent to be the arithmetic mean (rounded upward to the next 1/16th of 1%) of the rates of interest per annum notified to the Agent by the Reference Bank as the rate of interest at which dollar deposits in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan by the Reference Bank and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Participant" has the meaning specified in subsection 10.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 7.01. 12. "Permitted Investments" means: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof having maturities of not more than three years from the date of acquisition; (b) certificates of deposit, time deposits, Eurodollar time deposits, repurchase agreements, reverse repurchase agreements, or bankers' acceptances, having in each case a tenor of not more than three years, issued by any U.S. commercial bank or any commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (but including, in any event, Singapore), or a political subdivision of any such country, in each case having combined capital and surplus of not less than $100,000,000 and whose short-term securities are rated at least A-2 by Standard & Poor's Corporation ("S&P") or at least P-2 by Moody's Investor Service, Inc. ("Moody's"); (c) taxable and tax-exempt commercial paper of an issuer rated at least A-2 by S&P or at least P-2 by Moody's and in either case having a tenor of not more than 270 days; (d) medium term notes of an issuer rated at least AA by S&P or at least Aa2 by Moody's and having a remaining term of not more than three years after the date of acquisition by the Company or its Subsidiaries; (e) municipal notes and bonds which are rated at least SP-2 or AA by S&P or at least MIG-2 or Aa by Moody's with tenors of not more than three years; (f) investments in taxable or tax-exempt money market funds with assets greater than $500,000,000 and whose assets have average maturities less than or equal to 180 days and are rated at least A-2 by S&P or at least P-2 by Moody's; (g) money market preferred instruments of an issuer rated at least A-2 by S&P or at least P-2 by Moody's with tenors of not more than three years; or (h) other similar investments, subject to the Majority Banks' prior written approval. "Permitted Offshore Receivables" shall mean all obligations of any obligor who is not a resident of or located in the United States (whether now existing or hereafter arising) under a contract for sale of goods or services by the Company or any of its Subsidiaries, including any obligation of such obligor (whether now existing or hereafter arising) to pay interest, finance charges or amounts with respect thereto, 13. and, with respect to any of the foregoing receivables or obligations, (a) all of the interest of the Company or any of its Subsidiaries in the goods (including returned goods) the sale of which gave rise to such receivable or obligation after the passage of title thereto to any obligor, (b) all other Liens and property subject thereto from time to time purporting to secure payment of such receivables or obligations, and (c) all guarantees, insurance, letters of credit and other agreements or arrangements of whatever character from time to time supporting or securing payment of any such receivables or obligations. "Permitted Receivables" shall mean all obligations of any obligor (whether now existing or hereafter arising) under a contract for sale of goods or services by the Company or any of its Subsidiaries having a final maturity date which is 12 months or more after the date such obligations arise, including any obligation of such obligor (whether now existing or hereafter arising) to pay interest, finance charges or amounts with respect thereto, and, with respect to any of the foregoing receivables or obligations, (a) all of the interest of the Company or any of its Subsidiaries in the goods (including returned goods) the sale of which gave rise to such receivable or obligation after the passage of title thereto to any obligor, (b) all other Liens and property subject thereto from time to time purporting to secure payment of such receivables or obligations, and (c) all guarantees, insurance, letters of credit and other agreements or arrangements of whatever character from time to time supporting or securing payment of any such receivables or obligations, but shall not include Permitted Offshore Receivables. "Permitted Receivables Purchase Facility" shall mean any agreement of the Company or any of its Subsidiaries providing for sales, transfers or conveyances of Permitted Receivables or Permitted Offshore Receivables purporting to be sales (and considered sales under GAAP) that do not provide, directly or indirectly, for recourse against the seller of such Permitted Receivables or Permitted Offshore Receivables (or against any of such seller's Affiliates) by way of a guaranty or any other support arrangement, with respect to the amount of such Permitted Receivables or Permitted Offshore Receivables (based on the financial condition or circumstances of the obligor thereunder), other than such limited recourse as is reasonable given market standards for transactions of a similar type, taking into account such factors as historical bad debt loss experience and obligor concentration levels. "Permitted Swap Obligations" means all obligations (contingent or otherwise) of the Company or any Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions 14. to the defaulting party, or (ii) any provision creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder (other than an Event of Default under subsection 8.01(a). "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Reference Bank" means BofA. "Replacement Bank" has the meaning specified in Section 3.09. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief financial officer, the chief operating officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, any of the above officers or the chief accounting officer of the Company, or any other officer having substantially the same authority and responsibility. "Revolving Termination Date" means the earlier to occur of: (a) February 6, 2001; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Subordination Agreement" has the meaning specified in subsection 7.05(g). 15. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof, but in any event shall not include any Unrestricted Subsidiary other than for purposes of Section 6.01. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined by the Company based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank). "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. 16. "United States" and "U.S." each means the United States of America. "Unrestricted Subsidiary" shall mean any Subsidiary designated as such by the Company in accordance with Section 1.04. "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. "Wilsonville Facility" means the Company's principal facility and headquarters located in Wilsonville, Oregon. 1.02 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof," "herein," "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding," and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. 17. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.03 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. (c) If the Company or the Majority Banks notify the Agent that the Company or the Majority Banks, as the case may be, desire to amend any covenant in Article VII or any definition relating thereto to eliminate the effect of any change in GAAP occurring after the Closing Date on the operation of any such covenant, then the Company's compliance with such covenant shall be determined in accordance with GAAP as in effect immediately prior to such change in GAAP until either such notice is withdrawn or such covenant or related definition is amended in a manner reasonably satisfactory to the Company and the Majority Banks. 1.04 Designation of Unrestricted Subsidiaries. (a) The Company, at its option, may from time to time designate any Subsidiary as an "Unrestricted Subsidiary" for purposes hereof in accordance with the following: (i) any Subsidiary that is not a Material Subsidiary may be designated by the Company as an Unrestricted Subsidiary in its sole discretion; (ii) any Material Subsidiary may be designated by the Company as an Unrestricted Subsidiary only with the prior written consent of the Majority Banks; provided, however, no Subsidiary may be designated as an Unrestricted Subsidiary if (A) immediately after giving effect to any such designation, the aggregate revenues or aggregate assets of all Unrestricted Subsidiaries shall exceed 15% of the aggregate revenues or aggregate assets of the Company, its Subsidiaries and its Unrestricted Subsidiaries, taken as a whole or (B) any Default or Event of Default then exists or would result from any such designation. 18. (b) The Company shall provide to the Agent a Notice of Designation of Unrestricted Subsidiary (a "Notice of Designation") in substantially the form of Exhibit H signed by a Responsible Officer. Subject to the preceding subsection (a), any designation by the Company of an Unrestricted Subsidiary shall become effective (i) in the case of any Subsidiary that is not a Material Subsidiary, three Business Days after the Agent's receipt of a completed Notice of Designation in respect of such Subsidiary, and (ii) in the case of any Material Subsidiary, upon the written consent of the Majority Banks. In the case of the preceding clause (ii), the Majority Banks shall use good-faith efforts to consent to or deny the Company's request to designate a Material Subsidiary as an Unrestricted Subsidiary within 30 days of the Agent's receipt of a completed Notice of Designation. ARTICLE II THE CREDITS ----------- 2.01 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.01 (such amount as the same may be reduced under Section 2.05 or as a result of one or more assignments under Section 10.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay under Section 2.06 and reborrow under this section 2.01. 2.02 Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 19. 2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans, and (ii) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $10,000,000, in the case of Offshore Rate Loans, or $5,000,000, in the case of Base Rate Loans, or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) in the case of Offshore Rate Loans, the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. provided, however, that with respect to the Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 9:00 a.m. (San Francisco time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only; and further provided that if so requested by the Agent, all Borrowings during the first 60 days following the Closing Date shall have the same Interest Period and shall be Base Rate Loans or Offshore Rate Loans for Interest Periods no longer than one month. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than six (6) different Interest Periods in effect. 20. 2.04 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.04(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $10,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $10,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $10,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans, and (ii) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, (i) the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, or (ii) any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. 21. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Majority Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than six (6) different Interest Periods in effect. 2.05 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $10,000,000 or any multiple of $5,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.06 Optional Prepayments. Subject to Section 3.04, the Company may, at any time or from time to time, (a) in the case of Offshore Rate Loans, upon not less than three Business Days' irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in minimum amounts of $10,000,000 or any multiple of $1,000,000 in excess thereof, or (b) in the case of Base Rate Loans, upon irrevocable notice to the Agent given no later than 9:00 a.m. (San Francisco time) on the date of prepayment, ratably prepay Loans in whole or in part, in minimum amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.04. 2.07 Repayment. The Company shall repay to the Banks on the Revolving Termination Date the aggregate principal amount of Loans outstanding on such date. 22. 2.08 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04), plus the Applicable Margin. (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Offshore Rate Loans under Section 2.06 for the portion of the Offshore Rate Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. (c) Notwithstanding subsection (a) of this Section, if any amount of principal of or interest on any Loan, or any other amount payable hereunder or under any other Loan Document is not paid in full when due (whether at stated maturity, by acceleration, demand or otherwise), the Company agrees to pay interest on such unpaid principal or other amount, from the date such amount becomes due until the date such amount is paid in full, and after as well as before any entry of judgment thereon to the extent permitted by law, payable on demand, at a fluctuating rate per annum equal to the Base Rate plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.09 Fees. (a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated August 28, 1997. (b) Commitment Fees. The Company shall pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to the applicable "Commitment Fee" set forth on the pricing grid attached as Annex I in accordance with the parameters for calculation and adjustment of such Commitment Fee also set forth on Annex I. Such commitment fee shall accrue from the Closing Date to the 23. Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing on March 31, 1998 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.05, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. (c) Participation Fees. The Company shall pay to the Agent for the account of each Bank a participation fee in the amounts set forth on Schedule 2.09. 2.10 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. The Agent will, at the request of the Company or any Bank, deliver to the Company or the Bank, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate and the resulting interest rate. 2.11 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 11:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 11:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. 24. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.12 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. Such payment by the Company to the Agent shall be without prejudice to the Company's rights, if any, against the Bank which failed to fund. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately 25. (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY -------------------------------------- 3.01 Taxes. (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that 26. the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. 3.02 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. 27. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.03 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 3.04 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; 28. (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.06; (d) the prepayment (including pursuant to Section 2.07) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under the proviso of subsection 2.04(a) of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under subsection 3.03(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.05 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.09(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans, as the case may be, hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 3.06 Reserves on Offshore Rate Loans. The Company shall pay to each Bank, as long as such Bank shall be required under regulations of the FRB to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as "Eurocurrency liabilities"), additional costs on the unpaid principal amount of each Offshore Rate Loan equal to the actual costs of such reserves allocated to such Loan by the Bank (as determined by the Bank in good faith, which determination shall be conclusive absent manifest error), payable on each date on which interest is payable on 29. such Loan, provided the Company shall have received at least 15 days' prior written notice (with a copy to the Agent) of such additional interest from the Bank. If a Bank fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. 3.07 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.08 Delay. Failure or delay on the part of any Bank to demand compensation under this Article III shall not constitute a waiver of such Bank's right to demand such compensation; provided, that no Bank shall be entitled to compensation under this Article III for any increased costs or reductions incurred or suffered with respect to any date unless such Bank shall have notified the Company not more than 90 days after the later of (a) such date and (b) the date on which such Bank shall have become aware of such costs or reductions. 3.09 Substitution of Banks. Upon the receipt by the Company from any Bank (an "Affected Bank") of a claim for compensation under Section 3.03 or if the Company is required to pay any amount to any Affected Bank or the Agent for the account of an Affected Bank pursuant to subsection 3.01(b) or 3.01(c) and such Affected Bank has not changed the jurisdiction of its Lending Office so as to eliminate such additional payment by the Company within 30 days after a request by the Company to effect such change, the Company may: (i) request the Affected Bank to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company (which shall, in any event, be an Eligible Assignee) to acquire and assume all or a ratable part of all of such Affected Bank's Loans and Commitment (a "Replacement Bank"); (ii) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment; or (iii) designate a Replacement Bank. Any such designation of a Replacement Bank under clause (i) or (iii) or of an existing Bank under clause (ii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld or delayed), and shall be effected in accordance with all requirements for an assignment set forth in Section 10.08 hereof. Without limiting the generality of the foregoing, the Company agrees to pay to each Affected Bank any amounts arising under Section 3.04 by virtue of such Affected Bank's replacement on a date other than the last day of an Interest Period, with respect to any Offshore Rate Loans then outstanding. 3.10 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. 30. ARTICLE IV CONDITIONS PRECEDENT -------------------- 4.01 Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance reasonably satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes, if any, executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and (ii) A certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute and deliver this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and (ii) a status certificate for the Company from the Secretary of State of Oregon and certificates of foreign qualification and good standing of the Company in California and New Jersey, in each case, as of a recent date, together with a bring-down certificate by facsimile, dated the Closing Date; (d) Legal Opinions. An opinion of Dean Freed, Vice President and General Counsel of the Company substantially in the form of Exhibit D-1 and of Stoel Rives LLP substantially in the form of Exhibit D-2, each addressed to the Agent and the Banks; (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date; including any such costs, fees and expenses arising under or referenced in Sections 2.09 and 10.04; 31. (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; and (iii) there has occurred since September 30, 1997, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; (g) Evidence reasonably satisfactory to the Agent that all amounts owing under the Existing Facilities have been paid in full and all commitments to lend thereunder terminated, including without limitation, if so requested by the Agent, written confirmation in respect of the foregoing from any lender or bank agent party to the Existing Facilities; (h) A completed Compliance Certificate for the fiscal quarter ended September 30, 1997; and (i) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may reasonably request. 4.02 Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) or to continue or convert any Loan under Section 2.04 is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date: (a) Notice of Borrowing or Conversion/Continuation. The Agent shall have received (with, in the case of any Loan on the Closing Date, a copy for each Bank) a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable; (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct on and as of such Borrowing Date or Conversion/Continuation Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion. Each Notice of Borrowing and Notice of Conversion/Continuation submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the 32. date of each such notice and as of each Borrowing Date or Conversion/ Continuation Date, as applicable, that the conditions in this Section 4.02 are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES ------------------------------ The Company represents and warrants to the Agent and each Bank that: 5.01 Corporate Existence and Power. The Company and each of its Material Subsidiaries: (a) is a corporation duly organized, validly existing and, if applicable in such jurisdiction, in good standing under the laws of the jurisdiction of its incorporation; (b) has (i) the power and authority and (ii) all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents to which it is a party; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clause (b)(ii), clause (c) or clause (d), to the extent that the failure to do so is not reasonably expected to have a Material Adverse Effect. 5.02 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Loan Document to which the Company is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of the Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or (c) violate any Requirement of Law. 5.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or 33. required in connection with the execution, delivery or performance by, or enforcement against, the Company of the Agreement or any other Loan Document. 5.04 Binding Effect. This Agreement and each other Loan Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.05 Litigation. Except as specifically disclosed in Schedule 5.05, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if determined adversely to the Company or its Subsidiaries, would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 8.01(e). 5.07 ERISA Compliance. Except as specifically disclosed in Schedule 5.07: (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other applicable federal or state law, except to the extent that the failure to comply is not reasonably expected to have a Material Adverse Effect. Each Plan which is intended to qualify under Section 401(a) of the Code has received or has applied for when due and not been denied a favorable determination letter from the IRS and to the best knowledge of the Company, nothing has occurred which would cause the loss of such qualification. The Company and each ERISA Affiliate has made or duly provided for all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. 34. (b) There are no pending or, to the best knowledge of Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 5.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.12 and Section 7.07. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. To the extent that the Company uses Loan proceeds to acquire shares of its own stock which is Margin Stock, the Company intends to cause such acquired shares to be retired. 5.09 Title to Properties. The Company and each Subsidiary have good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. As of the Closing Date, the property of the Company and its Material Subsidiaries is subject to no Liens, other than Permitted Liens. 5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect. 5.11 Financial Condition. (a) The unaudited consolidated balance sheets of the Company and its Subsidiaries as of September 30, 1997, and the related consolidated statements of operations and cash flows for the fiscal quarter ended on that date: 35. (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except for the absence of footnotes and as otherwise expressly noted therein and subject to ordinary, good faith year end audit adjustments; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby. (b) The audited financial statements of the Company at December 31, 1996, reflect or disclose all material Indebtedness and other liabilities of the Company and its consolidated Subsidiaries, including liabilities for taxes, material commitments and Contingent Obligations. (c) Since September 30, 1997, there has been no Material Adverse Effect. 5.12 Environmental Matters. The Company conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof the Company has reasonably concluded that, except as specifically disclosed in Schedule 5.12, such Environmental Laws and Environmental Claims are not, individually or in the aggregate, reasonably expected to have a Material Adverse Effect. 5.13 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.15 Copyrights, Patents, Trademarks and Licenses, etc. Except as disclosed on Schedule 5.15, the Company or its Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the best knowledge of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any Subsidiary infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 5.05, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the 36. knowledge of the Company, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect. 5.16 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in part (a) of Schedule 5.16 hereto and has no material equity investments in any other corporation or entity other than those specifically disclosed in part (b) of Schedule 5.16. 5.17 Insurance. Except as specifically disclosed in Schedule 5.17, the properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Subsidiary operates. 5.18 Swap Obligations. Neither the Company nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. The Company has undertaken its own independent assessment of its consolidated assets, liabilities and commitments and has considered appropriate means of mitigating and managing risks associated with such matters and has not relied on any swap counterparty or any Affiliate of any swap counterparty in determining whether to enter into any Swap Contract. 5.19 Year 2000. On the basis of comprehensive review and assessment undertaken by the Company of the Company's and its Subsidiaries' computer applications and an assessment by the Company of its and its Subsidiaries' material suppliers, vendors and customers, the Company reasonably believes that the "Year 2000 Problem" (that is, the risk that computer applications used by any person may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999) will not result in a Material Adverse Effect. 5.20 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. 37. ARTICLE VI AFFIRMATIVE COVENANTS --------------------- So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 6.01 Financial Statements. The Company shall deliver to the Agent and each Bank, in form and detail reasonably satisfactory to the Agent and the Majority Banks: (a) as soon as available, but not later than 100 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of operations and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of a nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP consistently applied. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Material Subsidiary's records; and (b) as soon as available, but not later than 50 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries. 6.02 Certificates; Other Information. The Company shall furnish to the Agent and each Bank: (a) concurrently with the delivery of the financial statements referred to in subsection 6.01(a), a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 6.01(a) and (b), a Compliance Certificate executed by a Responsible Officer; (c) promptly, but in no event later than 10 days of filing the same, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC; and 38. (d) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Bank, may from time to time reasonably request. 6.03 Notices. The Company shall promptly notify the Agent and each Bank: (a) of the occurrence of any Default or Event of Default; (b) as soon as a Responsible Officer becomes aware thereof, of any matter that could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Material Subsidiary; including pursuant to any applicable Environmental Laws; (c) of the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the Agent and each Bank a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) a material increase in the Unfunded Pension Liability of any Pension Plan; (iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability. (d) upon the request from time to time (but not more frequently than once each fiscal quarter unless a Default or an Event of Default exists) of the Agent, the Swap Termination Values, together with a description of the method by which such values were determined, relating to any then-outstanding Swap Contracts to which the Company or any of its Subsidiaries is party; and (e) of any materially adverse change in the status of any material technology license of the Company or any Material Subsidiary which reasonably could be expected to result in a Material Adverse Effect. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating 39. what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 6.03(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been breached or violated, but the reasonable failure to identify all such clauses or provisions shall not, of itself, constitute a failure to comply with subsection 6.03(a). 6.04 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Material Subsidiary to: (a) except as otherwise permitted by this Agreement, preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except (i) in connection with transactions permitted by Section 7.03 and sales of assets permitted by Section 7.02 or (ii) where such failure to preserve or maintain could not reasonably be expected to result in a Material Adverse Effect; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 6.05 Maintenance of Property. The Company shall maintain, and shall cause each Subsidiary to maintain, and preserve all of its material property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted, except as permitted by Section 7.02. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. 6.06 Insurance. The Company shall maintain, and shall cause each Material Subsidiary to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 6.07 Payment of Obligations. Unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary, the Company shall, and shall cause each Material Subsidiary to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets; 40. (b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.08 Compliance with Laws. The Company shall comply, and shall cause each Material Subsidiary to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 6.09 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code, except in each case to the extent that any failure to maintain such compliance or qualification or to make such contributions could not reasonably be expected to have a Material Adverse Effect. 6.10 Inspection of Property and Books and Records. The Company shall maintain and shall cause each Material Subsidiary to maintain adequate books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company or such Material Subsidiary. The Company shall permit, and shall cause each Material Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants at such reasonable times during normal business hours and as often as may be reasonably necessary upon reasonable advance notice to the Company and, in the case of any discussion with independent public accountants of the Company or any Material Subsidiary, upon providing the Company's representatives with a reasonable opportunity to participate in and/or be present at any such discussion; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Company and at any time during normal business hours without advance notice (except that the Company's representatives shall be given a reasonable opportunity to participate in and/or be present at any discussions with independent public accountants of the Company or any Material Subsidiary). 6.11 Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance, in all material respects, with all Environmental Laws. 41. 6.12 Use of Proceeds. The Company shall use the proceeds of the Loans for working capital, acquisitions, share repurchases and other general corporate purposes not in contravention of any Requirement of Law or of any Loan Document. ARTICLE VII NEGATIVE COVENANTS ------------------ So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 7.01 Limitation on Liens. The Company shall not, and shall not suffer or permit any Material Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of the Company or any Subsidiary on the Closing Date and set forth in Schedule 7.01 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, levies, imposts, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.07, provided that no notice of lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of the Company or its Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business, provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; 42. (g) Liens consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such liens in the aggregate at any time outstanding for the Company and its Subsidiaries do not exceed $20,000,000; (h) easements, rights-of-way, zoning or use restrictions and other similar encumbrances incurred in the ordinary course of business 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 businesses of the Company and its Subsidiaries; (i) Liens on assets of Persons which become Subsidiaries after the date of this Agreement, provided, however, that such Liens existed at the time the respective Persons became Subsidiaries and were not created in anticipation thereof; (j) purchase money security interests on any property acquired, constructed or held by the Company or its Subsidiaries in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property; provided that (i) any such Lien attaches to such property concurrently with or within 30 days after the acquisition or construction thereof, (ii) such Lien attaches solely to the property so acquired or constructed in such transaction, (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such property, and (iv) the principal amount of the Indebtedness secured by any and all such purchase money security interests shall not at any time exceed $10,000,000; (k) Liens securing obligations in respect of capital leases on assets subject to such leases, provided that such capital leases are otherwise permitted hereunder; (l) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Subsidiary to provide collateral to the depository institution; (m) Liens consisting of pledges of cash collateral or government securities to secure on a mark-to-market basis Permitted Swap Obligations only, provided that (i) the counterparty to any Swap Contract relating to any such Permitted Swap Obligation is under a similar requirement to deliver similar collateral from time to time to the Company or the Subsidiary party thereto on a mark-to-market basis; and (ii) the aggregate value of such collateral so pledged by the Company and the Subsidiaries together in favor of any counterparty does not at any time exceed $10,000,000. (n) Liens securing Refinancing Indebtedness (as defined in subsection 7.05(f)) which was originally secured by a Lien permitted by this Section 7.01, 43. provided that such Lien does not apply to any other property or assets of the Company or any Subsidiary other than the proceeds of the property or assets subject to such Lien; (o) Liens pursuant to Permitted Receivables Purchase Facilities permitted by the terms hereof; (p) other non-consensual Liens arising in the ordinary course of business the existence or enforcement of which would not result in a Material Adverse Effect; and (q) other Liens securing Indebtedness and obligations in an aggregate principal amount at any time outstanding not exceeding $5,000,000, provided that any such Lien shall not encumber cash (other than to the extent such cash constitutes proceeds of the property subject to any such Lien), inventory or accounts receivable. 7.02 Disposition of Assets. The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business; (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; and (c) dispositions of inventory or equipment by the Company or any Subsidiary to the Company or any Subsidiary pursuant to reasonable business requirements; (d) dispositions of (i) Permitted Receivables pursuant to Permitted Receivables Purchase Facilities, provided that the value of all Permitted Receivables so sold by the Company and its Subsidiaries shall not exceed $15,000,000 at any time outstanding; and (ii) Permitted Offshore Receivables pursuant to Permitted Receivables Purchase Facilities, provided that the value of all Permitted Offshore Receivables so sold by the Company and its Subsidiaries shall not exceed $20,000,000 at any time outstanding; (e) the sale of the Wilsonville Facility for fair market value (as determined in good faith at the time of such sale by the board of directors of the Company); provided that no Default or Event of Default then exists or would result from such sale; (f) the sale of any property listed on Schedule 7.02 for fair market value (as determined in good faith at the time of such sale by the board of directors of the Company or the applicable Subsidiary, as the case may be); provided that no Default or Event of Default then exists or would result from such sale; and 44. (g) dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, (ii) the aggregate net book value of all assets so sold by the Company and its Subsidiaries, together, shall not exceed in any fiscal year $10,000,000, and (iii) any such disposition made pursuant to this subsection (g) shall not be of accounts receivable of the Company or any of its Subsidiaries. 7.03 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Subsidiary to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly- Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly-Owned Subsidiary; (c) the Company or any Subsidiary may merge with any Person in an Acquisition so long as (i) the Company or such Subsidiary shall be the continuing or surviving entity, provided that in any such merger involving the Company, the Company shall be the surviving entity, (ii) such Acquisition is otherwise permitted hereunder and (iii) immediately before and after giving effect to such merger no Default or Event of Default shall exist; and (d) any Subsidiary may merge with any Person pursuant to a disposition of such Subsidiary or the assets of such Subsidiary, in each case, permitted under Section 7.02. 7.04 Loans and Investments. The Company shall not purchase or acquire, or suffer or permit any Subsidiary to purchase or acquire, for cash or property, or make any commitment therefor for cash or property, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including any Affiliate of the Company (together, "Investments"), except for: (a) Investments held by the Company or Subsidiary in the form of Cash Equivalents or short term marketable securities or Permitted Investments; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; 45. (c) Investments by the Company in any of its Wholly-Owned Subsidiaries or by any of its Wholly-Owned Subsidiaries in the Company or another of its Wholly-Owned Subsidiaries; (d) Investments incurred in order to consummate Acquisitions otherwise permitted herein, provided that (i) the cash consideration given for any such Acquisition, together with the cash consideration given for all prior Acquisitions undertaken by the Company and its Subsidiaries after the Closing Date, shall not exceed $50,000,000 in any fiscal year, (ii) such Acquisitions are undertaken in accordance with all applicable Requirements of Law; and (iii) the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the acquiree is obtained; (e) Subject to clause (i) in subsection 7.04(d) above, Investments incurred in order to consummate Acquisitions otherwise permitted herein for which all or a portion of the consideration given for any such Acquisition is common stock of the Company or any Subsidiary, provided that (i) such Acquisitions are undertaken in accordance with all applicable Requirements of Law; and (ii) the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the acquiree is obtained (notwithstanding this clause (ii), if all of the consideration given for any such Acquisition is common stock of the Company or any Subsidiary, then the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the acquiree shall not be required hereby); (f) Investments constituting Permitted Swap Obligations or payments or advances under Swap Contracts relating to Permitted Swap Obligations; (g) Investments permitted under subsections 7.10(b) and (c); (h) Investments incurred in order to consummate Acquisitions not otherwise permitted herein subject to the prior written consent of the Majority Banks; (i) loans made by the Company or any Subsidiary in the ordinary course of business to a person not an Affiliate of the Company in an aggregate principal amount not exceeding $15,000,000 at any time outstanding; (j) loans made by the Company or any Subsidiary to employees in the ordinary course of business consistent with past practice in principal amounts not exceeding $2,500,000 in the aggregate at any time outstanding and not more than $500,000 to any individual employee; and (k) other Investments not exceeding $30,000,000 in any fiscal year as to all such Investments in the aggregate; provided that if all such Investments permitted by this subsection (k) exceed $15,000,000 in the aggregate in any fiscal year, then the $50,000,000 limitation set forth in the preceding subsection (d) shall be reduced for such fiscal year by the amount of such excess. 46. 7.05 Limitation on Indebtedness. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement; (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 7.08; (c) Indebtedness existing on the Closing Date and set forth in Schedule 7.05; (d) Indebtedness secured by Liens permitted by subsection 7.01(i), (j), (k), (m) and (n); (e) Indebtedness incurred in connection with leases permitted pursuant to Section 7.09; (f) extensions, renewals or refinancings of Indebtedness permitted under this Section 7.05, so long as (i) such Indebtedness (the "Refinancing Indebtedness") is in an aggregate principal amount not greater than the aggregate principal amount of the Indebtedness being extended, renewed or refinanced plus the amount of any premiums required to be paid therefor and fees and expenses associated therewith, (ii) such Refinancing Indebtedness has a later or equal final maturity and a longer or equal weighted average life as the Indebtedness being extended, refinanced or renewed, (iii) the interest rate applicable to such Refinancing Indebtedness shall be a market rate (as determined in good faith by the board of directors of the Company or the relevant Subsidiary, as the case may be) as of the time of such extension, renewal or refinancing, (iv) if the Indebtedness being extended, renewed or refinanced is subordinated to the Obligations, such Refinancing Indebtedness is subordinated to the Obligations to the same extent as the Indebtedness being extended, renewed or refinanced and (v) at the time of and after giving effect to such extension, renewal or refinancing, no Default or Event of Default shall exist; (g) Indebtedness incurred by the Company or any Subsidiary as consideration given for an Acquisition permitted hereunder (i) in an aggregate principal amount at any time outstanding not to exceed $10,000,000 plus (ii) any additional Indebtedness that is subordinated to the Obligations pursuant to a subordination agreement in substantially the form of Exhibit G (a "Subordination Agreement"), with such changes as the Agent or the Majority Banks may reasonably request or desire; (h) Indebtedness incurred by the Company or any Subsidiary pursuant to Permitted Receivables Purchase Facilities permitted hereunder; and (i) other unsecured Indebtedness in an aggregate principal amount outstanding not exceeding $10,000,000 at any time. 47. 7.06 Transactions with Affiliates. Except as otherwise expressly permitted hereunder, the Company shall not, and shall not suffer or permit any Subsidiary to, enter into any transaction with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary; provided, that the loans permitted by subsection 7.04(j) and the Company's or any Subsidiary's employee relocation program as in effect on the Closing Date, as such programs may be amended or otherwise modified after the Closing Date in the ordinary course of business, shall not be subject to the application of this Section 7.06. 7.07 Use of Proceeds. (a) The Company shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, otherwise than in connection with the purchase of shares of its own stock for immediate cancellation, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, in each case, in violation of Regulation G, T, U or X of the FRB, or (iv) to acquire any security in any transaction that is subject to Section 13(d) or 14(d) of the Exchange Act. (b) The Company shall not, directly or indirectly, use any portion of the Loan proceeds (i) knowingly to purchase Ineligible Securities from the Arranger during any period in which the Arranger makes a market in such Ineligible Securities, (ii) knowingly to purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by the Arranger, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by the Arranger and issued by or for the benefit of the Company or any Affiliate of the Company. The Arranger is a registered broker-dealer and permitted to underwrite and deal in certain Ineligible Securities; and "Ineligible Securities" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. ss. 24, Seventh), as amended. 7.08 Contingent Obligations. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Permitted Swap Obligations; (c) Contingent Obligations of the Company and its Subsidiaries existing as of the Closing Date and listed in Schedule 7.08; 48. (d) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business; (e) unsecured Guaranty Obligations by the Company of Indebtedness and other obligations of a Subsidiary, or by any Subsidiary of the Indebtedness and other obligations of any other Subsidiary, provided that, in each case, such Indebtedness and other obligations are otherwise permitted hereunder; and (f) Contingent Obligations under the Company's or any Subsidiary's employee relocation plan as in effect on the Closing Date, as such plans may be amended or otherwise modified after the Closing Date in the ordinary course of business. 7.09 Lease Obligations. The Company shall not, and shall not suffer or permit any Subsidiary to, create or suffer to exist any obligations for the payment of rent for any property under lease or agreement to lease, except for: (a) operating leases existing on or entered into by the Company or any Subsidiary after the Closing Date in the ordinary course of business and reported in the Company's consolidated financial statements in accordance with GAAP provided that payments in respect of all such operating leases, together with all payments in respect of capital leases permitted under clause (c) of this Section, do not exceed $30,000,000 in the aggregate in any fiscal year; (b) leases entered into by the Company or any Subsidiary after the Closing Date pursuant to sale-leaseback transactions (i) permitted under subsection 7.02(g) and (ii) in connection with a sale of the Wilsonville Facility permitted under subsection 7.02(e); (c) capital leases, other than those permitted under clause (b) of this Section, entered into by the Company or any Subsidiary after the Closing Date to finance the acquisition of equipment; provided that the aggregate annual rental payments for all such capital leases, together with all payments in respect of operating leases permitted under clause (a) of this Section, shall not exceed $30,000,000 in the aggregate in any fiscal year; and (d) leases entered into by Persons which become Subsidiaries after the date of this Agreement, provided that such leases existed at the time the respective Persons became Subsidiaries and were not created in anticipation thereof. 7.10 Restricted Payments. The Company shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding; except that: (a) the Company may declare and make dividend payments or other distributions payable solely in its common stock; 49. (b) so long as no Default or Event of Default exists or would result therefrom, the Company may purchase, redeem or otherwise acquire shares of its common stock or warrants or options to acquire any such shares pursuant to any employee stock option or purchase plan; provided that all such purchases, redemptions or other acquisitions otherwise permitted under this clause (b) do not exceed $15,000,000 in the aggregate in any fiscal year; and (c) so long as no Default or Event of Default exists or would result therefrom, the Company may otherwise purchase, redeem or acquire shares of its common stock or warrants or options to acquire any such shares; provided that all such purchases, redemptions or other acquisitions otherwise permitted under this clause (c) do not exceed (i) $180,000,000 in the aggregate and (ii) 20,100,000 shares (as such number may be adjusted for stock dividends and stock splits occurring after the Closing Date). For the sake of clarity, the parties hereto acknowledge and agree that whenever assets or property other than cash is given for any purchase, redemption or other acquisition otherwise permitted under this clause (c), the value of such purchase, redemption or other acquisition shall be equal to the net book value at such time of such non-cash assets or property for purposes of determining the Company's compliance with the $180,000,000 limitation set forth in the preceding clause (i). 7.11 ERISA. The Company shall not, and shall not suffer or permit any of its ERISA Affiliates to engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan or engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA which has resulted or could reasonably be expected to result in liability of the Company in an aggregate amount in excess of $5,000,000. 7.12 Change in Business. The Company shall not, and shall not suffer or permit any Material Subsidiary to, engage in any material line of business substantially different from design automation and reasonably related lines of business. 7.13 Accounting Changes. The Company shall not make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change the fiscal year of the Company. 7.14 Financial Covenants. (a) Adjusted Quick Ratio. The Company shall not as of the end of any fiscal quarter suffer or permit its ratio (determined on a consolidated basis) of (i) cash plus the value (valued in accordance with GAAP) of all Cash Equivalents, other than cash and Cash Equivalents subject to a Lien securing Indebtedness, plus net current accounts receivable (valued in accordance with GAAP) to (ii) Consolidated Current Liabilities (other than liabilities secured by a Lien on cash or Cash Equivalents), to be less than (A) 1.00 to 1.00 from the Closing Date through the fiscal quarter ending September 30, 1999, and (B) 1.10 to 1.00 thereafter. 50. (b) Minimum Tangible Net Worth. As long as cumulative stock repurchases and cash Acquisitions by the Company and its Subsidiaries are less than $100,000,000 in the aggregate after the Closing Date, the Company shall not permit Consolidated Tangible Net Worth as of the end of any fiscal quarter to be less than (i) 90% of Consolidated Tangible Net Worth as of June 30, 1997, plus (ii) 50% of consolidated net income (before non-cash merger and acquisition related expense) earned in each quarterly accounting period beginning with the quarter ended September 30, 1997 (to the extent such number is positive), plus (iii) 100% of the Net Issuance Proceeds of any new equity the Company issues after June 30, 1997 minus any acquisition-related write-offs for Acquisitions financed with the issuance of the stock, minus (iv) up to $180,000,000 for (A) the repurchase of stock, (B) the capitalization of intangible assets and (C) write-offs, in each case, resulting from cash Acquisitions; provided, however, if at any time after the Closing Date the cumulative stock repurchases and cash Acquisitions by the Company and its Subsidiaries equals or exceeds $100,000,000, then the "Minimum Tangible Net Worth" covenant set forth in this subsection 7.14(b) shall be recalculated (and applied retroactively) so that the percentage in clause (i) above will be 95% and in clause (ii) above will be 75%. (c) Leverage Ratio. The Company shall not as of the end of any fiscal quarter suffer or permit its Leverage Ratio to be greater than (i) 1.25 to 1.00 from the Closing Date through the fiscal quarter ending September 30, 1999, and (ii) 1.10 to 1.00 thereafter. (d) Minimum Cash and Accounts Receivable. The Company shall not as of the end of any fiscal quarter suffer or permit its ratio (determined on a consolidated basis) of (i) cash plus the value (valued in accordance with GAAP) of all Cash Equivalents, other than cash and Cash Equivalents subject to a Lien securing Indebtedness, plus 75% of net current accounts receivable (valued in accordance with GAAP) owing by account obligors located in the United States, to (ii) the then outstanding principal amount of the Loans, to be less than 1.25 to 1.00. For the avoidance of doubt, (i) Unrestricted Subsidiaries shall not be included in the calculation of any of the financial measures set forth in the preceding clauses (a), (c) or (d), and (ii) Permitted Receivables and Permitted Offshore Receivables sold pursuant to any Permitted Receivables Purchase Facility permitted hereunder shall not be included in the calculation of any of the financial measures set forth in the preceding clauses (a) through (d). ARTICLE VIII EVENTS OF DEFAULT ----------------- 8.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within five days after the same 51. becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company or any Subsidiary made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Section 6.01, 6.03(a) or 6.12 or in Article VII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew of such failure or (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Acceleration. (i) The Company or any Material Subsidiary (A) fails to make any payment in respect of any Indebtedness or Contingent Obligation (other than in respect of Swap Contracts), having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure, or (B) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition under the preceding clauses (A) or (B) is to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (1) any event of default under such Swap Contract as to which the Company or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (2) any Termination Event (as so defined) as to which the Company or any Subsidiary is an Affected Party (as so defined), and, in either event, the Swap Termination Value owed by the Company or such Subsidiary as a result thereof is greater than $10,000,000; or (f) Insolvency; Voluntary Proceedings. The Company or any Material Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the 52. ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Material Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $10,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $10,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $10,000,000; or (i) Monetary Judgments. One or more non-interlocutory judgments, non- interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $20,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which has a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) Change of Control. There occurs any Change of Control; or (l) Loss of Licenses. Any Governmental Authority revokes or fails to renew any material license, permit or franchise of the Company or any Material Subsidiary, or the Company or any Material Subsidiary for any reason loses any material license, permit or franchise, or the Company or any Material Subsidiary suffers the imposition of any 53. restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise where the effect of such revocation, failure, loss or imposition is to cause a Material Adverse Effect; or (m) Adverse Change. There occurs a Material Adverse Effect; or (n) Invalidity of Subordination Provisions. Any Subordination Agreement or the subordination provisions of any agreement or instrument governing any Indebtedness which is subordinated to the Indebtedness hereunder is for any reason revoked, invalidated or otherwise breached by the Company or any Subsidiary, or otherwise ceases to be in full force and effect as a result of any act or omission of the Company or any Subsidiary, or the Company or any Subsidiary otherwise contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder. 8.02 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, (a) declare the commitment of each Bank to make Loans to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.01 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 8.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. 54. ARTICLE IX THE AGENT --------- 9.01 Appointment and Authorization; "Agent". Each Bank hereby irrevocably (subject to Section 9.09) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any 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. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. 9.02 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.03 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 55. 9.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. 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 Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 4.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 9.05 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.06 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and credit worthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions 56. contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and credit worthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.07 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.08 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 9.09 Successor Agent. The Agent may, and at the request of the Majority Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent for the 57. Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is 58. no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 9.11 Agent Bank's Commitment. Unless the Company otherwise consents (which consent shall not be unreasonably withheld), the Bank acting as Agent hereunder shall at all such times hold not less than 15% of the Loans and Commitments; provided, however, that so long as BofA is the Agent hereunder, BofA shall at all such times hold not less than 20% of the Loans and Commitments. ARTICLE X MISCELLANEOUS ------------- 10.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent at the written request of the Majority Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be 59. effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.02); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.02 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.02, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.02; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon 60. delivery; except that notices pursuant to Article II or IX to the Agent shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.04 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (including in its capacity as Agent) within five Business Days after demand (subject to subsection 4.01(e)) for all reasonable costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the development, preparation, delivery, administration, syndication and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank within five Business Days after demand (subject to subsection 4.01(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 10.05 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any 61. and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, with respect to any demand, claim, investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 10.06 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 10.08 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent, which consents shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $10,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the 62. Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $4,000. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 10.08(a)), the Company shall, if requested by the Agent or any Bank, execute and deliver to the Agent new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 10.01. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 3.01, 3.03 and 10.05 (provided that the Participant shall not be entitled to receive any greater payment under Sections 3.01 or 3.03 than the originating Bank would have been entitled to receive with respect to the participation sold to such Participant and the Participant shall not be entitled to indemnification for 63. Attorney Costs of counsel selected solely by and representing the interests only of the Participant) as though it were also a Bank hereunder, and if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.09 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Company and provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process (provided that such Bank shall use its good faith efforts to give the Company notice of such subpoena or other court process); (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party (provided that the such Bank shall use its good faith efforts to provide notice to the Company of such litigation or proceeding); (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to be subject to the provisions of this Section 10.09; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 10.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at 64. any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.11 Automatic Debits of Fees. With respect to any commitment fee, arrangement fee, or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Agent, BofA or the Arranger under the Loan Documents, the Company hereby irrevocably authorizes BofA to debit any deposit account of the Company with BofA in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in BofA's sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off. 10.12 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.14 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.15 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent- Related Persons and the Indemnified Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 65. 10.16 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OREGON OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA OR OREGON, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 10.17 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.18 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the 66. Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in San Francisco, California, by their proper and duly authorized officers as of the day and year first above written. MENTOR GRAPHICS CORPORATION By: GREGORY K. HINCKLEY --------------------------------- Name: Gregory K. Hinckley Title: Chief Financial Officer By: DENNIS WELDON --------------------------------- Name: Dennis Weldon Title: Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: KEVIN MCMAHON --------------------------------- Name: Kevin McMahon Title: Managing Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: KEVIN MCMAHON --------------------------------- Name: Kevin McMahon Title: Managing Director 67. BANQUE NATIONALE DE PARIS By: RAFAEL C. LUMANLAN --------------------------------- Name: Rafael C. Lumanlan Title: Vice President By: CHARLES H. DAY ---------------------------------- Name: Charles H. Day Title: Assistant Vice President FLEET NATIONAL BANK, N.A. By: MATTHEW M. GLAUNINGER ---------------------------------- Name: Matthew M. Glauninger Title: Vice President THE BANK OF NOVA SCOTIA By: DARYL K. HOGGE --------------------------------- Name: Daryl K. Hogge Title: Officer THE FUJI BANK, LIMITED By: KEIICHI OZAWA --------------------------------- Name: Keiichi Ozawa Title: Joint General Manager 68. UNION BANK OF CALIFORNIA, N.A. By: TAI M. PHAM --------------------------------- Name: Tai M. Pham Title: Vice President 69. ANNEX I PRICING GRID
Leverage less than or equal to .90 Leverage greater than .90 EBITDA (x) x less $50MM $75MM x greater x less $50MM $75MM x greater than than than than $50MM less than x less than x $100MM $50MM less than x less than x $100MM less than less than less than less than $75MM $100MM $75MM $100MM Commitment 37.5 32.5 27.5 25.0 45.0 37.5 35.0 30.0 Fee Offshore Rate 150.0 112.5 87.5 62.5 200.0 162.5 125.0 100.0 Loan Spread Base Rate 25.0 0.0 0.0 0.0 75.0 37.5 0.0 0.0 Loan Spread
The Leverage Ratio and EBITDA used to compute the Commitment Fee and the Applicable Margin shall be the Leverage Ratio and EBITDA set forth in the Compliance Certificate most recently delivered by the Company to the Agent pursuant to Section 6.02(b) of the Credit Agreement; changes in the Commitment Fee and the Applicable Margin resulting from a change in the Leverage Ratio or EBITDA shall become effective on the date of delivery by the Company to the Agent of a new Compliance Certificate and accompanying financial statements pursuant to Section 6.02(b). If the Company shall fail to deliver a Compliance Certificate within the number of days after the end of any fiscal quarter or fiscal year as required pursuant to Section 6.02(b) (without giving effect to any grace period), the Commitment Fee and the Applicable Margin from the first day after the date on which such Compliance Certificate was required to be delivered to the Agent until the day on which the Company delivers to the Agent a Compliance Certificate and accompanying financial statements shall conclusively equal the highest Commitment Fee and Applicable Margin set forth above. Notwithstanding the foregoing, during the period from the Closing Date until the earlier of (i) the date of the Agent's receipt of a Compliance Certificate and accompanying financial statements for the fiscal year ending December 31, 1997, and (ii) 100 calendar days after the end of such fiscal year, the Commitment Fee and the Applicable Margin shall be calculated based on the Leverage Ratio and EBITDA set forth in the Compliance Certificate for the fiscal quarter ended September 30, 1997 delivered by the Company to the Agent on the Closing Date pursuant to Section 4.01(h) of the Credit Agreement. 1 ANNEX I SCHEDULE 2.01 COMMITMENTS AND PRO RATA SHARES ------------------------------- Bank Commitment Pro Rata Share - ---- ---------- -------------- Bank of America National Trust $ 25,000,000 25.00000% and Savings Association Banque Nationale de Paris 15,000,000 15.00000% Fleet National Bank, N.A. 15,000,000 15.00000% The Bank of Nova Scotia 15,000,000 15.00000% The Fuji Bank, Limited 15,000,000 15.00000% Union Bank of California, N.A. 15,000,000 15.00000% $100,000,000 100.00000% TOTAL 1 SCHEDULE 2.01 EX-10.H 4 EMPLOYMENT OFFER LETTER Mentor Graphics Corporation 8005 S.W. Boeckman Road Wilsonville, Oregon 97070-777 (503) 685-7000 January 5, 1997 Gregory K. Hinckley 26201 Catharine Court Los Altos Hills, CA 94022 Dear Greg: As a result of our discussions with you, the Mentor Graphics Board is convinced that your background and professional experience would significantly enhance our ability to attain the ambitious goals we have set for our company. We are equally confident that you will find us to offer challenges and responsibilities you will enjoy, along with an environment that will value your contribution. I am pleased to confirm our offer of regular, full-time employment with Mentor Graphics Corporation as Executive Vice President and Chief Operating Officer reporting to me with a pay grade level of E13. Your base starting pay will be $310,000 per year. As a professional (exempt) employee, you will be paid on a salaried basis, with paydays occurring semi-monthly, on the fifteenth and the last business day of each month. You will be participating in our Variable Incentive Pay Plan with a targeted bonus of $186,000, which is 60 percent of your base salary. Actual bonus payment is based primarily on business group and corporate performance. For those employees with less than a full year of service at year's end, the actual bonus payment will be prorated based on hire date. Any bonus earned will be paid during the first quarter of the following year, and you must be employed through December 31st in order to be eligible for payment. More important to your long-term financial future is the opportunity to participate in Mentor Graphics Corporation's stock option program. We will recommend that the Board of Directors grant you an option to purchase 250,000 shares of common stock, vested over a four year period from your date of hire. Shares are reviewed and approved on a monthly basis, as well as the terms of the option, and are subject to approval by the Board of Directors. With your relocation to Mentor Graphics from the Los Altos Hills area to the Portland area, we are offering a relocation package, which includes a relocation bonus of $400,000 less withholding at the supplemental tax rate. This bonus will be paid to you with your first paycheck. It is recognized that an extended period of commuting from your present home to Portland may be required until sometime during the summer of 1997. Normal business travel and living expenses will be provided by Mentor Graphics during that period. The Mentor Graphics Board of Directors may terminate your employment at any time, and you may resign at any time. However, if the Company terminates your employment without cause during the two-year period beginning on your start date, the Company will pay you any base salary Mr. Gregory K. Hinckley January 5, 1997 Page 2 already earned and an additional $496,000 in settlement of any and all claims you may have against the Company. If you voluntarily terminate your employment with the Company during the two-year period beginning on your start date, you will be obligated to repay 50% of the $400,000 relocation bonus. The Company will not have any further obligations to you. In addition, we offer a comprehensive benefit package that includes group insurance, a 401K plan, employee stock purchase, flexible time off, holiday pay and a tuition reimbursement program. Enclosed is our "Benefits Highlights" giving you more detailed information on our benefits. We anxiously await your decision and look forward to you officially joining the Mentor Graphics team. We would appreciate your decision to our offer by January 10, 1997. This offer of employment will lapse at that time. You may accept this offer by signing the endorsement below, returning the original to Staffing, and keeping the enclosed copy for your personal records. Also for your information, Mentor Graphics Corporation has a "no smoking" policy in all of our buildings. Employees wishing to smoke may do so at designated locations outside of our buildings. If you have any questions or need further information, please feel free to call me at (503) 685-1006. Sincerely, WALLY Walden C. Rhines President and CEO WCR/mb Enclosures cc: Corporate Staffing Corporate Records Also enclosed is an "Employment Eligibility Verification (Form I-9)." We are required by the Immigration Reform and Control Act of 1986 to have this form completed and on file prior to placing you on our payroll. Please review the enclosed form and instructions for completion. You will need to bring the appropriate documents mentioned on the Form I-9 on your first day of employment. You will complete this form during your new employee orientation. I accept your offer of employment and agree to sign, on my first day of employment, Mentor Graphics' standard Employment Agreement and complete I-9 verification. GREGORY K. HINCKLEY - ---------------------------------- ----------------------------------------- Signature Start Date 1/10/97 - ---------------------------------- Today's Date EX-21 5 LIST OF SUBSIDIARIES OF THE COMPANY
List of Subsidiaries of the Company - ----------------------------------- The following is a list of Mentor Graphics Corporation operating subsidiaries. Mentor Graphics has no parent companies. Subsidiary Percent Owned Anacad Electrical Engineering Egypt 100% Anacad Electrical Engineering SARL (France) 100% Antares Corporation 100% Exemplar Logic, Inc. 100% Mentor Graphics (Canada) Ltd. 100% Mentor Graphics (Denmark) A/S 100% Mentor Graphics (Finland) OY 100% Mentor Graphics (France) SARL 100% Mentor Graphics (Schweiz) AG Switzerland 100% Mentor Graphics (Singapore) PTE. LTD. 100% Mentor Graphics (Taiwan) Co. Ltd. 100% Mentor Graphics (United Kingdom) Ltd. 100% Mentor Graphics Design S.A. (Spain) SA 100% Mentor Graphics Deutschland (GmBH) 100% Mentor Graphics Israel Ltd. 100% Mentor Graphics Japan Co. Ltd. 100% Mentor Graphics Netherlands BV 100% Mentor Graphics Scandinavia AB 100% Mentor Graphics (India) Pvt. Ltd. 100% Meta Systems S.A. 100% Microtec Research, Inc. 100% Model Technology Inc. 100% Open Networks Engineering, Inc. 100% Precedence Incorporated 100% Seto Software GmbH 100%
EX-23 6 CONSENT OF ACCOUNTANTS CONSENT OF ACCOUNTANTS The Board of Directors Mentor Graphics Corporation: We consent to incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-11291, 33-18259, 2-90577, 33-30036, 2-99251, 33-30774, 33-57147, 33-57149, 33-57151 and 33-64717) and on Form S-3 (Nos. 33-52419, 33-56759, 33-60129, 333-277, 333-2883 and 333-11601) of Mentor Graphics Corporation and subsidiaries of our reports dated February 3, 1998, relating to the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity and related schedule for each of the years in the three-year period ended December 31, 1997, which reports appear in the December 31, 1997 annual report on Form 10-K of Mentor Graphics Corporation and subsidiaries. KPMG PEAT MARWICK LLP Portland, Oregon March 30, 1998 EX-27 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 YEAR YEAR YEAR DEC-31-1995 DEC-31-1996 DEC-31-1997 DEC-31-1995 DEC-31-1996 DEC-31-1997 186,676 165,406 84,402 25,320 31,673 52,658 96,962 108,957 106,010 3,291 3,163 2,426 0 0 0 327,583 338,192 272,339 99,605 102,253 103,452 25,955 21,472 27,516 495,372 513,359 402,302 114,092 137,344 124,148 0 0 0 0 0 0 0 0 0 294,917 297,756 291,263 31,309 21,884 (13,726) 495,372 513,359 402,302 432,517 447,886 454,727 432,517 447,886 454,727 117,204 133,816 159,033 117,204 133,816 159,033 262,759 323,919 332,064 308 1,168 1,220 2,585 2,423 555 59,048 (1,438) (33,051) 8,542 3,540 (1,744) 50,506 (4,978) (31,307) 0 0 0 0 0 0 0 0 0 .79 (.08) (.48) .78 (.08) (.48)
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