-----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, N5gET6GPHQMKcOLGHG3z+OS76SuO3ThRNRw8Uc5lhqT7RHJ5tYh2Jc/X3+HAR36b ybb2IbwVK5Qp6R3bNczItg== 0000950148-96-000911.txt : 19960517 0000950148-96-000911.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950148-96-000911 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUARTERDECK CORP CENTRAL INDEX KEY: 0000707668 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954320650 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19207 FILM NUMBER: 96567634 BUSINESS ADDRESS: STREET 1: 13160 MINDANAO WAY CITY: MARINA DEL REY STATE: CA ZIP: 90292 BUSINESS PHONE: 3103093700 MAIL ADDRESS: STREET 1: 13160 MINDANAO WAY CITY: MARINA DEL RAY STATE: CA ZIP: 90292 FORMER COMPANY: FORMER CONFORMED NAME: QUARTERDECK OFFICE SYSTEMS INC DATE OF NAME CHANGE: 19940510 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________________ FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-19207 QUARTERDECK CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 95-4320650 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA 90292 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 309-3700 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 number of shares of the Registrant's common stock, $.001 par value, outstanding as of April 30, 1996 was 31,502,220 2 QUARTERDECK CORPORATION AND SUBSIDIARIES FORM 10-Q MARCH 31, 1996 INDEX
PART I. FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. FINANCIAL STATEMENTS Consolidated Unaudited Condensed Balance Sheets as of March 31, 1996 and September 30, 1995 3 Consolidated Unaudited Condensed Statements of Operations for the three months and six months ended March 31, 1996 and 1995 4 Consolidated Unaudited Condensed Statements of Cash Flows for the six months ended March 31, 1996 and 1995 5 Notes to Consolidated Unaudited Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 21
2 3 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
MARCH 31, SEPTEMBER 30, 1996 1995 ------------- ----------------- Current assets: Cash and short-term investments $23,816 $39,669 Trade accounts receivable 28,987 13,621 Deferred tax asset 5,389 2,178 Inventories 4,571 2,281 Other current assets 5,542 4,006 ------- ------- Total current assets 68,305 61,755 Note Receivable from Related Party - Building 5,683 469 Equipment and leasehold improvements 11,461 8,335 Capitalized software costs 2,537 2,807 Other assets 8,091 3,333 ----- ----- $96,077 $76,699 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,038 $13,582 Accrued liabilities 14,614 14,973 Current portion of long-term obligations 17 255 Accrued acquisition, restructuring and other charges 4,584 3,455 ------- ------- Total current liabilities 27,253 32,265 6% Convertible notes, due March 31, 2001 25,000 -- Long-term obligations, less current portion 36 164 -- ------- Total liabilities 52,289 32,429 Stockholders' equity: Preferred stock (authorized: 2,000 shares; issued and outstanding: none) - - - - Common stock (authorized: 50,000 shares; issued and outstanding: 31,473 and 31,173 shares) 31 31 Treasury Stock (559) (559) Additional paid-in-capital 45,231 39,993 Retained earnings (Accumulated deficit) (364) 5,359 Foreign currency translation adjustment (551) (554) ------- ------- Total stockholders' equity 43,788 44,270 ------- ------- $96,077 $76,699 ======= =======
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 3 4 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1996 1995 1996 1995 ----- ----- ----- ----- Net revenues $46,713 $30,555 $88,577 $58,211 Cost of revenues 13,143 9,182 24,632 16,888 ------ ----- ------ ------ Gross margin 33,570 21,373 63,945 41,323 Operating expenses: Research and development 5,450 3,342 9,981 6,602 Sales and marketing 16,087 7,045 30,852 13,621 General and administrative 6,061 5,982 11,427 10,867 Acquisition and restructuring 4,707 160 7,259 144 -------- -------- -------- --------- Total operating expenses 32,305 16,529 59,519 31,234 Operating income 1,265 4,844 4,426 10,089 Interest income, net 57 438 411 679 -- --- --- --- Income before income taxes 1,322 5,282 4,837 10,768 Provision for income taxes 194 -- 875 322 --- -- --- --- Net income $ 1,128 $ 5,282 $ 3,962 $10,446 ===== ===== ===== ======= Net income per share $ 0.03 $ 0.17 $ 0.12 $ 0.34 ======= ======= ======= ======= Shares used to compute net income per share 33,760 31,031 34,260 30,728 ====== ====== ====== ====== Additional unaudited pro forma data: Income before income taxes $ 1,322 $ 5,282 $ 4,837 $10,768 Pro forma income taxes 3,332 867 4,264 2,516 ----- --- ----- ----- Pro forma net income (loss) $ (2,010) $ 4,415 $ 573 $ 8,252 ======== ====== ===== ====== Pro forma net income (loss) per share $ (0.06) $ 0.14 $ 0.02 $ 0.27 ========= ======== ======== ======== Shares used to compute pro forma net income (loss) per share 33,760 31,031 34,260 30,728 ======= ======= ======= ======
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements 4 5 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
SIX MONTHS ENDED MARCH 31, 1996 1995 -------- --------- Cash flows from operating activities: Net income $3,962 $10,446 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization of equipment and leasehold improvements 1,732 1,894 Amortization of capitalized software costs 1,816 921 Stock compensation - 42 Elimination of duplicate net income from acquired entities (717) (384) (Decrease) increase in unrealized gain, marketable securities (195) 12 Changes in assets and liabilities, net of acquisitions: Trade accounts receivable (15,341) (2,201) Inventories (1,882) (476) Other current assets (1,536) 239 Deferred tax asset (3,211) (244) Other assets 99 93 Accounts payable (6,559) (5,642) Accrued liabilities 1,926 3,397 Refundable Income Taxes - 5,647 Accrued acquisition, restructuring and other charges 1,129 (454) Foreign currency translation adjustment (3) (62) --- ---- Total adjustments (22,742) 2,782 -------- ----- Net cash (used) provided by operating activities (18,780) 13,228 -------- ------ Cash flows from investing activities: Purchases of marketable securities - (30,025) Sales of marketable securities 34,285 34,217 Proceeds from issuance of Convertible Notes 25,000 - Loan to Related Party for Note Receivable - Building (5,213) - Capital expenditures (4,862) (976) Capitalized software costs (1,554) (190) Cash acquired in acquisitions - 469 Purchases of minority interest of other companies (4,858) -- ------- -- Net cash provided by investing activities 42,798 3,495 ------ ----- Cash flows from financing activities: Principal payments under long-term obligations (244) (141) Dividends to shareholders of acquired entity (7,307) (5,783) Net proceeds from issuance of common stock 1,965 65 ----- -- Net cash used in financing activities (5,586) (5,859) ------- ------- Net increase in cash and cash equivalents 18,432 10,864 Cash and cash equivalents at beginning of period 5,384 6,636 ----- ----- Cash and cash equivalents at end of period $23,816 $17,500 ====== ====== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest 25 8 Income tax 1,372 - Non-cash transaction: Tax benefits arising from exercise of non-qualified stock options 1,100 42
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 5 6 QUARTERDECK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements of Quarterdeck Corporation are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in Quarterdeck's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, and in the Company's Form S-4 and Form 8-K regarding the Company's acquisition of Inset Systems, Inc. ("Inset"), and in the Company's Form S-3 and Form 8-K regarding the Company's acquisition of Datastorm Technologies, Inc. ("Datastorm"). In the opinion of management, the accompanying consolidated unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation. The results of operations for the three and six month periods ended March 31, 1996 are not necessarily indicative of results to be expected for the full fiscal year. 2. GENERAL Quarterdeck Corporation develops, markets and supports computer software products and offers services in four strategic business areas: utilities, communications, Internet solutions and Internet Services. Quarterdeck is a leader in bringing utilities solutions to the Windows 3.x, Windows 95 and DOS environments. The company also offers a line of Internet applications and telecommunications and collaborative computing products for corporate, small business and individual users. The company's diverse customer base includes government, education, corporate, small business and individual users (SOHO). The company has offices in England, France, Germany and Australia, with its European headquarters based in Dublin, Ireland. The Company was incorporated in California in 1982 as Quarterdeck Office Systems. In June 1991, the Company changed its state of incorporation from California to Delaware. In February 1995, the Company changed its name to Quarterdeck Corporation. In September 1995, the Company moved its principal offices to 13160 Mindanao Way, Marina del Rey, California, 90292; its telephone number is (310) 309-3700. Quarterdeck's Internet home page can be located on the World Wide Web at http://www.quarterdeck.com/. Unless the context otherwise indicates, the "Company" and "Quarterdeck" refers to Quarterdeck Corporation, its predecessor and its subsidiaries. 3. RECLASSIFICATIONS In order to conform to evolving financial reporting practices by the software industry, the Company is reporting the amortization of capitalized software and technical support costs as costs of revenues for all periods presented. The Company had previously reported amortization of capitalized software as research and development expense, and technical support costs as sales and marketing expense. Certain other amounts have been reclassified to provide consistent presentation. In combining the financial results of the Company with the results from the acquired entities that were previously Subchapter S Corporations, Datastorm and Landmark, and in compliance with the specific guidelines for pooling of interests accounting, the Undistributed Retained Earnings of these entities have been combined with Quarterdeck's Additional paid-in-capital for all periods presented. 6 7 4. ACQUISITIONS AND STRATEGIC INVESTMENTS On March 28, 1996, Quarterdeck consummated the acquisition of Datastorm, the developer and publisher of Procomm Plus, one of the industry's leading data communications products. Quarterdeck issued 5.2 million shares of common stock in exchange for all of the outstanding stock of Datastorm. The transaction was accounted for as a pooling of interests and therefore, the consolidated financial statements for all periods presented herein have been restated to reflect the combined operations of Quarterdeck and Datastorm. Datastorm had a calendar year end and accordingly, the Datastorm statement of operations for the year ended December 31, 1995 will be restated and combined with the Quarterdeck statement of operations for the fiscal year ended September 30, 1995. In order to conform Datastorm's year end to Quarterdeck's fiscal year end, the consolidated unaudited condensed statement of operations for the six months ended March 31, 1996 includes three months (October, November, December 1995) for Datastorm, which are included in the consolidated statement of operations for the fiscal year ended September 30, 1995. Accordingly an adjustment has been made to Retained earnings during the three months ended March 31, 1996 for the duplication of net income of $771,000 for the three month period ended December 31, 1995. Other results for such three month period of Datastorm include net sales of $9,283,000 and a gross margin of $5,146,000. The consolidated financial statement for the six months ended March 31, 1995 combines Quarterdeck's financial statements for the six months ended March 31, 1995 with Datastorm's financial statements for the six months ended June 30, 1995. Datastorm's S corporation status terminated upon acquisition by Quarterdeck. Datastorm's undistributed earnings at March 31, 1996 and all prior periods have been reclassified to Additional paid-in-capital in the combined financial statements in accordance with pooling of interests accounting. On December 29, 1995, Quarterdeck acquired Inset, a developer of graphics utility and application software for personal computers. Quarterdeck issued 921,218 shares of common stock in exchange for all of the outstanding common stock of Inset. This transaction was also accounted for as a pooling of interests and therefore, the consolidated financial statements for all periods presented herein have been restated to reflect the combined operations of Quarterdeck and Inset. On December 24, 1995, the Company and a Belgian venture capital group, incorporated a new Company, Quarterdeck Flanders N.V. ("QDF"), for the purpose of the development, integration and commercialization of advanced software products utilizing certain advanced speech technologies. These products will be designed to complement the Company's existing and future products. The Company has entered into a five year renewable exclusive license with QDF for publishing its products. QDF has entered into a three year exclusive license with Lernout & Hauspie Speech Products N.V. ("LHSP") covering certain product types and applications. The Company has also made an equity investment in LHSP. LHSP is a developer and licensor of advanced speech technologies. The Company purchased 50.002% of QDF in exchange for an agreement to make a capital contribution of $900,000. The financial position and results of operations, from inception, approximately January 1, 1996, of QDF are wholly immaterial to the attached financial statements and are therefore not included in the financial statements presented herein. On February 7, 1996 the Company acquired, in a private placement of common stock, a less than 5% interest in Infonautics Corporation in exchange for $3,250,000. Infonautics has certain Internet software products that are planned to be integrated with certain Internet products of Quarterdeck. This transaction is accounted for under the cost method of accounting and the investment is included on the Balance sheet in Other Assets and is carried at lower of cost or market. Infonautics consummated an initial public offering of its common stock during May of 1996. Quarterdeck's shares in Infonautics were not registered at that time and therefore remain subject to certain limitations on resale. During the six months ended March 31, 1996, the Company increased its investment in Limbex Corporation. Limbex is responsible for providing much of the intelligent agent search technology that is incorporated into the Company's WebCompass product. This investment is also accounted for under the cost method of accounting. 7 8 5. CONVERTIBLE NOTES On March 28, 1996, the Company issued $25 million principal amount of 6% Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional investor in a private placement pursuant to the terms of a Note Agreement, dated March 1, 1996. The Notes are convertible generally after April 1, 1997, at an initial conversion price of $21.18 per share. The conversion price is adjustable for certain below market equity issuances and the Notes contain other customary anti-dilution provisions. Subject to complying with other certain terms, the Notes may be prepaid without penalty, subject to conversion, anytime between April 1997 and April 1999 if the Company's Common Stock had been trading, for 20 of the 30 trading days preceding notice of prepayment, approximately 18% above the then current conversion price. 6. INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Quarterdeck provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate includes all anticipated federal, state and foreign income taxes. 7. REVENUE RECOGNITION Revenue from the sale of software products is recognized upon shipment, where collection of the resulting receivable is probable and there are no significant obligations remaining. The estimated costs to fulfill technical support obligations to end users arising from the sale of software are accrued upon shipment. Certain limited rights of return and exchange from customers exist as defined by the Company's general distributor agreements. The Company establishes allowances for estimated product returns and exchanges as a reserve against gross revenues. 8. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at March 31, 1996 amounted to $23,816,000. 8 9 9. COMPUTATION OF NET INCOME PER SHARE The income (loss) per common and common equivalent share for the three and six month periods ended March 31, 1996 and 1995 have been computed using the weighted average number of common and common stock equivalents (unless anti-dilutive), shares outstanding for each period are summarized below (000's omitted):
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 1996 1995 1996 1995 ---- ---- ---- ---- Weighted average common stock outstanding during period 31,442 30,437 31,374 30,364 Common stock equivalents of stock options outstanding 2,319 594 2,886 364 ----- --- ----- --- Shares used in net income (loss) per share calculation 33,760 31,031 34,260 30,728 ====== ====== ======= =======
Common stock equivalents consist of outstanding stock options and shares of common stock held in escrow. The weighted average number of shares of common stock outstanding during each of the periods has been adjusted to reflect the issuance of 921,218 shares of common stock issued in connection with the Inset acquisition and to reflect the issuance of 5.2 million shares of common stock issued in connection with the Datastorm acquisition. Primary and fully diluted net income per share are the same amounts for each of the periods presented. 10. ACQUISITION AND RESTRUCTURING CHARGES Acquisition and other similar charges incurred amounted to $4.7 million and $7.3 million, for an after-tax per share cost of $0.12 and $0.17 respectively, for the three and six months ended March 31, 1996. These charges relate primarily to acquisition costs incurred in connection with the acquisitions of Datastorm in March of 1996 and Inset in December 1995. These expenses principally include fees for financial advisory, legal and accounting services, personnel severance and benefits, and other related expenses. The remaining portion of the acquisition and other charges relate to additional restructuring charges and acquisition costs incurred during those periods. Accrued acquisition, restructuring and other charges increased from $3,455,000 at September 30, 1995 to $4,584,000 at March 31, 1996. Payments made against accrued balances during the three and six months ended March 31, 1996 amounted to $2,547,000 and $4,373,000 respectively. Additional accruals for the current quarter were related almost entirely to the Datastorm acquisition and amounted to $4,660,000. Accruals during the first quarter amounted to $1,689,000 and related to the acquisition of Inset. Of the current quarter's expense, $2,147,000 were related to write offs and reserves for duplicate facilities and personnel issues, $1,697,000 were direct acquisition costs, and $863,000 represented the write off of duplicate software products. 9 10 11. BANK CREDIT LINE The Company has an unsecured revolving line of credit from a bank and may borrow the lesser of 80% of Eligible Accounts Receivable or $12 million. The current term of the line of credit matures February 13, 1997. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest, at the Company's option, at either the bank's reference (prime) interest rate or the U.S. offshore rate plus a margin of 1.25% on the first $6 million of borrowings and a margin of 1.50% thereafter. The line is subject to the Company complying with certain customary financial covenants and restrictions, including a prohibition of the payment of dividends, other than those payable solely in capital stock, and a prohibition of any stock repurchase activity. At March 31, 1996 the Company did not have any borrowings outstanding under the line. 12. LEGAL PROCEEDINGS The Company was a defendant in an action initially commenced on June 29, 1995 by Corum Group Ltd. ("Corum"), in King County (Washington) Superior Court against Landmark Research International Corporation ("Landmark"). On July 7, 1995, Corum filed an amended complaint asserting tort and breach of contract claims against the Company and two former shareholders of Landmark. The lawsuit arose out of the Company's acquisition of Landmark on June 30, 1995. Among other things, Corum claims that it acted as a "broker" in the transaction and sought approximately $2,900,000 from Quarterdeck it claims it is owed as a commission with respect to the acquisition. The Company removed the action to U.S. District Court, Western District of Washington and asserted affirmative defenses, counter claims and third-party claims. During the current quarter, the Company settled the case with Corum. The Company's ultimate payment for the settlement approximates the amount previously accrued by the Company, and accordingly had an immaterial effect on the results of operations of the Company. 13. PRO FORMA DATA The consolidated unaudited condensed statements of operations includes a pro forma presentation for an estimate of the amount of income taxes which would have been recorded if Datastorm and Landmark (the entities newly pooled with Quarterdeck) had been C Corporations for all periods presented. 14. NOTE RECEIVABLE FROM RELATED PARTY Prior to being acquired by Quarterdeck, Datastorm loaned to a partnership, whose partners were Datastorm shareholders, funds the partnership used to commence the construction of a new building which is planned to house Datastorm. At March 31, 1996 the partnership still owned the building and the partners are now shareholders and employees or consultants of Quarterdeck. In connection with the acquisition, the Company is obligated to acquire the building from the partnership. The Company plans to complete the acquisition of the building in the near future. It is planned to be acquired in exchange for, among other things, cancellation of the Note receivable. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations focuses primarily on the results of the Company's operations, liquidity, and capital resources. This item should be read in conjunction with the consolidated financial statements, the notes thereto and other information, including information set forth in the Company's Form 10-K for the fiscal year ended September 30, 1995 and in the Company's Forms S-4, S-3 and 8-K regarding the Company's acquisitions of Datastorm and Inset filed with the Securities and Exchange Commission. In addition to an analysis of recent and historical financial results, the Form 10-K includes an analysis of certain of the Company's business risks, including risks which are inherent to software development as well as specific trends and uncertainties relating to the competitive environment in which the Company operates. The Company has sought to identify and disclose the significant risks to its business. However, the Company cannot predict where or to what extent any of such risks may be realized nor can there be any assurance that the Company has identified all possible issues which the Company faces now or may face in the future. In particular, the Company has recently completed a number of acquisitions and made investments in certain companies and plans to make additional acquisitions. Investors should carefully read the Form 10-K together with this Form 10-Q and all other recent filings the Company has made with the Securities and Exchange Commission, and consider all such risks before making an investment decision with respect to the Company's stock In the fast growing internet and communications markets, time to market is key to success. A year ago, the Company outlined its plan for acquisitions and strategic investments for leading technologies and companies. Over the past twelve months, Quarterdeck has executed a number of those acquisitions and investments based on the following key criteria: The acquisition must support Quarterdeck's long-term strategy and will complement or enhance existing business units; each acquisition must contribute to Quarterdeck's earnings per share within a pre-determined time frame; an acquisition must be a good fit; rapid integration of an acquisition helps to ensure that tangible and intangible benefits to existing operations will be recognized; and lastly, each technology investment should be rapidly transformed into products. Over the past twelve months the company made several investments in the internet area, the most significant of these were: Iware Connect - which gives the company the access to the Novell Netware market; StarNine - which gives the company a market-leading position in the Macintosh platform; Limbex - with the Limbex investment, Quarterdeck has acquired leading edge technology in the meta-search area for the internet and intranet. The Company considers the Limbex investment as one of its most strategic and will continue to invest in search technologies. Quarterdeck's acquisition of Prospero Systems and investments in Lernout & Hauspie and Intelligence at Large gave the company two important modules for its communications platform, Global Chat and WebTalk. With the acquisition of DataStorm and the intended acquisition of Future Labs, Quarterdeck has strongly enhanced its communications platform. Further planned investments in video and remote control will give Quarterdeck a complete solution for the various marketplaces. On March 28, 1996, Quarterdeck consummated the acquisition of Datastorm, the developer and publisher of Procomm Plus, the industry's leading data communications package. Quarterdeck issued 5.2 million shares of common stock in exchange for all of the outstanding stock of Datastorm. The transaction was accounted for as a pooling of interests and therefore, the consolidated financial statements for all periods presented herein have been restated to reflect the combined operations of Quarterdeck and Datastorm. RESULTS OF OPERATIONS Net Revenues: Net revenues for the three and six months ended March 31, 1996 increased by $16,158,000 or 52.9% and $30,366,000 or 52.2%, respectively, in relation to the comparative periods of the prior year. The increase in net revenues compared with the prior year period results primarily from an increasingly diversified product portfolio resulting from internal product development and the sales increases of acquired products. The Company has also broadened its distribution capabilities through expansion of its distribution network and acquisition of a direct sales organization. 11 12 During the March 1996 quarter, Datastorm released Procomm Plus for Windows 3.0 which runs on Windows 95 and 3.1. It includes an integrated FAX package, a Winsock-compliant TCP/IP stack, and a complete set of graphical applications for accessing the Internet, including a Web browser, telnet, FTP, and a news and mail reader. This particular release met with great success however, sales of this product are not expected to continue at the same rate. The Company also released a new utility program, SpeedyROM, to be used in conjunction with the growing number of CD-ROM drives. Sales of QEMM, the flagship memory management product, continued strong for the quarter as well. In anticipation of the acquisition of Datastorm, the Company made certain decisions with respect to the timing of product shipments during the latter part of the March quarter. As a consequence, releases of new Quarterdeck products and versions, e.g. WebCompass Pro, as well as shipments of existing products, were postponed. These actions adversely effected the Net revenues and the Gross margin of Quarterdeck, but were more than offset by the success of Datastorm's Procomm release. During the December 1995 quarter, the Company released a new version of QEMM, version 8.0, which adds new memory and reporting utilities for Windows 95, Windows 3.x and DOS. The Company also released several new important products in the Internet market, including WebCompass, a meta-search tool for the Internet; WebTalk, which enables real-time voice conversations over the Internet; WebStar 95/NT, a 32-bit version of Quarterdeck's Web server; WebAuthor 2.0, a new version of Quarterdeck's Internet authoring tool, and for the Macintosh, the WebSTAR SSL/Security Toolkit. The Company also released several new products during fiscal 1995 including a complete line of products for use on the Internet and private distributed data networks, and new utility products which include MagnaRAM 2, CleanSweep 95, WINProbe 4, HiJaak 95, and GameRunner. Net revenues from European and other international distributors, dealers and end-users outside of the United States for the three and six months ended March 31, 1996 amounted to $9,336,000 and $16,537,000, representing 20.0% and 18.7% of the Company's net revenues. Comparative amounts from the prior year three and six month periods were $3,850,000 and $6,645,000 or 12.6% and 11.4% of net revenues. The quarter to quarter growth and increases as compared to prior periods illustrate a present trend toward increased business from outside the US in both absolute terms and as a percentage of its total revenue. There can be no assurance that this trend will continue, or that foreign operations and sales will continue to be successful. However, it is management's present belief that growth in the industry is a worldwide phenomenon and that the Company should make attempts to position itself to generate sales in both foreign and domestic markets. Due to the inherent uncertainties in software development and in the microcomputer software industry, the Company is unable to predict whether the net revenue trends noted above will continue. Cost of Revenues: The Company's cost of revenues includes product packaging, documentation and diskettes, manufacturing expenses, amortization of capitalized software costs, technical support costs as well as translation costs and royalties paid to third parties. The cost of revenues as a percentage of net revenues improved to 28.1% for the three month period ended March 31, 1996 compared to 30.2% for the three month period ended March 31, 1995. Similar improvement is shown by the six month comparative figures which improved to 27.8% for the six month period ended March 31, 1996 compared to 29.2% for the six month period ended March 31, 1995 This improvement results principally from higher revenues over which to spread indirect costs of revenues, including production and technical support costs. In order to conform to evolving financial reporting practices by the software industry, the Company is reporting the amortization of capitalized software and technical support costs as costs of revenues for all periods presented. Such costs were previously classified as research and development and sales and marketing expenses, respectively. 12 13 Capitalized software development and purchased software costs are amortized over a period of one to three years, commencing upon initial product release. Fluctuations in amortization expense between periods may arise depending on the amount of software costs incurred and capitalized for particular software products and their respective release dates and amortization periods. Amortization of capitalized software costs increased from $419,000 for the three month period ended March 31, 1995 to $685,000 for the three month period ended March 31, 1996. This expense also increased for the six months ended March 31, 1996 to $1,095,000 from $921,000 for the comparative period of the prior year. The increase in amortization of software development costs is consistent with the growth of revenues and product offerings by the Company. Future cost of revenues as a percentage of net revenues will depend, in addition to the amount of amortization of capitalized software, on total sales, the mix of sales by product, by domestic versus international, and by single unit versus multiple license packages, among other things. The microcomputer software industry has experienced increased price competition in recent years. The Company anticipates that increased price competition will continue in the future and may result in reduced margins. Research and Development: Research and development expenses consist primarily of salaries and benefits and consulting fees to support product development, including product testing and documentation. Research and development expense for the three months ended March 31, 1996 increased to $5,450,000 from $3,342,000 for the comparable period of the prior year. For the six month periods these expenses also increased to $9,981,000 from $6,602,000. However, as a percentage of net revenue, these expenses remained constant for the comparative six month periods ended March 31. The proportionate dollar increase in research and development expense is due to increased research and development staffing levels and to increases in payments to third parties for contracted product development required to support the Company's expanding internet product development efforts. The Company capitalized $697,000 of purchased software costs during the three months ended March 31, 1996. The Company did not capitalize any internal software development costs, since the majority of development efforts incurred during the periods related to new products for which technological feasibility had not yet been established. The Company believes that to remain competitive it is necessary to continue to invest in software development efforts while at the same time considering the acquisition of complementary software products. The Company anticipates that spending for software development and purchased software will increase in the future. However, because of the inherent uncertainties of software development projects and the software market in general, there can be no assurance that increased software development efforts or additional purchased software will result in successful product introductions or increased sales. Sales and Marketing, and General and Administrative: Sales and marketing, and general and administrative expenses consist of salaries and commissions and related costs of administrative, sales and marketing, and customer service personnel as well as advertising, trade show and promotional expenses and facilities costs. For the three and six months ended March 31, 1996, Sales and marketing expenses increased by $9,042,000 and $17,231,000 respectively over comparable periods of the prior year, while increasing as a percentage of net revenues from 23.1% to 34.4% and from 23.4% to 34.8% for the three and six months ended March 31, 1996, respectively. These increases reflect management's commitment to support growth and increase market share of key products as well as marketing programs designed to increase and stimulate demand. Expenditures were also incurred for the expansion of the Company's direct sales organization. While Quarterdeck believes substantial sales and marketing efforts are essential to successfully introduce new products, to achieve revenue growth and to maintain and enhance the Company's competitive position, it is management's intention to reduce these costs as a percentage of net revenue. However, as a result of the continued expansion of its product lines and international and direct sales operations, as well as the introduction of new and upgraded products, Quarterdeck does expect the expenses associated with these efforts to continue to constitute its most significant operating expense. There can be no assurance that these increased sales and marketing efforts will be successful or that management will be successful in effectively reducing these costs as a percentage of net revenue. 13 14 For the three and six months ended March 31, 1996, General and administrative expenses increased by $79,000 and $560,000 respectively over the comparative periods of the prior year, while significantly decreasing as a percentage of net revenues from 19.6% to 13% for the three months ended, and from 18.7% to 12.9% for the six months ended March 31, 1995 and 1996, respectively. Acquisition, Restructuring, and Other Charges: These charges incurred amounted to $4.7 million and $7.3 million, for an after-tax per share cost of $0.12 and $0.17 respectively, for the three and six months ended March 31, 1996. These charges relate primarily to acquisition and subsequent restructuring costs. Such restructuring costs were incurred in order to take advantage of economies of scale, eliminate redundant functions and reduce overall operating costs in connection with the acquisitions of Datastorm in March 1996, and Inset in December 1995. Acquisition expenses include fees for financial advisory, legal and accounting services, and other related expenses. Income Taxes: The Company's estimated current effective tax rate of 15% reflects the additional deferred tax assets and lower tax rates on certain foreign earnings. Prior to March 31, 1996, Datastorm, which was acquired during the current quarter, was an S corporation whereby the income tax effects of Datastorm's activities accrued directly to its shareholders. Similarly, the income tax effects of Landmark's activities accrued to it's shareholders prior to it having been acquired by Quarterdeck in June of 1995. At September 30, 1995, the Company had a net deferred tax asset of $2,178,000, net of a valuation allowance of $3,336,000. This net deferred tax asset is comprised of the estimated tax effect of expected future reversing temporary differences, relating in part to charges taken for book purposes that are not deductible for federal income tax purposes until the amounts are paid in the future, net of the valuation allowance. Management believes that it is more likely than not that the Company will realize benefit of the net deferred tax asset. Further reduction of the valuation allowance is dependent on a number of factors including the timing of reversal of the temporary differences, and an assessment of the future realization of the deferred tax assets. Net Income: Net income for the three and six months ended March 31, 1996 decreased to $1,128,000 or $0.03 per share and $3,962,000 or $0.12 per share from $5,282,000 or $0.17 per share and $10,446,000 or $0.34 per share, respectively as compared to the comparable periods of the prior year. As noted above, the Company incurred $4.7 million and $7.3 million in acquisition and related charges during the fiscal 1996 periods. Net income per share before such charges would have been $0.15 and $0.29 for the 1996 periods presented. Trends and Uncertainties: The computer software industry is subject to rapid technological changes often evidenced by new competing products and improvements in existing products. Quarterdeck depends on the successful development or acquisition and resulting sales of new products, including upgrades of existing products, to replace revenues from products introduced in prior periods that may have begun to experience reduced revenues. If Quarterdeck's current leading products become outdated and lose market share faster than those revenues are replaced by new products, or if new products or existing product upgrades are not introduced when planned or do not achieve the revenues anticipated by Quarterdeck, Quarterdeck's operating results could be materially adversely affected. Even with normal development cycles, the market environment can change so quickly that features in products can become outdated soon after market introduction. These events may occur in the future and may have an adverse effect on future revenues and operating results. With the introduction of Windows 95, the software market is experiencing a shift to this new platform. As application programs and device drivers are developed to take advantage of this 32-bit operating environment, they are expected to lack certain of the memory limitations inherent in DOS and Windows 3.x and in DOS-based applications. Quarterdeck is focusing its development efforts on the Windows 95 and Windows NT platforms, while continuing to support Windows 3.x and DOS platforms. In September 1995, Quarterdeck released several new utility products for Windows 95, including memory compression (MagnaRAM), diagnostics (WINProbe) and disk management (CleanSweep). QEMM, Quarterdeck's leading memory management product, has been upgraded to version 8.0; QEMM 8.0 enhancements include new memory solutions for Windows 3.x and Windows 95, as well as continued support for DOS systems. It is Quarterdeck's expectation that memory management products will continue to be needed on Windows 95, but that memory management has experienced a shift from 16-bit DOS device driver management (older versions of QEMM) to complex solutions such as memory compression and better use of virtual memory (QEMM 8.0). 14 15 Quarterdeck is devoting substantial efforts to the development of software products that are designed to operate on Microsoft's Windows 95 and Windows NT. Microsoft may incorporate advanced utilities or other features in Windows 95 or Windows NT that may decrease the demand for certain of the Company's products, including those under development. If Quarterdeck is not able to continue to successfully, and timely develop and market products that function under Windows 95 and Windows NT, and offer value to Windows 95 and Windows NT users, future revenues would be adversely affected. Future competitive product releases may cause disruptions in orders for the Company's products while users and the marketplace evaluate the competitive products. The extent of the disruption in orders and the impact on future orders of the Company's products will depend on various factors that are not fully known at this time. Among those factors are the level of functionality, performance and features included in the final release of competitive products and the market's evaluation of those products as compared to the then current functionality, performance and features of the Company's products. The Company's Internet-related products compete with Internet access, creation and server tools from a variety of companies, including Netscape Communications Corporation and other connectivity, networking and Internet software application developers, Internet access providers and other on-line service providers, as well as operating system vendors, including Microsoft and IBM. The original Mosaic browser developed by the National Center for Supercomputing Applications is available for download in electronic format for free from the Internet. Certain competitors have also made versions of their Internet access, creation and server products available on the Internet for users to download at no charge or for extended evaluation. In addition, the market for Internet products may be adversely impacted to the extent that vendors of PC hardware or PC operating systems incorporate Internet tools, functions or capabilities within their operating systems or PC hardware and thereby reduce the market for stand-alone Internet products. Quarterdeck is dedicating substantial efforts on products and services for the telecommunications and collaborative computing and Internet markets and expects that a significant portion of future revenues will come from these products and services. The revenues from such new products and services may be less than Quarterdeck anticipates due to various factors including the timing of release in relation to competitive products and services, and uncertainties surrounding the rate and extent of development of these new and emerging markets. Quarterdeck's Internet-related products and services are dependent on the viability and continued growth of the Internet, and its expanded use by businesses and individuals for networking and communications. There are currently few laws or regulations directly applicable to access or to commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. Such laws and regulations may cover issues such as user privacy, pricing and characteristics and quality of products and services. The Telecommunications Act of 1996 (the "1996 Act"), which was recently enacted and the judicial interpretation of which is uncertain, imposes criminal penalties for transmission of or allowing access to certain obscene communications over the Internet and other computer services and contains additional provisions intended to protect minors. In addition, America's Carriers Telecommunication Association ("ACTA") recently filed a Petition for Declaratory Ruling Special Relief, and Institution of Rulemaking (the "ACTA Petition") before the Federal Communications Commission ("FCC"), arguing that the FCC has authority to regulate the Internet and, as such, should regulate, as they do the telecommunications carriers, providers of computer software products (such as the Company) which enable voice transmission over the Internet. The ACTA Petition requests the FCC to declare its authority over interstate and international telecommunications services using the Internet, to order providers of the aforementioned software to cease the sale of such software pending a rulemaking, and to institute a rulemaking body to govern the use of the Internet as a means for providing telecommunications services. The enactment of the 1996 Act, and of any similar laws or regulations in the future, may decrease the growth or use of the Internet, which could in turn decrease the demand for the Company's services and products and increase the Company's cost of doing business or otherwise have an adverse effect on the Company's business, operating results and financial condition. 15 16 While the acquisition of Datastorm, Inset, and other acquisitions previously completed during fiscal 1995 have broadened the Company's product portfolio and sales distribution channels, the acquisitions have resulted in the Company competing with other companies and in markets where it has not previously competed. The Company has also made investments in certain companies, and anticipates that it may make additional synergistic acquisitions and investments in the future. There are significant business risks associated with acquisitions, including the successful combination of the companies in an efficient and timely manner, the coordination of research and development and sales efforts, the retention of key personnel, diversion of management's attention away from day-to-day matters and the integration of the acquired products. Additionally, there may be an adverse impact on revenues of acquired companies due to the transition of products' sales and marketing and research and development activities. The Company's success will depend, in part, on its ability to integrate the operations of acquired companies and effectively utilize the acquired intellectual property. The Company's distributor and reseller customers also carry the products of Microsoft and other of the Company's competitors, many of whom have substantially greater financial resources than the Company. The distributors and resellers have limited capital to invest in inventory and their decisions to purchase the Company's products and in the case of resellers, to give them critical shelf space, is partly a function of pricing, terms and special promotions offered by the Company's competitors, over which the Company has no control and which it cannot predict. The Company's pattern of revenues and earnings may be affected by the phenomenon known as "channel fill." Channel fill occurs following the introduction of a new product or a new version of products as distributors buy significant quantities of the new product or version in anticipation of sales of such product or version. Following such purchases, the rate of distributors' purchases often declines, depending on the rates of purchases by end users or "sell-through." The phenomenon of "channel fill" may also occur in anticipation of price increases or in response to sales promotions or incentives, some of which may be designed to encourage customers to accelerate purchases that might otherwise occur in later periods. Channels may also become filled simply because the distributors are unable to, or do not, sell their inventories to retail distribution or end users as anticipated. If sell-through does not occur at a sufficient rate, distributors will delay purchases or cancel orders in later periods or return prior purchases in order to reduce their inventories. Consequently, there can be no assurance that existing inventories will not adversely impact the sales of future periods. In addition, between the date the Company 16 17 announces a new version or new product and the date of release, distributors, dealers and end users often delay purchases, cancel orders or return products in anticipation of the availability of the new version or new product. Such order delays or cancellations can cause material fluctuations in revenues from one quarter to the next. Net revenues may be materially affected favorably or adversely by these effects. The Company operates with relatively little order backlog; therefore, if near-term demand for the Company's products weaken in a given quarter, there could be a material adverse effect on revenues and on the Company's operating results. Like other manufacturers of packaged software products, Quarterdeck is exposed to the risk of product returns from distributors and reseller customers. Although Quarterdeck believes that it provides adequate allowances for returns, there can be no assurance that actual returns in excess of recorded allowances will not result in a material adverse effect on business, operating results and financial condition. FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE The Company has in the past experienced wide fluctuations in its operating results and stock price, and the Company's future operating results and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and quarterly operating results may experience significant fluctuations and be unpredictable as the result of a number of factors including, among others, introduction of new or enhanced products by the Company or its competitors, rapid technological changes in the Company's markets, seasonality of revenues, changes in operating expenses and general economic conditions. Any shortfalls in revenues or quarterly results could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Net income per share is calculated using the treasury stock method (see Note 9 of Notes to Consolidated Unaudited Financial Statements). Increases in the price of Quarterdeck's stock can have an adverse impact on the calculation of net income per share in that period as more outstanding instruments are included as common shares outstanding. As a result of the foregoing factors and other factors that may arise in the future, the market price of the Company's common stock may be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, Quarterdeck's cash and cash equivalents totaled $23,816,000 as compared to cash and cash equivalents of $5,384,000 and short term investments of $34,285,000 at September 30, 1995. During the six months ended March 31, 1996 the Company's total cash and short term investments has declined by $15,853,000, while the cash and cash equivalents balance has increased by $18,432,000. The decrease in cash and short-term investment balances result primarily from approximately $4.9 million of investments made by the Company in strategic technologies, including the stock of certain companies possessing such technology, payments of approximately $4.4 million of acquisition and restructuring charges, and $10.1 million in capital investments, including $5.2 million for the construction of a new facility in Columbia, Missouri, that will house Datastorm. The building is not yet complete and the amount invested appears on the accompanying Balance Sheets as Note receivable from Related Party - see Note 14. The completion of the facility requires an additional investment of cash from the Company. However, management is presently exploring the potential of a sale-leaseback transaction and other financing options. There can be no assurance that the Company will be successful in obtaining such financing with acceptable terms and conditions. During the six months ended March 31, 1996, Datastorm paid out $7.3 million in dividends to its shareholders prior to their acquisition by Quarterdeck. This payment represents a large component of the decrease in Cash and short term investments of the resulting combined Company. As a result of the growth of the Company, changes in net operating assets consumed $22.7 million. The largest component of which was the increase in Accounts receivable. At March 31, 1996, Accounts receivable totaled $28,987,000, compared to $13,621,000 at September 30, 1995, an increase of $15.4 million. Accounts receivable balances at March 31, 1996 reflect the increased net revenues and the release of certain significant new products during the current period. The Company is also continuing to expand its distribution channels into mass 17 18 merchants and warehouse clubs which require longer credit terms. As a result, a large portion of the revenues from new products released during the quarter were shipped under terms not due by March 31, 1996. Working capital at March 31, 1996 amounted to $41,052,000, an increase of $11,562,000, as compared to $29,490,000 at September 30, 1995. On March 28, 1996, the Company issued $25.0 million principal amount of 6% Convertible Senior Subordinated Notes, due 2001, to a single institutional investor in a private placement pursuant to the terms of a Note Agreement, dated March 1, 1996 (the "Note Agreement"). The Notes are convertible generally after April 1, 1997, at an initial conversion price of $21.18 per share. The conversion price is adjustable for certain below market equity issuances and the Notes contain other customary anti-dilution provisions. The Notes may be prepaid without penalty, subject to conversion, anytime between April 1997 and April 1999 if the Company's Common Stock had been trading, for 20 of the 30 trading days preceding notice of prepayment, approximately 18% above the then current conversion price. The Company has an unsecured revolving line of credit (the "Credit Facility") from a bank and may borrow the lesser of 80% of Eligible Accounts Receivable or $12 million. The current term of the line of credit matures February 13, 1997. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest, at the Company's option, at either the bank's reference (prime) interest rate or the U.S. offshore rate plus a margin of 1.25% on the first $6 million of borrowings and a margin of 1.50% thereafter. The line is subject to the Company complying with certain customary financial covenants and restrictions, including a prohibition of the payment of dividends, other than those payable solely in capital stock, and a prohibition of any stock repurchase activity. At March 31, 1996 the Company did not have any borrowings outstanding under the line. The Company believes existing cash and short-term investments, plus funds provided by operations and borrowing capacity under the line of credit, will be sufficient to fund operations for the balance of the year. The Company's capital requirements are dependent on management's plans regarding the levels and timing of additional acquisitions or investments. The Company may require additional capital in connection with the potential acquisition of or investment in additional companies and software product rights in the future. However, there is no guarantee that such additional financing will be available, or if available, will be available on acceptable terms. Any decision to obtain financing through debt or through equity investment will depend on various factors, including, among others, financial market conditions, strategic acquisition and investment opportunities, and developments in the Company's markets. The sale of additional equity securities or future conversion of any convertible debt would result in additional dilution to the Company's stockholders. The Company conducts business in various foreign currencies and is therefore subject to the transaction exposures that arise from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the date that they are consummated. The Company is also subject to certain exposures arising from the translation and consolidation of the financial results of its foreign subsidiaries. The Company utilizes operational hedging to the extent possible to mitigate the Company's transaction exposures. The Company has also hedged residual transaction exposures through the use of forward foreign exchange contracts. However, there can be no assurance that actions taken to manage such exposures will continue to be successful or that future changes in currency exchange rates will not have a material impact on the Company's future operating results. The Company does not hedge either its translation risk or its economic risk. 18 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company was a defendant in an action initially commenced on June 29, 1995 by Corum Group Ltd. ("Corum"), in King County (Washington) Superior Court against Landmark Research International Corporation ("Landmark"). On July 7, 1995, Corum filed an amended complaint asserting tort and breach of contract claims against the Company and two former shareholders of Landmark. The lawsuit arose out of the Company's acquisition of Landmark on June 30, 1995. Among other things, Corum claims that it acted as a "broker" in the transaction and sought approximately $2,900,000 from Quarterdeck it claims it is owed as a commission with respect to the acquisition. The Company removed the action to U.S. District Court, Western District of Washington and asserted affirmative defenses, counter-claims and third-party claims. During the current quarter, the Company settled the case with Corum. The Company's ultimate payment for the settlement approximates the amount previously accrued by the Company, and accordingly had an immaterial effect on the results of operations. The Company is a defendant in various other pending claims and lawsuits consistent with the industry. Management believes that the disposition of such matters will not have a material adverse impact on the results of operations or financial position of the Company. ITEM 2. CHANGES IN SECURITIES The Credit Facility and the Note Agreement both contain prohibitions from the payment of cash dividends by the Company. See notes 5 and 11 to the accompanying Condensed Consolidated Unaudited Financial Statements. The Company's prior and present intention was to retain any earnings to finance the operations, growth and possible additional acquisitions. As noted in Item 4, proposal two below, the Company's Certificate of Incorporation was amended during the current quarter to increase the number of shares of Common Stock authorized for issuance by the Company from 30,000,000 to 50,000,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on February 2, 1996, four proposals were submitted to the Company's stockholders. A brief description of those proposals and the results of the voting are as follows: Proposal One - Election of Director for a three year term.
Nominee Votes For Votes Withheld ------- --------- -------------- Frank W. T. LaHaye 21,575,438 347,151
Dr. Howard L. Morgan, King R. Lee, and Gaston Bastiaens continued their respective terms of office as directors. Proposal Two- Approval of amendment to the Company's Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance by the Company from 30,000,000 to 50,000,000.
Voting Results -------------- For 20,892,130 Against 409,266 Abstain 46,288 Broker Non Vote 574,905
19 20 Proposal Three - Approval of an amendment to the Company's 1990 Stock Plan to increase the number of shares of stock authorized for issuance thereunder from 3,000,000 to 6,000,000.
Voting Results -------------- For 10,311,998 Against 4,625,746 Abstain 48,304 Broker Non Vote 6,936,541
Proposal Four - Ratification of appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending September 30, 1996.
Voting Results -------------- For 21,810,109 Against 50,178 Abstain 62,302 Broker Non Vote 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) Exhibits: Previously filed on April 12, 1996 with the Securities and Exchange Commission as Exhibits to the Form 8-K with respect to the Company's acquisition of Datastorm Technologies, Inc, and incorporated herein by this reference. 99.1 Agreement and Plan of Reorganization among Quarterdeck Corporation, DTI Acquisition Corporation, Datastorm Technologies, Inc. and the shareholders of Datastorm Technologies, Inc. listed on the execution pages thereto, dated as of March 28, 1996. 99.2 Escrow Agreement among Quarterdeck Corporation, American Stock Transfer and Trust Company, as Escrow Agent, DTI Acquisition Corporation and the shareholders of Datastorm Technologies, Inc. listed on the execution pages thereto, dated as of March 28, 1996. 99.3 Registration Rights Agreement among Quarterdeck Corporation and the shareholders of Datastorm Technologies, Inc. listed on the execution pages thereto, dated as of March 28, 1996. 99.4 Note Agreement between Quarterdeck Corporation and The Northwestern Mutual Life Insurance Company, dated as of March 28, 1996. (a)(2) Exhibits accompanying this filing: 99.8 Credit Agreement dated as of February 14, 1996 between Quarterdeck Corporation and Bank of America N.T. & S.A., together with the First Amendment to the Credit Agreement dated as of March 28, 1996. (b) Reports on Form 8-K: A Form 8-K with respect to the Company's acquisition of Datastorm Technologies, Inc. was filed with the Securities and Exchange Commission on April 12, 1996. A Form 8-K with respect to the Company's acquisition of Inset Systems Inc. was filed with the Securities and Exchange Commission on January 16, 1996. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUARTERDECK CORPORATION (REGISTRANT) Date: May 13, 1996 \s\ Gaston Bastiaens -------------------- Gaston Bastiaens President and Chief Executive Officer Date: May 13, 1996 \s\ Frank Greico ---------------- Frank Greico Sr. Vice President and Chief Financial Officer
21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEET AND THE CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY THIS REFERENCE TO SUCH FINANCIAL STATEMENTS, INCLUDING THE ACCOMPANYING FOOTNOTES. 0000707668 QUARTERDECK CORPORATION 1,000 6-MOS SEP-30-1996 OCT-01-1995 MAR-31-1996 23,816 0 28,987 0 4,571 68,305 11,461 0 96,077 27,253 25,036 0 0 31 43,757 96,077 88,577 88,577 24,632 24,632 59,519 0 (411) 4,837 875 3,962 0 0 0 3,962 0.12 0.12
EX-99.8 3 CREDIT AGREEMENT DATED 2/14/96 W/ 1ST AMEND. 1 CREDIT AGREEMENT DATED AS OF FEBRUARY 14, 1996 BETWEEN QUARTERDECK CORPORATION AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION 1 2 TABLE OF CONTENTS
Section Page ARTICLE I Definitions and Financial Requirements. . . . . . . . . . . . . . . . . . . . 1 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Financial Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE II The Credit Facilities . . . . . . . . . . . . . . . . . . . . . . . . 9 2.01 The Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.02 Dollar Advances Under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.03 Commercial Letters of Credit under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.04 Standby Letters of Credit Under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.05 Local Currency Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.06 Mandatory Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.07 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.08 Voluntary Termination or Reduction of Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.09 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2 3 ARTICLE III Extensions of Credit, Payments and Interest Calculations . . . . . . . . . . . . . . . 14 3.01 Requests for Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.02 Disbursements and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.03 Branch Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.04 Evidence of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.05 Interest Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.06 Late Payments; Compounding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.07 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.08 Taxes and Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.09 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.10 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.11 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.12 Inability to Determine Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.13 Certificate of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.14 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV Conditions to Availability of Credit . . . . . . . . . . . . . . . . . . . . 19 4.01 Conditions to First Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.02 Conditions to Each Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE V Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . 21 5.01 Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.02 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.03 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.04 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.05 Permits, Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.07 No Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.08 Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.09 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.10 Information Submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.11 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.12 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.14 Swap Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE VI Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . 24 6.01 Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.02 Financial and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.03 Books, Records, Audits and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.04 Use of Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.05 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.06 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.07 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3 4 6.08 Existence and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE VII Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.02 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.03 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.04 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.05 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.06 Liquidations and Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.07 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.08 Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.09 Regulations G, T, U, and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.10 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.12 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.13 Total Liabilities to Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.14 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.15 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VIII Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 31 8.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (a) Failure to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (b) Breach of Representation or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (c) Specific Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (d) Other Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (e) Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (f) Failure to Pay Debts; Voluntary Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (g) Involuntary Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (h) Default of Other Financial Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (i) Invalidity of Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (j) Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (k) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (l) Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE IX Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.01 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.02 Consents and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.03 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.04 Costs and Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.05 Integration; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.06 Borrower's Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.07 Participations; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.08 General Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.09 Arbitration; Reference Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4 5 9.11 Headings; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 9.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 9.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 9.14 Use of Proceeds - Ineligible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Exhibits Exhibit A Form of Borrowing Base Certificate Exhibit B Form of Compliance Certificate Exhibit C Form of Opinion of Counsel to the Borrower Schedules Schedule 5.06 Existing Litigation Schedule 7.01 Indebtedness as of the Closing Date Schedule 7.02 Liens as of the Closing Date Schedule 7.05 Investments as of the Closing Date
5 6 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is entered into as of February 14, 1996, between QUARTERDECK CORPORATION, a Delaware corporation (the "Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). In consideration of the mutual covenants and agreements contained herein, the Borrower and the Bank agree as follows: ARTICLE I DEFINITIONS AND FINANCIAL REQUIREMENTS. 1.01 Definitions. The following terms (including plural and singular versions thereof) have the meanings indicated: "Acceptable Subsidiary": Quarterdeck Ireland or any other Subsidiary of the Borrower acceptable to the Bank in its sole discretion; provided that Quarterdeck Ireland or such Subsidiary (a) is specified as a "Borrower" on a continuing guaranty executed by the Borrower in form and substance satisfactory to the Bank, and (b) has executed such credit and related documentation with and in favor of the Bank as the Bank may request. "Account": any right to the payment of money owned by the Borrower or a Subsidiary and arising out of the sale of goods (including software) or the rendering of services by the Borrower or such Subsidiary. "Account Debtor": any Person who is or who may become obligated under or on account of an Account. "Advance": an advance hereunder. "Applicable Margin": (a) at any time when the aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Local Currency Advances and (iii) the L/C Outstanding Amount of all letters of credit is less than or equal to 50% of the Credit Limit, 1.25% per annum, and (b) at any time when the aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Local Currency Advances and (iii) the L/C Outstanding Amount of all letters of credit is greater than 50% of the Credit Limit, 1.50% per annum; provided, that the rate set forth in this clause (b) shall apply only to that portion of the Advances and the outstanding undrawn amount of any standby letters of credit which are in excess of 50% of the Credit Limit; and provided, further, 6 7 that the sums outstanding under the Quarterdeck Ireland Loan shall be deemed to have been the sums first advanced hereunder. "Availability Period": the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) February 13, 1997, and (b) the date on which the Bank's commitment to extend credit hereunder terminates. "Borrowing Base": as of any date of determination thereof, an amount equal to 80% of the value of all Eligible Accounts (net of all bad debt or similar reserves applicable thereto) outstanding at such date. "Borrowing Base Certificate": a certificate duly executed by the chief financial officer or controller of the Borrower, substantially in the form of Exhibit A. "Business Day": any day other than a Saturday, a Sunday, or other day on which commercial banks in San Francisco, California, are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Advance, means such a day on which dealings are carried on in the applicable offshore interbank market. "Closing Date": the date on which all conditions to the initial extension of credit hereunder are satisfied. "Code": the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "Compliance Certificate": a certificate substantially in the form of Exhibit B. "Credit Documents": collectively, this Agreement and each other agreement, documents and instrument now or hereafter delivered to the Bank (including any Offshore Credit Provider) in connection with the credits established herein and the transactions contemplated hereby. "Credit Limit": the amount $12,000,000 or the Equivalent Amount thereof, as the same may be reduced pursuant to Section 2.08. "Default": any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars", "dollars" and "$": each, lawful money of the United States. 7 8 "Dollar Advances": specified in subsection 2.01(b). "Eligible Account": at the time of any determination thereof, any Account of the Borrower or any Subsidiary as to which each of the following requirements has been met to the satisfaction of the Bank: (a) The Borrower or such Subsidiary has lawful and absolute title to such Account and such Account is, in the Borrower's reasonable judgment, collectible in the ordinary course of business; (b) Such Account is not subject to a bona fide dispute, setoff, counterclaim or other claim or defense on the part of any Person (including the Account Debtor of the Account) denying liability under such Account; (c) Such Account is not subject to any lien, encumbrance, security interest or similar charge in favor of any Person; (d) Such Account is a bona fide Account (which with respect to an Account arising from a sale of goods, was created as a result of a sale on an absolute basis and not on consignment, approval, or sale-and-return basis, it being understood that (i) Accounts subject to "re-balancing", i.e. where the Account Debtor has the right to return certain products in exchange for other products then stocked by such Account Debtor, and (ii) Accounts where the Account Debtor has the right to return certain products in exchange for newer versions of the same, but, in each case, the amount of the Account is not reduced as a result thereof shall not be considered to be Accounts created as a result of a sale on a sale-and-return basis) of the Borrower or such Subsidiary arising in the ordinary course of the Borrower's or such Subsidiary's business and which: (i) if an Account arising from the sale of goods, covers goods which have been shipped or delivered and on which have been taken all other actions necessary to create a binding obligation on the part of the Account Debtor on such Account; (ii) if an Account relating to the furnishing of services, covers services which have been performed and completed and on which have been taken all other actions necessary to create a binding obligation on the part of the Account Debtor on such Account; (e) The Account Debtor on such Account is not: 8 9 (i) an employee, affiliate (including a partnership, joint venture, limited liability company, joint stock company or other Person in which the Borrower or such Subsidiary has a direct or indirect ownership interest), parent, or subsidiary of the Borrower or such Subsidiary; (ii) the subject of any reorganization, bankruptcy, receivership, custodianship, insolvency, or other proceeding analogous to those described in subsections 8.01(f) or (g); and (f) Such Account is not outstanding more than 90 days past its original due date. "Environmental Laws": any foreign, federal, state, local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any governmental authority, any and all requirements of law and any and all common law requirements, rules, and bases of liability regulating, relating to, or imposing liability or standards of conduct concerning pollution or protection of human health or the environment, as now or may at any time hereafter may be in effect. "Equivalent Amount": (a) whenever this Agreement requires or permits a determination on any date of the equivalent in dollars of an amount expressed in a currency other than dollars, the equivalent amount in dollars of any amount expressed in a currency other than dollars as determined by the Bank on such date on the basis of the Spot Rate for the purchase of dollars with such other currency on the relevant date; or (b) whenever this Agreement requires or permits a determination on any date of the equivalent in a currency other than dollars of an amount expressed in dollars, the equivalent amount in a currency other than dollars of an amount expressed in dollars as determined by the Bank on such date on the basis of the Spot Rate for the purchase of such other currency with dollars on the relevant date. "ERISA": the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "ERISA Affiliate": any trade or business (whether or not incorporated) under common control with the Borrower 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). "Event of Default": any event listed in Article VIII of this Agreement. 9 10 "FDIC": the Federal Deposit Insurance Corporation, or any entity succeeding to any of its principal functions. "Final Maturity Date": (a) in respect of any Advances, February 13, 1997; (b) in respect of any commercial letters of credit, August 13, 1997; and (c) in respect of any standby letters of credit, August 13, 1997. "FRB": the Board of Governors of the Federal Reserve System, or any entity succeeding to any of its principal functions. "Hazardous Substance": any hazardous or toxic substance, material, or waste, defined, listed, classified, or regulated as such in or under any Environmental Laws, including asbestos, petroleum, or petroleum products (including gasoline, crude oil, or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde insulation. "IRS": the Internal Revenue Service or any entity succeeding to any of its principal functions under the Code. "L/C Outstanding Amount": at any time, the undrawn amount at such time of any letter of credit issued hereunder, plus the amount of all drafts or drawings paid or accepted by the Bank which have not yet been reimbursed to the Bank, plus any other obligation or liability of the Borrower or any Acceptable Subsidiary to the Bank with respect to any letter of credit issued under this Agreement. "Local Currency": specified in subsection 2.01(b). "Local Currency Advance": specified in subsection 2.01(b). "Material Adverse Effect": (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Borrower or any Acceptable Subsidiary to perform under any Credit Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability of any Credit Document. "Offshore Credit Provider": a foreign office, foreign branch or foreign affiliate of the Bank, acceptable to the Bank. "Offshore Rate": for each Offshore Rate Interest Period, the rate of interest (rounded upward to the next 1/16th of 1%) determined pursuant to the following formula: Offshore Rate = Offered Rate -------------------------------------- 1.00 - Eurodollar Reserve Percentage 10 11 Where: "Offered Rate" means the rate of interest at which deposits in the applicable currency in the approximate amount of the Offshore Rate Advance to be made and having a maturity comparable to such Offshore Rate Interest Period would be offered by the Bank's London Branch (or such other office as may be designated for such purpose by the Bank) to major banks in the London interbank market upon request of such banks at approximately 11:00 a.m. (London, England time) two Business Days prior to the first day of such Offshore Rate Interest Period. "Eurodollar Reserve Percentage" means, for any Offshore Rate Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on the first day of such Offshore Rate Interest Period under regulations issued from time to time by the FRB for determining the reserve requirement applicable to the Bank (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") having a term comparable to such Offshore Rate Interest Period. "Offshore Rate Advance": an Advance for which interest is based on the Offshore Rate. "Offshore Rate Interest Period": for each Offshore Rate Advance the period commencing on the date the Offshore Rate Advance begins to bear interest at a rate based on the Offshore Rate and ending one, two, three, or six months thereafter, as requested by the Borrower; provided, however, that the last day of each Offshore Rate Interest Period shall be determined in accordance with the practices of the applicable offshore interbank markets as from time to time in effect, and provided further that no such interest period shall extend beyond the Final Maturity Date. "Person": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or governmental authority. "Pension Plan": a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Borrower 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 plan years. 11 12 "Permitted Acquisition Charges": charges (including the write-off of acquired goodwill or other intangible assets) incurred by the Borrower or a Subsidiary on or after the Closing Date in connection with an acquisition (i) which acquisition is not prohibited hereunder and (ii) (a) which are incurred in the same fiscal quarter as the related acquisition or (b) which are incurred in the next subsequent fiscal quarter, provided that the Borrower shall have provided to the Bank in writing in the quarter during which such acquisition was consummated an estimate of such acquisition charges and such charges do not exceed 125% of such estimate. "Permitted Swap Obligations": all obligations (contingent or otherwise) of the Borrower 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 any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party. "Plan": an employee benefit plan (as defined in Section 3(3) of ERISA) which the Borrower sponsors or maintains or to which the Borrower makes, is making, or is obligated to make contributions and includes any Pension Plan. "Quarterdeck Ireland": Quarterdeck International, Limited, a wholly-owned Subsidiary of the Borrower organized under the laws of Ireland. "Quarterdeck Ireland Loan": specified in subsection 2.05(a). "Reference Rate": for any day, the rate of interest in effect for such day as publicly announced from time to time by the Bank in San Francisco, California, as its "reference rate." It is a rate set by the Bank based upon various factors including the Bank'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 the Bank shall take effect at the opening of business on the day specified in the public announcement of such change. "Reference Rate Advance": an Advance that bears interest based on the Reference Rate. 12 13 "Revolving Facility": the line of credit described in Section 2.01. "Spot Rate": for a currency, the rate quoted by the Bank as the spot rate for the purchase by the Bank of such currency with another currency through its Foreign Exchange Trading Center #5193, San Francisco, California, or such other of the Bank's offices as it may designate from time to time, at approximately 8:00 a.m. (San Francisco time) on the date two Business Days prior to the date as of which the foreign exchange computation is made. "Subsidiary": of the Borrower, any corporation, association, partnership, joint venture, or other business entity of which more than 50% of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Borrower or one or more Subsidiaries of the Borrower or a combination thereof. "Swap Contract": 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": 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 based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include the Bank). "Tangible Net Worth": the gross book value of the assets of the Borrower and its Subsidiaries on a consolidated basis (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred charges, and other like intangibles and monies due from affiliates, officers, directors, or shareholders of the Borrower or its Subsidiaries) less (a) reserves 13 14 applicable thereto, and (b) all liabilities (including accrued and deferred income taxes and subordinated indebtedness). 1.02 Financial Requirements. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared, in accordance with generally accepted accounting principles in effect from time to time in the United States, consistently applied. ARTICLE II THE CREDIT FACILITIES 2.01 The Revolving Facility. (a) From time to time during the Availability Period, subject to the terms and provisions hereof, the Bank, on a revolving basis, will (i) make Advances to the Borrower or an Acceptable Subsidiary and (ii) create and issue commercial and standby letters of credit for the Borrower's or an Acceptable Subsidiary's account. (b) Advances hereunder may be made in (i) dollars ("Dollar Advances"), or (ii) in a lawful currency other than dollars which is available at a branch or affiliate of the Bank located in a country other than the United States and is the legal tender of that country where the branch or affiliate is located (a "Local Currency") ("Local Currency Advances"). (c) The aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Local Currency Advances and (iii) the L/C Outstanding Amount of all letters of credit may not exceed at any one time the Credit Limit or the Borrowing Base. 2.02 Dollar Advances Under the Revolving Facility. (a) Subject to the other provisions of this Section, Dollar Advances under the Revolving Facility shall bear interest at a rate per annum equal to the Reference Rate. The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay interest quarterly, on the last day of each calendar quarter until the Final Maturity Date, on which date all accrued and unpaid interest shall be due and payable. The Borrower shall repay or cause the applicable Acceptable Subsidiary to repay the principal amount of each Reference Rate Advance on the date such advance is converted into an Offshore Rate Advance under subsection (b) below, and on the Final Maturity Date. (b) In lieu of the interest rate described above, the Borrower or the applicable Acceptable Subsidiary may elect during the Availability Period to have all or portions of Advances under the Revolving Facility be in dollars and bear 14 15 interest at the Offshore Rate plus the Applicable Margin during an Offshore Rate Interest Period, subject to the following requirements: (i) Each Offshore Rate Advance shall be for an amount not less than $500,000 and multiples of $500,000 in excess thereof; (ii) The Borrower shall pay or shall cause the applicable Acceptable Subsidiary to pay interest on each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance; provided, however, that if any Interest Period for a Offshore Rate Advance exceeds three months, interest shall also be payable on the date which falls three months after the beginning of such Interest Period and on each date which falls three months after any such interest payment date. The Borrower shall repay or shall cause the applicable Acceptable Subsidiary to repay the principal balance of each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance, and (if sooner occurring) on the Final Maturity Date. (iii) Any payment of an Offshore Rate Advance prior to the last day of the Offshore Rate Interest Period for such Advance, whether voluntary, by reason of acceleration or otherwise, including any mandatory payments required under this Agreement and applied by the Bank to an Offshore Rate Advance (it being agreed that the Bank shall apply any such payments first to Reference Rate Advances then outstanding unless such payment is expressly in respect of an Offshore Rate Advance (e.g. under Section 3.09(b)), shall be accompanied by the amount of accrued interest on the amount repaid and by the amount (if any) required by Section 3.11. 2.03 Commercial Letters of Credit under the Revolving Facility. (a) Each commercial letter of credit shall be denominated in dollars and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Security Agreement for Commercial Letter of Credit (or such other form as the Bank may require) executed by the Borrower or an Acceptable Subsidiary. (b) Each commercial letter of credit shall: (i) expire on or before 180 days after the date such letter of credit is issued, but in no event later than the Final Maturity Date; 15 16 (ii) require drafts payable in dollars at sight or up to 180 days after sight, but in no event later than the Final Maturity Date; (iii) shall not violate any policies of the Bank generally applicable to letters of credit such as the requested letter of credit; and (iii) be otherwise in form satisfactory to the Bank. (c) The Borrower shall pay or cause the applicable Acceptable Subsidiary to pay to the Bank issuance fees, negotiation fees, and other fees at the times and in the amounts the Bank advises the Borrower from time to time as being generally applicable to letters of credit such as the Borrower's or the Acceptable Subsidiary's commercial letters of credit. (d) In the event of any request for a drawing under a commercial letter of credit issued hereunder, the Bank will notify the Borrower. Each draft paid by the Bank under a commercial letter of credit issued hereunder shall be reimbursed by the Borrower or the applicable Acceptable Subsidiary to the Bank on the date such draft is paid by the Bank or, at the Borrower's option, but subject to satisfaction of all conditions to borrowing set forth in this Agreement, the Borrower may convert the amount of each drawing into a Reference Rate Advance (which conversion shall be deemed to be a new Advance) in accordance with the procedures for borrowing set forth herein. With respect to any unreimbursed drawing which is not converted into a Reference Rate Advance in whole or in part, because of the Borrower's failure to satisfy the conditions set forth in Section 4.02 or for any other reason, or reimbursed to the Bank by the Borrower or the Acceptable Subsidiary on the date of payment under the draft by the Bank, such reimbursement obligations shall bear interest, payable on demand, from the date of such drawing or payment, at the per annum rate of the Reference Rate plus 2%. (e) In addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide cash collateral in the amount of the L/C Outstanding Amount of any commercial letters of credit outstanding under this Agreement. (f) The aggregate of the L/C Outstanding Amounts in respect of commercial letters of credit and standby letters of credit may not exceed at any time $2,000,000 or the Borrowing Base. 16 17 2.04 Standby Letters of Credit Under the Revolving Facility. (a) Each standby letter of credit shall be denominated in dollars and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Agreement for Standby Letter of Credit (or such other form as the Bank may require) executed by the Borrower or an Acceptable Subsidiary. (b) Each standby letter of credit shall: (i) expire on or before one year after the date such letter of credit is issued, but in no event later than the Final Maturity Date; and (ii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank. (c) The Borrower shall pay to the Bank a non-refundable issuance fee equal to the Applicable Margin times the outstanding undrawn amount of each standby letter of credit, payable annually in advance (with the initial payment due on issuance), and calculated on the basis of the face amount outstanding on the day the fee is calculated and the stated expiry date of such letter of credit. However, if an Event of Default exists, at the option of the Bank, the amount of the fee shall be increased by 2% per annum, commencing on the day the Bank provides notice of the increase to the Borrower. The Borrower shall also pay or cause the applicable Acceptable Subsidiary to pay such other fees and commissions (other than issuance fees) at the times and in the amounts the Bank advises the Borrower from time to time as being generally applicable to letters of credit such as the Borrower's or the Acceptable Subsidiary's standby letters of credit. (d) In the event of any request for a drawing under a standby letter of credit issued hereunder, the Bank will notify the Borrower. Each draft paid by the Bank under a standby letter of credit issued hereunder shall be reimbursed by the Borrower or the applicable Acceptable Subsidiary to the Bank on the date such draft is paid by the Bank or, at the Borrower's option, but subject to satisfaction of all conditions to borrowing set forth in this Agreement, the Borrower may convert the amount of each drawing into a Reference Rate Advance (which conversion shall be deemed to be a new Advance) in accordance with the procedures for borrowing set forth herein. With respect to any unreimbursed drawing which is not converted into a Reference Rate Advance in whole or in part, because of the Borrower's failure to satisfy the conditions set forth in Section 4.02 or for any other reason, or reimbursed to the Bank by the Borrower or the Acceptable Subsidiary on the date of payment under the draft by the Bank, such reimbursement obligations shall bear interest, payable on demand, from the date of such drawing or payment, at the per annum rate of the Reference Rate plus 2%. 17 18 (e) In addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide cash collateral in the amount of the L/C Outstanding Amount of any standby letters of credit outstanding under this Agreement. (f) The aggregate of the L/C Outstanding Amounts in respect of standby letters of credit and commercial letters of the Bank of such draft, at the per annum rate of the Reference credit may not exceed at any time $2,000,000 or the Borrowing Base. 2.05 Local Currency Advances. (a) From time to time during the Availability Period, the Bank or any Offshore Credit Provider will make Local Currency Advances (in the aggregate principal amount outstanding at any one time not to exceed the Equivalent Amount of $2,000,000 or the Borrowing Base) to Quarterdeck Ireland denominated in Irish punt (the "Quarterdeck Ireland Loan") and, may, in its sole discretion, make Local Currency Advances to the Borrower and to Acceptable Subsidiaries (including Quarterdeck Ireland). The Equivalent Amount of all Local Currency Advances outstanding at any time may not exceed $5,000,000 or the Borrowing Base. (b) Neither the Bank nor any Offshore Credit Provider shall have any obligation to make any Local Currency Advance unless the following conditions are satisfied: (i) the Bank and the Borrower or the relevant Acceptable Subsidiary agree, at the time of Borrower's or such Acceptable Subsidiary's request for a Local Currency Advance, on the currency, the amount, the principal payment date(s), the interest rate (provided that the Quarterdeck Ireland Loan shall bear interest at the per annum rate determined by adding 1.25% plus the cost of funds, as set forth in the applicable Credit Documents, of the applicable Offshore Credit Provider) and payment date(s), the prepayment and overdue payment terms, and the reserve, tax and other material provisions for such Advance; and (ii) The Borrower or such Acceptable Subsidiary shall execute such additional documentation as the Bank or such Offshore Credit Provider may require relating to each Local Currency Advance. 18 19 2.06 Mandatory Payment. If at any time and for any reason the total amount of credit outstanding under this Agreement exceeds the limitations set forth herein, the Borrower shall pay to the Bank, upon demand, the amount of the excess; provided, that if the foregoing applies due to a change in applicable rates of exchange between Dollars and Local Currencies, the Borrower shall be obligated to pay such amount only if the excess is greater than $100,000 or the Equivalent Amount thereof. Payments under this Section may be applied to the obligations of the Borrower to the Bank in the order and manner as the Bank in its discretion may determine (provided, that if there are Reference Rate Advances and Offshore Rate Advances outstanding at such time, the Bank will apply any payments applied toward principal first to Reference Rate Advances). Payments to be applied to outstanding letters of credit and drafts accepted under letters of credit may, at the Bank's option, be used to prepay, or held as cash collateral to secure, the Borrower's or any Acceptable Subsidiary's obligations to the Bank with respect thereto. 2.07 Commitment Fee. The Borrower shall pay to the Bank a commitment fee at the rate of .375% per annum on the average daily unused portion of the credit provided under this Agreement. For purposes of computing the unused portion, the L/C Outstanding Amount shall be deemed to be usage. The commitment fee shall be computed on a calendar quarter basis, except for the first period which shall commence on the Closing Date, and end on March 31, 1996, and the last period which shall end on the last day of the Availability Period. The commitment fee shall be payable in arrears on April 1, 1996, on the first day of each successive calendar quarter thereafter, and on the last day of the Availability Period. 2.08 Voluntary Termination or Reduction of Credit Limit. The Borrower may, upon not less than five Business Days' prior notice to the Bank, terminate the Bank's commitment to extend credit hereunder, or permanently reduce the Credit Limit by a minimum amount of $1,000,000, or any multiple of $500,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Advances made on the effective date thereof, the then-outstanding principal amount of the Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount would exceed the amount of the Credit Limit then in effect. Once reduced in accordance with this Section, the Commitment may not be increased. All accrued commitment fees to, but not including the effective date of any termination of the Bank's commitment to extend credit hereunder, shall be paid on the effective date of such termination. 2.09 Optional Prepayments. Subject to Section 3.11, the Borrower may, at any time or from time to time, upon not less than three Business Days' irrevocable notice to the Bank in the 19 20 case of Offshore Rate Advances and one Business Days' irrevocable notice to the Bank in the case of Reference Rate Advances, prepay Advances in whole or in part. Such notice of prepayment shall specify the date and amount of such prepayment and the type(s) of Advances to be prepaid. In the case of a prepayment of Offshore Rate Advances, such prepayment shall be in a minimum amount of $500,000, or any multiple of $500,000 in excess thereof or, if less, the outstanding amount of such Advance. If such notice is given by the Borrower, the Borrower 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 3.11. ARTICLE III EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS 3.01 Requests for Credit. Each request for an extension of credit shall be made in writing on a form acceptable to the Bank or in any other manner acceptable to the Bank. 3.02 Disbursements and Payments. Each disbursement by the Bank and each payment by the Borrower under this Agreement shall be made in the funds and at such branch of the Bank as the Bank may from time to time select. 3.03 Branch Accounts. Each extension of credit under this Agreement shall be made for the account of such branch, office, or affiliate of the Bank as the Bank may from time to time select. 3.04 Evidence of Indebtedness. Principal, interest, and all other sums due to the Bank (or any Offshore Credit Provider) under this Agreement shall be evidenced by entries in records maintained by the Bank (or such Offshore Credit Provider), and, if required by the Bank, by a promissory note or notes. Each payment on and any other credits with respect to principal, interest, and all other sums due under this Agreement shall be evidenced by entries to records maintained by the Bank or such Offshore Credit Provider. The loan accounts or records maintained by the Bank or any Offshore Credit Provider shall be conclusive absent manifest error of the amount of the credit extended hereunder and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower or any Acceptable Subsidiary hereunder to pay any amount owing. 20 21 3.05 Interest Calculation. Interest based on the Reference Rate shall be computed on the basis of a 365/366-day year, actual days elapsed. All other interest and fees payable under this Agreement shall be computed on the basis of a 360 day year and actual days elapsed, which results in more interest or a larger fee than if a 365-366 day year were used. 3.06 Late Payments; Compounding. Any sum payable by the Borrower hereunder (including unpaid interest) if not paid when due shall bear interest (payable on demand) from its due date until payment in full at a rate per annum equal to the Reference Rate plus 2% per annum. At the option of the Bank, in each instance, any sum payable hereunder which is not paid when due (including unpaid interest) may be added to principal of the Revolving Facility and shall thereafter bear interest at the rate applicable to principal. 3.07 Business Day. Any sum payable by the Borrower hereunder which becomes due on a day which is not a Business Day shall be due on the next Business Day after such due date, unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Offshore Rate Interest Period into another calendar month, in which event such Offshore Rate Interest Period shall end on the immediately preceding Business Day. Any payments received by the Bank on a day which is not a Business Day shall be deemed to be received on the next Business Day after such date of receipt. 3.08 Taxes and Other Charges. (a) Any and all payments by the Borrower or any Acceptable Subsidiary to the Bank and any Offshore Credit Provider under this Agreement and any Credit Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Borrower shall, or shall cause the applicable Acceptable Subsidiary to, pay all Other Taxes. (b) If the Borrower or any Acceptable Subsidiary 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 the Bank or any Offshore Credit Provider, 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), the Bank or such Offshore Credit Provider, 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 Borrower shall, or shall cause the applicable Acceptable Subsidiary to, make such deductions and withholdings; 21 22 (iii) the Borrower shall, or shall cause the applicable Acceptable Subsidiary to, pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Borrower shall, or shall cause the applicable Acceptable Subsidiary to, also pay to the Bank or applicable Offshore Credit Provider, at the time interest is paid, Further Taxes in the amount that the Bank specifies as necessary to preserve the after-tax yield the Bank or such Offshore Credit Provider would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Borrower agrees to indemnify and hold harmless the Bank for the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the amount that the Bank specifies as necessary to preserve the after-tax yield the Bank or the applicable Offshore Credit Provider 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 makes written demand therefor. (d) Within 30 days after the date of any payment by the Borrower or any Acceptable Subsidiary of Taxes, Other Taxes or Further Taxes, the Borrower shall furnish to the Bank the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Bank. (e) For purposes of this Section, "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 this Section; "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 Credit Documents; and "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 the Bank and each Offshore Credit Provider, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which the Bank or the applicable 22 23 Offshore Credit Provider, as the case may be, is organized or maintains a lending office. 3.09 Illegality. (a) If the Bank determines that (i) the introduction of any law, rule, regulation, treaty, or determination of an arbitrator or court or other governmental authority or any change in or in the interpretation or administration thereof has made it unlawful, or that any central bank or other governmental authority has asserted that it is unlawful, for the Bank (directly or through any Offshore Credit Provider) to make or extend any Advance or other credit under this Agreement, or (ii) any order, judgment, or decree of any governmental authority or arbitrator purports by its terms to enjoin or restrain the Bank (or any Offshore Credit Provider) from making or extending any Advance or other credit hereunder, then, on notice thereof by the Bank to the Borrower, the obligation of the Bank to make or extend such Advance or other credit (directly or through any Offshore Credit Provider) shall be suspended until the Bank shall have notified the Borrower that the circumstances giving rise to such determination no longer exist. (b) If the Bank determines that it is unlawful for it or any applicable Offshore Credit Provider to maintain any Offshore Rate Advance or Local Currency Advance hereunder, the Borrower shall prepay in full all Offshore Rate Advances or Local Currency Advances, as the case may be then outstanding, together with interest accrued thereon, either on the last day of the applicable Offshore Rate Interest Period or the interest period applicable to the Local Currency Advance if the Bank or such Offshore Credit Provider may lawfully continue to maintain such Advances to such day and such loans have an interest period, or immediately, if the Bank may not lawfully continue to maintain such Advances or such loans have no interest period, together with any amounts required to be paid in connection therewith pursuant to Section 3.11. 3.10 Increased Costs. (a) If the Bank shall determine 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 Eurodollar Reserve Percentage included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), in each case, announced after the date hereof, there shall be any increase in the cost to the Bank of agreeing to make or making, funding or maintaining any credit hereunder, then the Borrower shall be liable for, and shall from time to time, within 30 days after demand therefor by the Bank, pay to the Bank, additional amounts as are sufficient to compensate it for such increased costs. 23 24 (b) If the Bank shall have determined that the introduction of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein or any change in the interpretation or administration thereof by any central bank or other governmental authority charged with the interpretation or administration thereof, or compliance by the Bank or any corporation controlling the Bank, with any request, guideline or directive regarding capital adequacy (whether or not having the force of law) of any such central bank or other authority, in each case, announced after the date hereof, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank, and the Bank (taking into consideration the Bank's or such corporation's policies with respect to capital adequacy and the Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of the Bank's obligation under this Agreement, then, within 30 days after demand of the Bank, the Borrower shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 3.11 Funding Losses. The Borrower shall reimburse the Bank and hold the Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of the failure of the Borrower (or any Acceptable Subsidiary) to make any payment or prepayment of principal of any Advance hereunder made at a rate of interest related to the Offshore Rate (including payments made after any acceleration thereof), or to borrow at such a rate, or the prepayment of an Advance which bears interest at such a rate on a day which is not the last day of the interest period with respect thereto (including payments made after any acceleration thereof or because the total amount of credit exceeds the limitations set forth herein), or the redenomination and conversion, upon the occurrence of any Event of Default, of an Advance which bears interest at such a rate; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Advances made at a rate related to the Offshore Rate hereunder or from fees payable to terminate any deposits from which such funds were obtained or deemed obtained. 3.12 Inability to Determine Rates. The Bank has no obligation to accept an election for an Offshore Rate Advance if (a) Dollar deposits in the principal amount, and for the period equal to the interest period, for such Advance are not available in the applicable funding market; or (b) the Offshore Rate does not accurately reflect the cost of such Advance. Nothing contained herein shall, however, obligate the Bank to obtain the funds for any Advance in any particular manner. 24 25 3.13 Certificate of the Bank. If the Bank claims any reimbursement or compensation pursuant to Section 3.10 or Section 3.11 hereof, then the Bank shall deliver to the Borrower a certificate setting forth in reasonable detail the amount payable to the Bank thereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. 3.14 Survival. The agreements and obligations of the Borrower under Sections 3.08 through 3.11 hereof shall survive the payment of all other obligations of the Borrower hereunder. ARTICLE IV CONDITIONS TO AVAILABILITY OF CREDIT. The Bank's obligation to extend credit under this Agreement is subject to the Bank's receipt of the following, each in form and substance satisfactory to the Bank: 4.01 Conditions to First Extension of Credit. Before the first extension of credit: (a) This Agreement, executed by the Borrower; (b) Satisfactory evidence of due authorization of the execution, delivery, and performance by the Borrower and any Acceptable Subsidiary of this Agreement and any other Credit Documents, including certified resolutions, incumbency certificate, articles of incorporation and bylaws; (c) An opinion of counsel for the Borrower (which counsel must be satisfactory to the Bank) substantially in the form of Exhibit C; (d) Certificates of state officials showing that the Borrower is in good standing or qualified to conduct business under the laws of the state of its organization and, if requested by the Bank, in any other state in which the Borrower required to be so qualified; (e) A certificate of an appropriate officer of the Borrower as to the matters set forth in Section 4.02(a) and (b); (f) Payment of any feeor expense required hereunder prior to the first extension of credit; (g) A continuing guaranty in favor of the Bank in form a substance satisfactory to the Bank, executed by the Borrower, guaranteeing all debts and obligations (whether contingent or otherwise) of any and all Subsidiaries which are 25 26 Acceptable Subsidiaries as of the Closing Date arising under or in connection with this Agreement or any other Credit Document; (h) a Borrowing Base Certificate for the month ending immediately prior to the Closing Date; and (i) Such other approvals, opinions, documents or instruments as the Bank may request. 4.02 Conditions to Each Extension of Credit. Before each extension or renewal of credit (including pursuant to any election under Section 2.02(b)), including the first: (a) The representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of each extension of credit (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); (b) Immediately prior to and immediately after giving effect to such extension of credit, no Default or Event of Default shall exist; (c) Executed originals of all Credit Documents required under Article II shall have been delivered to the Bank; and (d) There shall not have occurred a Material Adverse Effect. Each request for an extension of credit hereunder shall constitute a representation and warranty by the Borrower, as of the date of each such request and as of the date of each extension of credit, that the conditions in this Section are satisfied. 26 27 ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: 5.01 Corporate Existence and Power. The Borrower, and each Subsidiary: (a) is a corporation duly organized and existing under the laws of the state of its organization; (b) has the power and authority and 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 Credit Documents to which it is a party; and (c) is duly qualified and properly 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 license or qualification. 5.02 Authorization. The execution, delivery, and performance by the Borrower and each Acceptable Subsidiary of this Agreement and any other Credit Document to which any of them is a party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any organizational or charter documents; (b) conflict with or result in any breach or contravention of, or the creation of any lien, security interest, or charge under, any agreement, contract, indenture, document, or instrument to which the Borrower or any Subsidiary is a party or by which any property is bound, or any order, injunction, writ, or decree of any governmental authority to which the Borrower or any Subsidiary or any property is subject; or (c) violate any law, rule, regulation, or determination of an arbitrator or of a court or other governmental authority, in each case applicable to or binding upon the Borrower or any Subsidiary or any property. 5.03 Enforceability. This Agreement is a legal, valid, and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and the other Credit Documents and any other instrument or agreement required under this Agreement, when executed and delivered, will be legal, valid, binding, and enforceable in accordance with its terms against the Borrower or the Acceptable Subsidiary, as applicable. 5.04 Compliance with Laws. Each of the Borrower and its Subsidiaries is in compliance with all foreign, federal, state 27 28 and local laws, rules, regulations and determinations of arbitrators, courts and other governmental authorities materially affecting the business, operations or property of the Borrower and its Subsidiaries (including Environmental Laws), except where the failure to be in compliance could not be reasonably expected to have a Material Adverse Effect. 5.05 Permits, Franchises. The Borrower or its Subsidiaries possess all permits, memberships, franchises, contracts, and licenses required and all trademark rights, trade name rights, patent rights, and fictitious name rights necessary to enable the Borrower and its Subsidiaries to conduct the businesses in which they are now engaged, except where the failure to possess the same could not be reasonably expected to have a Material Adverse Effect. 5.06 Litigation. Except as disclosed on Schedule 5.06, there is no litigation, tax claim, proceeding, governmental or administrative action, arbitration proceeding or dispute pending, or, to the knowledge of the Borrower, threatened, against or affecting the Borrower or any of its Subsidiaries or any of their properties, except where the same could not be reasonably expected to have in a Material Adverse Effect. 5.07 No Event of Default. There exists no Default or Event of Default. 5.08 Other Obligations. As of the Closing Date, the Borrower is not in material default under any other material agreement involving the borrowing of money, the extension of credit, or the lease of real or personal property, to which the Borrower is a party as borrower, guarantor, installment purchaser, or lessee. 5.09 Tax Returns. The Borrower has no knowledge of any material pending assessments or adjustments with respect to its or its Subsidiaries' income tax liabilities for any year. 5.10 Information Submitted. All financial and other information that has been submitted by the Borrower or an Acceptable Subsidiary to the Bank, including the Borrower's financial statements delivered to the Bank most recently prior to the Closing Date: (a) in the case of financial statements, is prepared in accordance with generally accepted accounting principles consistently applied (subject, in the case of unaudited financial statements, to good faith year end audit adjustments and the absence of footnotes); and (b) is true and correct in all material respects and is complete insofar as may be necessary to give the Bank true and accurate knowledge of the subject matter thereof. 28 29 5.11 No Material Adverse Effect. Since September 30, 1995, there has been no Material Adverse Effect. 5.12 ERISA Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS, and any governmental authority succeeding to any of its principal functions under the Code, and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. (b) There are no pending or, to the best knowledge of Borrower, 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) Neither the Borrower not any ERISA Affiliate maintains or contributes to any Pension Plan or other Plan subject to Section 412 of the Code. Neither the Borrower nor any ERISA Affiliate has ever contributed to any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 5.13 Environmental Matters. (a) Except to the extent that, in the aggregate, a Material Adverse Effect could not result therefrom, (i) the properties of the Borrower and its Subsidiaries do not contain and have not previously contained (at, under, or about any such property) any Hazardous Substances or other contamination (A) in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, any Environmental Laws, (B) which could interfere with the continued operation of such property, or (C) which could impair the fair market value thereof; and (ii) there has been no transportation or disposal of Hazardous Substances from, nor any release or threatened release of Hazardous Substances at or from, any property of the Borrower or any of its Subsidiaries in violation of or in any manner which could give rise to liability under any Environmental Laws. (b) Neither the Borrower nor any of its Subsidiaries has received or is aware of any material claim or notice of material violation, alleged material violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to the properties or operations of the Borrower or any of its Subsidiaries, nor does the Borrower have knowledge or reason to 29 30 believe that any such action is being contemplated, considered, or threatened. 5.14 Swap Obligations. Neither the Borrower nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. ARTICLE VI AFFIRMATIVE COVENANTS So long as credit is available under this Agreement or any letter of credit is outstanding hereunder, and until full and final payment of all of the Borrower's and any Acceptable Subsidiaries' obligations under this Agreement and any other Credit Document: 6.01 Notices of Certain Events. The Borrower shall promptly give written notice to the Bank of: (a) all litigation, proceedings or actions affecting the Borrower or its Subsidiaries where the amount claimed is $1,000,000 or more; (b) any substantial dispute which may exist between the Borrower or its Subsidiaries and any governmental regulatory body or law enforcement authority; (c) any Default or Event of Default; (d) of the occurrence of any of the following events affecting the Borrower or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the 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 Borrower or any ERISA Affiliate with respect to such event: (i) the adoption of any new Pension Plan or other Plan subject to Section 412 of the Code by the Borrower or any ERISA Affiliate; or (ii) the commencement of contributions by the Borrower or any ERISA Affiliate to any Pension Plan, multiemployer plan within the meaning of Section 4001(a)(3) of ERISA, or other Plan subject to Section 412 of the Code. (e) any of the representations and warranties in Article V ceases to be true and correct; and (f) any other matter which has resulted or could reasonably be expected to result in a Material Adverse Effect. 30 31 6.02 Financial and Other Information. The Borrower shall deliver to the Bank in form and detail satisfactory to the Bank, and in such number of copies as the Bank may request: (a) Within 100 days after the end of each fiscal year, the Borrower's consolidated financial statements for such year audited by a certified public accountant together with an unqualified opinion of such certified public accountant and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cash flow; (b) Within 60 days after the end of each of the first three fiscal quarters of each fiscal year, the Borrower's consolidated financial statements for such period prepared by the Borrower and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cash flow; (c) Concurrently with the delivery of the financial statements referred to in subsections 6.02(a) and (b), a Compliance Certificate executed by the chief financial officer or controller of the Borrower; (d) (i) at any time that there are no Advances or letters of credit outstanding hereunder, within 45 days after the end of each fiscal quarter, or (ii) at any time that there are Advances or letters of credit outstanding hereunder, within 25 days after the end of each calendar month, a Borrowing Base Certificate; (e) Within 15 days after the date of filing with the Securities and Exchange Commission, copies of any of the Borrower's Form 10-K Annual Reports, Form 10-Q Quarterly Reports and Form 8-K Current Reports; and (f) Promptly upon request, such other materials and information relating to the Borrower or its Subsidiaries as the Bank may reasonably request. 6.03 Books, Records, Audits and Inspections. The Borrower shall, and shall cause its Subsidiaries to, maintain adequate books, accounts and records, and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance with the regulations of any governmental regulatory body having jurisdiction over the Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses, and permit employees or agents of the Bank at any reasonable time to inspect the Borrower's and its Subsidiaries' properties, and to examine or audit the Borrower's and its Subsidiaries' books, accounts, and records and make copies and memoranda thereof, 31 32 such inspections, examinations and audits, except during the existence of an Event of Default, to be at the Bank's expense. 6.04 Use of Facility. The Borrower shall use the credit facility provided herein solely for working capital purposes and investments and acquisitions permitted hereunder, in each case not in contravention of any requirement of law. 6.05 Insurance. The Borrower shall, and shall cause its Subsidiaries to, maintain and keep in force insurance of the types and in amounts customarily carried in lines of businesses similar to those of the Borrower or the applicable Subsidiary, including fire, extended coverage, public liability (including coverage for contractual liability), property damage (including use and occupance) and workers' compensation, all carried by responsible insurers, and deliver to the Bank from time to time, at the Bank's request, a copy of each insurance policy, or if permitted by the Bank, a certificate of insurance setting forth all insurance then in effect. 6.06 Compliance with Laws. The Borrower shall at all times comply with, and cause its Subsidiaries to comply with, all laws, statutes (including any fictitious name statute), rules, regulations, orders, and directions of any governmental authority having jurisdiction over the Borrower or any of its Subsidiaries or the business of the Borrower or any of its Subsidiaries (including all Environmental Laws), except where the failure to so comply could not be reasonably expected to have a Material Adverse Effect. 6.07 Compliance with ERISA. The Borrower 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; and (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification. 6.08 Existence and Properties. The Borrower shall, and shall cause its Subsidiaries to, maintain and preserve its existence and all rights, privileges, and franchises now enjoyed, conduct its business in an orderly, efficient, and customary manner, keep all the its properties in good working order and condition, ordinary wear and tear excepted, and from time to time make all needed repairs, renewals, or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved. 32 33 ARTICLE VII NEGATIVE COVENANTS So long as credit is available under this Agreement or any letter of credit is outstanding hereunder,and until full and final payment of all of the Borrower's and any Acceptable Subsidiary's obligations under this Agreement and any other Credit Document: 7.01 Other Indebtedness. The Borrower shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, or permit to exist any indebtedness or liabilities for or resulting from borrowed money, loans, or advances, or for the deferred purchase price of property under capital leases, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, or become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the obligation of any other Person; provided, however, that this Section shall not prohibit: (a) the acquisition of goods, supplies, or merchandise on normal trade credit; (b) the execution of bonds or undertakings in the ordinary course of its business as presently conducted; (c) the endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (d) indebtedness secured by liens permitted by Section 7.02(f); (e) indebtedness and guarantees in favor of the Bank or any Offshore Credit Provider; (f) indebtedness or other obligations to other creditors in an aggregate amount not to exceed $100,000,000 which are subordinated on terms and conditions reasonably satisfactory to the Bank (including the prior payment in full in cash of all principal, interest (including postpetition interest), cash collateral cover, fees and other senior obligations upon bankruptcy, insolvency, or dissolution and upon uncured payment defaults, but subject to a 180 day maximum blockage period upon other defaults) to all of Borrower's and its Subsidiaries' indebtedness or other obligations to the Bank or any Offshore Credit Provider hereunder or under any Credit Documents) whether now existing or hereafter arising; (g) indebtedness and liabilities outstanding on the date hereof and described on Schedule 7.01 and indebtedness and 33 34 liabilities incurred to refinance such indebtedness and liabilities; provided that the unpaid principal balance is not increased (except to the extent the increase is then otherwise permitted hereunder); and (h) indebtedness and liabilities of the Borrower to any Subsidiary or by any Subsidiary to any other Subsidiary or the Borrower. 7.02 Liens. The Borrower shall not, and shall not suffer or permit any of its Subsidiaries to, create, assume, or suffer to exist any security interest, deed of trust, mortgage, lien (including the lien of an attachment, judgment, or execution), or encumbrance, securing a charge or obligation, on or of any of its or their property, real or personal, whether now owned or hereafter acquired, except: (a) security interests and deeds of trust in favor of the Bank; (b) liens, security interests, and encumbrances in existence as of the date of this Agreement and listed on Schedule 7.02 and any lien or other encumbrance constituting a renewal, extension or replacement of any such lien or encumbrance; provided (i) the principal amount of indebtedness or other obligation secured by such renewal, extension or replacement lien or encumbrance does not exceed the principal amount of the indebtedness or other obligation renewed, extended or replaced unless such excess is otherwise permitted hereby at the time of the extension, renewal or replacement, and (ii) such lien or encumbrance is limited to all or a part of the property subject to the lien or encumbrance extended, renewed or replaced; (c) liens for current taxes, assessments, or other governmental charges which are not delinquent or remain payable without any penalty or which are being contested in good faith and by appropriate proceedings, and as to which to no foreclosure or forfeiture proceeding has been commenced, or, if commenced, which has been stayed; (d) liens (other than any lien imposed by ERISA) in connection with workers' compensation, unemployment insurance, or other social security obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due or which are being contested in good faith and by appropriate proceedings, and as to which no foreclosure or forfeiture proceeding has been commenced, or, if commenced, which has been stayed; (f) purchase money security interests in personal or real property hereafter acquired when the security interest does not extend beyond the property purchased; (g) liens incurred and deposits made in the ordinary course of business to secure the performance (including by way of surety bonds or appeal bonds) of tenders, bids, leases, contracts, statutory obligations or similar obligations or arising as a result of progress payments under contracts, in each case in the ordinary course of business and not relating to the repayment of indebtedness for borrowed money; (h) easements, 34 35 rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) that do not materially interfere with the ordinary conduct of business, materially detract from the value of the asset to which they attach or materially impair the use thereof; (i) building restrictions, zoning laws and other statutes, laws, rules, regulations, ordinances and restrictions; (j) leases, subleases or easements granted in the ordinary course of business to others not materially interfering with the business of, and consistent with past practices of, the Borrower or the relevant Subsidiary; (k) any attachment or judgement lien, not otherwise constituting an Event of Default, in existence less than 30 days after the entry thereof or with respect to which (i) execution has been stayed, (ii) payment is covered in full by insurance, or (iii) the Borrower or Subsidiary is in good faith prosecuting an appeal or other appropriate proceedings for review and has set aside on its books such reserves as may be required by GAAP with respect to such judgment or award; (l) liens or other encumbrances existing on assets of any Person at the time such Person becomes a Subsidiary and not created in anticipation thereof; and (m) other liens incidental to the conduct of the business or the ownership of the assets of the Borrower or any Subsidiary that (i) were not incurred in connection with borrowed money, (ii) do not in the aggregate materially detract from the value of the assets subject thereto or materially impair the use thereof in the operation of such business and (iii) do not secure obligations aggregating in excess of $250,000. 7.03 Intentionally Omitted. 7.04 Dividends. Neither the Borrower nor any of its Subsidiaries that is not wholly-owned by the Borrower shall declare or pay any dividends or distributions on any of its shares now or hereafter existing, or purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto, except for dividends payable solely in its capital stock. 7.05 Loans. Neither the Borrower nor any of its Subsidiaries shall make any loans, advances, or other extensions of credit to any of the Borrower's or such Subsidiary's executives, officers, or directors or shareholders (or any relatives of any of the foregoing) other than in the ordinary course of business, or make loans, advances or other extensions of credit to or invest in any other Person, other than (a) investments in cash equivalents and short-term marketable securities; (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; (c) extensions of credit by the Borrower to any of its wholly-owned Subsidiaries or by any of its wholly-owned Subsidiaries to 35 36 another of its wholly-owned Subsidiaries; (d) investments incurred in order to consummate acquisitions and other transactions otherwise permitted under Section 7.06; (e) investments in existence on the Closing Date and listed in Schedule 7.05 and extensions, renewals and restructurings thereof, provided that the amount thereof is not increased unless such increase is otherwise permissible under this Section 7.05; and (f) other loans, advances or other extensions of credit or investments in an aggregate amount not to exceed $1,000,000 at any one time. 7.06 Liquidations and Mergers. The Borrower shall not, and shall not suffer or permit any Subsidiary to, (i) liquidate or dissolve, (ii) enter into any consolidation, merger, partnership, joint venture, or other combination, or (iii) acquire or purchase control of, or the assets or business of, any other Person, except that (a) any Subsidiary may merge with the Borrower, provided that the Borrower 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 Borrower or another wholly-owned Subsidiary, and (c) notwithstanding clauses (ii) and (iii), the Borrower and its Subsidiaries may enter into any consolidation, merger, partnership, joint venture or other combination with, make loans or other extensions of credit to or other investments in, or purchase or acquire control or any part of the capital stock, assets or business of, any other Person if (w) such Persons are engaged in business activities (including development activities) or operations substantially similar to or related to present software and other business activities and operations of the Borrower and its Subsidiaries, (x) immediately prior to and after giving effect thereto, there exists no Default or Event of Default, (y) in the case of a merger of the Borrower, the Borrower is the surviving corporation, and (z) such transaction has been undertaken in accordance with all applicable requirements of law. 7.07 Sale of Assets. The Borrower shall not, and shall not suffer or permit any Subsidiary to, (a) sell, lease, or otherwise dispose of its business or assets as a whole or such as constitutes a substantial portion of the consolidated business or assets of the Borrower and its Subsidiaries; (b) sell or otherwise dispose of any of its accounts receivable except in connection with the collection of same in the ordinary course of business; (c) sell or otherwise dispose of any of its assets except for full, fair and reasonable consideration; or (d) enter into any sale and leaseback agreement covering any of its fixed or capital assets. 36 37 7.08 Business Activities. The Borrower shall not, and shall not suffer or permit any Subsidiary to, engage in any business activities or operations substantially different from or unrelated to present business activities and operations. 7.09 Regulations G, T, U, and X. The Borrower shall not, and shall not permit any of its Subsidiaries to, use any portion of the proceeds of any Advances or extensions of credit hereunder, directly or indirectly, (i) to purchase or carry margin stock (within the meanings of Regulations G, T, U, and X of the FRB), (ii) to repay or otherwise refinance indebtedness of the Borrower or others incurred to purchase or carry any such margin stock, (iii) to extend credit for the purpose of purchasing or carrying any such margin stock, or (iv) to acquire any other Person unless the acquisition has been approved by the board of directors or equivalent governing body of such Person. 7.10 Intentionally Omitted. 7.11 ERISA. The Borrower 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 which has resulted or could reasonably be expected to result in liability of the Borrower in an aggregate amount in excess of $2,000,000. 7.12 Quick Ratio. The Borrower shall not permit at any time on a consolidated basis the sum of cash, short-term cash investments, marketable securities not classified as long-term investments and accounts receivable (net of any bad debt reserve) to be less than 1.30 times current liabilities (which shall include all outstanding Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount). 7.13 Total Liabilities to Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis the Borrower's total liabilities (which shall include all outstanding Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount) to exceed (i) 1.00 times Tangible Net Worth until September 29, 1996, and (ii) 0.80 times Tangible Net Worth from and after September 30, 1996. 7.14 Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis its Tangible Net Worth to be less (i) than 90% of its Tangible Net Worth as of December 31, 1995 plus (ii) the net proceeds from any equity securities issued after December 31, 1995, plus (iii) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities after the date of this Agreement, less (iv) Permitted Acquisition Charges less (v) goodwill or other intangible assets acquired in connection with an acquisition (provided that such acquisition is not prohibited 37 38 hereunder and such goodwill or other intangible assets are acquired and recognized in the consolidated financial statements of the Borrower in the same fiscal quarter as the related acquisition). 7.15 Profitability. The Borrower shall not permit as of the last day of any fiscal quarter for the fiscal quarter then ending on a consolidated basis (i) a negative net operating income, which shall be defined as income before any deduction for interest expense, taxes, or extraordinary items, and without giving effect to any interest or other non-operating income) or (ii) a negative net income, which shall be defined as net income after tax (excluding extraordinary items); provided, that net operating income and net income shall be calculated without reduction for any Permitted Acquisition Charges. ARTICLE VIII EVENTS OF DEFAULT 8.01 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement: (a) Failure to Pay. The Borrower or any Acceptable Subsidiary fails to pay, when due, any installment of principal, or within three Business Days after the date when due any interest, fee or any other sum due under this Agreement or any other Credit Document in accordance with the terms hereof or thereof. (b) Breach of Representation or Warranty. Any representation or warranty herein (other than in Section 5.12) or in any other Credit Document proves to have been false or misleading in any material respect when made. (c) Specific Defaults. The Borrower fails to perform or observe any term, covenant or agreement contained in Section 6.01, 6.02(a) through (e), or 6.09 or Article VII hereof. (d) Other Defaults. The Borrower fails to perform or observe any other term or covenant contained in this Agreement or any Credit Document (other than in Section 9.14 hereof), and such default shall continue unremedied for a period of 30 days after the date upon which written notice thereof is given to the Borrower by the Bank. (e) Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Borrower or any Subsidiary involving in the aggregate a liability (to the extent not 38 39 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 $2,000,000 or more, and the same shall remain unvacated and unstayed pending appeal for a period of 15 days after the entry thereof. (f) Failure to Pay Debts; Voluntary Bankruptcy. The Borrower or any Subsidiary (i) fails to pay the Borrower's or such Subsidiary's debts generally as they come due, or (ii) files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors. (g) Involuntary Bankruptcy. An involuntary petition is filed under any bankruptcy or similar statute against the Borrower or any Subsidiary, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of the Borrower or any Subsidiary and such petition or appointment shall not be dismissed within 60 days after commencement. (h) Default of Other Financial Obligations. (i) Any default occurs under any other agreement involving the borrowing of money or the extension of credit 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 $1,000,000 to which the Borrower or any Subsidiary may be a party as borrower, guarantor, or installment purchaser, if such default consists of the failure to pay any obligation when due or if such default gives to the holder of the obligation concerned the right to accelerate the obligation, 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 Borrower 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 Borrower or any Subsidiary is an Affected Party (as so defined), and, in either event, the Swap Termination Value owed by the Borrower or such Subsidiary as a result thereof is greater than $1,000,000. (i) Invalidity of Subordination Provisions. The subordination provisions of any agreement or instrument governing any subordinated debt is for any reason revoked or invalidated, or otherwise cease to be in full force and effect, any Person contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder, or the obligations hereunder do not have the priority contemplated by this Agreement or such subordination provisions. 39 40 (j) Intentionally Omitted. (k) ERISA. Any of the representations and warranties contained in Section 5.12 shall cease to be true and correct or was false or misleading when made and the same has resulted or could reasonably be expected to result in liability of the Borrower in an individual or aggregate amount in excess of $2,000,000. (l) Change of Control. (i) any Person or two or more Persons acting in concert shall acquire beneficial ownership, directly or indirectly, of securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors; or (ii) during any period of up to 12 consecutive months, commencing after the Closing Date, individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the Board of Directors of the Borrower unless the persons replacing such individuals were nominated by the Board of Directors of the Borrower. 8.02 Remedies. If any Event of Default occurs, (a) any indebtedness of the Borrower or of any Acceptable Subsidiary under any of the Credit Documents, any term thereof to the contrary notwithstanding, shall at the Bank's option (but automatically upon the occurrence of an Event of Default described in subsection 8.01(f)(ii) or upon the occurrence of an Event of Default described in subsection 8.01(g) upon the expiration of the 60-day period mentioned therein) and without notice become immediately due and payable without presentment, demand, protest, or notice of dishonor, or any other notice, all of which are hereby expressly waived by the Borrower to the full extent permitted by law, and the Bank may declare an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any then-outstanding letters of credit (whether or not any beneficiary shall have presented, or be entitled at such time to present, the drafts or other documents required to draw under such letters of credit) to be immediately due and payable; (b) the obligation, if any, of the Bank (including through any Offshore Credit Provider) to make further loans or extensions of credit hereunder shall immediately cease and terminate, and (c) the Bank and each Offshore Credit Provider shall have all rights, powers, and remedies available under each of the Credit Documents, or accorded by law, including the right to resort to any or all security for any credit accommodation 40 41 described herein, and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers, and remedies of the Bank and each Offshore Credit Provider may be exercised at any time by the Bank or such Offshore Credit Provider and from time to time after the occurrence of an Event of Default. All rights, powers, and remedies of the Bank and any Offshore Credit Provider in connection with each of the Credit Documents are cumulative and not exclusive and shall be in addition to any other rights, powers, or remedies provided by law or equity. ARTICLE IX MISCELLANEOUS 9.01 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Borrower shall not assign this Agreement or any other Credit Document or any of the rights, duties or obligations of the Borrower hereunder without the prior written consent of the Bank. 9.02 Consents and Waivers. No failure to exercise and no delay in exercising, on the part of the Bank or any Offshore Credit Provider, 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. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 9.03 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. 9.04 Costs and Attorneys' Fees. The Borrower shall, whether or not the transactions contemplated hereby shall be consummated, pay or reimburse the Bank on demand for all costs and expenses incurred by the Bank in connection with the development, preparation, delivery, administration, and execution of, and any amendment, supplement, waiver or modification to, this Agreement and any other Credit Document and the consummation of the transactions contemplated hereby and thereby, including reasonable attorney fees and disbursements and the allocated cost of internal counsel and disbursements, incurred by the Bank with respect thereto; and in connection with the enforcement, attempted enforcement or preservation of 41 42 any rights or remedies hereunder or under any Credit Document, including any "workout" or restructuring under this Agreement, including attorney fees and disbursements and the allocated cost of internal counsel and disbursements. 9.05 Integration; Amendment. This Agreement, together with the other Credit Documents, embodies the entire agreement and understanding between the Borrower and the Bank. This Agreement may be amended or modified only in writing, signed by the Borrower and the Bank. 9.06 Borrower's Documents. The Bank shall be under no obligation to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower and shall destroy or otherwise dispose of same at such time as the Bank, in its discretion, deems appropriate. 9.07 Participations; Confidentiality. (a) The Bank may at any time sell, assign, grant participations in, or otherwise transfer to any other Person (a "Participant") all or part of the obligations of the Borrower and any Acceptable Subsidiary under this Agreement and any other Credit Document. The Borrower authorizes the Bank and each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of the Borrower and any Acceptable Subsidiary which may be in the hands of the Bank or such Participant, respectively. (b) The Bank agrees to take and to cause its affiliates (including any Offshore Credit Provider) to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Borrower and provided to it by the Borrower or any Subsidiary, under this Agreement or any other Credit 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 Credit Documents or in connection with other business now or hereafter existing or contemplated with the Borrower 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 Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Bank; provided, however, that the 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 the Bank by any such authority; (B) pursuant to 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 42 43 which the Bank or its affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Credit Document; (F) to the Bank's independent auditors and other professional advisors; (G) to any Participant, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Bank hereunder; (H) as to the Bank or its affiliates, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Borrower or any Subsidiary is party or is deemed party with the Bank or such affiliate; and (I) to its affiliates. 9.08 General Indemnification. The Borrower shall pay and indemnify the Bank, the Offshore Credit Providers, the Bank's parent company, and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses, or disbursements (including attorneys' fees and disbursements and the allocated costs of internal counsel) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Credit Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation, or proceeding related to this Agreement, any violation of any Environmental Law by the Borrower or its Subsidiaries, any release of a Hazardous Substance at or from any property of the Borrower or any of its Subsidiaries, or the loans and other extensions of credit hereunder 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 Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other obligations of the Borrower or any Acceptable Subsidiary hereunder or under the other Credit Documents. 9.09 Arbitration; Reference Proceeding. (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any other Credit Document or other agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitration shall be conducted within the 43 44 California county or counties: San Francisco or Santa Clara. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) Notwithstanding the provisions of subsection (a) of this Section, no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to the Bank which is secured by real property collateral located in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subsection (c) of this Section. (c) A controversy or claim which is not submitted to arbitration as provided and limited in subsections (a) and (b) of this Section shall, at the request of any party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 et seq. If such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) No provision of this paragraph shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At the Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 9.10 Notices. (a) All notices, requests and other communications provided for hereunder shall be in writing and 44 45 mailed or delivered to a party at its address specified on the signature pages hereof, or to such other address as shall be designated by such party in a written notice to the other parties. (b) All such notices and communications shall, when transmitted by overnight delivery, be effective when delivered for overnight delivery, or if personally delivered, upon such personal delivery, except that notices pursuant to Article II shall not be effective until actually received by the Bank. (c) The Borrower acknowledges and agrees that any agreement of the Bank pursuant to Article II hereof to receive notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. Telephone requests may be made by any individual identified in writing to the Bank on a form acceptable to the Bank as being authorized to make such requests. The Bank shall be entitled to rely upon any written or telephone request from persons it reasonably believes to be authorized by the Borrower to make such requests without making independent inquiry. The Borrower assumes the full risk of, and the Bank shall not be responsible for, any delays or errors in transmission, and the obligation of the Borrower to repay the loans and other extensions of credit hereunder shall not be affected in any way or to any extent by any failure by the Bank to receive written confirmation of any telephonic or facsimile notice or the receipt by the Bank of a confirmation which is at variance with the terms understood by the Bank to be contained in the telephonic or facsimile notice. 9.11 Headings; Interpretation. Article, section, and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. The words "hereof", "herein", "hereunder" and words of similar import when used in this Agreement shall 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. The term "including" is not limiting and means "including without limitation." 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." 9.12 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. 45 46 9.13 Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 9.14 Use of Proceeds - Ineligible Securities. The Borrower agrees that it will not, directly or indirectly, use any portion of the proceeds of any Advances or extensions of credit hereunder (i) knowingly to purchase Ineligible Securities from BASI during any period in which BASI 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 BASI, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by BASI and issued by or for the benefit of the Borrower or any affiliate of the Borrower. As used in this Section, "BASI" means BA Securities, Inc., a wholly-owned subsidiary of BankAmerica Corporation. BASI 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. Section 24, Seventh), as amended. 46 47 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. QUARTERDECK CORPORATION By: ____________________________ Name: __________________________ Title: _________________________ By: ____________________________ Name: __________________________ Title: _________________________ Address where notices to Borrower are to be sent: Quarterdeck Corporation 13160 Mindanao Way Marina Del Rey, CA 90292-9705 Attn: Chief Financial Officer Telecopier: (310) 309-3215 Telephone: (310) 309-3700 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ____________________________ Name: __________________________ Title: _________________________ Address where notices to Bank are to be sent: Bank of America National Trust and Savings Association The Mid-Cap Technology Group #5974 530 Lytton Avenue, 2nd Floor Palo Alto, CA 94301 Attn: Cecilia Person, Assistant Vice President Telecopier: (415) 853-4476 Telephone: (415) 853-4688 47 48 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of March 28, 1996, is entered into by and between QUARTERDECK CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS A. The Borrower and the Bank are parties to a Credit Agreement dated as of February 14, 1996 (the "Credit Agreement"), pursuant to which the Bank has extended certain credit facilities to the Borrower and its Acceptable Subsidiaries. B. The Borrower has requested that the Bank agree to certain amendments of the Credit Agreement. C. The Bank is willing to amend the Credit Agreement, subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended by adding the following defined term, in appropriate alphabetical order, therein: "`Subordinated Notes': the Borrower's 6.0% Convertible Senior Subordinated Notes due March 31, 2001 in an aggregate principal amount of up to $25,000,000, issued pursuant to the Note Agreement dated as of March 1, 1996. The parties agree that the Subordinated Notes shall constitute "subordinated indebtedness" as that term is used herein." (b) Section 7.13 of the Credit Agreement shall be amended and restated so as to read as follow: "7.13 Total Liabilities to Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis the Borrower's total liabilities (which shall include all outstanding Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount, and exclude the outstanding principal amount of the Subordinated Notes,) to exceed (a) 1.00 times 49 Tangible Net Worth until September 29, 1996, and (b) 0.80 times Tangible Net Worth from and after September 30, 1996. For purposes of this covenant only, Tangible Net Worth shall include the outstanding principal amount of the Subordinated Notes." (c) Section 8.01(e) of the Credit Agreement shall be amended and restated so as to read as follow: "(e) Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Borrower 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 $500,000 or more, and the same shall remain unvacated and unstayed pending appeal for a period of 30 days after the entry thereof." 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) No Default or Event of Default has occurred and is continuing, after giving effect to this Amendment. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct as of the date hereof (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). (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other Person. 4. Effective Date. This Amendment will become effective as of March 1, 1996 (the "Effective Date"), provided that the Bank has received from the Borrower a duly executed original (or, if 2 50 elected by the Bank, an executed facsimile copy) of this Amendment. 5. Consent of Guarantor. The Borrower, as guarantor with respect to the obligations of the Acceptable Subsidiaries to the Bank under the Credit Agreement, as amended by this Amendment, hereby reaffirms and agrees that each Guaranty to which the Borrower is party, and all other documents and agreements executed and delivered by the Borrower to the Bank in connection therewith, are in full force and effect, without defense, offset or counterclaim. 6. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to forbear or execute similar consents or amendments under the same or similar circumstances in the future. 7. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank. 3 51 (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 9.05 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. 4 52 (g) Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. QUARTERDECK CORPORATION By: __________________________________ Title: By: __________________________________ Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: __________________________________ Title: 5 -----END PRIVACY-ENHANCED MESSAGE-----