-----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, MI9/T/Kgs2jq7d97eWySNRS0aTmRlIHOYzZup/oTqqhVed8XBqCzWUhar9jrVxQs Tcn2SF/o2XEa54dvOwROQw== 0001012870-01-501620.txt : 20010815 0001012870-01-501620.hdr.sgml : 20010815 ACCESSION NUMBER: 0001012870-01-501620 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASPECT COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000779390 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942974062 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18391 FILM NUMBER: 1712320 BUSINESS ADDRESS: STREET 1: 1310 RIDDER PARK DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4083252200 MAIL ADDRESS: STREET 1: 1310 RIDDER PARK DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 FORMER COMPANY: FORMER CONFORMED NAME: ASPECT TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19940218 10-Q 1 d10q.txt FORM 10-Q DTD 06/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______to ______ Commission file number: 0-18391 ASPECT COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) California 94-2974062 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1310 Ridder Park Drive, San Jose, California 95131-2313 (Address of principal executive offices and zip code) Registrant's telephone number: (408) 325-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of the Registrant's Common Stock, $.01 par value, was 51,653,418 at July 31, 2001. 1 ASPECT COMMUNICATIONS CORPORATION INDEX Description Page Number - ----------- ----------- Cover Page 1 Index 2 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3: Quantitative and Qualitative Disclosures About Financial Market Risk 17 Part II: Other Information Item 4: Submission of Matters to a Vote of Security Holders 18 Item 6: Exhibits and Reports on Form 8-K 18 Signature 19 2 ASPECT COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts - unaudited)
June 30, December 31, 2001 2000 -------- ------------ Assets Current assets: Cash and cash equivalents $ 73,355 $ 84,544 Short-term investments 63,571 86,869 Marketable equity securities 766 9,545 Accounts receivable, net 83,838 135,243 Inventories, net 22,530 19,940 Other current assets 20,859 26,925 -------- -------- Total current assets 264,919 363,066 Property and equipment, net 119,082 108,780 Intangible assets, net 130,697 146,394 Other assets 16,816 17,258 -------- -------- Total assets $531,514 $635,498 ======== ======== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 27,637 $ 33,553 Accrued compensation and related benefits 22,514 28,483 Other accrued liabilities 63,829 67,609 Deferred revenues 38,435 45,041 -------- -------- Total current liabilities 152,415 174,686 Other long-term liabilities 4,390 852 Deferred taxes 5,554 3,394 Convertible subordinated debentures 178,232 173,041 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding - - Common stock, $.01 par value: 100,000,000 shares authorized, shares outstanding: 51,646,403 and 51,125,114 at June 30, 2001 and December 31, 2000, respectively 194,701 190,947 Deferred stock compensation (1,819) (2,421) Accumulated other comprehensive income (loss) (2,044) 2,726 Retained earnings 85 92,273 -------- -------- Total shareholders' equity 190,923 283,525 -------- -------- Total liabilities and shareholders' equity $531,514 $635,498 ======== ========
See Notes to Condensed Consolidated Financial Statements 3 ASPECT COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data - unaudited)
Three months ended Six months ended June 30, June 30, ------------------------ ---------------------- 2001 2000 2001 2000 ------------------------ ---------------------- Net revenues: License revenues $ 28,609 $ 41,770 $ 60,112 $ 87,853 Services revenues 64,827 64,821 125,712 126,711 Other revenues 19,943 25,017 42,088 61,467 ------------------------ ---------------------- Total net revenues 113,379 131,608 227,912 276,031 ------------------------ ---------------------- Cost of revenues: Cost of license revenues 2,013 3,276 4,010 6,112 Cost of services revenues 37,843 40,358 76,640 81,573 Cost of other revenues 18,567 20,621 38,373 44,971 Amortization of intangible assets 1,238 1,224 2,476 2,445 ------------------------ ---------------------- Total cost of revenues 59,661 65,479 121,499 135,101 ------------------------ ---------------------- Gross margin 53,718 66,129 106,413 140,930 Operating expenses: Research and development 21,983 24,075 45,201 48,476 Sales and marketing 46,062 40,062 95,954 78,452 General and administration 10,027 12,287 21,811 21,510 Restructuring charges 13,153 - 20,107 - In-process research and development - - - 5,018 Amortization of intangible assets and stock-based compensation 6,740 6,191 13,527 11,322 ------------------------ ---------------------- Total operating expenses 97,965 82,615 196,600 164,778 ------------------------ ---------------------- Loss from operations (44,247) (16,486) (90,187) (23,848) Interest and other income 1,348 8,222 3,542 14,937 Interest and other expense (2,983) (2,409) (5,393) (5,005) ------------------------ ---------------------- Loss before income taxes (45,882) (10,673) (92,038) (13,916) Provision (benefit) for income taxes 75 (2,989) 150 (1,785) ------------------------ ---------------------- Net loss $ (45,957) $ (7,684) $ (92,188) $ (12,131) ======================== ====================== Basic and diluted loss per share $ (0.89) $ (0.15) $ (1.79) $ (0.24) ======================== ====================== Basic and diluted weighted average shares outstanding 51,486 51,413 51,362 50,948 ======================== ======================
See Notes to Condensed Consolidated Financial Statements 4 ASPECT COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands--unaudited)
Six Months Ended June 30, --------------------- 2001 2000 --------------------- Cash flows from operating activities: Net loss $ (92,188) $ (12,131) Reconcilation of net loss to cash provided by (used in) operating activities: Depreciation 19,502 16,451 Amortization of intangible assets and stock-based compensation 16,003 13,767 Gain on sale of marketable securities (409) (9,361) Impairment of short-term investments 1,300 - Impairment of property 1,843 - Non-cash interest expense on debentures 5,191 4,894 In-process research and development - 5,018 Deferred taxes 3,147 (22,987) Changes in assets and liabilities, net of effects from company acquired in 2000: Accounts receivable 48,511 (11,678) Inventories (2,765) (7,023) Other current assets and other assets 8,207 16,373 Accounts payable (5,788) 17,026 Accrued compensation and related benefits (5,759) 324 Other accrued liabilities 1,039 (10,048) Deferred revenues (6,170) 11,482 --------------------- Cash provided by (used in) operating activities (8,336) 12,107 Cash flows from investing activities: Short-term investment purchases (156,669) (195,428) Short-term investment sales and maturities 180,085 223,994 Property and equipment purchases (32,674) (30,624) Purchase of company, net of cash acquired - (44,942) --------------------- Cash used in investing activities (9,258) (47,000) Cash flows from financing activities: Other common stock transactions, net 4,039 30,158 Payments on capital lease obligations (243) - Payments on note payable - (1,676) --------------------- Cash provided by financing activities 3,796 28,482 Effect of exchange rate changes on cash and cash equivalents 2,609 1,862 --------------------- Net decrease in cash and cash equivalents $ (11,189) $ (4,549) ===================== Cash and cash equivalents: Beginning of period $ 84,544 $ 84,826 --------------------- End of period $ 73,355 $ 80,277 ===================== Supplemental disclosure of cash flow information: Cash paid for interest $ 65 - Supplemental schedule of non-cash investing and financing activities: Stock options issued in connection with the acquisition of PakNetX Corporation - $ 10,422 Cancellation of restricted stock, net of issuances $ (285) -
See Notes to Condensed Consolidated Financial Statements 5 ASPECT COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED Basis of Presentation The condensed consolidated financial statements include the accounts of Aspect Communications Corporation (Aspect or the Company) and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain amounts in the three and six months ended June 30, 2000 have been adjusted to reflect the adoption of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which became effective for the Company during the fourth quarter of 2000. Operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and notes thereto included in the Company's 2000 "Annual Financial Report to Shareholders" attached as an appendix to the Proxy Statement for the 2001 Annual Meeting of Shareholders. Reclassifications Certain prior-period amounts have been reclassified to conform to the current- period presentation. The reclassifications had no significant impact on major captions. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands): June 30, December 31, 2001 2000 -------- ------------ Raw materials $18,188 $14,779 Work in progress 3,176 3,404 Finished goods 1,166 1,757 ------- ------- Total inventories, net $22,530 $19,940 ======= ======= Comprehensive Loss Comprehensive loss is calculated as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------ -------------------- 2001 2000 2001 2000 -------- ------- -------- -------- Net loss $(45,957) $ (7,684) $(92,188) $(12,131) Unrealized loss on investments, net (876) (4,590) (4,923) (16,355) Accumulated translation adjustments, net 73 219 153 (247) -------- ------- -------- -------- Total comprehensive loss $(46,760) $(12,055) $(96,958) $(28,733) ======== ======== ======== ========
Contingencies The Company is from time to time involved in litigation or claims that arise in the normal course of business. The Company does not expect that any current litigation or claims will have a material adverse effect on the Company's business, operating results, or financial condition. 6 Per Share Information Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share further includes the dilutive impact of securities or other contracts to issue common stock (stock options, convertible subordinated debentures, and restricted stock). Basic and diluted loss per share for the three and six months ended June 30 are calculated as follows (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 2001 2000 2001 2000 ------------------- -------- -------- Net loss $(45,957) $(7,684) $(92,188) $(12,131) ======== ======= ======== ======== Weighted average shares outstanding 51,616 51,413 51,499 50,948 Weighted average shares of restricted common stock (130) - (137) - -------- ------- -------- -------- Shares used in calculation, basic and diluted 51,486 51,413 51,362 50,948 ======== ======= ======== ======== Basic and diluted net loss per share $(0.89) $(0.15) $(1.79) $(0.24) ======== ======= ======== ========
The Company had approximately 13.6 million and 10.5 million common stock options outstanding as of June 30, 2001 and 2000, respectively, which could potentially dilute basic earnings per share in the future. These options were excluded from the computation of diluted earnings per share because inclusion of these shares would have had an anti-dilutive effect, as the Company had a net loss for the period. As of June 30, 2001 and 2000, the Company also had 4.3 million shares of common stock issuable upon conversion of the convertible debentures, and 155,250 shares of restricted common stock outstanding at June 30, 2001. The weighted average of these shares were not included in the calculation of diluted earnings per share for any of the periods presented, because this inclusion would have been anti-dilutive. SFAS 133 Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 as of January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the consolidated financial position, results of operations, or cash flows of the Company. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations originally accounted for under the pooling of interest method will not be changed. Management does not expect the adoption of SFAS No. 141 to have a material impact on the financial position, results of operations or cash flows of the Company. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop the amortization of goodwill with a net carrying value of approximately $53.7 million at December 31, 2001 and the annual amortization of $13.1 million that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test. Any transitional impairment loss will be recognized as a change in accounting principle on the date of adoption. If any impairment of goodwill is recognized prior to date of adoption, a loss will be charged to operating expenses. Impairment of Short-Term Investments During the second quarter of 2001, the Company recorded an impairment charge of $1.3 million for some of its short-term investments. The assets were determined to be impaired because the Company held debt securities of certain entities that were unsuccessful in obtaining additional financing and these entities ability to repay amounts owed was not likely. The Company will continue to review its existing short-term investments for impairment and make adjustments as needed. Capitalization of Interest Costs The Company began capitalizing interest costs relating to the construction of a new building during the third quarter of 2000. As of June 30, 2001, approximately $500,000 was capitalized into construction in progress. Capitalization of interest terminated in July 2001 because the building was ready for its intended use. 7 Restructuring Charge In February 2001 and April 2001, the Company reduced its workforce by 6% and 11%, respectively, and consolidated selected facilities in its continuing effort to better optimize operations. This resulted in restructuring charges of $7.0 million and $13.2 million, respectively. As of June 30, 2001, the total restructuring accrual was $12.3 million, of which, $8.5 million was a short-term liability and $3.8 million was a long-term liability. Components of the restructuring accrual as of June 30, 2001 were as follows (in thousands):
Severance and Consolidation of Other Restructuring Outplacement Facilities Costs Costs Total ---------------------------------------------------------------------- Provision I $ 3,227 $ 3,219 $508 $ 6,954 Payments and property write downs (2,287) (484) - (2,771) ---------------------------------------------------------------------- Balance at March 31, 2001 940 2,735 508 4,183 Provision II 4,947 8,076 130 13,153 Payments and property write downs (3,394) (1,609) (57) (5,060) ---------------------------------------------------------------------- Balance at June 30, 2001 $ 2,493 $ 9,202 $581 $12,276 ======================================================================
Severance and outplacement costs related to the termination of 457 employees. Employee separation costs include severance and other related benefits. Functions impacted by the restructuring included sales and sales infrastructure, support services, manufacturing, marketing, research and development, and corporate functions. As of June 30, 2001, the Company made $5.7 million in severance payments, and the remaining balance will be paid by the end of 2001. Consolidation of facilities costs include rent of unoccupied facilities, property write downs and other facilities related costs. As of June 30, 2001, the Company paid $250,000 in expenses and wrote down $1.8 million in property. The remaining accrual balance will be paid over the next 5 years. Other restructuring costs primarily include taxes, legal, and travel expenses. The Company expects these expenses to be fully paid during the third quarter of 2001. 2001 Stock Option Exchange Program In April 2001, the Company's Board of Directors approved the 2001 Stock Option Exchange Program. Under this program, eligible employees may elect to exchange their existing options for new options to purchase the same number of shares of Aspect common stock, but with a grant date of December 20, 2001. The new options will be issued from Aspect's 1996 Employee Stock Option Plan and will be nonstatutory stock options. The individuals participating in this program must be employees of Aspect on the re-grant date to be eligible to receive the new stock options. No consideration for the canceled stock options will be provided to individuals terminating employment prior to the re-grant date. The new grants will have an exercise price equal to the closing sale price of the Company's common stock on the date of re-grant. The new stock options will vest on the same schedule as the canceled options; provided, however, that vesting is suspended from the cancellation date until the new grant date. The new stock options will have the same expiration date as the cancelled options. At the expiration date of this program, June 19, 2001, the Company had accepted for exchange options to purchase 4,327,897 shares of common stock, representing approximately 48% of the options that were eligible to be tendered. Upon the terms and subject to the conditions of the program, we will grant new options to purchase an aggregate of 4,327,897 shares of Aspect common stock on or about December 20, 2001. Bank Line of Credit On June 19, 2001, the Company obtained a secured line of credit with Comerica Bank in the amount of $20.0 million, which bears interest at the Company's choice of either the bank's prime rate (6.75% at June 30, 2001) or LIBOR + 1.75% (LIBOR was 3.86% at June 30, 2001). The Company also obtained a secured equipment line of $5.0 million with the same bank, which bears interest at the Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit facilities are secured by a general lien on all Company assets. Borrowings under the $20.0 million line of credit are available for one year from date of agreement and borrowings under the equipment line are available through December 2001, at which time all borrowings thereunder become term notes, which are payable in equal monthly installments, including interest, over 3 years. At June 30, 2001, no amounts were outstanding under either facility and the Company was in compliance with all related covenants and restrictions. The financial covenants include adjusted tangible net worth, quick ratio, earnings before interest expense, income taxes, depreciation and amortization (EBITDA), unrestricted cash, and leverage ratio. Subsequent Event Aspect is currently in an arbitration proceeding in the United Kingdom which relates to a dispute between Aspect and Universities of Superannuation Scheme Limited ("USS") regarding an Agreement to Lease between Aspect and USS. USS is seeking specific performance by Aspect of the Agreement to Lease and damages in excess of 50,000 British Pounds (approximately US $70,600 at current exchange rates). In July 2001, the High Court of Justice, Chancery Division in the United Kingdom granted a stay of the proceedings and the dispute was referred to arbitration. 8 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I - - Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis in the Company's 2000 Annual Financial Report to Shareholders. The matters discussed in this report including, but not limited to, statements relating to (i) the Company's ongoing effort to incorporate technology acquired from PakNetX into the Company's products, including the amortization of intangibles; (ii) changes in anticipated spending levels in research and development, sales and marketing, and general and administrative expenses; and (iii) the adequacy of our financial resources to meet currently anticipated cash flow requirements for the next twelve months are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended; Section 21E of the Securities and Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act of 1995; and are made under the safe- harbor provisions thereof. Forward-looking statements may be identified by phrases such as "we anticipate," "are expected to," and "on a forward-looking basis," and are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Specific factors that could cause actual revenue and earnings per share results to differ include a potentially prolonged period of generally poor economic conditions that could impact our customers' purchasing decisions, the significant percentage our quarterly sales that are consummated in the last few days of the quarter, making financial predictions difficult and raising a substantial risk of variance in actual results; fluctuations in our North American and international business levels; the hiring and retention of key employees; changes in product line revenues; insufficient, excess, or obsolete inventory and variations in valuation; the potential disruption to our business which could result from the current power shortages in California; and foreign exchange rate fluctuations. For a discussion of these and other risks related to our business, see the section entitled "Business Environment and Risk Factors" below. Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect management's analysis only as of the date hereof. Aspect undertakes no obligation to publicly release any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof. Background and Acquisition Aspect Communications Corporation is the leading provider of business communications solutions that help companies improve customer satisfaction, reduce operating costs, gather market intelligence and increase revenue. Aspect is the trusted mission-critical partner of 76 percent of the Fortune 50, daily managing more than 3 million customer sales and service professionals worldwide. Aspect provides the mission-critical software platform, development environment and applications that seamlessly integrate voice-over-IP, traditional telephony, e-mail, voicemail, Web, fax and wireless business communications, while guaranteeing investment protection in a company's front-office, back-office, Internet and telephony infrastructures. Aspect's leadership in business communications solutions is based on more than 16 years of experience and over 7,600 implementations deployed worldwide. The Company is headquartered in San Jose, California, with offices around the world, as well as an extensive global network of systems integrators, independent software vendors and distribution partners. On February 18, 2000, the Company acquired privately held PakNetX Corporation (PakNetX), an eBusiness software provider based in Salem, New Hampshire. The transaction enabled Aspect to integrate multimedia-over-IP technology into its flagship contact server software and strengthen the Company's eCRM market position. The transaction was accounted for as a purchase and resulted in a one- time charge of approximately $5 million related to in-process technology in the quarter ended March 31, 2000. The Company initially paid approximately $45 million in cash for the outstanding common and preferred shares and warrants of PakNetX. In addition, Aspect assumed the existing PakNetX stock option plan and converted PakNetX stock options into options to purchase approximately 160,000 shares of Aspect common stock with a fair value of approximately $10 million and incurred transaction costs of approximately $2 million. In 2000, the Company made an additional $10 million in milestone payments. This amount was added to goodwill and is being amortized over the remaining useful life of the intangible asset. The historical operations of PakNetX are not material to the financial position or results of operations of the Company. The total purchase price and final allocation among the tangible and intangible assets and liabilities acquired including purchased in-process technology and the $10 million in milestone payments are summarized as follows (in thousands): 9
Amortization period Total purchase price: Purchase price allocation: (years) Total cash consideration $54,948 Tangible assets $ 301 Value of options assumed 10,422 Intangible assets: Transaction costs 1,850 Developed and core technology 41,466 7 Assembled workforce 567 4 Testing tools 518 4 Goodwill 34,018 7 In-process technology 5,018 Expensed Tangible liabilities (1,790) Deferred tax liabilities (12,878) ---------- ---------- $67,220 $ 67,220 ========== ==========
As noted above, Aspect recorded a one-time charge of approximately $5 million in the first quarter of 2000 for purchased in-process technology that had not reached technological feasibility and had no alternative future use. The purchased in-process technology related to the development of PakNetX's contact server products and contact center applications that had not reached technological feasibility. As a result, successful development of this technology was uncertain. As of June 30, 2001, some components of this technology have been incorporated into Aspect products, while the remaining components are expected to reach technological feasibility during the latter part of the fiscal year. Failure to successfully complete the remaining components of this project could result in impairment of the associated capitalized intangible assets and could require the Company to accelerate the time period over which the intangibles are being amortized, which could have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. As of June 30, 2001, the Company has incurred an additional $7.1 million in operating expenses related to the development of this technology. Significant assumptions used to determine the value of in-process technology included: (i) projected net cash flows that the Company expected to result from development efforts; (ii) an estimate of the percentage of the project that had been completed; and (iii) a discount rate of approximately 25%. As of June 30, 2001, no significant departures from the assumptions included in the valuation analysis had occurred. In February 2001 and April 2001, the Company reduced its workforce by 6% and 11%, respectively, and consolidated selected facilities in its continuing effort to better optimize operations. This resulted in restructuring charges of $7.0 million and $13.2 million, respectively. 10 Results of Operations The following table sets forth statement of operations data for the three and six months ended June 30, 2001 expressed as a percentage of total revenues:
Three months ended Six months ended June 30, June 30, ------------------ ---------------- 2001 2000 2001 2000 ----------------------------------------- Net revenues: License revenues 25% 32% 26% 32% Services revenues 57% 49% 56% 46% Other revenues 18% 19% 18% 22% ----------------------------------------- Total net revenues 100% 100% 100% 100% ----------------------------------------- Cost of revenues: Cost of license revenues 2% 2% 2% 2% Cost of services revenues 34% 31% 33% 30% Cost of other revenues 16% 16% 17% 16% Amortization of intangible assets 1% 1% 1% 1% ----------------------------------------- Total cost of revenues 53% 50% 53% 49% ----------------------------------------- Gross margin 47% 50% 47% 51% Operating expenses: Research and development 19% 18% 20% 18% Sales and marketing 41% 30% 42% 28% General and administration 8% 10% 10% 8% Restructuring charges 12% - 9% - In-process research and development - - - 2% Amortization of intangible assets and stock-based compensation 6% 5% 6% 4% ----------------------------------------- Total operating expenses 86% 63% 87% 60% ----------------------------------------- Loss from operations (39%) (13%) (40%) (9%) Interest and other income 1% 7% 2% 5% Interest and other expense (2%) (2%) (2%) (1%) ----------------------------------------- Loss before income taxes (40%) (8%) (40%) (5%) Provision (benefit) for income taxes - (2%) - (1%) ----------------------------------------- Net loss (40%) (6%) (40%) (4%) -----------------------------------------
11 Revenues - -------- Net revenues for the second quarter of 2001 decreased 14% to $113.4 million from $131.6 million in the second quarter of 2000. Net revenues for the first six months of 2001 decreased 17% to $227.9 million from $276.0 million in the first six months of 2000. As a percentage of total net revenues, international net revenues were 29% for the second quarter and first six months of 2001 and 35% and 34% for the second quarter and first six months of 2000, respectively. License revenues for the second quarter of 2001 decreased 32% to $28.6 million from $41.8 million in the second quarter of 2000. License revenues for the first six months of 2001 decreased 32% to $60.1 million from $87.9 million in the first six months of 2000. License revenues consist of strategic and other software revenues. The decrease across all periods presented was primarily due to recent changes in global economic conditions causing many of our customers to delay and/or reduce their capital spending. Services revenues were $64.8 million for the second quarter of 2001 and 2000. Services revenues were $125.7 million and $126.7 million for the first six months of 2001 and 2000, respectively. Services revenues consist primarily of maintenance and support revenues, consulting services, and educational fees. Services revenues remained relatively unchanged across all periods presented due to revenues generated from recurring maintenance and software support contracts from the existing installed base. Other revenues for the second quarter of 2001 decreased 20% to $19.9 million from $25.0 million in the second quarter of 2000. Other revenues for the first six months of 2001 decreased 32% to $42.1 million from $61.5 million in the first six months of 2000. Other revenues consist of hardware revenues. The decrease across all periods presented was primarily due to the global economic slowdown and the transformation of our business model. Gross Margin - ------------ Gross margin on license revenues was 93% and 92% for the second quarter of 2001 and 2000, respectively. Gross margin on license revenues was 93% for the first six months of 2001 and 2000. Cost of license revenues includes third party software royalties, product packaging, and documentation. Gross margin on services revenues was 42% and 38% for the second quarter of 2001 and 2000, respectively. Gross margin on services revenues was 39% and 36% for the first six months of 2001 and 2000, respectively. Cost of services revenues include expense related to support, consulting and education. Gross margin on services revenues increased across all periods presented as a result of selling more profitable support services and less consulting services. Gross margin on other revenues was 7% and 18% for the second quarter of 2001 and 2000, respectively. Gross margin on other revenues was 9% and 27% for the first six months of 2001 and 2000, respectively. Cost of other revenues includes labor, materials, overhead, and other directly allocated costs involved in the manufacture and delivery of our hardware products. Gross margin on other revenues decreased across all periods presented due to product mix, and lower than anticipated revenues and increased period costs. Operating Expenses - ------------------ Research and development (R&D) expenses for the second quarter of 2001 decreased 9% to $22.0 million from $24.1 million in the second quarter of 2000. R&D expenses for the first six months of 2001 decreased 7% to $45.2 million from $48.5 million in the first six months of 2000. R&D expenditures reflect our ongoing efforts to remain competitive through both new product development and expanded capabilities for existing products. The decrease across all periods presented was primarily due to the savings from workforce adjustments during the first half of 2001, and lower spending related to our expense reduction initiatives. As a percentage of net revenues, R&D expenses were 19% and 18% for the second quarter of 2001 and 2000, respectively, and 20% and 18% for the first six months of 2001 and 2000, respectively. We anticipate, on a forward- looking basis, that such expenses in absolute dollars will remain relatively flat in 2001, although such expenses as a percentage of net revenues may fluctuate between periods. Sales and marketing expenses for the second quarter of 2001 increased 15% to $46.1 million from $40.1 million in the second quarter of 2000. Sales and marketing expenses for the first six months of 2001 increased 22% to $96.0 million from $78.5 million in the first six months of 2000. The increase across all periods presented resulted primarily from focused efforts to support our sales and marketing strategies by investing in personnel, marketing initiatives, and training. The increase was offset by lower spending in other functions as part of our expense reduction initiatives. As a percentage of net revenues, sales and marketing expenses were 41% and 30% for the second quarter of 2001 and 2000, respectively, and 42% and 28% for the first six months of 2001 and 2000, respectively. We anticipate, on a forward-looking basis, that sales and marketing expenses will remain relatively flat in 2001, although such expenses as a percentage of net revenues may fluctuate between periods. General and administrative (G&A) expenses for the second quarter of 2001 decreased 18% to $10.0 million from $12.3 million in the second quarter of 2000. G&A expenses were $21.8 million and $21.5 million for the first six months of 2001 and 2000, respectively. G&A expenses decreased in the second quarter of 2001 from 2000 primarily due to the savings from workforce adjustments and lower spending related to our expense reduction initiatives. The decrease was partially offset by an increase in outsourced functions. As a percentage of net revenues, G&A expenses were 8% and 10% for the second quarter of 2001 and 2000, respectively, and 10% and 8% for the first six months of 2001 and 2000, respectively. We anticipate, on a forward-looking basis, that such expenses in absolute dollars will decrease in 2001, although such expenses as a percentage of net revenues may fluctuate between periods. 12 Restructuring charges were $13.2 million and $20.2 million for the second quarter and the first six months of 2001, or $0.26 and $0.39 per diluted share, respectively. The charges relate to the Company's workforce reductions and consolidation of selected facilities in an effort to reduce overall costs and optimize operational efficiency. In-process research and development expenses represent a non-recurring charge of $5 million in the second quarter of 2000, related to the acquisition of PakNetX. Amortization of intangible assets and/or stock-based compensation expenses included in cost of revenues and operating expenses were $8.0 million and $7.4 million for the second quarter of 2001 and 2000, respectively. These expenses included in cost of revenues and operating expenses were $16.0 million and $13.8 million for the first six months of 2001 and 2000, respectively. Amortization of intangible assets and stock-based compensation relate to the purchase of intangible assets in connection with various acquisitions and issuance of restricted stock to specific employees. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop the amortization of goodwill with a net carrying value of approximately $53.7 million at December 31, 2001 and the annual amortization of $13.1 million that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test. Any transitional impairment loss will be recognized as a change in accounting principle on the date of adoption. If any impairment of goodwill is recognized prior to date of adoption, the loss will be charged to operating expenses. Interest and Other Income (Expense) - ---------------------------------- Interest and other income was $1.3 million and $8.2 million for the second quarter of 2001 and 2000, respectively. Interest and other income was $3.5 million and $14.9 million for the first six months of 2001 and 2000, respectively. The decrease across all periods presented was primarily due to the gain on the sale of marketable equity securities in 2000, lower interest income attributable to lower average investment amounts in 2001, and the loss from the impairment of certain short-term investments in 2001. The pre-tax gain on the sale of marketable equity securities was $5.7 million and $9.4 million for the second quarter and the first six months of 2000, respectively. For the first six months of 2001, the loss from the impairment of short-term investments was $1.3 million and the pre-tax gain was $409,000 on the sale of marketable equity securities. Interest and other expense was $3.0 million and $2.4 million for the second quarter of 2001 and 2000, respectively. Interest and other expense was $5.4 million and $5.0 million for the first six months of 2001 and 2000, respectively. The increase across all periods presented was primarily due to the increase of the accretion of interest on the convertible subordinated debentures. Provision for Income Taxes - -------------------------- The Company recorded an income tax provision at an effective tax rate of less than 1% for the second quarter and first six months of 2001 compared with a benefit, excluding the effect of purchased in-process technology related to acquisitions, of 28% and 20% for the same periods of 2000. The tax rate for the second quarter and first six months of 2001 differs from the statutory rate due to current year net operating losses for which no benefit is provided as a result of the full valuation allowance against the Company's deferred tax assets. The tax benefit rate for the second quarter and first six months of 2000 is less than the statutory rate primarily due to nondeductible goodwill amortization. Liquidity and Capital Resources - ------------------------------- At June 30, 2001, the principal source of liquidity consisted of cash, cash equivalents, short-term investments, and marketable equity securities totaling $137.7 million, which represented 26% of total assets. The primary sources of cash during the first six months of 2001 were net sales of short-term investments of $23.4 million and proceeds from the issuance of common stock under various stock plans of $4.0 million. The primary uses of cash during the first six months of 2001 were $32.7 million for the purchase of property and equipment and $8.3 million to support operating activities. 13 The primary sources of cash during the first six months of 2000 were $12.1 million generated from operating activities, net sales of short-term investments of $28.6 million, and proceeds from the issuance of common stock under various stock plans of $30.2 million. The primary uses of cash during the first six months of 2000 were $44.9 million cash paid to acquire PakNetX, and $30.6 million for the purchase of property and equipment. The Company has been constructing a new facility. As of June 30, 2001, Aspect is committed to pay a minimum of an additional $10 million to fully complete the construction of the new building. As of June 30, 2001, the fair market value of the Company's marketable equity securities was $766,000. These securities are available for sale at Aspect's discretion and are subject to market prices, which have historically fluctuated significantly. On June 19, 2001, the Company obtained a secured line of credit with Comerica Bank in the amount of $20.0 million, which bears interest at the Company's choice of either the bank's prime rate (6.75% at June 30, 2001) or LIBOR + 1.75 (LIBOR was 3.86% at June 30, 2001). The Company also obtained a secured equipment line of $5.0 million with the same bank, which bears interest at the Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit facilities are secured by a general lien on all Company assets. Borrowings under the $20.0 million line of credit are available for one year from date of agreement and borrowings under the equipment line are available through December 2001, at which time all borrowings thereunder become term notes, which are payable in equal monthly installments, including interest, over 3 years. At June 30, 2001, no amounts were outstanding under either facility and the Company was in compliance with all related covenants and restrictions. The financial covenants include adjusted tangible net worth, quick ratio, earnings before interest expense, income taxes, depreciation and amortization (EBITDA), unrestricted cash, and leverage ratio. On a forward-looking basis, cash, cash equivalents, short-term investments, marketable equity securities, and anticipated cash flow from operations will be sufficient to meet presently anticipated cash requirements for at least the next twelve months. Effect of New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations originally accounted for under the pooling of interest method will not be changed. Management does not expect the adoption of SFAS 141 to have an impact on the financial position, results of operations or cash flows of the Company. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop the amortization of goodwill with a net carrying value of approximately $53.7 million at December 31, 2001 and the annual amortization of $13.1 million that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test. Any transitional impairment loss will be recognized as a change in accounting principle on the date of adoption. If any impairment of goodwill is recognized prior to date of adoption, the loss will be charged to operating expenses. Business Environment and Risk Factors The Overall Economic Climate Continues to Be Weak: Our products typically represent substantial capital commitments by customers, involving a potentially long sales cycle. As a result, customer purchase decisions may be significantly affected by a variety of factors including trends in capital spending for telecommunications or enterprise software for contact center servers, market competition, and the availability or announcement of alternative technologies. Continued recent weakness in global economic conditions has resulted in many of our customers delaying and/or reducing their capital spending related to information systems. If the economy continues to be weak, demand for the Company's products could decrease resulting in lower revenues and a decline in the overall rate of the Company's revenue growth. Our Company's Business Focus Continues to Evolve: Our shift to an enterprise software business model has required and will continue to require substantial change, potentially resulting in some disruption to our business. Our inability to successfully continue or complete this transition from a hardware to an enterprise software business in a timely manner could materially affect our business, operating results, or financial condition. These changes may include the following: . Changes in management and technical personnel; . Modifications to the pricing and positioning of our products which could impact revenues and operating results; . Expanded or differing competition resulting from operating in the enterprise software market; . More revenues being deferred to future periods under revenue recognition rules; and/or . An increased reliance on systems integrators to develop, deploy, and/or manage our applications. Our Revenues Are Dependent on a Small Number of Products: Historically, sales and installations of a small number of our products accounted for a substantial portion of net revenues. Demand for our products could be adversely affected by not meeting customer specifications and/or by problems with system performance, system availability, installation or service delivery commitments, or market acceptance. Our Market Is Intensely Competitive: The market for our products is intensely competitive, and competition is likely to intensify as companies in our industry consolidate to offer integrated solutions. Our principal competitors currently include companies in the eCRM market and companies that market traditional telephony products and services. 14 As the hardware requirements for a traditional call center diminish due to the emergence of the Internet, local area networks, and other factors, companies in these markets are merging and obtaining significant positions in the eCRM and traditional telephony products market. Many current and potential competitors, including Avaya Inc., Nortel Networks Corporation, Rockwell International Corporation, Alcatel SA, Siemens AG, Cisco Systems Inc., Siebel Systems Inc., and Oracle Corporation, have considerably greater resources, larger customer bases and broader international presence than Aspect. Consequently, the Company expects to encounter substantial competition from these and other sources. We May Be Involved in Litigation: We may be involved in litigation for a variety of matters. Claims brought against us may have a financial impact, both because of the effect on our common stock performance and because of the disruption, costs, and diversion of management attention such a claim would cause. In our industry, there has been extensive litigation regarding patents and other intellectual property rights, and we are periodically notified of such claims by third parties. In the past, we have been sued for alleged patent infringement. Organizations in our industry may intend to use intellectual property litigation to generate revenues. In the future, claims asserting infringement of intellectual property rights may be asserted or prosecuted against us. Although we periodically negotiate with third parties to establish intellectual property license or cross-license agreements, like our patent cross-license agreement with Lucent Technologies, Inc., such negotiations may not yield a settlement. Moreover, even if we negotiate license agreements with a third party, future disputes with such parties are possible. If we are unable to resolve an intellectual property dispute through a license, settlement, or successful litigation, we could be subject to damage assessments and be prevented from making, using, or selling certain products or services. In the future, we could become involved in other types of litigation, such as shareholder lawsuits for alleged violations of securities laws, claims by employees, and product liability claims. Any litigation could result in substantial cost to us and diversion of our efforts. Doing Business Internationally Involves Significant Risk: We market our products and services worldwide and anticipate entering additional countries in the future. If we fail to enter certain major international markets successfully, our competitive position could be impaired and we may be unable to compete on a global scale. The financial resources required to enter, establish, and grow new and existing international markets may be substantial, and international operations are subject to additional risks including: . The cost and timing of the multiple governmental approvals and product modifications required by many countries; . Market acceptance; . Exchange rate fluctuations; . Delays in market deregulation; . Difficulties in staffing and managing foreign subsidiary operations; and/or . Global economic climate considerations including potentially negative tax and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas, and other restrictions. Regulatory Changes and Changes Made to Generally Accepted Accounting Principles May Impact Our Business: The electronic communications industry in general is subject to a wide range of regulations throughout various markets and throughout various countries in which we currently operate or may wish to operate in the future. In addition, new products and services may involve entering into different or newly regulated areas. Changes in these environments may impact our business and could affect our ability to operate in certain markets or certain regions from time to time. Required revisions to generally accepted accounting principles will require us to review our accounting and financial reporting procedures in order to ensure continued compliance with required policies. From time to time such changes may have a short-term impact in the reporting that we do, and these changes may impact market perception of our financial condition. Technology Risks Our Intellectual Property May Be Copied, Obtained, or Developed by Third Parties: Our success depends in part upon our internally developed technology. Despite the precautions we take to protect our intellectual property, unauthorized third parties may copy or otherwise obtain and use our technology. In addition, third parties may develop similar technology independently. Technology Is Rapidly Changing: The market for our products and services is subject to rapid technological change and new product introductions. Current competitors or new market entrants may develop new, proprietary products with features that could adversely affect the competitive position of our products. We may not successfully anticipate market demand for new products or services, or introduce them in a timely manner. The convergence of voice and data networks, and wired and wireless communications could require substantial modification and customization of our current products and business models, as well as the introduction of new products. We may not be able to compete effectively in these markets. In addition, Aspect's products must readily integrate with major third-party security, 15 telephony, front-office, and back-office systems. Any changes to these third-party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Transaction Risks Acquisitions and Investments May Be Difficult and Disruptive: We have made a number of acquisitions and have made minority equity investments in other companies. Acquisitions or investments we make may experience significant fluctuations in market value or may result in significant write-offs, the creation of goodwill, or the issuance of additional equity or debt securities. These acquisitions and investments can, therefore, be costly and disruptive, and we may be unable to successfully integrate a new business or technology into our business. We may continue to make such acquisitions and investments, and there are a number of risks that future transactions could entail. These risks include the inability to successfully integrate or commercialize acquired technologies or otherwise realize anticipated synergies or economies of scale on a timely basis; the negative impact on earnings of significant charges related to the amortization of purchased technology and goodwill; diversion of management attention; dilution of existing equity holders; disruption of our ongoing business; inability to assimilate and/or retain key technical and managerial personnel for both companies; inability to establish and maintain uniform standards, controls, procedures, and processes; potential legal liability for pre-acquisition activities; permanent impairment of our equity investments; governmental, regulatory, or competitive responses to the proposed transactions; and/or impairment of relationships with employees, vendors, and/or customers including, in particular, acquired original equipment manufacturer and value- added reseller relationships. Operational/Performance Risks Our Revenues and Operating Results Are Uncertain and May Fluctuate: Our revenues may fluctuate significantly from period to period. There are many reasons for this variability, including the shift in our focus from supplying telecommunications equipment to becoming a provider of contact server software, and associated software applications; reduced demand for some of our products and services; a limited number of large orders accounting for a significant portion of product revenues in any particular quarter; the timing of consulting projects and completion of project milestones; the size and timing of individual software license transactions; dependence on new customers for a significant percentage of product revenues; the ability of our sales force to achieve quarterly revenue objectives; fluctuations in the results of existing operations, recently acquired subsidiaries, or distributors of our products or services; seasonality and mix of products and services and channels of distribution; our ability to sell support agreements and subsequent renewal agreements for support of our products; our ability to develop and market new products and control costs; and/or changes in market growth rates for different products and services. We May Experience Difficulty Managing Our Changes in Growth: Growth may place a significant strain on our operational and financial systems. We are upgrading these systems and may experience substantial disruption and incur significant expenses and write-offs during these transitions. We must carefully manage accounts receivables to limit credit risk. We must also maintain inventories at levels consistent with product demand. Inaccurate data (for example, credit histories or supply/demand forecasts) could quickly result in excessive balances or insufficient reserves. We May Experience Difficulty Expanding Our Distribution Channels: We have historically sold our products and services through our direct sales force and a limited number of distributors. Changes in customer preferences, the competitive environment, or other factors may require us to broaden original equipment manufacturer distribution channels, as well as expand third-party distributor, electronic, and other alternative distribution channels. We anticipate a greater reliance on systems integrators as we complete our recently announced workforce adjustment that will ultimately reduce our internal consulting resources. We may not be successful in expanding these distribution channels. We Are Dependent on Key Personnel: We depend on certain key management and technical personnel and on our ability to attract and retain highly qualified personnel in labor markets characterized by high turnover among, high demand for, and limited supply of, qualified people; and we have recently experienced turnover among such personnel. We have recently undergone significant changes in senior management and technical personnel and may experience additional changes as a result of continuing volatility in the high technology employment sector. Further, we increased the size of our sales force during the last two quarters of 2000. New personnel require extensive training and initially tend to be less productive than those with greater experience. Any delays or difficulties we encounter in recruiting, training, or retention could impair our ability to sell products and services, may be disruptive to our operations, and may make retention of highly qualified personnel increasingly challenging. We Are Dependent on Third Parties: We subcontract substantial elements of our manufacturing and other support functions to third parties. We depend on certain critical components in the production of our products and services. Certain of these components are obtained only from a single supplier and only in limited quantities. In addition, some of our major suppliers use 16 proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, suppliers could discontinue their products, or modify them in manners incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors. We also subcontract various support functions to third parties. If any of these vendors experience difficulty meeting our requirements for components we may be unable to meet development or delivery commitments. Our Operations Are Geographically Concentrated: Significant elements of our product development, manufacturing, information technology systems, corporate offices, and support functions are concentrated at a single location in San Jose, California. We also concentrate administrative, and support functions and related infrastructure to support our international operations at our U.K. offices. In the event of localized extended outages of critical utilities, including prolonged or recurrent power interruptions due to the current shortages in California, or a natural disaster, such as an earthquake or flood, or any disruption of local transportation systems, we could experience a significant business interruption. Financial/Capital Market Risks The Prices of Our Common Stock and Convertible Subordinated Debentures Are Volatile: We operate in a rapidly changing high-technology industry that exhibits significant stock market volatility. Accordingly, the price of our common stock and our convertible subordinated debentures may be subject to significant volatility. You cannot consider our past financial performance as a reliable indicator of performance for any future period, and should not use historical data to predict future results or trends. For any given quarter, a shortfall in our operating results from the levels expected by securities analysts or others could immediately and adversely affect the price of our convertible subordinated debentures and our common stock. If we do not learn of such shortfalls until late in a fiscal quarter, there could be an even more immediate and adverse effect on the price of our convertible subordinated debentures and our common stock. In addition, this volatility could be exacerbated by the relatively low trading volume of our common stock and debentures. Foreign Currency Exchange: Revenues generated from international operations are generally denominated in foreign currencies. We enter into foreign exchange forward contracts to hedge against fluctuations of intercompany account balances. Market value gains and losses on these hedge contracts are substantially offset by fluctuations in the underlying balances being hedged, and the net financial impact has not been material in any of the past three fiscal years. At June 30, 2001, our primary net foreign currency market exposures included Euros and British pounds. Our Debt and Debt Service Obligations Are Significant: We incurred $150 million of principal indebtedness ($490 million principal at maturity) from the sale of convertible subordinated debentures in August 1998. We obtained a secured line of credit and an equipment line totaling $25 million in June 2001. We had no amounts outstanding under either credit facility at June 30, 2001. The outstanding debt results in a ratio of long-term debt to total shareholders' equity of approximately 94% at June 30, 2001. As a result of this sale, we have substantially increased our principal and interest obligations. The degree to which we are leveraged could materially and adversely affect our ability to obtain additional financing and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business, and other factors affecting our operations, many of which are beyond our control. Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk Reference is made to the information appearing under the caption "Quantitative and Qualitative Disclosures About Financial Market Risk" of the Registrant's 2000 Annual Financial Report to Shareholders, attached as an appendix to Aspect's 2001 Proxy Statement, which information is hereby incorporated by reference. The Company believes there were no material changes in the Company's exposure to financial market risk during the second quarter or first six months of 2001. 17 Part II: Other Information Item 4. Submission of Matters to a Vote of Security Holders On May 16, 2001, the Annual Meeting of Shareholders of Aspect Communications Corporation was held in San Jose, California. An election of directors was held with the following individuals being elected to the Board of Directors of the Company: FOR WITHHELD ---------- -------- Donald P. Casey 47,720,648 410,917 Debra J. Engel 47,678,007 453,558 Norman A. Fogelsong 47,704,290 427,275 Beatriz V. Infante 47,573,736 557,829 Christopher B. Paisley 47,702,592 428,973 John W. Peth 47,728,900 402,665 David B. Wright 47,711,759 419,806 Other matters voted upon and approved at the meeting, and the number of affirmations and negative votes cast with respect to each such matters were as follows: To approve an amendment to the 1999 Equity Incentive Plan to increase the number of shares of common stock reserved for issuance thereunder by 2,450,000 shares (34,194,745 votes in favor, 13,787,679 votes opposed, 149,141 votes abstaining). To approve an amendment to the Aspect Incentive Plan (46,476,340 votes in favor, 1,493,558 votes opposed, 161,667 votes abstaining). To ratify the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending December 31, 2001 (47,908,775 votes in favor, 181,050 votes opposed, 41,740 votes abstaining). Item 6. Exhibits and Reports on Form 8-K A. Exhibits 10.82 Severance Agreement between the Registrant and Gary L. Smith, dated June 18, 2001. 10.83 * Comerica Bank Credit Agreement, dated June 19, 2001 - --------- * Material has been omitted pursuant to a request for confidential treatment and such material has been filed separately with the SEC. B. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aspect Communications Corporation (Registrant) Date: August 14, 2001 By /s/ Betsy Rafael ----------------------------------------------- Betsy Rafael Executive Vice President, Finance, Chief Financial Officer, and Secretary 19 EX-10.82 3 dex1082.txt SEVERANCE AGREEMENT GARY L. SMITH DTD 6/18/2001 EXHIBIT 10.82 June 18, 2001 Gary L. Smith This letter sets forth the substance of the separation agreement (the "Agreement") which Aspect Communications (the "Company") is offering to you to aid in your employment transition. 1. Termination. Your last day of work with the Company and your employment termination date will be the earlier of December 31,2001 or employment with another firm between June 18,2001 and December 31,2001. Your last day of work will be June 18,2001 and your status as of June 18,2001 shall be Executive Advisor to the CEO. 2. Accrued Salary and Paid Time Off. The Company will pay you all accrued salary, and all accrued FTO that you have earned but not used through the Separation Date, subject to standard payroll deductions and withholdings. You are entitled to these payments regardless of whether or not you sign this Agreement. 3. Severance Benefits. Although the Company has no obligation to provide additional severance benefits, the Company will provide you with the following severance package: (a) Salary. The Company will make severance payments to you in the form of continuation of your base salary in effect on June 18,2001, on a normal payroll basis, subject to standard payroll deductions and withholdings, through December 31,2001 or up to the date you commence employment with another Company, whichever is earlier. (b) Health Insurance. Your Aspect health benefits will be provided until your termination date. After your termination date, you will be eligible for up to 18 months of COBRA coverage at your cost provided you enroll and pay the monthly premiums. (c) Final Installment of Hiring Bonus. The Company will pay you the final installment of your hiring bonus in the amount of $25,000.00 less all applicable payroll deductions to be paid within ten days of the effective date of this Agreement. (d) Outplacement. Aspect has arranged outplacement services from Lee Hecht Harrison for you not to exceed $5,000.00 .We encourage you to make full use of these services to support your career transition process, both within and outside Aspect. You will receive a packet of information when you meet with Lee Hecht Harrison that provides details about your benefits and career transition services. Please read all of this information carefully to ensure that you understand your benefits coverage. To schedule an appointment with Lee Hecht Harrison you may call Kendra Jordan, Vice President of Business Development at 408-961-7610. 4. Stock Options. Under the terms of the Company's applicable Stock Option Plan and your stock option grant, vesting of your stock option granted pursuant to the Plan will cease as of your Separation Date. Your rights to exercise your option as to any vested shares will be as set forth in the Plan. 5. Other Compensation or Benefits. You acknowledge that, except as expressly provided in this Agreement, you will not receive any additional compensation, severance or benefits after the Termination Date. 6. Expense Reimbursements. You agree that, within ten (10) days of the Termination Date, you will submit your final documented expense reimbursement statement reflecting all business expenses you incurred through the Termination Date, if any, for which you seek reimbursement. The Company will reimburse you for these expenses pursuant to its regular business practice. 7. Return of Company Property. By the Termination date, you agree to return to the Company all Company documents (and all copies thereof) and other Company property that you have had in your possession at any time, including, but not limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards, identification badges and keys; and, any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof). You may retain your palm pilot and purchase your Aspect laptop computer at book value, if you wish. 8. California Living Expenses and Lease Car. The Company will continue to provide normal California living expenses to include the apartment and the lease automobile through July 31,2001. You will return the car to the leasing company by that date and you will vacate the apartment by July 31,2001. The Company will work with you to move the lease for the automobile to your name and financial responsibility, if you so desire. This transaction must be completed no later than July 31,2001. 9. Aspect Phone and Email. Aspect will provide limited voice mail and email for you to facilitate communication with job prospects through the termination date and as long as no abuses of the voice or email system by you exist. 10. Proprietary Information Obligations. Both during and after your employment you acknowledge your continuing obligations under your Proprietary Information and Inventions Agreement not to use or disclose any confidential or proprietary information of the Company without prior written authorization from a duly authorized representative of the Company. A copy of your Proprietary Information and Inventions Agreement is attached hereto as Exhibit A. 1. Confidentiality. The provisions of this Agreement will be held in strictest confidence by you and the Company and will not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) you may disclose this Agreement to your immediate family; (b) the parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (c) the Company may disclose this Agreement as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; and (d) the parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. In particular, and without limitation, you agree not to disclose the terms of this Agreement to any current or former Company employee. If you violate this confidentiality provision, the Company shall have the right to refuse to pay any money owed to you under this Agreement without affecting the enforceability of this Agreement. If you violate this confidentiality provision, the Company shall have the right to refuse to pay any money owed to you under this Agreement without affecting the enforceability of this Agreement. 2. Non-disparagement. Both you and the Company agree not to disparage the other party, and the other party's officers, directors, employees, shareholders and agents, in any manner likely to be harmful to them or their business, business reputation or personal reputation; provided that both you and the Company will respond accurately and fully to any question, inquiry or request for information when required by legal process. 3. Non-solicitation. You agree that for one (1) year following the Termination Date, you will not directly or indirectly solicit, entice, induce, or encourage any employee, consultant, or independent contractor of the Company to terminate his or her relationship with the Company in order to become an employee, consultant, or independent contractor to or for any other person or entity. 4. Release. In exchange for the payments and other consideration under this Agreement to which you would not otherwise be entitled, you hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and its officers, directors, agents, servants, employees, attorneys, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the execution date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with your employment with the Company or the termination of that employment; claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law, statute, or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing. 5. ADEA Waiver. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you may have under the ADEA, as amended. You also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which you were already entitled. You further acknowledge that you have been advised by this writing, as required by the ADEA, that: (a) your waiver and release do not apply to any rights or claims that may arise after the execution date of this Agreement; (b) you have been advised hereby to consult with an attorney prior to executing this Agreement; (c) you have twenty-one (21) days to consider this Agreement (although you may choose to voluntarily execute this Agreement earlier); (d) you have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (e) this Agreement will not be effective until the date upon which the revocation period has expired, which will be the eighth day after this Agreement is executed by you, provided that the Company has also executed this Agreement by that date ("Effective Date"). 6. Disputes Subject to Arbitration. You and the Company agree that any dispute regarding the interpretation, application or enforcement of this Agreement or any dispute arising out of your employment or the termination of that employment with Aspect Communications shall be decided by confidential, final and binding arbitration conducted in San Jose, California by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. Nothing in this paragraph is intended to prevent either you or Aspect Communications from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. 7. Section 1542 Waiver. YOU UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. In giving this release, which includes claims which may be unknown to you at present, you acknowledge that you have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to your release of any unknown or unsuspected claims you may have against the Company. 8. Miscellaneous. This Agreement, including Exhibit A, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to this subject matter. It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties or representations. This Agreement may not be modified or amended except in a writing signed by both you and a duly authorized officer of the Company. This Agreement will bind the heirs, personal representatives, successors and assigns of both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement and the provision in question will be modified by the court so as to be rendered enforceable. This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of California as applied to contracts made and to be performed entirely within California. If this Agreement is acceptable to you, please sign below and return the original to me. I wish you good luck in your future endeavors. Sincerely, ASPECT COMMUNICATIONS By: /s/ John Viera ____________________________________________________________________ John Viera June 18, 2001 Senior Vice President Human Resources Exhibit A - Proprietary Information and Inventions Agreement Agreed: /s/ Gary L. Smith _______________________________________________________________________ Gary L. Smith Date Exhibit A Proprietary Information and Inventions Agreement (Original Kept in Employee File, Attach Copy) EX-10.83 4 dex1083.txt COMMERCIAL BANK CREDIT AGREEMENT DTD 6/19/2001 EXHIBIT 10.83 ================================================================================ ASPECT COMMUNICATIONS CORPORATION CREDIT AGREEMENT DATED AS OF JUNE 19, 2001 COMERICA BANK - CALIFORNIA ================================================================================ CREDIT AGREEMENT ---------------- THIS CREDIT AGREEMENT, made as of the 19th day of June, 2001, by and between ASPECT COMMUNICATIONS CORPORATION, a California corporation (herein called "Company") and COMERICA BANK-CALIFORNIA, a California banking corporation, of San Jose, California (herein called "Bank"). RECITALS: A. Company desires to obtain certain credit facilities from Bank. B. Bank is willing to extend such credit to Company on the terms and conditions herein set forth. NOW, THEREFORE, Bank and Company agree as follows: WITNESSETH: 1. DEFINITIONS For the purposes of this Agreement the following terms will have the following meanings: "Account" shall have the meaning assigned to it in the California Uniform Commercial Code on the date of this Agreement. "Account Debtor" shall mean the party who is obligated on or under any Account. "Adjusted Tangible Net Worth" shall mean as of any date of determination, Tangible Net Worth as of such date plus the outstanding principal amount of the Subordinated Debt as of such date. "Advance" shall mean a borrowing requested by Company and made by Bank under Section 2 or 2.A of this Agreement, including any refunding or conversions of such borrowings pursuant to Section 3.A.3 hereof, and shall include a Eurodollar-based Advance and a Prime-based Advance. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and executive officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation for the purposes of this definition if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Alternate Base Rate" shall mean for any day a rate per annum (rounded upwards, if necessary, to the next higher 1/16 of 1%) equal to the Federal Funds Effective Rate in effect on such day plus one percent (1%). "Applicable Eurodollar Margin" shall mean one and three quarters percent (1 3/4%) with respect to the Revolving Credit Note and two percent (2%) with respect to the Equipment Line Note and each Equipment Term Note. "Applicable Interest Rate" shall mean the Eurodollar-based Rate or the Prime-based Rate, as selected by Company from time to time subject to the terms and conditions of this Agreement. "Applicable L/C Commission Rate" shall mean one and one quarter percent (1 1/4%) per annum. "Base Adjusted Tangible Net Worth" shall initially mean ***. On the last day of each fiscal quarter of Company (beginning June 30, 2001), Base Adjusted Tangible Net Worth shall increase by *** of Net Income for the quarter then ended; provided that for purposes of determining Base Adjusted Tangible Net Worth if Net Income is less than zero for any fiscal quarter, it shall be deemed to be zero for such fiscal quarter. In addition, effective upon the issuance after December 31, 2000 by Company or any of its Subsidiaries of any Equity Interests (other than Equity Interests issued to sellers in connection with a Permitted Acquisition) or the incurrence of any Subordinated Debt, Base Adjusted Tangible Net Worth shall increase by an amount equal to one hundred percent (100%) of the Net Cash Proceeds of such equity issuance or issuance of Subordinated Debt. "Business Day" shall mean any day on which commercial banks are open for domestic and international business (including dealings in foreign exchange) in San Jose, London and New York. "Capital Expenditure" shall mean, without duplication, any payment made directly or indirectly for the purpose of acquiring or constructing fixed assets, real property or equipment which in accordance with GAAP would be added as a debit to the fixed asset account of Company or a Subsidiary, as applicable, including, without limitation, amounts paid or payable under any conditional sale or other title retention agreement or under any lease or other periodic payment arrangement which is of such a nature that payment obligations of Company or a Subsidiary, as applicable, thereunder would be required by GAAP to be capitalized and shown as liabilities on the balance sheet of Company and its consolidated Subsidiaries. "Capital Lease" shall mean any lease of any property (whether real, personal or mixed) by Company or any Subsidiary as lessee which, in conformity with GAAP, is, or is required to be accounted for as a capital lease on the balance sheet of Company and its consolidated Subsidiaries, together with any renewals of such leases (or entry into new leases) on substantially similar terms. "Cash Equivalents" shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that *** Material has been omitted pursuant to a request for confidential treatment -2- the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than three years from the date of acquisition, (ii) marketable direct obligations issued by any State of the United States of America or any local government or other political subdivision thereof rated (at the time of acquisition of such security) at least AA by Standard & Poor's Ratings Group ("S&P") or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's") having maturities of not more than one year from the date of acquisition, (iii) U.S. dollar denominated time deposits, certificates of deposit and bankers' acceptances of (x) Bank, (y) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (z) any bank whose short-term commercial paper rating (at the time of acquisition of such security) by S&P is at least A-l or the equivalent thereof or by Moody's is at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"), in each case with maturities of not more than six months from the date of acquisition, (iv) commercial paper and variable or fixed rate notes issued by Bank or any Approved Bank or by the parent company of Bank or any Approved Bank and commercial paper and variable rate notes issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating (at the time of acquisition of such security) of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by any industrial company with a long-term unsecured debt rating (at the time of acquisition of such security) of at least AA or the equivalent thereof by S&P or the equivalent thereof by Moody's and in each case maturing within one year after the date of acquisition and (v) repurchase agreements with Bank or any Approved Bank maturing within one year from the date of acquisition that are fully collateralized by investment instruments that would otherwise be Cash Equivalents. "Consolidated" or "Consolidating" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amounts signified by such term for all such Persons determined on a consolidated or combined, as applicable, basis in accordance with GAAP. Unless otherwise specified herein, references to Consolidated financial statements or data of Company includes consolidation with its Subsidiaries in accordance with GAAP. "Default" shall mean any event which with the giving of notice or the passage of time, or both, would constitute an Event of Default under this Agreement. "Domestic Subsidiary" shall mean any direct or indirect Subsidiary of Company incorporated under the laws of the United States of America, or any state, territory, possession or other political subdivision thereof which is a domestic Subsidiary for purposes of Section 956 of the Internal Revenue Code; and "Domestic Subsidiaries" shall mean any or all of them. "EBITDA" shall mean as of any date of determination, Net Income for the fiscal quarter then ending plus, to the extent deducted in determining Net Income, (i) depreciation and amortization expense for such period, (ii) interest expense for such period and (iii) income taxes for such period, all as determined in accordance with GAAP. "Environmental Laws" shall mean all federal, state and local laws including statutes, regulations, ordinances, codes, rules, and other governmental restrictions and requirements, relating to environmental pollution, contamination or other impairment of the environment or -3- any hazardous or toxic substances of any nature. These Environmental Laws shall include but not be limited to the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, and the Federal Superfund Amendments and Reauthorization Act of 1986. "Equipment Loan" shall mean each term out loan for the Advances under Section 2.A evidenced by an Equipment Term Note. "Equipment Line Note" shall mean the Note described in Section 2.A.1 hereof made by Company to Bank in the form annexed to this Agreement as Exhibit "A". "Equipment Line Maturity Date" shall mean December 19, 2001. "Equipment Term Note" shall mean the Notes described in Section 2.A.2 hereof made by Company to Bank in the form attached as Exhibit "B". "Equity Interest" means, with respect to any Person, any and all shares, share capital interests, participations, warrants, options or other equivalents (however designated) of capital stock of a corporation and any and all equivalent ownership interests in a Person (other than a corporation). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor act or code. "Eurodollar-based Advance" shall mean an Advance which bears interest at the Eurodollar-based Rate. "Eurodollar-based Rate" shall mean a per annum interest rate which is the Applicable Eurodollar Margin plus the quotient of: ---- (a) the per annum interest rate at which Bank's Eurodollar Lending Office offers deposits to prime banks in the eurodollar market in an amount comparable to the relevant Eurodollar-based Advance or relevant principal portion of any Equipment Loan and for a period equal to the relevant Interest Period at approximately the time Company requests such Advance on the first day of such Interest Period; divided by (b) a percentage equal to 100% minus the maximum rate on such date at which Bank is required to maintain reserves on "Euro-currency Liabilities" as defined in and pursuant to Regulation D of the Board of Governors of the Federal Reserve System or, if such regulation or definition is modified, and as long as Bank is required to maintain reserves against a category of liabilities which includes Eurodollar deposits or includes a category of assets which includes Eurodollar loans, the rate at which such reserves are required to be maintained on such category; all as conclusively determined by Bank, such sum to be rounded upward, if necessary, to the nearest whole multiple of 1/16th of 1%. -4- "Eurodollar Lending Office" shall mean Bank's office located at Grand Cayman, British West Indies or such other branch of Bank, domestic or foreign, as it may hereafter designate as its Eurodollar Lending Office by notice to Company. "Event of Default" shall mean any of the Events of Default specified in Section 10 hereof. "Federal Funds Effective Rate" shall mean, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank from three Federal funds brokers of recognized standing selected by it. "Foreign Subsidiaries" shall mean all of Company's direct or indirect Subsidiaries other than the Domestic Subsidiaries. "GAAP" shall mean, as of any applicable date of determination, generally accepted accounting principles consistently applied, as in effect on the date of this Agreement. "Immaterial Subsidiary" shall mean any Subsidiary of Company which as of any applicable date of determination has (a) assets of less than One Million Dollars ($1,000,000) and (b) annual revenues of less than One Million Dollars ($1,000,000). "Indebtedness" shall mean all loans, advances, indebtedness, obligations and liabilities of Company to Bank under this Agreement, together with all other indebtedness, obligations and liabilities whatsoever of Company to Bank arising under or in connection with this Agreement, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising. "Indenture" shall mean the Indenture dated as of August 10, 1998 between Aspect Telecommunications Corporation as issuer and State Street Bank and Trust Company of California, N.A., as Trustee. "Interest Period" shall mean a period of one (1), two (2), three (3) or six (6) months as selected by Company pursuant to the provisions of this Agreement commencing on the day a Eurodollar-based Advance is made, or on the effective date of an election of the Eurodollar-based Rate made under Section 4.A.1 or Section 4.B.1. "Letter of Credit" shall have the meaning set forth in Section 2.5. "Letter of Credit Reserve" shall mean as of any date of determination, an amount equal to the aggregate principal amount of all undrawn Letters of Credit issued by Bank for the account of Company under and pursuant to this Agreement and the amount of all draws under Letters of Credit paid by Bank and not reimbursed by Company. -5- "Leverage Ratio" shall mean as of any date of determination, a ratio the numerator of which is total liabilities of Company and its Subsidiaries as of such date less the outstanding principal amount of the Subordinated Debt as of such date and the denominator of which is Adjusted Tangible Net Worth as of such date. "Loan Documents" shall mean collectively, this Agreement, any Notes, the Security Agreements, any Subordination Agreements and any other instruments or agreements executed at any time pursuant to or in connection with any such documents. "Net Cash Proceeds" shall mean, with respect to any issuance of Equity Interests or incurrence of Subordinated Debt, the aggregate cash proceeds received by Company and/or any Subsidiary, as the case may be, from such transaction, net of the reasonable direct expenses of such transaction. "Net Income" shall mean the net income (or loss) of Company and its consolidated Subsidiaries for any period, determined in accordance with GAAP. "Net Worth" shall mean as of any date of determination the stockholders' equity of Company and its consolidated Subsidiaries as of such date as determined in accordance with GAAP. "Note" shall mean the Revolving Credit Note, the Equipment Line Note and each, the Equipment Term Note, as the case may be, as any may be amended or modified from time to time, and "Notes" shall refer to each of them. "Notice of Term Rate" shall mean a Notice of Term Rate issued by Company under this Agreement in the form annexed to this Agreement as Exhibit "C". ----------- "Permitted Acquisition" shall mean any acquisition by the Company or any of its Subsidiaries of assets, businesses or business interests or shares of stock or other ownership interests of or in any Person ("target") which operates in substantially the same or a similar line of business as Company or the Subsidiary which is a party to the acquisition and which is conducted in accordance with the following requirements: (a) not more than five (5) days after the signing of any letter of intent for such proposed acquisition or not later than thirty (30) days before the consummation of the acquisition, whichever first occurs, the Company shall have provided a copy of the applicable letter of intent to Bank and promptly upon signing the definitive acquisition documents, Company shall have provided copies thereof to Bank; (b) on the date of any such acquisition, all necessary or appropriate governmental, quasi-governmental, agency, regulatory or similar approvals of applicable jurisdictions (or the respective agencies, instrumentalities or political subdivisions, as applicable, of such jurisdictions) and all necessary or appropriate non-governmental and other third-party approvals which, in each case, are material to such acquisition have been obtained and are in effect, and the Company and its Subsidiaries are in compliance in all material respects therewith, and all necessary or appropriate declarations, -6- registrations or other filings with any court, governmental or regulatory authority, securities exchange or any other person have been made; (c) the total consideration of all such acquisitions conducted while this Agreement remains in effect which is not paid for with stock of Company, computed on the basis of total acquisition consideration paid or incurred, or to be paid or incurred, by the Company or its Subsidiaries with respect thereto, including all indebtedness which is assumed or to which such assets, businesses or business or ownership interests or shares, or any Person so acquired, is subject, shall not exceed Fifty Million Dollars ($50,000,000); (d) within thirty (30) days after any such acquisition has been completed Company shall deliver to Bank executed copies of all material documents pertaining to such acquisition, and Company, its Subsidiaries and any of the corporate entities involved in such acquisition shall execute or cause to be executed, and provide or cause to be provided to Bank, such documents and instruments (including without limitation, the security agreements as required by Section 7.17 hereof and opinions of counsel, amendments, acknowledgments, consents and evidence of approvals or filings) as reasonably requested by Bank, if any; (e) within thirty (30) days prior to the effective date of the acquisition, Company shall deliver to Bank, (i) a pro forma financial statement for the target, as of the effective date of the acquisition, (ii) a pro forma financial statement of Company and its consolidated Subsidiaries for the 12 month period ending on the effective date of the acquisition prepared as if the acquisition became effective on the first day of such period; and (iii) financial projections for the 3 year period commencing on the effective date of the acquisition, including financial covenant compliance projections; and (f) both immediately before and after such acquisition, no Default or Event of Default (whether or not related to such acquisition), has occurred and is continuing and on the date of consummation of such acquisition, Company shall have provided to Bank a certificate of the chief financial officer of Company stating that no Default or Event of Default has occurred as a result of such acquisition or otherwise. "Permitted Liens" shall mean with respect to any Person: (a) liens for taxes not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued, provided that provision for the payment of all such taxes has been made on the books of such Person as may be required by generally accepted accounting principles, consistently applied; (b) mechanics', materialmen's, banker's, carriers', warehousemen's and similar liens and encumbrances arising in the ordinary course of business and securing obligations of such Person that are not overdue for a period of more than 60 days or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any proceedings commenced for the enforcement of such liens and encumbrances shall have been duly suspended; and (ii) such provision for the payment of such -7- liens and encumbrances has been made on the books of such Person as may be required by generally accepted accounting principles, consistently applied; (c) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits and similar statutory obligations which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any proceedings commenced for the enforcement of such liens shall have been duly suspended; and (ii) such provision for the payment of such liens has been made on the books of such Person as may be required by generally accepted accounting principles, consistently applied; (d)(i) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States government or any agency thereof entered into in the ordinary course of business and (ii) liens incurred or deposits made in the ordinary course of business to secure the performance of statutory obligations, bids, leases, fee and expense arrangements with trustees and fiscal agents and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money, any lease-purchase arrangements or the payment of the deferred purchase price of property), provided that full provision for the payment of all such obligations set forth in clauses (i) and (ii) has been made on the books of such Person as may be required by generally accepted accounting principles, consistently applied; and (e) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which do not materially interfere with the business of such Person. "Person" or "person" shall mean any individual, corporation, partnership, joint venture, limited liability company, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency, or other entity. "Prime Rate" shall mean the per annum interest rate established by Bank as its prime rate for its borrowers as such rate may vary from time to time, which rate is not necessarily the lowest rate on loans made by Bank at any such time. "Prime-based Advance" shall mean an Advance which bears interest at the Prime-based Rate. "Prime-based Rate" shall mean for any day a per annum interest rate which is the greater of (i) the Prime Rate or (ii) the Alternate Base Rate. "Quick Ratio" shall mean as of any date of determination, a ratio the numerator of which is Unrestricted Cash as of such date, plus Cash Equivalents as of such date which are not subject to any lien or security interest in favor of any person, plus Accounts of Company and its Subsidiaries as of such date (net of an allowance for doubtful Accounts) and the denominator of which is current liabilities of Company and its Subsidiaries as of such date, as determined in -8- accordance with GAAP (provided that the outstanding principal amount of the Advances shall in all cases be treated as current liabilities for purposes of determining the Quick Ratio). "Request for Advance" shall mean a Request for Advance issued by Company under this Agreement in the form annexed to this Agreement as Exhibit "D". ----------- "Revolving Credit Maturity Date" shall mean June 14, 2002. "Revolving Credit Note" shall mean the Note described in Section 2.1 hereof made by Company to Bank in the form annexed to this Agreement as Exhibit "E". ----------- "Security Agreements" shall mean the Security Agreement in the form and content of Exhibit "F" to this Agreement pursuant to which Company and each ----------- Domestic Subsidiary which is not an Immaterial Subsidiary grants to Bank a first priority security interest in all accounts, chattel paper, documents, equipment, fixtures, general intangibles, goods, instruments and inventory, wherever located and whether now owned or hereafter acquired, together with all replacements thereof, substitutions therefor, accessions thereto and all proceeds and products of all the foregoing. "Subordinated Debt" shall mean Debt of Company or a Subsidiary which has been subordinated in right of payment and priority to the Indebtedness, all on terms and conditions satisfactory to Bank. "Subordinated Debt Documents" shall mean any documents evidencing Subordinated Debt, in each case, as the same may be amended, modified or supplemented from time to time in compliance with the terms of this Agreement. "Subsidiary" shall mean a corporation or other entity of which more than fifty percent (50%) of the outstanding voting stock or equivalent equity interests are owned by Company, either directly or indirectly, through one or more intermediaries. "Tangible Net Worth" shall mean as of any date of determination, Net Worth less the Intangible Assets of the Company and its consolidated Subsidiaries and less deferred tax assets for stock disqualifying dispositions, all determined as of such date. For purposes of this Agreement, "Intangible Assets" means the amount (to the extent reflected in determining such Net Worth) of (i) all write- ups in the book value of any asset owned by Company and its consolidated Subsidiaries, (ii) loans or advances to Affiliates, (iii) all investments in unconsolidated Subsidiaries of the Company and all equity investments in Persons which are not Subsidiaries of Company and (iv) all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or developmental expenses and other intangible assets. "Unrestricted Cash" shall mean as of any date of determination, aggregate cash of Company and its Subsidiaries which is not subject to any lien or security interest in favor of any person. -9- 2. THE INDEBTEDNESS: Revolving Credit 2.1 Bank agrees to make Advances to Company at any time and from time to time from the effective date hereof until the Revolving Credit Maturity Date, not to exceed Twenty Million Dollars ($20,000,000) in aggregate principal amount at any one time outstanding. All of the Advances under this Section 2 shall be evidenced by the Revolving Credit Note under which Advances, repayments and readvances may be made, subject to the terms and conditions of this Agreement. 2.2 The Revolving Credit Note shall mature on the Revolving Credit Maturity Date and each Advance from time to time outstanding thereunder shall bear interest at its Applicable Interest Rate. The amount and date of each Advance, its Applicable Interest Rate, its Interest Period, if applicable, and the amount and date of any repayment shall be noted on Bank's records, which records will be conclusive evidence thereof absent manifest error. 2.3 Company may request an Advance under this Section 2 upon the delivery to Bank of a Request for Advance executed by an authorized officer of Company, subject to the following: (a) each such Request for Advance shall set forth the information required on the Request for Advance form annexed hereto as Exhibit "D"; ----------- (b) each such Request for Advance shall be delivered to Bank by 11:00 a.m. on the proposed date of Advance; (c) the principal amount of such Advance, plus the amount of any outstanding indebtedness to be then combined therewith having the same Applicable Interest Rate and Interest Period, if any, shall be in the case of a Eurodollar-based Advance at least $1,000,000; (d) a Request for Advance, once delivered to Bank, shall not be revocable by Company. Bank may, at its option, lend under this Section 2 upon the telephone request of an authorized officer of Company and, in the event Bank makes any such advance upon a telephone request, the requesting officer shall, if so requested by Bank, mail or facsimile to Bank, on the same day as such telephone request, a Request for Advance in the form attached as Exhibit "D". Company ----------- hereby authorizes Bank to disburse Advances under this Section 2 pursuant to the telephone instructions of any person purporting to be an authorized officer of Company and Company shall bear all risk of loss resulting from disbursements made upon any telephone request. Each telephone request for an Advance shall constitute a certification of the matters set forth in the Request for Advance form as of the date of such requested Advance. 2.4 Company may prepay all or part of the outstanding balance of the Prime-based Advance(s) under the Revolving Credit Note at any time. Upon one (1) Business Day prior notice to Bank, Company may prepay all or part of any Eurodollar-based Advance, provided that the amount of any such partial prepayment shall be at least $1,000,000 and the unpaid portion of -10- such Advance which is refunded or converted under Section 4.A.3 shall be subject to the limitations of Section 2.3(c) hereof. Any prepayment of a Prime-based Advance or a Eurodollar-based Advance on the last day of the Interest Period therefor made in accordance with this Section shall be without premium, penalty or prejudice to Company's right to reborrow under the terms of this Agreement. Any other prepayment shall be subject to the provisions of Section 5.1 hereof. 2.5 In addition to Advances under the Revolving Credit Note to be provided to Company by Bank under and pursuant to Section 2.1 of this Agreement, Bank further agrees to issue, or commit to issue, from time to time, standby letters of credit for the account of Company (herein individually called a "Letter of Credit" and collectively "Letters of Credit") in aggregate undrawn amounts not to exceed Ten Million Dollars ($10,000,000) at any one time outstanding; provided, however that the sum of the aggregate amount of Advances outstanding under the Revolving Credit Note plus the Letter of Credit Reserve shall not exceed Twenty Million Dollars ($20,000,000) at any one time; and provided further that no Letter of Credit shall, by its terms, have an expiration date which extends beyond one hundred twenty (120) days beyond the Revolving Credit Maturity Date or one (1) year after issuance, whichever first occurs. In addition to the terms and conditions of this Agreement, the issuance of any Letters of Credit shall also be subject to the terms and conditions of any letter of credit applications and agreements executed and delivered by Company to Bank with respect thereto. Company shall pay to Bank annually in advance a per annum fee equal to the Applicable L/C Commission Rate of the amount of each standby Letter of Credit. On the Revolving Credit Maturity Date, Company shall deposit with Bank cash collateral in the amount equal to the maximum amount available to be drawn at any time under any Letter of Credit then outstanding. 2.6 Company agrees to pay to Bank a commitment fee on the average daily balance of the unused portion of the revolving credit commitment at the rate of thirty two and one half one hundredths of one percent (.325%) per annum, computed on the actual number of days elapsed using a year of 360 days. The commitment fee shall be payable quarterly in arrears on the first day of each October, January, April and July (commencing October 1, 2001) and on the Revolving Credit Maturity Date. For purposes of calculating the commitment fee, outstanding Letters of Credit shall be considered usage of the commitment. 2.7 Proceeds of Advances under the Revolving Credit Note shall be used solely for working capital purposes and short-term general corporate purposes. 2.A. THE INDEBTEDNESS: Equipment Loans 2.A.1 Bank agrees to make Advances to Company at any time and from time to time from the effective date hereof until the Equipment Line Maturity Date, not to exceed Five Million Dollars ($5,000,000) in aggregate principal amount. The Advances under this Section 2.A shall be evidenced by the Equipment Line Note under which advances and repayments but not readvances may be made, subject to the terms and conditions of this Agreement. 2.A.2 The Equipment Line Note shall mature on the Equipment Line Maturity Date and each Advance from time to time outstanding thereunder shall bear interest at its Applicable Interest Rate. The amount and date of each Advance, its Applicable Interest Rate, its Interest -11- Period, and the amount and date of any repayment shall be noted on Bank's records, which records will be conclusive evidence thereof absent manifest error. 2.A.3 Company may request an Advance under this Section 2.A upon the delivery to Bank of a Request for Advance executed by an authorized officer of Company, subject to the following: (a) each such Request for Advance shall set forth the information required on the Request for Advance form annexed hereto as Exhibit "D"; ----------- (b) each such Request for Advance shall be delivered to Bank at least three (3) Business Days before the proposed date of Advance; (c) the principal amount of such Advance, plus the amount of any outstanding indebtedness to be then combined therewith having the same Applicable Interest Rate and Interest Period, if any, shall be in the case of a Eurodollar-based Advance at least $1,000,000; (d) the principal amount of such Advance shall not exceed an amount equal to one hundred percent (100%) of the invoice cost of unencumbered new machinery and equipment approved by Bank (excluding installation, delivery, tariffs, duties and other import fees and other soft costs) purchased by Company within ninety (90) days prior to the date of the Advance or soft costs approved by Bank which are evidenced by an invoice and incurred within ninety (90) days prior to the date of the Advance; (e) a Request for Advance, once delivered to Bank, shall not be revocable by Company. 2.A.4 The proceeds of Advances under the Equipment Line Note shall be used solely to purchase new machinery and equipment to be used in the Company's business and for soft costs. In connection with each Advance under the Equipment Line Note, Company shall provide to Bank such invoices and documentation as Bank may reasonably request. Advances against soft costs shall not exceed twenty five percent (25%) of the amount advanced under the Equipment Line Note. 2.A.5 Each time the aggregate amount of the Advances outstanding under the Equipment Line Note is $1,000,000 or more and on the Equipment Line Maturity Date, the Advances outstanding under the Equipment Line Note shall be termed out under an Equipment Term Note. The indebtedness represented by each Equipment Term Note shall be payable in equal monthly principal installments equal to the amount necessary to amortize the original amount of such Equipment Term Note over a three year term commencing on the first day of the first month after such Note is executed and on the first day of each month thereafter until the maturity date thereof, when the entire unpaid balance of principal and interest thereon shall be due and payable. The maturity date for each Equipment Term Note shall be the date which is three years after the date of such Note. -12- 2.A.6 Each Advance under the Equipment Line Note shall be in an amount not less than $50,000. 3.A. INTEREST, INTEREST PERIODS, CONVERSIONS, PREPAYMENTS-REVOLVING CREDIT. 3.A.1 The Revolving Credit Note, Equipment Line Note and the Advances thereunder shall bear interest from the date thereof on the unpaid principal balance thereof from time to time outstanding, at a rate per annum equal to the Prime-based Rate or the Eurodollar-based Rate, as the Company may elect subject to the provisions of this Agreement. With respect to Prime-based Advances, interest shall be payable monthly on the first Business Day of each month, commencing on the first Business Day following the month during which such Advance is made, and at maturity. With respect to Eurodollar-based Advances, interest shall be payable on the last day of each Interest Period applicable thereto, provided, however, if such Interest Period is longer than three months, interest shall be payable three months following the first day of such Interest Period and on the last day of such Interest Period. Notwithstanding the foregoing, from and after the occurrence of any Event of Default and solely during the continuation thereof, the Advances shall bear interest, payable on demand, at a rate per annum equal to: (i) in the case of Prime-based Advances, three percent (3%) above the Prime-based Rate; and (ii) in the case of a Eurodollar-based Advance, three percent (3%) above the rate which would otherwise be applicable under this Section 3.A.1 until the end of the then current Interest Period, at which time such Advance shall bear interest at the rate provided for in clause (i) of this Section 3.A.1. Interest on all Advances shall be calculated on the basis of a 360 day year for the actual number of days elapsed. The interest rate with respect to any Prime-based Advance shall change on the effective date of any change in the Prime-based Rate. 3.A.2 Each Interest Period for a Eurodollar-based Advance shall commence on the date such Eurodollar-based Advance is made or is converted from an Advance of another type pursuant to Section 3.A.3 hereof or on the last day of the immediately preceding Interest Period for such Eurodollar-based Advance, and shall end on the date one, two, three or six months thereafter, as the Company may elect as set forth below, subject to the following: (i) no Interest Period shall extend beyond the Revolving Credit Maturity Date or the Equipment Line Maturity Date, as applicable; and (ii) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless the next succeeding Business Day falls in another calendar month, in which case, such Interest Period shall end on the immediately preceding Business Day and when an Interest Period begins on a day which has no numerically corresponding day in the calendar month during which such Interest Period is to end, it shall end on the last Business Day of such calendar month. The Company shall elect the initial Interest Period applicable to a Eurodollar- based Advance by its Request for Advance given to the Bank pursuant to Section 2.3 or Section 2.A.3 or by its notice of conversion given to the Bank pursuant to Section 3.A.3, as the case may be. Provided that no Event of Default shall have occurred and be continuing, the Company may elect to -13- continue an Advance as a Eurodollar-based Advance by giving irrevocable written, telephonic or facsimile notice thereof to the Bank, before 11:00 a.m. on the last day of the then current Interest Period applicable to such Eurodollar-based Advance, specifying the duration of the succeeding Interest Period therefor. If the Bank does not receive timely notice of the election and the Interest Period elected by the Company, the Company shall be deemed to have elected to convert such Eurodollar-based Advance to a Prime-based Advance at the end of the then current Interest Period. 3.A.3 Provided that no Event of Default shall have occurred and be continuing, the Company may, on any Business Day, convert any outstanding Advance into an Advance of another type in the same aggregate principal amount, provided that any conversion of a Eurodollar-based Advance shall be made only on the last Business Day of the then current Interest Period applicable to such Advance. If the Company desires to convert an Advance, it shall give the Bank written, telephonic or facsimile notice, specifying the date of such conversion, the Advances to be converted, the type of Advance elected and, if the conversion is into a Eurodollar-based Advance, the duration of the first Interest Period therefor, which notice shall be given not later than 11:00 a.m. on the applicable date of conversion. 3.B. INTEREST, INTEREST PERIODS, CONVERSIONS, PREPAYMENTS-TERM LOANS. 3.B.1 (a) Each Equipment Term Note ("Amortizing Notes" and each loan thereunder, an "Amortizing Loan") and the loans thereunder shall bear interest from the date thereof on the unpaid principal balance thereof from time to time outstanding, at a rate per annum equal to the Prime-based Rate or the Eurodollar-based Rate as the Company may elect subject to the provisions of this Agreement. In the case of any portion of an Amortizing Note with respect to which the Applicable Interest Rate is the Prime-based Rate, interest shall be payable monthly on the first Business Day of each month and at maturity (whether by acceleration or otherwise). In the case of any portion of an Amortizing Note with respect to which the Applicable Interest Rate is the Eurodollar-based Rate, interest shall be payable on the last day of each Interest Period applicable thereto, provided, however, if such Interest Period is longer than three months, interest shall be payable three months following the first day of such Interest Period and on the last day of such Interest Period. Notwithstanding the foregoing, from and after the occurrence of an Event of Default and during the continuation thereof, the principal outstanding under the Amortizing Notes shall bear interest payable on demand, at a rate per annum equal to: (i) in the case of a portion of an Amortizing Note with respect to which the Applicable Interest Rate is the Prime-based Rate, three percent (3%) above the rate which would otherwise be applicable under this Section 3.B.1 and (ii) in the case of a portion of an Amortizing Note with respect to which the Applicable Interest Rate is the Eurodollar-based Rate, three percent (3%) above the rate which would otherwise be applicable under this Section 3.B.1 until the end of the then current Interest Period, and thereafter at the rate provided for in clause (i) of this Section 3.B.1. Interest shall be calculated on the basis of a 360 day year for the actual number of days elapsed. The interest rate applicable to any portion of an Amortizing Note with respect to which the Applicable Interest Rate is the Prime-based Rate shall change on the effective date of any change in the Prime-based Rate. -14- (b) On the date each Amortizing Loan is made, Company shall designate the initial Applicable Interest Rate with respect to such loan. 3.B.2 Each Interest Period for a portion of an Amortizing Loan with respect to which the Applicable Interest Rate is the Eurodollar-based Rate shall commence on the date such rate is selected pursuant to Section 3.B.3 hereof or on the last day of the immediately preceding Interest Period, as the case may be, and shall end on the date one month thereafter as the Company may elect as set forth below, subject to the following: (i) no Interest Period with respect to an Amortizing Loan shall extend beyond the maturity date applicable to such Note; (ii) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless the next succeeding Business Day falls in another calendar month, in which case, such Interest Period shall end on the immediately preceding Business Day and when an Interest Period begins on a day which has no numerically corresponding day in the calendar month during which such Interest Period is to end, it shall end on the last Business Day of such calendar month; (iii) no Interest Period with respect to a portion of an Amortizing Loan shall end past a date on which an installment of principal is due with respect to such loan; and (iv) no more than five (5) separate Interest Periods may be in effect at any one time with respect to the Equipment Term Notes. The Company shall elect the initial Interest Period applicable to an Amortizing Loan with respect to which the Applicable Interest Rate is the Eurodollar-based Rate by its Notice of Term Rate given to the Bank pursuant to Section 3.B.1 and subsequent Interest Periods by its Notice of Term Rate given to the Bank pursuant to Section 3.B.3, as the case may be. Provided that no Event of Default shall have occurred and be continuing, the Company may elect to continue a portion of an Amortizing Loan with respect to which the Applicable Interest Rate is the Eurodollar-based Rate by giving irrevocable written notice thereof to the Bank by its Notice of Term Rate, not later than 11:00 a.m. on the last day of the then current Interest Period applicable to such portion of an Amortizing Loan, as applicable, specifying the duration of the succeeding Interest Period therefor. If the Bank does not receive timely notice of the election and the Interest Period elected by the Company, the Company shall be deemed to have elected to convert such Applicable Interest Rate to the Prime-based Rate at the end of the then current Interest Period. 3.B.3 Provided that no Event of Default shall have occurred and be continuing, the Company may, on any Business Day, convert the Applicable Interest Rate with respect to a portion of an Amortizing Loan, as applicable to another Applicable Interest Rate, provided that any conversion while the Applicable Interest Rate is the Eurodollar-based Rate shall be made only on the last Business Day of the then current Interest Period. If the Company desires to convert an Applicable Interest Rate, it shall give the Bank irrevocable written notice thereof not later than 11:00 a.m. on the effective date of any such change specifying the date of such -15- conversion, the Applicable Interest Rate elected and, if the conversion is into the Eurodollar-based Rate, the duration of the first Interest Period therefor. 3.B.4 (a) At its option and upon one (1) Business Day's prior written, telephonic or facsimile notice to the Bank, the Company may prepay any portion of an Amortizing Loan in whole at any time or in part from time to time, with accrued interest on the principal being prepaid to the date of such prepayment, provided that: (i) in the case of a portion of an Amortizing Loan bearing interest at the Prime-based Rate each partial prepayment shall be in an amount not less than $250,000 or an integral multiple thereof; (ii) in the case of a portion of an Amortizing Loan bearing interest at the Eurodollar-based Rate, each partial prepayment shall be in an amount not less than $250,000. Any prepayment of a portion of an Amortizing Loan as to which the Applicable Interest Rate is the Prime-based Rate or an Amortizing Loan as to which the Applicable Interest Rate is the Eurodollar-based Rate on the last day of the applicable Interest Period shall be without premium or penalty. Any other prepayment shall be subject to the provisions of Section 4.1. (b) Each partial prepayment of an Amortizing Loan or the principal outstanding under an Amortizing Note shall be applied to the principal payments due thereunder in the inverse order of their maturities. 4. SPECIAL PROVISIONS, CHANGES IN CIRCUMSTANCES AND YIELD PROTECTION. 4.1 If Company makes any payment of principal with respect to any Eurodollar-based Advance or the principal under an Amortizing Note with respect to which the Eurodollar-based Rate is the Applicable Interest Rate on any day other than the last day of the Interest Period applicable thereto (whether voluntarily, by acceleration, or otherwise), or if Company fails to borrow any Eurodollar-based Advance after notice has been given by Company to Bank in accordance with the terms hereof requesting such Advance, or if Company fails to make any payment of principal or interest when due in respect of a Eurodollar- based Advance or the principal under an Amortizing Note with respect to which the Eurodollar-based Rate is the Applicable Interest Rate, Company shall reimburse Bank on demand for any resulting loss, cost or expense incurred by Bank as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties, whether or not Bank shall have funded or committed to fund such Eurodollar-based Advance or Amortizing Loan. Such amount payable by Company to Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant Interest Period, at the applicable rate of interest for said Advance(s) or principal under an Amortizing Loan provided under this Agreement, over (b) the amount of interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. Calculation of any amounts payable to Bank under this paragraph shall be made as though Bank shall have actually funded or committed to fund the relevant Eurodollar-based Advance or Amortizing Loan through the purchase of an underlying deposit in an amount equal to the amount of such Advance and having a maturity comparable to the relevant Interest -16- Period; provided, however, that Bank may fund any Eurodollar-based Advance or Amortizing Loan in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Upon the written request of Company, Bank shall deliver to Company a certificate setting forth the basis for determining such losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. 4.2 For any Interest Period for which the Applicable Interest Rate is the Eurodollar-based Rate, if Bank shall designate a Eurodollar Lending Office which maintains books separate from those of the rest of Bank, Bank shall have the option of maintaining and carrying the relevant Advance or Amortizing Loan on the books of such Eurodollar Lending Office. 4.3 If with respect to any Interest Period Bank reasonably determines that, by reason of circumstances affecting the foreign exchange and interbank markets generally, deposits in Eurodollars in the applicable amounts are not being offered to the Bank for such Interest Period, then Bank shall forthwith give notice thereof to the Company. Thereafter, until Bank notifies Company that such circumstances no longer exist, the obligation of Bank to make Eurodollar- based Advances, and the right of Company to convert an Advance to or refund an Advance as a Eurodollar-based Advance and the right of Company to elect the Eurodollar-based Rate for the Amortizing Loan shall be suspended. 4.4 If, after the date hereof, the introduction or implementation of, or any change in, any applicable law, rule or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by Bank (or its Eurodollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, shall make it unlawful or impossible for the Bank (or its Eurodollar Lending Office) to honor its obligations hereunder to make or maintain any Advance or the indebtedness under the Amortizing Loans with interest at the Eurodollar-based Rate, Bank shall forthwith give notice thereof to Company. Thereafter (a) the obligations of Bank to make Eurodollar-based Advances and the right of Company to convert an Advance or refund an Advance as a Eurodollar-based Advance and to elect the Eurodollar- based Rate for the Amortizing Loans shall be suspended and thereafter Company may select as Applicable Interest Rates only those which remain available, and (b) if Bank may not lawfully continue to maintain an Advance or an Amortizing Loan, as the case may be, to the end of the then current Interest Period applicable thereto, the Prime-based Rate shall be the Applicable Interest Rate for the remainder of such Interest Period. 4.5 If the adoption or implementation after the date hereof, or any change after the date hereof in, any applicable law, rule or regulation of any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its Eurodollar Lending Office) with any request or directive (whether or not having the force of law) made by any such authority, central bank or comparable agency after the date hereof: (a) shall subject Bank (or its Eurodollar Lending Office) to any tax, duty or other charge with respect to any Advance or any Note or shall change the basis of taxation of payments to Bank (or its Eurodollar Lending Office) of the principal -17- of or interest on any Advance or any Note or any other amounts due under this Agreement in respect thereof (except for changes in the rate of tax on the overall net income of Bank or its Eurodollar Lending Office imposed by any jurisdiction in which Bank is organized or engaged in business); or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Bank (or its Eurodollar Lending Office) or shall impose on Bank (or its Eurodollar Lending Office) or the foreign exchange and interbank markets any other condition affecting any Advance or any Note; and the result of any of the foregoing is to increase the costs to Bank of maintaining any part of the indebtedness hereunder or to reduce the amount of any sum received or receivable by Bank under this Agreement or under the Notes, by an amount deemed by the Bank to be material, then Bank shall promptly notify Company of such fact and demand compensation therefor and, within fifteen days after demand by Bank, Company agrees to pay to Bank such additional amount or amounts as will compensate Bank for such increased cost or reduction. Bank will promptly notify Company of any event of which it has knowledge which will entitle Bank to compensation pursuant to this Section. A certificate of Bank setting forth the basis for determining such additional amount or amounts necessary to compensate Bank shall be conclusively presumed to be correct save for manifest error. Bank agrees that, as promptly as practical after it becomes aware of the occurrence of any event or the existence of a condition that will cause Bank to be entitled to compensation under this Section, it will, to the extent not inconsistent with Bank's internal policies, use reasonable efforts to make, fund or maintain any affected Eurodollar-based Advance through another lending office of Bank if as a result thereof the additional monies which would otherwise be required to be paid in respect of such Eurodollar-based Advance would be materially reduced and if, as determined by Bank, in its reasonable discretion, the making, funding or maintaining of such Eurodollar-based Advance through such other lending office would not materially adversely affect such Advance or Bank. Company shall pay all reasonable expenses incurred by Bank in utilizing another lending office pursuant to this Section. 4.6 In the event that at any time after the date of this Agreement any change in law such as described in Section 4.5, hereof, shall, in the reasonable opinion of Bank require that the credit provided under Section 2 of this Agreement be treated as an asset or otherwise be included for purposes of calculating the appropriate amount of capital to be maintained by Bank or any corporation controlling Bank and such change has or would have the effect of reducing the rate of return on Bank's or Bank's parent's capital or assets as a consequence of the Bank's obligations hereunder to a level below that which Bank or Bank's parent would have achieved but for such change, then Bank shall notify Company and demand compensation therefor and, within fifteen days after demand by Bank, Company agrees to pay to Bank such additional amount or amounts as will compensate Bank for such reduction. Bank will promptly notify Company of any event of which it has knowledge which will entitle Bank to compensation pursuant to this Section. A certificate of Bank setting forth the basis for determining such -18- additional amount or amounts necessary to compensate Bank shall be conclusively presumed to be correct save for manifest error. 5. CONDITIONS 5.1 Company agrees to furnish Bank prior to the initial borrowing under this Agreement, in form and substance to be satisfactory to Bank, with (i) certified copies of resolutions of the Directors of Company evidencing approval of the borrowings and transactions contemplated hereunder; (ii) a certificate of good standing from the state of Company's incorporation and from the state(s) in which is required to be qualified to do business; (iii) an opinion of Company's legal counsel; and (iv) such other documents and instruments as Bank may reasonably require. 5.2 As security for all indebtedness of Company to Bank hereunder, Company agrees to furnish, execute and deliver to Bank, or cause to be furnished, executed and delivered to Bank, prior to or simultaneously with the initial borrowing hereunder, in form to be satisfactory to Bank and supported by appropriate resolution in certified form authorizing same, the following: (a) The Security Agreements; (b) Financing Statements required or requested by Bank to perfect all security interests to be conferred upon Bank under this Agreement and to accord Bank a perfected first priority security position under the Uniform Commercial Code (subject only to the encumbrances permitted hereunder); (c) Such other documents or agreements of security and appropriate assurances of validity and perfected first priority of lien or security interest as Bank may reasonably request at any time. 5.3 Upon execution of this Agreement, Company shall have paid to Bank a non-refundable commitment fee in the amount of $42,500. The Bank acknowledges the prior receipt of $5,000 of such fee. 5.4 The obligation of Bank to make Advances (including the initial Advance) under this Agreement and the obligation of Bank to issue any Letters of Credit shall be subject to the continuing conditions that: (1) No Default or Event of Default shall exist as of the date of the Advance or the request for the Letter of Credit; and (2) Each of the representations and warranties contained in this Agreement and in each of the other Loan Documents shall be true and correct in all material respects as of the date of the Advance or issuance of the Letter of Credit. -19- 6. REPRESENTATIONS AND WARRANTIES Company represents and warrants that: 6.1 Company is a corporation duly organized and existing in good standing under the laws of the State of California; Company and each of its Subsidiaries is in good standing in each jurisdiction in which it is required to be qualified to do business, except where the failure to be so qualified would not have a material adverse effect on the financial condition of Company and its Subsidiaries (taken as a whole) or their ability to carry on their business; execution, delivery and performance of this Agreement and other documents and instruments required under this Agreement, and the issuance of the Notes by Company are within its powers, have been duly authorized, are not in contravention of law or the terms of Company's Articles of Incorporation or Bylaws, and do not require the consent or approval of any governmental body, agency or authority; and this Agreement and other documents and instruments required under this Agreement and Notes, when issued and delivered, will be valid and binding on the Company in accordance with their terms. 6.2 The execution, delivery and performance of this Agreement and any other documents and instruments required under this Agreement, and the issuance of the Notes by Company are not in contravention of the unwaived terms of any indenture, agreement or undertaking to which Company is a party or by which it is bound. 6.3 Except as set forth on Schedule 6.3, no litigation or other proceeding before any court or administrative agency is pending, or to the knowledge of the officers of Company is threatened against Company or any of its Subsidiaries, the outcome of which would reasonably be expected to materially impair Company's or any Subsidiary's financial condition or the ability of Company or any Subsidiary to carry on its business. 6.4 There are no security interests in, liens, mortgages, or other encumbrances on any of Company's or any Subsidiary's assets, except to Bank or as otherwise permitted by this Agreement. 6.5 Neither Company nor any Subsidiary maintains or contributes to any employee pension benefit plan subject to title IV of the "Employee Retirement Income Security Act of 1974" (herein called "ERISA"), except those set forth in attached Schedule 6.5. There was no unfunded past service liability of any pension plan maintained by the Company as of March 31, 2001, and there is no accumulated funding deficiency within the meaning of ERISA, or any existing material liability with respect to any pension plan owed to the Pension Benefit Guaranty Corporation ("PBGC") or any successor thereto, except any funding deficiency for which an application to the PBGC for waiver is pending or for which a waiver has been granted by the PBGC. 6.6 The financial statements of the Company dated March 31, 2001, previously furnished to Bank, fairly present in all material respects the financial condition of the Company and its consolidated Subsidiaries as of such date; since said date there has been no material adverse change in the financial condition of the Company and its consolidated Subsidiaries; to the knowledge of Company's officers, except as described in Schedule 6.6, Company does not -20- have any material contingent obligations (including any liability for taxes) not disclosed by or reserved against in said balance sheet, and at the present time there are no material unrealized or anticipated losses from any present commitment of Company or any of its Subsidiaries. 6.7 All tax returns and tax reports of Company and its consolidated Subsidiaries required by law to have been filed have been duly filed or extensions obtained, and all taxes, assessments and other governmental charges or levies (other than those presently payable without penalty and those currently being contested in good faith for which adequate reserves have been established) upon Company and its consolidated Subsidiaries (or any of its or their properties) which are due and payable and for which the failure to pay would materially adversely affect its business or the value of its property or assets have been paid. The charges, accruals and reserves on the books of Company in respect of the Federal income tax for all periods are adequate in the opinion of Company. 6.8 There are no subsidiaries of Company, except those listed in attached Schedule 6.8. - ------------ 6.9 Except as set forth in Schedule 6.9: ------------ (a) Company and each of its Subsidiaries, in the conduct of its business, is in compliance in all material respects with all federal, state or local laws, statutes, ordinances and regulations applicable to any of them, the enforcement of which, if such Person were not in compliance, would reasonably be expected to materially adversely affect its business or the value of its property or assets. Company and its Subsidiaries have all approvals, authorizations, consents, licenses, orders and other permits of all governmental agencies and authorities, whether federal, state or local, required to permit the operation of their business as presently conducted, except such approvals, authorizations, consents, licenses, orders and other permits with respect to which the failure to have would not reasonably be expected to materially adversely affect their business or the value of their property or assets (taken as a whole). (b) Neither Company nor any Subsidiary is a party to any litigation or administrative proceeding, nor to the knowledge of Company's officers is any litigation or administrative proceeding threatened against Company or any Subsidiary, the outcome of which would reasonably be expected to have a material adverse effect on the Company or any Subsidiary which in either case (i) asserts or alleges that Company or any Subsidiary violated Environmental Laws, (ii) asserts or alleges that Company or any Subsidiary is required to clean up, remove, or take remedial or other response action due to the disposal, depositing, discharge, leaking or other release of any hazardous substances or materials, (iii) asserts or alleges that Company or any Subsidiary is required to pay all or a portion of the cost of any past, present, or future cleanup, removal or remedial or other response action which arises out of or is related to the disposal, depositing, discharge, leaking or other release of any hazardous substances or materials by Company or any Subsidiary. (c) Neither Company nor any Subsidiary is subject to any judgment, decree, order or citation related to or arising out of applicable Environmental Laws which would reasonably be expected to materially adversely affect its business or the value of its property or assets and to the best knowledge of the Company, neither Company nor any Subsidiary has been -21- named or listed as a potentially responsible party by any governmental body or agency in a matter arising under any applicable Environmental Laws which would reasonably be expected to materially adversely affect its business or the value of its property or assets. (d) To the Company's knowledge, Company and its Subsidiaries have all permits, licenses and approvals required under applicable Environmental Laws, the failure of which to have would have a material adverse effect on the operation of their business as presently conducted and as currently proposed to be conducted. 6.10 Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Company is not engaged principally, or as one of its important activities, directly or indirectly, in the business of extending credit for the purpose of purchasing or carrying margin stock, and none of the proceeds of any of the loans hereunder will be used, directly or indirectly, for any purpose which would violate the provisions of Regulation U or X of the Board of Governors of the Federal Reserve System. Terms for which meanings are provided in Regulation U of the Board of Governors of the Federal Reserve System or any regulations substituted therefor, as from time to time in effect, are used in this paragraph with such meanings. 6.11 Company and its Subsidiaries have good and valid title to the property pledged, mortgaged or otherwise encumbered or to be encumbered by them under the Security Agreements. 7. AFFIRMATIVE COVENANTS Company covenants and agrees that it will, so long as Bank may make any advance under this Agreement and thereafter so long as any indebtedness remains outstanding under this Agreement: 7.1 Furnish Bank: (a) within ninety one (91) days after and as of the end of each fiscal year of Company and its consolidated Subsidiaries, a detailed consolidated audit report of Company certified to by independent certified public accountants satisfactory to Bank; (b) within thirty (30) days after and as of the end of each month, consolidated and consolidating balance sheets and statements of profit and loss of Company and its consolidated Subsidiaries certified by an authorized officer of Company as being correct and accurate to the best of his knowledge; (c) within thirty (30) days prior to January 1 of each year, financial projections for the Company and its consolidated Subsidiaries in form satisfactory to Bank; (d) promptly upon becoming available to Company, regular and periodic reports, including Forms 10-K, 10-Q and 8-K filed by Company with the Securities and Exchange Commission; -22- (e) promptly upon becoming available to Company, any reports including management letters submitted to the Company by independent accountants in connections with any annual, interim or special audit; (f) other than as set forth in clause (d) above, any reports, notices, registrations statements, prospectuses, or proxy statements generally distributed by Company to its stockholders on a date no later than the date supplied to such stockholders; (g) such information as required by the terms and conditions of any security agreements referred to in this Agreement; (h) promptly, and in form to be satisfactory to Bank, such other information as Bank may reasonably request from time to time. 7.2 Pay and discharge, and cause its Subsidiaries to pay and discharge, all taxes and other governmental charges, and all contractual obligations calling for the payment of money (excluding for purposes of this Section 7.2 trade payables), before the same shall become overdue, unless and to the extent only that such payment is being contested in good faith. 7.3 Maintain, and cause its Subsidiaries to maintain, insurance coverage on their physical assets and against other business risks in such amounts and of such types as are customarily carried by companies similar in size and nature, and in the event of acquisition of additional property, real or personal, or of incurrence of additional material risks of any nature, increase such insurance coverage in such manner and to such extent as prudent business judgment and present practice would dictate; and in the case of all policies covering property mortgaged or pledged to Bank or property in which Bank shall have a security interest of any kind whatsoever, other than those policies protecting against casualty liabilities to strangers, all such insurance policies shall provide that the loss payable thereunder shall be payable to Company and Bank (as mortgagee) as their respective interests may appear, all said policies or copies thereof, including all endorsements thereon and those required hereunder, to be deposited with Bank. 7.4 Permit Bank, through its authorized attorneys, accountants and representatives, to examine Company's and each Subsidiary's books, accounts, records, ledgers and assets of every kind and description at all reasonable times upon oral or written request of Bank, which shall include but shall not be limited to collateral audits of Company conducted by Bank, at Bank's own cost and expense (provided, however, following the occurrence of any Event of Default, any such audits shall be at the expense of Company). 7.5 Promptly notify Bank of any condition or event which constitutes or with the running of time and/or the giving of notice would constitute a Default or an Event of Default under this Agreement, and promptly inform Bank of the existence or occurrence of any condition or event (other than conditions having an effect on the economy in general) which could have a material adverse effect upon Company's or any Subsidiary's financial condition (taken as a whole). 7.6 Maintain, and cause its Subsidiaries to maintain, in good standing all licenses required by the State of California or any agency thereof, or other governmental authority that -23- may be necessary or required for Company and its Subsidiaries to carry on its business as currently conducted. 7.7 Comply, and cause its Subsidiaries to comply, with all material requirements imposed by ERISA as presently in effect or hereafter promulgated, including but not limited to, the minimum funding requirements of any Pension Plan. 7.8 Promptly notify Bank after the occurrence thereof in writing of any of the following events: (a) the termination of a Pension Plan pursuant to Subtitle C of Title IV of ERISA or otherwise; (b) the appointment of a trustee by a United States District Court to administer a Pension Plan; (c) the commencement by the Pension Benefit Guaranty Corporation, or any successor thereto of any proceeding to terminate a Pension Plan; (d) the failure of a Pension Plan to satisfy the minimum funding requirements for any plan year as established in Section 412 of the Internal Revenue Code of 1954, as amended or any similar provision under the Internal Revenue Code of 1986, as amended; (e) the withdrawal of Company or any Subsidiary from a Pension Plan; or (f) a reportable event, within the meaning of Title IV of ERISA. 7.9 Furnish Bank, upon Bank's request, in form satisfactory to Bank with pledges, assignments or other security instruments covering any or all of Company's and each Domestic Subsidiary's personal property, of every nature and description, whether now owed or hereafter acquired, to the extent that Bank may in its sole reasonable discretion require. 7.10 Furnish to the Bank concurrently with the delivery of each of the financial statements required by Section 7.1(a) and 7.1(b), a statement in the form attached as Exhibit "G" prepared and certified by the chief financial officer of Company (or in such officer's absence, a responsible senior officer of Company) (a) setting forth all computations necessary to show compliance by Company with the financial covenants contained in Sections 7.11 through 7.15 hereof, (b) stating that as of the date thereof, no condition or event which constitutes a Default or an Event of Default hereunder or which with the running of time and/or the giving of notice would constitute a Default or an Event of Default hereunder has occurred and is continuing, or if any such event or condition has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by Company and (c) stating that the signer has reviewed this Agreement and that such certificate is based on an examination sufficient to assure that such certificate is accurate. 7.11 Maintain as of the end of each month an Adjusted Tangible Net Worth of not less than the Base Adjusted Tangible Net Worth. -24- 7.12 Maintain EBITDA of not less than the following amounts for the fiscal quarters specified below: Fiscal Quarter Ending Amount - --------------------- ------ June 30, 2001 *** September 30, 2001 *** December 31, 2001 *** March 31, 2002 and each fiscal quarter end thereafter *** 7.13 Maintain as of the end of each month a Quick Ratio of not less than *** to ***. 7.14 Maintain as of the end of each month a Leverage Ratio of not more than *** to ***. 7.15 Maintain as of the end of each month Unrestricted Cash of not less than ***. 7.16 Not later than December 31, 2001, maintain all cash collection and general disbursement accounts with Bank. 7.17 Cause each person that is or becomes a Domestic Subsidiary of the Company (other than an Immaterial Subsidiary) from time to time to execute and deliver a secured Guaranty in the form attached as Exhibit "H" to the Bank, ----------- together with such other documentation as Bank may reasonable require. 7.18 Maintain and cause each of its Subsidiaries to, maintain in full force and effect all patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and other authorizations necessary in Company's reasonable judgment for the ownership and operation of its properties and business. 8. NEGATIVE COVENANTS Company covenants and agrees that, so long as Bank may make any Advances under this Agreement and thereafter so long as any Indebtedness remains outstanding under this Agreement, it will not, and will cause its Subsidiaries not to, without the prior written consent of Bank: 8.1 Purchase, acquire or redeem any of its stock or make any material change in its capital structure. 8.2 Enter into any merger or consolidation or sell, lease, transfer, or dispose of all, substantially all, or any part of its assets, except sales of inventory in the ordinary course of its business, sale/leaseback or similar transactions which relate to Building 1A and/or 1B and any merger of a Subsidiary into Company provided that Company is the survivor. 8.3 Guarantee, endorse, or otherwise become secondarily liable for or upon the obligations of others, except (a) by endorsement for deposit in the ordinary course of business, - -------------------- *** Material has been omitted pursuant to a request for confidential treatment -25- (b) guaranties in favor of Bank, (c) Company's guaranty of the Stockly Park lease in an amount not exceeding $7,000,000 and (d) other guaranties of obligations of Subsidiaries for payroll obligations, duty and tax obligations and automobile purchases and leases pursuant to which the aggregate amount guarantied does not exceed $3,000,000. 8.4 Purchase or otherwise acquire or become obligated for the purchase of all or substantially all of the assets or business interests of any person, firm or corporation or any shares of stock of any corporation, trusteeship or association or in any other manner effectuate or attempt to effectuate an expansion of present business by acquisition, except for Permitted Acquisitions. 8.5 Affirmatively pledge or mortgage any of its assets, whether now owned or hereafter acquired, or create, suffer or permit to exist any lien, security interest in, or encumbrance thereon, except: (a) to Bank; (b) the Permitted Liens; (c) liens described in attached Schedule 8.5; ------------ (d) liens and security interests upon fixed assets acquired by Company after the date of this Agreement (including by virtue of a Capital Lease) provided that (i) any such lien or security interest is created solely for the purpose of securing indebtedness representing, or incurred to finance, the cost of the item of property subject thereto; (ii) the principal amount of the indebtedness secured by such lien does not exceed 100% of the fair value of the property at the time it was acquired, and (iii) the lien or security interest does not cover any property other than such item of property; and (e) a mortgage lien on the real property identified in Schedule 8.5, attached hereto and commonly known as Building 1B or a mortgage lien on the real property commonly known as Building 1A to secure the indebtedness permitted under Section 8.13(g). 8.6 Sell, assign, transfer or confer a security interest in any account, contract, note, trade acceptance or other receivable, except to Bank. 8.7 Materially alter the character of its business from that conducted as of the date of this Agreement. 8.8 Declare or pay any dividends or make any other distribution upon its stock except (i) dividends payable in the stock of Company, (ii) dividends by a Subsidiary to Company, and (iii) distributions made in connection with Company's Shareholder Rights Plan as in effect on the date of this Agreement. 8.9 Make any Capital Expenditure during any fiscal year if after giving effect thereto the aggregate amount of all Capital Expenditures made by Company and its Subsidiaries during such fiscal year would exceed $55,000,000. -26- 8.10 Enter into any transaction or series of transactions with any Affiliate other than on terms and conditions as favorable to Company as would be obtainable in a comparable arms-length transaction with a Person other than an Affiliate. 8.11 Make or allow to remain outstanding any investment (whether such investment shall be of the character of investment in shares of stock, evidence of indebtedness or other securities or otherwise) in, or any loans or advances or extensions of credit to, any person, firm, corporation or other entity or association, except: (a) investments of surplus cash in Cash Equivalents for cash management purposes; (b) sales on open account and in the ordinary course of business; (c) deposits made in the ordinary course of business in order to obtain goods or services; (d) other loans, advances and investments not exceeding $7,000,000 in the aggregate at any time outstanding. 8.12 Enter into or become subject to any agreement (other than this Agreement) (i) prohibiting the creation or assumption of any lien or encumbrance upon the properties or assets of Company or (ii) requiring an obligation to become secured (or further secured) if another obligation is secured or further secured. 8.13 Become or remain obligated for any indebtedness for borrowed money, or for any indebtedness incurred in connection with the acquisition of any property, real or personal, tangible or intangible, except: (a) indebtedness to Bank; (b) current unsecured trade payables and accrued liabilities arising in the ordinary course of Company's business (including, without limitation, obligations under operating leases); (c) existing indebtedness described in attached Schedule 8.13; (d) purchase money indebtedness incurred in connection with the acquisition of fixed assets in an aggregate amount not exceeding $10,000,000 incurred during any single fiscal year; (e) the Subordinated Debt; (f) unsecured indebtedness to ABN AMRO or another commercial lender on terms which are acceptable to Bank in the exercise of its sole discretion provided that Bank and ABM AMRO or such other lender, as applicable, have entered into an intercreditor agreement which is acceptable to Bank in the exercise of its sole discretion and provided that the aggregate principal amount of such indebtedness shall not exceed $15,000,000 at any time outstanding; and -27- (g) indebtedness incurred in connection with a mortgage for Building 1A or 1B provided that (i) the Company receives proceeds of the loan in an amount not less than $20,000,000, (ii) the indebtedness is incurred not later than December 31, 2001, (iii) the terms of the indebtedness are approved by Bank in the exercise of its reasonable discretion, and (iv) after giving effect to the incurrence of such indebtedness, no Event of Default shall have occurred and be continuing. 8.14 Permit the ratio of total assets of Company and the Domestic Subsidiaries located in the United States to total assets of Company and its Subsidiaries to be less than .75 to 1.0. 8.15 Purchase, redeem or prepay any of the Subordinated Debt or modify or amend any of the Subordinated Debt Documents, provided, however that the Company shall be permitted to redeem or purchase the Subordinated Debt from holders of the Subordinated Debt when such purchases or redemptions are required and provided that the Purchase Price (as defined in the Indenture) is paid solely through the issuance of the Company's common stock. 9. ENVIRONMENTAL PROVISIONS 9.1 Company shall comply, and shall cause its Subsidiaries to comply, with all applicable Environmental Laws except for such non-compliance which would not reasonably be expected to materially adversely affect its business or the value of its property or assets. 9.2 Company shall provide to Bank, promptly upon receipt, copies of any correspondence, notice, pleading, citation, indictment, complaint, order, decree, or other document from any source asserting or alleging a circumstance or condition which requires or may require a financial contribution by Company or any Subsidiary to a cleanup, removal, remedial action, or other response by or on the part of Company or any Subsidiary under applicable Environmental Laws or which seeks damages or civil, criminal or punitive penalties from Company for an alleged violation of Environmental Laws, where such contribution, response or damages would reasonably be expected to materially adversely affect its business or the value of its property or assets. 9.3 Company shall promptly notify Bank in writing as soon as Company becomes aware of the occurrence or existence of any condition or circumstance which makes the environmental warranties contained in this Agreement incomplete or inaccurate in any material respect as of any date. 9.4 In the event of any condition or circumstance that makes any environmental warranty, representation and/or agreement incomplete or inaccurate in any material respect as of any date, Company shall, at the reasonable request of Bank, at its sole expense, retain an environmental consultant, reasonably acceptable to Bank, to conduct a thorough and complete investigation regarding the changed condition and/or circumstance. A copy of the environmental consultant's report will be promptly delivered to both Bank and Company upon completion. 9.5 At any time Company, directly or indirectly through any environmental consultant or other representative, determines to undertake an environmental audit, assessment or investigation relating to any fact, event or condition which would reasonably be expected to materially adversely affect its business or the value of its property or assets, Company shall -28- promptly provide Bank with written notice of the initiation of the environmental audit, fully describing the purpose and intended scope of the environmental audit. Upon receipt, Company will promptly provide to Bank copies of all final findings and conclusions of any such environmental investigation. 9.6 Company hereby indemnifies, saves and holds Bank and any of its past, present and future officers, directors, shareholders, employees, representatives and consultants harmless from any and all loss, damages, suits, penalties, costs, liabilities and expenses (including but not limited to reasonable investigation, environmental audit(s), and legal expenses) arising out of any claim, loss or damage to any property, injuries to or death of persons, contamination of or adverse affects on the environment, or any violation of any applicable Environmental Laws, caused by or in any way related to any property owned or operated by Company, or due to any acts of Company or such person's, officers, directors, shareholders, employees, consultants and/or representatives; provided, however, that the foregoing indemnification shall not be applicable when arising solely from events or conditions occurring while the Bank is in sole possession (subject to the rights of any creditors of Company) of such property. In no event shall Company be liable hereunder for any loss, damages, suits, penalties, costs, liabilities or expenses arising from any act of gross negligence of Bank, or its agents or employees. It is expressly understood and agreed that the indemnifications granted herein are intended to protect Bank, its past, present and future officers, directors, shareholders, employees, consultants and representatives from any claims that may arise by reason of the security interest, liens and/or mortgages granted to Bank, or under any other document or agreement given to secure repayment of any indebtedness from Company, whether or not such claims arise before or after Bank has foreclosed upon and/or otherwise become the owner of any such property. All obligations of indemnity as provided hereunder shall be secured by the collateral documents. It is expressly agreed and understood that the provisions hereof shall and are intended to be continuing and shall survive the repayment of any indebtedness from Company to Bank. 9.7 Company shall maintain, and shall cause its Subsidiary to maintain, all permits, licenses and approvals required under applicable Environmental Laws except such permits, licenses and approvals the failure of which to have would reasonably not be expected to materially adversely affect its business or the value of its property or assets. 10. EVENTS OF DEFAULT 10.1 Upon occurrence of any of the following events of default: (a) non-payment of any installment of the principal of the Notes when due or any reimbursement obligation with respect to any Letter of Credit when due; (b) non-payment of any interest on the Notes when due in accordance with the terms thereof, or upon non-payment of any other outstanding Indebtedness when due in accordance with the terms thereof; (c) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in Section 7 or set forth in Section 8; -29- (d) default in observance or performance of any of the other conditions, covenants or agreements of Company herein set forth, and continuance thereof for thirty (30) days after written notice to Company by Bank; (e) any material representation or warranty made by Company or any other Person herein or in any instrument submitted pursuant hereto proves untrue in any material respect when made or deemed made; (f) default in the observance or performance of any of the conditions, covenants or agreements of Company or any other Person set forth in any collateral document which may be given to secure the indebtedness hereunder or in any other collateral document related to or connected with this Agreement or the indebtedness hereunder and continuance for ten (10) days; (g) default in the payment of any other obligation of Company, any Subsidiary or any Guarantor for borrowed money in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000), or in the observance or performance of any conditions, covenants or agreements related or given with respect to any obligations for borrowed money in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) sufficient to permit the holder thereof to accelerate the maturity of such obligation; (h) judgments for the payment of money in excess of the sum of One Hundred Thousand Dollars ($100,000) in the aggregate shall be rendered against Company, any Subsidiary or any Guarantor and such judgments shall remain unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of thirty (30) consecutive days from the date of its entry and such judgment is not covered by insurance from a solvent insurer who is defending such action without reservation of rights; (i) the occurrence of any "reportable event", as defined in the Employee Retirement Income Security Act of 1974 and any amendments thereto, which is determined to constitute grounds for termination by the Pension Benefit Guaranty Corporation of any employee pension benefit plan maintained by or on behalf of Company or any Subsidiary for the benefit of any of its employees or for the appointment by the appropriate United States District Court of a trustee to administer such plan and is reasonably likely that the occurrence of such event would result in a material adverse effect on Company, and such reportable event is not corrected and such determination is not revoked within thirty (30) days after notice thereof has been given to the plan administrator or Company; or the institution of proceedings by the Pension Benefit Guaranty Corporation to terminate any such employee benefit pension plan or to appoint a trustee to administer such plan; or the appointment of a trustee by the appropriate United States District Court to administer any such employee benefit pension plan; (j) (i) Any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Securities Exchange Act of 1934, as amended shall have acquired beneficial ownership of (within the meaning of Rule 13-3 promulgated by the Securities and Exchange Commission under said Act) 20% or more of the voting capital stock of Company; or (ii) individuals who were directors of Company on June 19, 2001 (the "Incumbent Board") shall cease to constitute a majority of the board of directors of Company; provided, that any individual -30- becoming a director subsequent to such date whose election or nomination for election by the Company's stockholders was approved by a vote of the majority of the directors then comprising the Incumbent Board shall be considered a member of the Incumbent Board; (k) if any of the Subordination Agreements is revoked; (l) if Bank shall for any reason deem itself to be insecure; then, or at any time thereafter, unless such default is remedied, Bank may give notice to Company declaring all outstanding indebtedness hereunder and under the Notes to be due and payable, whereupon all indebtedness then outstanding hereunder and under the Notes and any Letters of Credit shall immediately become due and payable without further notice and demand, and Bank shall not be obligated to make further Advances or issue any Letter of Credit hereunder. 10.2 If a creditors' committee shall have been appointed for the business of Company or any Subsidiary in connection with any bankruptcy or insolvency; or if Company or any Subsidiary shall have made a general assignment for the benefit of creditors or shall have been adjudicated bankrupt, or shall have filed a voluntary petition in bankruptcy or for reorganization or to effect a plan or arrangement with creditors; or shall file an answer to a creditor's petition or other petition filed against it, admitting the material allegations thereof for an adjudication in bankruptcy or for reorganization; or shall have applied for or permitted the appointment of a receiver, or trustee or custodian for any of its property or assets; or such receiver, trustee or custodian shall have been appointed for any of its property or assets (otherwise than upon application or consent of Company or any Subsidiary, as applicable), and such receiver, trustee or custodian so appointed shall not have been discharged within sixty (60) days after the date of his appointment or if an order shall be entered and shall not be dismissed or stayed within sixty (60) days from its entry, approving any petition for reorganization of Company or any Subsidiary, then the Notes and all indebtedness then outstanding hereunder and under any Letters of Credit shall automatically become immediately due and payable and Bank shall not be obligated to make further Advances or issue any Letters of Credit under this Agreement. 10.3 Upon the occurrence and during the continuance of an Event of Default, unless all of the Indebtedness is then immediately fully paid, Bank shall have and may exercise any one or more of the rights and remedies for which provision is made for a secured party under the UCC, under the Security Agreements or under any other document contemplated hereby or for which provision is provided by law or in equity, including, without limitation, the right to take possession and sell, lease or otherwise dispose of any or all of the collateral and to set off against the Indebtedness any amount owing by Bank to Company and/or any property of Company in possession of Bank. Company agrees, upon request of Bank, to assemble the collateral and make it available to Bank at any place designated by Bank which is reasonably convenient to Bank and Company. 10.4 All of the Indebtedness shall constitute one loan secured by Bank's security interest in the collateral and by all other security interests, mortgages, liens, claims, and encumbrances now and from time to time hereafter granted from Company to Bank. Upon the occurrence and during the continuance of an Event of Default which is not cured within the cure -31- period, if any, provided hereunder, Bank may in its sole discretion apply the collateral to any portion of the Indebtedness. The proceeds of any sale or other disposition of the Collateral authorized by this Agreement shall be applied by Bank, first upon all expenses authorized by the Michigan Uniform Commercial Code (or other applicable law) or otherwise in connection with the sale and all reasonable attorneys' fees and legal expenses incurred by Bank; the balance of the proceeds of such sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, then to other Indebtedness and the surplus, if any, shall be paid over to Company or to such other Person or Persons as may be entitled thereto under applicable law. Company shall remain liable for any deficiency, which Company shall pay to Bank immediately upon demand. 10.5 The remedies provided for herein are cumulative to the remedies for collection of the Indebtedness as provided by law, in equity or by any mortgage, security agreement or other document contemplated hereby. Nothing herein contained is intended, nor shall it be construed, to preclude Bank from pursuing any other remedy for the recovery of any other sum to which Bank may be or become entitled for the breach of this Agreement by Company. 10.6 Upon the occurrence and during the continuance of any Event of Default, Company shall immediately upon demand by Bank deposit with Bank cash collateral in the amount equal to the maximum amount available to be drawn at any time under any Letter of Credit then outstanding. 11. MISCELLANEOUS 11.1 This Agreement shall be binding upon and shall inure to the benefit of Company and Bank and their respective successors and assigns, except that the credit provided for under this Agreement and no part thereof and no obligation of Bank hereunder shall be assignable or otherwise transferable by Company. 11.2 Company shall pay all closing costs and expenses, including, by way of description and not limitation, reasonable attorney fees, lien search fees, appraisal fees and title policy fees incurred by Bank in connection with the commitment, consummation and closing of this Agreement. All of said amounts required to be paid by Company may, at Bank's option, be charged by Bank as an advance against the proceeds of the Notes. All costs, including reasonable attorney fees incurred by Bank in protecting or enforcing any of its or any of the Bank's rights against Company or any collateral or in defending Bank from any claims or liabilities by any party or otherwise incurred by Bank in connection with an event of default or the enforcement of this Agreement or the related documents, including by way of description and not limitation, such charges in any court or bankruptcy proceedings or arising out of any claim or action by any person against Bank which would not have been asserted were it not for Bank's relationship with Company hereunder, shall also be paid by Company. 11.3 Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP. -32- 11.4 No delay or failure of Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege, nor shall any single or partial exercise thereof preclude any further exercise thereof, or the exercise of any other power, right or privilege. The rights of Bank under this Agreement are cumulative and not exclusive of any right or remedies which Bank would otherwise have. 11.5 Except as expressly provided otherwise in this Agreement, all notices and other communications provided to any party hereto under this Agreement shall be in writing and shall be given by personal delivery, by mail, by reputable overnight courier, by telex or by facsimile and addressed or delivered to it at its address set forth below or at such other address as may be designated by such party in a notice to the other parties that complies as to delivery with the terms of this Section 11.5. Any notice, if personally delivered or if mailed and properly addressed with postage prepaid and sent by registered or certified mail, shall be deemed given when received; any notice, if given to a reputable overnight courier and properly addressed, shall be deemed given two (2) Business Days after the date on which it was sent, unless it is actually received sooner by the named addressee; and any notice, if transmitted by e-mail or facsimile, shall be deemed given when received (receipt confirmed in the case of telecopies and e-mail). Bank may, but shall not be required to, take any action on the basis of any notice given to it by telephone, but Company shall promptly confirm such notice in writing or by e-mail or facsimile, and such notice will not be deemed to have been received until such confirmation is deemed received in accordance with the provisions of this Section set forth above. If such telephonic notice conflicts with any such confirmation, the terms of such telephonic notice shall control. To Company: 1310 Ridder Park Drive San Jose, California 95131-2312 Attention: Chief Financial Officer Fax No. (408) 325-4439 To Bank: 800 Oak Grove Avenue Menlo Park, California 94025 Attention: Rob Ways Fax No. (650) 462-6058 11.6 This Agreement and the Notes have been delivered at San Jose, California, and shall be governed by and construed and enforced in accordance with the laws of the State of California. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.7 No amendments or waiver of any provisions of this Agreement nor consent to any departure by Company therefrom shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, waiver -33- or consent with respect to any provision of this Agreement shall affect any other provision of this Agreement. 11.8 All sums payable by Company to Bank under this Agreement or the other documents contemplated hereby shall be paid directly to Bank at its principal office set forth in Section 11.5 hereof in immediately available United States funds, without set off, deduction or counterclaim. In its sole discretion, Bank may charge any and all deposit or other accounts (including without limit an account evidenced by a certificate of deposit) of Company with Bank for all or a part of any Indebtedness then due; provided, however, that this authorization shall not affect Company's obligation to pay, when due, any Indebtedness whether or not account balances are sufficient to pay amounts due. 11.9 Any payment of the Indebtedness made by mail will be deemed tendered and received only upon actual receipt by Bank at the address designated for such payment, whether or not Bank has authorized payment by mail or any other manner, and shall not be deemed to have been made in a timely manner unless received on the date due for such payment, time being of the essence. Company expressly assumes all risks of loss or liability resulting from non-delivery or delay of delivery of any item of payment transmitted by mail or in any other manner. Acceptance by Bank of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default, and at any time thereafter and until the entire amount then due has been paid, Bank shall be entitled to exercise any and all rights conferred upon it herein upon the occurrence of an Event of Default. Upon the occurrence and during the continuance of an Event of Default, Company waives the right to direct the application of any and all payments at any time or times hereafter received by Bank from or on behalf of Company. Upon the occurrence and during the continuance of an Event of Default, Company agrees that Bank shall have the continuing exclusive right to apply and to reapply any and all payments received at any time or times hereafter against the Indebtedness in such manner as Bank may deem advisable, notwithstanding any entry by Bank upon any of its books and records. Company expressly agrees that to the extent that Bank receives any payment or benefit and such payment or benefit, or any part thereof, is subsequently invalidated, declared to be fraudulent or preferential, set aside or is required to be repaid to a trustee, receiver, or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or benefit, the Indebtedness or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or benefit had not been made and, further, any such repayment by Bank, to the extent that Bank did not directly receive a corresponding cash payment, shall be added to and be additional Indebtedness payable upon demand by Bank. 11.10 In the event Company's obligation to pay interest on the principal balance of the Notes is or becomes in excess of the maximum interest rate which Company is permitted by law to contract or agree to pay, giving due consideration to the execution date of this Agreement, then, in that event, the rate of interest applicable shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of such maximum rate shall be deemed to have been payments in reduction of principal and not of interest. -34- 11.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 11.12 This Agreement shall become effective upon the execution hereof by Bank and Company. 11.13 The Indebtedness constitutes Designated Senior Indebtedness (as defined in the Indenture). Bank acknowledges that Company may from time to time desire to optionally redeem a portion of the Subordinated Debt issued pursuant to the Indenture. The Bank will consider any request by Company for a consent to such redemption but the Bank's failure to give its consent shall not give rise to any liability on the part of Bank to Company and Bank shall be entitled to withhold its consent in its sole judgment. WITNESS the due execution hereof as of the day and year first above written. COMERICA BANK - CALIFORNIA ASPECT COMMUNICATIONS CORPORATION By: /s/ Robert Ways By: /s/ Betsy Rafael ------------------------------------ ------------------------------- Its: A.V.P. Its: CFO ----------------------------------- ------------------------------ -35- EXHIBIT "A" EQUIPMENT LINE NOTE ------------------- San Jose, California $5,000,000 June 19, 2001 On or before December 19, 2001, FOR VALUE RECEIVED, the undersigned ("Company") promises to pay to the order of Comerica Bank-California, a California banking corporation ("Bank") at 333 West Santa Clara Street, San Jose, California 95113, in lawful money of the United States of America the Indebtedness to Bank or so much of the sum of Five Million Dollars ($5,000,000) as may from time to time have been advanced and then be outstanding hereunder pursuant to the Credit Agreement ("Agreement") dated as of June 19, 2001, made by and between Company and Bank, together with interest thereon as hereinafter set forth. Capitalized terms used herein, unless defined to the contrary, have the meanings given them in the Agreement. Each of the advances made hereunder shall bear interest at the interest rate from time to time applicable thereto under the Agreement or as otherwise determined thereunder, and interest shall be computed, assessed and payable as set forth in the Agreement. This Note is a note under which advances and repayments but not readvances may be made from time to time, but only in accordance with the terms and conditions of the Agreement. This Note evidences borrowing under, is subject to, and may be accelerated or matured under, the terms of the Agreement, to which reference is hereby made. Company agrees that in the event of a default hereunder or any Default or Event of Default under the Agreement, Bank shall be entitled to liquidate and collect all property or assets (including deposits and other credits) whether presently owned or hereafter acquired, of Company in possession or control of (or owing by) the Bank for any purpose, and to apply the proceeds of such liquidations and collections, and offset any amounts owing by Bank, against Company's obligations hereunder and under the Agreement. This Note shall be interpreted and the rights of the parties hereunder shall be determined under the laws of, and enforceable in, the State of California. The indebtedness of Company to Bank under this Note constitutes Designated Senior Indebtedness (as defined in the Indenture). Company hereby waives presentment for payment, demand, protest and notice of dishonor and nonpayment of this Note and agrees that no obligation hereunder shall be discharged by reason of any extension, indulgence, release, or forbearance granted by any holder of this Note to any party now or hereafter liable hereon or any present or subsequent owner of any property, real or personal, which is now or hereafter security for this Note. Any transferees of, or endorser, guarantor or surety paying this Note in full shall succeed to all rights of Bank, and Bank shall be under no further responsibility for the exercise thereof or the loan evidenced hereby. Nothing herein shall limit any right granted Bank by any other instrument or by law. ASPECT COMMUNICATIONS CORPORATION By:___________________________________ Its:__________________________________ -2- EXHIBIT "B" EQUIPMENT TERM NOTE ------------------- San Jose, California $_______________ ___________, 200__ FOR VALUE RECEIVED, the undersigned ("Company") promises to pay to the order of Comerica Bank-California, a California banking corporation ("Bank") at 333 West Santa Clara Street, San Jose, California 95113, in lawful money of the United States of America the principal sum of_________________________________ Dollars ($_________) in lawful money of the United States of America payable in monthly principal installments each in the amount of $_________ commencing on ______________, _______________, and on a like day of each month thereafter until _________________, 200___, when the entire unpaid balance of principal and interest thereon shall be due and payable, together with interest thereon as hereinafter set forth. The principal balance from time to time outstanding hereunder shall bear interest at its Applicable Interest Rate or as otherwise determined under the Agreement (as defined below), and interest shall be computed, assessed and payable as set forth in the Agreement. This Note evidences borrowing under, is subject to, and may be accelerated or matured under, the terms of the Credit Agreement dated as of June 19, 2001, made by and between Company and Bank ("Agreement"), to which reference is hereby made. Company agrees that in the event of a default hereunder or any default or Event of Default under the Agreement, Bank shall be entitled to liquidate and collect all property or assets (including deposits and other credits) whether presently owned or hereafter acquired, of Company in possession or control of (or owing by) the Bank for any purpose, and to apply the proceeds of such liquidations and collections, and offset any amounts owing by Bank, against Company's obligations hereunder and under the Agreement. This Note shall be interpreted and the rights of the parties hereunder shall be determined under the laws of, and enforceable in, the State of California. The indebtedness of Company to Bank under this Note constitutes Designated Senior Indebtedness (as defined in the Indenture). Company hereby waives presentment for payment, demand, protest and notice of dishonor and nonpayment of this Note and agrees that no obligation hereunder shall be discharged by reason of any extension, indulgence, release, or forbearance granted by any holder of this Note to any party now or hereafter liable hereon or any present or subsequent owner of any property, real or personal, which is now or hereafter security for this Note. Any transferees of, or endorser, guarantor or surety paying this Note in full share succeed to all rights of Bank, and Bank shall be under no further responsibility for the exercise thereof or the loan evidenced hereby. Nothing herein shall limit any right granted Bank by any other instrument or by law. ASPECT COMMUNICATIONS CORPORATION By:________________________________________ Its:_______________________________________ -2- EXHIBIT "C" NOTICE OF TERM RATE ------------------- With reference to the Equipment Term Note dated _______________, 200_____ in the original principal amount of $_______________ delivered by the Company to the Bank under the Credit Agreement dated as of June 19, 2001 by and between Company and the Bank (as the same may be amended or modified from time to time, "Agreement") and pursuant to the Agreement, the Company hereby elects as the Applicable Interest Rate for such Note the ______________________ /1/ Rate. Such Applicable Interest Rate shall be effected on _______________________, ___________, and the Interest Period applicable thereto, if any, shall be one month. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. Dated this _____ day of __________, ________. ASPECT COMMUNICATIONS CORPORATION By:________________________________________ Its:_______________________________________ _____________________________ /1/ Insert, as applicable, "Eurodollar-based", or "Prime-based". EXHIBIT "D" REQUEST FOR ADVANCE ------------------- Pursuant to the Credit Agreement dated as of June 19, 2001, (herein called "Agreement"), the undersigned hereby requests COMERICA BANK-CALIFORNIA to make a(an) _______________/1/ Advance to the undersigned on ___________________, _________, in the amount of ___________________ DOLLARS, ($_________) under [the Revolving Credit Note dated June __, 2001] [Equipment Line Note dated June 19, 2001], issued by the undersigned to said Bank (herein called "Note"). The Interest Period for the requested Advance, if applicable, shall be _______________/2/. The last day of the Interest Period for the amounts being converted or refunded hereunder, if applicable, is ___________, ______. The undersigned certifies that the conditions set forth in Section 5.4 of the Agreement are satisfied as of the date hereof. The undersigned further certifies that upon advancing the sum requested hereunder, the aggregate principal amount outstanding under the Note will not exceed the face amount thereof or any advance formula applicable to Advances under such Note. If the amount advanced to the undersigned under the Note shall at any time exceed the face amount thereof or any Advance formula applicable to Advances under such Note, the undersigned will pay such excess amount on demand. The undersigned hereby authorizes said Bank to disburse the proceeds of this Request for Advance by crediting the account of the undersigned with Bank separately designated by the undersigned or as the undersigned may otherwise direct, unless this Request for Advance is being submitted for a conversion or refunding, in which case it shall refund or convert that portion stated above of the existing outstandings under the Note. Dated this ______ day of ______________________, __________. ASPECT COMMUNICATIONS CORPORATION By:_________________________________________ Its:________________________________________ __________________________ /1/ Insert, as applicable, "Eurodollar-based", or "Prime-based". /2/ For a Eurodollar-based Advance insert, as applicable, "one month", "two months", "three months", or "six months". EXHIBIT "E" REVOLVING CREDIT NOTE --------------------- San Jose, California $20,000,000 June 19, 2001 On or before the Revolving Credit Maturity Date FOR VALUE RECEIVED, Aspect Communications Corporation, a California corporation, (herein called "Company") promises to pay to the order of COMERICA BANK-CALIFORNIA, a California banking corporation (herein called "Bank") at its Main Office at 333 West Santa Clara Street, San Jose, California 95113, in lawful money of the United States of America the indebtedness or so much of the sum of Twenty Million Dollars ($20,000,000) as may from time to time have been advanced and then be outstanding hereunder pursuant to the Credit Agreement dated as of June 19, 2001, made by and between Company and Bank (as the same may be amended or modified from time to time, herein called "Agreement"), together with interest thereon as hereinafter set forth. Each of the Advances hereunder shall bear interest at the Applicable Interest Rate from time to time applicable thereto under the Agreement or as otherwise determined thereunder, and interest shall be computed, assessed and payable as set forth in the Agreement. This Note is a note under which advances, repayments and readvances may be made from time to time, subject to the terms and conditions of the Agreement. This Note evidences borrowing under, is subject to, is secured in accordance with, and may be matured under, the terms of the Agreement, to which reference is hereby made. As additional security for this Note, Company grants Bank a lien on all property and assets including deposits and other credits of the Company, at any time in possession or control of or owing by Bank for any purpose. The indebtedness of Company to Bank under this Note constitutes Designated Senior Indebtedness (as defined in the Indenture). Company hereby waives presentment for payment, demand, protest and notice of dishonor and nonpayment of this Note and agrees that no obligation hereunder shall be discharged by reason of any extension, indulgence, or forbearance granted by any holder of this Note to any party now or hereafter liable hereon. Any transferees of, or endorser, guarantor or surety paying this Note in full shall succeed to all rights of Bank, and Bank shall be under no further responsibility for the exercise thereof or the loan evidenced hereby. Nothing herein shall limit any right granted Bank by other instrument or by law. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. ASPECT COMMUNICATIONS CORPORATION By:________________________________ Its:_______________________________ -2- EXHIBIT "G" CERTIFICATE OF COVENANT COMPLIANCE ---------------------------------- To: Comerica Bank-California Re: Credit Agreement dated as of June 19, 2001 ("Credit Agreement"), by and between Comerica Bank, and Company. Gentlemen: This certificate is furnished pursuant to Section 7.10 of the Credit Agreement and sets forth various information as of ______________ , 200___ (the "Computation Date"). 1. Adjusted Tangible Net Worth. On the Computation Date, Adjusted Tangible --------------------------- Net Worth, which is required to be at least $_________ was _______________ as computed in the supporting documents attached hereto as Schedule 1. ---------- 2. Quick Ratio. On the Computation Date, the Quick Ratio, which was ----------- required to be at least ____ to 1.0 was _____ to 1.0 as computed in the supporting documents attached as Schedule 2. ---------- 3. EBITDA. On the Computation Date, EBITDA, which was required to be at ------ least $______________ was $____________ as computed in the supporting documents attached as Schedule 3. ---------- 4. Unrestricted Cash. On the Computation Date, Unrestricted Cash, which ----------------- was required to be at least $_____________ was $______________ as computed in the supporting documents attached as Schedule 4. ---------- 5. Leverage Ratio. On the Computation Date, the Leverage Ratio, which was -------------- required to be not more than ____ to 1.0 was _____ to 1.0 as computed in the supporting documents attached as Exhibit 5. The undersigned officer of Company hereby certifies that: A. All of the information set forth in this Compliance Certificate (and in any Schedule attached hereto) is true and correct in all material respects; and -------- B. As of the Computation Date, the Company has observed and performed all of their covenants and other agreements, and satisfied every condition, contained in the Credit Agreement and in the Notes and any other Loan Documents to be observed, performed and satisfied by it. C. I have reviewed the Credit Agreement and this Compliance Certificate is based on an examination sufficient to assure that this Compliance Certificate is accurate. D. Except as stated as Schedule 6 hereto (which shall describe any ---------- existing Event of Default or event which with the passage of time and/or the giving of notice, would constitute an Event of Default and the notice and period of existence thereof and any action taken with respect thereto or contemplated to be taken by Company), no Default or Event of Default has occurred and is continuing on the date of this Compliance Certificate. Capitalized terms used herein and in the schedules hereto, unless specifically defined to the contrary, have the meanings given to them in the Credit Agreement. IN WITNESS WHEREOF, Company has caused this Certificate to be executed and delivered by its duly authorized officer this ______ day of __________________, 200___. ASPECT COMMUNICATIONS CORPORATION By:________________________________ Its:_______________________________ -4- EXHIBIT "H" [LOGO OF COMERICA] Guaranty - -------------------------------------------------------------------------------- The undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank-California ("Bank") a California banking corporation, and to --------------------------- the Bank's successors and assigns, payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness to the Bank of Aspect Communications Corporation, a California corporation ("Borrower") or any successor in interest, including without limit any debtor- in-possession or trustee in bankruptcy which succeeds to the interest of this party or person (jointly and severally the "Borrower"), however this indebtedness has been or may be incurred or evidenced, whether absolute or contingent direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, and whether or not known to the undersigned at the time of this Guaranty or at the time any future indebtedness is incurred (the "Indebtedness"). The Indebtedness guaranteed includes without limit: (a) any and all direct indebtedness of the Borrower to the Bank, including indebtedness evidenced by any and all promissory notes; (b) any and all obligations or liabilities of the Borrower to the Bank arising under any guaranty where the Borrower has guaranteed the payment of indebtedness owing to the Bank from a third party; (c) any and all obligations or liabilities of the Borrower to the Bank arising from applications or agreements for the issuance of letters of credit; (d) any and all obligations or liabilities of the Borrower to the Bank arising out of any other agreement by the Borrower including without limit any agreement to indemnify the Bank for environmental liability or to clean up hazardous waste; (e) any and all indebtedness, obligations or liabilities for which the Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason, including without limit liability for interest and attorneys' fees on, or in connection with, any of the Indebtedness from and after the filing by or against the Borrower of a bankruptcy petition whether an involuntary or voluntary bankruptcy case, including, without limitation, all attorneys' fees and costs incurred in connection with motions for relief from stay, cash collateral motions, nondischargeability motions, preference liability motions, fraudulent conveyance liability motions, fraudulent transfer liability motions and all other motions brought by Borrower, Guarantor, Bank or third parties in any way relating to Bank's rights with respect to such Borrower, Guarantor, or third party and/or affecting any collateral securing any obligation owed to Bank by Borrower, Guarantor, or any third party, probate proceedings, on appeal or otherwise; (f) any and all amendments, modifications, renewals and/or extensions of any of the above, including without limit amendments, modifications, renewals and/or extensions which are evidenced by new or additional instruments, documents or agreements; and (g) all costs of collecting Indebtedness, including without limit reasonable attorneys' fees and costs. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, and diligence in collecting any Indebtedness, and agree(s) that the Bank may modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned further waive(s) any and all other notices to which the undersigned might otherwise be entitled. The undersigned acknowledge(s) and agree(s) that the liabilities created by this Guaranty are direct and are not conditioned upon pursuit by the Bank of any remedy the Bank may have against the Borrower or any other person or any security. No invalidity, irregularity or unenforceability of any part or all of the Indebtedness or any documents evidencing the same, by reason of any bankruptcy, insolvency or other law or order of any kind or for any other reason, and no defense or setoff available at any time to the Borrower, shall impair, affect or be a defense or setoff to the obligations of the undersigned under this Guaranty. The undersigned deliver(s) this Guaranty based solely on the undersigned's independent investigation of the financial condition of the Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate from time to time. The undersigned waive(s) any duty on the part of the Bank, and agree(s) that it is not relying upon nor expecting the Bank to disclose to the undersigned any fact now or later known by the Bank, whether relating to the operations or condition of the Borrower, the existence, liabilities or financial condition of any co-guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect these facts may have upon the undersigned's risk under this Guaranty or the undersigned's rights against the Borrower. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes without limit the possibility that the Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or its ability to pay its debts as they mature, has deteriorated. The undersigned represent(s) and warrant(s) that: (a) the Bank has made no representation to the undersigned as to the creditworthiness of the Borrower; and (b) the undersigned has (have) established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's financial condition. The undersigned agree(s) to keep adequately informed of any facts, events or circumstances which might in any way affect the risks of the undersigned under this Guaranty. The undersigned grant(s) to the Bank a security interest in and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned subordinate(s) any claim of any nature that the undersigned now or later has (have) against the Borrower to and in favor of all Indebtedness and agree(s) not to accept payment or satisfaction of any claim that the undersigned now or later may have against the Borrower without the prior written consent of the Bank. Should any payment, distribution, security, or proceeds, be received by the undersigned upon or with respect to any claim that the undersigned now or may later have against the Borrower, the undersigned shall immediately deliver the same to the Bank in the form received (except for endorsement or assignment by the undersigned where required by the Bank) for application on the Indebtedness, whether matured or unmatured, and until delivered the same shall be held in trust by the undersigned as the property of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower (other than any claim under a deed of trust or mortgage covering real property) with full right on the part of the Bank, in its own name or in the name of the undersigned, to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledges(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. The undersigned acknowledge(s) that the effectiveness of this Guaranty is not conditioned on any or all of the Indebtedness being guaranteed by anyone else. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any and all rights to be subrogated to the position of the Bank or to have the benefit of any lien, security interest or other guaranty now or later held by the Bank for the Indebtedness or to enforce any remedy which the Bank now or later has against the Borrower or any other person. Until the Indebtedness is irrevocably paid in full, the undersigned shall have no right of reimbursement, indemnity, contribution or other right of recourse to or with respect to the Borrower or any other person. The undersigned agree(s) to indemnify and hold harmless the Bank from and against any and all claims, actions, damages, costs and expenses, including without limit reasonable attorneys' fees, incurred by the Bank in connection with the undersigned's exercise of any right of subrogation, contribution, indemnification or recourse with respect to this Guaranty. The Bank has no duty to enforce or protect any rights which the undersigned may have against the Borrower or any other person and the undersigned assume(s) full responsibility for enforcing and protecting these rights. Notwithstanding any provision of the preceding paragraph or anything else in this Guaranty to the contrary, if any of the undersigned is or becomes an "insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) with respect to the Borrower, then that undersigned irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, recourse, reimbursement and any similar rights against the Borrower (or any other guarantor) with respect to this Guaranty, whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that the undersigned shall not be (or be deemed to be) a "creditor" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) of the Borrower (or any other guarantor) by reason of the existence of this Guaranty in the event that the Borrower becomes a debtor in any proceeding under the Federal Bankruptcy Code. This waiver is given to induce the Bank to enter into certain written contracts with the Borrower included in the Indebtedness. The undersigned warrant(s) and agree(s) that none of Bank's rights, remedies or interests shall be directly or indirectly impaired because of any of the undersigned's status as an "insider" or "affiliate" of the Borrower, and undersigned shall take any action, and shall execute any document, which the Bank may request in order to effectuate this warranty to the Bank. If any Indebtedness is guaranteed by two or more guarantors, the obligation of the undersigned shall be several and also joint, each with all and also each with any one or more of the others, and may be enforced at the option of the Bank against each severally, any two or more jointly, or some severally and some jointly. The Bank, in its sole discretion, may release any one or more of the guarantors for any consideration which it deems adequate, and may fail or elect not to prove a claim against the estate of any bankrupt, insolvent, incompetent or deceased guarantor; and after that, without notice to any other guarantor, the Bank may extend or renew any or all Indebtedness and may permit the Borrower to incur additional Indebtedness, without affecting in any manner the unconditional obligation of the remaining guarantor(s). This action by the Bank shall not, however, be deemed to affect any right to contribution which may exist among the guarantors. Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgment of delivery; provided, the termination shall not be effective until the opening of business on the fifth (5th) day following -2- written acknowledgment of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses, including without limit reasonable attorneys' fees and costs, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or of any lien, pledge or security interest securing this Guaranty) in whole or part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated, as the case may be, in the event that (a) any payment received or credit given by the Bank in respect of the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it; or (b) any liability is imposed, or sought to be imposed, against the Bank relating to the environmental condition of, or the presence of hazardous or toxic substances on, in or about, any property given as collateral to the Bank by the Borrower, whether this condition is known or unknown, now exists or subsequently arises (excluding only conditions which arise after any acquisition by the Bank of any such property, by foreclosure, in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of the Bank), in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned to the extent of all liability, costs and expenses (including without limit reasonable attorneys' fees and costs) incurred by the Bank as the direct or indirect result of any environmental condition or hazardous or toxic substances. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. For purposes of this Guaranty, "environmental condition" includes, without limitation, conditions existing with respect to the surface or ground water, drinking water supply, land surface or subsurface and the air; and "hazardous or toxic substances" shall include any and all substances now or subsequently determined by any federal, state or local authority to be hazardous or toxic, or otherwise regulated by any of these authorities. Although the intent of the undersigned and the Bank is that California law shall apply to this Guaranty, regardless of whether California law applies, the undersigned further agree(s) as follows: With respect to the limitation, if any, stated in the Additional Provisions below on the amount of principal guaranteed under this Guaranty, the undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the Bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at or prior to the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty and any other guaranties previously or subsequently given to the Bank by the undersigned and not expressly revoked, modified or invalidated in writing. The undersigned waive(s) any right to require the Bank to: (a) proceed against any person, including without limit the Borrower; (b) proceed against or exhaust any security held from the Borrower or any other person; (c) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the California or other applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's power; or (e) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest, or notices of dishonor in connection with any obligations or evidences of Indebtedness held by the Bank as security, in connection with any other obligations or evidences of indebtedness which constitute in whole or in part Indebtedness, or in connection with the creation of new or additional Indebtedness. The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale of it, including without limit, a nonjudicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as the Bank in its discretion may determine; (b) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness; and (c) apply payments received by the Bank from the Borrower to any indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this indebtedness is covered by -3- this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The Bank may without notice assign this Guaranty in whole or in part. Upon the Bank's request, the undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements. The undersigned waive(s) any defense based upon or arising by reason of (a) any disability or other defense of the Borrower or any other person; (b) the cessation or limitation from any cause whatsoever, other than final and irrevocable payment in full, of the Indebtedness; (c) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of the Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of the Borrower; (d) the application by the Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by the Borrower to the Bank or intended or understood by the Bank or the undersigned; (e) any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any Indebtedness by operation of law or otherwise; or (f) any modification of the Indebtedness, in any form whatsoever including without limit any modification made after effective termination, and including without limit, the renewal, extension, acceleration or other change in time for payment of the Indebtedness, or other change in the terms of any Indebtedness, including without limit increase or decrease of the interest rate. The undersigned understands that, absent this waiver, Bank's election of remedies, including but not limited to its decision to proceed to nonjudicial foreclosure on any real property securing the Indebtedness, could preclude Bank from obtaining a deficiency judgment against Borrower and the undersigned pursuant to California Code of Civil Procedure sections 580a, 580b, 580d or 726 and could also destroy any subrogation rights which the undersigned has against Borrower. The undersigned further understands that, absent this waiver, California law, including without limitation, California Code of Civil Procedure sections 580a, 580b, 580d or 726, could afford the undersigned one or more affirmative defenses to any action maintained by Bank against the undersigned on this Guaranty. The undersigned waives any and all rights and provisions of California Code of Civil Procedure sections 580a, 580b, 580d and 726, including, but not limited to any provision thereof that: (i) may limit the time period for Bank to commence a lawsuit against Borrower or the undersigned to collect any Indebtedness owing by Borrower or the undersigned to Bank; (ii) may entitle Borrower or the undersigned to a judicial or nonjudicial determination of any deficiency owed by Borrower or the undersigned to Bank, or to otherwise limit Bank's right to collect a deficiency based on the fair market value of such real property security; (iii) may limit Bank's right to collect a deficiency judgment after a sale of any real property securing the Indebtedness; (iv) may require Bank to take only one action to collect the Indebtedness or that may otherwise limit the remedies available to Bank to collect the Indebtedness. The undersigned waives all rights and defenses arising out of an election of remedies by Bank even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the undersigned's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the Code of Civil Procedure or otherwise. The undersigned acknowledges and agrees that this is a knowing and informed waiver of the undersigned's rights as discussed above and that Bank is relying on this waiver in extending credit to Borrower. The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including without limit this Guaranty. In connection with that right, the Bank may disclose any documents and information which the Bank now or later acquires relating to the undersigned and this Guaranty, whether furnished by the Borrower, the undersigned or otherwise. The undersigned further agree(s) that the Bank may disclose these documents and information to the Borrower. The undersigned agree(s) that the Bank may provide information relating to this Guaranty or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The total obligation under this Guaranty shall be UNLIMITED unless specifically limited in the Additional Provisions of this Guaranty, and this obligation (whether unlimited or limited to the extent indicated in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, any and all interest on all Indebtedness and any and all costs and expenses of any kind, including without limit reasonable attorneys' fees and costs, incurred by the Bank at any time(s) for any reason in enforcing any of the duties and obligations of the undersigned under this Guaranty or otherwise incurred by the Bank in any way connected with this Guaranty, the Indebtedness or any other guaranty of the Indebtedness (including without limit reasonable attorneys' fees and other expenses incurred in any suit involving the conduct of the Bank, the Borrower or the undersigned). All of these costs and expenses shall be payable immediately by the undersigned when incurred by the Bank, without demand, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Guaranty to attorneys' fees shall be deemed a reference to fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorneys' fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Any reference in the Additional Provisions or elsewhere (a) to this Guaranty being secured by certain collateral shall NOT be deemed to limit the total obligation of the undersigned under this Guaranty or (b) to this Guaranty being limited in any respect shall NOT be deemed to limit the total obligation of the undersigned under any prior or subsequent guaranty given by the undersigned to the Bank. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge -4- and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. The undersigned acknowledge(s) that the effectiveness of this Guaranty is subject to no conditions of any kind. This Guaranty shall remain effective with respect to successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, until this Guaranty is terminated in the manner and to the extent provided above. The undersigned warrant(s) and agree(s) that each of the waivers set forth above are made with the undersigned's full knowledge of their significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law If any of these waivers are determined to be contrary to any applicable law or public policy, these waivers shall be effective only to the extent permitted by law. This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of this Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns. This Guaranty shall be binding on the undersigned and the undersigned's heirs, legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower, and the undersigned acknowledge(s) that the terms of this Guaranty are reasonable. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. -5- Additional Provisions (if any): HE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. IN WITNESS WHEREOF, the undersigned has (have) signed this Guaranty on_________ GUARANTOR(S)__________________________ By:___________________________________ Signature of WITNESS: Its:_____________________________ (If Applicable) By:___________________________________ Signature of Signature of Its:_____________________________ (If Applicable) GUARANTOR'S ADDRESS ______________________________________ Street Address ______________________________________ City State Zip Code BORROWER(S): -----END PRIVACY-ENHANCED MESSAGE-----