U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
Gateway Data Sciences Corporation
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(Exact name of small business issuer as specified in its charter)
Arizona 86-0527788
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(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
3410 E. University Drive, Phoenix, AZ 85034
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(Address of principal executive offices)
(602) 968-7000
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 No X
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity: 2,838,138 shares of common stock, $.01 par value (as of October 28,
1997)
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GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1997
and January 31, 1997 3
Consolidated Statements of Operations for the
three months ended April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
three months ended April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 15
Signatures 16
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PART I, ITEM 1. FINANCIAL STATEMENTS
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 (UNAUDITED) AND JANUARY 31, 1997
<TABLE>
<CAPTION>
April 30, January 31,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 64,385 $ 936,232
Trade receivables - less allowance of $23,800 and $112,300, respectively 5,679,356 7,684,086
Inventories 2,502,521 2,420,393
Prepaid expenses and other assets 367,771 432,140
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Total current assets 8,614,033 11,472,851
PROPERTY AND EQUIPMENT - Net 1,829,258 1,794,894
NET INVESTMENT IN LEASE RESIDUALS 1,663,870 1,663,870
ACCOUNTS RECEIVABLE - Long Term 3,371,826 --
OTHER ASSETS 458,950 666,884
$ 15,937,937 $ 15,598,498
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,606,736 1,452,775
Accrued liabilities 545,232 2,889,574
Accrued payroll and benefits 717,002 346,319
Line of Credit 3,343,317 --
Current portion of notes payable 168,374 161,438
Current portion of capital lease obligations 58,987 74,375
Deferred revenue 1,028,540 1,058,759
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Total current liabilities 7,468,188 5,204,674
DEFERRED REVENUE, recognized after one year 1,419,303 1,785,266
NOTES PAYABLE, less current portion 235,815 280,600
CAPITAL LEASE OBLIGATIONS, less current portion 53,048 56,445
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Total liabilities 9,176,354 8,105,552
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
2,817,201 shares issued and outstanding at April 30, 1997 and
2,813,312 shares issued and outstanding at January 31, 1997 28,172 28,133
Additional paid-in capital 9,235,736 9,203,940
Deferred Compensation (17,905) --
Accumulated deficit (2,484,420) (1,739,128)
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Total shareholders' equity 6,761,583 7,492,946
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$ 15,937,937 $ 15,598,498
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</TABLE>
See notes to consolidated financial statements.
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GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
Three Months Ended
April 30,
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(Unaudited)
1997 1996
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REVENUE
Product revenue $ 2,734,502 $ 968,748
Software license revenue 1,016,731 1,252,300
Maintenance revenue 169,356 87,633
Professional services 749,466 486,417
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Total revenues 4,670,055 2,795,098
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OPERATING EXPENSES:
Products sold 2,128,786 557,482
Software development 1,097,484 754,981
Maintenance 130,356 133,044
Professional services 456,646 356,923
Sales and marketing 858,479 342,549
General and administrative 649,461 344,600
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Total expenses 5,321,212 2,488,579
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INCOME (LOSS) FROM OPERATIONS (651,157) 306,519
OTHER (INCOME) EXPENSE:
Interest expense 99,005 50,984
Other, net (4,870) (95)
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Total other expense, net 94,135 50,889
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INCOME (LOSS) BEFORE INCOME TAXES (745,292) 255,630
PROVISION FOR INCOME TAXES -- --
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NET INCOME (LOSS) $ (745,292) $ 255,630
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NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $ (.22) $ .12
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COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 2) 3,318,052 2,214,934
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See notes to consolidated financial statements.
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GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended
April 30,
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1997 1996
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(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (745,292) $ 255,630
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................ 203,839 117,624
Effect of changes in assets and liabilities:
Trade receivables ........................................ (1,367,096) (1,152,414)
Inventories .............................................. (82,128) (501,060)
Prepaid expenses and other assets ........................ 272,302 12,269
Accounts payable ......................................... 153,961 (670,013)
Accrued liabilities ...................................... (2,344,343) (320,860)
Accrued payroll and benefits ............................. 370,683 56,879
Deferred revenue ......................................... (396,183) 171,552
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Net cash used in operating activities ......... (3,934,257) (2,030,393)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................... (238,203) (395,395)
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Net cash used in investing activities ......... (238,203) (395,395)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering .................... -- 6,534,599
Principal payments on notes payable .......................... (37,849) (841,987)
Principal payments on capital lease obligations .............. (18,785) (14,075)
Borrowings on (payments to) line of credit ................... 3,343,317 (283,183)
Proceeds from issuance of common stock ....................... 13,930 --
Net payments to officers and employees ....................... -- (536,172)
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Net cash provided by financing activities ..... 3,300,613 4,859,182
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (871,847) 2,433,394
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 936,232 93,402
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CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 64,385 $ 2,526,796
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ..................... $ 99,005 $ 64,429
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Cash paid during the period for income taxes ................. $ -- $ 39,500
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Fair market value of stock issued to non-employee directors .. $ 19,533 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. INTERIM FINANCIAL REPORTING
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows for the periods presented have been made. The results of operations
for the three-month period ended April 30, 1997 are not necessarily indicative
of the operating results that may be expected for the entire year ending January
31, 1998. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended January 31, 1997.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares outstanding
during each period. Common stock equivalents consist of stock options and
warrants.
3. OTHER
The Company is party to various legal and administrative proceedings
arising in the ordinary course of business. The Company is involved in a
material dispute with a customer. The dispute involves a receivable of
$3,371,826 at April 30, 1997, of which approximately $1.5 million was one year
past due at that date. As of August 31, 1997, the receivable balance was
$3,803,055. On May 30, 1997, the customer filed suit against the Company in the
United States District Court for the Eastern District of Wisconsin (Case No.
97-C-0635). The complaint alleges that the Company breached its contract with
the customer by (i) failing to deliver and install certain software products,
(ii) failing to use its best efforts to achieve productive use of the Company's
software products, and (iii) failing to provide its professional consulting
services in a reasonable, workmanlike manner. The customer is seeking an
unspecified amount of damages and a declaratory judgment with respect to the
parties' respective rights and legal obligations. The complaint also alleges
that the Company acted in a fraudulent manner by making false representations to
the customer in connection with the contractual agreements between the Company
and the customer. On October 15, 1997, the court dismissed the customer's fraud
claim against the Company. The Company has filed a counterclaim for the amounts
that the Company claims the customer owes under the contract and has filed an
answer denying the customer's claims in the complaint. The Company intends to
vigorously pursue its counterclaim and to vigorously defend the lawsuit by the
customer. In the event that the Company is unable to obtain a successful
decision on its counterclaim or a decision adverse to the Company is rendered
with respect to the claims by the customer, the resolution of this matter could
have a material adverse effect on the Company.
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4. TRANSACTIONS WITH RELATED PARTIES
Included in Accrued Liabilities is a payable due to a related entity of
approximately $216,000. The payable is due to the related entity for loans of
approximately $650,000 to the Company, partially offset by amounts receivable
for management and consulting services provided during the year. Certain
executives of the Company maintain a direct interest and managerial role in the
related entity. The receivable portion is recorded as an arms-length transaction
at the estimated fair value of services performed.
In January 1997, the Company entered into an equipment lease agreement with
Anderson & Wells Investment Companies, an affiliate of Gregory S. Anderson and
Larry J. Wells, who are directors of the Company. The lease provides for
payments totaling approximately $675,700 to Anderson & Wells Investment
Companies during the period from January 1997 to November 1999.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Statements
The statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's "expectations," "anticipation,"
"intentions," "beliefs," or "strategies" regarding the future. Forward-looking
statements include statements regarding revenue, margins, expenses, and earnings
analysis for fiscal 1998 and thereafter; future products or product development;
future research and development spending and the Company's product development
strategy; and liquidity and anticipated cash needs and availability. All
forward-looking statements included in this Report are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors discussed in the Company's Report on Form
10-KSB, Item 1, "Special Considerations."
Operations
Gateway Data Sciences Corporation (the "Company") and its wholly owned
subsidiary, Gateway Credit Corporation ("GCC"), design, develop, market, and
implement software products and provide related customer support services for
retail and warehouse management systems. The Company also provides professional
services including product installation, training, maintenance, and
customization in conjunction with sales of its software products.
The Company historically has generated the majority of its revenue from
the resale of hardware and software products produced by third parties,
primarily International Business Machines Corp. ("IBM") AS/400 and related
peripheral equipment. The Company also has historically generated a portion of
its revenue from the sale of its proprietary software products, primarily the
Kinetics(TM) warehouse management system, which was developed exclusively for
use on the AS/400 platform, and from providing professional services related to
these products. Sales of IBM products, including hardware, software, and
maintenance, accounted for approximately 27% and 28% of total revenue for the
three months ended April 30, 1996 and 1997, respectively, and approximately 66%
and 56% of the Company's total revenue for the years ended January 31, 1996 and
1997, respectively. The Company's reseller agreement with IBM expired in July
1997. During the year ended January 31, 1996, the Company changed its business
strategy to focus on the development and marketing of its proprietary software
products. In conjunction with this change in strategy, the Company has since
dedicated many of its resources to the development and marketing of new software
products. The Company anticipates that this will result in a change in its
revenue mix. The Company believes that, although the change in revenue mix may
initially result in lower total revenue, it should also result in improved gross
profit margins as software revenue increases as a percentage of total revenue.
There can be no assurance, however, that the Company will be able to
successfully complete this transition in its business focus.
The Company has marketed the Kinetics(TM) warehouse management software
product for several years and will continue its current sales efforts dedicated
to this product and related services. Kinetics currently operates only on the
IBM AS/400 family of midrange computers. To date, the Company has derived
substantially all of its software revenue from Kinetics and other IBM-based
software products. Future revenue from sales of Kinetics and related services
will depend upon continued widespread use of IBM midrange computers and upon the
continued support of such computers by IBM. In addition, the Company will be
required to adapt Kinetics to any changes made by IBM to the AS/400's operating
system software. A significant shift away from
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<PAGE>
IBM midrange computer systems by the Company's customers or the failure by IBM
to continue its support of these systems could have a material adverse effect on
the Company.
During the year ended January 31, 1997, the Company introduced
Transact(TM), a point-of-sale software product developed in Java(TM) that can be
utilized on a wide variety of point-of-sale hardware platforms. During the three
months ended April 30, 1997, the Company introduced MarketBuilder(TM), a
relationship marketing system for retailers, and Crossfire(TM), an
Internet-based store communication system, both of which are also developed in
Java. The Company intends to increase the resources dedicated to software
development and marketing in support of its newly introduced retail
point-of-sale software products. Although the Company has not yet generated
significant sales of its new Java-based products, it expects that the
functionality of its new products, the flexibility of Java-based software, and
the continued focus on software development and marketing efforts will result in
sufficient future revenue to fund its ongoing operations.
Product revenue includes hardware, third-party software, and
third-party maintenance sold to the Company's customers. Software license
revenue includes revenue from the licensing of the Company's proprietary
software offerings as well as revenue from the customization and modification of
the Company's software for its customers. Professional services revenue includes
services to install the Company's software products and third-party hardware and
software products as well as services to train customers in the use of the
Company's software products and third-party hardware and software products.
Cost of products sold includes costs of those software and hardware
products not manufactured by the Company and maintenance resold by the Company.
The Company does not capitalize any software development costs associated with
the development of its proprietary software products and has expensed all
payroll and related costs for software development as incurred. Software
development cost also includes all other general and administrative costs
associated with software development personnel. Professional services expense
consists of salaries, benefits, and other general and administrative costs
attributable to professional services personnel. Sales and marketing expenses
consist primarily of salaries, commissions, benefits, marketing materials,
travel expenses, and other general and administrative costs associated with or
allocated to the Company's sales and marketing personnel. General and
administrative expenses include the cost of finance and accounting, human
resources, corporate information systems, and other administrative functions of
the Company.
Results of Operations of the Company for the Three Months Ended April 30, 1997
and 1996
Revenue. Total revenue increased 67% from approximately $2.8 million in
the three months ended April 30, 1996 to approximately $4.6 million in the three
months ended April 30, 1997. Product revenue increased 182% from approximately
$969,000 to approximately $2.7 million during the same periods. As a percentage
of total revenue, product revenue increased from 35% during the three months
ended April 30, 1996 to 59% during the three months ended April 30, 1997.
Software license revenue decreased 19% from approximately $1.3 million in the
three months ended April 30, 1996 to approximately $1.0 million in the three
months ended April 30, 1997. As a percentage of total revenue, software license
revenue decreased from 45% to 22% during the same periods. Software maintenance
revenue increased approximately 93% from approximately $88,000 in the three
months ended April 30, 1996 to approximately $169,000 in the three months ended
April 30, 1997. As a percentage of total revenue, maintenance revenue increased
from 3% in the three months ended April 30, 1996 to approximately 4% in the
three months ended April 30, 1997. Professional services revenue increased 54%
from approximately $486,000 to approximately $749,000 during the three months
ended April 30, 1996 and 1997, respectively. As a percentage of total revenue,
professional services revenue decreased from 17% to 16% during the three months
ended April 30, 1996 and 1997, respectively.
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The overall increase in total revenue is attributed to increases in
sales of third party products, maintenance revenue, and professional services.
The increase in third party product revenue is due to delayed shipments from IBM
of the then-new RISC AS/400 processors in the three months ended April 30, 1996.
Although revenue from third-party products increased during the three months
ended April 30, 1997, the Company continues to believe that revenue from
third-party products will decrease as a percentage of total revenue and that the
total dollar amounts of revenue from third-party products may decrease in the
future, particularly after the expiration of the reseller agreement with IBM in
July 1997. The increase in maintenance revenue is attributed to increased
software sales. The increase in professional services revenue resulted from the
Company's continued focus on sales of its proprietary software products, as well
as the Company's continuing efforts to provide professional services to
implement its software products.
Cost of Products Sold. Cost of products sold increased 282% from
approximately $557,000 during the three months ended April 30, 1996 to
approximately $2.1 million during the three months ended April 30, 1997. This
increase is attributed to the corresponding increase in sales of third-party
products during the same period. As a percentage of product revenue, cost of
products sold was approximately 58% and 78% during the three months ended April
30, 1996 and 1997, respectively.
Software Development Expense. Software development expense increased
from approximately $755,000 to approximately $1.1 million during the three
months ended April 30, 1996 and 1997, respectively. The 45% increase is
attributed to increased research and development efforts associated with the
development of the Company's proprietary software products. As a percentage of
total revenue, software development costs decreased from 27% in the three months
ended April 30, 1996 to 24% in the three months ended April 30, 1997.
Software Maintenance Expense. Software maintenance expense decreased by
1% from approximately $132,000 in the three months ended April 30, 1996, to
approximately $130,000 in the three months ended April 30, 1997.
Professional Services Expense. Professional services expense increased
by 28% from approximately $357,000 to approximately $457,000 during the three
months ended April 30, 1996 and 1997, respectively. Salaries and other expenses
for additional personnel contributed to this increase. As a percentage of
professional services revenue, professional services expense decreased from 73%
in the three months ended April 30, 1996 to 61% in the three months ended April
30, 1997. This decrease as a percentage is attributed to better utilization of
professional services personnel.
Sales and Marketing Expense. Sales and marketing expense increased 151%
from approximately $343,000 to approximately $858,000 in the three months ended
April 30, 1996 and 1997, respectively. The increase can be attributed to costs
incurred for marketing literature, additional sales and marketing personnel, and
an increased marketing presence at industry trade shows.
General and Administrative Expense. General and administrative expense
increased from approximately $345,000 in the three months ended April 30, 1996
to approximately $649,000 in the three months ended April 30, 1997. This 88%
increase is attributed to additional personnel and associated costs, additional
insurance costs, and increased building rent costs.
Other Income (Expense). Interest expense was approximately $51,000
during the three months ended April 30, 1996, as compared with approximately
$99,000 during the three months ended April 30, 1997. Interest expense incurred
on the Company's line of credit contributed to this increase. The average
outstanding balance on the line of credit during the three months ended April
30, 1996 was approximately $361,000 and approximately $2.8 million for the three
months ended April 30, 1997.
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Net Income (Loss). Net income decreased 392% from approximately
$256,000, or $.12 per share, in the three months ended April 30, 1996 to a net
loss of approximately $(745,000), or $(.22) per share, in the three months ended
April 30, 1997 as a result of the factors described above.
Liquidity and Capital Resources
The Company's working capital position decreased from approximately
$2.6 million at January 31, 1997 to approximately $1.1 million at April 30,
1997.
The Company used net cash of approximately $3.9 million for operations
during the three months ended April 30, 1997, primarily as a result of the
decrease in accrued liabilities and an increase in accounts receivable,
partially offset by an increase in prepaid expenses and accrued payroll and
benefits.
Capital expenditures for the three months ended April 30, 1997 totaled
approximately $238,000 for the purchase of computer hardware and software
products needed for the continued efficient development of the Company's
proprietary software products.
Financing activities provided net cash of approximately $3.3 million in
the three months ended April 30, 1997. This cash was provided by borrowings on
the Company's line of credit agreement with Norwest Business Credit, Inc.
("Norwest"). That line of credit, which matures on February 21, 2000, provides
borrowing capacity in the amount of the lower of $3.0 million or 80% of accounts
receivable, plus the lower of $250,000 or 50% of eligible inventory, as defined
in the agreement. The agreement, as subsequently amended, requires a $5,000
minimum monthly fee that includes interest calculated at the base lending rate
(prime rate) plus 2%, plus an unused facility fee of .25%. The Company signed an
addendum to this agreement in April 1997 that temporarily provided for borrowing
capacity in the amount of the lower of $3.5 million or 80% of accounts
receivable, plus the lesser of $250,000 or 50% of eligible inventory, as defined
in the agreement. Borrowings under the line of credit are secured by
substantially all of the Company's tangible and intangible assets. As of May 1,
1997 the agreement reverted back to the original terms that included borrowings
of the lesser of $3.0 million or 80% of eligible accounts receivable plus the
lesser of $250,000 or 50% of eligible inventory. As of October 27, 1997, the
Company was in default under certain covenants on this line of credit.
Accordingly, Norwest has the right to demand payment of all amounts outstanding,
which amounted to approximately $1.1 million at October 27, 1997. In addition,
in October 1997 Norwest exercised its right to not provide any further advances
under the line. In July 1997, Michael M. Gordon, the Company's Chairman of the
Board, President, and Chief Executive Officer and Mr. Gordon's spouse personally
guaranteed the Company's indebtedness under this line of credit. The Company
currently is seeking additional sources of financing, which may include one or
more private placements of debt or equity securities. There can be no assurance
that any additional financing will be available to the Company or as to the
terms of any such financing that is available. The inability to obtain such
financing could result in the inability of the Company to continue as a going
concern. If such financing is not available in sufficient amounts or on
satisfactory terms, the Company also may be unable to expand its business or to
develop new customers at the rate desired and its operating results may be
adversely affected.
The Company's financial statements for the three months ended April 30,
1997 have been prepared assuming that the Company will continue as a going
concern. The Company had negative cash flow from operations of $2,612,680 for
the year ended January 31, 1997, is in default of the terms of its line of
credit agreement, does not have any readily available financing, is engaged in
material litigation with a significant customer, recorded a net loss of
approximately $700,000 (unaudited) for the six months ended July 31, 1997, and
has not yet generated sufficient revenue from its software products to fund its
ongoing operations. Additionally, its IBM reseller agreement expired in July
1997. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company's plans with regards to these matters
are described in "Business Outlook and Risk Factors," below.
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<PAGE>
The consolidated financial statements have been prepared on a going concern
basis and do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
The Company's independent public accountants have reported to the
Company that, in the course of their audit of the Company's financial statements
for the fiscal year ended January 31, 1997 and their review of the unaudited
financial statements for the six months ended July 31, 1997, they discovered
various conditions that they believe constitute material weaknesses in the
Company's internal controls. These conditions consist of (i) weaknesses in
forecasting internal cash requirements; (ii) weaknesses in policies and
procedures to ensure the accurate timing, classification, and recording of
significant transactions; and (iii) weaknesses in maintaining formal
documentation regarding acquisitions and dispositions of assets. The Company has
been taking various steps intended to strengthen its internal controls,
including engaging more experienced personnel in both operational and financial
positions.
Business Outlook and Risk Factors
The trends indicated by the Company's operating results for the three
months ended April 30, 1997, together with the expiration of the IBM contract in
July 1997, reflect the Company's belief that although total revenue may decrease
in the near future, software and services revenue should contribute to a larger
share of overall revenue, which should result in an increase in gross profit
margins and net margins. The Company continues to invest heavily in research and
development of new and enhanced software products in order to reach a larger
segment of its targeted market. The Company recently announced new software
products that are platform independent and contain added and improved
functionality. The transition to hardware platform independence is designed to
lead to a broader market for the Company's products. The Company's total revenue
and product mix could be materially and adversely affected by many factors, some
of which are beyond the control of the Company. Those factors include the
Company's ability to maintain the software design and development capabilities
necessary to design and produce innovative and desirable products on a timely
and cost-effective basis; the Company's ability to penetrate new markets and
attract new customers; the budgeting and purchasing practices or constraints of
its customers; the length of the Company's sales cycles; the complicated nature
of the Company's product installations; and unanticipated postponement or
cancellation of significant orders. There also can be no assurance that the
Company's software products will achieve market acceptance or that the Company
will be able to develop new products and services in a timely and cost-effective
manner. The failure of the Company to successfully develop and market its own
software products and to overcome the loss of revenue from the sale of hardware
and software products developed by others could have a material adverse effect
on the Company.
As a result of the factors discussed in "Liquidity and Capital Resources."
above, the Company is in default under certain covenants in its line of credit
agreement, and the lender has exercised its right to not provide any further
advances under the line of credit. In addition, the Company has not yet
generated sufficient revenue from its software products to fund its ongoing
operations. The Company currently is seeking additional sources of financing,
which may include one or more private placements of debt or equity securities.
There can be no assurance that such financing will be available.
During July 1997, the Company's reseller agreement with IBM expired and the
Company entered into an agreement with Information Systems of North Carolina,
Inc. ("ISI") with respect to future sales of specified IBM AS/400 and related
products and services to certain of the Company's customers. Under this
agreement, the Company has ceased selling, and ISI has begun selling, the
specified AS/400-related products and services to the designated customers. The
agreement provides that ISI will pay to the Company 50% of its operating profits
(as defined) from sales of the
-12-
<PAGE>
specified products to the designated customers during the four-year term of the
agreement. The Company has the right to terminate the agreement and resume
direct sales of the specified AS/400-related products and services to the
designated customers in the event that ISI's payments to the Company are less
than $50,000 in each of two consecutive quarterly periods. In addition, ISI has
the right to terminate the agreement upon written notice to the Company,
provided that ISI ceases selling the specified AS/400-related products and
services to the designated customers for a period of two years after such
termination. As of the date of this Report, this arrangement has not provided
the Company with any meaningful revenue, and there can be no assurance that the
Company will derive significant revenue from this arrangement in the future.
The Company operates in an industry that is characterized by fast-changing
technology. As a result, the Company will be required to expend substantial
funds for continuing product development, including expenses associated with
research and development activities and additional engineering and other
technical personnel. There can be no assurance that such funds will be available
to the Company given its current financial condition and results of operations.
Any failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the operating results of the Company.
The Company continues to invest in sales and marketing in order to
enhance its image and brand awareness. The Company has continued to add new
marketing and sales personnel during the last three months, and has invested in
updating its industry trade-show presence and image. Although the Company
believes that its increased sales and marketing efforts will contribute to an
increased number of customers and increased revenue associated with the sales of
software products, certain risk factors exist that could have a material adverse
effect on the Company's operating results. Those risk factors include lack of
assurance that its products will achieve or maintain market acceptance; the
complexity of the Company's software programs, which may cause delays in product
development and could result in loss of market acceptance, loss of sales, and
reduction of market share; and the fact that the Company's software products
compete with those of many major domestic and international companies, many of
which have greater market recognition and substantially greater financial,
technical, and marketing resources than the Company possesses.
The Company has hired a new Vice President - Marketing and Chief Operating
Officer who has considerable experience in the sale of software products to
retail enterprises and in the management of software development companies. The
Company believes that this individual's expertise in the development of retail
software applications, his contacts in the retail industry, and his expertise in
the management of software development companies will enhance the Company's
ability to generate significant sales of its proprietary software products.
The Company plans to continue to increase the utilization of
professional services personnel. An increase in utilization of professional
services personnel can have a direct impact on revenue without any additional
associated costs. Risk factors that could, however, materially affect the
ability of the Company to increase utilization rates and professional services
revenue include factors such as fluctuating demand for professional services and
lack of assurance that there will continue to be a demand for the Company's
services. The Company may not be able to react to a significant decrease in
demand for its services during any given quarter, which could result in
continued expenses for professional personnel without offsetting revenue.
Although the Company has focused on controlling administrative costs, it
recognizes the added costs associated with attracting and retaining key
personnel. Because it operates in an industry that is characterized by a high
cost of recruiting and a current lack of qualified personnel, the Company
constantly evaluates employee benefits and the work environment that it provides
for its employees. The high cost associated with industry hiring practices could
have a material adverse effect on the Company's quarterly operating results. The
Company intends to continue to moderate
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<PAGE>
general and administrative costs so that revenue growth will continue to exceed
operating expenses. There can be no assurance, however, that the Company will be
able to predict or respond to a shortfall in sales during any given quarter in
order to reduce its fixed general and administrative expenses on a timely basis.
The Company believes that the industry in which it markets its products
and services has a strong outlook, with expanding markets characterized by a
highly fragmented group of competitors. As competition for consumer products
rises, retailers that represent a significant portion of the Company's current
and potential customers increasingly are aware of the need for business
information systems that allow them to focus on efficiently managing inventory
and of finding new ways to bring customers into their stores. The Company
strives to provide market-leading solutions that address those real-world
problems. Due to the risk factors discussed above and in the Company's Report on
Form 10-KSB, Item 1, "Special Considerations," as well as other factors that
generally affect high technology companies, there can be no assurance that the
Company will be able to successfully penetrate these markets in the future.
-14-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Securities
Not Applicable
Item 4. Submissions of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 Credit and Security Agreement, dated as of
February 21, 1997, between Gateway Data
Sciences Corporation, Gateway Credit
Corporation, and Norwest Business Credit,
Inc., together with Form of Revolving Note
10.16 First Amendment to Credit and Security
Agreement, dated as of April 23, 1997,
between Gateway Data Sciences Corporation,
Gateway Credit Corporation, and Norwest
Business Credit, Inc., together with Form of
Temporary Replacement Revolving Note
11. Computation of Net Income Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
-15-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature:
- ----------
GATEWAY DATA SCIENCES CORPORATION
/s/ Michael M. Gordon Chairman of the Board, October 29, 1997
- ------------------------- President, and Chief
Michael M. Gordon Executive Officer
(Principal Executive
Officer)
/s/ Vickie B. Jarvis Vice President, Finance and October 29, 1997
- ------------------------- Chief Financial Officer
Vickie B. Jarvis (Principal Financial and
Accounting Officer)
-16-
Committed Revolving Facility
----------------------------
with Letter of Credit Provisions
--------------------------------
CREDIT AND SECURITY AGREEMENT
Dated as of February 21, 1997
GATEWAY DATA SCIENCES CORPORATION, an Arizona corporation, and GATEWAY
CREDIT CORPORATION, an Arizona corporation (jointly, the "Borrower"), and
NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby
agree as follows:
ARTICLE I
Definitions
-----------
Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles.
"Accounts" means the aggregate unpaid obligations of customers
and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open
account or deferred payment basis.
"Advance" means an advance to the Borrower by the Lender under
the Credit Facility.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "control", when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement.
"Banking Day" means a day other than a Saturday on which banks
are generally open for business in Phoenix, Arizona.
<PAGE>
"Base Rate" means the rate of interest publicly announced from
time to time by Norwest Bank Minnesota, National Association as its
"base rate" or, if such bank ceases to announce a rate so designated,
any similar successor rate designated by the Lender.
"Borrowing Base" means, at any time and subject to change from
time to time in the Lender's sole discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) the lesser of (A) 80% of Eligible Accounts,
or (B) Three Million Dollars ($3,000,000),
plus
(ii) the lesser of (A) 50% of Eligible Inventory,
or (B) Two Hundred Fifty Thousand Dollars
($250,000).
The dollar amount in section (b)(ii)(B) above may be increased by
Lender to Five Hundred Thousand Dollars ($500,000) if Borrower obtains
a signed written agreement with International Business Machines
Corporation ("IBM"), satisfactory to Lender in its sole discretion,
providing in substance that IBM terminates any and all claims it may
have to a security interest in any of the Collateral.
"Collateral" means all of the Equipment, General Intangibles,
Inventory and Receivables, together with all substitutions and
replacements for and products of any of the foregoing and together with
proceeds of any and all of the foregoing and, in the case of all
tangible Collateral, together with all accessions and together with (i)
all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any such
goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
"Collateral Account" has the meaning specified in Section
4.1(d) hereof.
"Commitment" means Three Million Dollars ($3,000,000.00),
unless said amount is reduced pursuant to Section 2.9(b) hereof, in
which event it means the amount to which said amount is reduced.
"Credit Facility" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II hereof.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" means at any time three percent (3%) over the
Floating Rate, which Default Rate shall change when and as the Floating
Rate changes.
2
<PAGE>
"Eligible Accounts" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
(1) That portion of Accounts over Ninety (90) days
past invoice date except as to those Accounts owed by
Hagemeyer North America, Inc., Just for Feet, Inc., Guess?,
Inc., Factory Card Outlet of America LTD., Inc. and Illinois
Consolidated which shall be deemed eligible until over 120
days past invoice date;
(2) That portion of Accounts that are disputed or
subject to a claim of offset or a contra account;
(3) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer;
(4) Accounts owed by any unit of government, whether
foreign or domestic (provided, however, that there shall be
included in Eligible Accounts that portion of Accounts owed by
such units of government with respect to which the Borrower
has provided evidence satisfactory to the Lender that (A) the
Lender has a first priority perfected security interest and
(B) such Accounts may be enforced by the Lender directly
against such unit of government under all applicable laws);
(5) Accounts owed by an account debtor located
outside the United States which are not backed by a bank
letter of credit assigned to the Lender, in the possession of
the Lender and acceptable to the Lender in all respects, in
its sole discretion;
(6) Accounts owed by an account debtor that is the
subject of bankruptcy proceedings or has gone out of business;
(7) Accounts owed by Cyclone Software Corporation, an
Arizona corporation, or any shareholder, subsidiary,
Affiliate, officer or employee of the Borrower;
(8) Accounts not subject to a duly perfected security
interest in favor of the Lender or which are subject to any
lien, security interest or claim in favor of any Person other
than the Lender;
(9) That portion of Accounts that have been
restructured, extended, amended or modified;
(10) That portion of Accounts that constitutes
finance charges, service charges or sales or excise taxes;
3
<PAGE>
(11) That portion of Accounts that constitutes
deferred revenue or customer deposits;
(12) Accounts owed by an account debtor, regardless
of whether otherwise eligible, if 15% or more of the total
amount due under Accounts from such debtor is ineligible under
clauses (1), (2) or (9) above; and
(13) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.
"Eligible Inventory" means all inventory of the Borrower, at
the lower of cost or market value as determined in accordance with
generally accepted accounting principles; provided, however, that the
following shall not in any event be deemed Eligible Inventory:
(1) Inventory that is: in-transit; located at any
warehouse or other premises not approved by the Lender in
writing; located outside of the states, or localities, as
applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such
inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title;
on consignment to or from any other person or subject to any
bailment;
(2) Supplies, packaging or parts inventory;
(3) Work-in-process inventory;
(4) Inventory that is damaged, slow moving, obsolete
or not currently saleable in the normal course of the
Borrower's operations;
(5) Inventory that Borrower has received in trade,
that is used or that the Borrower has returned, has attempted
to return, is in the process of returning or intends to return
to the vendor thereof;
(6) Inventory that is subject to a security interest
in favor of any Person other than the Lender;
(7) Software, category 000 (miscellaneous) Inventory,
manuals and publications, services, and inventory located at
IBM Consolidation Centers; and
(8) Inventory otherwise deemed ineligible by the
Lender in its sole discretion.
"Environmental Laws" has the meaning specified in Section 5.12
hereof.
"Equipment" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all
4
<PAGE>
present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by the Borrower.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" has the meaning specified in Section 8.1
hereof.
"Floating Rate" means an annual rate equal to the sum of the
Base Rate plus one and one-half percent (1.50%), which Floating Rate
shall change when and as the Base Rate changes.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all present and
future patents, patent applications, patent rights, copyrights,
licenses, trademarks (including without limitation the trademark
"MARKETBUILDER"), trade names, trade secrets, customer or supplier
lists and contracts, manuals, operating instructions, permits,
franchises, the right to use the Borrower's name, and the goodwill of
the Borrower's business.
"Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease
or under service contracts or for manufacture or processing, and
wherever located.
"Issuer" means the issuer of any Letter of Credit.
"L/C Amount" means the sum of (i) the aggregate face amount of
any issued and outstanding Letters of Credit and (ii) the unpaid amount
of the Obligation of Reimbursement.
"L/C Application" means an application and agreement for
letters of credit in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in Section 2.3
hereof.
"Lockbox" has the meaning specified in Section 4.1(e) hereof.
"Loan Documents" means this Agreement, the Note, the Security
Documents, and all other documents relating to any of the foregoing.
"Minimum Interest Charge" has the meaning specified in Section
2.8(c) hereof.
5
<PAGE>
"Net Income" has the meaning specified in Section 6.12 hereof.
"Net Worth" has the meaning specified in Section 6.13 hereof.
"Note" means the Revolving Note of the Borrower payable to the
order of the Lender in substantially the form attached hereto as
Exhibit A.
"Obligations" has the meaning specified in Section 3.1 hereof.
"Obligation of Reimbursement" has the meaning specified in
Section 2.4 hereof.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for employees of the Borrower and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without
limitation) the premises legally described in Exhibit E attached
hereto.
"Receivables" means all of Borrower's accounts, as such term
is defined in the UCC, together with each and every right of the
Borrower to the payment of money, whether such right to payment now
exists or hereafter arises, whether such right to payment arises out of
a sale, lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently
transfers such person's interest to the Borrower, whether such right to
payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and
interests (including all liens and security interests) which the
Borrower may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but
not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Security Documents" means the Collateral Account Agreement
and the Lockbox Agreement, each as described in Section 4.1 hereof, and
the UCC-1 Financing Statement.
"Security Interest" has the meaning specified in Section 3.1
hereof.
6
<PAGE>
"Special Account" means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Sections 2.5 and
3.6 hereof.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the
time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the Borrower and
one or more other Subsidiaries, or by one or more other Subsidiaries.
"Termination Date" means February 21, 2000.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.12 hereof as the state
whose laws shall govern this Agreement, or in any other state whose
laws are held to govern this Agreement or any portion hereof.
ARTICLE II
Amount and Terms of the Credit Facility
---------------------------------------
Section 2.1 Advances. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date, or the earlier date of termination in whole of the Credit Facility
pursuant to Sections 2.9(a) or 8.2 hereof, in an aggregate amount at any time
outstanding not to exceed the Borrowing Base less the L/C Amount, which Advances
shall be secured by the Collateral as provided in Article III hereof. The Credit
Facility shall be a revolving facility and it is contemplated that the Borrower
will request Advances, make prepayments and request additional Advances. The
Borrower agrees to comply with the following procedures in requesting Advances
under this Section 2.1:
(a) The Lender shall not make any Advance under this Section
2.1 if, after giving effect to such requested Advance, the sum of the
outstanding and unpaid Advances under this Section 2.1 or otherwise would exceed
the Borrowing Base less the L/C Amount.
(b) Each request for an Advance under this Section 2.1 shall
be made to the Lender prior to 11:00 a.m. Mountain Standard Time of the day of
the requested Advance by the Borrower. Each request for an Advance may be made
in writing or by telephone, specifying the date of the requested Advance and the
amount thereof, and shall be by (i) any officer of the Borrower; or (ii) any
person designated as the Borrower's agent by any officer of the Borrower in a
writing delivered to the Lender; or (iii) any person reasonably believed by the
Lender to be an officer of the Borrower or such a designated agent.
7
<PAGE>
(c) Upon fulfillment of the applicable conditions set forth in
Article IV hereof, the Lender shall disburse loan proceeds by crediting the same
to the Borrower's demand deposit account maintained with Norwest Bank, Arizona,
National Association, unless the Lender and the Borrower shall agree in writing
to another manner of disbursement. Upon request of the Lender, the Borrower
shall promptly confirm each telephonic request for an Advance by executing and
delivering an appropriate confirmation certificate to the Lender. The Borrower
shall be obligated to repay all Advances under this Section 2.1 notwithstanding
the failure of the Lender to receive such confirmation and notwithstanding the
fact that the person requesting the same was not in fact authorized to do so.
Any request for an Advance under this Section 2.1, whether written or
telephonic, shall be deemed to be a representation by the Borrower that (i) the
condition set forth in Section 2.1(a) hereof has been met, and (ii) the
conditions set forth in Section 4.2 hereof have been satisfied as of the time of
the request.
Section 2.2 Note. All Advances made by the Lender under this Article II
shall be evidenced by and repayable with interest in accordance with the Note.
The principal of the Note shall be payable as provided herein and on the earlier
of the Termination Date or acceleration by the Lender pursuant to Section 8.2
hereof, and shall bear interest as provided herein.
Section 2.3 Issuance of Letters of Credit.
(a) The Lender agrees, on the terms and subject to the
conditions herein set forth, to issue or cause to be issued by an Issuer one or
more letters of credit for the account of the Borrower (each a "Letter of
Credit") from time to time during the period from the date hereof until the
earlier of the Termination Date or date the Credit Facility has been terminated
pursuant to Section 8.2(a) hereof, in an aggregate amount at any time
outstanding not to exceed the lesser of $500,000 or the Borrowing Base less the
sum of (i) all outstanding and unpaid Advances hereunder and (ii) the unpaid
amount of the Obligation of Reimbursement. Each Letter of Credit, if any, shall
be issued pursuant to a separate L/C Application entered into between the
Borrower and the Lender as co-applicants for the benefit of the Issuer,
completed in a manner satisfactory to the Lender and the Issuer. The terms and
conditions set forth in each such L/C Application shall supplement the terms and
conditions hereof, but in the event of inconsistency between the terms of any
such L/C Application and the terms hereof, the terms hereof shall control.
(b) No Letter of Credit shall be issued under this Section 2.3
if, after the issuance of such requested Letter of Credit, the sum of the face
amounts of all issued and outstanding Letters of Credit would exceed the lesser
of $500,000 or the Borrowing Base less the sum of (i) all outstanding and unpaid
Advances hereunder and (ii) the unpaid amount of the Obligation of
Reimbursement.
(c) No Letter of Credit shall be issued with an expiry date
later than the Termination Date in effect as of the date of issuance.
(d) Any request for the issuance of a Letter of Credit under
this Section 2.3 shall be deemed to be a representation by the Borrower that (i)
the condition set forth in Section
8
<PAGE>
2.3(b) hereof has been met, and (ii) the statements set forth in Section 4.2
hereof are correct as of the time of the request.
Section 2.4 Payment of Amounts Drawn Under Letters of Credit. The
Borrower acknowledges that the Lender, as co-applicant, will be liable to the
Issuer of any Letter of Credit for reimbursement of any and all draws thereunder
and all other amounts required to be paid under the applicable L/C Application.
Accordingly, the Borrower agrees to pay to the Lender any and all amounts
required to be paid under the applicable L/C Application, when and as required
to be paid thereby, and the amounts designated below, when and as designated:
(a) The Borrower hereby agrees to pay the Lender on the day a
draft is honored under any Letter of Credit a sum equal to all amounts drawn
under such Letter of Credit plus any and all reasonable charges and expenses
that the Issuer or the Lender may pay or incur relative to such draw, plus
interest on all such amounts, charges and expenses as set forth below (all such
amounts are hereinafter referred to, collectively, as the "Obligation of
Reimbursement").
(b) The Borrower hereby agrees to pay the Lender on demand
interest on all amounts, charges and expenses payable by the Borrower to the
Lender under this Section 2.4, accrued from the date any such draft, charge or
expense is paid by the Issuer until payment in full by the Borrower at the
Default Rate.
If the Borrower fails to pay to the Lender promptly the amount of its Obligation
of Reimbursement in accordance with the terms hereof and the L/C Application
pursuant to which such Letter of Credit was issued, the Lender is hereby
irrevocably authorized and directed, in its sole discretion, to make an Advance
in an amount sufficient to discharge the Obligation of Reimbursement, including
all interest accrued thereon but unpaid at the time of such Advance, and such
Advance shall be evidenced by the Note and shall bear interest as provided in
Section 2.8 hereof.
Section 2.5 Special Account. If the Lender terminates the Credit
Facility pursuant to Section 8.2(a), or the Credit Facility is otherwise
terminated for any reason whatsoever, while any Letter of Credit is outstanding,
the Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the maximum aggregate amount
available to be drawn under all Letters of Credit then outstanding, assuming
compliance with all conditions for drawing thereunder. The Special Account shall
be maintained for the Lender by any financial institution acceptable to the
Lender. Any interest earned on amounts deposited in the Special Account shall be
credited to the Special Account. Amounts on deposit in the Special Account may
be applied by the Lender at any time or from time to time to the Borrower's
Obligation of Reimbursement or any other Obligations, in the Lender's sole
discretion, and shall not be subject to withdrawal by the Borrower so long as
the Lender maintains a security interest therein. The Lender agrees to transfer
any balance in the Special Account to the Borrower at such time as the Lender is
required to release its security interest in the Special Account under
applicable law.
9
<PAGE>
Section 2.6 Increased Costs and Reduced Return.
(a) If the Lender shall determine that, after the date hereof,
the adoption of any applicable law, rule or regulation, or any change therein,
or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Issuer or the
Lender or its parent corporation with any requirement or directive (whether or
not having the force of law) of any such authority, central bank or comparable
agency:
(i) shall subject the Issuer or the Lender or its
parent corporation to any tax, duty or other similar charge with respect to any
Letter of Credit, the Advances or the Note or shall change the basis of taxation
of payments to the Issuer or the Lender or its parent corporation of the
Reimbursement Obligation, of the principal of or interest on the Advances or of
any other amounts due under this Agreement in respect of any Letter of Credit,
the Advances or the Note (except for any change in respect of any tax imposed on
the overall income of the Issuer or the Lender or its parent corporation); or
(ii) shall impose, modify or deem applicable any
reserve, special deposit or similar requirement (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System) against assets of, deposits with or for the account of, or credit
extended by, the Issuer or the Lender or its parent corporation or shall impose
on the Issuer or the Lender or its parent corporation any other condition
affecting any Letter of Credit, the Advances or the Note;
and the result of any of the foregoing is to increase the cost to the Issuer or
the Lender or its parent corporation of issuing or maintaining any Letter of
Credit or of making or maintaining any Advances, or to reduce the amount of any
sum received or receivable by the Issuer or the Lender or its parent corporation
under the application and agreement pursuant to which the Letter of Credit was
issued, this Agreement or the Note with respect thereto, by an amount deemed by
the Lender or its parent corporation to be material, then upon demand by the
Lender, the Borrower shall pay to the Lender such additional amount or amounts
as will compensate the Issuer or the Lender or its parent corporation for such
increased cost or reduction.
(b) If the Lender shall determine that the adoption after the
date hereof of any applicable law, rule or regulation regarding capital
adequacy, or any change therein after the date hereof, any change after the date
hereof in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender or its parent corporation
with any guideline or request issued after the date hereof regarding capital
adequacy (whether nor not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on the Lender's or the Lender's parent corporation's capital as a
consequence of any Letters of Credit, Advances or the Lender's obligations
hereunder to a level below that which the Lender or its parent corporation could
have achieved but for such adoption, change or compliance (taking into
consideration the Lender's policies with respect to capital adequacy and those
of the Lender's parent corporation) by an amount deemed to the Lender or its
parent corporation to be material, then from time to time
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on demand by the Lender, the Borrower shall pay to the Lender such additional
amount or amounts as will compensate the Lender or its parent corporation for
such reduction.
(c) Certificates of the Lender sent to the Borrower from time
to time claiming compensation under this Section, stating the reason therefor
and setting forth in reasonable detail the calculation of the additional amount
or amounts to be paid to the Lender hereunder shall be conclusive absent
manifest error. In determining such amounts, the Lender or its parent
corporation may use any reasonable averaging and attribution methods.
Section 2.7 Obligations Absolute. The obligations of the Borrower
arising under this Agreement shall be absolute, unconditional and irrevocable,
and shall be paid strictly in accordance with the terms of this Agreement, under
all circumstances whatsoever, including (without limitation) the following
circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure
from all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), or other person or entity,
whether in connection with this Agreement, the transactions contemplated herein
or in the Related Documents or any unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any respect
whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under
any Letter of Credit against presentation of a draft or certificate which does
not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing.
Section 2.8 Interest.
(a) The principal of the Advances outstanding from time to
time during any month shall bear interest (computed on the basis of actual days
elapsed in a 360-day year) at the Floating Rate; provided, however, that from
the first day of any month during which any Default or Event of Default occurs
or exists at any time, in the Lender's discretion and without waiving any of its
other rights and remedies, the principal of the Advances outstanding from time
to time shall bear interest at the Default Rate; and provided, further, that in
any event no rate change shall be put into effect which would result in a rate
greater than the highest rate
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permitted by law. Interest accruing on the principal balance of the Advances
outstanding from time to time shall be payable on the first day of the next
succeeding month and on the Termination Date or prepayment in full. Borrower
agrees that the interest rate contracted for includes the interest rate set
forth herein plus any other charges or fees set forth herein and costs and
expenses incident to this transaction paid by Borrower to the extent same are
deemed interest under applicable law.
(b) If any Person shall acquire a participation in Advances
under this Agreement and shall elect to accept interest with respect to such
participation at a lesser rate than the Floating Rate, the rate of interest
payable by the Borrower with respect to such participation shall be such lesser
rate of interest, if, to the extent that and so long as such Person shall hold
such participation. The Lender shall not be obligated to request, induce or
permit any Person to acquire or to retain any participation at all or in any
particular amount or at any particular rate of interest or on any particular
terms.
(c) Notwithstanding the interest payable pursuant to Section
2.8(a) hereof, the Borrower shall be liable to the Lender for interest hereunder
of not less than $5,000.00 per calendar month (the "Minimum Interest Charge")
during the term of this Agreement, and the Borrower shall pay any deficiency
between the Minimum Interest Charge and the amount of interest otherwise
calculated under Sections 2.8(a) and 2.8(b) hereof on the date and in the manner
provided in Section 2.8(a) hereof.
Section 2.9 Voluntary Prepayment; Termination of Agreement by the
Borrower; Permanent Reduction of the Commitment.
(a) Except as otherwise provided herein, the Borrower may, in
its discretion, prepay the Advances in whole at any time or from time to time in
part. The Borrower may terminate this Agreement at any time, so long as no
Letter of Credit has been issued and is outstanding with an expiration date
after such date, and, subject to payment and performance of all Obligations, may
obtain any release or termination of the Security Interest to which the Borrower
is otherwise entitled by law by (i) giving at least 30 days' prior written
notice to the Lender of the Borrower's intention to terminate this Agreement;
and (ii) paying the Lender a prepayment fee, due and payable on the prepayment
date, in an amount equal to (A) three percent (3%) of the Commitment amount if
prepayment is made on or before February 21, 1998; or, (B) two percent (2%) of
the Commitment amount if prepayment is made after February 21, 1998 and on or
before February 21, 1999; or (C) one percent (1%) of the Commitment amount if
prepayment is made after February 21, 1999 and before February 21, 2000, if the
Borrower terminates this Agreement effective as of any date other than the
Termination Date. However, no prepayment fee shall be due if prepayment is made
directly from the cash flow generated from the Borrower's business operations,
or, if the Credit Facility is repaid through a refinancing from a Norwest Bank
facility.
(b) The Borrower may at any time and from time to time, upon
at least 30 days' prior written notice to the Lender, permanently reduce in part
the Commitment; provided, however, that no reduction shall reduce the Commitment
to an amount less than the then-aggregate amount of the Advances; and provided,
further, that if the Borrower shall elect
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permanently to reduce in part the Commitment at any time other than the
Termination Date, the Borrower shall pay to the Lender a premium, due and
payable simultaneously with the giving of the notice, in an amount equal to (A)
three percent (3%) of the reduction amount if the reduction is made on or before
February 21, 1998; or, (B) two percent (2%) of the reduction amount if the
reduction is made after February 21, 1998 and on or before February 21, 1999; or
(C) one percent (1%) of the reduction amount if the reduction is made after
February 21, 1999 and before February 21, 2000.
Section 2.10 Mandatory Prepayment. Without notice or demand, if the sum
of the outstanding principal balance of the Advances plus the L/C Amount shall
at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately
prepay the Advances to the extent necessary to eliminate such excess; and (ii)
if prepayment in full of the Advances is insufficient to eliminate such excess,
pay to the Lender in immediately available funds for deposit in the Special
Account an amount equal to the remaining excess. Any payment received by the
Lender under this Section 2.10 or under Section 2.9 may be applied to the
Obligation of Reimbursement or the Advances, including interest thereon and any
fees, commissions, costs and expenses hereunder and under the Security
Documents, in such order and in such amounts as the Lender, in its discretion,
may from time to time determine. In addition to the foregoing, Borrower shall
pay to Lender a daily overadvance charge of One Hundred Dollars ($100.00) per
day for any period of time during which the sum of the outstanding principal
balance of the Advances plus the L/C Amount exceeds the Borrowing Base. During
any time period when there is an Event of Default under this Agreement, the
daily overadvance charge will be Two Hundred Dollars ($200.00) per day.
Section 2.11 Payment. All payments of principal of and interest on the
Advances, the Obligation of Reimbursement, the commissions and fees hereunder
and amounts required to be paid to the Lender for deposit in the Special Account
shall be made to the Lender in immediately available funds. The Borrower hereby
authorizes the Lender, in its discretion at any time or from time to time and
without request by the Borrower, to make an Advance to the extent necessary to
pay any such amounts and any fees, costs or expenses hereunder or under the
Security Documents.
Section 2.12 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.13 Use of Proceeds. The proceeds of Advances and each Letter
of Credit issued or caused to be issued shall be used by the Borrower to
refinance the Borrower's existing obligations to Concord Growth Capital and for
ordinary working capital purposes.
Section 2.14 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to any and all Advances made or
repaid, interest accrued or paid under this Agreement, outstanding Letters of
Credit and fees thereon and the Borrower's Obligation of Reimbursement. All
entries made on any such record shall be presumed correct
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until the Borrower establishes the contrary. On demand by the Lender, the
Borrower will admit and certify in writing the exact principal balance that the
Borrower then asserts to be outstanding to the Lender for Advances under this
Agreement and the amount of any Letters of Credit outstanding. Any billing
statement or accounting rendered by the Lender shall be conclusive and fully
binding on the Borrower unless specific written notice of exception is given to
the Lender by the Borrower within 30 days after its receipt by the Borrower.
Section 2.15 Setoff. The Borrower agrees that the Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any indebtedness owed to the Lender by the Borrower
(for Advances, the Obligation of Reimbursement or the amounts required to be
paid to the Lender for deposit in the Special Account or for any other
transaction or event), whether or not due. In addition, each other Person
holding a participating interest in any Advances made to the Borrower by the
Lender shall have the right to appropriate or setoff any deposit or other
liability then owed by such Person to the Borrower, whether or not due, and
apply the same to the payment of said participating interest, as fully as if
such Person had lent directly to the Borrower the amount of such participating
interest.
Section 2.16 Fees.
(a) The Borrower hereby agrees to pay the Lender a fully
earned and non-refundable origination fee of fifteen thousand dollars
($15,000.00), due and payable upon the execution of this Agreement.
Lender hereby acknowledges it has previously received said amount.
(b) The Borrower agrees to pay to the Lender a commitment fee
at the rate of twenty-five one hundredths percent (.25%) per annum on the
average daily unused portion of the Commitment from the date hereof to and
including the Termination Date, due and payable monthly in arrears on the first
day of each month, commencing March, 1997, provided that any such commitment fee
remaining unpaid on the termination of the Credit Facility or acceleration of
the Note by the Lender pursuant to Section 8.2 hereof shall be due and payable
on the date of such termination or acceleration. Such fee shall be calculated on
the basis of actual days elapsed in a 360-day year. If the total in any month of
(i) the amount of interest calculated under Sections 2.8(a) and 2.8(b) hereof
plus (ii) the commitment fee under this Section 2.16(b), is $5,000 or less,
Borrower's timely payment of the Minimum Interest Charge for said month will
also satisfy Borrower's obligation under this Section 2.16(b) for that month.
(c) The Borrower agrees to pay the Lender a commission with
respect to each Letter of Credit, if any, accruing on a daily basis and computed
at the annual rate of three percent (3%) of the available amount of such Letter
of Credit (as it may be changed from time to time) from and including the date
of issuance of such Letter of Credit until such date as such Letter of Credit
shall terminate by its terms, payable annually in advance, and prorated for any
part of a full calendar year in which such Letter of Credit remains outstanding.
The foregoing commission shall be in addition to any and all fees, commissions
and charges of any Issuer of a Letter of Credit with respect to or in connection
with such Letter of Credit.
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(d) The Borrower agrees to pay the Lender, on written demand,
the administrative fees charged by the Issuer in connection with the honoring of
drafts under any Letter of Credit, amendments thereto, transfers thereof and all
other activity with respect to the Letters of Credit.
(e) The Borrower hereby agrees to pay the Lender, on demand,
audit fees of $50.00 per hour per auditor in connection with any audits or
inspections by the Lender of any collateral or the operations or business of the
Borrower, together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection.
ARTICLE III
Security Interest
-----------------
Section 3.1 Grant of Security Interest. The Borrower hereby assigns and
grants to the Lender a security interest (collectively referred to as the
"Security Interests") in the Collateral, as security for the payment and
performance of each and every debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender (whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and whether
it is direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, the Obligation of
Reimbursement and all indebtedness of the Borrower arising under this Agreement,
the Note, any L/C Application completed by the Borrower or any other loan or
credit agreement or guaranty between the Borrower and the Lender, whether now in
effect or hereafter entered into; all such debts, liabilities and obligations
are herein collectively referred to as the "Obligations").
Section 3.2 Notification of Account Debtors and Other Obligors. In
addition to the rights of the Lender under Section 6.10 hereof, with respect to
any and all rights to payment constituting Collateral the Lender may at any time
(either before or after the occurrence of an Event of Default) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as agent and attorney in fact of the Borrower,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
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Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether before or after the occurrence of any Event of
Default, the Lender may (but need not), in the Lender's name or in the
Borrower's name, execute and deliver proof of claim, receive all such monies,
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time after the occurrence and
during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of
goods that are Collateral and for other purposes that the Lender may in good
faith deem to be related or incidental purposes.
(c) The right of the Lender to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of all
Obligations, and (ii) final sale or disposition of all goods constituting
Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of any of
the Premises; provided, however, in the event that the Lender does pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises, the Borrower shall reimburse the Lender promptly for the
full amount thereof. In addition, the Borrower will pay, or reimburse the Lender
for, all taxes, fees, duties, imposts, charges and expenses at any time incurred
by or imposed upon the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the provisions of
this Section 3.4.
Section 3.5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks (including without limitation the trademark "MARKETBUILDER"),
franchises, trade names, copyrights and patents of the Borrower for the purpose
of selling, leasing or otherwise disposing of any or all Collateral following an
Event of Default.
Section 3.6 Security Interest in Special Account and Collateral
Account. The Borrower hereby pledges, and grants to the Lender a security
interest in, all funds held in the Special Account and in the Collateral Account
from time to time and all proceeds thereof, as security for the payment of all
present and future Obligations of Reimbursement and all other Obligations.
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ARTICLE IV
Conditions of Lending
---------------------
Section 4.1 Conditions Precedent and Conditions Subsequent to Making
the Initial Advance or Issuing the Initial Letter of Credit.
Conditions Precedent. The obligation of the Lender to make the initial Advance
or issuing or causing to be issued any Letter of Credit under the Credit
Facility shall be subject to the condition precedent that the Lender shall have
received all of the following, each in form and substance satisfactory to the
Lender:
(a) This Agreement, properly executed on behalf of the
Borrower.
(b) The Note, properly executed on behalf of the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
subordination, disclaimer and consent with respect to each such lease.
(d) A Collateral Account Agreement, duly executed by the
Borrower and Norwest Bank, Arizona, National Association, pursuant to which the
Borrower and the institution establish a depository account (the "Collateral
Account") in the name of and under the sole and exclusive control of the Lender,
from which such institution agrees to transfer finally collected funds to the
Lender for application to the Advances.
(e) A Lockbox Agreement, duly executed by the Borrower and
Norwest Bank Arizona, National Association, pursuant to which the Borrower
agrees to maintain and direct account debtors to make payment to a lockbox for
the benefit of the Lender (the "Lockbox"), from which Lockbox such institution
shall transfer funds to the Collateral Account.
(f) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements have been filed and remain in
effect against the Borrower, except those financing statements relating to liens
permitted pursuant to Section 7.1 hereof and those financing statements filed by
the Lender, and (iii) the Lender has duly filed all financing statements
necessary to perfect the Security Interests granted hereunder, to the extent the
Security Interests are capable of being perfected by filing. Without limiting
the foregoing, the Lender shall have also received, in form and substance
satisfactory to the Lender, termination of: (i) that certain financing statement
in favor of secured party Concord Growth Corporation filed September 21, 1995
with the Arizona Secretary of State as document number 847410; and (ii) that
certain financing statement in favor of secured party Sundance Venture Partners,
L.P. filed January 10, 1996 with the Arizona Secretary of State as document
number 861997.
(g) A certificate of the Secretary or an Assistant Secretary
of the Borrower, certifying as to (i) the resolutions of the directors and, if
required, the shareholders of the
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Borrower, authorizing the execution, delivery and performance of this Agreement
and the Security Documents, (ii) the articles of incorporation and bylaws of the
Borrower, and (iii) the signatures of the officers or agents of the Borrower
authorized to execute and deliver this Agreement, the Security Documents and
other instruments, agreements and certificates, including Advance requests, on
behalf of the Borrower.
(h) A current certificate issued by the Secretary of State of
the state of the Borrower's incorporation, certifying that the Borrower is in
compliance with all corporate organizational requirements of such state.
(i) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(j) A certificate of an officer of the Borrower confirming, in
his personal capacity, the representations and warranties set forth in Article V
hereof.
(k) An opinion of counsel to the Borrower, addressed to the
Lender.
(l) Certificates of the insurance required hereunder, with all
hazard insurance containing a loss payee endorsement in favor of the Lender and
with all liability insurance naming the Lender as an additional insured.
(m) Payment of the fees and commissions due through the date
of the initial Advance or Letter of Credit under Section 2.16 hereof and
expenses incurred by the Lender through such date and required to be paid by the
Borrower under Section 9.7 hereof.
(n) Such other documents as the Lender in its sole discretion
may require.
Conditions Subsequent. On or before the 60th day following the date of this
Agreement, the Lender shall have received, in form and substance satisfactory to
the Lender, termination of: that certain Notice of Federal Tax Lien Under
Internal Revenue Laws, filed April 8, 1992 with the Arizona Secretary of State
as document number 700990. Default in the performance of these conditions
subsequent shall be an Event of Default under Section 8.1 (d) of this Agreement.
Section 4.2 Conditions Precedent to All Advances. The obligation of the
Lender to make each Advance or to issue or cause to be issued any Letter of
Credit shall be subject to the further conditions precedent that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of the date of such Advance or issuance of Letter
of Credit as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
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(b) no event has occurred and is continuing, or would result
from such Advance or the issuance of such Letter of Credit, as the case may be,
which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
------------------------------
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations; Tax Identification Number. The
Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Arizona, and is duly licensed or
qualified to transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted by it makes
such licensing or qualification necessary. The Borrower has all requisite power
and authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its corporate existence, the Borrower has done
business solely under the names set forth in Exhibit B hereto. The chief
executive office and principal place of business of the Borrower is located at
the address set forth in Exhibit B hereto, and all of the Borrower's records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations set forth in Exhibit B hereto. The Borrower's tax identification
number is correctly set forth in Section 9.4.
Section 5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (a) require
any consent or approval of the stockholders of the Borrower, (b) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof, (c) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (d)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected, or (e) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance of any nature (other than the Security Interests) upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
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Section 5.3 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.4 Subsidiaries. Except as set forth in Exhibit B attached
hereto, the Borrower has no Subsidiaries.
Section 5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements of the Borrower
for its fiscal year ended January 31, 1996 and unaudited financial statements of
the Borrower for the months ended October 31, 1996, and those statements fairly
present the financial condition of the Borrower on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles. Since the
date of the most recent financial statements, there has been no material adverse
change in the business, properties or condition (financial or otherwise) of the
Borrower.
Section 5.6 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Affiliates or the properties of the Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
the Borrower or any of its Affiliates.
Section 5.7 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 5.8 Taxes. To Borrower's and its Affiliates' knowledge, the
Borrower and its Affiliates have paid or caused to be paid to the proper
authorities when due all federal, state and local taxes required to be withheld
by each of them. The Borrower and its Affiliates have filed all federal, state
and local tax returns which to the knowledge of the officers of the Borrower or
any Affiliate, as the case may be, are required to be filed, and the Borrower
and its Affiliates have paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment received by
any of them to the extent such taxes have become due.
Section 5.9 Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest balance
sheet referred to in Section 5.5 hereof and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for (i)
mortgages, security interests and liens permitted by Section 7.1 hereof, and
(ii) in the case of any such property which is not Collateral or other
collateral described in the Security Documents, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower as presently conducted.
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No financing statement naming the Borrower as debtor is on file in any office
except to perfect only security interests permitted by Section 7.1 hereof.
Section 5.10 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may become
payable to participants or beneficiaries of any such Plan).
Section 5.11 Default. To the Borrower's knowledge, the Borrower is in
compliance with all provisions of all agreements, instruments, decrees and
orders to which it is a party or by which it or its property is bound or
affected, the breach or default of which could have a material adverse effect on
the financial condition, properties or operations of the Borrower.
Section 5.12 Environmental Protection. The Borrower has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws and regulations relating to emissions, discharges, releases
of pollutants, contaminants, hazardous or toxic materials, or wastes into
ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. The Borrower shall provide
copies of all such permits, licenses and other authorizations to the Lender upon
the Lender's request. The Borrower also shall provide to the Lender copies of
all environmental investigation and inspection reports available to the Borrower
that pertain to Borrower's facilities, upon the Lender's request. Except as
previously disclosed to the Lender in writing, the Borrower and all activities
of the Borrower at its facilities comply with all Environmental Laws and with
all terms and conditions of any required permits, licenses and authorizations
applicable to the Borrower with respect thereto. Except as previously disclosed
to the Lender in writing, the Borrower is also in compliance with all
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in Environmental Laws or
contained in any plan, order, decree, judgment or notice of which the Borrower
is aware. Except as previously disclosed to the Lender in writing, the Borrower
is not aware of, nor has the Borrower received notice of, any events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may interfere with or prevent continued compliance with, or which may give
rise to any liability under, any Environmental Laws. Except as previously
disclosed to the Lender in writing, the Borrower has received no inquiry from
any federal, state or local agency concerning Borrower's facilities or any
adjacent properties involving possible environmental contamination or violations
of any Environmental
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Laws, and has no knowledge of any such inquiry to any party concerning
Borrower's facilities or any adjacent properties. Borrower agrees to notify
Lender promptly in writing of any inquiries by third parties or regulatory
agencies concerning the possible presence of environmental contamination on
Borrower's facilities or any adjacent properties or concerning any possible
violations of Environmental Laws involving Borrower's facilities or any adjacent
properties. The Lender shall have the right to enter Borrower's facilities for
the purpose of conducting environmental investigations, including taking soil
and water samples, during Borrower's normal business hours of operation.
Section 5.13 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.
Section 5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interests and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected first security interest in all Collateral
and all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section 5.16 Borrower's Relationship With IBM. Borrower purchases
computer equipment and related goods from International Business Machines
Corporation ("IBM"), for resale or lease to Borrower's customers. Borrower does
not receive any credit terms from IBM, and Borrower has no payment obligations
to IBM pursuant to any credit terms. Further, Borrower does not intend to seek
or receive any credit terms from IBM during the term of this Credit Facility.
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ARTICLE VI
Affirmative Covenants of the Borrower
-------------------------------------
So long as the Note shall remain unpaid, the Credit Facility shall be
outstanding or any Letter of Credit shall be outstanding, the Borrower will
comply with the following requirements, unless the Lender shall otherwise
consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Borrower, audited financial
statements of the Borrower with the unqualified opinion of independent certified
public accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the balance sheet of the Borrower as
at the end of such fiscal year and the related statements of income, retained
earnings and cash flows of the Borrower for the fiscal year then ended,
prepared, if the Lender so requests, on a consolidating and consolidated basis
to include any Affiliates, all in reasonable detail and prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
the accounting practices applied in the financial statements referred to in
Section 5.5 hereof, together with (i) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or Event of
Default hereunder and all relevant facts in reasonable detail to evidence, and
the computations as to, whether or not the Borrower is in compliance with the
requirements set forth in Sections 6.12 through 6.13 and Section 7.10 hereof;
and (ii) a certificate of the chief financial officer of the Borrower stating
that such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements referred to in Section
5.5 hereof and whether or not such officer has knowledge of the occurrence of
any Default or Event of Default hereunder and, if so, stating in reasonable
detail the facts with respect thereto;
(b) as soon as available and in any event within twenty (20)
days after the end of each month, an unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the end of and
for such month and for the year to date period then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the figures for
the corresponding date and periods in the previous year, all prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the accounting practices reflected in the financial statements
referred to in Section 5.5 hereof, subject to year-end audit adjustments; and
accompanied by a certificate of the chief financial officer of the Borrower,
substantially in the form of Exhibit D hereto stating (i) that such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with the accounting practices reflected
in the financial statements referred to in Section 5.5 hereof, subject to
year-end audit adjustments, (ii) whether or not such officer has
23
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knowledge of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto, (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections 6.12 through 6.13 and
Section 7.10 hereof, and (iv) that Borrower has not sought or received any
credit terms from IBM and does not contemplate or intend to seek or receive any
credit terms from IBM.
(c) within fifteen (15) days after the end of each month,
agings of the Borrower's accounts receivable and its accounts payable and an
inventory certification report as at the end of such month;
(d) at least thirty (30) days before the beginning of each
fiscal year of the Borrower, the projected balance sheets and income statements
for each month of such year, each in reasonable detail, representing the good
faith projections of the Borrower and certified by the Borrower's chief
financial officer as being the most accurate projections available and identical
to the projections used by the Borrower for internal planning purposes, together
with such supporting schedules and information as the Lender may in its
discretion require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in Section 5.6
hereof or which seek a monetary recovery against the Borrower in excess of Ten
Thousand Dollars ($10,000.00);
(f) as promptly as practicable (but in any event not later
than five business days) after an officer of the Borrower obtains knowledge of
the occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default hereunder,
notice of such occurrence, together with a detailed statement by a responsible
officer of the Borrower of the steps being taken by the Borrower to cure the
effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the chief financial officer of the
Borrower setting forth details as to such Reportable Event and the action which
the Borrower proposes to take with respect thereto, together with a copy of the
notice of such Reportable Event to the Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended,
the statement of the chief financial officer of the Borrower setting forth
details as to such failure and the action which the Borrower proposes to take
with respect thereto, together with a copy of any notice of such failure
required to be provided to the Pension Benefit Guaranty Corporation;
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(i) promptly upon knowledge thereof, notice of (i) any
disputes or claims by customers of the Borrower; (ii) any goods returned to or
recovered by the Borrower; and (iii) any change in the persons constituting the
officers and directors of the Borrower;
(j) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such other
collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to
its stockholders;
(l) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities exchange;
(m) promptly upon knowledge thereof, notice of the violation
by the Borrower of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial condition;
and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment schedules,
copies of invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or information as the
Lender may request.
Section 6.2 Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower's business and financial condition and
such other matters as the Lender may from time to time request in which true and
complete entries will be made in accordance with generally accepted accounting
principles consistently applied and, upon request of the Lender, will permit any
officer, employee, attorney or accountant for the Lender to audit, review, make
extracts from or copy any and all corporate and financial books and records of
the Borrower at all times during ordinary business hours, to send and discuss
with account debtors and other obligors requests for verification of amounts
owed to the Borrower, and to discuss the affairs of the Borrower with any of its
directors, officers, employees or agents. The Borrower will permit the Lender,
or its employees, accountants, attorneys or agents, to examine and inspect any
Collateral, other collateral covered by the Security Documents or any other
property of the Borrower at any time during ordinary business hours.
Section 6.3 Account Verification. The Borrower will at any time and
from time to time upon request of the Lender send requests for verification of
accounts or notices of assignment to account debtors and other obligors.
Section 6.4 Compliance with Laws; Environmental Indemnity. The Borrower
will (a) comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its business or
its financial condition, (b) comply with all applicable Environmental Laws and
obtain any permits, licenses or similar approvals 25
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required by any such Environmental Laws, and (c) use and keep the Collateral,
and will require that others use and keep the Collateral, only for lawful
purposes, without violation of any federal, state or local law, statute or
ordinance. The Borrower will indemnify, defend and hold the Lender harmless from
and against any claims, loss or damage to which the Lender may be subjected as a
result of any past, present or future existence, use, handling, storage,
transportation or disposal of any hazardous waste or substance or toxic
substance by the Borrower or on property owned, leased or controlled by the
Borrower. This indemnification agreement shall survive the termination of this
Agreement and payment of the indebtedness hereunder.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interests, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and so long
as the Collateral and Lender's lien thereon is not in any manner impaired by any
enforcement remedy available to the tax levying entity during the period of such
contest.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this Section 6.6 shall prevent the Borrower from discontinuing the operation
and maintenance of any of its properties if such discontinuance is, in the
judgment of the Lender, desirable in the conduct of the Borrower's business and
not disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims
or demands of all persons (other than the Lender) claiming the Collateral or any
interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except the Security Interests and other security
interests permitted by Section 7.1 hereof.
Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
keep all tangible
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Collateral insured against risks of fire (including so-called extended
coverage), theft, collision (for Collateral consisting of motor vehicles) and
such other risks and in such amounts as the Lender may reasonably request, with
any loss payable to the Lender to the extent of its interest, and all policies
of such insurance shall contain a lender's loss payable endorsement for the
benefit of the Lender. All policies of liability insurance required hereunder
shall name the Lender as an additional insured.
Section 6.8 Preservation of Corporate Existence. The Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 Lockbox; Collateral Account. (a) The Borrower will
irrevocably direct all present and future Account debtors and other Persons
obligated to make payments constituting Collateral to make such payments
directly to the Lockbox. All of the Borrower's invoices, account statements and
other written or oral communications directing, instructing, demanding or
requesting payment of any Account or any other amount constituting Collateral
shall conspicuously direct that all payments be made to the Lockbox and shall
include the Lockbox address. All payments received in the Lockbox shall be
processed to the Collateral Account.
(b) The Borrower agrees to deposit in the Collateral Account
or, at the Lender's option, to deliver to the Lender, all collections on
Accounts, contract rights, chattel paper and other rights to payment
constituting Collateral, and all other proceeds of Collateral, which the
Borrower may receive directly notwithstanding its direction to Account debtors
and other obligors to make payments to the Lockbox, immediately upon receipt
thereof, in the form received, except for the Borrower's endorsement when deemed
necessary. Until delivered to the Lender or deposited in the Collateral Account,
all proceeds or collections of Collateral shall be held in trust by the Borrower
for and as the property of the Lender and shall not be commingled with any funds
or property of the Borrower. Amounts deposited in the Collateral Account shall
not bear interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations. All such collections shall
constitute proceeds of Collateral and shall not constitute payment of any
Obligation. Collected funds from the Collateral Account shall be transferred to
the Lender's general account, and the Lender may deposit in its general account
or in the Collateral Account any and all collections received by it directly
from the Borrower. The Lender may commingle such funds with other property of
the Lender or any other person. The Lender from time to time at its discretion
may, after allowing: (i) two (2) Banking Days after deposit in the Collateral
Account; and (ii) one (1) Banking Day after deposit in the Lender's account
(Account number 00-28695 at Norwest Bank, Minnesota, National Association),
apply such funds to the payment of any and all Obligations, in any order or
manner of application satisfactory to the Lender. All items delivered to the
Lender or deposited in the Collateral Account shall be subject to final payment.
If any such item is returned uncollected, the Borrower will immediately pay the
Lender, or, for items deposited
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in the Collateral Account, the bank maintaining such account, the amount of that
item, or such bank at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be liable as
an endorser on all items deposited in the Collateral Account, whether or not in
fact endorsed by the Borrower.
Section 6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10
hereof, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the performance or observance by the Lender of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the delegate of the Lender, acting alone, as the attorney in fact of the
Borrower (which appointment is coupled with an interest) with the right (but not
the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.11.
Section 6.12 Net Income Covenant. "Net Income" means after tax net
income of the Borrower from continuing operations determined on a consolidating
and consolidated basis. Borrower will for the fiscal quarter ending January 31,
1997 achieve a minimum Net Income of Five Hundred Thirty Thousand Dollars
($530,000). Thereafter, Borrower will, as of the last day of each fiscal quarter
beginning with the quarter ending April 30, 1997, achieve a minimum Net Income
as follows:
$500,000 for the fiscal quarter ending April 30;
$550,000 for the fiscal quarter ending July 31;
$550,000 for the fiscal quarter ending October 31; and
$600,000 for the fiscal quarter ending January 31.
Section 6.13 Net Worth Covenant. "Net Worth" means the net worth of
Borrower determined in accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent consolidating and
consolidated audited financial
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statement. Subject to periodic increases as listed below, Borrower will at all
times from and after January 31, 1997 maintain a minimum book Net Worth of Seven
Million Two Hundred Thousand Dollars ($7,200,000) as of the last day of each
calendar month. So long as this Agreement remains in effect, such minimum book
Net Worth shall be increased as of the end of each fiscal quarter over the
previous fiscal quarter's minimum book Net Worth, as follows:
Increase of $500,000 for the fiscal quarter ending April 30;
Increase of $550,000 for the fiscal quarter ending July 31;
Increase of $550,000 for the fiscal quarter ending October 31; and
Increase of $600,000 for the fiscal quarter ending January 31.
ARTICLE VII
Negative Covenants
------------------
So long as the Note shall remain unpaid, the Credit Facility shall be
outstanding or any Letter of Credit shall be outstanding, the Borrower agrees
that, without the prior written consent of the Lender:
Section 7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing:
(a) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in Exhibit
C hereto, securing indebtedness for borrowed money permitted under Section 7.2
hereof;
(b) the Security Interests; and
(c) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrower so long as the Borrower
is in, and maintains, compliance with every other provision of this Agreement.
Notwithstanding any contrary provision in this Agreement, Borrower will not seek
or receive any credit terms from IBM or permit any perfected security interest
in the Collateral in favor of IBM.
Section 7.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in Exhibit C hereto; and
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(c) indebtedness relating to liens permitted in accordance
with Section 7.1(c) hereof.
Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower
for deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in existence on
the date hereof and listed in Exhibit C hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without limitation
Cyclone Software Corporation, an Arizona corporation or any partnership or joint
venture, except:
(1) investments in direct obligations of the United
States of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of America
having a maturity of one year or less, commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or
"P-2" by Moody's Investors Service or certificates of deposit or bankers'
acceptances having a maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(2) travel advances or loans to officers and
employees of the Borrower not exceeding at any one time an aggregate of Ten
Thousand Dollars ($10,000.00); and
(3) advances in the form of progress payments,
prepaid rent or security deposits.
(b) The Borrower will not create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof and listed
in Exhibit B hereto.
Section 7.5 Dividends. The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock or make any payment on account of the purchase, redemption or
other retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly; provided, however, that if the Borrower
is an S Corporation within the meaning of the Internal Revenue Code of 1986, as
amended, or shall become such an S Corporation with the Lender's consent under
Section
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7.16 hereof, and after first providing such supporting documentation as the
Lender may request, the Borrower may pay dividends in an amount equal to the
amount of state and federal income tax which would be due by each shareholder
with respect to income deemed to be received by such shareholder from the
Borrower as a result of the Borrower's status as an S Corporation at the highest
marginal income tax rate for federal and state (for the state or states in which
each shareholder is liable for income taxes with respect to such income) income
tax purposes, after taking into account any deduction for state income taxes in
calculating the federal income tax liability.
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
Section 7.10 Capital Expenditures. The Borrower will not expend or
contract to expend more than One Million Three Hundred Thousand Dollars
($1,300,000.00) in the aggregate during any fiscal year, or more than One
Million Three Hundred Thousand Dollars ($1,300,000.00) in any one transaction,
for the lease, purchase or other acquisition of any capital asset, or for the
lease of any other asset, whether payable currently or in the future.
Section 7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
Section 7.12 Discounts, etc. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before or
after notice from the Lender) modify, amend,
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<PAGE>
subordinate, cancel or terminate the obligation of any account debtor or other
obligor of the Borrower.
Section 7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10 hereof.
Section 7.14 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
Section 7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower will not change
its name.
Section 7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its certificate of incorporation, articles of
incorporation or bylaws. The Borrower will not become an S Corporation within
the meaning of the Internal Revenue Code of 1986, as amended, or, if the
Borrower already is such an S Corporation, it shall not change or rescind its
status as an S Corporation.
Section 7.17 Salaries. If the Borrower is not in compliance with any of
the following sections of this Agreement: 6.5, 6.10, 6.12, 6.13, 7.1 through and
including 7.13, and 7.19, then the Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than twenty percent (20%) in any one fiscal year, for
all such persons in the aggregate, or pay any such increase from any source
other than profits earned in the year of payment. Notwithstanding the foregoing,
the Borrower may pay bonuses which have been approved by the Borrower's Board of
Directors.
Section 7.18 Change in Ownership. The Borrower will not issue or sell
any stock of the Borrower so as to change the percentage of voting and
non-voting stock owned by each of the Borrower's shareholders, and the Borrower
will not permit or suffer to occur the sale, transfer, assignment, pledge or
other disposition of any or all of the issued and outstanding shares of stock of
the Borrower.
Section 7.19 Obtaining Credit From IBM. The Borrower will not seek,
receive or accept any credit terms from IBM during the term of this Credit
Facility.
32
<PAGE>
ARTICLE VIII
Events of Default, Rights and Remedies
--------------------------------------
Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal of
the Note when it becomes due and payable; or
(b) Failure to pay when due any amount specified in Section
2.4 hereof relating to the Borrower's Obligation of Reimbursement, or failure to
pay immediately when due or upon termination of the Credit Facility any amounts
required to be paid for deposit in the Special Account under Section 2.5 or 2.10
hereof; or
(c) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement; or
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement; or
(e) The Borrower shall be or become insolvent, or admit in
writing its inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall apply for or
consent to the appointment of any receiver, trustee, or similar officer for it
or him or for all or any substantial part of its or his property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of the Borrower; or the Borrower shall institute (by petition,
application, answer, consent or otherwise) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution, liquidation or
similar proceeding relating to it under the laws of any jurisdiction; or any
such proceeding shall be instituted (by petition, application or otherwise)
against the Borrower; or any judgment, writ, warrant of attachment, garnishment
or execution or similar process shall be issued or levied against a substantial
part of the property of the Borrower; or
(f) A petition shall be filed by or against the Borrower under
the United States Bankruptcy Code naming the Borrower as debtor; or
(g) Any representation or warranty made by the Borrower in
this Agreement, or by the Borrower (or any of its officers) in any agreement,
certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement shall
prove to have been incorrect in any material respect when deemed to be
effective; or
(h) The rendering against the Borrower of a final judgment,
decree or order for the payment of money in excess of Fifty Thousand Dollars
($50,000.00) and the continuance of such judgment, decree or order unsatisfied
and in effect for any period of 30 consecutive days
33
<PAGE>
without a stay of execution (unless such judgment, decree or order is for a
claim covered by insurance and there is no dispute regarding insurance
coverage); or
(i) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than the
Lender, or under any indenture or other instrument under which any such evidence
of indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of grace, if
any, specified in such evidence of indebtedness, indenture, other instrument or
lease; or
(j) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the assets of the Borrower in favor of the Plan; or
(k) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of trust,
assignment or other instrument or agreement securing any obligations of the
Borrower hereunder or under any note; or
(l) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without the
prior written consent of the Lender; or
(m) The Borrower shall fail to pay, withhold, collect or remit
any tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for which
it shall have set aside on its books adequate reserves therefor) or notice of
any state or federal tax liens shall be filed or issued; or
(n) Default in the payment of any amount owed by the Borrower
to the Lender other than any indebtedness arising hereunder; or
(o) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2 Rights and Remedies. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
34
<PAGE>
(a) The Lender may, by notice to the Borrower, declare the
Credit Facility to be terminated, whereupon the same shall forthwith terminate;
(b) The Lender may, by notice to the Borrower, declare to be
forthwith due and payable the entire unpaid principal amount of the Note then
outstanding, all interest accrued and unpaid thereon, all amounts payable under
this Agreement and any other Obligations, whereupon the Note, all such accrued
interest and all such amounts and Obligations shall become and be forthwith due
and payable, without presentment, notice of dishonor, protest or further notice
of any kind, all of which are hereby expressly waived by the Borrower;
(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower,
including without limitation any funds on deposit with the Lender, whether or
not matured, to the payment of the Advances, including interest accrued thereon,
and of all other sums then owing by the Borrower hereunder, including, without
limitation, the Obligation of Reimbursement;
(d) The Lender may make demand upon the Borrower and,
forthwith upon such demand, the Borrower will pay to the Lender in immediately
available funds for deposit in the Special Account pursuant to Sections 2.10 and
3.6 hereof an amount equal to the maximum aggregate amount available to be drawn
under all Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder;
(e) The Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC, including,
without limitation, the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process (without a
prior hearing or notice thereof, which the Borrower hereby expressly waives) and
the right to sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be designated by
the Lender which is reasonably convenient to both parties;
(f) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(g) the Lender may exercise any other rights and remedies
available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(f) hereof, the entire unpaid principal amount of the
Note and the Obligation of Reimbursement (whether contingent or funded), all
interest accrued and unpaid thereon, all other amounts payable under this
Agreement and any other Obligations shall be immediately due and payable
automatically without presentment, demand, protest or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice
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<PAGE>
shall be deemed commercially reasonable if given (in the manner specified in
Section 9.3) at least ten calendar days prior to the date of intended
disposition or other action.
ARTICLE IX
Miscellaneous
-------------
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed to the party to whom notice is being given at its address as
set forth below and, if telecopied, transmitted to that party at its telecopier
number set forth below:
If to the Borrower:
Gateway Data Sciences Corporation
3410 East University Drive, Suite 100
Phoenix, Arizona 85034
Telecopier: (602) 437-6493
Attention: Michael M. Gordon
and
Gateway Credit Corporation
3410 East University Drive, Suite 100
Phoenix, Arizona 85034
Telecopier: (602) 437-6493
Attention: Michael M. Gordon
36
<PAGE>
If to the Lender:
Norwest Business Credit, Inc.
3300 North Central Avenue, 5th Floor
Mail Station 9025
Phoenix, Arizona 85012-2501
Telecopier: (602) 263-6215
Attention: Darcy Della Flora
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II hereof shall not
be effective until received by the Lender.
Section 9.4 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
Gateway Data Sciences Corporation
3410 East University Drive, Suite 100
Phoenix, Arizona 85034
Federal Tax Identification No. 86-0527788
and
Gateway Credit Corporation
3410 East University Drive, Suite 100
Phoenix, Arizona 85034
Federal Tax Identification No. 86-0602189
Name and address of Secured Party:
Norwest Business Credit, Inc.
3300 North Central Avenue, 5th Floor
Mail Station 9025
Phoenix, Arizona 85012-2501
Section 9.5 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the
37
<PAGE>
Lender may reasonably request in order to secure, protect, perfect or enforce
the Security Interests or the rights of the Lender under this Agreement (but any
failure to request or assure that the Borrower executes, delivers or endorses
any such item shall not affect or impair the validity, sufficiency or
enforceability of this Agreement and the Security Interests, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).
Section 9.6 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) attorneys' fees, incurred
by the Lender in connection with the Obligations, this Agreement, the Loan
Documents, any Letters of Credit, and any other document or agreement related
hereto or thereto, and the transactions contemplated hereby, including without
limitation all such costs, expenses and fees incurred in connection with the
negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interests.
Section 9.8 Indemnity. In addition to the payment of expenses pursuant
to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees and agents of the foregoing (the "Indemnitees"),
from and against (i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the making of the
Advances or issuance of any Letter of Credit, and (ii) any and all liabilities,
losses, damages, penalties, judgments, suits, claims, costs and expenses of any
kind or nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel) in connection with any investigative,
administrative or judicial proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred by or asserted
against such Indemnitee, in any manner relating to or arising out of or in
connection with the making of the Advances, the issuance of any Letter of
Credit, this Agreement and all other Loan Documents or the use or intended use
of the proceeds of the Advances or any Letter of Credit (the
38
<PAGE>
"Indemnified Liabilities"). If any investigative, judicial or administrative
proceeding arising from any of the foregoing is brought against any Indemnitee,
upon request of such Indemnitee, the Borrower, or counsel designated by the
Borrower and satisfactory to the Indemnitee, will resist and defend such action,
suit or proceeding to the extent and in the manner directed by the Indemnitee,
at the Borrower's sole cost and expense. Each Indemnitee will use its best
efforts to cooperate in the defense of any such action, suit or proceeding. If
the foregoing undertaking to indemnify, defend and hold harmless may be held to
be unenforceable because it violates any law or public policy, the Borrower
shall nevertheless make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities which is permissible under applicable
law. The obligation of the Borrower under this Section 9.8 shall survive the
termination of this Agreement and the discharge of the Borrower's other
Obligations.
Section 9.9 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
Section 9.10 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.11 Binding Effect; Assignment; Complete Agreement; Sharing of
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof and
supersedes all prior agreements, written or oral, on the subject matter hereof.
Without limitation of the Lender's right to share information regarding the
Borrower and its Affiliates with Lender's participants, accountants, lawyers and
other advisors, the Lender may share at any time with Norwest Corporation, and
all direct and indirect subsidiaries of Norwest Corporation, any and all
information the Lender may have in its possession regarding the Borrower and its
Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such sharing of such information.
Section 9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Arizona. Each party
consents to the personal jurisdiction of the state and federal courts located in
the State of Arizona in connection with any controversy related to this
Agreement, waives any argument that venue in any such forum is not convenient
and agrees that any litigation initiated by any of them in connection with this
Agreement shall be venued in either the Superior Court of Maricopa County,
Arizona, or the United States District Court, District of Arizona.
39
<PAGE>
The parties waive any right to trial by jury in any action or proceeding based
on or pertaining to this Agreement.
Section 9.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
GATEWAY DATA SCIENCES CORPORATION, an
Arizona corporation
By /s/ Michael M. Gordon
------------------------------
Its President
-----------------------------
By /s/ Vickie B. Jarvis
------------------------------
Its V.P. Finance & Treasurer
-----------------------------
GATEWAY CREDIT CORPORATION, an
Arizona corporation
By /s/ Michael M. Gordon
------------------------------
Its President
-----------------------------
By
------------------------------
Its
-----------------------------
NORWEST BUSINESS CREDIT, INC.,
a Minnesota corporation
By /s/ Darcy Della Flora
------------------------------
Its Vice President
-----------------------------
41
<PAGE>
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$3,000,000.00 Phoenix, Arizona
____________, 1997
For value received, the undersigned, GATEWAY DATA SCIENCES CORPORATION,
an Arizona corporation and GATEWAY CREDIT CORPORATION, an Arizona corporation
(jointly, the "Borrower"), hereby promise to pay on February 21, 2000 to the
order of Norwest Business Credit, Inc., a Minnesota corporation (the "Lender"),
at its main office in Phoenix, Arizona, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of THREE MILLION AND N0/100
DOLLARS ($3,000,000.00) or, if less, the aggregate unpaid principal amount of
all advances made by the Lender to the Borrower pursuant to that certain Credit
and Security Agreement (the "Credit Agreement") of even date herewith by and
between the Lender and the Borrower, together with interest on the principal
amount hereunder remaining unpaid from time to time, computed on the basis of
the actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Credit
Agreement. The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement. This Note may be prepaid only in
accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
The Borrower agrees that the interest rate contracted for includes the
interest rate set forth herein plus any other charges or fees set forth herein
and costs and expenses incident to this transaction paid by the Borrower to the
extent the same are deemed interest under applicable law.
A-1
<PAGE>
Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.
GATEWAY DATA SCIENCES CORPORATION, an
Arizona corporation
By____________________________
Its_________________________
By____________________________
Its_________________________
GATEWAY CREDIT CORPORATION, an
Arizona corporation
By____________________________
Its_________________________
By____________________________
Its_________________________
A-2
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment is made as of the 23rd day of April, 1997 by
and between GATEWAY DATA SCIENCES CORPORATION, an Arizona corporation, and
GATEWAY CREDIT CORPORATION, an Arizona corporation (jointly, the "Borrower"),
and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Credit and
Security Agreement dated as of February 21, 1997 (the "Credit Agreement").
The Lender has agreed to make certain loan advances to the
Borrower and to issue or cause to be issued certain letters of credit for the
account of the Borrower pursuant to the terms and conditions set forth in the
Credit Agreement.
The loan advances under the Credit Agreement are evidenced by
the Borrower's Revolving Note dated as of February 21, 1997, in the maximum
principal amount of $3,000,000.00 and payable to the order of the Lender (the
"Note").
All indebtedness of the Borrower to the Lender is secured
pursuant to the terms of the Credit Agreement and all other Security Documents
as defined therein (collectively, the "Security Documents").
The Borrower has requested that certain amendments be made to
the Credit Agreement, which the Lender is willing to make pursuant to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, it is agreed as follows:
1. Terms used in this Amendment which are defined in the
Credit Agreement shall have the same meanings as defined therein, unless
otherwise defined herein.
2. The Credit Agreement is hereby amended as follows:
(a) In section 1.1 of the Credit Agreement, the
definition of "Commitment" is hereby deleted in its entirety
and replaced with the following definition:
<PAGE>
"'Commitment' means Three Million Five Hundred
Thousand Dollars ($3,500,000.00), unless said amount
is reduced pursuant to Section 2.9(b) hereof, in
which event it means the amount to which said amount
is reduced."
At the earlier of May 1, 1997 or the date of Borrower's
receipt of payment from CSK, Inc. of an invoice in the amount
of $1,350,000.00, the replacement definition of "Commitment"
as stated immediately above will be deleted in its entirety
and replaced with the following definition:
"'Commitment' means Three Million Dollars
($3,000,000.00), unless said amount is reduced
pursuant to Section 2.9(b) hereof, in which event it
means the amount to which said amount is reduced."
(b) In section 1.1 of the Credit Agreement, the
definition of "Borrowing Base" is hereby deleted in its
entirety and replaced with the following definition:
"'Borrowing Base' means, at any time and subject to
change from time to time in the Lender's sole
discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) the lesser of (A) 80 % of Eligible
Accounts, or (B) Three Million Five Hundred
Thousand Dollars ($3,500,000.00), plus
(ii) the lesser of (A) 50% of Eligible
Inventory, or (B) Two Hundred Fifty Thousand
Dollars ($250,000).
"The dollar amount in section (b)(ii)(B) above may be
increased by Lender to Five Hundred Thousand Dollars
($500,000.00) if Borrower obtains a signed written
agreement with International Business Machines
Corporation ("IBM"), satisfactory to Lender in its
sole discretion, providing in substance that IBM
terminates any and all claims it may have to a
security interest in any of the Collateral.
"Borrower acknowledges and agrees that, as of the
date of the First Amendment to the Credit Agreement,
the outstanding principal balance of the Advances
plus the L/C Amount exceeds the Borrowing Base as
defined in the Credit Agreement prior to this First
Amendment. This overadvance will be cured by Borrower
by the deadlines specified below, by Borrower
reducing the overadvance amount to the amounts stated
below:
2
<PAGE>
<TABLE>
<CAPTION>
Overadvance amount to be reduced By this date:
to no more than this amount: -------------
----------------------------
<S> <C>
$900,000.00 Date of this First Amendment
$500,000.00 April 28, 1997
$250,000.00 May 5, 1997
-0- May 9, 1997."
</TABLE>
At the earlier of May 1, 1997 or the date of Borrower's
receipt of payment from CSK, Inc. of an invoice in the amount
of $1,350,000.00, the replacement definition of "Borrowing
Base" as stated immediately above will be deleted in its
entirety and replaced with the following definition:
"'Borrowing Base' means, at any time and subject to
change from time to time in the Lender's sole
discretion, the lesser of
(a) the Commitment, or
(b) the sum of
(i) the lesser of (A) 80 % of Eligible
Accounts, or (B) Three Million Dollars
($3,000,000.00), plus
(ii) the lesser of (A) 50% of Eligible
Inventory, or (B) Two Hundred Fifty Thousand
Dollars ($250,000).
"The dollar amount in section (b)(ii)(B) above may be
increased by Lender to Five Hundred Thousand Dollars
($500,000.00) if Borrower obtains a signed written
agreement with International Business Machines
Corporation ("IBM"), satisfactory to Lender in its
sole discretion, providing in substance that IBM
terminates any and all claims it may have to a
security interest in any of the Collateral."
"Borrower acknowledges and agrees that, as of the
date of the First Amendment to the Credit Agreement,
the outstanding principal balance of the Advances
plus the L/C Amount exceeds the Borrowing Base as
defined in the Credit Agreement prior to this First
Amendment. This overadvance will be cured by Borrower
by the deadlines specified below, by Borrower
reducing the overadvance amount to the amounts stated
below:
3
<PAGE>
<TABLE>
<CAPTION>
Overadvance amount to be reduced By this date:
to no more than this amount: -------------
----------------------------
<S> <C>
$900,000.00 Date of this First Amendment
$500,000.00 April 28, 1997
$250,000.00 May 5, 1997
-0- May 9, 1997."
</TABLE>
3. Except as explicitly amended by this Amendment, all of the
terms and conditions of the Credit Agreement shall remain in full force and
effect and shall apply to any advance or letter of credit thereunder.
4. The Borrower agrees to pay the Lender a fully earned,
non-refundable fee in the amount of $15,000.00 in consideration of the execution
by the Lender of this Amendment. Said amount shall be advanced to Borrower's
account under this Credit Facility with Lender on June 1, 1997.
5. This Amendment shall be effective upon receipt by the
Lender of an executed original hereof, together with each of the following, each
in substance and form acceptable to the Lender in its sole discretion:
(a) The Temporary Replacement Revolving Note
substantially in the form of Exhibit A hereto, duly executed on behalf of the
Borrower (the "Temporary Replacement Note").
(b) Certificate of the Secretary of each Borrower
certifying as to (i) the resolutions of the board of directors of the Borrower
approving the execution and delivery of this Amendment, (ii) the fact that the
Articles of Incorporation and Bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of the Borrower's Secretary
dated as of February 28, 1997 as to Gateway Data Sciences Corporation and as of
February 18, 1997 as to Gateway Credit Corporation, in connection with the
execution and delivery of the Credit Agreement, continue in full force and
effect and have not been amended or otherwise modified except as set forth in
the Certificate to be delivered, and (iii) certifying that the officers and
agents of the Borrower who have been certified to the Lender, pursuant to the
Incumbency Certificate of the Borrower's Secretary dated as of February 18,
1997, as being authorized to sign and to act on behalf of the Borrower continue
to be so authorized or setting forth the sample signatures of each of the
officers and agents of the Borrower authorized to execute and deliver this
Amendment and all other documents, agreements and certificates on behalf of the
Borrower.
6. The Borrower hereby represents and warrants to the Lender
as follows:
(a) The Borrower has all requisite power and
authority to execute this Amendment and the Temporary Replacement Note and to
perform all of its obligations hereunder, and this Amendment and the Temporary
Replacement Note have been duly executed
4
<PAGE>
and delivered by the Borrower and constitute the legal, valid and binding
obligation of the Borrower, enforceable in accordance with their terms.
(b) The execution, delivery and performance by the
Borrower of this Amendment and the Temporary Replacement Note have been duly
authorized by all necessary corporate action and do not (i) require any
authorization, consent or approval by any governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any
provision of any law, rule or regulation or of any order, writ, injunction or
decree presently in effect, having applicability to the Borrower, or the
articles of incorporation or by-laws of the Borrower, or (iii) result in a
breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties
contained in Article V of the Credit Agreement are correct on and as of the date
hereof as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
7. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby. Upon the satisfaction of
each of the conditions set forth in section 5 hereof, the definition of "Note"
and all references thereto in the Credit Agreement shall be deemed amended to
describe the Temporary Replacement Note, which Temporary Replacement Note shall
be issued by the Borrower to the Lender in replacement, renewal and amendment,
but not in repayment, of the Note. At the earlier of May 1, 1997 or the date of
Borrower's receipt of payment from CSK, Inc. of an invoice in the amount of
$1,350,000.00, the definition of "Note" and all references thereto in the Credit
Agreement shall be deemed amended to describe the Revolving Note dated as of
February 21, 1997, which Revolving Note shall replace, renew and amend, but not
repay, the Temporary Replacement Note.
8. The execution of this Amendment and acceptance of the
Temporary Replacement Note and any documents related hereto shall not be deemed
to be a waiver of any Default or Event of Default under the Credit Agreement or
breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or
not existing on the date of this Amendment.
9. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
5
<PAGE>
10. The Borrower hereby reaffirms its agreement under the
Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses and the fee
required under section 4 hereof.
11. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
12. Regarding "Eligible Inventory", Borrower acknowledges and
agrees that its inventory is currently ineligible because Lender has not
received a landlord's subordination, disclaimer and consent with respect to each
lease of the Premises, a condition precedent in section 4.1(c) of the Credit
Agreement.
13. Any breach by Borrower of the terms and conditions in this
First Amendment shall be an Event of Default under section 8.1 of the Credit
Agreement. Upon the occurrence of an Event of Default or at any time thereafter,
the Lender may exercise any or all of the rights and remedies specified in
section 8.2 of the Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the day and year first above written.
GATEWAY DATA SCIENCES
CORPORATION, an Arizona corporation
By /s/ Michael M. Gordon
---------------------------------
Printed Name: Michael M. Gordon
-----------------------
Its President
-------------------------------
GATEWAY CREDIT CORPORATION,
an Arizona corporation
By /s/ Michael M. Gordon
---------------------------------
Printed Name: Michael M. Gordon
-----------------------
Its President
-------------------------------
6
<PAGE>
NORWEST BUSINESS CREDIT, INC.,
a Minnesota corporation
By /s/ Darcy Della Flora
---------------------------------
Printed Name: Darcy Della Flora
-----------------------
Its Vice President
-------------------------------
<PAGE>
TEMPORARY REPLACEMENT REVOLVING NOTE
$3,500,000.00 Phoenix, Arizona
April 23, 1997
For value received, the undersigned, GATEWAY DATA SCIENCES
CORPORATION, an Arizona corporation, and GATEWAY CREDIT CORPORATION, an Arizona
corporation (jointly, the "Borrower"), hereby promises to pay on February 21,
2000 to the order of Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its main office in Phoenix, Arizona, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of THREE
MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($3,500,000.00) or, if less,
the aggregate unpaid principal amount of all advances made by the Lender to the
Borrower pursuant to that certain Credit and Security Agreement (the "Credit
Agreement") dated as of February 21, 1997 by and between the Lender and the
Borrower, together with interest on the principal amount hereunder remaining
unpaid from time to time, computed on the basis of the actual number of days
elapsed and a 360-day year, from the date hereof until this Note is fully paid
at the rate from time to time in effect under the Credit Agreement. The
principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement. This Note may be prepaid only in accordance
with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the
Credit Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection,
including attorneys' fees and legal expenses in the event this Note is not paid
when due, whether or not legal proceedings are commenced.
The Borrower agrees that the interest rate contracted for
includes the interest rate set forth herein plus any other charges or fees set
forth herein and costs and expenses incident to this transaction paid by the
Borrower to the extent the same are deemed interest under applicable law.
A-1
<PAGE>
Presentment or other demand for payment, notice of dishonor
and protest are expressly waived.
At the earlier of May 1, 1997 or the date of Borrower's
receipt of payment from CSK, Inc. of an invoice in the amount of $1,350,000.00,
the Revolving Note dated as of February 21, 1997 shall replace, renew and amend,
but not repay, this Temporary Replacement Revolving Note.
GATEWAY DATA SCIENCES CORPORATION,
an Arizona corporation
By /s/ Michael M. Gordon
---------------------------------
Printed Name: Michael M. Gordon
-----------------------
Its President
-------------------------------
GATEWAY CREDIT CORPORATION,
an Arizona corporation
By /s/ Michael M. Gordon
---------------------------------
Printed Name: Michael M. Gordon
-----------------------
Its President
-------------------------------
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended April 30,
1996 1997
---- ----
<S> <C> <C>
Net income for primary income per common share $ 256 $ (745)
=========== ===========
Weighted average number of common shares outstanding
during the year 2,126,532 2,814,992
Add common equivalent shares (determined using the
treasury stock method) representing shares issuable
upon exercise of incentive stock options and warrants 88,402 503,060
----------- -----------
Weighted average number of shares used in calculation
of primary earnings per share 2,214,934 3,318,052
=========== ===========
Primary earnings per share .12 (.22)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the period ended
April 30, 1997 and is qualified in its entirety by reference to such financial
statements. This Exhibit shall not be deemed filed for purposes of Section 11 of
the Securities Act of 1933 and Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of such Sections, nor shall it be
deemed a part of any other filing which incorporates this report by reference,
unless such other filing expressly incorporates this Exhibit by reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 64
<SECURITIES> 0
<RECEIVABLES> 5,702
<ALLOWANCES> 24
<INVENTORY> 2,502
<CURRENT-ASSETS> 8,614
<PP&E> 3,398
<DEPRECIATION> 1,569
<TOTAL-ASSETS> 15,938
<CURRENT-LIABILITIES> 7,468
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,938
<SALES> 4,670
<TOTAL-REVENUES> 4,670
<CGS> 2,129
<TOTAL-COSTS> 5,321
<OTHER-EXPENSES> (5)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99
<INCOME-PRETAX> (745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (745)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
