SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1998 or
___ Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
Commission file number 0-2387
RESEARCH, INCORPORATED
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(Exact name of the Company as specified in its charter)
Minnesota 41-0908058
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 24064, Minneapolis, Minnesota 55424
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(Address of principal executive office) (Zip Code)
(The Company's telephone number, including area code) (612) 941-3300
Title of each class Name of each exchange on which registered
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Securities registered pursuant to
Section 12(b) of the Act:
None
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Securities registered pursuant to
Section 12(g) of the Act:
Common Stock with a par value of
$.50 per share NASDAQ Symbol RESR
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Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Company's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
The aggregate market value of the common shares held by nonaffiliates was
approximately $ 3 million based upon the closing sale price of the Company's
common stock as of December 11, 1998.
As of December 18, 1998; 1,266,337 common shares were outstanding.
Documents incorporated by reference:
1) Portions of the Proxy Statement dated December 18, 1998, for the Annual
Meeting of Shareholders to be held on January 21, 1999, are incorporated
by reference into Part III.
<PAGE>
RESEARCH, INCORPORATED
PART I
Item 1. Business
(a) General Development of the Business
Research, Incorporated (the "Company") is engaged in the design,
manufacturing and sale of complete product solutions based on its
core competencies: precise heating and control. The Company's
primary focus is on high growth markets including Graphic Arts (ink
drying), SMT (solder reflow for surface mount technology), (BGA)
ball-grid array, (CSP) chip scale packaging and Plastics. BGA and
CSP are segments of the semi-conductor industry. Applications for
the Company's products include, solder reflow for assembly of
surface mount printed circuit boards and chip production, ink drying
for on demand printing, forming of plastics, tube shrinking,
materials testing and curing/finishing.
In fiscal 1997, the Company refocused its efforts from a
product-driven company to a market-driven company. The global market
for the Company's products includes the United States, Canada,
Europe, Asia, Australia, Latin America and South America. Sales are
made both direct and through independent sales representatives and
distributors. The Company currently operates as one business segment
through three operating divisions: Drying, Thermal Solutions, and
Research International. During fiscal 1998 the Company merged the
resources of Control Systems into the Thermal Solutions Division.
Company operations are located in Eden Prairie, Minnesota, a suburb
of Minneapolis, with a subsidiary, Research Incorporation Limited,
operating as a manufacturing site and European sales office in
Plymouth, England.
On November 8, 1995 the Company established a Foreign Sales
Corporation (FSC) to obtain export incentives related to Research
Incorporated's international sales activities.
Research, Incorporated was organized as a Minnesota corporation in
October 1966, and prior to that date, operated as the R-I Controls
Division of a predecessor company which was formed in 1952. Research
Inc. is located at 6425 Flying Cloud Drive, Eden Prairie, Minnesota
55344.
(b) Financial Information About Industry Segments
The Company operates in a single industry segment, industrial
electronic instruments and systems. Financial information concerning
its operations has been presented in the financial statements
referred to under Item 8.
(c) Narrative Description of the Business
(1) (i) Products and Markets - The Company is currently engaged in
the design, manufacture, and marketing of three product
classes; reflow ovens, drying systems and heating devices.
RESEARCH INTERNATIONAL DIVISION
The electronics manufacturing market segments addressed
by the Research International Division are characterized
by significant growth cycles with technology rapidly
accelerating to stay ahead of obsolescence. Surface
mount technology (SMT) and ball-grid array (BGA)
represent the most advanced processes for creating
solder-connections to silicon chips. Automation provided
by Research International's reflow ovens enable
semiconductor manufacturers and assemblers around the
world to remain competitive, low cost producers. The
microcircuits that pass through Research International's
reflow ovens become the electronic intelligence of
computer workstations, laptops and palmtops, as well as
cellular phones, pagers and other high demand wireless
communications products.
Research International plans to gain market share
through technology leadership, market driven to address
customers future needs and leadership in customer
service and satisfaction. Research International
accelerated expansion into Europe due to the decline of
Asian activity. The division added and trained thirteen
new industry savvy representatives to cover all of
Europe and to begin forging strategic alliances with key
customers.
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The No-Clean feature of Research International's
MicriFlo(TM) and ThermaFlo(TM) ovens for SMT as well as
its ChipFlo(TM) oven for BGA introduced in the third
quarter of 1997, enables manufacturers to operate their
systems without costly, periodic stops (up to 24 hours
per month) to clean flux buildup in the heater cavities.
In the semi-conductor manufacturing environment, such
interruptions add significant costs to their operations.
The low velocity nitrogen convection (LVNC) feature of
the ChipFlo oven enables solder leads to be bonded onto
substrate film without flutter or air movement
interfering with the bonding process. Similarly, the
DeltaFlo 10LN oven, introduced in the second quarter of
1997, extends low nitrogen capabilities to fan-forced
convection reflow ovens for manufacturers of high volume
SMT circuit cards.
Product introduction for special applications in fiscal
1998 included the DeltaFlo 10LNSV and CureFlo. The
DeltaFlo 10LNSV has high output yet a small footprint.
The CureFlo cures or sets the shellac coating on circuit
boards to eliminate shifting of components, without
igniting the volatile lacquer vapors.
Research International in close collaboration with
leading SMT manufacturers is developing the Tower(TM)
reflow oven. The patented Tower reflow oven is one-third
the length of conventional reflow ovens and
simultaneously handles different circuit board types. It
is the only vertical oven with a board transport
situated outside the heating zones for maximum
reliability, and planned for commercial availability in
the fourth quarter of fiscal 1999.
Research International markets its products through
independent sales representatives utilizing advertising,
tradeshows and rapid customer response and excellent
customer support to gain market share.
DRYING DIVISION
The Drying Division, an offshoot of the Company's
Thermal Solutions Division, was formed in 1997 to focus
on opportunities in the ink-drying segment of the
graphic arts market. The printing industry's quest for
top speeds and enhanced productivity created the need
for the Drying Division's products, which dry ink
rapidly as it is applied.
Product advantages such as precise heat control that
preserves the integrity of the printed piece, speeds of
up to 1,000 feet per minute, smaller machine footprints,
and lower power requirements have earned the division a
50 percent share of the market segment it serves. The
division estimates the size of the overall ink drying
market worldwide to be approximately $800 million
annually.
The division has primarily concentrated its efforts on
the high-end, ink-jet printing market niche, through a
strategic supplier relationship with Scitex Digital
Printing, Inc., the world's leading supplier of ink-jet
printing equipment used for high-volume, high-speed
print applications such as lottery tickets, magazine
sweepstakes, and direct mail. The Drying Division has
created a full line of products including the
Speed-Dri(R) and Web-Dri(R), along with the new
Roll-Dri(TM), to work in tandem with Scitex printers.
This broad product line gives users the ability to
choose a dryer that gives them the appropriate
combination of speed, size, power, and price to ensure
the highest return on their investment.
In Asia, despite the recent fluctuations in financial
markets, direct mail solicitations and database
development are in the beginning stages, and variably
printed business forms are growing in importance. The
Drying Division has the market development strategy in
place to take advantage of these trends, while
minimizing its exposure. Scitex has expanded into the
Asian market and brought with it a need for high-speed
dryers. Because space and electricity are at a premium
throughout Asia, doing business in the region demands
that dryers run on lower power and have smaller
footprints. To meet these requirements, the division
developed the R1000 Roll-Dri, which reduces energy
consumption by more than 50 percent, while running at
high speeds.
Smaller printers also need high speeds in order to
compete. Research, Inc.'s new Speed-Dri was designed to
serve smaller printers in the short-run, on-demand print
marketplace. Several manufacturers introduced new,
moderately priced ink-jet printers to meet the
requirements of smaller
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letter shops that serve the short-run direct mail niche.
Since the printers are attractively priced, users can
afford to offer their customers versatile ink-jet
production as an alternative to preprinted glued labels.
In 1999, the Drying Division is expanding beyond inkjet
based print technologies into areas such as toner based
imaging for forms manufacturers. The Drying Division is
also establishing itself as a total system integrator
with its new modular drying system which includes
components related to the entire print-production
process.
The Drying Division signed a distributor agreement with
Scitex Digital Printing, Inc., that provides Scitex with
exclusive worldwide rights to market and sell Research,
Inc. drying systems, when integrated with Scitex ink-jet
printing equipment. A manufacturing license and
exclusive distribution agreement was also signed with
Munich-based IndustrieSerVis G.m.b.H. Under this
agreement each company is licensed to make, use and sell
drying systems and custom system integration components
developed by the other. The agreement also grants each
company exclusive distribution rights for the others'
products.
THERMAL SOLUTIONS DIVISION
The Thermal Solutions Division (TSD) advances the
corporate core competency of precise heat control. TSD
created a family of products using IR in the brand, such
as the SpotIR series, infrared spot heaters and ChambIR
series, infrared chamber heaters. TSD addresses multiple
markets including plastics, metal processing, and
coatings as well as paper processing. TSD is one of the
few manufacturers using "instant on/off" infrared lamps
and reflectors, with advantages over competing hot-wall
or hot-air processes in terms of energy efficiency,
accuracy of focus, high heating rates, and temperature
control. The Thermal Solutions Division develops
products providing focused heat and complete product
solutions for customers. These products are marketed
through independent sales representatives who are
knowledgeable in the targeted markets.
TSD develops complete solutions using the Company's core
heat-control technology to address growth opportunities.
One such total solution product line incorporates
heater, framework, control, and cooler in a single
package.
During fiscal 1998, the division partnered with a
leading manufacturer of disposable medical devices to
develop and incorporate a one-of-a-kind heating
solution. The technology utilizes pinpoint-focused
infrared heat to quickly and carefully release each
device for its mold. This technology can be transferred
to other applications in which focused heat, speed,
cleanliness, cost savings and ease of use are project
drivers.
(ii) Product Investment - The Company expects to continue
expenditures for research and development in excess of
10 percent of sales, which is significantly higher than
the average for its industries.
(iii) Sources and Availability of Raw Materials - Raw
materials essential to the business of the Company are
generally readily available from a number of sources.
(iv) Patents and Trademarks - The Company has a number of
patents and is a party to certain license agreements
which, while deemed important, are less significant to
its competitive position than factors such as product
development, name recognition, reliable product
maintenance, support and knowledge of employees due to
the rapid technological changes in the industry.
(v) Seasonality - The business of the Company is not
seasonal.
(vi) Working Capital Requirements - The practices of the
Company relating to working capital items are not
considered unusual. The Company carries inventory to
support customers rapid delivery requirements.
(vii) Customers - During fiscal 1998 the Company had two
customers that accounted for 13% and 10% of net sales.
In fiscal 1997 the Company had two customers that
accounted for 19% and 12% of net sales, while in fiscal
1996 one customer accounted for 11% of net sales.
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During fiscal 1998 the Company has two customers that
represented 12% and 11% of net accounts receivable. In
fiscal 1997 the Company had two customers that
represented 20% and 10% of net accounts receivables,
while in fiscal 1996 one customer represented 10% of net
accounts receivables.
(viii)Backlog - The dollar amount of the Company's backlog of
orders from operations believed to be firm at September
30, 1998, was $4,274,000; at September 30, 1997, it was
$2,730,000. It is anticipated that all of the backlog at
September 30 will be shipped in the subsequent 12-month
period. Backlog has no unusual significance to the
business of the Company.
(ix) Government Contracts - Government contracts which may be
subject to renegotiation of profits or termination do
not constitute a material portion of the Company's
business.
(x) Competition - The Company's business is highly
competitive, particularly in the areas of price, service
and product performance. Competition involves hundreds
of companies -- ranging from companies which are much
smaller than the Company to large companies in the
electronics, printing and plastics industries.
(xi) Research and Development - The Company incurred expenses
of approximately $2,968,000, $2,581,000 and $1,735,000
in fiscal years 1998, 1997, and 1996, respectively, on
Company-sponsored research activities related to the
development of new products, new related products and to
the improvement of existing products. No material funds
were expended for customer-sponsored research
activities.
(xii) Environmental Regulations - Compliance with federal,
state and local provisions regulating the discharge of
materials into the environment or otherwise relating to
the protection of the environment is not expected to
have a material effect upon the capital expenditures,
earnings or competitive position of the Company.
(xiii)Employees - At September 30, 1998, the Company had 134
employees.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
(1) The Company has a subsidiary in the United Kingdom. The
results of its operations were not material to the Company.
Export sales involve sales to customers primarily in Asia,
Latin America, Europe, Canada and Australia. See Note 7,
"Foreign Sales" of the Notes to Consolidated Financial
Statements.
(2) Not applicable.
(3) Not applicable.
Item 2. Properties
The Company's plant and office, which are owned in fee, are located
on approximately 12 acres of property at 6425 Flying Cloud Drive,
Eden Prairie, Minnesota. The facilities consist of 90,000 square
feet of completely air-conditioned space deemed suitable for light
manufacturing and office use. Management considers these facilities
to be in good condition, well-maintained and adequate for its
current operations. On October 4, 1996, the first quarter of fiscal
1997, the Company completed the sale of 13.1 acres of undeveloped
land. The Company's subsidiary in the U.K. is operated in a 20,000
square foot leased facility.
Item 3. Legal Proceedings
The Company is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
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Item 4A. Executive Officers
None of the executive officers of the Company has any family
relationship with any other officer, and all officers serve at the
pleasure of the Board of Directors. The following table sets forth
other information regarding the Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
B.E. Bailey 50 Vice President 1992
D.G. Brady 56 Vice President 1990
N.R. Cox 43 Vice President 1998
R.L. Grose 48 Treasurer 1997
C.C. Johnson 54 President, CEO and Director 1984
G.E. Magnuson 68 Secretary and Director;
Retired Partner, Lindquist & Vennum 1975
P.L.L.P.
K.M. O'Rourke 41 Vice President 1993
</TABLE>
There are no arrangements or understandings between any of the
officers and any other person pursuant to which any of them was
selected as an officer.
Messrs. Johnson, Brady, Bailey, Cox, Grose and Ms. O'Rourke have
each been employed by the Company for more than five years. Since
1990 Mr. Magnuson is a retired partner of Lindquist & Vennum
P.L.L.P. Mr. Magnuson has been a director and secretary of the
Company for more than five years. Ms. O'Rourke became Vice President
in November 1993; previously Ms. O'Rourke was Manager of Human
Resources. Mr. Grose became Treasurer in January of 1997; previously
he was Controller. In December 1998, Mr. Cox became Vice President;
previously Mr. Cox was General Manager since 1996 and prior to that
Engineering Manager.
5
<PAGE>
PART II
Item 5. Market for The Company's Common Stock and Related Stockholder
Matters
(a) & (c) Market Information and Dividends
The Company's Board of Directors discontinued declaring dividends
after the dividend paid March 31, 1998.
Dividends paid and price range per share of common stock is as
follows:
Beginning on October 20, 1998, the Company's common stock began
trading on the Nasdaq SmallCap Market symbol (RESR), rather than on
the Nasdaq National Market tier of the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Bid Price Range
Dividends Paid 1998 1997
---------------- ------------------- ----------------
During Quarter Ended 1998 1997 High Low High Low
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31 $.056 $.056 9-3/5 6-3/5 5-2/5 3-4/5
March 31 .06 .056 7-1/2 4-5/8 7-3/5 4
June 30 .216* 6-6/16 2-6/16 7-4/5 4-2/5
September 30 .056 4 1-11/16 8 5-1/5
------------------------------------------------------------------------------------------
TOTAL $.116 $.384
=========================================
</TABLE>
* INCLUDES A ONE-TIME SPECIAL DIVIDEND OF $.20 FROM THE SALE OF THE
DIMENSION PRODUCT LINE AND SALE OF LAND. PRICES ADJUSTED FOR STOCK
SPLIT, 5 FOR 4 ON DECEMBER 31, 1997.
(b) Holders
The number of holders of record of the Company's common stock
as of December 7, 1998, was 566. The Company estimates that an
additional 800 shareholders own stock held for their accounts
at brokerage firms and financial institutions.
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Item 6. Selected Financial Data
CONSOLIDATED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the Years ended September 30 1998 1997 1996 1995 1994
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Operations:
Net sales $ 16,731 $ 22,843 $ 19,661 $ 20,923 $ 18,163
Gross profit 5,986 10,085 7,955 9,019 7,947
Percent of sales 35.8% 44.1% 40.5% 43.1% 43.8%
Income (loss) from operations (1) (4,986) 551 89 903 661
Gain on sale of land -- 1,147 -- -- --
Gain on sale of product line -- -- 344 -- --
Interest income (expense), net (345) (3) 25 49 64
Income (loss) before income taxes (5,331) 1,695 458 952 725
Percent of sales (31.9)% 7.4% 2.3% 4.6% 4.0%
Income tax provision (benefit) (1,813) 578 168 325 228
Net income (loss) $ (3,518) $ 1,117 $ 290 $ 627 $ 497
Percent of sales (21.0)% 4.9% 1.5% 3.0% 2.7%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Earnings per Share:
Basic $ (2.82) $ 0.80 $ 0.20 $ 0.44 $ 0.35
Diluted (2.82) 0.79 0.19 0.43 0.35
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Cash Dividends Paid per Share $ .116 $ .384 $ .205 $ .176 $ .176
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Return on Beginning
Stockholders' Equity N/A 15.3% 4.0% 9.3% 7.7%
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Weighted Average Number of
Shares Outstanding:
Basic 1,247 1,391 1,444 1,411 1,406
Diluted 1,247 1,418 1,492 1,459 1,408
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
As of September 30 1998 1997 1996 1995 1994
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Consolidated Financial Condition:
Net working capital $ 41 $ 3,934 $ 5,091 $ 5,195 $ 4,952
Current ratio 1.0 to 1 1.6 to 1 2.7 to 1 2.5 to 1 2.5 to 1
Property and Equipment, Net $ 2,392 $ 2,521 $ 2,100 $ 1,876 $ 1,695
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Total Assets 11,373 12,849 10,338 10,593 10,080
Total Stockholders' Equity 3,218 6,516 7,275 7,195 6,762
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Number of Shares Outstanding 1,266 1,211 1,452 1,425 1,406
Book Value per Share $ 2.54 $ 5.38 $ 5.01 $ 5.05 $ 4.81
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
</TABLE>
(1) For fiscal 1998, loss from operations includes a $1,676 restructuring charge
and inventory write down of $697.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
In fiscal 1997, the Company shifted from a product-driven to a market-driven
strategy in order to leverage its engineering expertise and to concentrate and
invest resources on customers and markets that offer the best potential return.
The Company identified key markets in which it has the potential to be a
dominant player: surface mount technology (SMT), graphic arts, and infrared. In
each area, the Company identified key customers and strategic partners with whom
it would work most closely to meet their respective needs. The Company also
identified key geographic markets, where it would make additional investments to
capitalize on growth potential. The Company believes the SMT and graphic arts
markets have the greatest potential for growth. In the SMT market, the Company
plans to gain market share by dedicating additional resources to key customers
that have ongoing needs for high-quality products and excellent customer
service.
Strategic partnerships and high levels of customer service will be key
components of the Company's market-driven strategy. While the breadth of the
Company's product lines will probably decrease as efforts are focused on
selected markets, the Company will invest in new product development at levels
that will support its goal of achieving 50% of sales from products developed in
the last three years.
CONSOLIDATED OPERATIONS
1998-1997 COMPARISON
Sales for fiscal 1998 decreased 27% from fiscal 1997. The overall decrease in
sales is attributable to the protracted Asian economic crisis and its impact on
capital expenditures of the Company's high-tech customers in the United States.
Sales to the electronics industry in the SMT market decreased 46% from the prior
year. Sales to the printing industry in the graphic arts market increased 11%; a
slower growth than fiscal 1997 due to lower than expected sales in Asia as a
result of the economic crisis in that region. Sales of core heating and control
products were down 13% due to the uncertainty caused by the Asian situation on
domestic capital equipment expenditures.
The Company has refocused its resources to expand into other geographic markets
such as Europe and is not as reliant on Asia. Management believes there will
continue to be quarter to quarter fluctuations in the SMT market. Sales of new
products introduced in the last three years accounted for 38% of sales, less
than its goal of 50% due to the loss of new product sales in Asia.
Gross profit margins decreased 8.3% due to an inventory write down of $697,000,
primarily in the SMT market, as well as the effect of additional unabsorbed
fixed costs. The inventory write down was caused by the continued pressure on
the electronics industry as the on going Asian economic turmoil affected capital
equipment expenditures of manufacturers around the world.
Selling expenses increased to 32.8% as a percent of sales in fiscal 1998 from
26.3% of sales in 1997 due to significantly lower level of sales created by the
Asian economic crisis.
Expenditures for research and development increased to 17.7% as a percentage of
sales in fiscal 1998 from 11.3% of sales in 1997 due to the lower level of sales
and the Company's plans to maintain its investments in new product development
in its major markets. The Company's goal is to generate 50% of sales from new
products developed in the last three years. The Company has shifted the emphasis
of its research and development efforts from product adaptations, extensions and
enhancements to new product solutions for its chosen markets. The Company has
focused its efforts on high potential products and markets. The Company expects
to invest more than 10% of sales on these efforts.
General and administrative expenses increased to 5.0% as a percentage of sales
in fiscal 1998 from 4.1% in 1997, however, the absolute dollars decreased
$102,000. The percentage increase was due to the lower sales volume while
spending was reduced by cost containment measures and resource realignment.
In February 1998, the Company consolidated the Control Systems business into the
Thermal Solutions Division. Control Systems dealt primarily with Asian glass
manufacturers and contributed less than 5 percent of sales in fiscal 1997. Costs
associated with the restructuring and the redeployment of Control Systems'
resources were taken as a one-time charge of $635,000 in the second quarter of
fiscal 1998. Costs associated with the restructuring primarily
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consisted of severance costs. In the third quarter the Company took a
restructuring charge of $1,041,000, primarily for severance pay related to a
workforce reduction in the third quarter and asset write downs. The Company took
these actions in the quarter in response to continued pressure on the
electronics industry as the ongoing Asian economic turmoil affected capital
equipment expenditures of manufacturers around the world. The Company
aggressively reduced costs, restructured and streamlined operations while
focusing product offerings increasingly on value-added customer solutions. The
Company is focusing on resource realignment to reduce fixed costs, as well as
cash and asset management programs.
Interest expense was $345,000 in fiscal 1998 compared to $51,000 in fiscal 1997.
This increase was due to a higher borrowing position.
The effective tax rate for fiscal 1998 and 1997 was 34%.
1997-1996 COMPARISON
Sales for fiscal 1997 increased 16%. The overall increase in sales is attributed
to increased demand in the electronics industry, the Company's focus on key
customers and acceptance of new product introductions. Sales to the electronics
industry in the SMT market increased 70% over the prior year and sales to the
printing industry in the graphic arts market increased 20%. The sales increases
in the SMT and graphic arts markets were partially offset by the loss of
approximately $2,000,000 of sales of the Dimension product, which was sold in
September 1996. The increase in sales to the graphic arts market is due to the
Company's focus in fiscal year 1996 to penetrate that market. Sales (excluding
Dimension sales for 1996) increased 29.0%. Sales of new products introduced in
the last three years accounted for 57% of sales.
Gross profit margin increased 3.6% due to the product mix of sales in the SMT
market, lower warranty costs and the impact of new product introductions in the
SMT and graphic arts markets. Gross margins in 1996 were affected by initial
production costs and product warranty expense associated with new product
introductions in the SMT product line and lower gross margins from Dimension
products. Warranty expense incurred in 1996 was related to correctable,
nonrecurring retrofit changes and the integration of a new controller in the SMT
reflow oven product line. Management has implemented design review procedures
that it believes will prevent future occurrences. Gross margins on the SMT
product line are relatively lower than other product lines.
Selling expenses as a percent of sales dropped 1.3% due to reduced reliance on
independent sales representatives in the graphic arts market and the sale of the
Dimension product line partially offset by investments to develop new customer
relationships.
Expenditures for research and development increased to 11.3% as a percentage of
sales in 1997 from 8.8% of sales in 1996 due to the Company's plan to increase
its investment in new product development in its major markets and funding of
the Tower, a first-to-market product solution, introduced in fiscal 1998. These
investments are in line with the Company's goal to generate 50% of sales from
new products developed in the last three years.
General and administrative expense increased to 4.1% as a percentage of sales in
1997. This increase was due to costs associated with hiring and training
additional personnel to support the Company's growth during a tight labor
market. The Company expects the labor shortage to continue to impact these
costs. The Company will also invest in new business systems and processes in the
future with the expectation that these expenses will be leveraged and provide
future productivity improvements.
Net income for 1997 includes a one-time gain on sale of land of $1,147,000. The
gain on the sale of land is net of $312,000 of expenses such as site preparation
and professional fees.
The effective tax rate for 1997 was 34%, compared to 37% in 1996. The decrease
is due to the increase in research and development spending and the associated
legislation enacted in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $41,000 at the end of fiscal 1998 as compared
to $3,934,000 in 1997. The Company's current ratio at September 30, 1998 and
1997, was 1.0 and 1.6, respectively.
The decrease in working capital is due to the cash used in operating activities.
Decreases in accounts receivable, inventories, and an increase in deferred
revenues were offset by cash used due to the net loss. Accounts receivables
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decreased due to lower sales. Inventories were lower due to the Company's
ability to utilize inventories that were built up to meet customers quick
delivery requirements. Deferred revenue was generated from customer advances
which were a result of the Company's efforts to aggressively manage cash during
the Asia economic crisis. The increase in cash used in investing activities was
due to property and equipment purchases which were incurred primarily before the
Asia economic downturn. In March 1998 the Company discontinued paying dividends.
The Company has recorded a $493,000 tax receivable, resulting from recognition
of a net operating loss (NOL) carryback, which is expected to be received in the
second quarter of fiscal 1999. Further, to help improve cash flows, the Company
now receives customer advances for significant orders and recorded $623,000 of
customer advances at September 30, 1998.
The Company has a secured bank line of credit of $5,000,000 with interest
charged at the prime rate. The line is secured by substantially all the
Company's assets. At September 30, 1998, the Company had borrowings outstanding
of $4,100,000. The Company did not meet certain net worth, debt to equity and
net income covenants at September 30, 1998 and has received a waiver of those
covenants from its lender. This credit facility terminates January 29, 1999. A
short-term note payable of $766,000 was paid off on January 15, 1998. The
Company has no long-term debt.
On December 17, 1998, the Company signed a new three-year loan and security
agreement with a bank. The new agreement provides for total borrowings of up to
$8 million subject to lending formulas based on eligible receivables,
inventories, certain long-term assets and other terms specified in the
agreement. This new credit facility consists of a line of credit with interest
charged at 2.25% above prime and four term loans with interest charged initially
at 2.75% above prime. The agreement contains certain restrictive covenants and
any outstanding borrowings are secured by substantially all of the Company's
assets. The Company expects to close and draw on the new loan by January 29,
1999.
The Company's management believes its cash flow from operations and borrowing
facilities will be sufficient to meet the Company's financing requirements for
the foreseeable future. The Company believes that success in its industries
requires substantial financial flexibility due to customer expectations and
rapidly changing technologies.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software, devices and products with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in the
Company's manufacturing operations, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
STATE OF READINESS
The Company has undertaken various initiatives to evaluate the Year 2000
readiness of the products sold by the Company ("Products"), the information
technology systems used in the Company's operations ("IT Systems"), its non-IT
systems, such as power to its facilities, HVAC systems, building security,
voicemail and other systems, as well as the readiness of its customers and
suppliers. The Company has identified eleven Year 2000 target areas that cover
the entire scope of the Company's business and has internally established a
teams committed to completing an 8-step Compliance Validation Process ("CVP")
for each target area. The team is expected to fully complete this process on or
before September 1, 1999. The table below identifies the Company's target areas
as well as the 8-step CVP with its
10
<PAGE>
expected timeline. Although some Phase 2 remediation activities have been
started or completed, most team activity is currently focused towards the
process of completing Phase 1.
<TABLE>
<CAPTION>
YEAR 2000 TARGET AREAS COMPLIANCE VALIDATION PROCESS
---------------------- -----------------------------
<S> <C> <C>
PHASE 1
-------
1. Business Computer Systems 1. Team Formation Expected Completion:
2. Technical Infrastructure 2. Inventory Assessment
3. End-User Computing 3. Compliance Assessment End of Q2 Fiscal 1999
4. Manufacturing Equipment 4. Risk Assessment
5. Test Lab
6. Telecommunications PHASE 2
7. Research & Development -------
8. Logistics 5. Resolution/Remediation Expected Completion:
9. Facilities 6. Validation
10. Customers 7. Contingency Plan End of Q4 Fiscal 1999
11. Suppliers/Key Service Providers 8. Sign-Off Acceptance
</TABLE>
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside of the Company's control, the Company is in the process of mailing
letters to those with whom its believes its relationships are material and is
verbally communicating with some of its strategic customers and vendors to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether products and services purchased from or by such
entities are Year 2000 ready. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys and
mailings, with significant vendors and service providers as part of the Phase 2
validation.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. The Company has
incurred the majority of its costs from the recent installation of an update to
its business computer system consisting primarily of Year 2000 software upgrades
as well as the opportunity cost of time spent by employees of the Company
evaluating Year 2000 compliance matters. Because the Company did not accelerate
the installation of the software upgrades, it does not consider the costs
related thereto to be charges for Year 2000 compliance. Presently, the Company
does not have specific estimates for the cost of other upgrades and enhancements
to its IT Systems but will provide such by the completion of Phase 1 when they
are expected to be available. The Company does anticipate that these estimates
will be reasonable and presently expects such to be within the Company's fiscal
1999 budget. At this time, the Company does not possess information necessary to
estimate the potential financial impact of Year 2000 compliance issues relating
to its non-IT Systems, Products, vendors, customers and other third parties.
Such impact, including the effect of a Year 2000 business disruption, could have
a material adverse impact on the Company's financial condition and results of
operations.
RISKS OF YEAR 2000 ISSUES
Because the Company is still in the discovery and evaluation phase of assessing
its overall Year 2000 exposure, it cannot at this time state with certainty that
the Year 2000 issues will not have a material adverse impact on its financial
condition, results of operations and liquidity. Although the Company considers
them unlikely, the Company believes that the following several situations, not
in any particular order, make up the Company's "most reasonably likely worst
case Year 2000 scenarios":
1. Disruption of a Significant Customer's Ability to Accept Products or Pay
Invoices
The Company's significant customers are large, well-informed customers, mostly
in the surface mount technology and printing industries, who are disclosing
information to their vendors that indicates they are well along the path toward
Year 2000 compliance. These customers have demonstrated their awareness of the
Year 2000 issue by issuing requirements of their suppliers and indicating the
stages of identification and remediation which they consider
11
<PAGE>
adequate for progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies that the
Company believes would be able to make adjustments in their processes as
required to cause timely payment of invoices.
2. Disruption of Supply Materials
The Company is in the process of surveying its vendors with regard to their Year
2000 readiness, and will assess and catalog the responses to the survey. The
Company is hopeful of receiving adequate responses from critical vendors and
many non-critical vendors within the first two quarters of fiscal 1999. The
Company expects to work with vendors that show a need for assistance or that
provide inadequate responses, and in many cases expects that survey results will
be refined significantly by such work. Where ultimate survey results show that
the need arises, the Company will arrange for back-up vendors before the
changeover date.
3. Disruption of the Company's IT Systems
The Company has completed a scheduled upgrade of its current business software
systems to be Year 2000 compliant. Year 2000 testing of end-user computing
hardware and software will occur sometime during fiscal 1999. For this reason,
the Company considers that disruption of its IT Systems is unlikely.
4. Disruption of the Company's Non-IT Systems
The Company is currently conducting a comprehensive assessment of all non-IT
systems, including among other things its manufacturing systems and operations,
with respect to both embedded processors and obvious computer control. For some
systems, upgrades are already scheduled and it is expected that the Phase 1
assessments will highlight by the end of the second quarter of fiscal 1999 any
further remediation needs. Considering the nature of the equipment and systems
involved, the Company expects that the timing of assessment to be such that it
will be able to complete any remediation efforts on a reasonably short schedule,
and in any case before arrival of the Year 2000. The Company also believes that,
after such assessment and remediation, if any disruptions do occur, such will be
dealt with promptly and will be no more severe with respect to correction or
impact than would be an unexpected breakdown of well-maintained equipment.
CONTINGENCY PLANS
While the Company recognizes the need for contingency planning, it has not yet
developed any specific contingency plans for potential Year 2000 disruptions.
The aforementioned 8-step Compliance Validation Process, however, does include
contingency planning by the team and such plans, as developed, will be carefully
reviewed by the Company. The Company does anticipate developing contingency
plans for its most critical areas, but details of such plans will depend on the
Company's final assessment of the problem as well as the evaluation and success
of its remediation efforts. Future disclosures will include contingency plans as
they become available.
CHANGES IN PERSONNEL
A vice president of the Company who was responsible for the Company's Year 2000
compliance efforts, among other matters, retired from the Company in the third
quarter of fiscal 1998. With respect to covering the Company's Year 2000 issues,
the Company has replaced this former employee with a senior-level manager who is
familiar with the technological issues and challenges involved with the Year
2000 and who has accepted both responsibility and authority for all aspects of
the Company's compliance. Regarding the Year 2000, the Company's new Operations
Manager, who serves as the Company's Year 2000 Compliance Manger, reports
directly to the Company's President and Chief Executive Officer and works
closely with legal and, where needed, technical advisors.
For further information regarding the current year items impacting cash flows,
see the Company's Consolidated Statements of Cash Flows.
INFLATION
In the past three years, inflation has not had a significant effect on
operations.
FORWARD-LOOKING STATEMENTS
The statements included herein that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. There are certain important
factors that could cause actual results to differ materially from those
anticipated by some of the statements made herein. Investors are cautioned that
all forward-looking statements involve risks and uncertainty. Some of the
factors
12
<PAGE>
that could affect results are the effectiveness of new product introductions,
the product mix of our sales, the amount of sales generated or volatility in the
major markets, competition, currency fluctuations, availability of labor,
general economic conditions, market cycles, dependence on capital expenditures
of contract manufactures in SMT, product cancellations or rescheduling, loss of
a significant customer, interruptions in the Company's operations or those of
any of its suppliers or major customers as such may be caused by problems
arising from the Year 2000.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company does not hold any derivative financial instruments,
derivative commodity instruments or other financial instruments. The
Company engages neither in speculative nor derivative trading
activities. As of September 30, 1998, the Company had $4.1 million
of debt outstanding with a variable interest rate (see Note 2 to the
financial statements). A fluctuation in the underlying interest rate
on this debt at its current balance would not have a material effect
on the Company's financial condition or results of operations.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, together with the
report of the Company's independent public accountants, Arthur
Andersen LLP, are included in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
13
<PAGE>
PART III
Items 10., Pursuant to General Instruction G (3), the information required by
11., 12., Item 10 - Directors and Executive Officers of the Company,
and 13. Item 11 - Executive Compensation,
Item 12 - Security Ownership of Certain Beneficial Owners and
Management, and
Item 13 - Certain Relationships and Related Transactions, except
that portion of Item 10 relating to executive officers of the
Company, which is set forth in Item 4A of this report, is hereby
incorporated by reference from the Company's definitive Proxy
Statement, to be filed with the Commission with respect to the
Annual Meeting of Shareholders to be held on January 21, 1999.
14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
Page #
------
(a) (1) Financial Statements:
The following consolidated financial statements of
Research, Incorporated and the Report of the Independent
Public Accountants thereon, are filed as part of this Form
10-K.
(i) Report of Independent Public Accountants 18
(ii) Consolidated Balance Sheets as of September 30, 1998
and 1997 19
(iii) Consolidated Statements of Operations and
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1998, 1997, and 1996 20, 21
(iv) Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997, and 1996 22
(v) Notes to Consolidated Financial Statements 23-28
(2) Financial Statement Schedule
The following financial statement schedule is filed with
this report:
(i) Schedule II -Valuation and qualifying accounts 29
All schedules except those listed above are omitted because they are
not applicable or not required, or because the required information
is included in the financial statements or notes thereto.
(3) Exhibits
(3.1) Articles of Incorporation - Incorporated by
reference to Exhibit (3.1) of the Company's Form
10-K for the period ended September 30, 1994
(3.2) Bylaws - Incorporated by reference to Exhibit (3.2)
of the Company's Form 10-K for the period ended
September 30, 1994
(4.1) Line of Credit Agreement between Norwest Bank
Minnesota N.A. and the Company dated October 13,
1997. Incorporated by reference to exhibit (4.1) of
the Company's Form 10K for the period ended
September 30, 1997
(4.2) Revolving Note Agreement between Norwest Bank
Minnesota N.A. and the Company dated October 13,
1997. Incorporated by reference to exhibit (4.1) of
the Company's Form 10K for the period ended
September 30, 1997
(4.3) Waiver of Covenant and Credit Agreement from Norwest
Bank Minnesota N.A. dated December 17, 1998
(4.4) Loan and Security Agreement between Coast Business
Credit, a division of Southern Pacific Bank and the
Company dated December 17, 1998
(10.1) 1991 Stock Plan - Incorporated by reference to
registration statement on Form Form S-8, file No.
33-75256 (filed February 14, 1994)
15
<PAGE>
(10.2) Form S-8 filed 11-5-97 - Employee Stock Purchase
Plan Incorporated by reference to Exhibit 4.1 of
registration statement, on Form S-8, file 333-39567
(21.1) Subsidiaries of the Company
(23.1) Consent of Arthur Andersen LLP
(27.0) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on form 8-K were filed in the quarter ended September 30,
1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESEARCH, INCORPORATED
By /s/ Claude C. Johnson
------------------------------------
Claude C. Johnson, President and CEO
By /s/ Richard L. Grose
------------------------------------
Richard L. Grose, Treasurer
Date: December 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
Signature Title Date
/s/ Claude C. Johnson. President, CEO and Director December 18, 1998
- ----------------------
Claude C. Johnson *
/s/ Richard L. Grose. Treasurer December 18, 1998
- --------------------.
Richard L. Grose **
/s/ J. G. Colwell, Jr. Director December 18, 1998
- ----------------------
John G. Colwell, Jr.
/s/ E. L. Lundstrom Director December 18, 1998
- --------------------
Edward L. Lundstrom
/s/ G. E. Magnuson Director December 18, 1998
- ------------------
Gerald E. Magnuson
/s/ C. G. Schiefelbein Director December 18, 1998
- ----------------------
Charles G. Schiefelbein
* Principal executive officer
* * Principal financial officer
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Research, Incorporated:
We have audited the accompanying consolidated balance sheets of Research,
Incorporated (a Minnesota corporation) and Subsidiary as of September 30, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. These consolidated financial statements and supplemental schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Research, Incorporated and
Subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed as a part of Item 14 in this
Form 10-K is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 30, 1998
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30
-----------------------------
ASSETS 1998 1997
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 108,647 $ 1,204,827
Accounts receivable, net of reserves of $150,000 2,897,503 3,979,299
Income tax receivable 493,241 --
Inventories 3,943,157 4,485,830
Deferred income tax benefit 537,000 405,000
Prepayments 215,784 191,465
- ----------------------------------------------------------------- ------------ ------------
Total current assets 8,195,332 10,266,421
- ----------------------------------------------------------------- ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 235,569 221,927
Building 2,298,694 2,182,492
Machinery and equipment 4,339,268 4,534,825
Less accumulated depreciation (4,481,995) (4,418,279)
- ----------------------------------------------------------------- ------------ ------------
Net property and equipment 2,391,536 2,520,965
- ----------------------------------------------------------------- ------------ ------------
OTHER ASSETS
Deferred income tax benefit 786,000 --
Other assets -- 61,320
- ----------------------------------------------------------------- ------------ ------------
Total other assets 786,000 61,320
- ----------------------------------------------------------------- ------------ ------------
Total assets $ 11,372,868 $ 12,848,706
================================================================= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 4,100,000 $ 2,231,998
Accounts payable 1,692,062 1,689,153
Deferred revenues 623,196 --
Accrued liabilities:
Salaries and benefits 326,645 728,374
Warranty reserve 350,000 350,000
Real estate taxes 160,000 155,000
Restructuring reserves 602,723 --
Income taxes -- 873,739
Other 299,748 303,971
- ----------------------------------------------------------------- ------------ ------------
Total current liabilities 8,154,374 6,332,235
- ----------------------------------------------------------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $.50 par value, 5,000,000 shares authorized,
1,266,337 and 1,211,468 shares issued and outstanding
at September 30, 1998 and 1997, respectively 633,168 605,734
Additional paid-in capital 591,906 307,111
Foreign currency translation 92,097 39,752
Retained earnings 1,901,323 5,563,874
- ----------------------------------------------------------------- ------------ ------------
Total stockholders' equity 3,218,494 6,516,471
- ----------------------------------------------------------------- ------------ ------------
Total liabilities and stockholders' equity $ 11,372,868 $ 12,848,706
================================================================= ============ ============
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED BALANCE SHEETS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30 1998 1997 1996
- ------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 16,730,935 $ 22,843,081 $ 19,661,182
Cost of Sales 10,745,255 12,758,030 11,705,817
- ------------------------------------------- ------------ ------------ ------------
Gross profit 5,985,680 10,085,051 7,955,365
- ------------------------------------------- ------------ ------------ ------------
Expenses:
Selling 5,490,800 6,013,914 5,431,240
Research and development 2,967,803 2,580,770 1,735,204
General and administrative 837,670 939,174 700,460
Restructuring (Note 3) 1,676,000 -- --
- ------------------------------------------- ------------ ------------ ------------
Total expenses 10,972,273 9,533,858 7,866,904
- ------------------------------------------- ------------ ------------ ------------
Income (Loss) From Operations (4,986,593) 551,193 88,461
Interest Income -- 47,890 24,969
Interest Expense (344,871) (51,412) --
Gain on Sale of Land (Note 3) -- 1,147,094 --
Gain on Sale of Product Line (Note 3) -- -- 344,400
- ------------------------------------------- ------------ ------------ ------------
Income (Loss) Before Income Taxes (5,331,464) 1,694,765 457,830
Income Tax Provision (Benefit) (1,813,000) 578,000 168,000
- ------------------------------------------- ------------ ------------ ------------
Net Income (Loss) $ (3,518,464) $ 1,116,765 $ 289,830
- ------------------------------------------- ------------ ------------ ------------
Net Income (Loss) Per Common Share:
Basic $ (2.82) $ 0.80 $ 0.20
Diluted (2.82) 0.79 0.19
Weighted Average Common Shares Outstanding:
Basic 1,246,530 1,391,145 1,444,000
Diluted 1,246,530 1,418,376 1,492,236
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Foreign
------------ Paid-In Currency Retained
Shares Amount Capital Translation Earnings Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 1,424,523 $ 712,262 $ 54,862 $ 8,953 $ 6,418,712 $ 7,194,789
Stock options exercised 27,031 $ 13,515 $ 75,453 -- -- 88,968
Foreign currency translation -- -- -- 8,863 -- 8,863
Net income -- -- -- -- 289,830 289,830
Dividends -- -- -- -- (306,996) (306,996)
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 1,451,554 725,777 130,315 17,816 6,401,546 7,275,454
Stock options exercised 56,813 28,407 147,106 -- -- 175,513
Foreign currency translation -- -- -- 21,936 -- 21,936
Stock repurchase (296,899) (148,450) 29,690 -- (1,413,238) (1,531,998)
Net income -- -- -- -- 1,116,765 1,116,765
Dividends -- -- -- -- (541,199) (541,199)
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 1,211,468 605,734 307,111 39,752 5,563,874 6,516,471
Stock options exercised 32,030 16,014 210,385 -- -- 226,399
Employee stock purchase plan 22,839 11,420 74,410 -- -- 85,830
Foreign currency translation -- -- -- 52,345 -- 52,345
Net loss -- -- -- -- (3,518,464) (3,518,464)
Dividends -- -- -- -- (144,087) (144,087)
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30 1998 1,266,337 $ 633,168 $ 591,906 $ 92,097 $ 1,901,323 $ 3,218,494
========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30 1998 1997 1996
- ---------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $(3,518,464) $ 1,116,765 $ 289,830
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 675,709 529,876 463,429
Deferred income taxes (918,000) (26,000) (2,000)
Gain on sale of land -- (1,147,094) --
Gain on sale of product line -- -- (344,400)
Changes in current operating elements:
Accounts receivable, net 1,081,796 (1,612,485) 1,781,093
Inventories 542,673 (1,111,342) (852,042)
Prepayments (24,319) (28,155) (66,201)
Accounts payable and accrued liabilities (398,043) 353,554 (736,333)
Deferred revenues 623,196 -- --
Restructuring reserves 602,723 -- --
Income taxes payable (receivable) (1,366,980) 330,272 (142,588)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (2,699,709) (1,594,609) 390,788
- ---------------------------------------------------------------------- ----------- ----------- -----------
Investing Activities:
Proceeds from sale of land -- 1,529,543 --
Proceeds from sale of product line -- -- 1,000,000
Property and equipment purchases (489,303) (921,032) (650,352)
Other 4,343 (6,472) 2,312
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (484,960) 602,039 351,960
- ---------------------------------------------------------------------- ----------- ----------- -----------
Financing Activities:
Borrowings under line of credit 5,534,002 1,665,998 --
Payments on line of credit (3,666,000) (200,000) --
Issuance of common stock 312,229 175,513 88,968
Repurchase of common stock -- (765,998) --
Cash dividends paid (144,087) (541,199) (306,996)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 2,036,144 334,314 (218,028)
- ---------------------------------------------------------------------- ----------- ----------- -----------
Foreign Currency Translation 52,345 21,936 8,863
- ---------------------------------------------------------------------- ----------- ----------- -----------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (1,096,180) (636,320) 533,583
Beginning of year 1,204,827 1,841,147 1,307,564
- ---------------------------------------------------------------------- ----------- ----------- -----------
End of year $ 108,647 $ 1,204,827 $ 1,841,147
====================================================================== =========== =========== ===========
Supplemental Cash Flow Information:
Non-cash financing activity:
Repurchase of common stock through
issuance of note payable $ -- $ 766,000 $ --
Cash paid for:
Interest $ 287,598 $ 29,636 $ --
Income taxes $ 31,000 $ 161,000 $ 356,000
====================================================================== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
Research, Incorporated and its wholly owned subsidiary, Research Incorporation
Limited (collectively, the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the Company's
Subsidiary are translated into U.S. dollars using current exchange rates at the
end of the period. Statements of operations items are translated at average
exchange rates prevailing during the period.
CASH & CASH EQUIVALENTS - Cash equivalents represent money market investments
that have an original maturity of three months or less. Cash and cash
equivalents are recorded at cost, which approximates fair value.
ACCOUNTS RECEIVABLE - Accounts receivable consisted of the following at
September 30:
1998 1997
- --------------------------------------------------------------------
Trade receivables, net $2,646,772 $3,739,741
Costs in excess of billing
on percentage-of-completion
contracts 250,731 239,558
- --------------------------------------------------------------------
Total $2,897,503 $3,979,299
====================================================================
INVENTORIES - Inventories are stated at the lower of first-in, first-out, cost
or market and include direct labor costs, materials and overhead. Inventories
consisted of the following at September 30:
1998 1997
- --------------------------------------------------------------------
Manufactured subassemblies
and purchased parts $2,228,521 $3,070,262
Work in process 1,714,636 1,415,568
- --------------------------------------------------------------------
Total $3,943,157 $4,485,830
====================================================================
DEPRECIATION - Depreciation of property and equipment is computed principally
using accelerated methods for both financial and income tax reporting purposes.
Depreciation is charged to operations over the estimated useful lives of the
property and equipment as follows:
Years
- --------------------------------------------------------------------
Land improvements 20
Building 33
Machinery and equipment 3 to 10
====================================================================
REVENUE RECOGNITION - Sales and related cost of sales are recorded at the time
of shipment, except for system contracts, which are recognized on a
percentage-of-completion basis. Revenues on such contracts are recognized as the
work progresses, based on the estimated gross profit for each contract.
When a loss is anticipated on a contract, the full amount of the loss is
provided currently.
SIGNIFICANT CUSTOMERS - During fiscal 1998 the Company had two customers that
accounted for 13% and 10% of net sales. In fiscal 1997 the Company had two
customers that accounted for 19% and 12% of net sales, while in fiscal 1996 one
customer accounted for 11% of net sales.
During fiscal 1998 the Company has two customers that represented 12% and 11% of
net accounts receivable. In fiscal 1997 the Company had two customers that
represented 20% and 10% of net accounts receivables, while in fiscal 1996 one
customer represented 10% of net accounts receivables.
23
<PAGE>
WARRANTIES - The Surface Mount Technology (SMT) products are under warranty
against defects in material and workmanship for a two-year period with an
extended warranty on three components. The Company's other products are
generally under warranty for a one-year period. Estimated warranty costs are
accrued in the same period as products are shipped. An analysis of reserves for
product warranties is performed on a quarterly basis by reviewing the status of
new product introductions, trends of warranty expense by product, and internal
management information to identify known or potential defects and the estimated
warranty exposure.
INCOME TAXES - Deferred income tax assets or liabilities are recognized for the
differences between financial and income tax reporting basis of assets and
liabilities based on enacted tax rates and laws.
USE OF ESTIMATES - The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Ultimate results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting Comprehensive Income,"
issued in June 1997 and effective for fiscal years beginning after December 15,
1997, requires the Company to report and display comprehensive income and its
components. Comprehensive income is defined as changes in equity of a business
enterprise during a period except those resulting from investments by owners and
distributions to owners. The Company will adopt SFAS No. 130 in the first
quarter of fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information, "will be effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires disclosure of business and geographic segments in
the consolidated financial statements of the Company. The Company will adopt
SFAS No. 131 in fiscal 1999 and is currently analyzing the impact it will have
on the disclosures in its financial statements.
2. DEBT OBLIGATIONS:
LINE OF CREDIT - During fiscal 1998, the Company had a $5,000,000 secured bank
line of credit which carried an interest rate equal to the bank's prime rate
(8.25%) at September 30, 1998. The line is secured by substantially all of the
Company's assets. At September 30, 1998, and 1997 the Company had borrowings
outstanding of $4,100,000 and $1,466,000 respectively. The Company was not in
compliance with certain net worth, debt to equity and net income covenants at
September 30, 1998 and has received a waiver of those covenants from its lender.
NOTE PAYABLE - At September 30, 1997, the Company had a $766,000 note payable
with interest at a rate of 8.5%. The note was paid in January 1998.
NEW CREDIT FACILITY APPROVED SUBSEQUENT TO SEPTEMBER 30, 1998 - On December 17,
1998, the Company signed a new three-year loan and security agreement with a
bank. The new agreement provides for total borrowings of up to $8 million
subject to lending formulas based on eligible receivables, inventories, certain
long-term assets and other terms specified in the agreement. This new credit
facility consists of a line of credit with interest charged at 2.25% above prime
and four term loans with interest charged initially at 2.75% above prime. The
agreement contains certain restrictive covenants and any outstanding borrowings
are secured by substantially all of the Company's assets. The Company expects to
close and draw on the new loan by January 29, 1999.
3. NONRECURRING GAINS AND LOSSES:
SALE OF LAND - During fiscal 1997, the Company sold a parcel of undeveloped land
for $1,530,000. The net gain recognized on the sale was $1,147,000 and is shown
as Gain on Sale of Land in the accompanying Consolidated Statements of
Operations.
SALE OF PRODUCT LINE - During fiscal 1996, the Company sold its Dimension
product line, including associated equipment, for a total sales price of
$1,000,000. The net gain recognized on the sale was approximately $344,000 and
is shown as Gain on Sale of Product Line in the accompanying Consolidated
Statements of Operations. An agreement was also signed with the buyer allowing
the Company to purchase the Dimension product on a discounted basis for a
minimum of three years.
24
<PAGE>
RESTRUCTURING - During fiscal 1998 the Company announced the realignment of its
business due to industry conditions in capital equipment markets and continued
pressure on the electronics industry as the ongoing Asian economic turmoil
affected capital equipment expenditures of manufacturers around the world.
In February the Company consolidated the resources of its Control Systems
business into the Thermal Solutions Division. The Control Systems, which dealt
primarily with Asian glass manufacturers, contributed less than 5 percent of
sales in fiscal 1997. In July, the Company announced additional workforce
reductions, mainly in manufacturing and support areas, and these were
accomplished primarily through a voluntary layoff. The total workforce
reductions were 25%. Costs associated with the restructuring are reflected in
the statement of operations and total $1,676,000, primarily for severance costs.
Additionally, the Company has written down inventory by $697,000 to reflect
exiting certain lines of product and excess inventory. This inventory change has
been included in cost of goods sold.
4. STOCKHOLDERS' EQUITY:
EARNINGS PER SHARE DATA - In the fiscal year ended September 30, 1998, the
Company adopted SFAS No. 128 "Earnings per Share, " which requires disclosure of
basic earnings per share ("EPS") and diluted EPS, which replaces the former
primary EPS and fully diluted EPS. Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed similarly to EPS as previously reported except
that, when applying the treasury stock method to common equivalent shares, the
Company must use its average share price for the period rather than the more
dilutive "greater of the average share price or end-of-period share price."
As a result of the adoption of SFAS No. 128, the Company's reported earnings per
share for all prior periods were restated. The effect of this accounting change
on reported EPS data is as follows:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary EPS as reported $ (2.82) $ .79 $ .19
Effect of SFAS No. 128 .00 .01 .01
------------------------------------------------
Basic EPS as restated $ (2.82) $ .80 $ .20
================================================
Fully diluted EPS as reported $ (2.82) $ .77 $ .19
Effect of SFAS No. 128 .00 .02 .00
------------------------------------------------
Diluted EPS as restated $ (2.82) $ .79 $ .19
================================================
</TABLE>
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
Years Ended September 30, (In thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (3,518) $ 1,117 $ 290
================================================
Weighted average common shares outstanding - Basic 1,247 1,391 1,444
Effect of dilutive securities:
Stock option plans 0 27 48
------------------------------------------------
Weighted average common shares outstanding - Diluted 1,247 1,418 1,492
================================================
Net income (loss) per share - Basic $ (2.82) $ .80 $ .20
================================================
Net income (loss) per share - Diluted $ (2.82) $ .79 $ .19
================================================
</TABLE>
STOCK SPLIT - On November 5, 1997, the Company's Board of Directors approved a
five-for-four stock split effected in the form of a stock dividend. The stock
split has been retroactively reflected in the accompanying consolidated
financial statements and related notes. All share and per share data have been
restated to reflect the stock split.
STOCK REPURCHASE - On May 28, 1997, the Company repurchased 237,519 shares of
common stock at a price of $6.45 per share from a major stockholder through the
issuance of a note payable to the stockholder and borrowing under the Company's
line-of-credit facility.
STOCK-BASED COMPENSATION - The Company has a stock option plan (the Plan). A
total of 210,000 shares or common stock have been reserved for issuance to
directors, officers, and key employees. Stock options have been granted at their
fair market value as determined by the Board of Directors at the date of grant.
The stock options
25
<PAGE>
expire after five years from the date of grant and are exercisable at a rate of
25% per year on a cumulative basis, beginning one year after the date of grant.
Information regarding stock options is shown below for the year ended September
30:
<TABLE>
<CAPTION>
1998 1997 1996
AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning 154,063 $4.74 140,938 $ 4.14 140,625 $ 3.50
Granted 37,000 6.63 73,750 4.58 35,625 6.11
Exercised (32,030) 4.20 (56,813) 3.09 (27,031) 3.35
Expired -- -- (2,875) 3.97 -- --
Canceled (7,501) 4.78 (938) 4.93 (8,281) 4.67
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end 151,532 $5.35 154,063 $ 4.74 140,938 $ 4.14
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end 49,354 $5.02 43,125 $ 4.39 76,250 $ 3.29
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $2.11 $ .74 $ 1.40
====================================================================================================================================
</TABLE>
The Company accounts for the options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the options
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per common share would have been the following pro forma
amounts for the year ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $(3,518,464) $1,116,765 $289,830
Pro forma $(3,550,431) $1,096,824 $279,852
Net income (loss) per common share-diluted:
As reported $(2.82) $.79 $.19
Pro forma $(2.85) $.77 $.19
==================================================================================================
</TABLE>
The fair market value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used for grants in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Assumptions as of the grant date 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.41% 5.89% 5.51%
Expected lives 5.00 5.00 5.00
Expected volatility 47% 38% 43%
==================================================================================================
</TABLE>
Options outstanding at September 30, 1998, have an exercise price ranging
between $4.00 and $6.625.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1997, the Shareholders approved an Employee Stock Purchase Plan.
Under the terms of the plan, employees may purchase stock at 85% of Market Price
at the beginning or end of a six month phase; whichever price is lower. There
were 100,000 shares authorized for this plan. As of September 30, 1998, 22,975
shares have been issued.
5. INCOME TAXES:
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal $(749,000) $599,000 $201,000
Current state 2,000 2,000 2,000
Foreign -- 3,000 (33,000)
- --------------------------------------------------------------------------------------------------
(747,000) 604,000 170,000
Deferred income taxes (1,066,000) (26,000) (2,000)
- --------------------------------------------------------------------------------------------------
Income tax provision (benefit) $(1,813,000) $578,000 $168,000
==================================================================================================
</TABLE>
26
<PAGE>
A reconciliation of the statutory federal rate to the effective tax rate is as
follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal rate (34%) 34% 34%
State taxes, net of federal
income tax provision - - -
Other, net - - 3
- --------------------------------------------------------------------------------
Effective tax rate (34%) 34% 37%
================================================================================
The Company has recorded the following net deferred taxes:
As of September 30 1998 1997
- --------------------------------------------------------------------------------
Reserves and other accruals $241,000 $376,000
Net operating loss carryforward 194,000 --
Restructuring reserves 102,000 --
- --------------------------------------------------------------------------------
Total current deferred taxes 537,000 376,000
- --------------------------------------------------------------------------------
Net operating loss carryforward 466,000 --
Depreciation and amortization (146,000) (148,000)
Restructuring reserve 306,000 --
Reserves and other accruals 160,000 29,000
- --------------------------------------------------------------------------------
Total noncurrent deferred taxes 786,000 (119,000)
- --------------------------------------------------------------------------------
Net deferred taxes $1,323,000 $257,000
================================================================================
The Company has a net operating loss carryforward of $1,932,000 as of September
30, 1998.
6. RETIREMENT BENEFITS:
The Company has a profit sharing retirement plan that provides deferred
compensation benefits for eligible employees. The annual contribution to the
plan is discretionary and is determined in accordance with policies established
by the Board of Directors. The Board of Directors authorized contributions of
$186,000, $232,000, and $160,000 for fiscal 1998, 1997 and 1996, respectively.
Contributions for fiscal 1998 and 1996 included 401(k), while 1997 included both
401(k) and discretionary profit sharing.
7. FOREIGN SALES:
Export sales to customers in various foreign countries totaled $4,811,000,
$11,174,000 and $6,976,000 in fiscal 1998, 1997 and 1996, respectively. Sales to
customers in Asia totaled $1,789,000, $3,709,000 and $4,542,000 in fiscal 1998,
1997 and 1996, respectively. Sales to customers in Latin America totaled
$1,030,000, $3,990,000 and $613,000 in fiscal 1998, 1997, and 1996,
respectively. Sales to European customer were $1,696,000, $2,445,000 and
$1,042,000 in fiscal 1998, 1997 and 1996, respectively
1998 1997 1996
- --------------------------------------------------------------------------------
Asia $ 1,789 $ 3,709 $ 4,542
Latin America 1,030 3,990 613
Europe 1,696 2,445 1,042
Other 296 1,030 779
- --------------------------------------------------------------------------------
Total $ 4,811 $ 11,174 $ 6,976
================================================================================
27
<PAGE>
8 UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th 1998
1998 Quarterly Results Quarter Quarter Quarter Quarter Total
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Operations:
Net sales $ 4,868 $ 3,215 $ 4,308 $ 4,340 $ 16,731
Gross profit 2,315 1,000 1,076 1,595 5,986
Loss before income taxes (265) (2,211) (2,370) (485) (5,331)
Net loss $ (180) $ (1,548) $ (1,599) $ (191) $ (3,518)
Earnings per Share:
Basic $ (.15) $ (1.24) $ (1.28) $ (.15) $ (2.82)
Diluted (.15) (1.24) (1.28) (.15) (2.82)
===================================================================================================
<CAPTION>
1st 2nd 3rd 4th 1997
1997 Quarterly Results Quarter Quarter Quarter Quarter Total
- ------------------------------- ---------- ---------- ---------- ---------- ----------
Consolidated Operations:
Net sales $ 4,873 $ 5,816 $ 5,622 $ 6,532 $ 22,843
Gross profit 2,063 2,680 2,475 2,867 10,085
Gain from sale of land 1,147 -- -- -- 1,147
Income before income taxes 1,102 249 114 230 1,695
Net Income $ 686 $ 153 $ 69 $ 209 $ 1,117
Earnings per Share:
Basic $ .47 $ .10 $ .05 $ .17 $ .80
Diluted .47 .10 .05 .16 .79
===================================================================================================
</TABLE>
28
<PAGE>
RESEARCH, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Balance,
Beginning End of
of Period Additions Deductions Period
----------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts (1):
Year ended September 30, 1996 $ 150,000 $ 5,480 $ (5,480) 150,000
Year ended September 30, 1997 150,000 12,563 (12,563) 150,000
Year ended September 30, 1998 150,000 13,116 (13,116) 150,000
Restructuring reserve (2):
Year ended September 30, 1996 $ -- $ -- $ -- $ --
Year ended September 30, 1997 -- -- -- --
Year ended September 30, 1998 -- 1,676,000 (1,073,277) 602,723
</TABLE>
(1) Doubtful account deductions represent amounts determined to be
uncollectible and charged against the reserve net of collections on
accounts previously written off.
(2) Restructuring reserve deduction represent amounts actually paid for
restructuring costs.
29
Exhibit 4.3
Norwest Bank Minnesota,
National Association Waiver of Covenant and Credit Agreement
- ------------------------------------------------------------------
Re: Waiver of Covenant Defaults under Credit Agreement dated October 13, 1997,
as amended by the First Amendment dated May 13, 1998 (as amended, the
"Agreement"), between Norwest Bank Minnesota, N.A. ("Norwest") and
Research, Incorporated ("Borrower").
Norwest agrees to waive the violations of the covenants outlined below for the
fiscal year ending September 30, 1998:
7.2(a) Tangible Net Worth - Maintain a minimum Tangible Net Worth of at least
$5,000,000 as of the end of each fiscal quarter, through and including
June 30, 1998, of at least $6,000,000 as of the end of the fiscal year
ending September 30, 1998, and the end of each fiscal quarter
thereafter;
7.2(b) Total Liabilities to Net Worth - Maintain a ratio of total liabilities
to Tangible Net Worth of less than 1.3 to 1.0 as of the end of each
fiscal quarter, through and including June 30, 1998, and of less than
1.3 to 1.0 as of the end of the fiscal year ending September 30, 1998,
and the end of each fiscal quarter thereafter;
7.2(c) Net Profit - Achieve a minimum pre-tax profit of $750,000 as of
September 30, 1997, and of $700,000 as of September 30, 1998.
The Borrower has informed the Bank that it has secured replacement financing
through Coast Business Credit and expects to satisfy its loans with Norwest by
early January. In anticipation of the January funding date, Coast Business
Credit has requested that the Borrower execute security agreements and financing
statements in favor of Coast Business Credit. Any grant of a security interest
by the Borrower is a default under Section 7.3(b) of the Agreement. The Borrower
has requested that Norwest waive the default under Section 7.3(b) caused by the
Borrower granting a security interest to Coast Business Credit.
Norwest agrees to waive the default caused by the Borrower granting a security
interest in its assets to Coast Business Credit conditioned upon the Borrower
executing a copy of this letter and delivering it to Norwest, evidencing its
acknowledgment and agreement to the following amendments to the Agreement:
1. Commencing January 1, 1999, the "INTEREST RATE" section of the promissory
note dated October 13, 1997 in the original principal amount of $5,000,000.00
("Revolving Note") shall be amended to read as follows: "The principal balance
outstanding under this Revolving Note shall bear interest at an annual rate
equal to three percent (3.0%) in excess of the Base Rate, floating. "Base Rate"
means the rate of interest established by the Bank from time to time as the
"base" or "prime" rate of interest at its principal office in Minneapolis,
Minnesota."
2. Section 3.2 of the Agreement is hereby deleted.
3. If the Revolving Note is not paid in full by its January 31, 1999 maturity
date a $25,000 fee will automatically be included as additional indebtedness due
and owing under the Revolving Note. The inclusion of the fee described herein
shall not preclude or limit the holder of the Revolving Note from demanding
payment of the Revolving Note at any time and for any reason without further
notice.
4. The Borrower and Coast Business Credit shall execute and deliver to Norwest a
Debt Subordination Agreement, in a form acceptable to Norwest, subordinating all
indebtedness owed by the Borrower to Coast Business Credit to any indebtedness
owed by the Borrower to Norwest.
The waivers by Norwest set forth herein extend only to the covenants outlined
above and only for the period described above. All other terms and conditions of
the Agreement and related documents remain in full force and effect. These
waivers are subject to full repayment by January 29, 1999 of all obligations
currently owed by the Borrower to Norwest. If this condition is not met or if it
becomes apparent that this condition will not be met, Norwest reserves all of
its rights and remedies as described in the Agreement and related documents.
NORWEST BANK MINNESOTA, N.A.
By: /s/ Stephen G. Bishop
- --------------------------
Its: Vice President
December 17, 1998
RESEARCH, INC.
By: /s/ Richard L Grose
- ------------------------
Its: Treasurer
December 17, 1998
EXHIBIT 4.4
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
by and between
RESEARCH, INCORPORATED
as Borrower
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
as Lender
Dated as of December 17, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. DEFINITIONS...................................................1
Account Debtor................................................1
Affiliate.....................................................1
Audit.........................................................1
Borrower..................................................... 1
Borrower's Address............................................1
Business Day..................................................1
Change of Control.............................................1
Closing Date..................................................1
Coast.........................................................1
Code..........................................................1
Collateral....................................................1
Credit Limit..................................................1
Default.......................................................2
Deposit Account...............................................2
Dollars or $..................................................2
Early Termination Fee.........................................2
EBIT..........................................................2
Eligible Foreign Receivables..................................2
Eligible Inventory............................................2
Eligible Receivables..........................................2
Eligible UK Receivables.......................................3
Equipment.....................................................3
Equipment Acquisition Loans...................................3
Event of Default..............................................4
GAAP..........................................................4
General Intangibles...........................................4
Inventory.....................................................4
Inventory Loans...............................................4
Investment Property...........................................4
Loan Documents................................................4
Loans.........................................................4
Material Adverse Effect.......................................4
Maturity Date.................................................4
Maximum Dollar Amount.........................................4
Minimum Monthly Interest......................................4
Obligations...................................................4
Permitted Liens...............................................5
Person........................................................5
Prime Rate....................................................5
Real Property.................................................5
Receivable Loans..............................................5
Receivables...................................................5
Renewal Date..................................................5
Research Limited..............................................6
Solvent.......................................................6
Term Loan.....................................................6
Year 2000 Problem.............................................6
Other Terms...................................................6
2. CREDIT FACILITIES.............................................6
2.1 Loans................................................6
3. INTEREST AND FEES.............................................6
3.1 Interest.............................................6
3.2 Fees.................................................6
4. SECURITY INTEREST.............................................6
5. CONDITIONS PRECEDENT..........................................7
5.1 Status of Accounts at Closing........................7
5.2 Minimum Availability.................................7
5.3 Landlord Waiver......................................7
5.4 Real Property........................................7
5.5 Executed Agreement...................................7
5.6 Opinion of Borrower's Counsel........................7
5.7 Priority of Coast's Liens............................7
5.8 Insurance............................................7
5.9 Borrower's Existence.................................7
5.10 Organizational Documents.............................7
5.11 Taxes................................................8
5.12 Due Diligence........................................8
5.13 Year 2000 Problem Assessment Certificate.............8
5.14 Other Documents and Agreements.......................8
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.....8
6.1 Existence and Authority..............................8
6.2 Name; Trade Names and Styles.........................8
6.3 Place of Business; Location of Collateral............8
6.4 Title to Collateral; Permitted Liens.................8
6.5 Maintenance of Collateral............................9
6.6 Books and Records....................................9
6.7 Financial Condition, Statements and Reports..........9
6.8 Tax Returns and Payments; Pension Contributions......9
6.9 Compliance with Law..................................9
6.10 Litigation...........................................9
6.11 Use of Proceeds.....................................10
6.12 Year 2000 Compliance................................10
7. RECEIVABLES..................................................10
7.1 Representations Relating to Receivables.............10
7.2 Representations Relating to Documents and Legal
Compliance.........................................10
7.3 Schedules and Documents relating to Receivables.....10
7.4 Collection of Receivables...........................10
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
7.5 Remittance of Proceeds..............................11
7.6 Disputes............................................11
7.7 Returns.............................................11
7.8 Verification........................................11
7.9 No Liability........................................11
8. ADDITIONAL DUTIES OF THE BORROWER............................11
8.1 Financial and Other Covenants.......................11
8.2 Insurance...........................................11
8.3 Reports.............................................12
8.4 Access to Collateral, Books and Records.............12
8.5 Negative Covenants..................................12
8.6 Litigation Cooperation..............................13
8.7 Further Assurances..................................13
9. TERM.........................................................13
9.1 Maturity Date.......................................13
9.2 Early Termination...................................13
9.3 Payment of Obligations..............................13
10. EVENTS OF DEFAULT AND REMEDIES...............................13
10.1 Events of Default...................................13
10.2 Remedies............................................15
10.3 Standards for Determining Commercial Reasonableness.16
10.4 Power of Attorney...................................16
10.5 Application of Proceeds.............................17
10.6 Remedies Cumulative.................................18
11. GENERAL PROVISIONS...........................................18
11.1 Interest Computation................................18
11.2 Application of Payments.............................18
11.3 Charges to Accounts.................................18
11.4 Monthly Accountings.................................18
11.5 Notices.............................................18
11.6 Severability........................................18
11.7 Integration.........................................19
11.8 Waivers.............................................19
11.9 No Liability for Ordinary Negligence................19
11.10 Amendment...........................................19
11.11 Time of Essence.....................................19
11.12 Attorneys Fees, Costs and Charges...................19
11.13 Benefit of Agreement................................20
11.14 Publicity...........................................20
11.15 Paragraph Headings; Construction....................20
11.16 Governing Law; Jurisdiction; Venue..................20
11.17 Mutual Waiver of Jury Trial.........................20
ii
<PAGE>
COAST
LOAN AND SECURITY AGREEMENT
Borrower: RESEARCH, INCORPORATED
Address: 6425 Flying Cloud Drive
Eden Prairie, Minnesota 55344
Date: December 17, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower named above (the "Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to
be a part of this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section 1
below.
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General
Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records
and the Collateral.
"Borrower" has the meaning set forth in the introduction to this
Agreement.
"Borrower's Address" has the meaning set forth in the introduction to
this Agreement.
"Business Day" means a day on which Coast is open for business.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
"Closing Date" date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this
Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the
Code.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBIT" means, in any fiscal period, Borrower's consolidated Net Income
(other than extraordinary or non-recurring items of Borrower for such period),
plus (i) the amount of all interest expense and income tax expense of Borrower
for such period, on a consolidated basis, and plus or minus (as the case may be)
(ii) any other non-cash charges which have been added or subtracted, as the case
may be, in calculating Borrower's consolidated net income for such period.
"Eligible Foreign Receivables" means Receivables arising from
Borrower's customers located outside the United States which Coast otherwise
approves for borrowing in its sole and absolute discretion. Without limiting the
foregoing, Coast will consider the following in determining the eligibility of
such receivables: (i) whether the Borrower's goods are shipped backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with a Dun & Bradstreet rating,
or (vi) whether Borrower's goods are shipped to a company that has credit
insurance acceptable to Coast in its discretion. By way of clarification, if
Borrower ships goods to a foreign jurisdiction but the corresponding Receivable
is invoiced to a United States address for the Account Debtor and is in all
other respects an Eligible Receivable, such Eligible Receivable shall be a
standard Eligible Receivable and not a foreign Receivable.
"Eligible Inventory" means Inventory which Coast, in its sole judgment,
deems eligible for borrowing, based on such considerations as Coast may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Coast's discretion,
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of finished goods or raw
material less than one year old, in good, new and salable condition which is not
perishable, not obsolete or unmerchantable, and is not comprised of work in
process, subassemblies, packaging materials or supplies; (ii) meets all
applicable governmental standards; (iii) has been manufactured in compliance
with the Fair Labor Standards Act; (iv) conforms in all respects to the
warranties and representations set forth in this Agreement; (v) is at all times
subject to Coast's duly perfected, first priority security interest; (vi) is
situated at a one of the locations set forth on the Schedule; and (vii) has a
recognized market with significant demand.
"Eligible Receivables" means Borrower's Receivables, Eligible UK
Receivables, and Eligible Foreign Receivables arising in the ordinary course of
Borrower's or Research Limited's business from the sale of goods or rendition of
services, which Coast, in its sole judgment, shall deem eligible for borrowing,
based on such considerations as Coast may from time to time deem appropriate.
Eligible Receivables shall not include the following:
(a) Receivables that the Account Debtor has failed to pay within 90
days of invoice date;
(b) Receivables owed by an Account Debtor or its Affiliates where
twenty five percent (25%) or more of all Receivables owed by that Account Debtor
(or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower or Research Limited, provided that a
Receivable with respect to which the Account Debtor is an independent sales
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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representative of Borrower shall not be considered ineligible by reason of this
clause (c);
(d) Receivables with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Receivables, other than Eligible Foreign Receivables and
Eligible UK Receivables, that are not payable in Dollars or with respect to
which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof;
(f) Receivables with respect to which the Account Debtor is either
(i) the United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which Borrower
has complied, to the satisfaction of Coast, with the Assignment of Claims Act,
31 U.S.C. " 3727), or (ii) any State of the United States (exclusive, however,
of Receivables owed by any State that does not have a statutory counterpart to
the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower or Research Limited, has or has asserted a right of setoff,
has disputed its liability, or has made any claim with respect to the
Receivables;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower and Research Limited exceed twenty five percent
(25%) of all Eligible Receivables, to the extent of the obligations owing by
such Account Debtor in excess of such percentage;
(i) Receivables with respect to which the Account Debtor is subject
to any reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation proceeding, or becomes insolvent, or goes out
of business;
(j) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the services
giving rise to such Receivable have not been performed and accepted by the
Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is located
in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services.
"Eligible UK Receivables" means Receivables of Research Limited that
are (i) invoiced from the United Kingdom for goods shipped from the United
Kingdom; (ii) payable in the United Kingdom in the official currency or
currencies thereof; and (iii) otherwise constitute an Eligible Receivable.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
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"Equipment Acquisition Loans" means the Loans described in Section 2(d)
of the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"Federal Income Tax Receivable Loans" means the Loans described in
Section 2(e) of the Schedule.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, investment property, inventions, designs,
drawings, blueprints, patents, patent applications, trademarks and the goodwill
of the business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Inventory Loans" means the Loans described in Section 2(b) of the
Schedule.
"Investment Property" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"Loan Documents" means this Agreement, the agreements and documents
listed on Section 5 of the Schedule, and any other agreement, instrument or
document executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of
the Schedule.
"Net Income"" means Borrower's yearly net income as determined in
accordance with GAAP.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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document, whether arising from an extension of credit, opening of a letter of
credit, banker's acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by
assignment and any participation by Coast in Borrower's debts owing to others),
absolute or contingent, due or to become due, including, without limitation, all
interest, charges, expenses, fees, attorneys' fees (including attorneys' fees
and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and Coast.
"Permitted Liens" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general
partnership, limited partnership, limited liability partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, government, or any agency or political division
thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute
therefor of the Bank of America NT & SA whether or not that rate is the lowest
interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal on the first business day of the applicable month, as
the base rate on corporate loans at large U.S. money center commercial banks.
"Real Estate Term Loan" means the Loan described in Section 2(f) of the
Schedule.
"Real Property" means all real property owned by Borrower and located
in the State of Minnesota.
"Receivable Loans" means the Loans described in Section 2(a) of the
Schedule.
"Receivables" means all of Borrower's and Research Limited's now owned
and hereafter acquired accounts (whether or not earned by performance), letters
of credit, contract rights, chattel paper, instruments, securities, documents,
securities accounts, security entitlements, commodity contracts, commodity
accounts, investment property and all other forms of obligations at any time
owing
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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to Borrower or Research Limited, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower or Research Limited, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is
renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that
this Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal
of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Research Limited" means Research Incorporation Limited, a company
organized under the laws of the United Kingdom.
"Solvent" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Tangible Net Worth" means consolidated stockholder's equity plus
subordinated debt otherwise permitted hereunder, less, goodwill, patents,
trademarks, copyrights, franchises, formulas, leasehold interests, leasehold
improvements, non-compete agreements, engineering plans, deferred tax benefits,
organization costs, prepaid items and any other assets of Borrower that would be
treated as intangible assets on Borrower's balance sheet prepared in accordance
with GAAP.
"Term Loan" means the Loans described in Section 2(c) of the Schedule.
"Year 2000 Problem" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms" All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
and in percentages to be determined by Coast in its good faith discretion, up to
the Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates, including, without limitation, its advance rates based upon Eligible
Receivables or Eligible Inventory, without declaring a Default or an Event of
Default if it determines that there has occurred a Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during
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the term of this Agreement with respect to the Receivable Loans and the
Inventory Loans in the amount set forth on the Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast. All fees
shall be deemed fully earned on the Closing Date and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when
due, Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the
satisfaction, in the sole discretion of Coast, at or prior to the first advance
of funds hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and
unpaid ninety (90) days past its invoice date except for such accounts payable
being contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 LANDLORD WAIVER. Coast shall have received duly executed
(a) landlord waivers and access agreements in form and substance
satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed
appropriate by Coast, in form for recording in the appropriate recording office,
with respect to all leased locations where Borrower maintains any inventory or
equipment.
(b) mortgagee waivers in form and substance satisfactory to Coast,
in Coast's sole and absolute discretion, and when deemed appropriate by Coast,
in form for recording in the appropriate recording office, with respect to all
mortgaged locations where Borrower maintains any inventory or equipment.
(c) warehouse waivers in form and substance satisfactory to Coast,
in Coast's sole and absolute discretion, and when deemed appropriate by Coast,
in form for recording in the appropriate recording office, with respect to all
warehouse locations where Borrower maintains any inventory or equipment.
5.4 REAL PROPERTY. Coast shall have received duly executed mortgages
and/or deeds of trust in form and substance satisfactory to Coast, in Coast's
sole and absolute discretion, in form for recording in the appropriate recording
office, with respect to the Real Property.
5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
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5.8 INSURANCE. Coast shall have received copies of the insurance
binders or certificates evidencing Borrower's compliance with Section 8.2
hereof, including lender's loss payee endorsements.
5.9 BORROWER'S EXISTENCE. Coast shall have received copies of
Borrower's articles or certificate of incorporation and all amendments thereto,
and a Certificate of Good Standing, each certified by the Secretary of State of
the state of Borrower's organization, and dated a recent date prior to the
Closing Date, and Coast shall have received Certificates of Foreign
Qualification for Borrower from the Secretary of State of each state wherein the
failure to be so qualified could have a Material Adverse Effect.
5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.11 TAXES. Coast shall have received evidence from Borrower that
Borrower has complied with all tax withholding and Internal Revenue Service
regulations, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.13 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have
received a certificate from the relevant officer of Borrower to the effect that,
as the result of a comprehensive assessment undertaken by Borrower by Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
would cause Borrower to reasonably believe that the Year 2000 Problem will cause
a Material Adverse Effect.
5.14 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such
other agreements, instruments and documents as Coast may require in connection
with the transactions contemplated hereby, all in form and substance
satisfactory to Coast in Coast's sole and absolute discretion, and in form for
filing in the appropriate filing office, including, but not limited to, those
documents listed in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make
Loans, Borrower represents and warrants to Coast as follows, and Borrower
covenants that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
articles or certificate of incorporation or Borrower's by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
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6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture. Borrower is not and
will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Coast, use its best efforts to cause such
third party to execute and deliver to Coast, in form acceptable to Coast, such
waivers and subordinations as Coast shall specify, so as to ensure that Coast's
rights in the Collateral are, and will continue to be, superior to the rights of
any such third party. Borrower will keep in full force and effect, and will
comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements now or in the future delivered to Coast have been, and will be,
prepared in conformity with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year-end
adjustments) and now and in the future will fairly reflect the financial
condition of Borrower, at the times and for the periods therein stated. Between
the last date covered by any such statement provided to Coast and the date
hereof, there has been no Material Adverse Effect. Borrower is now and will
continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and will
timely pay, all foreign, federal, state and local taxes, assessments, deposits
and contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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service providing for the automatic deposit of all payroll taxes payable by
Borrower.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in a Material
Adverse Effect. Borrower will promptly inform Coast in writing of any claim,
proceeding, litigation or investigation in the future threatened or instituted
by or against Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely
for lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan 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."
6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers, Borrower represents and warrants that Borrower knows of
no facts that would cause Borrower to reasonably believe that the Year 2000
Problem will cause a Material Adverse Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's or Research Limited's
business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE.
Borrower represents and warrants to Coast as follows: All statements made and
all unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's and Research
Limited's books and records are and shall be genuine and in all respects what
they purport to be. All sales and other transactions underlying or giving rise
to each Receivable shall fully comply with all applicable laws and governmental
rules and regulations. All signatures and indorsements on all documents,
instruments, and agreements relating to all Receivables are and shall be
genuine, and all such documents, instruments and agreements are and shall be
legally enforceable in accordance with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's and Research Limited's Receivables, nor shall
Coast's failure to advance or lend against a specific Receivable affect or limit
Coast's security interest and other rights therein. Loan requests received after
10:30 A.M. Los Angeles, California time, will not be considered by Coast until
the next Business Day. Together with each such schedule, or later if requested
by Coast, Borrower shall furnish Coast with copies (or, at Coast's request,
originals) of all contracts, orders, invoices, and other similar documents, and
all original shipping instructions, delivery receipts, bills of lading, and
other evidence of delivery, for any goods the sale or disposition of which gave
rise to such Receivables, and Borrower warrants the genuineness of all of the
foregoing. Borrower shall also furnish to Coast an aged accounts receivable
trial balance in such form and at such intervals as Coast shall request. In
addition,
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Borrower shall deliver to Coast the originals of all instruments, chattel paper,
security agreements, guarantees and other documents and property evidencing or
securing any Receivables, upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Coast with copies of all credit memos as and when requested
by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower and Research Limited shall have
the right to collect all Receivables, unless and until an Event of Default has
occurred. Borrower and Research Limited shall hold all payments on, and proceeds
of, Receivables in trust for Coast, and Borrower shall deliver all such payments
and proceeds to Coast within one (1) Business Day after receipt by Borrower or
two (2) Business Days after receipt by Research Limited, in their original form,
duly endorsed to Coast, to be applied to the Obligations in such order as Coast
shall determine. Coast may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Coast may specify, pursuant to a blocked account agreement
in such form as Coast may specify. Coast or its designee may, at any time,
notify Account Debtors that Coast has been granted a security interest in the
Receivables.
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition
of any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower or two (2) Business Days after receipt by Research Limited,
in their original form, duly endorsed to Coast, to be applied to the Obligations
in such order as Coast shall determine. Borrower agrees that it will not
commingle proceeds of Collateral with any of Borrower's or Research Limited's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (a) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an Event
of Default, settle or adjust disputes or claims directly with Account Debtors
for amounts and upon terms which Coast considers advisable in its reasonable
credit judgment and, in all cases, Coast shall credit Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default and if requested by Coast, Borrower shall (a)
hold the returned Inventory in trust for Coast, (b) segregate all returned
Inventory from all of Borrower's other property, (c) conspicuously label the
returned Inventory as subject to Coast's security interest, and (d) immediately
notify Coast of the return of any Inventory, specifying the reason for such
return, the location and condition of the returned Inventory, and on Coast's
request deliver such returned Inventory to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower, Research Limited, or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's or Research
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Limited's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower or Research Limited (including budgets, sales
projections, operating plans and other financial documentation), as Coast shall
from time to time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but
not less frequently than quarterly and on one (1) Business Day's notice, Coast,
or its agents, shall have the right to perform Audits. Coast shall take
reasonable steps to keep confidential all confidential information obtained in
any Audit, but Coast shall have the right to disclose any such information to
its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena
or other legal process. The Audits shall be at Borrower's expense and the charge
for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day
(or such higher amount as shall represent Coast's then current standard charge
for the same), plus reasonable out-of-pocket expenses. Neither Borrower nor
Research Limited will enter into any agreement with any accounting firm, service
bureau or third party to store Borrower's or Research Limited's books or records
at any location other than, respectively, Borrower's or Research Limited's chief
executive office, without first notifying Coast of the same and obtaining the
written agreement from such accounting firm, service bureau or other third party
to give Coast the same rights with respect to access to books and records and
related rights as Coast has under this Loan Agreement. Borrower shall also take
all necessary steps to assure that Research Limited's and its material
accounting and software, systems and applications, and those of its and Research
Limited's accounting firm, service bureau or any other third party vendor or
supplier, will on a timely basis, adequately and completely address the Year
2000 Problem in all material aspects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior
written consent, do any of the following:
(a) merge or consolidate with another entity, except in a
transaction in which (i) the owners of the Borrower hold at least fifty percent
(50%) of the ownership interest in the surviving entity immediately after such
merger or consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of
business, or (ii) in a transaction or a series of transactions not involving the
payment of an aggregate amount in excess of the amount set forth in Section 8 of
the Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
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(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party unless such party has provided Coast with a waiver in form and
substance satisfactory to Coast in its sole discretion;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis, provided that Borrower may consign
Inventory with an aggregate value of not exceeding $500,000 in the period from
the date hereof through the date 120 days after the Closing Date; and thereafter
not exceeding $200,000 to any one party or $400,000 in the aggregate.
(g) except as set forth in the Schedule with respect to advances to
Research Limited, make any loans of any money or other assets, except (i)
advances to customers or suppliers in the ordinary course of business, (ii)
travel advances, employee relocation loans and other employee loans and advances
in the ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would have
a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section,
other than the sale of Inventory in the ordinary course of business, are only
permitted if no Default or Event of Default is continuing or would occur as a
result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Coast with respect to any Collateral or relating to
Borrower or Research Limited, Borrower shall, without expense to Coast, make
available Borrower and Research Limited and their respective officers,
employees, agents, books and records, to the extent that Coast may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than one hundred twenty (120) days prior to the Maturity Date or
the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination
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and thereafter shall bear interest at a rate equal to the rate applicable to the
Receivable Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Coast's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower, Research Limited, or any of their
respective officers, employees or agents, now or in the future, shall be untrue
or misleading and results in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its or Research Limited's books and records or Collateral as provided in Section
8.4 above, or shall breach any negative covenant set forth in Section 8.5 above;
or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within five (5) Business Days after the
date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower or Research Limited breaches any material contract or
obligation, which has or may reasonably be expected to have a Material Adverse
Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of
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any jurisdiction, now or in the future in effect, which is (i) not timely
controverted, or (ii) not cured by the dismissal thereof within thirty (30) days
after the date commenced; or
(l) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer
or experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
(p) Borrower or Research Limited shall generally not pay its debts
as they become due, or Borrower or Research Limited shall conceal, remove or
transfer any part of its property, with intent to hinder, delay or defraud its
creditors, or make or suffer any transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or
(q) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store or remove any of the Collateral, and remain
on the premises or cause a custodian to remain on the premises in exclusive
control thereof, without charge for so long as Coast deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should Coast seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
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(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge. Coast is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in
its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast (including attorneys' fees and expenses incurred in connection
with bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least five (5) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least five (5) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.
Los Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may
(but is not obligated to) direct any prospective purchaser to ascertain
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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directly from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power
of attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner:
(a) Execute on behalf of Borrower any documents that Coast may, in
its sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim
that relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same rights
of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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incurred in connection therewith (as and when they are incurred and irrespective
of whether suit is brought), at any time asserted against, imposed upon, or
incurred by any of them in connection with or as a result of or related to the
execution, delivery, enforcement, performance, and administration of this
Agreement and any other Loan Documents or the transactions contemplated herein,
and with respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person hereunder with
respect to any Indemnified Liability that a court of competent jurisdiction
finally determines to have resulted from the gross negligence or willful
misconduct of such Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of
any sale of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower or Research Limited, and all of
such rights and remedies are cumulative and none is exclusive. Exercise or
partial exercise by Coast of one or more of its rights or remedies shall not be
deemed an election, nor bar Coast from subsequent exercise or partial exercise
of any other rights or remedies. The failure or delay of Coast to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations,
all checks, wire transfers and other items of payment received by Coast
(including proceeds of Receivables and payment of the Obligations in full) shall
be deemed applied by Coast on account of the Obligations three (3) Business Days
after receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such three (3) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such three (3) Business Days of "clearance" or "float" actually occur,
and shall be deemed to be the equivalent of charging three (3) Business Days of
interest on such collections. This across-the-board three (3) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all
payments with respect to the Obligations may be applied, and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and manner
as Coast shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
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11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in full
force and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Coast, or any
of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast, but nothing herein shall relieve Coast
from liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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limited to, any attorneys' fees and costs (including attorneys' fees and
expenses incurred pursuant to bankruptcy) Coast incurs in order to do the
following: prepare and negotiate this Agreement and the documents relating to
this Agreement; obtain legal advice in connection with this Agreement or
Borrower; enforce, or seek to enforce, any of its rights; prosecute actions
against, or defend actions by, Account Debtors; commence, intervene in, or
defend any action or proceeding; initiate any complaint to be relieved of the
automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy
claim, third-party claim, or other claim; examine, audit, copy, and inspect any
of the Collateral or any of Borrower's or Research Limited's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower or Research Limited. If either Coast or Borrower
files any lawsuit against the other predicated on a breach of this Agreement,
the prevailing party in such action shall be entitled to recover its costs and
attorneys' fees (including attorneys' fees and expenses incurred pursuant to
bankruptcy), including (but not limited to) attorneys' fees and costs incurred
in the enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder without the consent of Borrower. Coast reserves
the right to syndicate all or a portion of the transaction created herein or
sell, assign, transfer, negotiate, or grant participations in all or any part
of, or any interest in Coast's rights and benefits hereunder. In connection with
any such syndication, assignment or participation, Coast may disclose all
documents and information which Coast now or hereafter may disclose all
documents and information which Coast now or hereafter may have relating to
Borrower, Research Limited, or their respective businesses. To the extent that
Coast assigns its rights and obligations hereunder to any third Person, Coast
thereafter shall be released from such assigned obligations to Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only
used in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
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11.17 MUTUAL WAIVER OF JURY TRIAL BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
RESEARCH, INCORPORATED
By
----------------------------------------
President or Vice President
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By
----------------------------------------
Title:
------------------------------------
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COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: RESEARCH, INCORPORATED
ADDRESS: 6425 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
DATE: DECEMBER 17, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-referenced borrower of even date.
================================================================================
SECTION 2. CREDIT FACILITIES
SECTION 2.1 - CREDIT LIMIT:
Loans in a total amount at any time outstanding to Borrower not to exceed the
lesser of a total of Eight Million Dollars ($8,000,000) at any one time
outstanding (the "Maximum Dollar Amount"), or the sum of (a) through (f) below:
(a) Receivable Loans in an amount not to exceed:
(1) 85% of the amount of Eligible Receivables (as defined in
Section 1 of the Agreement) that are not Eligible UK
Receivables, provided that advances against Eligible Foreign
Receivables shall not exceed Two Hundred Fifty Thousand
Dollars ($250,000); plus
(2) 80% of the amount of Borrower's Eligible Receivables that are
Eligible UK Receivables, not to exceed Five Hundred Thousand
Dollars ($500,000).
(b) Inventory Loans in an amount not to exceed the lesser of:
(1) Thirty-five percent (35%) of the value of Borrower's Eligible
Inventory (as defined in Section 1 of the Agreement,
calculated at the lower of cost or market value and determined
on a first in, first out basis); provided that the advance
rate for Eligible Inventory that consists of Inventory
purchased from third parties (vendor Inventory) shall be 25%,
or
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(2) One Million Five Hundred Thousand Dollars ($1,500,000).
Effective April 1, 1999, a sublimit for finished goods of
$100,000 will become effective, plus
(c) Two Term Loans in the total original principal amount not to exceed the
lesser of:
(1) Seventy percent (70%) of the appraised net orderly liquidation
value of Borrower's existing Equipment, provided that Coast
agrees and acknowledges that the appraisal performed by AVS
Corp. indicating a net orderly liquidation value of $907,000
for such Equipment is acceptable; or
(2) Six Hundred Thirty Thousand Dollars ($630,000).
The Term Loan against the value of computers and computer related items
will not exceed the sum of $150,000 and will be repayable in thirty-six
(36) equal monthly installments plus interest. The Term Loan against
Equipment (other than computers and computer-related items) will not
exceed the sum of $480,000 and will be repayable in sixty (60) equal
monthly installments plus interest, commencing one (1) month after the
Closing Date, plus
(d) Equipment Acquisition Loans in minimum advances of One Hundred Thousand
Dollars ($100,000) in a total amount not to exceed the lesser of:
(1) Eighty percent (80%) of the cost of new Equipment (after
subtracting taxes, engineering and installation charges); and
(2) Two Million Dollars ($2,000,000).
Coast shall have no obligation to advance any Equipment Acquisition
Loan to Borrower unless Borrower has satisfactorily demonstrated to
Coast in Coast's sole discretion that the ratio of Borrower's EBIT to
aggregate interest on borrowed money equals or exceeds 1.25:1 measured
on a quarterly basis for the two consecutive quarters prior to the
request for such Equipment Acquisition Loan. Advances for the Equipment
Acquisition Loans shall be amortized over a period of up to thirty-six
(36) months depending on the assets purchased; plus
(e) Federal Income Tax Receivable Loans in an amount not to exceed the
lesser of:
(1) One hundred percent (100%) of the amount of any income tax
refund due and owing to Borrower from the federal government
of the United States of America, provided that (x) such
federal income tax Receivable shall not be subject to offset
or be contingent in any way as verified by an opinion of
Borrower's accounting firm Arthur Anderson LLP in form and
substance satisfactory to Coast in its sole discretion, (y)
such Receivable has been assigned to Coast in form and
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COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
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substance satisfactory to Coast in its sole discretion, and
(z) the federal government of the United States of America has
agreed to deliver the proceeds of such Receivable directly to
Coast or to a lockbox controlled by Coast. to the extent
permitted by law.
(2) Five Hundred Eighty Thousand Dollars ($580,000).
(f) Real Estate Term Loan in an amount not to exceed the lesser of:
(1) Sixty-five percent (65%) of the fair market value of the Real
Property as determined by appraisal performed at Borrower's
expense by an appraiser and otherwise in form and substance
satisfactory to Coast in its sole discretion, provided that
Coast agrees and acknowledges that the appraisal of the Real
Property conducted by Towle Real Estate Company indicating a
fair market value of $2,900,000 for the Real Property is
acceptable; and
(2) One Million Eight Hundred Eighty-five Thousand Dollars
($1,885,000).
The Real Estate Term Loan will be repayable in one hundred eighty (180)
equal monthly installment of principal, commencing one (1) month after
the Closing Date.
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COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
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SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST RATE:
A rate equal to the Prime Rate plus 2.25% per annum for the Receivable Loans,
Inventory Loans, and Income Tax Receivable Loans and a rate equal to the Prime
Rate plus 2.75% per annum for the Term Loan, Equipment Acquisition Loans, and
the Real Estate Term Loan, calculated on the basis of a 360-day year for the
actual number of days elapsed (collectively, the "Standard Rates"), provided
that such rates shall be reduced to, respectively, the Prime Rate plus 1.75% and
the Prime Rate plus 2.25% (collectively, the "Reduced Rates") if Borrower
satisfactorily demonstrates to Coast that Borrower's Net Income exceeds $200,000
in each of two consecutive quarters (provided that no quarter shall be eligible
for such purpose unless it consists of the quarter including the Closing Date or
a later quarter), and provided further that if Coast reduces the interest rate
and the audited year end financials reflect Net Income of less than the $200,000
for the relevant fiscal quarter(s) or if the Net Income for that fiscal year,
spread over the four fiscal quarters, averages less than $200,000 per quarter,
Borrower shall immediately pay to Coast the difference between the interest
which would have been due and owing on the Obligations if the Standard Rates had
been applied rather than the Reduced Rates. The interest rate applicable to all
Loans shall be adjusted monthly as of the first day of each month, and the
interest to be charged for each month shall be based on the highest Prime Rate
in effect during the prior month, but in no event shall the rate of interest
charged on any Loans in any month be less than 9% per annum.
SECTION 3.1 - MINIMUM MONTHLY INTEREST:
Interest on fifty percent (50%) of the Maximum Dollar Amount measured on a daily
basis.
SECTION 3.2 - LOAN FEE:
One Hundred Forty Thousand Dollars ($140,000), such amount being fully earned on
the Closing Date, and payable Eighty Thousand Dollars ($80,000) on the Closing
Date, Forty Thousand Dollars ($40,000) on the first anniversary of the Closing
Date, and Twenty Thousand Dollars ($20,000) on the second anniversary of the
Closing Date.
SECTION 3.2 - FACILITY FEE:
$3,500 per quarter payable on the Closing Date (prorated for any partial quarter
at the beginning of the term of this Agreement) and continuing on the first day
of each quarter thereafter.
SECTION 9.1 - RENEWAL FEE:
0.5% of the Maximum Dollar Amount per year commencing on the third anniversary
of the Closing Date.
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SECTION 9.2 - EARLY TERMINATION FEE:
An amount equal to the greater of (i) an amount equal to all interest due and
payable during the 6 months immediately preceding the effective date of
termination, (ii) an amount equal to the average monthly interest due and
payable based on the greater of the six month monthly interest immediately
preceding the effective date of termination or, if the effective date of
termination is less than 6 months from initial funding, an amount equal to the
average monthly interest multiplied by the number of full or partial months from
the effective date of termination to the Maturity Date will be due and payable,
or (iii) an amount equal to the Minimum Monthly Interest multiplied by the
number of full or partial months from the effective date of termination to the
Maturity Date.
================================================================================
SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM AVAILABILITY:
$300,000 at funding
SECTION 5.14 - OTHER DOCUMENTS AND AGREEMENTS:
1. Secured Guaranty by Research Limited and Security Agreement granting
Coast a first priority perfected security interest in all of the
tangible and intangible assets of Research Limited;
2. An opinion of counsel to Research Limited regarding the due
authorization, execution and enforceability of the documents entered
into by Research Limited in connection with this Agreement;
3. Authorizing resolutions, the organizational documents of Research
Limited and evidence of the good standing and active status thereof in
each jurisdiction where Research Limited conducts business;
4. UCC-1 financing statements, fixture filings and termination statements;
5. Security Agreements (including those covering copyrights, patents and
trademarks);
6. Such other documents and agreements as requested by Coast.
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COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
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SECTION 5.15 - OTHER CONDITIONS:
1. Collections of proceeds of Receivables, including, without limitation,
all Receivables of Research Limited, through a lockbox account
maintained by one or more banks and otherwise in form and substance
satisfactory to Coast in its sole discretion.
2. Borrower shall have a minimum excess availability of $300,000
immediately following the initial funding.
3. Borrower and Research Limited shall not have any accounts payable more
than 90 days past invoice date.
4. Borrower and Research Limited shall have paid and be current with
respect to all applicable taxes and governmental fees and assesments.
5. Borrower and Research Limited shall each have granted to Coast a first
priority lien and security interest on all of their respective tangible
and intangible assets, including intellectual property but excluding
certain leased equipment not included on Borrower's books or in the AVS
Corp. appraisal. Borrower shall cause the collateral assignment to
Coast of all intellectual property owned by any Affiliate and used by
Borrower in connection with its business, including, without
limitation, the MicriFlow patent.
6. Borrower shall have provided to Coast landlord waivers for all
locations where Borrower leases real property, or, in the alternative,
Coast may establish reserves against borrowing availability hereunder
in an amount determined by Coast in its sole discretion.
7. Borrower shall have provided Coast with audited consolidated and
consolidating fiscal year 1998 financial statements showing no material
adverse change from the draft fiscal year 1998 financial statements
provided to Coast by Borrower.
8. Borrower shall have satisfactorily demonstrated to Coast in Coast's
sole discretion that Borrower has adequately reduced its operating
costs and expenses.
9. Coast shall have received an updated environmental report for the Real
Estate performed by an environmental company and otherwise in form and
substance satisfactory to Coast in its sole discretion and showing no
material adverse conditions.
10. Borrower shall have provided Coast with Borrower's first quarter
consolidated and consolidating fiscal year 1999 financial statements
showing no material adverse differences from the projections previously
provided to Coast.
================================================================================
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF BORROWER:
None.
27
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
SECTION 6.2 - PRIOR TRADE NAMES OF BORROWER:
None.
SECTION 6.2 - EXISTING TRADE NAMES OF BORROWER:
Research International.
SECTION 6.3 - OTHER LOCATIONS AND ADDRESSES:
None.
SECTION 6.10 - MATERIAL ADVERSE LITIGATION:
None.
SECTION 6.10 - FUTURE CLAIMS AND LITIGATION:
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving any single claim of Fifty Thousand Dollars ($50,000) or more,
or involving One Hundred Thousand Dollars ($100,000) or more in the aggregate.
================================================================================
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS AND COVENANTS:
1. Borrower shall maintain a Minimum Excess Availability of $100,000 at
all times.
2. Borrower shall not pay dividends to its shareholders in any fiscal year
in excess of 25% of Borrower's annual profits less taxes for such year,
provided that Coast may change or eliminate such covenant in its sole
discretion reasonably exercised based on such considerations as it
considers relevant no sooner than the first anniversary of the Closing
Date.
3. In consideration of Coast advancing Receivable Loans to Borrower based
on Eligible UK Receivables, Borrower agrees to advance to Research
Limited an amount not to exceed 80% of Eligible UK Receivables that are
Eligible Receivables plus $250,000, provided that Borrower may advance
additional sums to Research Limited with the prior written approval of
Coast in its sole discretion.
4. Borrower shall maintain a Tangible Net Worth at all times of no less
than 80% of Borrower's actual Tangible Net Worth on the Closing Date.
SECTION 8.2 - INSURANCE:
Subject to the limitations set forth in Section 8.2 of the Agreement, Coast
shall release to Borrower insurance proceeds with respect to Equipment totaling
less than Fifty Thousand Dollars ($50,000).
28
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
SECTION 8.3 - REPORTING:
Borrower shall provide Coast with the following:
1. Monthly Receivable agings, aged by invoice date and by customer in
alphabetical order, within five (5) days after the end of each month
together with a monthly deferred revenue listing to be sorted by
customer in alphabetical order.
2. Monthly accounts payable agings, aged by invoice date, and outstanding
or held check registers within five (5) days after the end of each
month.
3. Monthly perpetual inventory reports and agings for the Inventory valued
on a first-in, first-out basis at the lower of cost or market (in
accordance with GAAP) or such other inventory reports as are reasonably
requested by Coast, all within ten (10) days after the end of each
month.
4. Monthly internally prepared financial statements, as soon as available,
and in any event within thirty (30) days after the end of each month.
5. Quarterly internally prepared financial statements, as soon as
available, and in any event within forty-five (45) days after the end
of each fiscal quarter of Borrower.
6. Quarterly customer lists, including customer name, address, and phone
number.
7. Annual financial statements, as soon as available, and in any event
within ninety (90) days following the end of Borrower's fiscal year,
containing the unqualified opinion of, and certified by, an independent
certified public accountant acceptable to Coast.
8. Changes to milestone (progress) Receivables and Affiliate Receivables
on the day of the change.
9. Monthly sales reports organized by geographic region.
10. Monthly reports of all inter-company balances and advances between
Borrower and Research Limited.
================================================================================
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE:
The last Business Day of the month three (3) years from the Closing Date,
subject to automatic renewal as provided in Section 9.1 of the Agreement, and
early termination as provided in Section 9.2 of the Agreement.
29
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
Research Incorporation Limited is incorporated in the United Kingdom as a
Private Limited Company. Research International Inc. is incorporated in
Barbados, West Indies as a Foreign Sales Corporation.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statement File No. 33-21699, File No.
33-45386, File No. 33-75256 and File No. 333-39567.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE 10-K FOR THE YEAR
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 109
<SECURITIES> 0
<RECEIVABLES> 3,048
<ALLOWANCES> 150
<INVENTORY> 3,943
<CURRENT-ASSETS> 8,195
<PP&E> 6,874
<DEPRECIATION> 4,482
<TOTAL-ASSETS> 11,373
<CURRENT-LIABILITIES> 8,154
<BONDS> 0
0
0
<COMMON> 633
<OTHER-SE> 2,585
<TOTAL-LIABILITY-AND-EQUITY> 11,373
<SALES> 16,731
<TOTAL-REVENUES> 16,731
<CGS> 10,745
<TOTAL-COSTS> 10,745
<OTHER-EXPENSES> 10,972
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 345
<INCOME-PRETAX> (5,331)
<INCOME-TAX> (1,813)
<INCOME-CONTINUING> (3,518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,518)
<EPS-PRIMARY> (2.82)
<EPS-DILUTED> (2.82)
</TABLE>
