<PAGE>
Form 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-9129
DESIGN AUTOMATION SYSTEMS, INC.
Exact name of Registrant as specified in is charter
TEXAS 75-1657943
State of Incorporation IRS Employer Identification Number
SUITE 370
3200 WILCREST
HOUSTON, TEXAS 77042-3366
713-783-2374
Address and telephone number of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock of the Registrant outstanding at August 13,
1999 was 21,583,986.
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 1-4
Item 2 Management's Discussion and Analysis or Plan of Operation 6
PART II OTHER INFORMATION
Item 2 Changes of Securities and Use of Proceeds 9
Item 6 Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June December
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 169,715 $ 850,925
Account receivable - trade, no allowance for doubtful accounts 4,479,419 4,020,385
Net assets - discontinued operations 81,486 -
Other assets 364,540 144,579
------------ ------------
Total current assets 5,095,160 5,015,889
PROPERTY AND EQUIPMENT, net 195,469 71,480
Goodwill 5,647,102 -
------------ ------------
Total assets $ 10,937,731 $ 5,087,369
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 175,000 $ 1,031,483
Accounts payable 3,858,501 3,649,398
Accounts payable to affiliate 41,186 50,419
Accrued expenses and other current liabilities 1,570,031 386,488
------------ ------------
Total current liabilities 5,644,718 5,117,788
SHAREHOLDERS' EQUITY (DEFICIT) :
Common stock, par value $ .01; 50,000,000 shares authorized;
21,283,986 and 16,560,000 shares issued and outstanding at
June 30, 1999 and December 31, 1998 , respectively 212,840 165,600
Additional paid -in capital 5,408,388 -
Retained earnings (accumulated deficit) (328,215) (196,019)
------------ ------------
Total shareholders' equity (deficit) 5,293,013 (30,419)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 10,937,731 $ 5,087,369
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
1
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 6,696,418 $ 7,612,094 $ 14,371,727 $ 10,769,434
OPERATING EXPENSES:
Cost of revenues 5,881,829 6,697,557 12,775,905 9,517,897
Selling, general and administrative 992,572 546,297 1,736,819 975,309
------------ ------------ ------------ ------------
6,874,401 7,243,854 14,512,724 10,493,206
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (177,983) 368,240 (140,997) 276,228
OTHER INCOME (EXPENSE):
Interest expense (648) (14,876) (648) (27,984)
Interest income 17,438 5,094 28,478 12,835
Other income 11,051 24,031 41,254 74,393
------------ ------------ ------------ ------------
27,841 14,249 69,084 59,244
------------ ------------ ------------ ------------
Income before income taxes and
discontinued operations (150,142) 382,489 (71,913) 335,742
Income taxes 15,260 - (11,040) -
------------ ------------ ------------ ------------
Income from continuing operations (134,882) 382,489 (82,953) 335,742
Discontinued Operations (22,267) - (49,243) -
------------ ------------ ------------ ------------
Net income (loss) $ (157,149) $ 382,489 $ (132,196) $ 335,742
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ (.01) $ .03 $ (.01) $ .02
Discontinued operations $ - $ - $ - $ -
Net income $ (.01) $ .03 $ (.01) $ .02
WEIGHTED AVERAGE SHARES OUTSTANDING 20,451,933 14,400,000 20,451,933 14,400,000
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
2
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (132,196) $ 335,742
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Discontinued operations 49,245 -
Depreciation 14,965 1,526
Amortization 95,023 -
Changes in assets and liabilities, net of assets acquired in business
Combination:
Accounts receivable 46,388 (1,542,788)
Accounts payable 131,791 1,711,391
Accrued expenses and other current liabilities 636,490 2,921,428
Other, net (208,833) (149,856)
----------- -----------
Net cash provided by operating activities 632,873 3,277,443
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (86,405) (40,970)
Net cash used in acquisitions of business (171,195) -
Advances to Related Party - (197,724)
----------- -----------
Net cash used in investing activities (257,600) (238,694)
CASH FLOWS FROM FINANCING ACTIVITIES:
payment on notes payable, net (1,056,483) (1,784,526)
Advances from shareholder, net - 137,808
----------- -----------
Net cash used in financing activities (1,056,483) (1,646,718)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (681,210) 1,392,031
CASH AND CASH EQUIVALENTS, at beginning of period 850,925 354,551
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 169,715 $ 1,746,582
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES - interest paid $ 648 $ 27,984
----------- -----------
----------- -----------
- income taxes paid $ 72,600 $ -
----------- -----------
----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock in business combinations $ 5,323,600 $ -
Net assets acquired in business combinations 247,330 -
Goodwill (5,742,125) -
----------- -----------
Net cash used in business combinations $ (171,195) $ -
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
3
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED ENDED JUNE 30, 1999 AND 1998
PART 1
FINANCIAL INFORMATION
(1) PRESENTATION OF INTERIM INFORMATION
The unaudited consolidated financial statements and related notes are
presented as permitted by Form 10-QSB, and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year ended December 31, 1998. The
information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. The results
of operations for interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1999.
The accompanying unaudited consolidated condensed financial statements and
related notes should be read in conjunction with the audited consolidated
financial statements and the Form 10-K of Design Automation Systems, Inc.
(the "Company") and notes thereto, for its fiscal year ended December 31,
1998.
(2) BUSINESS COMBINATION
Effective January 1, 1999, Loch Exploration, Inc. (Loch), a Texas
corporation, acquired all of the stock of the Company in a "reverse
merger," whereby the Company is the acquiror for accounting purposes. In
connection with the acquisition, Loch (effectively a shell corporation)
issued the Company's shareholders 16,560,000 shares of authorized but
unissued common stock, $.01 par value, valued at approximately $ 4.3
million. The transaction was funded January 4, 1999. The amount of
consideration was negotiated through an arms-length transaction. The
transaction was accounted for in a manner similar to a pooling of
interests, whereby no goodwill resulted from this transaction. As a result
of the transaction, the Company is taxed as a C Corporation; however, at
the date of the transaction, no significant basis differences existed
between tax and financial reporting purposes that would result in deferred
tax balances. Net assets and operations as presented herein as discontinued
operations are $ 81,486 and $ 49,243 respectively.
Effective January 1999, the Board of Directors of the Company approved
five-year employment agreements with three key employees for an aggregate
minimum base salary and bonus compensation of $ 925,000. On December 31,
1998, the Company's shareholders approved a 10,000-for-one split of the
Company's common stock. Shares issued and outstanding have been
retroactively restated to reflect this split.
(3) ACQUISITIONS
On March 31, 1999, the Company acquired all of the issued and outstanding
stock of COAD Solutions, Inc. (COAD) an information technology consulting
firm in an arms-lengths transaction between the Company and the
shareholders of COAD. The consideration for the acquisition was (1) 600,000
shares of Company common stock, (2) $ 200,000 cash, payable $ 100,000 at
closing, and $ 100,000 payable in quarterly installments of $25,000
beginning 90 days from the closing date, and ( 3) for a period of 24 months
each COAD stockholder will receive a 20% royalty on gross revenues of
SQLACE products. The stockholders of COAD entered into employment
agreements, which terminate in December 2001 and include a non-compete
provision for the term of the agreement and one year thereafter. However,
the Company can provide no assurance the non-compete will be enforceable.
The transaction has been accounted for as a purchase and resulted in
goodwill of approximately $ 2,900,000, which will be amortized over a
period of ten years.
4
<PAGE>
On May 28, 1999, the Company acquired all of the issued and outstanding
stock of Dynamic Professional Services, LLC, (Dynamic) an information
technology consulting firm in an arms-lengths transaction between the
Company and the shareholders of Dynamic. The consideration for the
acquisition was: (1) 524,000 shares of Company common stock, (2) $ 200,000
cash, payable $ 100,000 at closing, and $ 100,000 payable in quarterly
installments of $ 25,000 beginning 90 days from the closing date, and (3)
additional stock consideration if on June 1, 2000 the closing price for the
Company common stock for the prior 15 business days is less than $ 5.15 per
share in an amount equal to 5,340 shares for each $0.01 below $ 5.15. The
Company has reserved 2,750,000 shares of Company common stock for the
additional consideration. Certain stockholders of Dynamic entered into
employment agreements, which terminate in 2001 and include a non-compete
provision for the term of the agreement and one year thereafter. However,
the Company can provide no assurance the non-compete will be enforceable.
This transaction has been accounted for as a purchase and resulted in
goodwill of approximately $ 2,800,000, which will be amortized over a
period of ten years.
The earnings of each acquired entity are included in the Company's
consolidated operations from each respective acquisition date. The
following unaudited pro forma condensed results of operations for the
three and six months ended June 30, 1999 and 1998 have been prepared as
if the transaction had occurred on January 1, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 7,078,078 $ 8,463,083 $ 15,799,726 $ 1,247,412
Income (loss) from $ (191,547) $ 465,853 $ (205,503) $ 595,132
continuing operations
Net Income (loss) $ (187,614) $ 480,102 $ (147,294) $ 534,144
Earnings (loss) Per Common Share $ (.01) $ .02 $ (.01) $ .03
</TABLE>
(4) SUBSEQUENT EVENT
Effective July 30, 1999, the Company acquired all of the issued and
outstanding stock of Connected Software Solutions, Inc. (Connected), an
electronic-business consulting and training firm, in an arms-length
transaction between the Company and the members of Connected. The
consideration for the acquisition was: (1) 300,000 shares of Company common
stock, (2) $ 300,000 cash payable in six quarterly installments of $ 50,000
beginning 90 days from the closing date, and (3) additional stock
consideration if on August 1, 2000 the closing price for the Company common
stock for the prior 15 business days is less than $ 5.15 per share in an
amount equal to 3000 shares for each $0.01 below $5.15. The Company has
reserved 1,500,000 shares of Company common stock for the additional
consideration. The shareholders of Connected entered into employment
agreements with the Company's wholly-owned subsidiary, COAD, which will
continue on a year-to-year basis and include a non-compete provision for
the term of the agreement and one year thereafter. However, the Company can
provide no assurance the non-compete can be enforceable. This transaction
has
5
<PAGE>
been accounted for as a purchase, and resulted in goodwill of
approximately $ 1,800,000, which will be amortized over a period of ten
years.
The Company entered into a financing agreement with FINOVA Capital
Corporation that will provide a $5,000,000 credit facility. The aggregate
outstanding amount is not to exceed the lesser of $ 3,500,000 less the
outstanding principal amount of any floorplan loans or an amount equal to
the sum of 85% of the net amount of eligible receivables due from an
account debtor other than FINOVA and 100% of the net amount eligible
receivables due from FINOVA pursuant to a floor plan financing arrangement
with borrower's customer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-QSB.
OVERVIEW
Design Automation Systems, Inc. (the "Company") engages in the
business of providing computer system integration specializing in UNIX client
server architecture and its components, and offering system management services
with a complete software selection. The Company's integration services assist
customers in dealing with issues during the entire life cycle of their systems;
including system architecture and design, product acquisition, configuration and
implementation, ongoing operational support, and evolutions in technology. The
Company provides solutions to complex information technology problems including
system availability and performance, UNIX/ Microsoft Windows NT integration,
client server database implementation, network security, and internet/intranet
electronic commerce/electronic business World Wide Web application deployment.
In March 1999, the Company acquired all of the issued and outstanding stock of
COAD Solutions, Inc. ("COAD"), which provides the Company with a highly
experienced team of consultants specializing in PeopleSoft HRMS implementations,
custom development and upgrades. COAD also provides design and implementation of
knowledge management systems, Internet/intranet development and project
management services, and markets "SQL Ace" software, a proprietary program for
easy data manipulation of multiple, complex databases.
In May 1999, the Company acquired all of the issued and outstanding stock of
Dynamic Professional Services, LLC ("Dynamic") and merged Dynamic into COAD.
Dynamic increases the Company's PeopleSoft HRMS practice and expands the COAD
involvement into the public sector.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
For the six months ended June 30, 1999, as compared to the six months ended
June 30, 1998, revenues increased to $ 14,371,727 from $ 10,769,434 an
increase of $ 3,602,293 or 33% primarily due to increased growth of
individual sales.
6
<PAGE>
For the six months ended June 30, 1999 gross profit increased to $1,595,822
or 28% as compared to the six months ended June 30, 1998 of $1,251,537 due to
greater sales volume. The gross profit percentage for the six months ended
June 30, 1999 was 11% compared to 12% for the six months ended June 30, 1998
as a result of decreased margins in hardware and somewhat increased margins
from consulting. Selling, general, and administrative expenses increased to
$ 1,736,819 for the six months ended June 30, 1999 from $975,309 for the six
months ended June 30, 1998, an increase of $ 761,510 or 78%, primarily due to
an increase in personnel costs to service increased revenues, increased
professional fees related primarily to being a public entity and an increase
of amortization of goodwill related to the acquisitions in 1999. This
resulted in loss from operations of $ 140,997 for the six months ended June
30, 1999, as compared to income from operations $ 276,228 for the six months
ended June 30, 1998.
For the six months ended June 30, 1999, net loss was $ 132,196 as compared to
a net income of $ 335,742 for the six months June 30, 1998 primarily as a
result of increase of operating expenses and non-cash expenses related to
the 1999 acquisitions.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998.
For the three months ended June 30, 1999, as compared to the three months
ended June 30, 1998, revenues decreased to $ 6,696,418 from $ 7,612,094, a
decrease of $ 915,676 or 12% primarily due to the customer emphasis of
resolving year 2000 problems. The acquisitions of Dynamic and COAD somewhat
have increased the consulting revenues of the Company for the three months
ended June 30, 1999.
For the three months ended June 30, 1999 gross profit decreased to $ 814,589
or 11% as compared to the three months ended June 30, 1998 of $ 914,557
primarily due to tighter pressures on prices in the hardware environment. The
gross profit percentage for the three months ended June 30, 1999 was 12%
compared to 12% for the three months ended June 30, 1998 as a result of
decreased margins from hardware and somewhat increased margins from
consulting. Selling, general, and administrative expenses increased to
$ 992,572 for the three months ended June 30, 1999 from $ 546,297 for the
three months ended June 30, 1998, an increase of $ 446,275 or 82%, primarily
due to an increased professional fees related primarily to being a public
entity, and acquisitions which includes approximately $ 95,000 in
amortization cost. For three months ended June 30, 1999, this resulted in
loss from operations of $ 177,983, compared to $ 368,240 income from
operations for the three months ended June 30, 1998.
The three months ended June 30, 1999, net loss was $ 157,149 as compared to
net income of $ 382,489 for the three months June 30, 1998, primarily as a
result of increase operating expenses, and non-cash expenses related to the
1999 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations is intended to
present the reader with information regarding the Company's ability to
generate cash to meet its ongoing requirements. Accordingly, the information
below speaks as to the parent Company's ability to generate cash to meet its
ongoing cash requirements of the Company, which now include COAD and Dynamic.
As of June 30, 1999, the Company's primary sources of liquidity were cash and
cash equivalents of $ 169,715, $4,479,419 of accounts receivable, and
$ 8,500,538 of available and unused funds in the Company's lines of credit.
The Company had a working capital deficit of $ 549,558 as of June 30, 1999.
Net cash provided by operating activities was $ 632,873 for the six months
ended June 30, 1999, as compared to net cash provided by operating activities
of $ 3,277,443 at June 30, 1998, the difference was primarily due to the
result of increased accounts payable and timing of payments due to vendors.
Net cash used in investing activities was $ 275,600 for the six months
ended June 30, 1999, as compared to $238,694 for the six months ended June
30, 1998, primarily due to the purchase of property and equipment in 1998 and
cash used in the aforementioned acquisitions of COAD and Dynamic in 1999.
7
<PAGE>
Net cash used in financing activities was $ 1,056,483 for the six months ended
June 30, 1999, as compared to $1,646,718, the result of a decrease in the
Company's line of credit.
As of July 31, 1999 the Company had $ 73,069 in cash and cash equivalents.
Management believed that the Company's line of credit, current assets and
cash generated from operations will be sufficient to accommodate the
Company's current operations through fiscal year 1999.
DISCONTINUED SEGMENT RESULTS OF OPERATIONS
REVENUES AND OPERATING EXPENSES:
Total revenue for the second quarter of 1999 amounted to $ 10,605, and lease
operating expenses amounted to $7,768. The second quarter net loss of
$ 22,267 is mainly due to the increased operating expenses. The revenue for
the six months ended June 30, 1999 amounted to $21,696, and lease operating
expenses amounted to $ 12,982. The net loss for the six months June 30, 1999
is due to the overall market decline in oil and gas price and operating
expenses.
YEAR 2000 COMPLIANCE ISSUES
The year 2000 poses certain issues for business and consumer
computing, particularly the functionality of software for two-digit storage of
dates and special meanings for certain dates such as 9/9/99. The year 2000 is
also a leap year, which may also lead to incorrect calculations, functions, or
system failure. The problem exists for many kinds of software, including
software for mainframes, PCs, and embedded systems.
In assessing the effect of the year 2000 problem on the Company,
management has identified, and is currently evaluating, the following three
general areas:
. Internal infrastructure;
. Supplier/third-party relationships;
. Contingency plans.
A discussion of the three general areas as well as management's
ongoing and planned actions with regard to each is set forth below:
INTERNAL INFRASTRUCTURE. The Company is in the process of verifying
that all of its personal computers, servers, and software are Year 2000
compliant. The Company intends to replace or upgrade all items that are found
not to be year 2000 compliant. The Company intends to determine if the software
vendors of all of its critical
8
<PAGE>
applications have represented that their products are year 2000 compliant.
The Company will obtain certification from its vendors that these systems are
year 2000 compliant. The costs related to these efforts have not been nor are
they expected to be material to the Company's business, financial condition,
or results of operations.
SUPPLIERS/THIRD-PARTY RELATIONSHIPS. The Company has been gathering
information from vendor Web sites and available compliance statements to
identify and, to the extent possible, resolve issues involving the year 2000
problem. The Company relies on outside vendors for water, electrical, and
telecommunications services as well as climate control, building access, and
other infrastructure services. The Company does not intend to independently
evaluate the year 2000 compliance of the systems utilized to supply these
services. The Company has received no assurance of compliance from the providers
of these services. There can be no assurance that these suppliers will resolve
any or all year 2000 problems with these systems before the occurrence of a
material disruption to the Company's business. Any failure of these third
parties to resolve year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, or results of operation.
SOFTWARE RESOLD BY THE COMPANY. The Company resells software that has
been developed outside the Company. Reliance is placed upon the software vendor
and distributor to address the year 2000 problem. Prior to taking on a software
for resell, the Company is provided documentation from the software developer
and the distributor of the software regarding its year 2000 compliance.
CONTINGENCY PLANS. The Company has not currently developed a formal
contingency plan to be implemented as part of its efforts to identify and
correct year 2000 problems affecting its internal systems. However, if the
Company deems it necessary, it may take the following actions:
- Accelerated replacement of affected equipment or software;
- Short to medium-term use of backup equipment and software;
- Wholesale backup of existing computerized data prior to January 1,
2000;
- Increased work hours for Company personnel; and/or
- Other similar approaches.
If the Company is required to implement any of these contingency
plans, such plans could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Based on the actions taken to date as discussed above, the Company is
reasonably certain that it has or will identify and resolve all year 2000
problems that could materially adversely affect its business and operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, the Company issued 524,000 shares of Company common
stock to the stockholders of Dynamic in connection with the acquisition of
100% of the outstanding capital stock of Dynamic. The Company believes the
transaction was exempt from registration pursuant to Section 4(2) and/or
Regulation D promulgated under the Act as a transaction by an issuer not
involving any public offering. No underwriter was utilized in such issuances
and no commissions were paid.
In July 1999, the Company issued 300,000 shares of Company common
stock to the stockholders of Connected in connection with the acquisition of
100% of the outstanding capital stock of Connected. The Company believes the
9
<PAGE>
transaction was exempt from registration pursuant to Section 4(2) and/or
Regulation D promulgated under the Act as a transaction by an issuer not
involving any public offering. No underwriter was utilized in such issuances
and no commissions were paid.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
2.1 (1) Exchange Agreement by and between Loch Exploration,
Inc. and Design Automation Systems Incorporated
2.2 (2) Exchange Agreement by and between Loch Exploration,
Inc. and COAD Solutions, Inc.
2.3 (2) Acquisition Agreement of Cherokee Methane
Corporation
2.4 (2) Plan of Merger between the Company and Design
Automation Systems Incorporated
2.5 (6) Exchange Agreement between the Company and Dynamic
Professional Services, LLC
2.6 (7) Exchange Agreement between the Company and Connected
Software Solutions, Inc.
3.1 (3) Articles of Incorporation
3.2 (4) Amended Articles of Incorporation
3.3 (3) By-laws
4.1 (3) Common Stock Specimen
10.1 (4) 1999 Employee Stock Option Plan
10.2 (2) Employment Agreement with Carl Rose
10.3 (2) Employment Agreement with Charles Leaver
10.4 (5) Employment Agreement with Kelly Knake
10.5 (2) Lease Agreement
10.6 (2) Indirect Reseller Agreement between the Company,
Hewlett-Packard Company and Hall-Mark Computer
Products
10.7(2) Indirect Reseller Agreement between the Company,
Hewlett-Packard Company and Client Systems, Inc.
10.8(2) Indirect Value Added Reseller Agreement between the
Company and Sun Microsystems Computer Corporation
10.9(2) IBM Business Partner Agreement for Solution
Providers
10.9(8) 1999 Line of Credit with FINOVA Capital Corporation
10.10(2) Line of Credit with Finova Corporation
21.1(2) List of Subsidiaries of the Registrant
27. (8) Financial Data Schedule
</TABLE>
---------------
(1) Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 15, 1999 and incorporated herein by reference.
10
<PAGE>
(2) Filed as an exhibit to the Company's 10-K for the year ended
December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on
Form S-1 dated September 7, 1979 and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Definitive Information
Statement filed March 9, 1999 and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to the Company Form 8-K filed June 14, 1999
and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K filed August 11,
1999 and incorporated herein by reference.
(8) Filed herewith
(b) REPORTS ON FORM 8-K
Form 8-K filed June 14, 1999
Form 8-K/A filed August 11, 1999
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Design Automation Systems, Inc.
Date: August 16, 1999
By /s/ Robert E. Nelson
------------------------------------
Robert E. Nelson
Chief Financial Officer and Director
12
<PAGE>
[LOGO]
SCHEDULE TO LOAN AND SECURITY AGREEMENT
BORROWER: DESIGN AUTOMATION SYSTEMS, INC.
ADDRESS: 3200 Wilcrest Drive, Suite 370
Houston, TX 77042
DATE: ________________________
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
DEFINITIONS (SECTION 1.1):
"ELIGIBLE RECEIVABLES" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services which
FINOVA, in its sole judgment, shall deem eligible based on such considerations
as FINOVA may from time to time deem appropriate. Without limiting the
foregoing, a Receivable shall not be deemed to be an Eligible Receivable if (i)
the account debtor has failed to pay the Receivable within a period of ninety
(90) days after invoice date or, with respect to any Receivable where the
account debtor is the United States or any department, agency or instrumentality
thereof, thirty (30) days after invoice date, to the extent of any amount
remaining unpaid after such period, or, if the Receivable is payable C.O.D., the
Receivable has not been paid within thirty (30) days after the date the goods
were shipped; (ii) the account debtor has failed to pay more than the percentage
specified below of all outstanding Receivables owed by it to Borrower within
ninety (90) days after invoice date; (iii) the account debtor is an Affiliate of
Borrower; (iv) the goods relating thereto are placed on consignment, guaranteed
sale or other terms pursuant to which payment by the account debtor may be
conditional; (v) the account debtor is not located in the United States or
Canada, unless the Receivable is supported by a letter of credit or other form
of guaranty or security, in each case in form and substance satisfactory to
FINOVA; (vi) the account debtor is the United States or any department, agency
or instrumentality thereof, which has not acknowledged the assignment of the
contract Receivable to FINOVA in accordance with the Federal Assignment of Clams
Acts (open account Receivables due from the United States or any department,
agency or instrumentality thereof may be excluded from this provision in
FINOVA's sole discretion); (vii) Borrower is or may become liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower;
(viii) the account debtor's total obligations to Borrower exceed the percentage
specified below of all Eligible Receivables, (ix) the account debtor disputes
liability or makes any claim with respect thereto (up to the amount of such
liability or claim), or is subject to any insolvency or bankruptcy proceeding,
or becomes insolvent, fails or goes out of a material portion of its business;
(x) the amount thereof consists of late charges or finance charges; (xi) the
amount thereof consists of a credit balance more than ninety (90) days past due;
or (xii) the face amount thereof exceeds the amount specified below, unless
accompanied by evidence of shipment of the goods relating thereto satisfactory
to FINOVA in its sole discretion.
(ii) Cross-age percentage 25%
(viii) Concentration limit To be approved by a FINOVA
Portfolio Manager if > 15% of total eligible receivables.
(xii) Proof of Shipment threshold $50,000
13
<PAGE>
"PREPARED FINANCIALS" means the balance sheets of Borrower as of the date
hereof, and as of each subsequent date on which audited
balance sheets are delivered to FINOVA from time to
time hereunder, and the related statements of
operations, changes in stockholder's equity and changes
in cash flow for the periods ended on such dates.
"GUARANTORS" means Carl Rose and Jenta Rose and any other Person who
may from time to time guaranty all or part of the
Obligations.
TOTAL FACILITY (Section 2.1):
Five Million Dollars ($5,000,000) ("Total Facility")
LOANS (Section 2.2):
A. REVOLVING LOANS: a revolving line of credit ("Revolving Credit Line")
consisting of loans against Borrower's Eligible Receivables and Eligible
Inventory ("Revolving Loans") in an aggregate outstanding principal amount (the
"Revolving Loans Borrowing Base") not to exceed the lesser of:
(a) Three Million Five Hundred Thousand Dollars ($3,500,000)
(the "Maximum Revolving Facility Amount") less the
outstanding principal amount of any Floorplan Loans (as
hereinafter defined); or
(b) an amount equal to the sum of: (I) eighty-five percent
(85%) of the net amount of Eligible Receivables due from an
account debtor other than FINOVA and one hundred percent
(100%) of the net amount of Eligible Receivables due from
FINOVA pursuant to a floor plan financing arrangement with
Borrower's customer.
B. FLOORPLAN LOANS: a floorplan line of credit consisting of loans
against Borrower's Floorplanned Inventory ("Floorplan Loans") in an aggregate
principal amount not to exceed at any time Three Million Five Hundred Thousand
Dollars ($3,500,000) less the amount of any outstanding approvals given by
FINOVA to any manufacturer of Floorplanned Inventory. No individual Floorplan
Loan shall exceed 100% of the manufacturer's invoice price for Eligible
Inventory ("Floorplan Loans Borrowing Base").
C. COMBINED BORROWING LIMITS: In no event may the sum of the outstanding
Revolving Loans and the outstanding Floorplan Loans exceed Five Million Dollars
($5,000,000) ("Maximum Combined Loan Amount").
In no event may the sum of the Maximum Combined Loan Amount and the
amount of any outstanding approvals given by FINOVA to any manufacturer of
Floorplanned Inventory ("Open Approvals") exceed the Total Facility
($5,000,000).
14
<PAGE>
INTEREST AND FEES (Section 2.6):
REVOLVING CREDIT LINE INTEREST RATE. Borrower shall pay FINOVA interest
on the daily outstanding balance of all Revolving Loans at a per annum rate of
one and one-half percentage points (1.5%) in excess of the "Base Rate." The Base
Rate shall equal the rate of interest published in the "Money Rates" section of
The Wall Street Journal as the "Prime Rate."
FLOORPLAN CREDIT LINE INTEREST. Interest on any amount past due under the
Floorplan Credit Line pursuant to Section 2.7 hereof shall accrue from the due
date or any extended due date at a per annum rate of six percentage points
(6.0%) in excess of the Base Rate.
In all applications unless a fixed interest rate is specified, the
interest rate chargeable hereunder shall be increased or decreased, as the case
may be, without notice or demand of any kind, upon the announcement of any
change in the Base Rate. Each change in the Base Rate shall be effective
immediately. In all applications unless specified otherwise, interest charges
and all other fees and charges herein shall be computed on the basis of a year
of 360 days and actual days elapsed and shall be payable to FINOVA in arrears on
the first day of each month.
FACILITY FEE. Borrower shall pay to FINOVA an annual facility fee. The
fee will be Fifteen Thousand Dollars ($15,000), payable on the Closing Date and
Seven Thousand Five Hundred Dollars ($7,500), payable on the anniversary of the
closing date.
APPLICATION FEE. Borrower has paid FINOVA an application fee in the
amount of Two Thousand Five Hundred Dollars ($2,500). This fee shall be credited
against FINOVA's legal fees and other out-of-pocket expenses and any amount
remaining shall either be returned to Borrower or applied to reduce the
outstanding balance of the Revolving Loans, as Borrower shall elect.
COLLATERAL (Section 3.4)
Required Insurance in the amount of Two Hundred Seventy Five Thousand
Dollars (275,000) at all times.
CONDITIONS PRECEDENT (Section 4):
The obligation of FINOVA to make the initial advance hereunder is subject
to the fulfillment, to the satisfaction of FINOVA and its counsel, of each of
the following conditions, in addition to the conditions set forth in Sections
2.1 and 2.2 above:
EXCESS BORROWING AVAILABILITY Borrower shall have excess borrowing
availability under the Revolving Loans Borrowing Base on the day of the initial
advance in an amount of not less than Five Hundred Thousand Dollars ($500,000),
after giving effect to the initial advance hereunder and after having given
effect to subtracting all of the Borrower's accounts payable outstanding 30 days
or more beyond their written terms and all book overdrafts.
LOCKBOX: (Section 2.11 (c)) Borrower shall establish and maintain a
lockbox at Chase Manhattan Bank of Texas, N.A.
SUBORDINATION AGREEMENT: FINOVA must receive signed full subordination
agreement from Access Graphics. In the event that Access Graphics does not sign
the agreement or the negotiated agreement is not satisfactory to FINOVA and its
counsel, Access Graphics will be required to terminate their existing filing and
re-file after FINOVA.
ADDITIONAL COLLATERAL: UCC-1 financing statement to be filed on wholly
owned subsidiaries of Borrower, including COAD Solutions.
15
<PAGE>
FISCAL YEAR-END FINANCIAL STATEMENTS: FINOVA must receive a copy of
audited financial statements for fiscal year-end December 31, 1997 and December
31, 1998 with a signed accountant's letter.
REPORTING REQUIREMENTS (Section 9.1):
Borrower shall provide FINOVA with monthly agings aged by invoice date
and reconciliations of Receivables within fifteen (15) days after the end
of each month.
Borrower shall provide FINOVA with monthly accounts payable agings aged
by invoice date, outstanding or held check registers and inventory
certificates within fifteen (15) days after the end of each month.
Borrower shall provide FINOVA with monthly unaudited consolidated
financial statements within thirty (30) days after the end of each month.
Borrower shall provide FINOVA with audited consolidated and consolidating
fiscal financial statements within ninety (90) days after the end of each
fiscal year, as more specifically described in Section 9.1 hereof, and
with an opinion issued by a Certified Public Accountant which is
acceptable to FINOVA.
Borrower shall provide FINOVA with annual detailed projections for the
upcoming fiscal year of Borrower within ninety (90) days after the end of
each fiscal year of Borrower.
Borrower shall provide FINOVA with Collateral and Loan report on a
daily basis.
Borrower shall provide FINOVA with notice regarding cash transfers
between its subsidiaries.
Borrower shall provide FINOVA with personal financial statements for Carl
and Jenta Rose on an annual basis.
CREDIT MEMORANDA (Section 3.5): $10,000
BUSINESS DAYS FOR CLEARANCE (Section 2.11): 1 day
INVENTORY RETURNS (Section 3.6): $10,000
EVENTS OF DEFAULT - JUDGMENTS (7.1): $10,000
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1): Texas
Fictitious Names/Prior Corporate Names (Section 5.2): Loch Exploration, Inc.
Design Automation
DASI
DA
Borrower Location(s) (Section 5.16): 3200 Wilcrest Drive, Suite 270
16
<PAGE>
Houston, TX 77042
130 S. Bemisten, Suite 303
St. Louis, MO 63105
1150 Lakeway Drive, Suite 219
Austin, TX 78738
Permitted Encumbrances (Section 1.1): Pitney Bowes
FINANCIAL COVENANTS (Section 6.13):
Upon receipt of 6/30/99 SEC Form 10-Q, financial covenants shall be
set. The Borrower will be notified of the proposed covenants and FINOVA must
receive the Borrower's consent, prior to monitoring the proposed covenants.
Covenants will be monitored on a quarterly basis.
NEGATIVE COVENANTS (Section 6):
CAPITAL EXPENDITURES: Borrower shall not make or incur any Capital
Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by
Borrower in any fiscal year (beginning with the
2000 fiscal year) would exceed $100,000.
INDEBTEDNESS: Borrower shall not create, incur, assume or permit
to exist any Indebtedness (including Indebtedness in
connection with Capital Leases) in excess of $50,000
per annum other than (i) the Obligations and any
indebtedness subordinated to the Obligations
pursuant to a subordination agreement acceptable to
FINOVA in its sole discretion, (ii) trade payables
and other contractual obligations to suppliers and
customers incurred in the ordinary course of
business and (iii) other Indebtedness existing on
the date of this Agreement and reflected in the
Prepared Financials delivered to FINOVA prior to the
Closing Date (other than Indebtedness paid on the
date of this Agreement from proceeds of the initial
advances hereunder).
TERM (Section 9.2):
The initial term of this Agreement shall be two (2) year(s) from the date
hereof (the "Initial Term"), unless earlier terminated as provided in Section 9
or 7.2 above or elsewhere in this Agreement.
TERMINATION FEE (Section 9.2):
The Termination Fee provided in Section 9.2 shall be an amount equal to
the following percentage of the Total Facility amount:
17
<PAGE>
(i) One percent (1.0%), if such notice of early termination
occurs on or prior to the first anniversary of this Agreement;
(ii) One half of one percent (.5%), if such notice of early
termination occurs after the first anniversary of this Agreement.
In the event that an early termination results from a change in control
of the Borrower and a comparable Total Credit Facility is established between
FINOVA and the Entity responsible for the change in control of Borrower, the
early termination fee will be waived by FINOVA.
In the event that an early termination results from a change in the
Borrower's primary vendor for Sun Microsystems product, and FINOVA is unable to
accommodate floorplan financing, the early termination fee will apply only to
the Revolving portion of the Credit Facility.
DISBURSEMENT (Section 9.11):
Unless and until Borrower otherwise directs FINOVA in writing, all loans
(other than Floorplan Loans disbursed directly to manufacturers or vendors of
Floorplanned Inventory as contemplated in Section 2.4 of this Agreement) shall
be wired to Borrower's operating bank account:
Account Number: __________________________
Bank: ___________________________________
City, State: _______________________________
ABA #: ___________________________________
NOTICE (Section 9.12):
Any notices sent to FINOVA should be sent simultaneously to the address
listed in the preamble to the Agreement and to the following:
FINOVA Capital Corporation
1850 Central Avenue
P.O. Box 2209
Phoenix, AZ 85002-2209
Attn: Joseph R. D'Amore, Vice President
FINOVA Capital Corporation
355 South Grand Avenue
Suite 2400
Los Angeles, CA 90071
Attn: John Bonano
ADDITIONAL PROVISION:
- - INVENTORY RESERVE: The balance of the floorplan outstandings shall be
reserved from the available borrowing base, prior to advancing on
eligible A/R for the Revolving Credit Line.
- - A/R CONCENTRATION ACCOUNTS: A/R concentration accounts > 15% must be
approved by a FINOVA Portfolio Manager for inclusion in the eligible
receivables base.
18
<PAGE>
- - AUDITS: Quarterly audits to be performed.
- - MERGERS & ACQUISITIONS: Design Automation Systems, Inc. will not enter
into any mergers or acquisitions without the prior written consent of
FINOVA. Design Automation Systems, Inc. will promptly notify FINOVA of
any proposed merger or acquisition. Design will furnish FINOVA all
information regarding the proposed transaction under the same
confidentiality restrictions as imposed on Design. FINOVA will provide
Design with its consent or rejection within ten (10) business days.
FINOVA's consent will not be unreasonably withheld.
CO-BORROWER:
By signing below, COAD Solutions, Inc. agrees that it will be a
Co-Borrower under the Loan and Security Agreement and this Schedule and it will,
as a Co-Borrower, be jointly and severally liable for all Obligations.
BORROWER: FINOVA:
DESIGN AUTOMATION SYSTEMS, INC. FINOVA CAPITAL CORPORATION
Tax I.D. No. 75-1657943
By: By:
--------------------------------- -------------------------
President Title: Vice President
By:
---------------------------------
Secretary or Ass't. Secretary
CO-BORROWER:
COAD SOLUTIONS, INC.
Tax I.D. No. 76-0599447
By:
--------------------------------------------------------
President
By:
--------------------------------------------------------
Secretary or Ass't. Secretary
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET JUNE 30, 1999, CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 169,715
<SECURITIES> 0
<RECEIVABLES> 4,479,419
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,095,160
<PP&E> 332,627
<DEPRECIATION> (137,158)
<TOTAL-ASSETS> 10,937,731
<CURRENT-LIABILITIES> 5,644,718
<BONDS> 0
0
0
<COMMON> 212,840
<OTHER-SE> 5,080,173
<TOTAL-LIABILITY-AND-EQUITY> 10,937,731
<SALES> 14,371,727
<TOTAL-REVENUES> 14,371,727
<CGS> 12,775,905
<TOTAL-COSTS> 14,512,724
<OTHER-EXPENSES> 69,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (684)
<INCOME-PRETAX> (71,913)
<INCOME-TAX> (11,040)
<INCOME-CONTINUING> (82,953)
<DISCONTINUED> (49,243)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,196)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
