<PAGE>
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year Commission
ENDED JUNE 30, 1998 FILE NO. 0-9996
DOTRONIX, INC.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1387074
- ----------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
160 FIRST STREET S.E.
New Brighton, Minnesota 55112-7894
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 633-1742
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK
$.05 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X. No _____.
-------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
State issuer's revenues for its most recent fiscal year: $9,257,942
The aggregate market value of voting stock held by nonaffiliates of the
registrant's common stock, as of August 31, 1998 was approximately $3,325,000
(based on the last sale price of such stock as reported by NASDAQ Stock Market).
The number of shares outstanding of the registrants common stock, as of August
31, 1998 was 4,039,601.
A portion of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders is incorporated into Part III as set forth therein.
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PART I
This Form 10-KSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. For this purpose any
statements contained in this Form 10-KSB that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially
depending on a variety of factors, many of which are not within the Company's
control. These factors include but are not limited to economic conditions
generally and in the industries in which the Company's customers participate;
competition within the Company's industry, including competition from much
larger competitors; technological advances which could render the Company's
products less competitive or obsolete; failure by the Company successfully to
develop new products or to anticipate current or prospective customers' product
needs; price increases or supply limitations for components purchased by the
Company for use in its products; and delays, reductions, or cancellations of
orders previously placed with the Company.
During the year ended June 30, 1998, the Company's operations were impacted by a
significant decrease in revenues. The Company was unable to reduce costs to
offset the revenue decrease. In an effort to increase revenues, the Company is
attempting to expand its products to new market niches. Unless the Company is
successful in the effort to increase revenues in the future, the Company may be
required to adjust its cost structure to a level that could be supported by its
revenues. There can be no assurance that the Company will be able to develop
additional markets for its products or that revenue will remain at current
levels or increase in the future.
Item 1. Business
- ----------------
General
- -------
Dotronix, Inc. (the "Company") was founded in 1980 for the purpose of designing,
manufacturing and marketing cathode ray tube ("CRT") displays and closed circuit
television ("CCTV") monitors. Such displays and monitors are used to display
alphanumeric information, graphics and images in a broad range of applications.
These applications range from use in relatively simple information systems, such
as airline flight information displays, to much more sophisticated systems such
as computer-aided design, manufacturing and engineering ("CAD/CAM/CAE") systems
and medical diagnostic imaging systems.
The image on a CRT display or CCTV monitor is produced by magnetically guiding
an interruptible stream of electrons against the back of a phosphorescent
screen. This stream of electrons strikes against the back of a phosphorescent
screen. When the stream of electrons strikes the back of the screen a bright
area is produced, and when it is interrupted a dark area appears. In a medium-
resolution unit the stream of electrons scans the screen of 525 horizontal lines
30 times per second, so that the series of light and dark areas produced appears
as a steady coherent image to the viewer. High-resolution displays scan a
greater number of lines, in some instances at greater speed, thus producing a
clearer image on the screen.
Products
- --------
The Company primarily designs, manufactures and markets products for the medical
diagnostic, transportation, and the multimedia presentation and display markets.
The medical market products consist primarily of high resolution monochrome and
color displays marketed to the major OEMs within the market. This OEM base
serves x-ray, CT scan, MRI and other instrumentation uses. The medical products
are used in diagnostic
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and work station applications and for fixed and portable instrumentation
devices. CRT sizes range from 5" to 21".
The Company also markets a product line of large screen color displays in the
multimedia arena. Product uses include video walls, displays for flight
information systems, and other public information displays. Products range from
20" to 27".
The Company continues to selectively market to the federal government and its
agencies, offering high quality, medium resolution, color and monochrome
displays.
Although the Company has developed standardized CRT displays in order to provide
cost-effective products, it also works closely with customers in order to adapt
existing designs and to develop new products to meet customers' specific
requirements.
Marketing
- ---------
The Company believes that the market for CRT displays and CCTV monitors is
extensive and diverse. As described above, CRT displays and CCTV monitors are
used in a wide variety of computer-based information systems and video-based
systems. The Company's principal marketing effort is directed toward the OEMs
of the various systems in which displays and monitors are used. Company
personnel work with these OEMs in order to determine the OEMs' technical needs
and cost objectives and to adapt the Company's designs accordingly. This
adaptation process typically entails specification of the components to be used
within the Company's standard design in order to meet these needs and
objectives. Greater degrees of customization are required, however, for certain
display applications.
The Company's present customer base consists of 200 OEMs and system integrators
located predominantly in the United States, with 8% of the Company's revenues
during the year ended June 30, 1998 consisting of sales to customers in Europe,
Canada, and the Far East. Sales to the Company's five largest customers
accounted for 45% of its revenues during the year ended June 30, 1998. Five
separate customers have accounted for 10% or more of revenues during one or more
of the last fiscal years. Their respective percentages of revenue by fiscal
year are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ----------------- ---------------------
<S> <C> <C> <C>
Customer A 13% 8% 10%
Customer B 12% 0% 0%
Customer C 9% 14% 7%
Customer D 8% 9% 10%
Customer E 0% 0% 23%
</TABLE>
In order to meet the diverse requirements of OEMs, the Company markets its
products directly to such manufacturers through its own technically trained
sales employees. The Company employs salespersons in St. Paul, Minnesota, Eau
Claire, Wisconsin, Los Angeles, California and Eatontown, New Jersey. The
Company's CRT displays and CCTV monitors are priced in the range from $100 to
$10,000; depending on size and other specifications, degree of adaptation
required and quantity.
Competition
- -----------
The Company believes that competition in the market for CRT displays and CCTV
monitors is generally based on price, product performance, product availability
and customer service. A number of other domestic and foreign companies,
including Panasonic Company, Sony, Tatung Company, Conrac Corporation,
Tektronix, Inc., Philips Electronics, Ltd., and Mitsubishi Electronic
Corporation, presently manufacture CRT displays and CCTV monitors and market
them to OEMs. In addition, some OEMs
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produce their own CRT displays and CCTV monitors. Many of the companies in CRT
display and CCTV monitor market have substantially greater resources than the
Company.
The Company also faces potential competition from other, non-CRT based
information display technologies, such as liquid crystal displays and other
flat-panel displays. The Company believes, however that such alternative
technologies have not yet proven economical and effective in most applications
in which the Company's products are used. The development of an economical and
effective flat-panel display could have an adverse effect on the Company's
business; therefore, the Company is following developments closely and
evaluating the potential use of this technology in its product lines.
Manufacturing and Suppliers
- ---------------------------
The Company purchases the components of its CRT displays and CCTV monitors from
outside suppliers and manufactures, assembles, and tests these components at its
New Brighton, Minnesota and Eau Claire, Wisconsin facilities. The components of
CRT displays and CCTV monitors include standardized CRTs, magnetic deflection
yokes and transformers, power sources and other standardized electronic
components as well as printed circuit boards and chassis manufactured to the
Company's specifications. The Company believes that such standardized
components generally are available from more than one source of supply and
numerous manufacturers of components to specification are available. In the
manufacturing process transistors, capacitors and other electronic components
are inserted into holes drilled in a printed circuit board. The components are
then flow-soldered to the circuit board and then the CRT, deflection yoke and
the power source are mounted on the chassis and hand wired. The completed units
are then put through a series of quality control tests plus a burn-in period
before shipment to the customer.
Government Regulations
- ----------------------
The Company's products, or products into which they are incorporated, must be
certified by officials of the Department of Health and Human Services as
complying with regulations limiting the amount of radiation that may be emitted
by CRT displays and CCTV monitors. The Company has been able to obtain such
approvals without material delay. The Company has received exemption from
certain of the certification procedures under an exception contained in the
regulations which reduces the administrative burden of such certification
procedures. In addition, the Company's products are subject to Federal
Communications Commission regulations limiting the amount of radio noise
emissions from computing devices. The Company has been able to obtain the
necessary certifications in a timely manner.
Personnel
- ---------
As of June 30, 1998 the Company had 114 full-time employees. The Company
believes that its relationship with its employees is satisfactory. None of the
Company's employees are covered by collective bargaining agreements.
Sales Backlog: Research and Development
- ---------------------------------------
The Company's sales backlog expected to be shipped by the end of the following
fiscal year was approximately $1.7 million at June 30, 1998 and $4.5 million at
June 30, 1997. The Company believes that the dollar amount of backlog at a
given date is not necessarily indicative of sales for any succeeding period.
For example, certain regular customers of the Company place frequent orders on a
short term basis only.
Research and development costs totaled approximately $399,000 for fiscal 1998,
$302,000 for fiscal 1997 and $297,000 for fiscal 1996.
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Item 2. PROPERTIES
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The Company's corporate offices and certain manufacturing operations are located
in a building that is approximately 17,000 square feet in New Brighton,
Minnesota. The Company also leases in New Brighton under a five year lease that
expires March 2003, approximately 22,000 square feet of warehouse space from a
company wholly owned by William S. Sadler, president of the Company, at a rental
rate of $4,932 per month. The lease has a renewal option for five additional
years at the same rate. The Company utilizes, on a month to month rental basis,
approximately 4,500 square feet in New Brighton, Minnesota at $2,185 per month,
from another company, wholly owned by William S. Sadler. Dotronix' office and
manufacturing facility in Eau Claire, Wisconsin is located in an approximately
33,600 square foot building owned by the Company.
Item 3. LEGAL PROCEEDINGS
- -------------------------
None
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------
None
5
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
- ----------------------------------------------
AND RELATED STOCKHOLDER MATTERS
- -------------------------------
The Company's Common Stock has been quoted on the NASDAQ Stock Market since
October 21, 1986 under the symbol "DOTX". The following table sets forth the
range of high and low closing sales prices of the Common Stock in the NASDAQ
Stock Market as reported by NASDAQ.
FISCAL YEAR ENDED JUNE 30, 1998 HIGH LOW
First Quarter......................... $ 1-1/8 $ 7/8
Second Quarter........................ 1-3/16 7/8
Third Quarter......................... 2 1
Fourth Quarter........................ 2 1-1/8
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW
First Quarter......................... $ 2 $1-1/4
Second Quarter........................ 1-13/16 1
Third Quarter......................... 1-3/8 1
Fourth Quarter........................ 1-5/16 1
As of June 30, 1998, there were 344 record holders of the Company's Common
Stock. The Company has not paid dividends on its Common Stock and does not
expect to pay cash dividends for the foreseeable future. The Company's
borrowing arrangement prohibits the payment of cash dividends. The Company's
current policy is to retain any earnings to finance operations.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations:
- ---------------------
The Company's revenues decreased $682,926 (7%) during the fiscal year ended June
30, 1998 and decreased $4,635,391 (32%) during the fiscal year ended June 30,
1997 from the respective preceding fiscal years. The decrease for fiscal 1998
was mainly due to decreased video wall shipments with a slight reduction
experienced in the medical OEM market. The decrease for fiscal 1997 was caused
by the completion of the FAA upgrade program and decreased video wall shipments
caused by reduced needs by two major customers of this product.
Five customers comprised 42% of the total fiscal 1998 sales of the Company. In
fiscal 1997 and 1996 these same customers comprised 31% and 50% of sales,
respectively. The respective percentages of revenue by fiscal year are as
follows:
1998 1997 1996
-------------- ----------------- ---------------------
Customer A 13% 8% 10%
Customer B 12% 0% 0%
Customer C 9% 14% 7%
Customer D 8% 9% 10%
Customer E 0% 0% 23%
The Company's gross margin was 30% in fiscal 1998, 25% in fiscal 1997 and 35%
in fiscal 1996. The increase in fiscal 1998 was primarily due to a more
favorable product mix and reduced manufacturing expenses. The decrease in fiscal
1997 was due primarily due to the completion of the FAA upgrade program and
reduced manufacturing utilization as a result of reduced product shipments.
6
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Selling, general, and administrative expenses increased 2% and decreased 11% in
fiscal 1998 and 1997, from their respective preceding fiscal years. The
increase in fiscal 1998 was due to increase marketing and sales effort
associated with new product introductions. The decrease in fiscal 1997 was due
to reduced personnel and other costs in all areas as well as an elimination of
bonus expense due to the financial results for the year.
Interest expense decreased 55% during the year ended June 30, 1998 and increased
5% during the year ended June 30, 1997 from the respective preceding fiscal
years. The decrease in fiscal 1998 was caused by reduced borrowing levels and
the negotiation of a new credit facility that reduced the interest rate. The
increase in fiscal 1997 were caused by higher borrowing levels on the Revolving
Working Capital Loan as compared to the previous fiscal year.
As of June 30, 1998 the Company had available income tax operating loss
carryforwards of approximately $2,450,000 that can be used to offset future
taxable income.
Effects of Inflation
- --------------------
The Company believes that its revenues and results of operations have not been
significantly affected by inflation during the three years ended June 30, 1998.
Financial Condition, Liquidity and Capital Resources:
- -----------------------------------------------------
On November 13, 1997, the Company entered into a working capital loan and
security agreement with Coast Business Credit. The agreement covers a period of
three years with the following provisions:
. Maximum availability of $3,000,000 not to exceed 85% of eligible receivables,
as defined, plus outstanding equipment acquisition loans. The capital
equipment acquisition loans can not exceed $500,000.
. The loans bear interest at 2% over prime (10.5% at June 30, 1998) and are
secured by all the assets of the Company. The agreement also provides for
minimum interest payments on loan balances of $600,000 in year one, $900,000
in year two and $1,200,000 in year three.
. Payment of $1,250 quarterly loan facility fee.
. Early termination fees of $90,000 the first year, $60,000 the second year and
$30,000 in the third year.
. The maintenance of a minimum tangible net worth as defined, of $5,000,000.
The Company believes that the cash and cash equivalents on hand at June 30, 1998
and future amounts available to it under the aforementioned credit agreement
should be adequate to meet the short and long term capital needs. The Company
is seeking to add inventory as an additonal financing source under the existing
credit facility with Coast. These funds, if made available, would finance
working capital needs for the Company's new product introductions.
During fiscal 1998, 466 shares of common stock were issued upon exercise of
stock options. Total proceeds from these transactions were $363.
During fiscal 1997, 65,000 shares of common stock were issued upon exercise of
warrants and 1,200 shares were issued upon exercise of stock options. Total
proceeds from these transactions were $68,762.
In addition, during fiscal 1997 the Company announced its intention to
repurchase up to 250,000 shares of its common stock. In fiscal 1997 246,800
shares were repurchased for
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a total of $267,953. In fiscal 1998 an additional 3,200 shares were repurchased
for an additional $3,300.
Cash Flow
- ---------
During fiscal 1998 cash flows used in operating activities were $915,000.
Through the repayment of debt $1,219,000 was consumed. Equity transactions
consumed $1,000 as well. Purchases of equipment used $158,000. Overall cash
decreased $2,292,000.
During fiscal 1997 cash flows used in operating activities were $112,000.
Through the repayment of debt $464,000 of cash was consumed. Equity
transactions consumed $199,000 of cash during fiscal 1997 as well. Purchases
of equipment used $49,000 of cash. Overall cash decreased $875,000.
During fiscal 1996 cash flows from operations provided approximately $1,264,000
due mainly to net income and depreciation and amortization. Financing activities
provided $233,000 from net borrowings on the revolving loan and proceeds from
stock option and warrant exercises. Purchases of equipment used $69,000.
Overall cash increased approximately $1,429,000.
At June 30, 1998, working capital was $4,533,000.
The Company has no material commitments for capital expenditures at June 30,
1998.
New Accounting Pronouncements
- -----------------------------
In June 1997 the Financial Accounting Standards Board (FASB) issued SFAS 130
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, losses) in a full set of general-purpose financial
statements and requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires an enterprise to classify items of
other comprehensive income by their nature in a financial statement and to
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for the Company in
fiscal 1999, but is not expected to have a significant effect on the Company's
present financial statement disclosures.
Also, in June 1997 the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information", effective for financial statements issued
for periods beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. In general, SFAS 131 requires financial
information to be reported on the basis that is used internally for evaluating
performance and deciding how to allocate resources. Adoption of SFAS 131 in
fiscal 1999 is not expected to result in significant changes to the operating
activities presently disclosed.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the value of those derivatives
would be accounted for depending on the use of the derivatives and whether it
qualifies for hedge accounting. This statement is not expected to have a
material impact on the Company's financial statements. This statement is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company will adopt this accounting standard as required in
fiscal 2000.
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Item 7. FINANCIAL STATEMENTS
- ----------------------------
The financial statements of the Company are included (with an index listing all
such statements) in a separate financial section at the end of this Annual
Report on Form 10-KSB.
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- ------------------------------------------------------------------------------
DISCLOSURE
- ----------
None.
Item 9. IMPACT OF THE YEAR 2000 ON THE COMPANY'S INFORMATION TECHNOLOGY
- --------------------------------------------------------------------------
SYSTEMS.
- --------
The Company's products are not impacted by the year 2000 issue since the
displays/monitors that the Company designs and manufacturers do not contain date
logic as part of their operation.
The Company's business systems; consisting of manufacturing requirements
planning(MRP) and accounting systems (accounts receivable, accounts payable,
general ledger) are not year 2000 compliant. To comply with the year 2000 issue,
the Company has plans to replace the existing business system. As of June 30,
1998, four companies have been identified as potential suppliers for the
Company's new business system. These four potential suppliers will complete
demonstrations of their systems in September of 1998. The successful supplier,
along with internal Company resources, will install the new system with an
implementation date of January 1, 1999.
In fiscal year 1998 the Company retained an external consultant to assist in the
selection and implementation of the replacement business system. The consultant
has been the only incremental cost that the Company has incurred. The total
cost through June 30, 1998 for the implementation effort has been $16,500,
which has been expensed. It is anticipated that the acquisition cost of the
hardware and software with the related costs of conversion, training, and
support will total approximately $400,000.
The Company intends to finance the acquisition of this system through a multiple
year lease arrangement. It is anticipated that the non-recurring transition
costs will be financed through the use of the Company's available operating cash
flow and advances against under its line of credit.
The current systems implementation plan has a planning buffer of 6 months. The
Company can continue to operate on the existing system through June 30, 1999.
At July 1, 1999, when the fiscal year becomes June 30, 2000, the business
systems would not function in their intended manner. The Company feels that the
buffer period of 6 months is sufficient to address unplanned issues and/or
greater complexity with respect to the Company's use of the replacement system.
9
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- -------------------------------------------------------------
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
------------------------------------------------------
ACT
---
See Part I of this report. Pursuant to General Instruction E(2), reference is
made to information contained under the heading "Election of Directors" in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before September
30, 1998, which information is incorporated herein.
Executive Officers of the Company
- ---------------------------------
The executive officers of the Company who are not also directors of the Company
are as follows:
Name Age Position
- ----- ---- ----------
Robert J. Andrews 55 Vice President, Operations
Erling J. Anderson 47 Chief Financial Officer
Robert J. Andrews has been Vice President, Operations of the Company since 1986.
He has been employed by the Company since 1982 as Operations Manager. Prior to
joining the Company, Mr. Andrews was the Director of Operations of Audiotronics
Corporation.
Erling J. Anderson has been Chief Financial Officer of the Company since June of
1997. Prior to joining the Company, Mr. Anderson was Director of Financial
Plans and Controls for U.S. Operations, Computing Devices International; a
division of Ceridian, Inc.
Item 11. EXECUTIVE COMPENSATION
- -------------------------------
Pursuant to General Instruction of E(2), reference is made to information
contained under the heading "Executive Compensation" in the Company's definitive
proxy statement for its 1998 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before September 30, 1998, which
information is incorporated herein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- --------------------------------------------------------
AND MANAGEMENT
--------------
Pursuant to General Instruction E(2), reference is made to information contained
under the heading "Voting Securities and Principal Holders" in the Company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before September 30,
1998, which information is incorporated herein.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Pursuant to General Instruction E(2), reference is made to information contained
under the heading "Certain Transactions" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before September 30, 1998, which
information is incorporated herein.
10
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Item 14. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Listing of Exhibits
-------------------
Exhibit
Number Description
- -------- -----------
3.1 Articles of Incorporation, as amended to date of this report
(incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1988).
3.2 Bylaws of the Company (incorporated by reference to exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1991).
4.1 Specimen certificate representing the Company's Common Stock
(incorporated by reference to exhibit 3(a) to Amendment No. 2 to the
Company's Registration Statement on Form S-18, File No. 2-71333C).
10.1 Amended and Restated Employment Agreement of William S. Sadler dated
July 1, 1998.
10.2 Lease for land and building located at 60 Cleveland Avenue S.E., New
Brighton, Minnesota (incorporated by reference to exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the year ended June 30,
1993).
10.3 Amendment of Lease for land and building located at 50 Cleveland
Avenue S.E., New Brighton, Minnesota (incorporated by reference to
exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1993).
10.4 Dotronix, Inc. 1989 Stock Option and Restricted Stock Plan
(incorporated by reference to exhibit 10.9 to the Company's Annual
report on Form 10-K for the year ended June 30, 1990).
10.5 Loan and Security Agreement by and between the Company and Coast
Business Credit, a division of Southern Pacific Bank. Dated as of
November 13, 1997.
10.6 Dotronix, Inc. Non-employee Director Stock Option Plan (incorporated
by reference to exhibit 10.9 to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1992).
23 Independent Auditors' Consent (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
-------------------
No reports were filed on Form 8-K during the quarter ended June 30,
1998.
11
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SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOTRONIX, INC.
Date: September 29, 1998 By /s/ William S. Sadler
-------------------------------------
William S. Sadler, President
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date Signature
- ----- ---------
September 29, 1998 By /s/ William S. Sadler
-----------------------------------------------
William S. Sadler, President, Treasurer and
Director
September 29, 1998 By /s/ Erling J. Anderson
------------------------------------------------
Erling J. Anderson, Chief Financial Officer
September 29, 1998 By /s/ Ray L. Bergeson
------------------------------------------------
Ray L. Bergeson, Director
September 29, 1998 By /s/ Robert J. Snow
------------------------------------------------
Robert J. Snow, Director
September 29, 1998 By /s/ Edward L. Zeman
------------------------------------------------
Edward L. Zeman, Director
September 29, 1998 By /s/ L. Daniel Kuechenmeister
------------------------------------------------
L. Daniel Kuechenmeister, Director
12
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DOTRONIX, INC.
INDEX TO FINANCIAL STATEMENTS
Independent auditors' report.......................... F-2
Balance sheets........................................ F-3
Statement of operations............................... F-5
Statements of stockholder's equity.................... F-6
Statements of cash flows.............................. F-7
Notes to financial statements......................... F-8
13
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INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
DOTRONIX, INC.
NEW BRIGHTON, MINNESOTA
We have audited the accompanying balance sheets of Dotronix, Inc. (the Company)
as of June 30, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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, such financial statements present fairly, in all material
respects, the financial position of Dotronix, Inc. as of June 30, 1998 and 1997,
and the results of its operations and cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/S/Deloitte & Touche LLP
August 28, 1998
Minneapolis, Minnesota
14
<PAGE>
BALANCE SHEETS
DOTRONIX, INC.
ASSETS (NOTE C)
<TABLE>
<CAPTION>
June 30
-----------------------------------------
CURRENT ASSETS: 1998 1997
------------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 290,578 $2,582,679
Accounts receivable, less allowance for doubtful
accounts of $36,588 and $136,597 respectively 1,141,845 1,886,093
Inventories (Note A) 3,904,737 3,550,924
Prepaid expenses 15,324 72,603
------------------- ------------------
TOTAL CURRENT ASSETS 5,352,484 8,092,299
PROPERTY, PLANT AND EQUIPMENT (Notes A and B) 1,121,679 1,008,289
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, less amortization (Note A) 629,980 701,977
License agreement, less amortization (Note A) 35,000 45,000
Other 31,202 725
------------------- ------------------
$7,170,345 $9,848,290
=================== ==================
</TABLE>
See notes to financial statements.
15
<PAGE>
BALANCE SHEETS CONTINUED
DOTRONIX, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES: June 30
-----------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Revolving loan (Note C) $ 254,264 $ 1,472,864
Accounts payable 284,230 631,176
Salaries, wages and payroll taxes 183,787 235,978
Other accrued liabilities 96,828 129,558
----------- -----------
TOTAL CURRENT
LIABILITIES 819,109 2,469,576
COMMITMENTS AND CONTINGENCIES (Notes D and H)
STOCKHOLDERS' EQUITY(Notes C and E ):
Common stock, $.05 par value, 12,000,000
shares authorized, 4,039,601 and 4,040,335
shares issued and outstanding, respectively 201,980 202,017
Additional paid-in capital 10,796,081 10,797,043
Accumulated deficit (4,646,825) (3,620,346)
--------------------- ------------------
TOTAL STOCKHOLDERS' 6,351,236 7,378,714
EQUITY
--------------------- ------------------
$ 7,170,345 $ 9,848,290
===================== ==================
</TABLE>
See notes to financial statements.
16
<PAGE>
STATEMENT OF OPERATIONS
DOTRONIX, INC.
<TABLE>
<CAPTION>
Year ended June 30
--------------------
1998 1997 1996
------------------ -------------------- -------------------
<S> <C> <C> <C>
REVENUES (Note G) $ 9,257,942 $ 9,940,868 $14,576,259
COSTS AND EXPENSES:
Cost of sales 6,472,814 7,468,947 9,401,912
Selling, general, and administrative 3,691,349 3,628,459 4,080,387
Interest 120,258 264,559 252,660
------------------ -------------------- -------------------
10,284,421 11,361,965 13,734,959
------------------ -------------------- -------------------
NET (LOSS) / EARNINGS $(1,026,479) $(1,421,097) $ 841,300
================== ==================== ===================
BASIC (LOSS) EARNINGS PER COMMON SHARE $(0.25) $(0.34) $0.20
DILUTED (LOSS) EARNINGS PER COMMON SHARE (0.25) $(0.34) $0.20
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 4,038,564 4,157,233 4,179,623
Diluted 4,038,564 4,157,233 4,289,618
</TABLE>
See notes to financial statements.
17
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
DOTRONIX, INC.
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated
--------------------------------------------------------
Shares Amount capital deficit Total
---------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT
JUNE 30, 1995 4,173,214 $208,661 $10,940,929 $(3,040,549) $ 8,109,041
Common stock
issued 45,721 2,286 46,375 48,661
Net income 841,300 841,300
---------------- ---------------- ---------------- ----------------- ----------------
BALANCES AT
JUNE 30, 1996 4,218,935 210,947 10,987,304 (2,199,249) 8,999,002
Common stock
issued 68,200 3,410 65,352 68,762
Common stock
repurchased (246,800) (12,340) (255,613) (267,953)
Net Loss (1,421,097) (1,421,097)
---------------- ---------------- ---------------- ----------------- ----------------
BALANCES AT
JUNE 30, 1997 4,040,335 202,017 10,797,043 (3,620,346) 7,378,714
Common stock
issued 2,466 123 2,178 2,301
Common stock
repurchased (3,200) (160) (3,140) (3,300)
Net loss (1,026,479) (1,026,479)
---------------- ---------------- ---------------- ----------------- ----------------
BALANCES AT
JUNE 30, 1998 4,039,601 $201,980 $10,796,081 $(4,646,825) $ 6,351,236
================ ================ ================ ================= ================
</TABLE>
See notes to financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
DOTRONIX, INC. Year Ended June 30
------------------
1998 1997 1996
----------------- ------------------ -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (1,026,479) $ (1,421,097) $ 841,300
Adjustments to reconcile net (loss)/income to net
cash (used in) provided by operating activities:
Depreciation and amortization 236,222 241,325 305,277
Provision for loss and accounts receivable 59,991 160,846 33,846
Change in assets and liabilities:
Accounts receivable 734,255 674,882 (298,179)
Inventories (513,813) 608,823 442,718
Prepaid expenses 57,279 7,182 7,990
Other assets (30,477) 38,370 28,131
Accounts payable and accrued liabilities (379,676) (125,668) (59,727)
Salaries, wages and payroll taxes payable (52,191) (296,993) (36,931)
----------------- ------------------ -----------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (914,889) (112,330) 1,264,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (157,614) (48,658) (68,666)
Purchase of license agreement
- (50,000) -
----------------- ------------------ -----------------
NET CASH USED IN
INVESTING ACTIVITIES (157,614) (98,658) (68,666)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,301 68,762 48,661
Repurchase of common stock (3,300) (267,953) -
Borrowings on revolving loan 8,959,176 10,170,384 14,490,077
Repayments on revolving loan (10,177,775) (10,634,800) (14,305,594)
----------------- ------------------ -----------------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (1,219,598) (663,607) 233,144
----------------- ------------------ -----------------
NET (DECREASE) INCREASE IN CASH AND (2,292,101) (874,595) 1,428,903
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,582,679 3,457,274 2,028,371
----------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS
AT END YEAR $ 290,578 $ 2,582,679 $ 3,457,274
----------------- ------------------ -----------------
</TABLE>
See notes to financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DOTRONIX, INC.
YEARS ENDED JUNE 30, 1998, 1997 AND 1996.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS:
The Company designs, manufactures and markets monochrome and color cathode ray
tube (CRT) displays and closed circuit television (CCTV) monitors for a broad
range of applications. CRT displays are used to display alphanumeric information
and graphics in market quotation systems, word processing systems, computer-
aided design, manufacturing and engineering (CAD/CAM/CAE) systems, desktop
publishing systems and other computer based information systems. CCTV monitors
are used to display video images generated by medical imaging systems, closed-
circuit surveillance systems, studio monitor systems and other video-based
systems.
During the years ended June 30, 1998 and June 30,1997 the Company's operations
were impacted by a significant decrease in revenues. The Company was unable to
reduce costs to offset the decrease in revenue. In an effort to increase
revenues, the Company is attempting to expand its products to new market niches.
Unless the Company is successful in the effort to increase revenues in the
future, the Company may be required to adjust its cost structure to a level that
could be supported by its revenues. There can be no assurance that the Company
will be able to develop additional markets for its products or that revenue will
remain at current levels or increase in the future.
CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, receivables, accounts payable, revolving debt, accrued expenses and other
liabilities are carried at amounts which reasonably approximate their fair value
due to the short-term nature of these amounts or due to variable rates of
interest which are consistent with current market rates.
INVENTORIES:
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories include material, direct labor and overhead and consist of
the following:
<TABLE>
<CAPTION>
June 30
1998 1997
--------------- ----------------
<S> <C> <C>
Raw materials........ $ 4,022,609 $ 3,682,875
Work-in-process...... 443,728 598,524
Finished goods....... 485,022 360,792
----------- -----------
Total inventory 4,951,359 4,642,191
Obsolesence reserve (1,046,622) (1,091,267)
----------- -----------
Net inventory $ 3,904,737 $ 3,550,924
=========== ===========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided using the straight-line method over estimated useful
lives of 25 years for buildings, five years for laboratory equipment, office
furniture and fixtures and data processing equipment and three years for
transportation equipment. Building improvements are depreciated over the
remaining useful life of the building at the time of the improvement.
20
<PAGE>
INTANGIBLE ASSETS:
Goodwill, related to the acquisition of a subsidiary which was merged into
Dotronix, Inc., is amortized using the straight-line method over a 20 year
period. Accumulated amortization against this asset was $810,000 and $738,000 at
June 30, 1998 and 1997 respectively.
In fiscal year 1997 the Company acquired license rights to a new product, for a
period of five years, at a cost of $50,000. This license is being amortized on
a straight-line basis over the 5 year license period. Accumulated amortization
against this asset was $15,000 and $5,000 at June 30, 1998 and 1997,
respectively.
RECOGNITION OF REVENUE:
The Company recognizes revenue upon shipment of products to the customer.
EARNINGS (LOSS) PER COMMON SHARE:
Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings per
Share. Earnings (loss) per share amounts presented for fiscal 1997 and 1996
have been restated for the adoption of SFAS No. 128. Basic earnings (loss) per
share are computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted earnings per share assumes the exercise
of stock options and warrants using the treasury stock method, if dilutive. The
following table reflects the calculation of basic and diluted earnings (loss)
per share.
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------------
(Loss) Earnings Shares Per Share Amount
-------------------- ------------------ ---------------------
<S> <C> <C> <C>
Fiscal Year 1998-Basic & diluted $ (1,026,479) 4,038,564 $ (.25)
Fiscal Year 1997-Basic & diluted $ (1,421,097) 4,157,233 $ (.34)
Fiscal Year 1996-Basic $ 841,300 4,179,623 $ .20
Fiscal Year 1996-Diluted $ 841,300 4,289,618 $ .20
</TABLE>
Because of the net loss in fiscal 1998 and 1997, all potentially dilutive
securities have an antidilutive effect on the dilutive EPS calculation. The
dilutive securities are comprised of stock option shares exercisable during the
respective years. Both basic and dilutive EPS were computed by dividing the net
loss applicable to common stock by the weighted average common shares
outstanding. FY 1996 earnings per diluted share includes the effect of all
potentially dilutive securities which represent 109,995 stock option shares with
an exercise price that is less than the average share price on the NASDAQ during
fiscal 1996.
ACCOUNTING 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
the reported amount of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
IMPAIRMENT OF LONG LIVED ASSETS:
Management periodically reviews the carrying value of long-term assets for
potential impairment by comparing the carrying value of these assets to the
estimated undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related expected future cash flows be less
than the carrying value, an impairment loss would be recognized. An impairment
loss would be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset with fair value being determinied using
discounted cash flows. To date, management has determinied that no impairment
of these assets exists.
21
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997 the Financial Accounting Standards Board (FASB) issued SFAS 130
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, losses) in a full set of general-purpose financial
statements and requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires an enterprise to classify items of
other comprehensive income by their nature in a financial statement and to
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for the Company in
fiscal 1999, but is not expected to have a significant effect on the Company's
present financial statement disclosures.
Also, in June 1997 the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information", effective for financial statements issued
for periods beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. In general, SFAS 131 requires financial
information to be reported on the basis that is used internally for evaluating
performance and deciding how to allocate resources. Adoption of SFAS 131 in
fiscal 1999 is not expected to result in significant changes to the operating
activities presently disclosed.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the value of those derivatives
would be accounted for depending on the use of the derivatives and whether it
qualifies for hedge accounting. This statement is not expected to have a
material impact on the Company's financial statements. This statement is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company will adopt this accounting standard as required in
fiscal 2000.
22
<PAGE>
B. PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
JUNE 30
1998 1997
-------------- ---------------
<S> <C> <C>
Land $ 182,509 $ 182,509
Building & Building Improvements 1,347,534 1,344,006
Machinery and laboratory equipment 3,375,872 3,350,977
Office furniture and fixtures 768,181 711,591
Data processing equipment 959,316 776,715
Transportation equipment 38,060 38,060
---------- ----------
$6,671,472 $6,403,858
Less: accumulated depreciation
and amortization 5,549,793 5,395,569
---------- ----------
$1,121,679 $1,008,289
========== ==========
</TABLE>
C. FINANCING ARRANGEMENTS
On November 13, 1997, the Company entered into a working capital loan and
security agreement with Coast Business Credit (Coast). The agreement covers a
period of three years with the following provisions:
. Maximum availability of $3,000,000 not to exceed 85% of "eligible
receivables", as defined, plus outstanding equipment acquisition loans. The
capital equipment acquisition loans cannot exceed $500,000.
. The loans bear interest at 2% over prime (10.5% at June 30, 1998) and are
secured by all the assets of the Company. The agreement also provides for
minimum interest payments on loan balances of $600,000 in year one, $900,000 in
year two and $1,200,000 in year three.
. Payment of $1,250 quarterly loan facility fee.
. Early termination fees of $90,000 the first year, $60,000 the second year and
$30,000 in the third year.
. The maintenance of a minimum tangible net worth as defined, of $5,000,000.
The Company believes that the cash and cash equivalents on hand at June 30, 1998
and future amounts available to it under the aforementioned credit agreement
should be adequate to meet the short and long term capital needs. The Company
is seeking to add inventory as an additonal financing source under the existing
credit facility with Coast. These funds, if made available, would finance
working capital needs for the Company's new product introductions.
23
<PAGE>
D. COMMITMENTS AND CONTINGENCIES
Warehouse facilities, office equipment and vehicles are leased under operating
leases. Total operating lease and rent expense for the Company for the years
ended June 30, 1998, 1997, and 1996 was $156,000, $180,000 and $168,000,
respectively. Minimum future obligations on these operating leases at June 30,
1998 are as follows:
Year ending June 30:
1999......................$ 89,514
2000...................... 70,453
2001...................... 59,181
2002...................... 59,181
2003, thereafter.......... 44,386
-------
$ 322,715
=======
E. STOCKHOLDERS' EQUITY
The Company has an incentive stock option plan for employees for the granting of
options to purchase up to 500,000 shares of the Company's common stock. The
Company also has a Nonemployee Director Stock Option Plan for the granting of
options to nonemployee Directors to purchase up to 100,000 shares of the
Company's common stock. Each nonemployee director is automatically granted, on
the first business day following the Company's annual meeting, 500 shares of
common stock and an option to purchase an additional 2,500 shares of common
stock. New directors receive an initial option grant following the first board
meeting at which such director is elected of an option to purchase 5,000 shares
of common stock.
A summary of the status of the Company's stock options are presented below
<TABLE>
<CAPTION>
Year Ended 6/30/98 Year Ended 6/30/97 Year Ended 6/30/96
---------------------------- -------------------------- --------------------------
Wgtd Avg Wgtd Avg Wgtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 172,010 $1.66 258,832 $1.57 287,530 $1.53
Granted 10,000 $ .97 10,000 $1.64 11,000 $2.05
Exercised (466) $ .78 (1,200) $1.05 (19,030) $1.07
Canceled (13,601) $1.06 (95,622) $1.42 (20,668) $1.82
------- ----- ------- ----- ------- -----
Outstanding at end of year 167,943 $1.70 172,010 $1.66 258,832 $1.57
======= ===== ======= ===== ======= =====
Options exercisable at year end 141,723 $1.57 144,900 $1.55 118,760 $1.39
======= ===== ======= ===== ======= =====
Options available for future 26,220 27,110 140,072
grant ======= ======= =======
</TABLE>
24
<PAGE>
The Company has elected to continue following the accounting guidance of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" for measurment and recognition of stock-based transactions with
employees. No compensation cost has been recognized for options issued under
the plans when the exercise price of the options are at least equal to the fair
market value of the common stock at the date of grant. Had compensation cost
for the stock options issued been determinied based on the fair value at the
grant date, consistent with the provisions of SFAS No. 123, "Accounting For
Stock Based Compensation". The Company's 1998, 1997 and 1996 net income and
earnings per share would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Net (loss) earnings
As reported $(1,026,479) $(1,421,097) $841,300
Pro forma $(1,030,641) $(1,429,535) $764,878
Earnings per basic & diluted share
As reported $ (.25) $ (.34) $ .20
Pro forma $ (.26) $ (.34) $ .18
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions and results.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Risk free interest rate 5% 7% 7%
Expected life 10 years 10 years 10 years
Expected volatility 65% 53% 53%
Expected fair value of options on grant date $4,162 $8,438 $76,422
</TABLE>
The following table summarizes information about stock options outstanding at
June 30,1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ -----------------------------------------
Remaining
Number Contractual Life Number
Outstanding (Years) Exercise Price Exercisable Exercise Price
- -------------- ------------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
22,742 4.9 $ .78 22,742 $ .78
10,000 9.4 $ .97 10,000 $ .97
11,244 3.0 $ 1.19 11,244 $ 1.19
7,500 5.4 $ 1.25 7,500 $ 1.25
1,000 7.3 $ 1.25 1,000 $ 1.25
12,500 6.4 $ 1.31 12,500 $ 1.31
7,500 4.5 $ 1.56 7,500 $ 1.56
15,000 3.5 $ 1.63 15,000 $ 1.63
10,000 8.4 $ 1.64 10,000 $ 1.64
8,017 1.5 $ 2.13 8,017 $ 2.13
10,000 7.4 $ 2.13 10,000 $ 2.13
30,922 7.0 $ 2.31 15,461 $ 2.31
21,518 2.0 $ 2.54 10,759 $ 2.54
- -------------- ------------------------- -------------------- ----------------- --------------------
167,943 5.3 $ 1.70 141,723 $ 1.57
============== ========================= ==================== ================= ====================
</TABLE>
25
<PAGE>
F. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and income tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
A reconciliation of the Company's income tax provision that would be provided
based on a statutory federal income tax rate of 35% to the Company's effective
rate is as follows:
<TABLE>
<CAPTION>
Year ended June 30
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed tax(benefit) provision at
federal tax rate................... ($359,000) $(497,000) $ 294,500
Change in valuation allowance...... 322,000 470,000 (292,000)
Permanent differences.............. 29,000 29,000 5,900
Graduated tax benefit.............. 10,000 14,000 (8,400)
Other.............................. (2,000) 16,000
---------- --------- ---------
Provision(benefit) $ 0 $ 0 $ 0
---------- --------- ---------
</TABLE>
Deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of the Company's assets and
liabilities. Temporary differences, net operating loss carryforwards and
valuation allowances comprising the net deferred taxes on the balance sheets are
as follows:
<TABLE>
<CAPTION>
June 30,1998
---------------------------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Tax depreciation greater than book $ $ (9,445) $ (9,445)
Net operating loss carryforward... 832,886 832,886
Accrual for obsolete inventory.... 355,852 355,852
Inventory costs capitalized....... 108,726 108,726
Tax credit carryforward........... 93,368 93,368
Allowance for doubtful accounts... 12,440 12,440
Accrual for warranty reserve...... 11,058 11,058
Prepaid insurance................. (2,897) (2,897)
Accrual for vacation.............. 22,451 22,451
Accrual for health insurance...... 17,346 17,346
Other............................. 6,253 (3,194) 3,059
Valuation allowance............... (1,444,844) (1,444,844)
----------------- ---------------- ------------------
$ 15,536 $ (15,536) $ 0
----------------- ---------------- ------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
June 30,1997
---------------------------------------------------------------
Assets Liabilities Total
------ ----------- -----
<S> <C> <C> <C>
Tax depreciation greater than book $ $ (9,974) $ (9,974)
Net operating loss carryforward... 486,477 486,477
Accrual for obsolete inventory.... 371,031 371,031
Inventory costs capitalized....... 97,668 97,668
Tax credit carryforward........... 93,368 93,368
Allowance for doubtful accounts... 46,443 46,443
Accrual for warranty reserve...... 16,549 16,549
Prepaid insurance................. (22,798) (22,798)
Accrual for vacation.............. 21,781 21,781
Accrual for health insurance...... 18,726 18,726
Other............................. 6,355 (3,194) 3,161
Valuation allowance............... (1,122,432) (1,122,432)
----------------- ---------------- ------------------
$ 35,966 $ (35,966) $ 0
----------------- ---------------- ------------------
</TABLE>
At June 30, 1998, the Company has federal income tax net operating loss
carryforwards of approximately $2,450,000 which will expire through 2013 and has
for Minnesota income tax purposes loss carryforwards of $1,044,000 which will
expire beginning in 2004. the Company also has general business tax credit
carryforwards of approximately $93,000 which will expire from fiscal 2002
through 2006.
G. SIGNIFICANT CUSTOMERS AND OTHER INFORMATION ON OPERATIONS
Five customers comprised 42% of the total 1998 revenues of the Company. In
fiscal years 1997 and 1996, these same customers comprised 31% and 50% of the
sales, respectively. The percentages of revenue by fiscal year are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A 13% 8% 10%
Customer B 12% 0% 0%
Customer C 9% 14% 7%
Customer D 8% 9% 10%
Customer E 0% 0% 23%
</TABLE>
The Company is susceptible to various risks due to the nature of it's business,
including customer requested delays in shipments or cancellation of certain
orders.
Revenues include interest income from investments of approximately $72,000,
$159,000 and $122,000 for the years ended June 30, 1998, 1997 and 1996,
respectively.
Costs and expenses include research and development costs and advertising of
approximately of $399,000 and $175,000, $302,000 and $137,000, and $297,000 and
$126,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
27
<PAGE>
H. RELATED-PARTY TRANSACTIONS
The Company is leasing manufacturing and warehousing facilities owned by
companies which are owned by the president and major stockholder of Dotronix.
During each of the years ended June 30, 1998, 1997, and 1996, Dotronix incurred
approximately $82,000, $88,000, and $86,000 respectively for rental of these
manufacturing and warehousing facilities. Operating commitments as of June 30,
1998 (Note D) include $281,124 of obligations to the president and major
stockholder of Dotronix.
The Company has a patent license agreement with an employee of the Company to
manufacture and sell an automobile accessory product that had been developed and
patented by the employee. Under the terms of the license agreement, a payment
of $50,000 was made to the employee for exclusive rights to the product. In
addition, the Company is obligated to make additional royalty payments of 4% of
product sales over the term of the agreement. In fiscal 1998 royality expense
of $32,000 was incurred under the terms of this agreement. If certain minimum
levels of royalty payments are not made the agreement will automatically
terminate.
I. RETIREMENT PLANS
The Company has a 401(k) retirement plan for all Dotronix employees who elect to
participate once certain eligibility requirements are met. Each eligible
employee may elect to defer 1% to 15% of his or her compensation. The Company
may contribute an amount on behalf of each participant equal to a percentage of
each participant's compensation or an amount as determined each year by the
Board of Directors. Contributions to the plan by the Company were approximately
$45,000, $46,000 and $50,000 for the years ended June 30, 1998, 1997, and 1996,
respectively.
The Amended and Restated Employment Agreement with the president and major
shareholder, dated July 1, 1998, provides for a base compensation of $15,000 per
month. In addition, subject to the Company's pretax earnings levels, a minimum
bonus of $150,000 each fiscal year is to be paid in cash. The Company incurred
and expensed a bonus of $150,000 for the year ended June 30, 1996. No bonuses
were incurred or expensed in fiscal years 1997 and 1998.
J. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow activities are as follows:
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest..................... $120,000 $265,000 $253,000
Income taxes................. 1,000 8,000 -
</TABLE>
28
<PAGE>
DOTRONIX, INC.
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-KSB
FOR YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Description Page in
-----------
Number form
- -------- -------
<S> <C> <C>
3.1 Articles of Incorporation, as amended to date of this report
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1988) .
3.2 Bylaws of the Company (incorporated by reference to exhibit 3.2 to
the Company's Annual Report on Form 10-K for the year ended June
30, 1991.
4.1 Specimen certificate representing the Company's Common Stock
(incorporated by reference to exhibit 3(a) to Amendment No. 2 to
the Company's Registration Statement on Form S-18, File No.
2-71333C).
10.1 Amended and Restated Employment Agreement of William S. Sadler
dated July 1, 1998 (incorporated by reference to exhibit 10.1 to
the Company's Annual Report on Form 10-KSB for the year ended June
30, 1998).
10.2 Lease for land and building located at 60 Cleveland Avenue S.E.,
New Brighton, Minnesota (incorporated by reference to exhibit
10.10 to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1993).
10.3 Amendment of Lease for land and building located at 50 Cleveland
Avenue S.E., New Brighton, Minnesota (incorporated by reference to
exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1993).
10.4 Dotronix, Inc. 1989 Stock Option and Restricted Stock Plan
(incorporated by reference to exhibit 10.9 to the Company's Annual
report on Form 10-K for the year ended June 30, 1990).
10.5 Loan and Security Agreement by and between the Company and Coast
Business Credit, a division of Southern Pacific Bank. Dated as of
November 13, 1997.
10.6 Dotronix, Inc. Non-employee Director Stock Option Plan
(incorporated by reference to exhibit 10.9 to the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1992).
23 Independent Auditors' Consent (filed herewith). 28
27 Financial Data Schedule (filed herewith). 29
</TABLE>
29
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(1998)
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of July 1, 1998,
amends and restates in its entirety that employment agreement entered into
January 2, 1981, by and between Dotronix, Inc., a Minnesota corporation
(hereinafter "Dotronix") and William S. Sadler, a resident of the State of
Minnesota (hereinafter "Sadler"), as such agreement was previously amended,
extended and restated.
WITNESSETH THAT:
WHEREAS, Dotronix desires to employ the services of Sadler by reason of his
ability and experience in the business of Dotronix; and
WHEREAS, Sadler desires to continue to be employed by Dotronix and is
willing to accept employment in accordance with the provisions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. Duties. Dotronix hereby employs Sadler as President of Dotronix to
------
supervise and direct the operation of the business conducted and to be conducted
by Dotronix, subject always to the direction and control of the Board of
Directors of Dotronix, and Sadler does hereby accept such employment.
2. Term. This Agreement and Sadler's employment shall commence on the
----
date hereof and expire on June 30, 2001, unless sooner terminated as provided
for herein.
3. Base Compensation. Dotronix shall pay, and Sadler shall accept, as
-----------------
base compensation for the services to be performed by Sadler hereunder, a
monthly salary of fifteen thousand dollars ($15,000) adjusted annually at the
same rate as the average annual salary adjustment of all Dotronix employees;
provided, however, that such salary shall at no time be less than fifteen
thousand dollars ($15,000) per month.
4. Incentive Compensation.
----------------------
(a) In addition to the base compensation described in Section 3, Sadler
shall be paid a one-time cash incentive payment of $125,000 on July 31, 2001, if
the conditions set forth in both (i) and (ii) below have been satisfied:
<PAGE>
(i) A designated successor to Sadler as chief executive officer,
acceptable to the Board of Directors, shall have been employed by Dotronix
on or before June 30, 1999, and shall remain employed by Dotronix at June
30, 2001. The designated successor to Sadler need not have actually
succeeded Sadler at June 30, 1999 or June 30, 2001, in order for this
condition to be satisfied.
(ii) Dotronix' corporate pre-tax earnings for the fiscal years ending
June 30, 1999, 2000 and 2001 shall have aggregated at least $2 million. Any
pre-tax loss during such fiscal years shall be included in the calculation
of aggregate earnings for the three fiscal years as a negative number. The
calculation of pre-tax earnings or loss for such fiscal years shall take
into account the accrual or payment of any bonuses payable under Section 5
below and any amount payable under this Section 4.
(b) If a Change of Control, as defined in Section 12 below, shall occur,
Sadler shall immediately be paid a one-time cash payment of $125,000 pursuant to
this Section 4, regardless of whether the conditions set forth in (a) above have
been satisfied.
5. Bonus Compensation.
------------------
(a) In addition to the base compensation described in Section 3, Sadler
shall be paid a bonus of $150,000 in each of fiscal years 1999, 2000 and 2001;
provided, however, that the bonus in any one year cannot exceed twenty percent
(20%) of corporate pre-tax earnings before the payment of such bonus. In the
event the bonus is restricted by the 20% limitation in one year, it will be made
up in a subsequent year, provided that the sum of the bonus payments does not
exceed twenty percent (20%) of corporate pre-tax earnings before the payment of
such bonuses.
(b) Sadler shall participate in Dotronix' incentive plan for salaried
employees as the same may be structured from time to time on the same basis as
other salaried employees. Payments received by Sadler under the salaried
employee incentive plan for a given fiscal year shall be credited against the
amount payable to Sadler under (a) above for such fiscal year. If the amount
payable to Sadler under the salaried employee incentive plan for a fiscal year
exceeds the amount payable to him under (a) above for such fiscal year, Sadler
shall be entitled to receive the greater amount.
6. Severence Benefit.
-----------------
(a) In the event Sadler's employment terminates due to his death or
disability pursuant to Section 10(b) below, he (or, in the case of his death,
his estate) shall be paid a severence benefit equal to one hundred percent
(100%) of the base
2
<PAGE>
compensation which would be due under Section 3 (as adjusted, if applicable,
pursuant to Section 3) for the twelve full calendar months immediately following
such termination. This severance benefit shall be due and payable 30 days
subsequent to such termination of employment.
(b) In the event Sadler's employment terminates following a Change of
Control as defined in Section 11 below, he shall be paid a severence benefit
equal to one hundred percent (100%) of the base compensation which would be due
under Section 3 (as adjusted, if applicable, pursuant to Section 3) through the
expiration date set forth in Section 2. This severance benefit shall be due and
payable immediately upon such termination of employment.
(c) Sadler shall not be entitled to a severance benefit pursuant to this
Section 6 in the event of his termination for "cause" as defined in Section 10
below or in the event of his resignation (other than a resignation following a
Change of Control, as contemplated by the last sentence of Section 11).
7. Activities During Employment. Sadler does hereby warrant and represent
----------------------------
to Dotronix that he is not subject to any agreement or arrangement which would
preclude him from carrying out the terms of this Agreement. Sadler and Dotronix
acknowledge and agree that Sadler shall be permitted, during the term of this
Agreement, to devote such time as is necessary to the fulfillment of his
obligations as President of Dynetic Systems, Inc., a Minnesota corporation.
Sadler agrees that he shall at all times devote his full time, energy and skill
during reasonable business hours to the performance of his duties as President
of Dotronix and as President of Dynetic Systems, but that the majority of his
time and efforts shall be devoted to the business affairs of Dotronix.
8. Benefits. Sadler shall be entitled to participate in any insurance,
--------
pension and other benefits which may be afforded by Dotronix to its employees
engaged in a supervisory or management position.
9. Convenant Not to Compete. Sadler agrees that, during the term of this
------------------------
Agreement and for a period ending three (3) years after the termination of his
employment with Dotronix for any reason, he will not, directly or indirectly, on
his own behalf or as a partner, officer, employee, consultant, stockholder,
director, or trustee of any person, firm or corporation solicit, accept or
service any customers of Dotronix, nor engage in any business which would
compete with, or be of a similar nature to, the business being carried on by
Dotronix. The parties hereto hereby recognize that money damages would not be an
adequate remedy for the breach of this convenant and Sadler hereby agrees to the
grant of specific performance of this convenant or other appropriate equitable
relief by a court of competent jurisdiction in the event of its breach.
3
<PAGE>
10. Termination. Notwithstanding any other provision contained herein,
-----------
this Agreement may be terminated by (a) the mutual agreement of the parties
hereto; (b) the death of Sadler, or the disability of Sadler which prevents him
from performing his normal duties for a period of six consecutive months or
more; or (c) Dotronix for cause. For purposes of this Agreement, the term
"cause" shall mean deliberate misconduct on the part of Sadler which is
seriously injurious to the interests of Dotronix, which misconduct shall be
specified in a written notice of termination delivered to Sadler by the Board of
Directors of Dotronix.
11. Change of Control. A "Change of Control" shall have occurred if
-----------------
(a) any person other than Sadler, or any group of persons acting in
concert other than a group of which Sadler is a part, shall acquire
beneficial ownership of 35% or more of the outstanding voting stock of
Dotronix, or
(b) Dotronix shall be party to a merger, consolidation, share
exchange or other business combination transaction as a result of which any
person other than Sadler, or any group of persons acting in concert other
than a group of which Sadler is a part, shall acquire or hold beneficial
ownership of 35% or more of the outstanding voting stock of the surviving
entity, or
(c) a majority of the Board of Directors shall cease to be composed
of the persons who are presently members of the Board (i.e., Sadler, Ray L.
Bergeson, Robert J. Snow, Edward L. Zeman, and L. Daniel Kuechenmeister) or
who were appointed or nominated with the affirmative vote of at least three
of such persons,
and, in the case of (a), (b) or (c) above, either
(i) Sadler's employment with Dotronix thereafter is terminated (other
than (A) for "cause" as defined in Section 10 above, or (B) by virtue of
the death or disability of Sadler, or (C) by means of the resignation of
Sadler), or
(ii) Sadler's reponsibilities with Dotronix thereafter are materially
reduced without his agreement, or Sadler is required to relocate without
his agreement.
A resignation by Sadler following the occurrence of an event specified in (ii)
above shall not be deemed a resignation by Sadler for purposes of (i)(C) above
or for purposes of Section 6(c).
12. Entire Agreement and Governing Law. This Agreement contains the entire
----------------------------------
agreement between the parties hereto and it shall be amended or modified only by
written instruments signed by both parties hereto. This Agreement shall in
4
<PAGE>
all respects be governed, enforced and interpreted in accordance with the laws
of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
DOTRONIX, INC.
By /s/ Erling J. Anderson
--------------------------------------
Erling J. Anderson
Chief Financial Officer and Secretary
/s/ William S. Sadler
--------------------------------------
William S. Sadler
5
<PAGE>
EXHIBIT 10.5
----------------------------------------------------------------------------
COAST BUSINESS CREDIT(R)
LOAN AND SECURITY AGREEMENT
BORROWER: DOTRONIX, INC.
ADDRESS: 160 FIRST STREET S.E.
NEW BRIGHTON, MINNESOTA 55112
DATE: NOVEMBER 13, 1997
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(s) 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 thirty-five
percent (35%) 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" means the date of the initial funding under this Agreement.
------------
"Coast" has the meaning set forth in the introduction to this Agreement.
-----
1
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY 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 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 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, in good,
new and salable condition which is not perishable, not obsolete or
unmerchantable, and is not comprised of raw materials, work in process,
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; and (vi) is situated
at a one of the locations set forth on the Schedule.
"Eligible Receivables" means Receivables arising in the
--------------------
ordinary course of Borrower'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;
(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, 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. (S) 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);
2
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------------------------------
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right or 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 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.
"Equipment" means all 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.
"Equipment Acquisition Loans" means the Loans described in Section [2(b)]
---------------------------
of the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
----------------
this Agreement.
"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
3
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------------------------------
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.
"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.
"Unused Line Fee" has the meaning set forth in Section 3 of the Schedule.
---------------
"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 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
4
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------------------
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 Property" means Borrower's real property located in 160 First Street
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S.E., New Brighton, Minnesota 55112 and 3833 North White Avenue, Eau Claire,
Wisconsin 54703.
"Receivable Loans" means the Loans described in Section 2(a) of the
----------------
Schedule.
"Receivables" means all of the Borrower'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 to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, 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.
"Schedule" has the meaning set forth in the Introduction of this Agreement.
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"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 Borrower'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.
"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,
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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provided no Default or Event of Default has occurred and is continuing. In
addition, Coast may create reserves against or reduce 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 Unused Line Fee during the term of
this Agreement with respect to the Receivable Loans and the Equipment
Acquisition 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 and are deemed
fully earned 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, 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 account payable of Borrower shall be
due and unpaid ninety (90) days past its due 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 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.5 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion of
Borrower's counsel, inform and substance satisfactory to Coast in its sole and
absolute discretion.
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COST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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5.6 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.
5.7 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.
5.8 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 dates 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.
5.9 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 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.
5.10 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.
5.11 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.12 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
biding 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.
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
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------
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 to the extent said security interests are perfected pursuant to
the documents entered into and notices given in connection herewith, 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 shall file a patent application on all patentable
material and register any trademarks, copyrights and copyrightable material
which comprises the Collateral and advise Coast of the acquisition, existence,
filing and/or registration thereof. 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 had 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 service
or maintain internal procedures, Borrower shall provide Coast with documentary
evidence, on a monthly basis, that all payroll taxes payable by Borrower are
current.
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
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COAST BUSINESS CREDITS LOANS AND SECURITY AGREEMENT
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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".
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 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 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
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and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's security
interest and other things 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, 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 shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
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, 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.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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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, 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
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, 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 VERTIFICATION. 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 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 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 acceptance 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
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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 (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 expense. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
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.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(d) 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;
(e) 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;
(f) enter into any other transaction outside the ordinary course of
business;
(g) 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;
(h) store any Inventory or other Collateral with any warehouseman or
other third party;
(i) sell any Inventory on a sale-or-return guarantee sale,
consignment, or other contingent basis;
(j) 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, (iii) loans to employees, officers and directors
for the purpose of purchasing equity securities of the Borrower, and (iv) a loan
in the principal amount of $110,000.00 previously made to Menuboard Marketing
L.P., a Delaware limited partnership;
(k) incur any debts outside the ordinary course of business, which
would have a Material Adverse Effect;
(l) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(m) 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);
(n) make any change in Borrower's capital structure which would have
a Material Adverse Effect; or
(o) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section 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, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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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. If this
Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a
Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee
shall be due and payable on the Renewal Date and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
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 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 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 or any of Borrower's 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 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 seven (7) 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
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
(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 breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect, which failure
is not cured within five (5) Business Days after the breach; 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 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
(po) Borrower shall generally not pay its debts as they become due,
or Borrower 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) Borrower shall fail to file a patent application on any
patentable material or register any trademark, copyright or copyrightable
material which is part of the Collateral or advise Coast of the acquisition,
creation, existence, filing on or registration of any such Collateral: or
(r) 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
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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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 statue, 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;
(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
right under all licenses and all franchise agreements shall inure to Coast
benefits;
(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, possessing 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 seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------
(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 8:00a.m. and 6:00p.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 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) Upon an Event of Default, 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) Upon an Event of Default, 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) Upon an Event of Default, 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
15
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Coast Business Credit Loans and Security Agreement
----------------------------------------------------------------------
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 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 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 Coasts 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, 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 10.5 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
16
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
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.
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 reasonable attorneys' fees (including reasonable 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
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
not limited to, any reasonable attorneys' fees and costs (including reasonable
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 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. 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 reasonable attorneys'
fees (including reasonable attorneys' fees and expenses incurred pursuant to
bankruptcy), including (but not limited to) reasonable 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 reasonable
attorneys' fees, costs and charges (including reasonable 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 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 by the sale of assignment or participation interests, all
without the consent of 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 ant 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.
18
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------
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:
DOTRONIX, INC.
/s/ William S. Sadler
- -----------------------------------
By: William S. Sadler
Title: President and Treasurer
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific
Bank
/s/ Susan G. Dudas
- -----------------------------------
By: Susan G. Dudas
Title: Vice President
19
<PAGE>
COAST BUSINESS CREDIT (R)
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: DOTRONIX, INC.
ADDRESS: 160 FIRST STREET S.E.
NEW BRIGHTON, MN 55112
DATE: NOVEMBER 13, 1997
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-borrower of even date.
- --------------------------------------------------------------------------------
SECTION 2 - CREDIT FACILITIES
SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time
outstanding not to exceed the lesser of a
total of THREE MILLION DOLLARS
($3,000,000.00) at any one time outstanding
(the "Maximum Dollar Amount"), or the sum of
(a) and (b) below:
(a) Receivable Loans in an amount not to
exceed eighty percent (80%) of the
amount of Borrower's Eligible
Receivables (as defined in Section 1 of
the Agreement) which amount may be
increased to eighty-five percent (85%)
of the amount of Borrower's Eligible
Receivables (as defined in Section 1 of
the Agreement) in the event Borrower's
dilution rate is less than five percent
(5%).
(b) Equipment Acquisition Loans, in minimum
advances of One Hundred Thousand Dollars
($100,000), commencing on the day such
advance is made by Coast, at interest
only followed by a forty-eight month
monthly amortization of principal plus
interest with the remaining balance due
on November 30, 2000, in a total amount
not to exceed the lesser of:
(1) Eighty percent (80%) of the cost of
new Equipment (after subtracting
taxes and installation charges),
plus up to eighty (80%) of the
----
appraised forced liquidation value
of used
20
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
Equipment acquired by Borrower (after
subtracting taxes and installation
charges); or
(2) Five Hundred Thousand Dollars
($500,000.00)
The availability of the Equipment Acquisition Loans is subject to Borrower
achieving and maintaining a debt service coverage ratio of not less than One and
One Quarter (1.25) to One (1) measured on a three (3) month rolling average. For
the purpose of this Paragraph, debt service coverage shall be defined as EBITDA
(as defined by GAAP) less cash capex and taxes divided by all principal plus
interest.
- --------------------------------------------------------------------------------
SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 2.0% per
annum, calculated on the basis of a 360-day
year for the actual number of days elapsed.
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 9.0% per annum.
SECTION 3.1 - MINIMUM MONTHLY
INTEREST: An amount equal to the Interest Rate
described above charged against an
outstanding daily loan balance of TWENTY
PERCENT (20%) OF THE MAXIMUM DOLLAR AMOUNT
during Year 1; an amount equal to the
Interest Rate described above charged against
an outstanding daily loan balance of THIRTY
PERCENT (30%) OF THE MAXIMUM DOLLAR AMOUNT
during Year 2; an amount equal to the
Interest Rate described above charged against
an outstanding daily loan balance of FORTY
PERCENT (40%) OF THE MAXIMUM DOLLAR AMOUNT
during Year 3 and thereafter.
SECTION 3.2 - CLOSING FEE: THIRTY THOUSAND DOLLARS ($30,000.00), such
amount being fully earned on the Closing
Date, and payable concurrently herewith.
SECTION 3.2 - FACILITY FEE: ONE THOUSAND TWO HUNDRED FIFTY DOLLARS
($1,250.00) per quarter, payable on the
Closing Date (prorated for any partial
quarter at the beginning of the term of this
Agreement) and the beginning of each quarter
thereafter.
SECTION 9.1 - RENEWAL FEE: ONE HALF OF ONE PERCENT (0.5%) of the Maximum
Dollar Amount per year.
21
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
SECTION 9.2 - EARLY TERMINATION
FEE: An amount equal to three percent (3%) of
the Maximum Dollar Amount (as defined in
the Schedule), if termination occurs on
or before the first anniversary of the
effective date of this Agreement, two
percent (2%) of the Maximum Dollar
Amount, if termination occurs after the
first anniversary and on or before the
second anniversary of the effective date
of this Agreement; one percent (1%) of
the Maximum Dollar Amount, when
termination occurs after the second
anniversary of the effective date of
this Agreement; and one percent (1%) of
the Maximum Dollar Amount, when
termination occurs on or after the
Maturity Date or Renewal Date.
- --------------------------------------------------------------------------------
SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM
AVAILABILITY: FIVE HUNDRED THOUSAND DOLLARS
($500,000.00) at funding.
SECTION 5.13 - OTHER DOCUMENTS
AND AGREEMENTS: 1. UCC-1 financing statements, fixture
filings and termination statements;
2. Security Agreements (including those
covering copyrights, patents and
trademarks).
- --------------------------------------------------------------------------------
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF
BORROWER: Video Monitors, Inc. - a subsidiary
merged into Borrower.
SECTION 6.2 - PRIOR TRADE NAMES
OF BORROWER: None.
SECTION 6.2 - EXISTING TRADE
NAMES OF BORROWER: None.
SECTION 6.3 - OTHER LOCATIONS AND
ADDRESSES: 3833 North White Avenue, Eau Claire, WI
54703.
50 Cleveland Avenue, New Brighton, MN
55112.
60 Cleveland Avenue, New Brighton, MN
55112.
22
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------------
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
($50,000.00) or more, or involving One
Hundred Thousand Dollars ($100,000.00) or
more in the aggregate.
- --------------------------------------------------------------------------------
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1- OTHER PROVISIONS:
1. Borrower shall have no accounts payable over
ninety (90) days from invoice date at the
time of funding.
2. All of Borrower's applicable taxes shall be
paid and current at the time of funding and
at all times during the Term of the Loan and
Security Agreement.
3. Daily remittances shall be collected via a
lockbox in form and substance approved by
Coast which shall be in place on or before
the Closing Date.
4. Borrower shall ensure that Coast is granted a
first priority perfected security interest on
all of Borrower's tangible and intangible
assets to the extent said security interests
are perfected pursuant to the documents
entered into and notices given in connection
herewith, including, without limitation,
accounts receivables, inventory, machinery
and equipment, and all other tangible and
intangible assets including patents,
trademarks and/or copyrights.
5. Borrower shall, at funding and at all times
during the Term hereof, maintain a minimum
Tangible Net Worth (as defined in Section 1
above) of Five Million Dollars($5,000,000).
6. Satisfactory review of UCC and Cal Lender
searches.
7. Coast shall establish a Three Percent (3%)
monthly reserve for demo unit sales.
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 ($50,000,00).
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the
following:
23
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------
1. Monthly Receivable agings, aged by invoice
date, within ten (10) days after the end of
each month.
2. Monthly accounts payable agings, aged by
invoice date, and outstanding or held check
registers within ten (10) days after the end
of each month.
3. Monthly unaudited financial statements, as
soon as available, and in any event within
thirty (30) days after the end of each month.
4. Quarterly unaudited financial statements, as
soon as available, and in any event within
forty-five (45) days after the end of each
fiscal quarter of Borrower.
5. Quarterly customer lists, including customer
name, address, and phone number.
6. Annual CPA audited consolidated and
consolidating financial statements, including
inventory review, as soon as available, and
in any event within ninety (90) days
following the end of Borrower's fiscal year,
certified by independent certified public
accountants acceptable to Coast.
7. 10Q and 10K filings or extensions thereof, as
soon as available, and in any event within
ten (10) days following the filing thereof.
SECTION 8.5 - NEGATIVE COVENANTS
(ACQUIRED ASSETS): Fifty Thousand Dollars ($50,000.00).
- --------------------------------------------------------------------------------
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE: November 30, 2000, 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.
24
<PAGE>
EX-23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-33702 of Dotronix, Inc. on Form S-8 and in Registration Statement No. 33-
46456 of Dotronix, Inc. on Form S-3 of our report dated August 28, 1998
appearing in Annual Report on Form 10-KSB of Dotronix, Inc. for the year ended
June 30, 1998.
/s/ Deloitte & Touche LLP
September 29, 1998
Minneapolis, Minnesota
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