UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
Commission File Number 1-13424
Data Systems Network Corporation
Michigan 38-2649874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34705 W. 12 Mile Rd., Suite 300 48331
Farmington Hills, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(248) 489-8700
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common Stock, $.01 Par Value - 4,857,974 shares as of October 31, 1997
PART I. - FINANCIAL INFORMATION
ITEM I. - FINANCIAL STATEMENTS.
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
REVENUES:
Net sales $16,062,643 $5,015,491 $46,297,213 $14,815,940
Service revenue 5,036,777 1,360,273 14,329,712 2,872,262
Total revenues 21,099,420 6,375,764 60,626,925 17,688,202
COST OF REVENUES:
Cost of sales 12,616,057 4,509,696 35,760,768 13,184,103
Cost of service 3,773,650 806,088 10,619,802 1,367,774
Total cost of 16,389,707 5,315,784 46,380,570 14,551,877
Revenues
GROSS PROFIT 4,709,713 1,059,980 14,246,355 3,136,325
OPERATING EXPENSES:
Selling expenses 2,664,955 897,423 7,337,958 1,932,164
General and
administrative
expenses 1,099,464 608,696 3,539,728 1,462,501
Total operating
expenses 3,764,419 1,506,119 10,877,686 3,394,665
INCOME (LOSS)
FROM OPERATIONS 945,294 (446,139) 3,368,669 (258,340)
OTHER INCOME (EXPENSE):
Interest expense (351,081) (142,704) (1,062,061) (337,448)
Interest income 163,721 82,248 276,054 218,164
Other income 146,969 209,474 208,615 304,061
Net other income
(expense) (40,391) 149,018 (577,392) 184,777
INCOME (LOSS) BEFORE
INCOME TAXES AND MINORITY
INTEREST 904,903 (297,121) 2,791,277 (73,563)
MINORITY INTEREST
IN SUBSIDIARY 44,147 3,000
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEMS 904,903 (252,974) 2,791,277 (70,563)
EXTRAORDINARY ITEMS:
Loss on settlement
of bankruptcy (164,666) (164,666)
Gain recognized upon
extinguishment of debt 75,494 75,494
INCOME (LOSS) BEFORE
INCOME TAXES 904,903 (342,146) 2,791,277 (159,735)
INCOME TAXES (225,000) - (979,546) -
NET INCOME $679,903 $(342,146) $1,811,731 $(159,735)
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30,
1997 1997 1996
Fully
Primary Diluted Primary
EARNINGS (LOSS)
PER COMMON SHARE $0.15 $0.14 $(0.13)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,576,883 4,811,502 2,665,993
For the Nine Months Ended September 30,
1997 1997 1996
Fully
Primary Diluted Primary
EARNINGS (LOSS)
PER COMMON SHARE $0.43 $0.41 $ (0.06)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,172,219 4,368,119 2,595,885
See Accompanying Notes to the Condensed Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $6,894,912 $1,522,434
Accounts receivable (net of
allowance of $375,909 and
$67,609 at September 30, 1997
and December 31, 1996,
respectively) 24,405,815 12,102,794
Notes receivable 673,778 564,059
Inventories 4,331,625 2,563,201
Other current assets 734,380 646,112
Total current assets 37,040,510 17,398,600
SERVICE PARTS, net 1,279,544 1,471,284
PROPERTY AND EQUIPMENT, net 1,773,673 1,811,923
GOODWILL, net 4,136,983 4,291,312
OTHER ASSETS 274,657 549,056
TOTAL ASSETS $44,505,368 $25,522,175
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 2) $5,217,548 $9,225,211
Accounts payable (Note 3) 7,949,128 7,594,346
Accrued liabilities 1,575,072 813,831
Deferred maintenance revenues 572,766 1,256,566
Total current liabilities 15,314,514 18,889,954
LONG-TERM DEBT (Note 2) 12,000,000 75,000
STOCKHOLDERS' EQUITY (Notes 4 and 5):
Preferred stock, authorized
1,000,000 shares, none outstanding
Common stock ($.01 par value;
authorized 10,000,000 shares;
issued and outstanding 4,857,824
and 3,255,000 shares at September
30, 1997 and December 31,1996,
respectively) 48,578 32,550
Additional paid-in capital 17,945,027 9,139,153
Accumulated deficit (802,751) (2,614,482)
Total stockholders' equity 17,190,854 6,557,221
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $44,505,368 $25,522,175
See Accompanying Notes to the Condensed Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,811,731 ($159,735)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Minority interest in subsidiary (3,000)
Depreciation and amortization 798,424 299,077
Gain recognized on extinguishment of debt (75,494)
Provision for doubtful receivables 308,300 17,191
Provision for inventory obsolescence 153,198 45,817
Changes in assets and liabilities
that provided (used) cash,
net of effects of acquisition:
Accounts receivable (12,611,321) (203,300)
Notes receivable (109,719) (561,235)
Inventories (1,921,622) (1,379,010)
Other current assets (88,268) (359,978)
Service parts (67,890) (31,112)
Other assets 274,399 (5,504)
Accounts payable 354,782 1,471,967
Accrued liabilities 761,241 (439,443)
Deferred maintenance revenues (683,800) 13,071
Net cash used in operating activities (11,020,545) (1,370,688)
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisition of property and equipment, net (346,215) (520,651)
Purchase of UNS common stock (7,000)
Redemption of warrants and exercise of
stock options, net 8,821,902
Issuance of common stock in connection
with acquisition (890,000)
Net cash provided by (used in)
investing activities 8,475,687 (1,417,651)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current borrowings under bank
line of credit (4,007,663) 1,402,506
Payment of principal on long-term debt (75,000) (394,644)
Increase in long-term borrowings under
bank line of credit 12,000,000 181,605
Net cash provided by financing activities 7,917,337 1,189,467
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,372,478 (1,598,872)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,522,434 3,171,544
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,894,912 1,572,672
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Interest $(1,062,061) $337,448
Income taxes $60,000 None
See Accompanying Notes to the Condensed Consolidated Financial Statements.
DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Data Systems Network Corporation ("Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and should be read in conjunction with the Company's audited
consolidated financial statements and notes contained in the Company's
Form 10-K for the year ended December 31, 1996. The condensed consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results of operations for
the periods presented.The results of such interim periods are not necessarily
indicative of the results of operations for the full year. The accompanying
consolidated financial statements include the financial statements of Data
Systems Network Corporation and its 70%-owned subsidiary, Unified Network
Services, Inc. ("UNS"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Note 2. Bank Line of Credit
As of September 30, 1997, the Company has a credit agreement (the "Credit
Agreement") with NBD Bank (the "Bank"). As of September 30, 1997, the Credit
Agreement provides for a revolving line of credit not to exceed $12 million,
a discretionary line of credit not to exceed $8 million and a dicretionary
lease line not to exceed $500,000, secured by a security interest in all of
the Company's accounts receivable, inventory (other than equipment financed
through the IBM Credit Corporation agreement) and equipment. Borrowing limits
under the revolving line of credit and the discretionary line of credit are
determined based on a collateral formula which includes 80% of qualified
trade receivables and 48% of eligible inventory (excluding inventory financed
through the IBM Credit Corporation agreement) and spare parts up to $3
million. The term of the revolving line of credit extends to September 30,
1999 and the discretionary line of credit extends to September 30, 1998.
Amounts outstanding under the discretionary line of credit are due on demand
and advances under the discretionary lease line are due on such date or
it or the discretionary line of credit bear interest at the Bank's prime
rate or at a rate set by the Bank from time to time, as determined by the
Company at the time of the advance. Advances under the lease financing bear
interest at prime or a negotiated rate.Outstanding advances at September 30,
1997 bear interest at an effective rate of 7.85%. The Credit Agreement
contains certain covenants requiring the Company to maintain a minimum
current ratio of 1.75 to 1 and total leverage not to exceed 3.5 to 1
Note 3. Credit Line
The Company is party to a secured finance agreement with IBM Credit
Corporation. As of September 30, 1997, the agreement extended a maximum of
$5.5 million in secured funds to be used exclusively for the acquisition of
inventory for resale, limited to those products manufactured by Apple, Compaq
, Hewlett Packard, IBM and Lexmark. Use of this credit line is at the
Company's option. To secure payment of all debt incurred under this
agreement, IBM Credit Corporation was granted a first security interest in
the Company's financed inventory equal to the amount of the outstanding debt.
thirty (30) day interest free financing of eligible inventory and a variable
discount from the invoice price for eligible product purchases paid
within fifteen days from the date of invoice. This agreement can be
terminated at any time by the Company or the lender. The terms and
conditions of this financing agreement can be changed at the discretion of
IBM Credit Corporation. The amount outstanding at September 30, 1997 is
approximately $2.1 million and has been included in accounts payable.
Note 4. Redemption of Warrants
In February 1997, the Company called all of its then outstanding Redeemable
Common Stock Purchase Warrants ("Warrants") for redemption as of March 10,
1997 pursuant to the Warrant Agreement, dated October 28, 1994, setting forth
the terms of the Warrants. Approximately 99% of the Warrants were exercised
on or prior to the date of redemption at a price of $6.25 per Warrant,
resulting in net proceeds to the Company of approximately $7,300,000. In
connection with the receipt of consent to the redemption, the
to 60,000 units, consisting of two common shares and two warrants to purchase
an additional two common shares ("Units") which may be purchased upon
exercise of a warrant issued to the underwriters' representatives in the
Company's initial public offering. The registration was completed in July
1997 and during the third quarter of 1997, all related warrants were
exercised, resulting in net proceeds to the Company of approximately
$1,400,000.
During the first quarter of 1997, the Company's bank lender exercised for
nominal consideration 85,000 warrants which were held in connection with
the Company's prior reorganization. Such shares had been included in paid
in capital and in the calculation of earnings per share and therefore,
the par value of $850 has been reclassified to common stock.
Note 5. Exercise of Stock Options
During the three months ended September 30, 1997, approximately 22,000 stock
options of current and former employees were exercised, resulting in net
proceeds to the Company of approximately $96,000.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis of financial condition and results of operations of
the Company should be read in conjunction with the Company's financial
statements and notes thereto included under Item 1. Financial Statements.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased 230% to $21.1 million for the three
months ended September 30, 1997 from $6.4 million for the same period in
1996. For the nine months ended September 30, 1997, total revenues increased
242% to $60.6 million from $17.7 million for the same period in 1996. These
increases were attributable primarily to the acquisition of the Network
Systems Group of SofTech, Inc. ("NSG") in September 1996 and the Company's
expansion into the eastern region of the United States in the fourth quarter
of 1996. A significant portion of the increase was attributable to the
substantial contract with the State of Michigan assigned to the Company as
part of the NSG acquisition. The contract has been extended to April 1998 and
it is anticipated that the contract will be to extended through August 1998.
As with all of the Company's service contracts, there can be no assurance
that, if rebid, the Company will be awarded a new contract on terms and
conditions which are at least as favorable to the Company as the current
contract. The Company also experienced significant growth in the
southeastern region of the United States in both the commercial and
governmental sectors of their business.
Net sales increased to $16.1 million and $46.3 million for the three and nine
months ended September 30, 1997, respectively, from $5.0 million and $14.8 mi
llion during the same periods in 1996, due primarily to the acquisition of
NSG and the eastern region expansion. Returns and allowances decreased to
0.9% as a percentage of net sales for the three and nine months ended
September 30, 1997 from 6.0% during the same periods in 1996. This decrease
is primarily attributable to the increase in the Company's pre-sales support
resources, which has permitted the Company and its customers to more
accurately assess customer's equipment needs at the time sales are made.
Service revenues increased $3.7 million to 23.9% of total revenues in the
three months ended September 30, 1997 from 21.3% in the corresponding period
of 1996. For the nine months ended September 30, 1997, service revenues
increased $11.5 million to 23.6% of total revenues, compared to 16.2% for the
corresponding period of 1996. A significant percentage of the service
revenue increases resulted from an increase in maintenance revenues from the
State of Michigan contract and installation and project service revenues
generated from the Southeastern Region. The Company's continued focus on
increasing service revenue by improving its ability to deliver services to
all customers and by better utilization of its technical resources also
contributed to the increase.
COST OF REVENUES. The cost of revenues decreased to 77.6% and 76.5% of total
revenues for the three and nine months ended September 30, 1997, respectively
, from 83.4% and 82.3% for the same periods in 1996.
The cost of service revenue increased to 74.9% and 74.1% of service revenues
for the three and nine months ended September 30, 1997, respectively, from
59.3% and 47.6% for the same periods in 1996. These increases were due
primarily to the Company's continuing investment in additional technical
personnel which increased both pre- and post- sale field support headcount
to allow for the current and anticipated growth in service offerings. The
increase in the cost of service revenue for the nine months ended
September 30, 1997 was also due to the cost of contracting with third party
subcontractors to support installations in areas where the Company does not h
have a physical presence.
The cost of sales decreased to 78.6% and 77.2% of net sales for the three
and nine months ended September 30, 1997, respectively, compared to 89.9%
and 89.0% for the same periods in 1996. The Company attributes these
decreases primarily to the success of its efforts to shift sales toward
higher margin advanced technology products and the abilities of its sales
force to offer limited value-added services as part of the Company's product
offerings.
OPERATING EXPENSES. Selling, general and administrative expense decreased to
17.8% of total revenue for the three months ended September 30, 1997
compared to 23.6% of total revenue for the same period in 1996. The Company
is benefiting from economies of scale which have enabled it to increase its
revenue base at a faster rate than the personnel costs required to support
the operational infrastructure have increased.
Selling, general and administrative expense decreased to 17.9% of total
revenue for the nine months ended September 30, 1997 compared to 19.2% for
the same period in 1996. The decrease was primarily due to the revenue rate
of growth exceeding the increases in customer service, accounting and
distribution personnel and the expansion of internal network and
communication systems and the Company's ability to take advantage of
economies of scale.
OTHER INCOME (EXPENSE). Interest expense for the three and nine months ended
September 30, 1997 increased $208,000 and $726,000, respectively, compared
to the same periods in 1996. The increases reflect the Company's need to
borrow to support its increased business activity and to support increased
levels of receivables and inventory. Interest expense is expected to
decline in future quarters due to the more favorable interest rate negotiated
with the Company's bank lender and as the Company is better able to manage
the business processes related to the significant increase in business
activity. Interest income increased by $82,000 for the three months ended
September 30, 1997 compared to the prior year period as a result of an
increase in the Company's cash reserves due to the exercise of outstanding
warrants and stock options to purchase common stock which generated net
proceeds of approximately $8.8 million. Interest income for the nine months
ended September 30, 1997 increased by $58,000 compared to the prior year
period as a result of increased average cash balances and increased interest
rates.
FINANCIAL CONDITION
The Company finances its business primarily through funds generated
internally through operations, trade credit, and advances under its credit
agreement (the "Credit Agreement") with NBD Bank (the "Bank"). As of
September 30, 1997, the Credit Agreement provides for a revolving line of
credit not to exceed $12 million, a discretionary line of credit not to
exceed $8 million and a dicretionary lease line not to exceed $500,000,
secured by a security interest in all of the Company's accounts receivable,
inventory, (other than equipment financed through the IBM Credit Corp.
Agreement) and equipment. Borrowing limits under the revolving line of credit
and the dicretionary line of credit are determined based on a collateral
formula which includes 80% of qualified trade receivables and 48% of eligible
inventory (excluding inventory financed through the IBM Credit Corporation
agreement) and spare parts up to $3 million. The term of the revolving line
of credit extends to September 30, 1999 and the discretionary line of credit
extends to September 30, 1998. Amounts outstanding under the discretionary
line of credit are due on demand and advances under the discretionary lease
line are due on such date or dates determined by the Company and the bank at
the time of the advance. Advance under the revolving line of credit or the
discretionary line of credit bear interest at the Bank's prime rate or at a
rate set by the Bank from time to time, as determined by the Company at the
time of the advance. Advances under the lease financing bear interest at
prime or a negotiated rate. Outstanding advances at September 30, 1997 bear
interest at an effective rate of 7.85%. The Credit Agreement contains
certain covenants requiring the Company to maintain a minimum current ratio
1.75 to 1 and total leverage not to exceed 3.5 to 1.
The secured financing agreement with IBM Credit Corporation continues to
offer thirty day interest free financing up to $5.5 million on certain
products purchased by the Company for resale. As of September 30, 1997, IBM
Credit Corporation purchase transactions accounted for $2.1 million of the
total accounts payable balance.
In February 1997, the Company called all of its then outstanding Warrants for
redemption as of March 10, 1997 pursuant to the Warrant Agreement, dated
October 28, 1994. Approximately 1,256,000 shares were issued due to the
resulting exercise of Warrants, generating net proceeds to the Company of
approximately $7.3 million. During the third quarter of 1997, 240,00 common
shares underlying a warrant issued to the underwriters' representative in
the Company's initial public offering were issued upon the exercise of the
warrant during the quarter, resulting in net proceeds to the Company of
approximately $ 1.4 million. Also, approximately 22,000 stock options were
exercised during the quarter, resulting in net proceeds to the Company of
approximately $96,000.
For the nine months ended September 30, 1997, the Company increased cash and
cash equivalents by approximately $5.4 million, primarily due to the receipt
of the redemption of net proceeds from the exercise of outstanding
warrants and employee stock options and borrowings under the Credit
Agreement. Cash used by operations increased to $11.0 million during the
nine months ended September 30, 1997, compared to $1.4 million during the
nine months ended September 30, 1996, primarily as a result of increased
accounts receivable and the longer payments cycles associated with
government and institutional customers, and secondarily to inventory held for
project sales. These factors were partially offset by net income for the
period and increases in accounts payable and accrued liabilities. Working
capital as of September 30, 1997 was $21.7 million compared to a working
capital deficiency of $1.5 million at December 31, 1996, primarily due to the
exercise of warrants and stock options described above and the
reclassification of $12 million from short term to long term debt pursuant
to the new Credit Agreement which was executed as of September 30, 1997.
The Company believes that the combination of present cash balances, future
operating cash flows, and credit facilities will be adequate to fund the
Company's currently anticipated internal growth and current short and long
term cash flow requirements.
The foregoing discussion and analysis contain a number of "forward looking
statements" within the meaning of the Securities Exchange Act of 1934 and
are subject to a number of risks and uncertainties. These include general
business conditions, continuing favorable economic conditions, the relative
uncertainties in the market direction of emerging technologies, a lack of
market acceptance of the Company's products and services, the failure of the
Company's customers to fulfill contractual commitments, the ability of the
Commpany to develop and sustain new customers in geographic areas in which
the Company has recently begun to operate, the ability of management to
implement new systems to manage the Company's growth effectively and
efficiently, the Company's ability to retain its commercial and governmental
contracts (including, without limitation, the State of Michigan contract),
the ability of the Company to recruit and retain qualified personnel and the
potential loss of key personnel within the new regions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
During the third quarter of 1997, the Company issued 240,000 common shares to
H.J. Meyers & Co., Inc. for cash totalling $1.5 million upon exercise of the
Representative's Warrant (the "Warrant") which was originally granted in the
Company's initial public offering in November 1994. The terms of the Warrant
permitted the holder to exercise the Warrant until October 28, 1999 for a
total of 60,000 units, consisting of two common shares and two common stock
purchase warrants, at a price of $12.50 per unit. The underlying common stock
purchase warrants were each exercisable for one common share at $ 6.25 per
share. The sale of such shares was exempt from registration pursuant to
Sections 4 (2) and 4 (6) of the Securities Act of 1933. The Company relied
upon these exemptions based upon the accredited and sophisticated nature of
the holder of the Warrant, the fact there was but one holder of the Warrant,
the provision of financial and other information concerning the Company to the
Warrant holder, the lack of general solicitation and actions taken by the
Company to restrict resale of the securities without registration.
Item 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.4(d) NBD Bank Credit Agreement, dated September 30, 1997
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Data Systems Network Corporation
November 13, 1997 /S/ Philip M. Goy
Date Philip M. Goy
Vice President and Chief
Financial Officer
(principal financial officer)
November 13, 1997 /S/ Michael W. Grieves
Date Michael W. Grieves
President and Chief
Executive Officer
(duly authorized officer)
EXHIBIT 10.4(d) CREDIT AGREEMENT
This Credit Agreement, dated as of the Effective Date set forth below, is by
and between Data Systems Network Corporation, a Michigan corporation (the
"Borrower"), and NBD Bank, a Michigan banking corporation (the "Bank").
RECITALS:
(A) The Bank and the Borrower wish to provide for a revolving bank credit
in a principal amount not to exceed $12,000,000, a discretionary credit
facility in a principal amount not to exceed $8,000,000 and a discretionary
credit facility in a principal amount not to exceed $500,000, as provided
herein.
AGREEMENT:
THEREFORE, in consideration of the Recitals and the mutual promises
contained in this agreement, the parties agree as follows:
ARTICLE I -- DEFINITIONS
"Acceptable Accounts Receivable" shall mean all trade accounts receivable of
the Borrower in which the Bank has a perfected, first priority, security
interest, excluding accounts more than 90 days past due from the date of
invoice, accounts subject to offset or defense, government accounts (except
for all state and local municipal trade receivables which are acceptable for
up to 120 days from the date of invoice), bonded, affiliate and foreign
accounts, and accounts otherwise unacceptable to the Bank. In
invoice (or 120 days with respect to municipal trade accounts), then all
trade accounts receivable shall be excluded as qualifying Acceptable Accounts
Receivable.
"Authorization" shall mean the uncommitted Credit Authorization established
by Section 2.2 and the uncommitted Lease Authorization established by Section
2.2.1.
"Authorization Termination Date" means September 30, 1998.
"Borrowing Base" shall mean (i) 80% of Acceptable Accounts Receivable, plus
(ii) 48% of inventory of the Borrower in which the Bank has a perfected,
first priority, security interest, valued at lower of cost or market and
excluding amounts outstanding under the IBM floor plan and inventory release
agreement dated as of July 12, 1995 as amended on October 1, 1997, (the "IBM
Inventory"), but not exceeding $3,000,000.
"Business Day" means a day other than Saturday or Sunday on which banks are
open for business in Detroit.
"Commitment" means the obligation of the Bank to make Loans under the
Revolving Credit not exceeding $12,000,000, as such amount may be modified or
reduced from time to time pursuant to the terms hereof.
"Credit Authorization" is defined in Section 2.2.
"Credit Facilities" shall mean the Revolving Credit and the Authorization.
"Credits" shall mean the Revolving Credit and the Authorization.
"Current Assets" shall mean current assets as determined in accordance with
GAAP.
"Current Liabilities" shall mean current liabilities as determined in
accordance with GAAP.
"Default" means an event described in Section 7.
"Effective Date" shall mean the date set forth in the last paragraph of this
agreement described as the effective date of this agreement.
"Floating Rate" means a rate per annum equal to the Prime Rate, changing
when and as the Prime Rate changes.
"GAAP" means, as of the date of determination, generally accepted accounting
principles, consistently applied.
"Intangible Assets" means goodwill, licenses, patents, copyrights,
franchises, mailing lists, catalogs, trademarks, bond discount, underwriting
expense, organizational expense and other similar intangible assets.
"Interest Period" means a Negotiated Rate Interest Period.
"Lease" is defined in Section 2.2.1.
"Lease Authorization" is defined in Section 2.2.1.
"Lending Installation" means any office, branch, subsidiary or affiliate of
the Bank.
"Lien" means any security interest, mortgage, pledge, lien, claim, charge,
encumbrance, title retention agreement, lessor's interest under a capitalized
lease or analogous instrument, in, of or on any Person's assets or
properties in favor of any other Person.
"Loan" means a loan under the Revolving Credit as described in Section 2.1
or under the Authorization as described in Section 2.2. and 2.2.1.
"Loan Documents" shall mean this agreement, the Notes, the Security
Agreement, the related financing statements and any other documents executed
in connection with the Revolving Credit and the Authorization.
"Master Demand Note" shall mean the Master Demand Note of the Borrower in
the form of Exhibit B evidencing Loans under the Authorization.
"Material Adverse Effect" means an event or action that (i) could reasonably
be expected to materially and adversely affect the business, properties,
condition (financial or otherwise), or results of operations of the Borrower
and its Subsidiaries taken as a whole, or (ii) has been brought by or before
any court or arbitrator or any governmental body, agency or official, and
draws into question the validity or enforceability of any material provision
of this agreement.
"Negotiated Rate" means with respect to a Negotiated Rate Loan for the
relevant Negotiated Rate Interest Period, a rate of interest established by
the Bank in its sole and absolute discretion.
"Negotiated Rate Interest Period" means with respect to a Negotiated Rate
Loan, a period of not less than one day and not more than 180 days,
commencing on a Business Day selected by the Borrower pursuant to this
agreement. If such Negotiated Rate Interest Period would end on a day which
is not a Business Day, such Negotiated Rate Interest Period shall end on the
next succeeding Business Day, unless such next succeeding Business Day is
after the Revolving Credit Termination Date, in which case such Negoti
od may end after the Revolving Credit Termination Date.
"Negotiated Rate Loan" means a Loan which bears interest at the Negotiated
Rate.
"Notes" means the Master Demand Note and the Revolving Credit Note and
"Note" shall mean either one of them, including any amendment or replacement.
"Obligations" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid facility fees, all Leases and all other
obligations of the Borrower to the Bank arising under this agreement, and the
Notes.
"Person" means any corporation, natural person, firm, limited liability
company, joint venture, partnership, trust, unincorporated organization,
enterprise, government or any department or agency of any government.
"Prime Rate" means a rate per annum equal to the "prime rate" of interest
announced by the Bank from time to time, changing when and as the prime rate
changes, which shall not necessarily be the lowest rate charged by the Bank
to any of its customers.
"Rate Option" means the Negotiated Rate or the Floating Rate.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System from time to time in effect and includes any successor or
other regulation or official interpretation of the Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Revolving Credit" shall mean the revolving credit facility established by
Section 2.1.
"Revolving Credit Note" shall mean the Revolving Credit Note of the Borrower
in the form of Exhibit A evidencing Loans under the Revolving Credit.
"Revolving Credit Termination Date" means September 30, 1999.
"Section" means a numbered section of this agreement, unless another
document is specifically referenced.
"Security Agreement" shall mean a Security Agreement between the Bank and
the Borrower in form and substance satisfactory to the Bank granting the Bank
a security interest in the collateral described in Section 2.13.
"Subordinated Debt" means all debt, obligations and liabilities of the
Borrower to any Person other than the Bank which has been subordinated to the
Obligations pursuant to a subordination agreement satisfactory in form and
content to the Bank.
"Subsidiary" means any corporation more than 50% of the outstanding voting
securities of which are at the time owned or controlled, directly or
indirectly, by the Borrower or by one or more Subsidiaries or by the
Borrower and one or more Subsidiaries, or any similar business organization
which is so owned or controlled.
"Tangible Net Worth" means total assets less Intangible Assets, total
liabilities, and loans to shareholders and/or officers of the Borrower.
"Total Leverage" means the ratio of the Borrower's total liabilities less
Subordinated Debt to its Tangible Net Worth plus Subordinated Debt.
"UCC" shall mean the Uniform Commercial Code as adopted in the State of
Michigan and amended from time to time.
"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.
The foregoing definitions are applicable to both the singular and plural
forms of the defined terms. Any accounting terms used but not otherwise
defined have the meanings given them under GAAP.
ARTICLE II -- THE LOANS
2.1. The Revolving Credit Commitment. From and including the Effective Date
of this agreement and prior to the Revolving Credit Termination Date, the
Bank agrees, on the terms of this agreement to make Loans to the Borrower
from time to time in amounts not exceeding, in the aggregate at any one time
outstanding, the lesser of the Commitment or the Borrowing Base.
2.2. The Credit Authorization. The Bank has approved an uncommitted credit
authorization (the "Credit Authorization") to the Borrower in the aggregate
principal amount not to exceed $8,000,000 at any one time outstanding,
subject to the terms and conditions set forth in this agreement and the
Bank's continuing satisfaction with the Borrower's managerial and financial
status. Credit under the Credit Authorization shall be in the form of Loans
extended from time to time by the Bank in its sole discretion a
all terminate on the Authorization Termination Date. Disbursing a Loan
under the Credit Authorization on one or more occasions shall not commit the
Bank to take such action in the future. The Bank shall, in the ordinary
course of business, make notations in its records of the date and amount of
each Loan under the Credit Authorization, the amount of each payment on such
Loans, and other information. Such records shall be prima facie evidence of
the outstanding principal balance of the Master Demand Not
2.2.1. The Lease Authorization. The Bank has approved an uncommitted
authorization (the "Lease Authorization") to the Borrower in the aggregate
principal amount not to exceed $500,000 at any one time outstanding, subject
to the terms and conditions set forth in this agreement and the Bank's
continuing satisfaction with the Borrower's managerial and financial status.
Credit under the Lease Authorization shall be in the form of loans/credit to
the Borrower evidenced either (1) by notes on the Bank's standa
y conditional sales contracts on standard forms of EFI. Both lease
agreements and conditional sales contracts are referred to in the plural as
"Leases." Interest on each Loan evidenced by a note shall accrue at the
Floating Rate. If the Loan is evidenced by a Lease, rent or payments, as the
case may be, interest shall accrue at a rate to be negotiated by the
Borrower and the Bank. The maturity of each note or the term of any Lease
shall not exceed 60 months from the note or Lease commencement date. The
or equipment being financed under any Loan or Lease. Loans made and credit
extended under the Lease Authorization shall be used by the Borrower to
finance the acquisition of machinery or equipment for use in the Borrower's
business. Advances at any time under the Lease Authorization are solely at
the Bank's discretion. Any Loan or Lease made on one or more occasions shall
not commit the Bank to make a Loan or Lease on any later occasion. Unless
earlier withdrawn, the Lease Authorization shall expire on
2.3. Limitation of Aggregate Outstandings Under the Credits.
Notwithstanding any provision of this agreement to the contrary, the sum of
the Obligations outstanding at any one time under the Revolving Credit plus
the aggregate amount of all Loans outstanding under the Authorization shall
not exceed $20,500,000 at any one time.
2.4. Commitment Fee and Reduction of the Commitment. The Borrower agrees
to pay to the Bank a commitment fee on the daily average of the unused
portion of the Commitment, at the rate of one quarter of one percent (1/4%)
per annum from the date of this agreement to and including the Revolving
Credit Termination Date, payable on the last day of each calendar quarter in
arrears and on the Revolving Credit Termination Date. The Borrower may
permanently reduce the Commitment in whole, or in part in integral
the amount of any reduction, but the amount of the Commitment may not be
reduced below the outstanding principal amount of the Loans. All accrued
facility fees are payable on the effective date of any termination of the
obligations of the Bank to make Loans. The Revolving Credit, once reduced or
terminated, may not be reinstated.
2.5. The Loans. Subject to the terms of this agreement, the Borrower may
borrow, repay and reborrow at any time prior to the Revolving Credit
Termination Date. The Loans may be Floating Rate Loans or Negotiated Rate
Loans, or a combination of them, selected by the Borrower in accordance with
Section 2.6. The Loans made under the Revolving Credit must be repaid in
full on the Revolving Credit Termination Date. The Bank may book the Loans
at any Lending Installation. The Borrower may from time to time
ness Day's prior notice to the Bank without penalty or premium. A Negotiated
Rate Loan may not be paid prior to the last day of the applicable Interest P
eriod. If at any time the Obligations exceed the Borrowing Base, the Borrowe
r shall immediately prepay the Loans in the amount by which the Obligations s
o exceed the Borrowing Base.
2.6. Method of Selecting Rate Options and Interest Periods. The Borrower may
select the Rate Option and Interest Period applicable to each Loan from time
to time. The Borrower must give the Bank an irrevocable borrowing notice in
the form attached hereto as Exhibit C (the "Notice of Borrowing"), not later
than 10:00 a.m. Detroit time on the borrowing date of each Floating Rate
Loan or Negotiated Rate Loan, specifying:
(i) the borrowing date of that Loan, which must be a Business Day,
(ii) the aggregate amount of that Loan,
(iii) the Rate Option selected for that Loan, and
(iv) in the case of each Negotiated Rate Loan, the Negotiated Rate Interest
Period applicable to it.
Each Negotiated Rate Loan will bear interest on the outstanding principal
amount for each day during the Negotiated Rate Interest Period applicable to
it from and including the first day of that Interest Period to (but not
including) the last day of that Interest Period at the interest rate
determined as applicable to that Negotiated Rate Loan. If at the end of an
Interest Period for an outstanding Negotiated Rate Loan, the Borrower has
failed to select a new Rate Option or to pay that Loan, then that Loan
until the effective date of a new Rate Option with respect to it is selected
by the Borrower. An outstanding Floating Rate Loan may be converted to a
Negotiated Rate Loan at any time subject to the notice provisions applicable
to the type of Loan selected. The Borrower may not select a Negotiated Rate
for a Loan if there exists a Default or Unmatured Default. The Borrower may
not select an Interest Period for Revolving Credit Loans which would end
after the Revolving Credit Termination Date or an Intere
. Each Negotiated Rate Loan must be in the minimum amount of $1,000,000 (and
in multiples of $100,000 if in excess of the minimum).
2.7. Rates Applicable After Default. If any Loan is not paid at maturity,
whether by acceleration or otherwise, (i) each Negotiated Rate Loan will bear
interest for the remainder of the applicable Interest Period at the rate
otherwise applicable to that Interest Period plus 3% per annum, and (ii) each
Floating Rate Loan will bear interest at a rate per annum equal to the
Floating Rate otherwise applicable to the Floating Rate Loan plus 3% per
annum. During the continuance of any other Default, the Bank m
st for the remainder of the applicable Interest Period at the rate otherwise
applicable to that Interest Period plus 3% per annum, and (z) each Floating
Rate Loan will bear interest at a rate per annum equal to the Floating Rate
otherwise applicable to the Floating Rate Loan plus 3% per annum.
2.8. Method of Payment. All payments of principal, interest, and fees must
be made in immediately available funds to the Bank at the Bank's address
specified pursuant to Section 9.5, or at any other Lending Installation of
the Bank specified in writing by the Bank to the Borrower, by noon (local
time) on the date when due. The Bank is authorized to charge the account of
the Borrower maintained with it for each payment of principal, interest and
fees as it becomes due.
2.9. No Setoff or Deduction. All payments of principal and interest shall
be made by the Borrower without setoff or counterclaim, and free and clear of
, and without deduction or withholding for, or on account of, any present or
future taxes, levies, imposts, duties, fees, assessments, or other charges of
whatever nature, imposed by any governmental authority, or by any department
, agency or other political subdivision or taxing authority unless any such
deduction is required by law. If any such deductio
the Bank receives all amounts contemplated by this agreement.
2.10. The Notes; Telephonic Notices. The Bank is authorized to record on
its books the date, amount, Rate Option and Interest Period of each Loan, and
the date and amount of each principal payment made under the Notes. These
records govern absent manifest error, provided that neither the failure to
record nor any error in that record affects the Borrower's obligations under
the Notes. The Borrower authorizes the Bank to extend Loans and effect Rate
Option selections based on telephonic notices made by
er agrees to deliver promptly to the Bank a written confirmation of each
telephonic notice signed by an authorized officer of the Borrower. If the
written confirmation differs in any material respect from the action taken by
the Bank, the records of the Bank govern, absent manifest error.
2.11. Interest Payment Dates; Interest Basis. Interest accrued on the
Loans is payable (i) for Floating Rate Loans and for Negotiated Rate Loans,
on the last day of each month, (ii) for all Loans, on any date on which the
Loan is paid or prepaid, whether due to acceleration or otherwise. Interest
and commitment fees are calculated for actual days elapsed on the basis of a
360-day year. Interest is payable for the day a Loan is made but not for the
day of any payment on the amount paid if payment is rece
Loan becomes due on a day which is not a Business Day, that payment must be
made on the next succeeding Business Day and, in the case of a principal
payment, that extension of time is included in computing interest.
2.12. Security Agreement. On or before the Effective Date, to secure the
prompt payment of the Borrower's obligations under this agreement, the Notes,
the Leases and all other obligations of the Borrower to the Bank, whether
direct or indirect, absolute or contingent, due or to become due, now
existing or later arising, the Borrower shall deliver to the Bank the
Security Agreement, and all financing statements that the Bank shall
reasonably request in connection with the Security Agreement, all duly execu
2.13. Personal Property Collateral. The Security Agreement shall grant to
the Bank, a duly perfected, first priority, continuing security interest
satisfactory to the Bank in the following collateral and all its additions,
substitutions, increments, proceeds and products, whether now owned or later
acquired:
(i) Accounts Receivable. All of the accounts, chattel paper, general
intangibles, instruments, and documents (as those terms are defined in the
UCC), rights to refunds of taxes paid at any time to any governmental entity,
and any letters of credit and drafts under them given in support of the
foregoing of the Borrower;
(ii) Inventory. All of the inventory (as that term is defined in the UCC,
and excluding a first priority security interest only in the IBM Inventory)
of every type, of the Borrower, wherever located;
(iii) Equipment. All of the equipment and fixtures (as those terms are
defined in the UCC), of the Borrower, wherever located; and
(iv) Books and Records. All books and records related in any way to any of
the above.
2.13.1 Notice. The Borrower shall promptly notify the Bank when any
collateral, as described above, is moved to a jurisdiction other than the
State of Michigan.
2.14. Additional Collateral/Setoff. To further secure the prompt payment of
the Borrower's obligations under this agreement, the Notes, and all other
obligations of the Borrower to the Bank, whether direct or indirect,
absolute or contingent, due or to become due, now existing or later arising,
the Borrower grants to the Bank a continuing security interest in (A) all
securities and other property of the Borrower in the custody, possession or
control of the Bank (other than property held by the Bank solely
ve the right at any time to apply its own debt or other liability to the
Borrower, or to any other party liable for payment of the Borrower'
obligations under this agreement in whole or partial payment of those
obligations, without any requirement of mutual maturity.
2.15. Cross Lien. Any of the Borrower's other property in which the Bank ha
s a lien to secure payment of any other obligation, whether direct or
indirect, absolute or contingent, due or to become due, now existing or later
arising, shall also secure payment of and be part of the collateral for the
Borrower's obligations under this agreement.
ARTICLE III -- CHANGE IN CIRCUMSTANCES
3.1. Yield Protection. If any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive
(whether or not having the force of law), or any interpretation of them, or
compliance by the Bank with them,
(i) subjects the Bank or any applicable Lending Installation to any tax,
duty, charge or withholding on or from payments due from the Borrower
(excluding taxation of the overall net income of the Bank or applicable
Lending Installation), or changes the basis of taxation of payments to the
Bank in respect of its Loans or other amounts due to it under this agreement,
or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, the Bank or any
applicable Lending Installation (other than reserves and assessments taken
into account in determining the interest rate applicable to Negotiated Rate
Loans), or
(iii) imposes any other condition the result of which is to increase the
cost to the Bank or any applicable Lending Installation of making, funding or
maintaining loans or reduces any amount receivable by the Bank or any
applicable Lending Installation in connection with loans, or requires the
Bank or any applicable Lending Installation to make any payment calculated by
reference to the amount of loans held or interest received by it, by an
amount deemed material by the Bank, or
(iv) affects the amount of capital required or expected to be maintained
by the Bank or any Lending Installation or any corporation controlling the
Bank, and the Bank determines the amount of capital required is increased by
or based on the existence of this agreement or its obligation to make Loans
under this agreement or of commitments of this type,
then, within 15 days of the Bank's demand, the Borrower must pay the Bank
that portion of the increased expense incurred (including, in the case of
Section 3.1(iv), any reduction in the rate of return on capital to an amount
below that which it could have achieved but for the law, rule, regulation,
policy, guideline or directive, and after taking into account the Bank's
policies as to capital adequacy) or reduction in amounts received which the
Bank determines is attributable to making, funding and maintain
3.2. Funding Indemnification. If any payment of a Negotiated Rate Loan
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Negotiated
Rate Loan is not made on the date specified by the Borrower for any reason
other than default by the Bank, the Borrower indemnifies the Bank for any
loss or cost incurred by it resulting from these facts, including without
limitation any loss or cost in liquidating or employing deposit
3.3. Bank Statements; Survival of Indemnity. To the extent reasonably
possible, the Bank will designate an alternate Lending Installation with
respect to Negotiated Rate Loans to reduce any liability of the Borrower to
the Bank under Section 3.1, so long as that designation is not
disadvantageous to the Bank. The Bank will deliver a written statement as
to the amount due, if any, under Section 3.1 or 3.2. That written statement
will set forth in reasonable detail the calculations upon which the Bank det
ARTICLE IV -- CONDITIONS PRECEDENT
4.1. Initial Loan. The Bank is not required to make the initial Loan under
this agreement unless the Borrower has furnished to the Bank whatever
opinions of counsel, certificates of incumbency, resolutions, by-laws,
articles of incorporation and any other documents (including, but not
limited to, the Security Agreement) which the Bank reasonably requests.
4.2. Each Loan. The Bank is not required to make any Loan, unless on the
applicable borrowing date (i) there exists no Default or Unmatured Default,
(ii) the warranties contained in Article V are true and correct as of such
borrowing date, and (iii) all legal matters incident to making the Loan are
satisfactory to the Bank and its counsel.
ARTICLE V -- WARRANTIES
The Borrower warrants to the Bank that:
5.1. Corporate Existence and Standing. Each of the Borrower and the
Subsidiaries is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has
all requisite authority to conduct its business in each jurisdiction in
which its business is conducted except where the failure to have that
authority would not have a Material Adverse Effect.
5.2. Authorization and Validity. The Borrower has the corporate power and
authority and legal right to execute and deliver this agreement and the Note
and to perform its obligations under them. The execution and delivery by the
Borrower of this agreement and the Note and the performance of its
obligations under them have been duly authorized by proper corporate
proceedings, and this agreement and the Note each constitute legal, valid and
binding obligations of the Borrower enforceable against the Borrow
5.3. No Conflict; Government Consent. Neither the execution and delivery
by the Borrower of this agreement and the Note, nor the consummation of the
transactions described in them, nor compliance with their provisions will
violate any law, rule, regulation, order, writ, judgment, injunction, decree
or award binding on the Borrower or any Subsidiary, or the Borrower's or any
Subsidiary's articles of incorporation or by-laws, or the provisions of any
indenture, instrument or agreement to which the Borrower
is a party or is subject, or by which it or its property is bound, or
conflict with or constitute a default under any indenture, instrument or
agreement, or result in the creation or imposition of any Lien in, of or on
the property of the Borrower or a Subsidiary pursuant to the terms of any
indenture, instrument or agreement. No order, consent, approval, license,
authorization, or validation of, or filing, recording or registration with,
or exemption by, or other action in respect of, any governmental or
tion with the execution, delivery and performance of, or the legality,
validity, binding effect or enforceability of, this agreement or the Note.
5.4. Financial Statements. The June 30, 1997 consolidated financial
statements of the Borrower and the Subsidiaries previously delivered to the
Bank were prepared in accordance with GAAP in effect on the date those
statements were prepared and fairly present the consolidated financial
condition and operations of the Borrower and the Subsidiaries at that date
and the consolidated results of their operations for the period then ended.
5.5. Material Adverse Change. Since June 30, 1997, there has been no
material adverse change in the business, properties, condition (financial or
otherwise), prospects or results of operations of the Borrower and its
Subsidiaries.
5.6. Litigation and Contingent Obligations. Except as set forth on
Schedule 1, there is no litigation, arbitration, governmental investigation,
proceeding or inquiry pending or, to the knowledge of any of their officers,
threatened against or affecting the Borrower or any Subsidiary which might
have a Material Adverse Effect. Other than any liability incident to that
litigation, arbitration or proceedings, the Borrower has no material
contingent obligations not provided for or disclosed in the financial
5.7. Regulation U. Margin stock (as defined in Regulation U of the Board
of Governors of the Federal Reserve System) constitutes less than 25% of
those assets of the Borrower and its Subsidiaries which are subject to any
limitation on sale, pledge, or other restriction under this agreement.
5.8. Compliance With Laws. The Borrower and its Subsidiaries have complied
in all material respects with all applicable statutes, rules, regulations,
orders and restrictions of any domestic or foreign government or any
instrumentality or agency of them, having jurisdiction over the conduct of
their respective businesses or the ownership of their respective properties.
ARTICLE VI -- COVENANTS
During the term of this agreement, unless the Bank otherwise consents in
writing:
6.1. Financial Reporting. The Borrower will maintain, for itself and each
ubsidiary, a system of accounting established and administered in accordance
with GAAP, and furnish to the Bank:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified (except for qualifications relating to changes in accounting
principles or practices reflecting changes in GAAP and required or approved
by the Borrower's independent certified public accountants) audit report
certified by independent certified public accountants, acceptable to the
Bank, prepared in accordance with GAAP on a consolidated basis for itself and
the Subsidiaries, including balance sheets as of the end of that per
(ii) Within 45 days after the close of the first three quarterly periods of
each of its fiscal years, for itself and the Subsidiaries, consolidated
unaudited balance sheets as at the close of each that period and consolidated
profit and loss and reconciliation of surplus statements and statements of
cash flows for the period from the beginning of that fiscal year to the end
of that quarter, all certified by an officer of the Borrower.
(iii) Promptly upon furnishing it to its shareholders, copies of all
financial statements, reports and proxy statements so furnished.
(iv) Promptly upon filing them, copies of all registration statements and
annual, quarterly, monthly or other regular reports which the Borrower or any
Subsidiary files with the Securities and Exchange Commission.
(v) Any other information (including non-financial information) which the
Bank or any Bank Installation from time to time reasonably requests.
6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to
, use the proceeds of the Loans for general corporate purposes. The Borrower
may not, nor may it permit any Subsidiary to, use any of the proceeds of the
Loans to purchase or carry any "margin stock" (as defined in Regulation U).
6.3. Conduct of Business. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted, and do all things necessary to remain duly incorporated, validly
existing and in good standing as a domestic corporation in its jurisdiction
of incorporation and maintain all requisite authority to conduct its business
in each jurisdiction in which its business is conducted, excep
t.
6.4. Taxes. The Borrower will, and will cause each Subsidiary to, timely
file complete and correct United States federal and applicable foreign, state
and local tax returns required by law, and pay when due all taxes,
assessments and governmental charges and levies on it or its income, profits
or property, except those which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
set aside.
6.5. Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply in all material respects with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to
which it may be subject.
6.6. Merger. The Borrower will not merge or consolidate with or into any
other Person unless the Borrower is the legally surviving corporation and,
after giving effect to the merger or consolidation, no Default or Unmatured
Default exists.
6.7. Liens. The Borrower will not, nor will it permit any Subsidiary to,
create, incur, or suffer to exist any Lien in, of or on the property of the
Borrower or any Subsidiary, except:
(i) Liens for taxes, assessments or governmental charges or levies on its
property if they are not at the time delinquent or if they can be paid later
without penalty, or are being contested in good faith and by appropriate
proceedings.
(ii) Liens imposed by law, such as carriers', warehousemen's and mechanics'
liens and other similar liens arising in the ordinary course of business
which secure payment of obligations not more than 60 days past due or which
are being contested in good faith by appropriate proceedings and for which
adequate reserves have been set aside on its books.
(iii) Liens arising out of pledges or deposits under worker's compensation
laws, unemployment insurance, old age pensions, or other social security or
retirement benefits, or similar legislation.
(iv) Utility easements, building restrictions and any other encumbrances or
charges against real property which are of a nature generally existing with
respect to properties of a similar character and which do not in any material
way affect their marketability or interfere with their use in the business
of the Borrower or the Subsidiaries.
(v) Liens existing on the date of this agreement.
6.8. Notice of Default. The Borrower will, and will cause each Subsidiary
to, give prompt notice in writing to the Bank of the occurrence of any
Default or Unmatured Default and of any other development, financial or
otherwise, which might have a Material Adverse Effect or might materially
adversely affect the ability of the Borrower to repay the Obligations.
6.9 Debt. The Borrower will not, nor will it permit any Subsidiary to,
incur or permit to remain outstanding, debt for borrowed money or installment
obligations, except debt reflected in the latest financial statement of the
Borrower furnished to the Bank prior to execution of this agreement and not
to be paid with proceeds of borrowings under the Credit Facilities. For
purposes of this covenant, the sale of any accounts receivable is deemed the
incurring of debt for borrowed money.
6.10 Guaranties. The Borrower will not, nor will it permit any
Subsidiary to, guarantee or otherwise become or remain secondarily liable on
the undertaking of another, except for endorsement of drafts for deposit and
collection in the ordinary course of business.
6.11 Advances and Investments. The Borrower will not, nor will it permit
any Subsidiary to, purchase or acquire any securities of, or make any loans
or advances to, or investments in, any person, firm or corporation, except
obligations of the United States Government, open market commercial paper
rated one of the top two ratings by a rating agency of recognized standing,
or certificates of deposit in insured financial institutions.
6.12 Current Ratio. The Borrower will not, nor will it permit any
Subsidiary to, permit the ratio of its Current Assets to its Current
Liabilities to be less than 1.75 to 1.00.
6.13 Total Leverage. The Borrower will not, nor will it permit any
Subsidiary to, permit its Total Leverage to exceed 3.5 to 1.00.
ARTICLE VII -- DEFAULTS
The occurrence of any one or more of the following events constitutes a
Default:
7.1. Any warranty made or deemed made by or on behalf of the Borrower or
any Subsidiary to the Bank under or in connection with this agreement, any
Loan, or any certificate or information delivered in connection with this
agreement or the Note is materially false on the date as of which it is made.
7.2. The principal of the Note is not paid when due, or any interest or any
facility fee or other obligations under this agreement or the Note are not
paid within five days after they become due.
7.3. The Borrower breaches any of the terms of Section 6.6, 6.7, 6.8, 6.12
or 6.13.
7.4. The Borrower breaches (other than a breach which constitutes a Default
under Section 7.1, 7.2 or 7.3) any of the terms of this agreement which is
not remedied within thirty days after written notice from the Bank.
7.5. The Borrower or any Subsidiary fails to pay any debt for borrowed
money equal to or exceeding $25,000 the aggregate when due; or the Borrower
or any Subsidiary defaults in the performance of any term contained in any
agreement under which that debt was created or is governed, the effect of
which is to cause, or to permit the holder or holders of that debt to cause,
that debt to become due prior to its stated maturity; or any debt of the
Borrower or any Subsidiary is declared to be due and payable or
aturity; or the Borrower or any Subsidiary does not pay, or admits in writing
its inability to pay, its debts generally as they become due.
7.6. The Borrower or any Subsidiary (i) has an order for relief entered
with respect to it under present or future Federal bankruptcy laws, (ii)
makes an assignment for the benefit of creditors, (iii) applies for, seeks,
consents to, or acquiesces in, the appointment of a receiver, custodian,
trustee, examiner, liquidator or similar official for it or any substantial
part of its property, (iv) institutes any proceeding seeking an order for
relief under present or future Federal bankruptcy laws, or seeking
n, arrangement, adjustment or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
fails to file an answer or other pleading denying the material allegations of
any such proceeding filed against it, (v) takes any corporate action to
authorize or effect any of the foregoing actions set forth in this Section
7.6 or (vi) fails to contest in good faith any appointment or proceeding
described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower or any
Subsidiary, a receiver, trustee, examiner, liquidator or similar official is
appointed for the Borrower or any Subsidiary or any substantial part of its
property, or a proceeding described in Section 7.6(iv) is instituted against
the Borrower or any Subsidiary and that appointment continues undischarged or
those proceedings continue undismissed or unstayed for a period of 30
consecutive days.
7.8. Any reportable event (as defined in Section 4043 of ERISA) occurs in
connection with any plan (as defined in ERISA).
7.9. Any Person, or two or more Persons acting in concert, acquires
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934) of 20% or more
of the outstanding shares of the Borrower's voting stock.
ARTICLE VIII - ACCELERATION; REMEDIES; AND AMENDMENTS
8.1. Acceleration. If any Default described in Section 7.6 or 7.7 occurs
with respect to the Borrower, the obligations of the Bank to make Loans
automatically terminates and the Obligations are immediately due and payable
without any election or action on the part of the Bank. If any other Default
occurs, the Bank may terminate or suspend its obligation to make Loans, or
declare the Obligations due and payable, or both, whereupon the Obligations
are immediately due and payable, without presentment, dema
8.2. Preservation of Rights. No delay or omission of the Bank to exercise
any right under this agreement or the Note impairs that right nor can it be
construed to waive any Default or acquiesce in any Default, and the making of
a Loan notwithstanding the existence of a Default or the inability of the
Borrower to satisfy the conditions precedent to that Loan does not constitute
a waiver or acquiescence. Any single or partial exercise of any right does
not preclude any other or further exercise of it or t
t or the Note is valid unless in writing signed by the Bank and then only to
the extent that writing specifies. All remedies contained in this agreement
and the Note or by law afforded are cumulative and all are available to the
Bank until the Obligations have been paid in full.
8.3. Amendments. Subject to the provisions of this Article VIII, the Bank
and the Borrower may enter into agreements supplementing this agreement for
the purpose of adding or modifying this agreement or the Note or changing in
any manner the rights of the Bank or the Borrower or waiving any Default.
8.4. Setoff. In addition to and without limiting any rights of the Bank
under applicable law, if the Borrower becomes insolvent, howsoever evidenced,
or any Default or Unmatured Default occurs, any and all deposits (including
all account balances, whether provisional or final and whether or not
collected or available) and any other debt at any time held or owing by the
Bank to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to the Bank, w
ARTICLE IX -- GENERAL PROVISIONS
9.1. Survival of Warranties. All warranties of the Borrower contained in
this agreement survive the delivery of the Note and the making of the Loans.
9.2. Taxes. Any taxes (excluding income taxes) or other similar
assessments or charges payable or ruled payable by any governmental authority
in respect of this agreement and the Note must be paid by the Borrower,
together with interest and penalties, if any.
9.3. Expenses; Indemnification. The Borrower must reimburse the Bank for
any costs, internal charges and out-of-pocket expenses (including attorneys'
fees and time charges of attorneys for the Bank, who may be employees of the
Bank) paid or incurred by the Bank in connection with the preparation, review
, execution, delivery, amendment, modification, administration, collection
and enforcement of this agreement and the Note. The Borrower further
indemnifies the Bank, its directors, officers and employees
mitation all expenses of litigation or preparation for litigation whether or
not the Bank is a party) which any of them pay or incur arising out of or
relating to this agreement, the Note, the transactions described in this
agreement or the direct or indirect application or proposed application of
the proceeds of any Loan. The obligations of the Borrower under this Section
survive the termination of this agreement.
9.4. Successors and Assigns. The terms of this agreement and the Note bind
and benefit the Borrower and the Bank and their respective successors and
assigns, except that the Borrower has no right to assign its rights or
obligations under this agreement or the Note. The Bank may, in the ordinary
course of its commercial banking business and in accordance with applicable
law, at any time sell to one or more banks or other entities participating
interests in any Loan, the Note or the Commitment. The Bank
ore banks or other entities all or any part of its rights and obligations
under this agreement or the Note, and the Borrower releases the Bank for the
amount so assigned.
9.5. Giving Notice. Except as otherwise permitted by Section 2.6 with
respect to borrowing notices, all notices, requests and other communications
to any party must be in writing (including bank wire, telex, facsimile
transmission or similar writing) and must be given to a party: (y) in the
case of the Borrower or the Bank, at its address, facsimile number or telex
number set forth on the signature page below, or (z) in the case of any party
, whatever other address, facsimile number or telex number that
e (i) if given by telex, when it is transmitted to the telex number specified
in this Section and the appropriate answerback is received, (ii) if given by
facsimile transmission, when transmitted to the facsimile number specified
in this Section and confirmation of receipt is received, (iii) if given by
mail, 72 hours after that communication is deposited in the mails with first
class postage prepaid, addressed as required, or (iv) if given by any other
means, when delivered at the address specified in this
ARTICLE X -- GOVERNING LAW; JURISDICTION; JURY TRIAL WAIVER
10.1 Choice of Law. This agreement and the Notes are to be construed in
accordance with the internal laws (but not the law of conflicts) of Michigan.
10.2 Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any United States federal or Michigan state
court sitting in Michigan in any action or proceeding arising out of or
relating to any Loan, and the Borrower irrevocably agrees that all such
claims may be heard and determined in any such court and irrevocably waives
any present and future objection it may have as to the venue of any action or
proceeding brought in that court, or that that court is an inconveni
t the Borrower in the courts of any other jurisdiction. Any judicial
proceeding by the Borrower against the Bank or any affiliate of the Bank
involving, directly or indirectly, any matter in any way arising out of,
related to, or connected with any Loan must be brought only in a court in
Michigan.
10.3 Waiver of Jury Trial. The Bank and the Borrower knowingly, voluntarily
and intelligently waive any right either of them have to a trial by jury in
any proceeding (whether sounding in contract or tort) which relates to,
arises out of, or is connected with this or any related agreement, or the
relationship they purport to create. This provision may only be modified in
a written instrument executed by the Bank and the Borrower.
EXECUTED ON: September 30, 1997 which shall be the Effective Date of this
agreement.
DATA SYSTEMS NETWORK NBD BANK
CORPORATION
By: By:
Michael W. Grieves James T. McKeon
Its President and C.E.O. Its: Assistant Vice President
ADDRESS FOR NOTICES:
34705 West Twelve Mile, Suite 300 38601 Twelve Mile Road
Farmington Hills, Michigan 48331 Farmington Hills, Michigan 48331
Phone: (248-489-7117) Phone: (248-488-0658)
Fax: (248-489-1007) Fax: (248-488-0634)
EXHIBIT A
MASTER PROMISSORY NOTE
$12,000,000 Detroit, Michigan
September 30, 1997
For value received, on September 30, 1999 Data Systems Network Corporation
(the "Borrower") promises to pay to the order of NBD Bank (the "Bank"), at
the Bank's principal office in the State of Michigan, in lawful money of the
United States of America and in immediately available funds, the principal
sum of TWELVE MILLION AND 00/100 DOLLARS ($12,000,000), or such lesser amount
as is indicated on the Bank's records, together with interest computed on
the balance from time to time unpaid on the basis of the
pursuant to the "Credit Agreement" as defined below and reflected on the
Bank's records. Interest on the unpaid principal amount is payable in
accordance with the terms of the Credit Agreement. The Borrower agrees to
pay interest on overdue principal from the date of demand or default until
paid at the rate which is three percent (3%) per annum in excess of the rate
announced from time to time by the Bank as its prime rate.
In no event may the interest rate exceed the maximum rate allowed by law.
Any interest which would for any reason be unlawful under applicable law will
be applied to principal.
Waiver: The Borrower and each endorser of this note and any other party
liable for the debt evidenced by this note severally waives demand,
presentment, notice of dishonor and protest of this note, and consents to any
extension or postponement of time of its payment without limit as to number
or period, to any substitution, exchange or release of all or any part of any
collateral securing this note, to the addition of any party, and to the
release, discharge, or suspension of any rights and remedies again
is liable for the payment of this note. No delay on the part of the holder
in the exercise of any right or remedy waives that right or remedy.
No single or partial exercise by the holder of any right or remedy precludes
any future exercise of that right or remedy or the exercise of any other
right or remedy. No waiver or indulgence by the holder of any default is
effective unless it is in writing and signed by the holder, and a waiver on
one occasion does not bar or waive any right on any future occasion
This note evidences a debt under the terms of a certain Credit Agreement
between the Bank and the Borrower contemporaneously dated, and any amendments
, (the "Credit Agreement"), which is incorporated by reference for additional
terms, including default and acceleration provisions.
WAIVER OF JURY TRIAL: The Borrower and the Bank waive trial by jury in any
judicial proceeding involving, directly or indirectly, any matter (whether
sounding in tort, contract or otherwise) in any way arising out of, related
to, or connected with any Loan or the relationship established under it.
Address:
34705 West Twelve Mile, Suite 300 DATA SYSTEMS NETWORK
Farmington Hills, Michigan 48331 CORPORATION
Phone: (248) 489-7117
Fax: (248) 489-1007 By:
Michael W. Grieves
Its: President and C.E.O.
EXHIBIT B
MASTER PROMISSORY NOTE
$8,000,000.00 Detroit, Michigan
September 30, 1997
For value received, on demand or at such other maturity or maturities as are
set forth in the Bank's records, Data Systems Network Corporation (the
"Borrower") promises to pay to the order of NBD Bank (the "Bank"), at the
Bank's principal office in the State of Michigan, in lawful money of the
United States of America and in immediately available funds, the principal
sum of EIGHT MILLION AND 00/100 DOLLARS ($8,000,000.00), or such lesser
amount as is indicated on the Bank's records, together with interest
ear of 360 days at the rate(s) per annum determined from time to time
pursuant to the "Letter Agreement," as defined below, and reflected on the
Bank's records, which interest shall be payable in accordance with the terms
set forth in the Letter Agreement, and to pay interest on overdue principal
from the date of demand or default until paid at the rate which is three
percent (3%) per annum in excess of the rate announced from time to time by
the Bank as its prime rate.
In no event shall the interest rate exceed the maximum rate allowed by law.
Any interest which would for any reason be deemed unlawful under applicable
law shall be applied to principal.
Waiver: The Borrower and each endorser of this note and any other party
liable for the debt evidenced by this note severally waives demand,
presentment, notice of dishonor and protest of this note, and consents to any
extension or postponement of time of its payment without limit as to number
or period, to any substitution, exchange or release of all or any part of any
collateral securing this note, to the addition of any party, and to the
release, discharge, or suspension of any rights and remedies again
exercise of any right or remedy shall operate as a waiver. No single or
partial exercise by the holder of any right or remedy shall preclude any
future exercise of that right or remedy or the exercise of any other right or
remedy. No waiver or indulgence by the holder of any default shall be
effective unless it is in writing and signed by the holder, nor shall a
waiver on one occasion be construed as a bar to or waiver of any right on any
future occasion.
This note evidences a debt under the terms of a certain Letter Agreement
between the Bank and the Borrower contemporaneously dated, and any amendments
, (the "Letter Agreement"), which is incorporated by reference for additional
terms and conditions, including default and acceleration provisions.
WAIVER OF JURY TRIAL: The Borrower and the Bank waive trial by jury in any
judicial proceeding involving, directly or indirectly, any matter (whether
sounding in tort, contract or otherwise) in any way arising out of, related
to, or connected with any Loan or the relationship established under it.
Address:
34705 West Twelve Mile, Suite 300 DATA SYSTEMS NETWORK
Farmington Hills, Michigan 48331 CORPORATION
Phone: (248) 489-7117
Fax: (248) 489-1007 By:
Michael W. Grieves
Its: President and C.E.O.
EXHIBIT C
NOTICE OF BORROWING
, 199_
NBD Bank
38601 Twelve Mile Road
Farmington Hills, Michigan 48331
Attn: James T. McKeon
RE: Credit Agreement (as amended and modified from time to time, the "Credit
Agreement") dated as of September 30, 1997, by and among Data Systems Network
Corporation and NBD Bank
Gentlemen:
Unless otherwise defined herein, capitalized terms used herein shall have
the meanings attributable thereto in the Credit Agreement.
This Notice of Borrowing is delivered to you pursuant to Section 2.6 of the
Credit Agreement.
The Borrower hereby requests a [Floating Rate Loan][Negotiated Rate Loan] in
the aggregate principal amount of $________________ to be made on __________
_____, 19__, and for interest to accrue thereon at the rate established by
the Credit Agreement for [Floating Rate Loans][Negotiated Rate Loans], which
rate shall be ____% [insert absolute rate as quoted by Bank] for this loan.
[The duration of the Negotiated Rate Interest Period with respect thereto
shall be ___________ days.] The [Floating Rate Loan][N
The Borrower has caused this Notice of Borrowing to be executed and
delivered by its duly authorized officer by 10:00 a.m. this ______ day of ___
_______________, 199_.
Data Systems Network Corporation
By:
Name:
Title:
EXHIBIT 11
Data Systems Network Corporation
Computation of Earnings Per Share
Nine Months Ended September 30, 1997 and 1996
SEPTEMBER 30, 1997: Primary Fully Diluted
Number of shares
Weighted average shares issued 4,776,883 4,811,502
Less weighted average shares held in escrow (200,000)
Weighted average shares outstanding 4,576,883 4,811,502
Earnings
Net Income $679,903 $679,903
Earnings per share
Net Income $0.15 $0.14
SEPTEMBER 30, 1996: Primary
Number of shares
Weighted average shares issued 2,895,885
Less weighted average shares held in escrow (300,000)
Weighted average shares outstanding 2,595,885
Earnings
Net Loss $(159,735)
Earnings per share
Net Loss $(0.06)
EXHIBIT 27
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> NINE MONTHS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,895,000
<SECURITIES> 0
<RECEIVABLES> 25,455,000
<ALLOWANCES> 376,000
<INVENTORY> 4,332,000
<CURRENT-ASSETS> 37,041,000
<PP&E> 3,053,000
<OTHER ASSETS> 4,411,000
<TOTAL-ASSETS> 44,505,000
<CURRENT-LIABILITIES> 15,315,000
<LONGTERM DEBT> 12,000,000
0
0
<COMMON> 48,578
<OTHER-SE> 17,142,000
<TOTAL-LIABILITY-AND-EQUITY> 44,505,000
<SALES> 60,626,000
<TOTAL-REVENUES> 60,626,000
<CGS> 46,380,000
<TOTAL-COSTS> 10,393,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,062,000
<INCOME-PRETAX> 2,791,000
<INCOME-TAX> 980,000
<INCOME-CONTINUING> 1,811,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,811,731
<EPS-PRIMARY> .43
<EPS-DILUTED> .41
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